Working capital management

Working capital management INDIAN FARMER FERTILISER COOPERATIVE LIMITED RICHA RAI INDIAN INSTITUTE OF PLANNING & MANAGEMENTNew Delhi, Satbari2011SUBMITTED TO : MR KAMAL VERMA[FINANCE & ACCOUNT DEPARTMENT8/8/2011

AKNOWLAGEMENTThis project has been prepared as a part of an internship required during the completion of PGDBM programme at INDIAN FARMERS FERTILIZERS ASSOCIATION COOPEARTIVE LIMITED, HEAD OFFICE, and NEW DELHI.With an overwhelming sense of genuine obligation, I express my deep sense of gratitude to Mr S.B RINDANI, EXECUTIVE DIRECTOR (FINANCE), and HEAD OFFICE for allowing me to carry out my dissertation work in the department.I feel very opportune in presenting my thanks to my project guide respected Mr. Suresh Goyal, Chief Manager (Finance and Accounts) whose constant support, patience, positive attitude, able guidance and blessing were responsible for the accomplishment of the work.I also extend my conceded regards to Mr Ram Niwas Rathi, Senior Manager for rendering knowledge about working capital management of IFFCO. I also express my earnest gratitude to Mr Sukant Sharma, Assistant Manager and Mr.J.D Chandra, Manager Accounts for their constant support during the entire tenure.At this junction, I also owe my regards to my faculty members of M.S RAMAIAH INSTITUTE OF MANAGEMENT.I express my sincere thanks to all friends and person who helped directly or indirectly with his or her labour and advice for the successful completion of the dissertation report.These past 2 months were of utmost importance as they added value towards my path of knowledge.At the nib but not at the neep, I bow down my head before my beloved parents with all Sthe reverence whose blessing has solely contributed to reach the point.

Executive SummaryIFFCO (Indian Farmers and Fertilizers Cooperative Limited) is the largest producer and distributor of fertilizers in India. The project is primarily focused on the Working Capital Management of the company. Some other areas like foreign payment management, Buyers Credit, Hedging, Derivative etc are also taken into consideration for the study during the training period.The Working capital consists of four broad sub- topics: Cash Management, Debtors Management, Inventory Management , and Short Term Financing.Working Capital Assessment of the company is done by preparing statement called cash Monitoring Authorization, which calculates the working capital Gap of the company and the same is submitted with the Bank for availing the Loan. Bank finances the 75% of the Working Capital Gap and the rest is to be financed by the company. The mode of loan is Cash Credit Loan. Now it depends on the company, the amount of loan it wants to avail. The loan amount cannot exceed the limit financed by the Bank.The Working Capital requirement of the company has been considerably increased from Rs. 950 crore in the year 2005-06 to Rs. 1450 crore in the year 2006-07 and to Rs. 2000 crores in the year 2007-08 to Rs.5000 crores in the year 2008-2009. The primary reason for the increase in the Working capital of the company is because of the increase in the demand of the fertilizers and the company has to increase its production, increase in the price of the raw materials and delay in the disbursement of the subsidy by FICC.There is an efficient Cash Management system in the company. As the entire fund requirement of the company is financed by the Bank. The cash in hand of the company is very less. The company manages its cash at bank in such a way that no balance in any account is kept idle even for one day. All the favorable balances of the sales Collection account and the current account is transferred to the Cash Credit account at the end of every day in order to save the interest on the overdraft balances for the day. All the major cash requirements are fulfilled from the cash credit account. Any cash received by IFFCO is immediately transferred to the cash credit account in order to decrease the overdraft balances.The major sources of the company are the sales of the fertilizers, Other revenues received from the investment in the subsidiary companies and the subsidy received from the FICC and the application of the Cash is for making the payment to the suppliers both national and the international.There are supply chains through which the finished products of IFFCO reach to the final consumers. There are Marketing Federations in every state which purchases the fertilizers from IFFCO and the same is sold to the cooperatives and from the cooperatives it reaches to the farmers. IFFCO generally does not sell the fertilizers directly to the cooperatives and if it does no credit is allowed to them, the cooperatives have to purchase the fertilizers in Cash. Federations and the Agro Industrial Development Corporations are the debtors of IFFCO because the fertilizers are sold to these agencies on credit. A credit of 30 45 days is provided to the federations and a cash discount is provided to the federations if the payment is made within the credit period. The government is the major debtor of IFFCO because the major portion of the cost of production in the form of subsidy is due with the government.The subsidy becomes due when the fertilizers are dispatched from the warehouses of IFFCO and it is expected to be received within the period of 45 days but the same does not happens. Sometimes due to lack of the budget with the government, the government issues fixed bonds for 15 to 20 years and the fund of the company is blocked and thus the requirement of the Working Capital increases. The major source of the short term financing for the company is Cash Credit which fulfills the entire Working Capital requirement, the interest is charged by the bank on the amount withdrawn from the bank by the company. The company also takes short term loans, these loans are taken for a period of 4 months. As the rate of interest on these loans are cheaper than that of the Cash Credit Loans, sometimes the company take the Short Term Loans and deposit in the cash credit account in order to decrease the overdraft balance of the Cash credit Account.The inventory conversion period cannot be determined as the production is continuous in the Urea manufacturing plants. The major inventory is gas which is supplied by the gas companies through pipelines. In the plants producing the complex fertilizers the raw material are not easily available in the national as well as the international market. The company is ready to purchase any amount of raw materials if the same is available in the market.The raw materials for the complex fertilizers are imported from other countries and the payment is also made in the foreign currencies. These foreign payments are managed by using different exchange rate options such as spot rate, tom rate and the cash rate. The company also protects itself from the losses, by hedging the exchange rate and through the derivatives. Moreover the company also avail the finance facility from banks.

TABLE OF CONTENTS

1) Acknowledgement........012) Executive Summary..043) Introduction............................................................................4) Objectives..........085) Methodology.........10a) Limitations....11 6) Organization Profile....12 7) Chapter 1 WORKING CAPITAL MANAGEMENT.........35 8) Chapter 2 Financial Ratio Analysis ..86 9) Findings....148 10) Conclusion.....149 11) Bibliography......152

INTRODUCTION TO THE TASKOur summer training helps us to get our theoretical concepts more clear. We can actually link our theoretical concepts with the actual practices followed in the organizations. I had talked to my seniors, faculties, supervisors and other trainees in my organization. Everybody told me that I should select such a topic on which I can get the full information, support, and guidance from my supervisors. I had talked to my supervisor about the same and he suggested to me take Working Capital Management as the title of my Summer Training Project Report. There is altogether a different section which takes care of all the aspects of working capital.Working capital refers to the amount required for meeting day-to-day expenses and for the regular trading activities. That is why; working capital is a very sensitive issue. It is very important to take care of working capital very carefully. No company can survive and perform effectively without managing it efficiently. If the working capital is not managed efficiently then is can spoil the image of the company because it would not be able to run its day-to-day activities smoothly. I always wanted to take such a topic which suits my interest. Being good in numbers and accounts, I wanted to take a topic which is related to accounts or which involves numbers. Working capital involves both the things. It is very interesting. This is the section where you feel a very significant part of your organization. I have chosen this topic because it involves the arrangement and application of funds. It involves a lot of activities that are very important to understand from the point of view of a finance manager. That is why, I have chosen this topic.

Rationale of the studyThe Working Capital Management is a very good subject to work upon. If you work on this subject, you will come to know about the various aspects related to it. You will get to know how sensitive it is. It serves as the backbone of any enterprise.Every department is directly or indirectly related to it. If the Working Capital is managed efficiently then the whole organization gets benefited. Therefore, in order to ensure the smooth functioning of your organization Working Capital Management has to be done in a proper and effective manner.

This project will help us to know: Concepts of Working Capital How Working Capital Management is done. What needs to consider while calculating the Working Capital Requirements.

SCOPE OF THE STUDYThe scope of the study refers to the extent to which the other concepts are included in the study. The scope of Working Capital Management includes:-

Cash Management: - Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Debtors Management: - Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice- versa); see Discounts and allowances1. Inventory Management: - Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ). Short term financing: - Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

FINANCIAL PERFORMANCEIn spite of constraints in availability of raw materials, and inordinate delays in receipt of large subsidy amounts from Government of India, IFFCO has yet again delivered an impressive financial performance in all its major parameters, namely, Revenue Growth, Operating Margins and Resource Utilisation testifying to robustness of its Corporate Strategy of creating multiple drivers of growth. This was possible due to higher production, sales volume and improvement in operating efficiencies. The Society achieved the highest ever sales of Urea of 63.35 Lakh MT and Fertilizers 118.27 Lakh MT. This represents an increase of 8% for Urea and 5 per cent in case of Fertilizers over the previous best.

OBJECTIVES OF THE STUDY:-

This Research Project covers the two most important aspects or features of the functioning of the FINANCE DEPARTMENT of Indian Farmers Fertilizers Cooperative Limited (IFFCO).The First Part is both, an analytical as well as an academic study that involves an analysis of the Working Capital and Working Capital Management Policies of the Organization-IFFCO.The main objectives of this study are: -

To understand the Working Capital Management policies of the organization.

To understand the importance of Working Capital Management. To analyze the liquidity position of the organization.

To analyze the short term financing policies and patterns, which affect the working capital of the organization.

To study the factors that affects the Working Capital Management at IFFCO.

To find out the profitability and operational efficiency of the organization.

To analyze the data and information of the previous years to know the actual position of funds, investments and liabilities of the organization.

To identify some broad policy measures to improve the working capital position of the organization.

To estimate the working capital requirements of the organization in the near future.

METHODOLOGY OF THE STUDY:-

The training is basically an in house training which intimated me with various aspects of the project.Here, while conducting the study I have relied on two types of data, viz. primary data and secondary data.. Based on the outcome of primary and secondary data, various statistics were prepared.Primary Data: The data collected through meetings with various managers & employees of Finance and accounts department. I worked under guidance of Mr. Suresh Goyal, who gave me his valuable time and information. He sent me to various sections of Finance & Accounts Dept. and other departments for collection of data.

Sources of collection of secondary data:

Balance Sheet Profit & Loss Account Annual Reports Budget Accounting Reports Financial Year Book

Research DesignThe research will be both descriptive and conclusive.Descriptive research is a kind of research where the description of the topic is given.Conclusive research is the kind of research in which the conclusion is given at the end of the report.

Other sources of information Web site

LIMITATIONS OF THE STUDYThe following are the limitations of this summer project training:- The study is limited to five financial years i.e. from 2006-07 to 2010-11. The data used in this study has been taken from the Balance sheet & their related schedules of IFFCO Ltd., New Delhi as per the requirement. Some data are grouped and sub-grouped.Since this study is being done for academic purpose the time available does not allow the student to go in depth. Information or the secondary data required for the study is also limited (in relation to Indian Fertiliser Industry). Some of the information that was essential for this study cannot however be given in this report due to companys confidentiality. The scope and area of the study was limited to corporate office of IFFCO (Finance Division) New Delhi only.

SECTOR OVERVIEW

COMPANYs Mission

IFFCO's mission is "to enable Indian farmers to prosper through timely supply of reliable, high quality agricultural inputs and services in an environmentally sustainable manner and to undertake other civilities to improve their welfare"Emerging as a dynamic organization, focusing on strategic strengths, seizing opportunities for generating and building upon past success, enhancing earnings to To provide to farmers high quality fertilizers in right time and in adequate quantities with an objective to increase crop productivity. . Commitment to health, safety, environment and forestry development to enrich the quality of community life. To acquire, assimilate and adopt reliable, efficient and cost effective technologies. A true Cooperative Society committed for fostering cooperative movement in the country. To ensure growth in core and non-core sectors. . Sourcing raw materials for production of phosphoric fertilizers at economical cost by entering into Joint Ventures outside India.

Companys VisionIFFCOs vision is "to augment the incremental incomes of farmers by helping them to increase their crop productivity through balanced use of energy efficient fertilizers, maintain the environmental health and to make cooperative societies economically & democratically strong for professionalized services to the farming community to ensure an empowered rural India.

To retain dominant position in Indian fertilizer sector and cost effective technologies. Sourcing raw materials for production of Phosphate Fertilizers at low cost with joint ventures outside India. Emerging as a dynamic organization, focusing on strategies maximizing the shareholders value. To build a culture of trust, openness & mutual concern. Implement diversification in information technologies. Committed to cooperate social responsibilities for sustainable development. Commitment to health, safety, environment & forestry development to enhance quality of community life. A true cooperative society committed to foster cooperative movement in the country.

SHARE CAPITAL (AS ON 31ST MARCH, 2011)

(Rs in Crore) Authorized Share Capital: 1000.00 Subscribed and Paid up Capital: 425.95 (All Share Capital by Cooperatives only)

GROWTH IN NUMBER OF MEMBER SOCIETIES

(As on 31st March)

Chart 1: Increase in Share Capital Of no. of Societies in IFFCOPRODUCT WISE PRODUCTION PERFORMANCE:-

Chart 2 : PRODUCTWISE PRODUCTION PERFORMANCE

MARKETING CHANNELS:-Distribution of fertilizers mainly through the Cooperative System: - State level Apex Cooperative Marketing Federation Acts as wholesaler Direct supplies to Societies in some States IFFCO-NCDC Cooperative Societies Small quantities to institutional agencies like Agro Industries Corporation et 157 IFFCO Farmers Service Centers

DISTRIBUTION AND WAREHOUSING: TRANSPORTATION Both by Rail (91%) and Road (09%) WAREHOUSING Federations & Cooperative Godowns Central Warehousing Corporation (CWC) and State Warehousing Corporation (SWCDistribution of fertilizers mainly through the Cooperative System: - State level Apex Cooperative Marketing Federation Acts as wholesaler Direct supplies to Societies in some States IFFCO-NCDC Cooperative Societies

Small quantities to institutional agencies like Agro Industries Corporation etc

158 IFFCO Farmers Service Centers.

IFFCO PLANTS

PLANTSLOCATIONCOMMISSIONED INEXPANDED INANNUAL PRODUCTION CAPACITY ( In Lakh MT)

KALOLGUJARAT19751997UREA5.45

KANDLAGUJARAT19751981&1999DAP/NPK24.15

PHULPURU.P.19811997UREA14.16

AONLAU.P.19881996UREA17.29

PARADEEPORISSASEPT. 2005-DAP/NPK19.20

Table 1 : Details Of Plants

PLANT LOCATIONS

KANDALA UNITS

Paradeep Unit

FINANCIAL PERFORMANCE:- (Rs. Crore)YEARS2006-072007-082008-092009-10

TURNOVER103301216332933.3016808.57

PROFIT BEFORE TAX251.25380.52441.95567.28

INCOME TAX76.23122.9381.94 90.34

PROFIT AFTER TAX175.02257.59360.01 401.10

SHARE CAPITAL422.92423.93426.28426.24

RESERVES AND SURPLUS3218.93264.73532.593844.26

NETWORTH3301.23555.43641.84968.04

NET ASSETS EMPLOYED4369.59049.21066216737.31

INVESTMENTS690.73776.16740.461169.91

Table 2 : Last Five Year Financial Performance of IFFCO

PROFIT BEFORE TAX (PBT)(Rs. Crore)

Chart 5 : Five Year Profit Before Tax detailsTURNOVER:-

Chart 6 : Five Year turnover Performance of IFFCOSERVICE TO FARMERS:-Agricultural Extension and fertilizer use Promotion Programmes that are an integral part of the marketing activity. Programmes are conducted at Area/State/Zonal offices under the guidance of agricultural scientists.Programmes undertaken are: Balanced Fertilization Programmes.

Adoption of villages for all round socio-economic development.

Farmers visit to various agricultural institutes and research farms.

Farmers Meetings, Field Days and Crop Seminars.

Static/Mobile Soil Testing Laboratories with Audiovisual.

Other Social Activities/Development Programmes include:-

Supply of fodder in draught prone areas

Veterinary Checkup and Distribution of Medicines

Human Health Checkup and Distribution of Medicines

Providing drinking water facilities

Assistance to School / School children

Watershed development projects

COOPERATIVE RURAL DEVELOPMENT TRUST (CORDET)

PROMOTED BY IFFCO LOCATIONS: KALOL (GUJARAT), PHULPUR (U.P.), KANDLA(GUJARAT).

ACTIVITIES OF CORDET

Farmers Training Soil Testing Bio Fertiliser Production Demonstration Farming Seed Multiplication

INVESTMENTS OUTSIDE IFFCO:-Indian Potash Ltd (IPL) IFFCOs Equity : Rs. 2.68 Crore Percentage of Equity held: 34% Activity: Marketing of Potash and imported fertilizers

Industries Chimiques du Senegal (ICS) I & II IFFCOs Equity : Rs 161.53 Crore Percentage of Equity held : 19.47 % Plant Site : Darou, Senegal Product : Phosphoric Acid, NPK Fertilizers

IFFCO - TOKIO General Insurance Company Ltd.(ITGI) IFFCOs Equity : Rs. 193.91 Crore Percentage of Equity held : 72.6% Activity : General Insurance

Oman India Fertiliser Company (OMIFCO) IFFCOs Equity : Rs. 329.08 Crore Percentage of Equity held : 25% Plant Site : Sur, Oman Product : Ammonia, Urea

National Commodity and Derivative Exchange (NCDEX) IFFCOs Equity : Rs. 3.60 Crore Percentage of Equity held : 12% Activity : On Line Trading in Commodity Futures

National Collateral Management Services Ltd. (NCMSL) IFFCOs Equity : Rs. 4 Crore Present percentage of : 13.33% Equity held Activity : Collateral Risk Management Solutions

OTHERS Indian farm forestry development corporation (IFFDC) : Rs 8.60 crore Maharashtra State Coop. Bank Ltd. : Rs. 10 Lakhs IFFCO Kisan Bazaar : Rs. 5 Lakhs Indian Tourism Coop. Ltd. : Rs. 1 Lakh

DIVERSIFICATION:-

1) IFFCO-TOKIO GENERAL INSURANCE CO. LTD. Diversified into General Insurance due to :- Tremendous potential available To serve the insurance needs of farmers IFFCOs Rural Brand Equity Low gestation period

The scope includes a mix of following: Rural Insurance Business Fire Insurance Business Marine Insurance Business Miscellaneous Insurance Business.

IFFCO KISAN BAZAR LTD.:-IFFCO Kisan Bazar Ltd. was incorporated on 26.02.2004 with an Authorised Equity Capital of Rs. 1 Crore with the objective to set up a chain of Super Stores across the Country .Negotiations are in progress for strategic alliance with the prospective Foreign partner for operations of large format Retail Outlets in India.

OTHER PROGRAMS BY IFFCO:-SANKAT HARAN BIMA YOJANA: With the purchase of each bag of IFFCO/IPL fertilizer from Cooperative Society/FSC, the buyer is automatically covered against accident up to an amount of Rs. 4000/- for one year. Maximum liability limited to Rs. 0.1 Million irrespective of the number of bags purchased. Respective manufacturer pays premium @ Rs. 1/- per bag. Cash receipt is evidence of insurer cover.OMAN INDIA FERTILIZER PROJECT: Grassroots ammonia/urea complex has been set up at Aloha near Sur, Oman. The project comprises two ammonia and two urea plants of 2*1750 MTPD and 2*2530 MTPD respectively. Entire urea production of 1.65 MILLION MT is being purchased by GOI under off take Agreement. Surplus Ammonia is being purchased by IFFCO.NELLORE FERTILIZER PROJECT: Environment clearance, Rail transport clearance, Allocation of Naphtha, Water and Power are accorded for the project. Project is kept in abeyance till finalization of long term fertilizer policy. Plant capacities of Urea are 2328 MTPD and Ammonia is 1350 MTPD.

VISION 2010 OF IFFCO

The Society has embarked upon another growth plan titled VISION 2010 to achieve annual turnover of Rs. 15,000 crore (USD 3400 Million) by the year 2010. Society is exploring avenues for diversification into other profitable business areas, apart from fertiliser sector, for sustained growth and adequate return to member shareholders. Vision 2010 would mainly focus on farmer oriented schemes and strengthening of cooperative infrastructure.

Broadly identified business activities under the VISION 2010 are :- Installation of Ammonia/Urea plants including acquisition of fertilizer units Generation of Power Production and Marketing of micro-nutrients, seeds, biofertilisers, pesticides etc. Value addition to agri-products and marketing Banking and Financial Services Information Technology and IT enabled services Establishments of Retail Chain in urban and semi-urban locations

WORKING CAPITAL MANAGEMENT:-

AN ANALYTICAL RESEARCHWorking Capital Management is the interaction between current assets and current liabilities. The current assets refer to those assets, which in ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. Decisions relating to working capital and short term financing are referred to as Working Capital Management. This involves managing the relationship between a firm's short-term assets and its short-term liabilities. The major thrust is on managing the current assets because a current liability arises in context of current assets.The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.The management of current assets is similar to that of fixed assets in the sense that in both cases the firm analyses their effects on its return and risk.

However, The management of fixed and current assets differs in THREE ways:-1) In the management of fixed assets, time is very important consequently, discounting and compounding aspects of time element play a significant role in capital budgeting and a minor one in the management of current assets.2) Large holdings of current assets especially cash strengthen times liquidity (and reduces riskiness) but also reduces overall profitability.3) The levels of fixed as well as current assets depend upon the expected sales , but it is only the current assets, which can be adjusted with sales fluctuations in short runs.

In examining the management of current assets, answers will be sought to the following questions:- What is the need to invest funds in the current assets? How much funds should be invested in each type of current assets? What should be the proportion of long term and short term funds to finance current assets? What appropriate sources of funds should be there to finance current assets?

Working Capital Management is a significant part of financial management. Its importance arises from two reasons: - Investment in current represents assets a substantial portion of total management. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed assets investment and long term financing are also responsive to variations in sales. However this relationship is not as close and direct as it is in the case of Working Capital Management.

Hence in this study an attempt has been made to analyze the size and composition of working capital and whether such an investment has increased or declined over a period of time.

Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is involved in the most vital decision of the allocation of capital. There is a need to have a broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in the most efficient manner .One of the most important task of financial manager is to select an assortment of appropriate sources of finance for the current assets. Normally the excess of current assets over current liabilities should be financed by long-term sources. Precisely it is not possible to find out which long term sources has been used to finance current assets, but it can be examined as to what proportion of current assets has been financed by long term funds. Therefore, an attempt has been made in this regard.

In working capital analysis the direction of change over a period of time is of crucial importance. Not only that, analysis of working capital trends provides a base to judge whether the practice and prevailing policy of the management with regards to the working capital is good enough or an improvement is to be made in managing the working capital funds.

Hence in this study, an attempt is made about the trends of the working capital management of selected enterprise. In addition, to have higher profitability the firms may sacrifice solvency and maintained a relatively low of current assets. When the firms do so their profitability will improve and less are tied up in the idle current assets, but their solvency will be threatened. Hence, an attempt is made to study the association of profitability with the working capital ratios. With this view, an effort has been made in this project report to, make an in-depth study of IFFCO in respect of its performance and its working capital management.

MEANING OF WORKING CAPITAL:-

Capital required for business can be classified under two main categories: -

1) FIXED CAPITAL 2) WORKING CAPITAL

Every business needs funds for two purposes for its establishment to carry out its day-to-day operations.

FIXED..CAPITAL Long term funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land, buildings, furniture, etc. investments in these assets represents that part of firms capital, which is blocked on a permanent or fixed basis and is called fixed capital.

WORKING CAPITALFunds are also needed for short-term purpose for the purchase of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as Working Capital.

The term Working Capital refers to the amount of capital, which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities).

Current Assets are resources, which are in cash or will soon be converted into cash in "the ordinary course of business. Current assets like Liquid Assets (cash and bank deposits), Inventory, Debtors and Receivables, etc.Current Liabilities are commitments, which will soon require cash settlement in "the ordinary course of business". Current Liabilities like Bank Overdraft, Creditors and Payables, Other Short -Term Liabilities. Thus: WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

TYPES OF WORKING CAPITAL

Working Capital can be further divided into two types namely:1) Permanent or fixed working capital2) Variable or temporary working capital

1) Permanent or Fixed working capitalPermanent or Fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation to the current assets, for example: every firm has to maintain a minimum level of raw material, work-in-progress, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital. As the business grows, the requirements of permanent working capital also increase due to the increases in current assets.

2) Temporary or Variable Working CapitalVariable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part which is required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research etc..

GOOD MANAGEMENT OF WORKING CAPITAL

Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies are available for managing specific working capital items. Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to departments.

Objectives of Working Capital Management:- Liquidity vs. Profitability The basic objective of working capital is to provide adequate support for the smooth functioning of the normal business operations of the company. Based on this the companies can follow any of the two approaches or even a combination of both. A company opting for high investment in current assets follows the Conservative Approach i.e. subjected to lower degree of risk. This approach imparts greater LIQUIDITY to the company. The other approach is the Aggressive Approach in which the firm goes for fewer investments in current assets, thus leaving more amounts of funds for investment in more profitable ventures. This approach imparts greater PROFITABILITY to the company.

Choosing the pattern of financing The management of financing the chosen level of current assets once again takes into consideration the attitude of management towards risk.

Determinants of Working CapitalThe working capital requirements of a concern depend upon a large number of factors. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However the following are the factors generally influencing the working capital requirements: -

Nature or character of businessThe working capital requirements of a firm basically depend upon the nature of the business. Public undertakings like electricity, water supply, and railways need very limited working capital because they offer cash sales only and supply services.

Size of businessThe working capital requirements of a concern are directly influenced by the size of the business. Greater the size of a business unit, generally larger will be the requirements of working capital.

Manufacturing processIn manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Larger the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw material and other supplies have to be carried far a longer period in the process with progressive increment of labor and service costs the finished product is finally obtained.

Seasonal variationsIn certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure the uninterrupted flow and process them during the entire year. A huge amount is thus blocked in the form of material inventories during such seasons, which gives rise to more working capital requirements.

Rate of stock turnoverThere is a high degree of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having low rate of turnover.

Firms credit policyA concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand the concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital.

Advantages Of Adequate Working Capital:

The main advantages of maintaining adequate amount of working capital are as follows:

Solvency of the businessAdequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

GoodwillSufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

Quick and regular return on investmentsEvery 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.

Ability to face crisesAdequate working capital enables a concern to face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

Regular payments of salaries, wages and other day-to-day commitmentsA company which has ample working capital can make regular payments 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.

Easy loansA concern having adequate working capital, high solvency and good credit standing can arrange loans from the banks and others on easy and favorable terms.

Regular supply of raw materialsSufficient working capital ensures regular supply of raw materials and continuous production

Factors Affecting Working Capital

Every business concern should have adequate working capital to run its business operations. It should have neither redundant for excess working capital nor inadequate or shortage of working capital. Both Excess, as well as short Working capital positions are bad for any business.

Disadvantages Of Redundant Or Excessive Working Capital

Excessive working capital means idle funds, which earn no profit for the business, and hence the business cannot earn proper rate of return on investments.

When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more changes of theft, losses and waste.

Excessive working capital implies excessive debtors and defective credit policy, which may cause higher incidents of bad debts.

When there is excessive working capital, relations with the bank and other financial institutions may not be maintained.

It may result into overall inefficiency in the organization and also due to low rate of return on investments, the value of shares may also falls.

Dangers Of Inadequate Working Capital

A concern, which has inadequate working capital, can pay its short-term liabilities in time. Thus, it will loss its reputation and shall not be able to get good credits facilities.

It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and creates inefficiencies, increase costs and reduces the profits if the business.

Approaches to Working Capital ManagementThe objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities.Working Capital Management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management The individual components of working capital can be effectively managed by using various techniques and strategies

The main purposes of Working Capital Ratio Analysis are: To indicate working capital management performance; and To assist in identifying areas requiring closer management.

Three key points need to be taken into account when analyzing financial ratios. These key points are as follows:- The results are based on highly summarized information. Consequently, situations, which require control, might not be apparent, or situations, which do not warrant significant effort, might be unnecessarily highlighted. Different departments face very different situations. Comparisons between them, or with global ideal ratio values, can be misleading. Ratio analysis is somewhat one-sided; favorable results mean little, whereas unfavorable results are usually significant.

However, financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation.

Sources Of CashThe various sources of cash that provide the money to fund the working capital include the following:-Existing cash reservesPayables (credit from suppliers)New equity or loans from shareholdersBank overdrafts or lines of creditLong term loans Profit or net income

Working Capital is the day to day requirement of the company. The company requires Capital for the procurement of raw materials, conversion process and for the time taken to recover cash from the debtors. All these process takes time and money.A company estimates its inventory conversion period and debtors collection period and subtract the average payment period to determine its Cash Conversion Cycle. It is the period for which the company requires the cash. Inventory conversion period + debtors collection period is the gross working capit

ASSESSMENT OF WORKING CAPITAL REQUIREMENTS( FORM- I )Particulars of the existing /proposed limits from the Banking System(Limits from all Banks and Financial Institutions as on date of application)Sl. No(1).Name of the bank/ Financial Institutions (2)Nature of facility(3)

ExistingLimit

(4)Extent to which limits were utilized during last 12 month.Balance as on 31/3/2009(7)Balance as on 31/3/2009(8)Limits now requested for the year 2007-09 (9)

Max(5)Min(6)

A

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

Working capital LimitsIndian Overseas BankState Bank of IndiaStandard Chartered BankBank Of BarodaThe Maharashtra State Cooperative BankThe West Bengal State Cooperative BankMadhya Pradesh State Cooperative BankThe Karnataka State Coop. Bank The Punjab State Coop. Bank ICICI Bank Ltd.IDBI Bank Ltd.HSBC Bank Ltd.

Total

Form -1 consists of existing limits from all the banks and financial institutions as on date of application of cash credit. It Contains following items:- Name of the banks there are all together 14 banks with different existing limits who together has sanctioned a limit of 1450crs for the year 2006-07 in the lieu of working capital requirement of the company Existing limits: the share of each bank in providing the existing limit of 1450crs to the company. Balance outstanding as on the end of previous financial year i.e.31/3 2006:- This column displays the amount currently being used by the company of the limits sanctioned by each banks. The amount outstanding to each bank is displayed in the column at the end of previous financial year. Balance outstanding as on end of current financial year i.e.31/03/2007:- this column displays the amount outstanding to each bank at the end of financial year 2006-07. The difference in the amount of out standing between the year end 2005-06 and 2006-07 is repaid or withdrawn by the company. Limits requested for upcoming year i.e. 2007-08:- the amount requested by the company for the upcoming year i.e. 2000crs is displayed in this column.

This statement is prepared to inform the bankers about the limits sanctioned by the consortium in the previous year, credit status, and to request for new cash credit limit.

Form II: Operating statement

SI.no.Particulars2008-09 Actual2009-10 Projections

KalolkandlaphulpurAonlaParadeepimportesTotalkalolkandlaphulpurAonlaParadeepimportedTotal

1..

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

Gross Sales(i)Domestic sales(ii)Export sales Total sales

Less: Excise duty

a)Net Sales(1-2)b)Subsidy from FICCC)Net sales including Subsidy[a+b]% age rise or fall in net sales as compared to previous year

Cost of Salesi)Raw materials (including stores and other items used in the process of manufacture) a)Imported b)Indigenous

ia)Purchase of finished goodsa)Importedb)indigenous

ii) Other sparesa)Importedb)Indigenous

iii)Power and fuel

iv)Direct Labour

v)Other Manufacturing Expenses

vi)Depreciation

vii) sub-Total( i to vi )

viii)Add: opening stock in process

sub total

ix) a)Less; closing stock b)Less: stock Trf. For self consumption

x)cost of production

xi)Add: opening stock of finished goods

sub total

xii)Deduct: closing stock of finished goods

xiii) Sub-Total(Total cost of sales)

Selling and General Administration Expenses

Sub total (5+6)

Operating profit before interest (3-7)Interest

Operating profit after interest(8-9)

i)Add:other non-operating incomea)Misc.incomeb)Interest on Deposits with Banksc)Dividend incomed)Handling remuneration from GoI on imp. Fertilizere)others

sub total(income)

ii) Deduct other non-operating expensesa)Prior period Expenditure/icomeb)Provision for taxesc)Handling Expenses on imported fertilizerd)Others

sub total (expenses)

iii)Net of other non-operating income/ expenses(net of[11(i)+11(ii)]

Profit before tax/loss[10 +11(iii)]

Provision for taxes

Net profit/loss(12+13)

a)contribution to co-operative edu. Fundb)Donationsc)Equity dividend paidd)dividend rate

Retained profit(14-15)

Retained Profit/ Net Profit (%)

FORM-II It is the operating statement of the company for two previous year i.e. 2005-06 and 2006-07 and the current year i.e.2007-08.First of all the net sales is calculated, secondly the calculation of cost of sales is done, which contains total cost of production and selling, general and administrative expense. The operating profit or loss is calculated by subtracting the total cost of production and selling, general and administrative expense from net sales. After then the operating profit or loss after interest is calculated by subtracting interest from the operating profit. To get the PBT i.e. profit before tax other non operating income like interest, rent, lease rent on machine, and miscellaneous interest are added and other non operating expenses like other expenses and donation is subtracted.Net profit or loss is derived by subtracting the provision for taxes. Again by subtracting the dividend paid and partners salary, retained profit can be derived.This statement is submitted to the bank in order to display all the operations profit and loss and retained profit to the consortium of banks providing cash credit

Form III: Analysis of Balance sheet

SL.No. Particulars 31-March-07Actual(1)31-March-08Actual(2)31-March-09Actual(3)31-March-10Projection(4)

1.

2.3.4. 5.6.7.8. 9. 10.

11.12 13. 14. 15.16.17.18.

19.20.21.22.23. 24.25.

28.

29. 30.

31. 32.33. 34.

35. 36.37.

38.

39.40. 41. 42.

43.44.45. 46.47. CURRENT LIABILITIESShort-term borrowings from banks(including bills purchased, discounted excess borrowings placed on repayment basis)i)From applicant bank-WCDFrom applicant bank-CC/Billsii)From other banksiii) Of which BP&BD Sub total [A]Short term borrowings from othersSundry Creditors[ Trade]Advance Payments from Customers/Deposits from DealersProvision for TaxationDividend payableOther statutory Liabilities[Due within one year] Deposits/Installment of Term loans/DPGs Debentures etc.[Due with one year]Other Current Liabilities & provisions [Due within one year]Total Current Liabilities[total of 1 to 9 ]TERM LIABILITIES

Debentures [Not maturing within one year]Preference Shares [Redeemable after one year]Term loans [Excluding installments payable within one year]Deferred payment credits [Excluding installments due within one year]Other term loans[ unsecured]Other term liabilitiesTOTAL TERM LIABILITIES [Total of 11 to 16]TOTAL OUTSIDE LIABILITIES [total of 10+17]

NET WORTHOther share capitalGeneral Reserve Revaluation Reserve Other Reserves [Excluding Provisions]Surplus [+] or Deficit[-] in Profit & Loss AccountNET WORTHTOTAL LIABILITIES[18+24]CURRENT ASSETSCash& Bank BalancesInvestments [other than ling term investments ]i)Government &Other Trusted Securitiesii)Fixed Deposits with banksi)Receivables other than deferred& exports [including Bills purchased and Discounted by banks]ii) Export receivables [including bills purchased/Discounted by bands ]Installment of Deferred receivables[ Due within on year]Inventoryi)Raw Materials [including stores and other items used in the process of manufacture ]a)Imported b)Indigenousii)Stocks-in-process iii)Finished Goodsiv) Other consumable Spares a)Imported b) IndigenousAdvances to suppliers of Raw Material Stores/SparesAdvances payment of Taxes Other Current Assets [including subsidy Recoverable]TOTAL CURRENT ASSETS[Total of 26 to 33] FIXED ASSETSGross Block [Land&Building, Machinery, capital work-in-progress]Depreciation to date NET BLOCK[35-36]OTHER NON-CURRENT ASSETS Investments /book debts/advances/deposits which are not current Assets [i]a)Investments in subsidiary companies/ affiliatesb)Others[ii]Advances to suppliers of capital Goods & Contractors [iii] Deferred receivables maturity exceeding on year[Iv]OthersNon-consumable stores &spares Other non-current assets including dues from directorsTOTAL OTHER NON-CURRENT ASSETS [Total o f 38 to 40]Intangible Assets [Patents, goodwill, preliminary expenses, bad/doubtful debts not provided for, etc.]TOTAL ASSETS [Total of 34,37,41&42]TANGIBLE NET WORTH [24-42]NET WORKING CAPITAL [(17+24)-(37+41-42)] To tally with [34-10]Current Ratio[ item 34/10]Total Outside Liabilities/ Tangible Net Worth[18/44]ADDITIONAL INFORMATION[I] Arrears of cumulative Dividend[ii]Gratuity liability not provided for [iii]Disputed excise /customs /tax liabilities[iii]Other Liabilities not provided fo

FORM - III Form III is the analysis of balance sheet of the company. First of all the total outside liabilities are calculated by adding total current liabilities which includes short term borrowings from bank, short term borrowing from others, sundry creditors, advances provision for taxation dividend payable, other statutory liabilities, deposits, debentures (redeemable within one year) and term liabilities which includes debentures preference shares (redeemable after one year), term loans, deferred payments credits, term deposits, other term liabilities.Secondly total liabilities are calculated by adding total outside liabilities and Net Worth.Thirdly the calculation of total asset is done by adding total current assets, net block, total other non current assets and intangible assets.Fourthly tangible Net Worth is calculated by subtracting intangible assets from Net Worth.Net working capital is calculated by adding total term liabilities with Net Worth and subtracting Net Block, totals other current asset and intangible asset to tally with total current assets less total current liabilities. The sole purpose of this form is to bring out the excess of total current assets over current liabilities i.e. the net working capital and tally the same with the total term liabilities + Net Worth Net Block, total other current assets and intangible assets.

Form IV: Comparative Statement of current Assets & current Liabilities

SI.no.Particulars2008-09 Actual2009-10 Projections

kalolkandlaphulpurAonlaParadeepimportesTotalkalolkandlaphulpurAonlaParadeepimportedTotal

1.

2.

3.

4.

5.

6.7.

8.

9.

10.

11.

12.

13.

14.A. A. Current Assets Raw Materials( including stores and other items used in the process of manufacture )

a)Indigenous Months consumption

Other consumable spares, excluding those included in 1abovea)Importedmonths consumption

b)Indigenous Months, consumption

Stock in progress months consumptionFinished GoodsMonths, cost of sales

Receivables other than exported &deferred receivables Export receivablesAdvances to suppliers of raw materials & stores/spares, consumables

Other current assets including cash bank balances& deferred receivables due within one yearTotal Current Assets

B.Current liabilities( other than bank borrowing for working capital)

Creditors for purchase of raw materials, stores and consumable sparesAdvances from customersStatutory liabilities

Other current liabilities[ specify major items ] short term borrowing, unsecured loans , dividend payable, instalment of term loan, deffered payment credit, public deposits , debentures etc.Total [ to agree with sub-total B Form iii]

Form IVForm IV is the comparative statement of current assets and the current liabilities where all the items of current assets and current liabilities are shown in details.Form v: Computation of Maximum permissible bank finance for working capital

SI.no.Particulars2008-09 Actual2009-10 Projections

kalolkandlaphulpurAonlaParadeepimportesTotalkalolkandlaphulpurAonlaParadeepimportedTotal

1.

2.

3.

4.

5.

6.

Total current Assets ( 9 in form iv)

Total other current Liablities ( other than bank borrowing)

Working Capital Gap WCG (1-)Actual/ Projected net working capital (45 in form iii)

Item 3 minus item 4

Assessed Bank Finance

a) b) O

ii)

Form VForm V is the computation of maximum permissible Bank Finance for the Working Capital.Items content Current Assets Current Liabilities The working capital Gap is calculated by subtracting the current liabilities from the current Assets. Minimum stipulated Net Working Capital 25% of the Working Capital Gap. Actual Net Working Capital

The bank finances the minimum of the above two, i.e. the minimum of stipulated Net Working Capital and the Actual Net Working CapitalSL NOPARTICULARS 31-MARCH-07 ACTUALS (1) 31-MARCH-08 ACTUAL (2) 31-MARCH-09FOLLOWING YR. PROJECTION (3)

1.

2.

3.4. 5.

6. 7.

8.

SOURCESa)Net profit (after tax)b)Depreciationc)Increase in capitald) Increase in Term Loans (incl.Public deposits)e) Decrease in i) Fixed assetsii) Other non current assetsf) Othersg)Total

USESa)Net Lossb)Decrease in share capitalc)Decrease in Term Loans (Including public deposits)d)Increase in i)Fixed assetsii)Other non-current assetse) Dividend paymentsf)Othersg)TOTALLong Term Surplus(+)/Deficit(-)(1-2)Increase / decrease in current assets (As per details given below)Increase /decrease in current liabilities other than bank borrowings ( as per details given below)Increase / decrease in working capital gapNet surplus (+)/deficit(-) Difference of 3 and 6Increase /Decrease in bank borrowings INCREASE / DECREASE IN NET SALES [Including subsidy]

The Bank sanction the 75% of the working capital Gap i.e. the amount excess of the current asset over the current liability. For instance the Working Capital Gap of IFFCO is Rs. 2670 crore then the company will be eligible for a loan of 2000 crore only.The reason behind this evaluation is because the Current Assets that is the Stock of Finished Goods, Book debts and the Subsidy receivable remains hypothecated with the Consortium (consortium is the group of banks that together provide the Cash Credit to the company of the agreed limit). This is done because if the company fails to repay the banks loan then the bank can liquidate its current assets and recover its money. The original value of current assets cannot be recovered if it is liquidated instantly. Thus to be in the safer side the 75% of the total amount of working capital gap is provided as cash credit.

CHAPTER - 3

The Financial Performance has been analyzed by grouping the Financial Ratios in four broad categories:1. Liquidity Ratio2. Leverage Ratio3. Profitability Ratios4. Activity Ratios1. Liquidity Ratio: - Liquidity ratio measures the firms ability to meet current obligations. Current Ratio:-For 2007-08 = Current asset/ Current liabilities = 5575.74/1371.57 = 4.21 i.e. =4.21:1For 2008-09 =7672.99/3782.89 =2.41 Objective:- Current ratio shows the short term financial position of the business. This ratio measures the ability of the firm to pay its current liabilities. The ideal current ratio is supposed to be 2:1 i.e. current assets must be twice the current liabilities. In case this ratio is less than 2:1 the short term financial position is not supposed to be very sound and in case, it is more than 2:1, it indicates idleness of working capital. Regarding IFFCO, the current ratio is above the standard yardstick that shows the firms ability to pay its current liabilities. Company has 4.21 Rs. Current assets for 1Rs. Current liabilities in financial year 2007-08. But it decreased in 2008-09 but still yet it is up to the standard yardstick.

YearCurrent AssetsCurrent LiabilitiesCurrent Ratio =Current Assets / Current Liabilities

(Rs.In Lakhs)(Rs. In Lakhs)

2003-042564.02902.442.84

2004-052603.981104.842.36

2005-064748.981361.593.49

2006-076071.971201.235.05

2007-085775.741371.574.21

2008-087672.993782.892.41

Quick ratio:-For 2007-08, = Current asset Inventory /Current Liabilities = 5775.74-1577.10/1371.57 = 3.06i.e. = 3.06:1For 2008-09 =7672.99-1731.36/3182.89 = 1.87

Objective: - Quick ratio is calculated to work out the liquidity of a business. This ratio measures the ability of the business to pay its current liabilities in a real way. The ideal quick ratio is supposed to be 1:1 i.e. quick assets must be equal to the current liabilities. In case, the ratio is less than 1:1 it shows a very weak short term financial position and in case it is more than 1:1 it shows a better short-term financial position.

2. Leverage Ratio:- Judge the long term financial position of the firm.

a) Total Debt Equity Ratio :- = Total debt/ net worth = 6775.64/3688.66 = 1.84 i.e. =1.84:1For 2008-09 = 12802.78/ 3958.87 =3.23

Objective: - Debt to total funds (net worth) ratio shows the proportion of long term funds. Which have been raised by way of loans. This ratio measures the long term financial position and soundness of long term financial policies. The debt to total fund ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not considered good and treated an indicator of risky long term financial position of the business. It indicates that the business depends too much upon outsiders loan.

Regarding IFFCO, the total debt equity ratio is 3.23:1 which shows that company is using more debt from outside to meet its working capital requirements, which is not a good indicator.

b) Coverage Ratio:- Interest coverage ratio or the times interest earned is used to test the firms debt servicing capacity.For 2007-08, Interest coverage = EBIDT/ Interest = 1180.82/389.37 = 3.03For 2008-09 = 1935.55/1023.20 =1.89Objective:- The interest coverage ratio shows the number of times the interest charges are covered by funds that are ordinary available for their payment. A higher ratio is desirable, but too high a ratio indicates that the firm is very conservative in using debt, and that it is not using credit to the best advantage of shareholders. A lower ratio indicates excessive use of debt, or inefficient operations. The firm should make efforts to improve the operating efficiency, or to retire debt to have a comfortable coverage ratio.In case of IFFCO the interest coverage ratio 1.89 shows that the firm is earning sufficient profit to meet its interest obligations on the short term and long term borrowings.3. Profitability Ratio:- It measures the overall performance and effectiveness of the firm.A) EPS (Earning per share) :- For 2007-08, = PAT (profit after tax) /no. of Shares = 258 cr. /4239 lakhs = 6.08

For 2008-09, = 360/42.39 = 8.43 Objective: - Earning per share helps in determines the market price of the equity share of the company. It also helps to know whether the company is able to use its equity share capital effectively with compare to other companies. It also tells about the capacity of the company to pay dividends to its equity share holders.Regarding IFFCO the earning per share has increased in year 2008-09 which shows that the company is able to use its equity share capital effectively. b) Return on Capital Employed :-For 2007-08= PBT (profit before tax)/ Capital employed = 380.52/10830.235 = 3.51For 2008-09, = 441.95/14151.13 = 3.12

Objective: - Return on capital employed measures the profit, which a firm earns on investing a unit of capital. The profit being the net result of all operations, the return on capital expresses all efficiencies and inefficiencies of a business. This ratio has a great importance to the share holders and investors and also to management. To shareholders it indicates how much their capital is earning and to the management as to how efficiently it has been working. This ratio influences the market price of the shares. The higher the ratio, the better it is.

Regarding IFFCO the return on capital has decreased in the year 2008-09 which is now 3.12%. Due to the higher cost of production it decreased. This ratio influences the market prices of the shares.

5. Activity Ratio:- Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets.a) Debtors turnover ratio :- = Sales/ Avg. debtors = 12162.82/ 3194.69 = 3.81 Objective: - This ratio indicates the efficiency of the concern to collect the amount due from debtors. It determines the efficiency with which the trade debtors are managed higher the ratio, better it is as it proves that the debts are being collected very quickly.

Regarding IFFCO the debtors turnover ratio is 3.81:1 which shows the efficiency of the company to collect the amount due from debtors is excellent.b) Working capital turnover ratio :- For 2007-08, = Sales / Avg. working Capital = 12162.82/4642.11 = 2.62For 2008-09, = 339.33/4447.135 = 7.63

Objective: - This ratio indicates the number of times the utilization of working capital in the process of doing business. The higher is the ratio, the lower is the investment in working capital and the greater are the profits. However, a very high turnover indicates a sign of over trading and puts the firm in financial difficulties. A low working capital turnover ratio indicates that the working capital has not been used efficiently.

In case of IFFCO, there is big change in working capital ratio that is 2.62:1 to 7.63:1. That shows that the requirement of working capital management of society is excellent with minimum collection period of debtors and cash realization.

c) Fixed assets turnover ratio:- For 2007-08, = Net sales /Net fixed assets = 12162.82/ 5099.75 = 2.38 For 2008-09 = 33933/5213 = 6.32

Objective: - This ratio expresses the number to times the fixed assets are being turned over in a stated period. It measures the efficiency with which fixed assets are employed. A high ratio means a high rate of efficiency of utilization of fixed asset and low ratio means improper use of the assets.Regarding IFFCO the fixed assets turnover ratio in year 2008-09 is 6.32:1 that shows the optimum utilization of fixed assets. In comparison of previous year the ratio has increased from 2.38:1 to 6.32:1. Subject:- Analysis of Financial Performance of IFFCO viz-a-viz other companies in the fertilizer sector for the year ended 31st March, 2008. The salient features brought enclosed statement is given as under:1. Physical Performance: During the Financial year2007-08, IFFCO has produced 68.48 lakh MT fertilizer which is highest amongst the all other fertilizer companies. However, the total fertilizer production of top three companies in the fertilizer sector for the financial year 2007-08 is as under:Name of the company Production (LMTs)

UREACOMPLEXTOTAL

IFFCO39.6428.8468.48

NFL32.6800.0032.68

RCF18.3204.6823.00

Similarly IFFCO has achieved highest sales of 68.48 lakh MT, which is also highest amongst all companies in the Fertilizer sector. However, other than IFFCO Rank-wise other two companies are NFL and RCF, which have achieved sales of 32.68 lakh MTand 23.00 Lakh MT respectively.Financial Performance:-Since IFFCO has achieved highest sales of 68.48 lakh MT fertilizers amongst all fertilizer companies during the year 2007-08, the performance of the society is also highest in terms of all financial parameters i.e. Turnover, operating Profit, Profit before Tax and Profit after Tax. However, the ranking of top three companies in each of these financial parameters is given as under:

NAME OF THE COMPANYTurnover( Amount Rs. Crore )

1.IFFCO12162.82

2.RCF5137.27

3.NFL4141.00

FINDINGS:- After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that :-

Current assets are increasing more than current liabilities. Cash & Bank Balances have decreased sharply, which indicates proper utilization of funds at IFFCO. Position of inventory is Very Good in current assets (31.99%). Inventory Turnover Ratio increases consistently, which shows greater degree of utilization of inventory during the study period. Position of Debtors To Current Assets is average (14.760 %). This ratio had increased from the year 2001-02 to 2003-04 showing a liberal credit policy followed by the company. Large part of working capital is involved in maintaining inventory. Working capital of the company increases from 149914 in 2004-05 to 33873 in 2005-06. Inventory as a component of current assets is high (35.78%) as compared to the other components.

CONCLUSIONS & SUGGESTIONSWorking capital is one of the most important aspects of operational efficiency of business. Working Capital plays a very important role in the functioning of any organization. Both the current assets & current liabilities are very much influencing factors on the working capital of an organization.

After the discussion and analysis of the financial position of IFFCO Ltd.., it is clear that the working capital of IFFCO is in sound position. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital.

In current assets also, there are two most important factors that are Debtors and Inventory that affect working capital. In IFFCO Ltd. Inventory and Debtors are efficiently managed to strengthen the position of the organization both in short term and long terms.After analyzing and interpreting the financial data of INDIAN FARMERS FERTILIZER COOPERATIVE LIMITED with the help of Ratio Analysis, the following suggestions were given to the organization for further betterment & improvement in the working capital: The present status and levels of current assets is extremely good and therefore it requires proper maintenance.It can be observed that there is though large sum of current assets than the ideal ratio 2:1, however it is because of the selling of government special Bonds. The current percentage of cash is too high which means there is a need to route this idle cash inorder to increase the profitability of the firm.

BIBLIOGRAPHY

Book Pandey,I.M.(IIMA),Fanancial management(theory practices) Khan,M.Y. and Jain,P.K.Fanancial Management (text problems),second edition, Tata Mc-Grawhill Publishing company Ltd. Dr.S.N.Maheshwari,Management Accounting and Financial control Thirteen edition, Sultan Chand & Sons. JOURNALS The Management Accountant,vol.39,no.7,july 2007 The Management Accountant,vol.39,no.5,july 2007 Revenue Budget IFFCO Account Manual IFFCO Statement Of F&A Section IFFCO Annual Reports of IFFCO WEB SITES www.iffco.nic.in www.google.com www.indiatimes.com www.investopedia.com

79