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Table of contents

S.No. Content Page No.

1. 2. (1.1) (1.2) (1.3) (1.4) 3. 4. (4.1) (4.2) 5. (5.1) (5.2) (5.3) 6. 7. 8.

Executive summary Introduction to the organization Introduction to the industry Introduction to the products Rationale of the study Scope of the study Objective of the study/Review of literature Methodology Types of research used in this analysis Limitations of study Observations, Analysis and discussion Working capital Ratio analysis Discussion Recommendations Conclusion Bibliography

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5-18 19-26 27 28 29-32

33 34

35-52 52-67 68-78 79 80 81

Executive Summary
Company profile
Bhushan Limited, a closely held Company of erstwhile Bhushan Group, is a merged entity of Bhushan Industries Limited (BIL), Bhushan Metallics Limited (BML) and Dcor Steel Limited, under a Scheme of Amalgamation, which came into effect with effect from 1st April 1999. These companies were closely held companies with almost three decades old track record of profitable operations, and dividend payment prior to their fusion into Bhushan Limited. BIL and BML were incorporated almost 36 years ago on 24th September 1973 and DSL was incorporated on 3rd April 1980. The merged Companies were carrying on business of producing Steel and manufacturing Steel products.

Product profile

Hr coil Cr coils Alloy steel round Tor steel Wire rods Pig iron Sponge iron Cr sheets

Scope of the study


Working capital for the purpose of study has been taken as net working capital. This analysis covers year 2007-08,2008-09 and 2009-10. Analysis will be made of working capital and its various components with the help of ratio analysis. This study reveals the liquidity strength and weakness of organization and analysis the co. over the year.

Objective
A) B) C) To calculate the current working capital working position of the company. To know the future requirements of working capital of the company. To give suggestions regarding the proper management of the working capital to the

company.

Research methodology
This study is descriptive in nature. It describes the functioning of the company including working capital & financial analysis.

Data collection method :


The data is collected for the report work through secondary sources. Primary Data:-This data is based upon personal discussion with managers, officers and other employees working in various sections of Finance Department, BPS LTD. Secondary Data:-It is mainly based upon office records, Cost-sheets and other published documents of BPS LTD.CHANDIGARH.

Conclusion
BPS Ltd. is growing at a fast pace as it can be seen through the increase in sales. The Company is effectively using its resources of men, material and machinery, which led to the decrease in cost of goods sold despite increase in sales. The liquidity position of the firm has shown a detrimental trend in relation to previous year because of greater increase in current liabilities than current assets but still the liquidity position is satisfactory which can be seen from the liquidity ratios. The Company has been doing good business and earning profits as it is evident from the Profit & Loss A/C of the company ratios. Moreover the company is efficiently using its fixed assets and working capital for generating sales.

Limitations
The biggest limitation for carrying out analysis was the unavailability of the data due to security reasons. It was felt that period of six to eight weeks for analysis of working capital management was too short. The contribution of companys staff is less due to their busyness. The balance sheets of only two years have been studied because of non availability of last financial years balance sheet and companys merger in the year 2007.

Bibliography
Annual Reports of the financial year 2008-09 and 2009-10 of BPS Ltd. Books Shashi K. Gupta & R.K. Sharma, Financial Management, New Delhi Kalyani Publisher I.M. PANDEY : Financial Management,New Delhi Vikas Publications 4

(A) INTRODUCTION TO THE INDUSTRY


(1.1) INTRODUCTION OF STEEL

Steel is crucial to the development of any modern economy and is considered to be the backbone of human civilization. The level of per capita consumption of steel is treated as an important index of the level of socioeconomic development and living standards of the people in any country. It is a product of a large and technologically complex industry having strong forward and backward linkages in terms of material flows and income generation. All major industrial economies are characterized by the :been largely shaped by the strength of their steel industries in their initial stages of development. Steel industry was in the vanguard in the liberalization of the industrial Sector and has made rapid strides since then. The new Greenfield plants represent the latest in technology. Output has increased, the industry has moved up in the value chain and exports have raised consequent to a greater integration with the global economy. The new plants have also brought about a greater regional dispersion easing the domestic supply position notably in the western region. At the same time, the domestic steel industry faces new challenges. Some of these relate to the trade barriers in developed markets and certain structural problems of the domestic industry notably due to the high cost of commissioning of new projects. The domestic demand too has not improved to significant levels. The litmus test of the steel industry will be to surmount these difficulties and remain globally competitive.

(1.2)

HISTORY OF STEEL

Steel was discovered by the Chinese under the reign of Han dynasty in 202 BC till 220 AD. Prior to steel, iron was a very popular metal and it was used all over the globe. Even the time period of around 2 to 3 thousand years Before Christ is termed as Iron Age as iron was vastly used in that period in each and every part of life. But, with the change in time and technology, people were able to find an even stronger and harder material than iron that was steel. Using iron had some disadvantages but this alloy of iron and carbon fulfilled all that iron couldnt do. The Chinese people invented steel as it was harder than iron and it could serve better if it is used in making weapons. One legend says that the sword of the first Han emperor was made of steel only. From China, the process of making steel from iron spread to its south and reached India. High quality steel was being produced in Southern India in as early as 300 BC. Most of the steel then was exported from Asia only. Around 9th century AD, the smiths in the Middle East developed techniques to produce sharp and flexible steel blades. In the 17th century, smiths in Europe came to know about a new process of cementation to produce steel. Also, other new and improved technologies were gradually developed and steel soon became the key factor on which most of the economies of the world started depending.

(1.3) OVERVIEW OF INDUSTRY


(1.3.1) INDUSTRY OVERVIEW- GLOBAL SCENARIO

Economic meltdown during the year under report has adversely affected the production and demand globally. Inventory built up has caused global steel demand slowdown. It is estimated that global steel production during the year 2010 is expected to be about 1350 million tonnes of crude steel. The current year growth may not be in tune with the past few years due to economic slowdown world over, which has also affected Asian continent and developing countries to some extent. Basic raw material i.e. coal and iron ore witnessed increase in prices resulted into volatile in price trend. Steel process during the year under report remained highly volatile. Due to recession and crisis in prices, unexpectedly created problem for many steel-consu ming industries. Inventories were piled up. The Steel demand, which is on a decline in recent time, is expected to pick up in the medium to long term due to higher than historical GDP growth, integration of economies and convergence in GDP of developing countries like China, India and Brazil with the developed economies.

Contribution of Countries to Global Steel Industry:- The countries like China, Japan, India and South Korea are in the top of the above in steel production in Asian countries. China accounts for one third of total production i.e. 419m ton, Japan accounts for 9% i.e. 118 m ton, India accounts for 53m ton and South Korea is accounted for 49m ton, which all totally becomes more than 50% of global production. Apart from this USA, BRAZIL, UK accounts for the major chunk of the whole growth.

(1.3.2) Country Wise Crude Steel Production

Country China Japan United states Russia South Korea Germany Ukraine Brazil India Italy

Crude steel production (MTPA) 272.5 112.7 98.9 65.6 47.5 46.4 38.7 32.9 32.6 28.4

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(1.4) OVERVIEW OF INDIAN STEEL INDUSTRY.


Government has been supporting the Indian Steel industry to improve the consumption per capita and production of steel. The National Steel Policy 2005 has projected an annual steel consumption growth of 7 percent based on GDP growth rate of 7to 7.5 percent and production of 110MMT of crude steel by 2019-20. Nonetheless, with the current rate of ongoing greenfield and brownfield projects, the Ministry of Steel has projected that these growth trends are likely to be exceeded and it is envisaged that in the next five years demand will grow at higher annual average growth rate of over 10 percent as compared to around 7 percent growth achieved between 1991-92 and 2005-06 As per estimate of the Ministry of Steel, Govt. of India, the crude steel production capacity in the country by 2011-12 will be nearly 124MMT. The Indian Steel industry recorded a crude steel production of 70.13MMT in 2009 and expected to grow by 107.86MMT by 2011-12. The growth in the Indian steel industry in the earlier years had been backed by strong economic growth with GDP growth of above 7 %. The industry, which is presently witnessing a slowdown and is estimated to grow at a rate of 4-6% per annum as there is a strong correlation between GDP growth and steel consumption and Indian economy (i.e. GDP) is projected to grow at a rate of 7 % per annum. In Union Budget 2010-11, the government has allocated US$ 37.4 billion to the infrastructure sector and has increased the allocation for road transport by 13% to US$ 4.3 billion which will further promote the steel industry.

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Despite many obstacles, Indian steel industry still enjoys significant competitive and natural advantages to emerge as a key player in global steel, which lends it a competitive edge to emerge as a location of choice for steel manufacturer. Abundant deposit of iron ore, particularly in the eastern region located in Orissa, Jharkhand and Chhattisgarh is prime destination of steel industry. Your company visualizes the potential growth in steel sector.

Secondary steel manufacturers have played vital role and has been contributing around 60-65% of total countrys finished steel production that consume Hot Rolled Coil as a major input. India has emerged as the fifth largest producer of steel in the world and is likely to become the second largest producer of crude steel by 2015-16. India will become the worlds second largest steel producer by 2012, more than double of its present capacity to 124MT as part of the push being given to assist over all infrastructure development. Indias steel consumption rose 8 per cent in the year ended March 2010, over the same period a year ago on account of improved demand from sectors like automobile, infrastructure and housing. The countrys steel consumption increased to 56.3MT in the 12 months to March 2010 from 52.3MT in the previous year, as per the Ministry of Steel.

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(1.5) OVERVIEW OF INDIAN POWER SECTOR


Power sector for the Indian steel industry plays pivotal role to its competitive edge and price reduction. Waste heat recovery process has been recognized the competitive generation cost of power. In the Indian scenario, electricity sector is predominantly controlled by Public Sector Undertakings of Govt. of India in generation of electricity, which includes NTPC, NHPC and NPCI. Nuclear-based power generation in the near future in the country shall bridge the gap of generation and demand of power sector. State level corporations are also involved in the generation of electricity. The intra state distribution is managed by the State Electricity Boards (SEBs) and private companies. Power Grid Corporation of India is responsible for the inter-state transmission of electricity and the development of national grid. India is worlds 6th largest energy consumer, accounting for 3.4 per cent of global energy consumption. Due to Indias economic rise, the demand for energy has grown at an average of 3.6 per cent per annum over the past 30 years. More than 50 per cent of Indias commercial energy demand is met through the countrys vast coal reserve. About 75 per cent of the electricity consumed in India is generated by thermal power plants, 21 per cent by hydroelectric power plants and 4 per cent by nuclear power plants. The country has also invested heavily in recent years on renewable sources of energy such as wind energy.

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(1.6) STEEL COMPANIESS IN INDIA


Steel Authority of India Limited (SAIL) [TURNOVER Rs. 45,555 crores is the leading steelmaking company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defense industries and for sale in export markets. The Government of India owns about 86% of SAIL's equity and retains Management Control of the Company. However, SAIL, by virtue of its "Navratna" status, enjoys significant operational and financial autonomy. Major units of SAIL are as under:

Integrated Steel Plants: Bhilai Steel Plant (BSP) in Chhattisgarh Durgapur Steel Plant (DSP) in West Bengal Rourkela Steel Plant (RSP) in Orissa Bokaro Steel Plant (BSL) in Jharkhand

Special Steel Plants: Alloy Steels Plants (ASP) in West Bengal Salem Steel Plant (SSP) in Tamil Nadu Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Subsidiaries: Indian Iron and Steel Company (IISCO) in West Bengal Maharashtra Elektrosmelt Limited (MEL) in Maharashtra Bhilai Oxygen Limited (BOL) in New Delhi

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Other major steel producers are:


TISCO (Tata Iron and Steel Corporation Ltd.) [TURNOVER Rs. 19,693.28 crores] JSW Steel Ltd (Formerly JISCO i.e. Jindal Iron and Steel Company a merged entity of JISCO and JVSL i.e. Jindal Vijaynagar Steels Ltd.) [TURNOVER Rs. 12,628.91 crores]

Essar Steel. [TURNOVER Rs. 11,926.87 crores] Vizag Steel (also known as Visakhapatnam Steel Plant) [TURNOVER Rs. 10433 crores] Ispat Industries Ltd. [TURNOVER Rs. 9401.67 crores] Jindal Steel and Power Ltd. [TURNOVER Rs. 5459.87 crores] Bhushan Steel Ltd.[TURNOVER Rs. 4202crores] Bhushan Power and Steel Ltd. [TURNOVER Rs. 3873 crores] Uttam Galva Steels Ltd. [TURNOVER Rs. 3288.47 crores] Lloyds SteeI Industries Ltd [TURNOVER Rs. 2474.36crores] Sesa Goa Ltd [TURNOVER Rs. 2279.52crores] Mukand Ltd. [TURNOVER Rs. 1,926.79 crores] Electro Steel Castings Ltd. [TURNOVER Rs. 1384.42crores] Kalyani Steel Ltd. [TURNOVER Rs. 1173.37 crores] Mahindra Ugine Steel Company Ltd.[TURNOVER Rs. 924. 94 crores

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(1.7) COMPANY HISTORY


Bhushan Limited, a closely held Company of erstwhile Bhushan Group, is a merged entity of Bhushan Industries Limited (BIL), Bhushan Metallics Limited (BML) and Dcor Steel Limited, under a Scheme of Amalgamation, which came into effect with effect from 1st April 1999. These companies were closely held companies with almost three decades old track record of profitable operations, and dividend payment prior to their fusion into Bhushan Limited. BIL and BML were incorporated almost 36 years ago on 24th September 1973 and DSL was incorporated on 3rd April 1980. The merged Companies were carrying on business of producing Steel and manufacturing Steel products. Shri B B Singhal, father of Shri Sanjay Singhal in early 1970s as a small unit-manufacturing door hinges, commenced the business venture. For initial years the group continued to operate on a very small level. In 1980 Shri Sanjay Singhal joined the business. The progress journey of these companies commenced at a steady pace lead by vision and dynamic and committed leadership of Shri Sanjay Singhal. With step-by-step highly conservative growth strategy, the Company earned a place for itself in Indian Steel Industry, defying the gloom witnessed in general. It would be pertinent to mention here that another company, from the promoters family, Bhushan Steel and Strips Limited (BSSL) came into Steel Cold Rolling and Galvanizing industry with manufacturing facilities in Sahibabad UP, around 1990. Shri Sanjay Singhal has also been associated with that company too as a part of the promoters family. However since around November 2002, Mr Sanjay Singhal is exclusively managing the Bhushan Limited and the other

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company BSSL is being managed jointly by Shri B B Singhal and Shri Neeraj Singhal, the father and younger brother of Shri Sanjay Singhal. As stated earlier, Operations in the Company were started way back in 1970 with starting of operations of manufacturing door hinges. In late 1970s capacities for manufacturing of Railway track fasteners was set up and with the increase in demand capacity additions took place from time to time. The Companys stride towards growth came in 1981, with the setting up of mill for long product re-rolling. Later on in 1985 steel melting facilities were set up as part of backward integration. In the following year mini steel plant was upgraded with continuous casting and ladle refining furnace facilities. In mid 1980s, facilities were created for manufacturing of Black Pipes and GI Tubes. All these facilities were built up in large capacities. In 1988 Company moved to production of flat products with commissioning of narrow width (upto 500mm) cold rolling facilities at Chandigarh (in BIL) with a total capital outlay of Rs 65 crores. In 1998 Company commissioned a state of the art, with many firsts in Indian industry, viz. ERW Precision Tube and a Cable Tape unit with a total cost of Rs 28 crores. The growth of the company continued and a significant milestone was achieved in the year 2000 with setting up of a large investment of Rs. 300 crores in setting up a cold rolling and galvanizing unit at Bangihatti near Kolkata. The project was set up in a record time of 14 months. A narrow width Cold Rolling Mill was set up in the year 2002 to make Companys product more economical in narrow width segment applications. The Company moved forward

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for further capacity enhancement of cold rolling facilities by setting up of 3rd 6 HI cold rolling mills which had been commissioned during FY 2004 in a record time of 10 months. The company has set up an integrated steel plant at Rengali, District Sambalpur, Orissa in phases. Phase-I and II have already been implemented and are in operation, Phase III is in early stage of implementation and Phase IV of the project is on papers. The company had commissioned Phase I of its Orissa Project successfully in November 2005 by installing 0.30 MMTPA capacity of crude steel at a cost of around Rs. 829.7 crore. It had commissioned Phase II of its Orissa Project successfully in December 2007 by installing 0.92 MMTPA capacity of crude steel at a cost of around Rs. 2,900 crore. It is currently implementing Phase III of its Orissa Project by installing 0.32 MMTPA of crude steel and development of Jamkhani coal block at a cost of Rs. 2,978 crore. For all these three phases, the company has raised a total debt of around Rs.4,476 crore from 25 Indian banks.

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(B) INTRODUCTION TO THE PRODUCTS


Major products of Bhushan Power and Steels ltd.

HR COIL

STEEL BILLETS

ALLOY STEEL ROUNDS

TOR STEEL

WIRE RODS

PIG IRON

SPONGE IRON

POWER

CR COILS

NARROW CR COILS

CR SHEETS

PRECISION TUBES (ERW and CEW)

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CABLE TAPES

BLACK PIPE

GI PIPES

GP COILS / SHEETS

GP CORRUGATED SHEETS

Geographical Network of Plants


Industrial area, Chandigarh o Plot no. 3 o Plot no. 71 o Plot no. 83 o Plot no. 141-142

Derabassi, Punjab Hooghly, Serampur, West Bengal Rengali, Sambalpur, Orisa

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Marketing Network
1. Andhra Pradesh 2. Assam 3. Bihar 4. Chandigarh 5. Delhi 6. Gujarat 7. Haryana : Hyderabad, Vijayawada : Guwahati : Patna, Gulabbagh : Chandigarh : Delhi : Ahmedabad , Rajkot : Faridabad, Panchkula, Manesar

8. Himachal Pradesh : Baddi, Parwanoo, Kullu, Una 9. Jammu and Kashmir : Jammu 10. Karnataka 11. Maharashtra : Banglore : Mumbai, Pune, Aurangabad

12. Madhya Pradesh : Indore 13. Orissa 14. Punjab 15. Tamil Nadu : Bhubaneswar, Sambalpur : Amritsar, Derabassi, MandiGobindgarh, Ludhiana, Jalandhar : Chennai, Hosur

16. Uttar Pradesh : Ghaziabad 17. West Bengal 18. Jharkhand : Kolkata, Siliguri : Jamshedpur

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FOREIGN NETWORK

EXPORTING COUNTRIES

1.Bangladesh

2.Belgium
3.Benin 4.China 5.Congo 6.Egypt 7.France 8.Zambia

BELGIUM

SWITZERLAND

9.Ghana 10.Hongkong

France USA
LEBANON
CHINA

SOUTH KOREA

11.South Korea

12.Lebanon
13.Liberia 14.Malaysia

NEPAL
SENEGAL EGYPT UAE SAUDI ARBIA GHANA TOGO SUDAN OMAN SIERRA TEMA BENIN LEONE NIGERIA & LIBERIA CONGO BANGLADESH VIETNAM MYANMAR THAILAND SRI LANKA

15.Myanmar
16.Nepal

Hong Kong
SINGAPORE

17.Nigeria 18.Oman 19.Papua Guinea

ZAMBIA

PAPUA NEW GUINEA

20.Saudi Arabia 21.Senegal 22.Singapore 23.South africa

SOUTH AFRICA

24.Sri lanka

25.Sudan
26.Switzerland 27.Tema

28.Thailand
29.Togo 30.UAE 31.USA 32. Vietnam 33.Sierra Leone

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Product Mix

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(C) RATIONALE OF THE STUDY


What we are about to study - stock, debtors and creditors control - are all part of working capital management in the same way that a discussion of liquidity was part of working capital management.

We know that working capital is concerned with the ability of a business to be able to pay its way. The three ratios we are concerned with now are concerned with spending and saving money in the right places. Too much stock and we waste money on buying it and keeping it. Too much money loaned to our debtors and it's money we can't use for something else, such as buying machinery, paying our creditors or even investing it. Too much money in the form of creditors and we might have a problem that no one else will give us credit for anything else because they think we can't afford it, and, if we suddenly have a cash problem, we might not be able to pay our creditors.

Working capital management is concerned with the control aspects of the issues we have just mentioned.

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(D) SCOPE OF THE STUDY


Working capital for the purpose of study has been taken as net working capital. This analysis covers year 2007-08,2008-09 and 2009-10. Analysis will be made of working capital and its various components with the help of ratio analysis. This study reveals the liquidity strength and weakness of organization and analysis the co. over the year.

Need of the study


In todays time there is serve competition in every field and the steel industry is also facing a lot of competition a we know competitor can pause some threats to the organization as well as they provide us some opportunities. An organization can store over its competition either by enhancing the quality of the products, reducing the price, heavily spending promotional activities or having a effective distribution network.

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OBJECTIVES OF THE STUDY


Working capital is synonymous with current assets. There is no denying the fact that working capital is one of the most important tool in the hands of the company for the successful operation of the business. It is imperative for the finance manager to properly assess the future requirements of working capital in the company. Keeping in view this objective in mind, I want to estimate the future needs of working capital of the company. The project itself speaks for the importance of the study:-

A) To calculate the current working capital working position of the company. B) To know the future requirements of working capital of the company.

C) To give suggestions regarding the proper management of the working capital to company.

the

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REVIEW OF LITERATURE
Introduction: Working Capital Management
Working capital refers to that part of the firms capital which is required for financing shortterm or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assets keep revolving fast and are being constantly converted in to cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital .The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.

Definition:According to Guttmann & Dougall Excess of current assets over current liabilities.

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According to Park & GladsonThe excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries& wages payable, accounts payable, taxes owned to Government).Capital required for a business can be classified under two main categories via, 1) Fixed Capital 2) Working Capital Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p.m., land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basins is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.

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RESEARCH METHODOLOGY
RESEARCH DESIGN:
This study is descriptive in nature. It describes the functioning of the company including working capital & financial analysis. Data collection method : The data is collected for the report work through secondary sources. Primary Data: This data is based upon personal discussion with managers, officers and other employees working in various sections of Finance Department, BPS LTD. Secondary Data: It is mainly based upon office records, Cost-sheets and other published documents of BPS LTD.CHANDIGARH.

(A) TYPES OF RESEARCH USED IN THIS ANALYSIS:This research employed following type of research: - Descriptive Research

DESCRIPTIVE RESEARCH OR EX-POST FACT RESEARCH:Descriptive research has been conducted to describe the various characteristics related to working capital. It includes the facts finding inquiries of different kinds. It has done to know the following facts: What is the position of working capital in BPS LTD. What is the position of different expenditure and what effect they are putting on working capital requirement. What are the various sources of raising the funds are adopted by the company. What is the working capital financing mix of the company.

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(B) LIMITATIONS
The biggest limitation for carrying out analysis was the unavailability of the data due to security reasons. It was felt that period of six to eight weeks for analysis of working capital management was too short. The contribution of companys staff is less due to their busyness. The balance sheets of only two years have been studied because of non availability of last financial years balance sheet and companys merger in the year 2007. Some areas of research which need to be studied have been overlooked by me.

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OBSERVATION,ANALYSIS & DISCUSSION

(1) WORKING CAPITAL


The term working Capital refers to net working capital .Net Working Capital is the excess of current assets over current liabilities.

NET WORKING CAPITAL=CURRENT ASSEST-CURRENT LIABILITIES

A firm needs fixed capital as well as working capital for its operations while the fixed capital is invested in fixed assets and the working capital is in the form of current assets. The management of current assets differs from fixed assets in the following three ways: 1. First is managing fixed assets time is very important factor in fixed assets but significant in current assets. 2. Secondly the large holdings of current assets strengthen the firms liquidity positions but also reduce the overall profitability. 3. Third, level of fixed as well as current assets depends upon expected sales, but it is only current assets, which can be adjusted with sales fluctuation in short run.

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CONCEPT OF WORKING CAPITAL


There are two basic interpretations of working concept

Balance sheet concept Operating cycle concept CONCEPT OF WORKING CAPITAL

Balance sheet

operating cycle

Net working capital

Gross working capital

(1) BALANCE SHEET CONCEPT : there are two types of working capital under this concept 1. Gross working capital: It refers to firms investments in current assets. Thus Gross working capital includes the total current assets. 2. Net working capital: It refers to difference between current assets and current liabilities i.e. NWC = current assets - current liabilities It can be negative or positive. The positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities exceed current assets. 36

(2) OPERATING CYCLE CONCEPT: A company operating cycle typically consists


of 3 primary activities: purchasing resources, producing the product and distributing the product. Operating cycle is the time duration to convert sales, after the conversion of resources into inventories into cash. It involves three phases. 1. Acquisition of resources 2. Manufacture of product 3. Sale of the product either for cash or on credit.

Operating cycle of manufacturing company:(a) Acquisition of resources:-It includes new material, labour and fuel. (b) Manufacturing of the product:-It includes the conversion of raw material into work-inprogress and then into finished goods.

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(c) Sales of product:-It includes sales of cash or on credit.

Debtors

Cash

Finished Goods

Raw Materials

Work-in-Progress

The length of the operating cycle of a firm is the sum of:


Inventory conversion period Receivables conversion period Payable deferred period cash conversion period

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Classification of working capital


The working capital can be classified into ways: on the basis of concept on the basis of time On the basis of concept it is classified into two i.e. GWC and NWC On the basis of time it is classified into permanent and fixed working capital and temporary or working capital. Permanent working capital : it is the minimum amount , which is to insure effective utilization of fixed facilities and for maintaining the circulation of current assets . there is always a minimum level of current assets , which is continuously required by the enterprise to carry out its normal business operation. this minimum level of working capital is known as permanent working capital as this capital is permanently blocked in the of current assets. Temporary working capital : temporary working capital is amount of

working capital , which is required to meet the seasonal demands and some special exigencies . the temporary working capital can be further classified as seasonal working capital . most of enterprise has to provide additional working capital to meet the seasonal and special needs

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NEED OF WORKING CAPITAL


The need of working capital arises due to time gap between production and realization of cash from sales. There is an operating cycle involved in the sales and realization of cash. There are time gaps in the purchase of materials and production; production and sales; and sales and realization of cash. Thus working capital is needed for the following purpose: For the purchase of raw material, components and spare. To pay wages and salaries To incur day to day expenses and overhead costs such as fuel, power and office expenses, etc. To meet the selling cost as packing advertising etc. To provide credit facilities to the costumers. To maintain the inventories of the raw material, work in progress, stores and spares and finished goods.

ESTIMATING WORKING CAPITAL NEEDS The most appropriate method of calculating working capital needs of a firm is the concept of operating cycle. Following are the other three approaches which can be applied to estimate working capital needs . 1) Current assets holding period: To estimate working capital requirements on the basis of average holding period of current assets and relating them to cost based on the companys experience in the previous year.

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2) Ratio to sales: To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales. 3) Ratio of fixed assets: sometimes working capital may be estimated as the percentage of fixed assets. IMPORTANCE OF ADEQUATE WORKING CAPITAL Working capital is the life, blood and nerve of a business. Just as circulation of blood is essential in human body for maintaining life, working capital is very essential to maintain the smooth running of the business. No business can run successfully without an adequate amount of working capital. The main advantages of an adequate amount of working capital are, 1. Solvency of Business an adequate solvency of business working capital helps in maintaining solvency of business by providing an uninterrupted flow of production 2.Goodwill sufficient working capital enables a business concern to make prompt payments and hence helps and maintaining and creating goodwill. 3.Regular supply of raw materials sufficient working capital ensures a regular supply of raw materials and continuous production. 4.Regular payment of salaries , wages and other day to day commitments- a company which has an ample working capital can make regular payment of salaries , wages and other day to day commitments which raise the morale of its employees , increases their efficiency , reduces wastages and costs and enhances production and profits.

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5.Ability to face crisis- adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital. 6.Quick and regular return on investment- every investor wants a quick and regular return on his investments. sufficiency of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits ., this gains the confidence of its investors and creates a favorable market to raise additional funds in the future . Every business concern should have an adequate working capital to run its operations. it should have either redundant or excess working capital nor inadequate nor shortage of working cap[ital . both excess as well as short working capital positions are bad for any business . however , out of the two, it is the inadequacy of working capital , which is more dangerous of point of view of the firm.

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VARIOUS CONSTITUENTS OF WORKING CAPITAL The two constituents of working capital are as follows : current assets current liabilities

Current assets : these are the assets, which can be converted onto cash with in an accounting year or are held for short period of time. The major components of current assets include inventories cash and bank balance accounts receivables loans and advances short term investment

Current liabilities : there are short term debates and obligations due to outside parties. The major components of current liabilities includes

trade credit bank loans overdrafts and cash short term loans from FI

tax payment due

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APPROACHES TO FINANCE CURRENT ASSETS


The approaches followed by a company may be referred to as : 1. Matching approach 2. conservative approach 3. aggressive approach 4. 1)

Matching approach :

under this approach long term financing will be used to finance fixed assets and permanent current assets and short term finance for temporary or variable current assets. More can be understood from following graph.

Temporary current assets

Short term financing assets permanent current assets fixed assets Time Long term financing

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2). Conservative approach : Under this policy a firm is said to be conservative when it depends more on long-term funds for financing needs . Under a conservating approach. A firm finances its permanent assets and also a part of current assets with long term financing. Temporary current assets

Short term financing assets Permanent current assets Fixed assets . time Long term financing

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3). Aggressive Approach : A firm may be aggressive in financing its assets. A aggressive policy is said to be followed to by the firm when it uses more short-term financing than matching plan.Under an aggressive policy, the firm finances a part of its permanent current assets with short term financing. Some extremely aggressive firm may even finance a part of their fixed assets with short term financing. This can be more understood by the following figure. Temporary current assets

Short term financing assets permanent current assets Fixed assets Time . Long term financing

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MANAGEMENT OF WORKING CAPITAL


Working capital, in general practice, refers to the excess of current assets over current liabilities. Management of working capital therefore, is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exists between them. In other words, it refers to all aspects of administration of both current assets and current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e., it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital positions are bad for any business. Inadequacy of working capital may lead a firm to insolvency and excessive working capital implies idle funds, which earn no profits for the business. Working capital management policies of a firm have a great effect on its profitability, liquidity and structural health of the organization. In this context, working capital management is three dimensional in nature: Dimension I is concerned with the formulation of the policies with regard to profitability, risk and liquidity. Dimension II is concerned with the decisions about the composition and level of current assets. Dimension III is concerned with the decisions about the composition and level of current liabilities.

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There is a definite inverse relationship between the degree of risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets while a liberal management assumes greater risk by reducing working capital. However, the goal of the management should be to establish a suitable tradeoff between profitability and risk. The management of working capital includes: Cash management. Receivables management. Inventory management..

CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is the lifeblood of a business firm, it is needed to acquire supplies, resources, equipment, and other assets used in generating the product and services provided by the firm. Cash is the medium of exchange which allows management to carry on the various activities of the business firm from day to day. As long as the firm has the cash to meet these obligations, financial failure is improbable. Without cash, or at least access to it, bankruptcy become a grim possibility. Such is the emerging view of modern corporate cash management. Near cash items like marketable securities are also included in cash. The modern day business comprises new numerous units spread over vast geographical areas. It is the duty of finance manager to provide adequate cash to each of the units. The firm should keep sufficient cash, neither more nor less, to meet various needs. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle without contributing anything towards the firms profitability..

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Motives For Holding Cash:


The firms needs for cash may be attributed to the following needs: Transaction motive, Precautionary motive and speculative motive.

1.

Transaction motive

A firm needs cash for making transactions in the day to day operations. The cash is needed to make purchases, pay expenses, taxes, dividend etc. The cash needs arise due to the fact that there is no complete synchronization between cash receipts and payments. Sometimes, cash receipts exceed cash payments or vice versa. The transaction needs of cash can be anticipated because the expected payments in near future can be estimated.

2. Precautionary motive
A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. In some situations, cash receipt will less than expected and cash payments will be more, as purchases may have to be made for cash instead of credit. Such contingencies often arise in business. A firm should keep some cash for such contingencies or it should be in a position to raise finances at a short period. The cash maintained for contingency needs is not productive or it remains idle

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3. Speculative motive
The speculative motive relates to holding of cash for investing in profitable opportunities as and when they arise. Such opportunities do not come in regular manner. These opportunities cannot be scientifically predicted but only conjectures can be made about their occurrence. The primary motive of a firm is not to indulge in speculative transactions but such investments may be made at times.

4. Compensation motive
One more motive to maintain cash is to compensation for providing free services by bank to business. As banks provides a number of services to its customers like clearance of cheques, transfer of funds etc. and for this purpose they wish their customer to maintain minimum cash balance. This balance is not used by firm but banks can use it to earn profits and thus compensate itself for the cost of services to the customer.

CASH MANAGEMENT CYCLE

Business operations

Cash collections

Information and control Cash payments

Deficit Surplus

Borrow Invest

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Cash management seeks to accomplish this cycle at a minimum cost and at the same time, it also seeks to achieve liquidity and control. Sales generate cash which has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed cash management seeks to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve liquidity and control. The management of cash is also important because it is difficult to predict cash flows accurately, particularly the inflows and there is no perfect coincidence between the inflows and outflows of cash. During some periods cash outflow exceeds cash inflow. The main aim of the cash management is to manage its cash balance at minimum profitable investment opportunities.

(1) Cash planning: Cash planning is technique to plan and control the use of cash. A projected cash flow statement may be prepared based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash.

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(2) Cash forecasting and budgeting: (a) Cash forecasting: Short term forecast: The short-term forecasts can be made with the help of

cash flow projections. Financial manager will make estimates of likely receipts in the near future and the expected disbursements in that period. Though it is not possible to make exact forecasts even than estimates of cash flows will enable the planners to make arrangement for cash needs. One should keep in mind the sources from where he will meet short-term needs. He should also plan for productive use of surplus cash for short periods. Long term forecast: The long-term cash forecasts are also essential for proper cash planning. Long term forecasts indicate companys future financial needs for working capital, capital projects etc. (b) Cash budgeting :-A cash budget is an estimate of cash receipts and disbursements of cash during a future period of time. It is a device to plan and control the use of cash. The cash budget pinpoints the period when there is likely to be excess or shortage of cash. Thus, a firm by preparing a cash budget can plan the use of excess cash and make arrangements for the necessary cash as and when required. (3) Report for control:-Cash reports providing a comparison of actual developments with forecast figures, are helpful in controlling and revising cash forecasts on a continual basis. Several types of cash reports may be prepared like daily cash report, monthly cash report etc.

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(2) RATIO ANALYSIS


Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is not an end itself. It is only a means of better understanding of financial strength and weakness of a firm. Calculation of ratios does not serve any purpose, unless several appropriate ratios are analyzed and interpreted. There are a number of ratios which can be calculated from the information given in the financial statements, but the analyst has to select the appropriate data and calculate only a few appropriate ratios from the same keeping in mind the objective of analysis The following are four steps involved in the ratio analysis: Selection of relevant data from financial statement depending upon objective of analysis. Calculation of the appropriate ratios from the above data. Comparison of the calculated ratios with the ratio of same firm in the past, or the ratios developed from projected financial statements or the ratios of some other firms or the comparisons with ratios of the industry to which the firm belongs. Interpretation of the ratios:-

Ratio analysis is one of the most powerful tools of financial analysis. It is used as a device to analyse and interpret the financial health of enterprise. It is with help of ratios that the financial statements can be analysed more clearly and decisions made from such analysis. The use of ratios is not confined to financial managers only. There are different parties

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interested in the ratio analysis for knowing the financial position of a firm for different purposes. The supplier of goods on credit, banks, financial institutions, investors, shareholders and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis, one can measure the performance of the firm is improving or deteriorating. Thus, Ratios have wide applications and are of immense use today.The two main types of ratios that have been analyzed in this topic are as follows:

1. LIQUIDITY RATIO:The importance of adequate Liquidity in the sense of the ability of a firm to meet current or short term obligation when they become due for payment can hardly be over stressed. In fact, liquidity is a prerequisite for the very survival of a firm. The short term creditors of a firm are interested in the short term solvency or liquidity of a firm. But liquidity implies, from the view point of utilization of the funds of the firms that funds are idle or they earn very little. A proper balance between the two contradictory requirements that is liquidity and profitability is required for efficient financial management. The liquidity ratios, measure the ability of a firm to meet its short term obligations and reflect the short term financial strength or solvency of the firm. The ratios that indicate the liquidity of a firm are Current Ratio Liquid Ratio Cash Rat 54

2.

ACTIVITY RATIOS:-Funds are invested in various assets in business to make sales

and earn profits. The efficiency with which assets are managed directly effect the volume of sales. The better the management of assets, the larger is amount of sales and profits. Activity ratios measures are efficiency or effectiveness with which a firm manages it resources or assets. These ratios are also called turnover ratios because they indicate the speed with which Assets all are converted into sales. Depending upon the purpose, a number of turnover ratios can be calculated.Following are the activity ratios: Stock Turnover Ratio Inventory Conversion Ratio Debtors Turnover Ratio Average Collection Period Creditors Turnover Ratio Average Payment Period Fixed Asset Turnover Ratio Working Capital Turnover Ratio

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1. CURRENT RATIO
Current ratio or working capital ratio is the ratio which expresses the relationship between current assets and current liabilities. The Current Ratio measures the ability of a firm to maintain solvency over a short run. Current Ratio is not only a measure of solvency but can index of working capital available to the enterprise. CURRENT RATIO = CURRENT ASSETS CURRENT LIABILITIES

PARTICULARS Current assets Current liabilities Current Ratio

2007-08 769778840 438735762 1.75

2008-09 1007100541 525942353 1.91

2009-10 673296147 338735655 1.98

CURRENT RATIO
2 1.8 1.6 2007-08 2008-09 2009-10 CURRENT RATIO

Interpretation According to rule of thumb current ratio should be 2:1. However, the rule should not be blindly followed. According to the above figures we can find out that in last three years ratio of company is 1.75, 1.91 and 1.98 which is a good sign for the company but still the company either needs to increase its current assets or reduce its current liability.

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2. QUICK RATIO
Quick ratio or liquid ratio is the real test of liquidity of an enterprise. It is another important ratio for the measure of the extent to which the liquid assets are available to meet the immediate liabilities. This ratio attempts to measure the ability of the firm to meet its obligations relying solely on its liquid Current Asset such as Cash and Accounts Receivable. It is for this reason that the quick ratio is also known as acid test ratio. QUICK RATIO = QUICK ASSETS CURRENT LIABILITIES

PARTICULARS Quick assets Current liabilities Quick Ratio

2007-08 233393836 438735762 0.53

2008-09 302970197 525942353 0.57

2009-10 222932823 338735655 0.65

QUICK RATIO
0.8 0.6 0.4 0.2 0 2OO7-08 2008-09 2009-10 QUICK RATIO

InterpretationAs a rule of thumb quick ratio of 1:1 is considered satisfactory. As we see that company quick ratio is not the benchmark in any of the years, hence it is not a good sign for the company. The companys last three years ratio is 0.53, 0.57 and 0.65 which is not good. Although it is rising as compare to previous year. 57

3. ABSOLUTE LIQUID RATIO


It establishes the relationship between absolute quick assets and current liabilities.

ABSOLUTE LIQUID RATIO= Cash& bank balance + market. securities Current liabilities PARTICULARS Cash & Bank balances Current liabilities Absolute Liquid Ratio 2007-08 60268163 438735762 0.14 2008-09 56881975 525942353 0.10 2009-10 47441959 338735655 0.14

ABSOLUTE LIQUID RATIO


0.15 0.1 0.05 0 2007-08 2008-09 2009-10 ABSOLUTE LIQUID RATIO

Interpretation The thumb rule for this ratio is 0.5:1.The absolute liquid ratio for the year 2008 is 0.14 and for the year 2009 it is 0.10 and for the year 2010 is 0.14. The ratio is not satisfactory for firm as the firm did not have sufficient cash.

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5. INVENTORY OR STOCK TURNOVER RATIO


This ratio measures the efficiency of the manufacturing function in scheduling the production, and the efficiency of the marketing function in disposal of outputs of an enterprise by constantly feeding the distribution channel. Interpreted properly, this ratio will also indicate the presence of unresolved conflict between the marketing management and financial management, the former trying to keep the distribution channel overstocked for fear of stock-outs and the latter trying to minimize it for fear of high interest cost involved in carrying these inventories. INVENTORY TURNOVER RATIO = COST OF GOODS SOLD AVG. INVENTORY

PARTICULARS Cost of goods sold Inventory I. T. R

2007-08 4035572520

2008-09 5232096970

2009-10 5240440101 289333718 18.11

224904080.5 281650419.5 17.94 18.57

INVEN. TURNOVER RATIO


19 18.5 18 17.5 2007-08 2008-09 2009-10 INVEN. TURNOVER RATIO

Interpretation Inventory turnover ratio measures the times of conversion of stock into sales with in a year. Usually, a high stock turnover indicates efficient management of inventory. The ratio of last two years are mostly same of the company. The fall in ratio is not good for company.

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5. DAYS OF HOLDING INVENTORY


It indicates the number of days the inventory kept in stores before sales.

Days of holding inventory:I.T.R

365 DAYS

PARTICULARS I.T.R Days of holding inventory

2007-08 17.94 20

2008-09 18.57 20

2009-10 18.11 20

DAYS OF HOLDING INVEN.


25 20 15 10 5 0 2007-08 2008-09 2009-10 DAYS OF HOLDING INVEN.

Interpretation Days of holding inventory tells for how many days company holds the inventory. The inventory conversion period of last two years is same and satisfactory. The conversion period of the company is 20 days.

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6. DEBTORS OR RECEIVABLE TURNOVER RATIO


Among all the working capitals this one is most important to the vendor firm because it is from realization of debtors that the accounts payable of the applicant firm is met. This ratio has to be simultaneously interpreted along with finished goods inventory turnover ratio.Increasing volume of receivables with out a matching increase in sales is reflected by a low (high number of days) receivable turnover ratio. It is an indication of slowing down of collection machinery or an extended line of credit being allowed by the customer organization. DEBTORS TURNOVER RATIO = SALES AVG. DEBTORS PARTICULARS Sales Debtors Debtors ratio 2007-08 2008-09 2009-10

6193159238 7588016557 8038969705 110998776 turnover 56 138610478 55 136884871 59

60

DTR
DTR 2007-08 2008-09 2009-10

55

50

Interpretation It indicates the number of times debtors turnover each year. Generally the higher value of debtors turnover the more efficient is the management. In fact in last three fiscal years, this ratio has been excellent for the company. It indicates that its vendors are loyal and pays on time. 61

7. AVERAGE COLLECTION PERIOD


The average collection period represents the average number of days for which a firm waits before its receivables are converted into cash.

AVERAGE COLLECTION PERIOD =

365 DAYS D.T.R

PARTICULARS D.T.R ACP

2007-08 56 6.5

2008-09 55 7

2009-10 59 6

AVG. COLLECTION PERIOD


8 7 6 5 2007-08 2008-09 2009-10 AVG. COLLECTION PERIOD

Interpretation Generally, the shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors. Hence, the period is short in all the years i.e. 6.5 days, 7 days, 6days etc. which represents good quality of debtors.

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8. CREDITORS TURNOVER RATIO


In the course of business operations, a firm has to make credit purchases and incur short-term liabilities. The creditor is interested in finding how much time the firm is likely to take in repaying its trade creditors. So the ratio indicates the velocity with which the creditors are turned over in relation to purchases. The ratio is calculated by dividing Purchases by Creditors. CREDITORS TURNOVER RATIO= PURCHASES AVG. CREDITORS

PARTICULARS Purchases Creditors CTR

2007-08 5620506186 139694892 40.23

2008-09 6809208460 164318822 41.43

2009-10 6653795996 141874119.5 46.89

C. T . R
50 45 40 35 2007-08 2008-09 2009-10 CREDITORS TURNOVER RATIO

Interpretation Generally lower the ratio, better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. The creditor turnover ratio of the firm is on an increasing trend in the last 3 years. It has increased from 40.23 to 46.89 to 12.21 which is good for the company.

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9. AVERAGE PAYMENT PERIOD


It indicates about in how many days company pays to its creditors.

AVERAGE PAYMENT PERIOD:- 365 days CTR

PARTICULARS C.T.R A.P.P

2007-08 40.23 9

2008-09 41.43 9

2009-10 46.89 8

AVG. PAYMENT PERIOD


9.5 9 8.5 8 7.5 2007-08 2008-09 2009-10 AVG. PAYMENT PERIOD

Interpretation Generally lower the ratio, better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm.The average payment period has been decreased as compared to last year. It means company pays to its creditors earlier than before. Average period is on a continuous decline since last 3 years which is a good sign for the company.

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10. WORKING CAPITAL TURNOVER RATIO


It indicates the velocity of utilization of net working capital and also number of times the working capital is turned over in the course of a year. Net working capital is computed by deducting the current liabilities from the total current assets.

WORKING CAPITAL TURNOVER RATIO:- COST OF GOODS SOLD NET WORKING CAPITAL

2007-08 PARTICULARS 4035572520 C.O.G.S 331043078 NET W.C 12.19 W.C.T.R

2008-09 5232096970 481158188 10.87

2009-10 5240440101 334560492 15.66

W.C. TURNOVER RATIO


20 15 10 5 0 2007-08 2008-09 2009-10 W.C. TURNOVER RATIO

Interpretation As the ratio indicates the number of times in which the working capital is turned during the period of one year. The higher the ratio the better it is.The ratio is on a fluctuating trend since in 2009 it decreased as compared to 2008 but in 2010 it has increased which is a good sign for the company

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SCHEDULE OF CHANGES IN WORKING CAPITAL

PARTICULARS

PREVIOUS YEAR (Amount)

CURRENT YEAR (Amount)

INCREASE IN W.C

DECREASE IN W.C

CURRENT ASSETS & LOANS & ADV. Inventories Stores and spare parts Raw material in tanks Raw material at port Work in process Finished products By- products Sundry Debtors Due to more than 6 months Others Cash & Bank balances Cash & cheque in hand & in transit With scheduled banks Unpaid equity dividend Loans & advances Advances Advance tax & TDS Balance with excise authorities

66

Total current Assets (A) CURRENT LIABILITIES & PROVISIONS Acceptances Sundry Creditors Other liabilities Unpaid equity dividend Interest accrued Prov. for doubtful debts Prov. for income tax Prov. for dividend on equity sh. Prov. for dividend on pref. sh. Total current liabilities(B) Net working capital (A)(B) Net increase in working capital TOTAL

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(3) DISCUSSION WORKING CAPITAL MANAGEMENT AT BHUSHAN POWER AND STEEL CO. LTD.
An Introduction
The working capital basically suggests the liquidity position of the company. To analyse the working capital of the company, the various short-term items would be studied and also its effect would be seen. The study of various items for the last two years would be studied. The various current assets of the company over the years have been sundry debtors, cash in hand and at bank, loans and advances and inventory. On the other hand, the current liabilities are basically creditors, unpaid interest and various provisions. As the company is into FMCG sector therefore it is highly necessary to ensure optimum level of current assets. The optimum level ensures that company is not facing any liquidity problem. These various items would be studied individually in the next part and interpreted respectively. For the batter understanding of the working capital management of BPS, the working capital study is divided into five broad categories: 68 Schedule of changes working capital of the company Sundry Debtors of the company Inventory Management of the company Cash Management of the company Sundry Creditors of the company

Management of Individual Components

1) Schedule of changes of working capital of BPS Ltd. PARTICULARS YEAR 2007-08 (Amount) CURRENT ASSETS & LOANS & ADV. Inventories Stores and spare parts Raw material in tanks Raw material at port Work in process Finished products By- products Sundry Debtors Due to more than 6 months Others Cash & Bank balances Cash & cheque in hand & in transit 123437 10577352 10453915 110998776 166222190 55223404 2684779 2621057 63722 32743401 163469989 115785255 49788337 172997141 1600881 40955134 229857871 94402859 67004436 267721452 4188593 17216099 94724311 2587712 8211733 66387882 21382396 YEAR 2008-09 (Amount) INCREASE IN W.C DECREASE IN W.C

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With scheduled banks Unpaid equity dividend Loans & advances Advances Advance tax & TDS Balance with excise authorities Total current Assets (A) CURRENT LIABILITIES & PROVISIONS Acceptances Sundry Creditors Other liabilities Unpaid equity dividend Interest accrued Prov. for doubtful debts Prov. for income tax

60144726

46086187 218476 218476

14058539

59539156 2585876 1865

70124018 9742023

10584862 7156147 1865

772463619

1009721598

226749774 139694892 51940456

284210950 188942751 40607496 218476 11332960

57261176 49247859

218476

1443792 2684779

1293021 2621057

150771 63722

6608177

6608177

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Prov. for dividend on equity sh. Prov. for dividend on pref. sh. Total current liabilities(B) Net working capital (A)- (B) Net increase in working capital TOTAL

10043315

8614304

1429011

2055356

2055356

441420541

528563410

331043078

481158188

150115109

150115109

481158188

481158188

313411482

313411482

WORKING CAPITAL
100% 50% 0% 2007-08 2008-09 WORKING CAPITAL

Interpretation: The working capital of the company has been increased by rupees 150115109 (481158188331043078) as compared to last year. It means company manages its working capital more efficiently as compared to last year. And companys assets are also increased. +

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PARTICULARS

YEAR 2008-09 (Amount)

YEAR 2009-10 (Amount)

INCREASE IN W.C

DECREASE IN W.C

CURRENT ASSETS & LOANS & ADV. Inventories Stores and spare parts Raw material in tanks Raw material at port Work in process Finished products By- products Sundry Debtors Due to more than 6 months Others Cash & Bank balances Cash & cheque in hand & in transit With scheduled banks Unpaid equity dividend Unclaimed preference redemption amount Loans & advances Advances Advance tax & TDS Balance with excise authorities 70124018 9742023 63551996 4391306 6572022 5350717 74410 74410 46086187 218476 27494618 403085 184609 18591569 10577352 19469846 8892494 166222190 106561535 59660655 2621057 2811879 190822 40955134 229957871 94402859 67004436 267721452 4188593 20181788 110477111 79951470 32144179 203912994 3695782 20773346 119480760 14451389 34860257 63808458 492811

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Total current Assets (A) CURRENT LIABILITIES & PROVISIONS Acceptances Sundry Creditors Other liabilities Unpaid equity dividend Unclaimed preference redemption amount Interest accrued Prov. for doubtful debts Prov. for income tax Prov. for dividend on equity sh. Prov. for dividend on pref. sh. Total current liabilities(B) Net working capital (A)- (B) Net decrease in working capital TOTAL

1009721598

675917204

333804394

284210950 175557895 188942751 94805488 40607496 38037059 218476 403085

108653055 94137263 2570437 184609

74410

74410

1293021 969686 2621057 1825852

323335 795205

5918327 8614304 12921457

5918327 4307153

2055356

2055356

528563410 340561507

188001903

481158188 335355697

145802491

145802491

481158188

481158188

363679477

363679477

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WORKING CAPITAL
100% 50% 0% 2008-09 2009-10 WORKING CAPITAL

2) Sundry Debtors of the company


They occur from the normal working of the business. These are covered under the head of Current Assets under Schedule G CURRENT ASSETS, LOANS & ADVANCES. The debtors of the company are unsecured and are divided into two categories: (a) Due for more than six months: These are those debts which are to be recovered after a

period of six months. these are further divided into: (i) Considered Good: The company is almost sure to recover these debts on the

appropriate date as fixed earlier. Therefore no provision has been maintained for them. On the basis of study of last two years, the figure for this amount has been decreasing and it is not a good sign for the company as these are considered good by the company. (ii) Considered Doubtful: These debts are not considered to be recovered in 100% by

the company and therefore a provision is maintained so that the company should not suffer from a big loss at one moment. The amount of this debt is increasing. It states that those debt which company is not fully sure to recover is increasing and hence not in favour of the company.

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(iii)

Provision for doubtful debts : The company makes provision so that the loss can be

reimbursed and it should not face liquidity problem at the end of the day. The company maintains 100% provision for doubtful debts which is satisfactory decision by the company. (b) Others (considered good) : These are debts other than the above said. These are

considered good by the company and hence no provision is maintained for these. The amount of this type of debt is increased from past year.

3) Inventory Management of the company:-Inventory is stock of a company, which is


manufacturing for sale and component that make up the product. Inventory means a schedule of items held at a particular point of time. These are covered under the head of Current Assets under Schedule G CURRENT ASSETS, LOANS & ADVANCES.The inventory of the company is divided into 5 parts: Stores and Spare parts Goods in transit Work in process Finished products and by products

4) Cash Management of the company:-Cash section is an important section of finance


and accounts department. It deals with the employees, contractors and suppliers for their payments. Corporate office plays a dominant role in cash management. The corporate office allocates different amount of each to different coalmines as per its requirements. Corporate office acts as a linkage between the BPS and main book. Cash balance represents the aggregate of cash in hand, cheques in hand, remittances in transit, and balances with banks in current accounts and in fixed deposits with others. 75

Year

Cash & Bank Balances

Currents Assets

% to Current Assets

2006-07

60268163

769778840

7.8%

2007-08

56881975

1007100541

5.6%

2008-09

47441959

673296147

7.05%

The size of the cash showed increase in 2008-09 as compared to the previous year. In last three years the percent of cash to total current assets is 7.8%, 5.6% and 7.05%. There is increase in percent because company s current assets as well as cash is decreased as compared to previous year. Company should have more percent of its current assets in form of cash to meet its day-today expenses as well as emergency situations.

5) Sundry Creditors of the company


The creditors are managed at plant level only. Mostly the creditor comprises of contractors to whom payment are to be given and the capital works. This is basically done as per terms and condition with respective parties. In case of small-scale industries it is done with in 30 days if the dues are above 1 lakh. There is also a scheme of earnests money deposits for the registered small scale industries. The schemes allow having a security deposits which is refundable at the end of contract. In case of statutory payment that is the income tax, excise tax one month due is there. The sundry creditors of the company are divided into two parts: 76

(i) Small Scale Industries: These basically include those industries from which the company purchases secondary raw material or items necessary in production. These are decreasing and are good for the company. (ii) Others: These include those industries from which the company purchases its primary raw material, without which it is not able to start its production. These have shown a consistency in the last three years and the changes have been almost negligible. This states that the company has been paying off its creditors on due dates as well as has maintained good relations with them.

OPERATING CYCLE
Operating cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases: Acquisition of resources such as raw material, labors and fuel etc. Manufacture of the product which includes conversion of raw material into work in process into finished goods. Sales of the product either for cash or on credit.

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Cash

Raw material

Sales

Work-inProcess

Finished Goods

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RECOMMENDATIONS

FINDINGS OF THE STUDY


The company has a good reputation and image. It has been observed from companys annual reports. Sale of the company has been increased as compared to last year. Companys sale has been increased by 5.6% this year. Liquidity position of the company is not so good as the liquidity ratios of the company are less than thumb rule of the ratios.. Major part of companys current assets is constituted by the stock. The company has more raw material in transit than in stores. The cash in hand has been reduced as compared to last year which may not be good for company. The net increase in working capital indicates more increase in its current assets than its current liabilities. It represents the good working capital management by the company.

RECOMMENDATIONS
The company should retain more cash in hand to meet its day to day expenses. The company should try to improve its liquidity position either by increasing its current assets or by reducing its current liabilities. The company should also improve its current assets for improving in its working capital position.

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CONCLUSION
BPS Ltd. is growing at a fast pace as it can be seen through the increase in sales. The Company is effectively using its resources of men, material and machinery, which led to the decrease in cost of goods sold despite increase in sales. The liquidity position of the firm has shown a detrimental trend in relation to previous year because of greater increase in current liabilities than current assets but still the liquidity position is satisfactory which can be seen from the liquidity ratios. The Company has been doing good business and earning profits as it is evident from the Profit & Loss A/C of the company ratios. Moreover the company is efficiently using its fixed assets and working capital for generating sales. The Company is into a lot of modernization and expansion for the growth of the Company and to increase its sales. The firm should also invest some funds outside the business to increase its earnings. The company should keep more cash for the liquidity position of the company.The various turnover ratios indicate sound management policies of the company overtime. The company has very well managed its debtors and also has good policies to recover its debts. The increasing sales indicate that demand of the product would go still high in the near future. The inventory has also been very well managed by the company. The changes in the sundry creditors of the company has almost been negligible, which states that the debts are being paid-off by the company on time and the relations with the parties have also been very good. The unnecessary expenses have also been under control by the company. The company is also fulfilling its social responsibilities by giving business to small scale industries as well as going by the laws of the government. Hence it can be said that on overall basis the company is on sound and profitable track. 80

BIBLIOGRAPHY

Annual Reports of the financial year 2008-09 and 2009-10 of BPS Ltd. Books

Shashi K. Gupta & R.K. Sharma, Financial Management, New Delhi Kalyani Publisher I.M. PANDEY : Financial Management,New Delhi Vikas Publications; PRASANA CHANDRA : Fundamentals of Financial Management, Theory and practices

Websites www.bpsl.net www.scribd.com www.nseindia.com www.bhushanpowersteel.com

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