PROJECT REPORT

On

A STUDY ON WORKING CAPITAL MANAGEMENT OF HINDUSTAN

NEWSPRINT LIMITED KOTTAYAM

Submitted by

TRACY BAZIL

In partial fulfillment of the award of the degree of

Master of Business Administration

Of

COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY

DEPARTMENT OF MANAGEMENT STUDIES

Toc H INSTITUTE OF SCIENCE & TECHNOLOGY

Arakkunnam P.O, Ernakulam District, KERALA – 682 313

Toc H INSTITUTE OF SCIENCE & TECHNOLOGY

Arakkunnam P.O, Ernakulam District, KERALA – 682 313

DEPARTMENT OF MANAGEMENT STUDIES

Certificate

This is to certify that the project entitled “A STUDY ON WORKING CAPITAL

MANAGEMENT” submitted By TRACY BAZIL of Semester is a bonafide

account of the work done by her under our supervision, during the academic year

2009-2010

(Faculty Name) …………………………...

Project Guide Head of the Department

JAISHU ANTONY MANAVALAN

DECLARATION

I the under signed TRACY BAZIL declare that the project report entitled “A

STUDY ON WORKING CAPITAL MANAGEMENT IN HINDUSTAN

NEWSPRINT LIMITED, KOTTAYAM” submitted by me under the guidance of

Mr JAISHU ANTONY MANAVALAN in partial fulfillment of the requirement

for the award of the degree in MBA is my original work. The impartial findings in

the report are based on the data collected by myself and I have not copied from any

report submitted to any university either this or in the previous report year.

PLACE:

DATE : TRACY BAZIL

Acknowledgment

It gives me extreme pleasure and satisfaction to express my sincere

thanks to all those who helped me directly and indirectly to make this study a

faithful one.

First of all, I would like to express my gratitude to my research guide

Mr Jaishu Antony Manavalan (faculty, MBA department) for the unlimited

encouragement and generous help without which this study would not have been

completed. And also I would like to express my sincere thanks to Dr. Job Kuruvila,

Principle of Toch College and all the faculty members of MBA Department.

I like to express my heartfelt gratitude to Mr Narayana Swamy (Project

Guide) of Hindustan Newsprint Company Limited and all those employees of

Hindustan Newsprint Company LTD who gave me their help and information

necessary for this study. And I remember with gratitude all my friends and

classmate for their unreserved support.

I am very much thankful to the almighty God for having blessing to

complete my project successfully.

CONTENTS

CHAPTER ITEMS PAGE NO:

List of tables

List of figures

1 Introduction

Objectives of the study

Scope of the study

Research methodology

Research design

Data source

Period of the study

Limitations of the study

2 Industry profile

Paper

World scenario

Indian scenario

State scenario

3 Company

History of the company

Strengths of the company

Operational & financial leverage

Production summary

Financial results

Functions of the finance department

4 Theoretical perspective

Introduction

Meaning of working capital

Working capital management

Classification of working capital

Sources of working capital

Measures to improve working capital

Different aspects of working capital

Factors affecting working capital or requirements or

determinants of working capital

Approaches or methods of estimating working capital

Working capital cycle

Working capital policies

5 Data analysis and interpretation

Current asset details

Current liabilities details

Computing of working capital

Schedule of changes in working capital (2000-2008)

Current ratio

Inventory turn over ratio

6 Findings, suggestions, conclusions

7 Bibliography

Annexure

EXECUTIVE SUMMARY

A well designed and implemented working capital management is expected to contribute positively to the creation of a firm’s value. “Working Capital” is the capital invested in different items of current assets needed for the business, viz, inventory, debtors, cash and other current assets such as loans & advances to third parties. Those current assets are essential for smooth business operations and proper utilization of fixed assets. The firm should maintain sufficient level of working capital to produce upto a given capacity and maximize the return on investment in fixed assets. Shortage of working capital leads to lower capacity utilization, lower turnover and hence lower profits. Working Capital, in excess of the amount required to produce to full capacity, is idle and consequently leads to decline in profits. Hence the dictum “Adequacy is a virtue, surfeit is not”.

This study concentrates on the main components of working capital like inventory management, accounts receivable management and cash management of HNL for the period F.Y 2004-2009. The tools used in this study includes ratio analysis, trend analysis and percentage method.

CHAPTER-1

INTRODUCTION

INTRODUCTION:

Every business whether big, medium or small, needs finance to carry on its operations and to achieve its target. Infact, finance is so indispensable today that its rightly said to be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish its objectives. So this chapter deals with studying various aspects of working capital management that is necessary to carry out the day-today operations. The term working capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories funds invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence it is known as revolving or circulating capital. On the whole, Working Capital Management performs a key function and is of top priority for every finance manager. All managers must, however, keep in mind that n their pursuit to liquidity, they should not lose sight of there basic goal of profitability. They should be able to attain a judicious mix of liquidity and profitability while managing their working capital.

OBJECTIVE OF THE STUDY

PRIMARY OBJECTIVE:

1. To analyze the firm’s Working Capital position.

2. To study the working capital performance of the company.

SECONDARY OBJECTIVE :

1. To determine the composition of current assets and current liabilities.

2. To study the operational performance of the company.

3. To study the financial performance of the company for the last 5 years.

4. To ascertain the liquidity, solvency and profitability positions of the firm.

5. To study the stock level.

SCOPE OF THE STUDY

The study is on working capital management of Hindustan Newsprint Ltd, Kottayam. The study

furnishes the management of idea about the performance of working capital of the company.

Management of working capital refers to management of current assets, current liabilities and

relationship between them. The basic goal of working capital is to maintain the satisfactory level

of working capital. A sound working capital policy ensures higher profitability and proper

liquidity of a firm. Every business needs funds for two purposes: for its establishment and to

carry out its day to day operations. Similarly HNL also need funds to carry out its operation and

establishments. For this purpose it is important for the company to manage its short term assets

and liability.

Working capital is quite essential for the working of any business. For a good manufacturing company, some basic capital for producing the goods is required before it starts selling them. It has to take care of production expenses, administration expenses as well as selling expenses. Moreover, since business is usually done on credit, there is a time lag between the date of sale and date of receipt of revenues, which can be as high as 90 days at times. Considering all these, it is essential that a company has sufficient capital to keep it going before it coverts its purchases into goods and then finally into cash.

Each and every study has its own scope. This project intends to study the working capital

position of the HNL.This study helps to identify the areas that could be improved. Further

suggestions were quoted which the company could use it in the future program enhancing better

utilization of all resources.

METHODOLOGY

The study exhibits both descriptive and analytical character. Regarding the theoretical concept it

is descriptive since it interprets and analysis the secondary data in order to arrive at appropriate

conclusion, it is also analytical in character. The interpretation of data is done based on ratio and

percentage

PRIMARY

Primary data has been obtained through personal discussions with managers and senior officials

of the organization.

SECONDARY

Secondary data’s has been obtained from published reports like the annual reports of the

company, balance sheets, and profit and loss account, booklets, records such as files, reports

maintained by the company. Mainly the annual report consists of two parts;

1) Profit and Loss Account

2) Balance Sheet

Profit and loss account reveals the income and expenditure of the company. Balance Sheet

reveals the financial position of the organization. Those two statements are prepared by the

highly qualified and experts with the help of available information or data.

TOOLS USED FOR THE ANALYSIS

1. Trend Analysis

2. Ratio Analysis

3. Operating Cycle Analysis

4. Working Capital Leverage Analysis

5. Schedule of changing in working capital

PERIOD OF STUDY

The present study deals with the data collected from the annual reports and other relevant

documents for the period commencing from 2004-2005 to 2008-2009.

LIMITATIONS

The data’s were collected mainly on the basis of secondary data. So all the limitations of

secondary data are applicable.

Due to busy work schedule, detailed discussions were not possible.

The data collected for the study was historic in nature, so the suggestions will be

irrelevant.

CHAPTER- 2

INDUSTRY PROFILE

INDUSTRY PROFILE

Paper is one of the important industrial products used for the production of books, magazines

and newspaper. Educational, government and industrial sectors cannot operate without paper.

Other important paper products include cardboard, which is used in packing and adsorbent paper

such as tissue and towels. The different type of the paper being produced is paper, paperboards

and newsprint. Newsprint is a major material input into production of newspapers. During the

course of analysis of the paper industry there is an imperative need to study the prospects of

newsprint industry.

Prior to 1956, India did not have any newsprint mill. Hence, imports alone met the demand

for newsprint in India. It was only in early 1956 that the first mill, owned by government, came to

produce newsprint in India. Since then additional government-owned and many private mills had

sprung up. At present, the newsprint manufacturing industry consists of 73 mills. Five of the mills

are “large”, and these account for about one-third of the total installed newsprint capacity in India.

However, by current international trends it is debatable whether all five mills can be regarded as

“large.” The industry, consisting of many small mills that use obsolete technology and machines,

is further characterized by relatively high costs of papermaking fibre, energy and transport.

In addition, the quality of newsprint produced tends to be poor. India’s newsprint

manufacturers, particularly its medium to small mills, have difficulty competing against imports.

The problem is however not confined to newsprint industry; it extends to India’s several

manufacturing industries ― a lingering result of government policies in the past (Kochhar, et al.

2006). As a result of the introduction of economic liberalisation policies and other developments

since early 1990s, the industry situation is improving but not fast enough to keep pace with the

rising demand for newsprint by the rapidly expanding newspaper industry.

Notwithstanding the problem of competing against newsprint imports, India has been exporting

newsprint on a regular basis since early 1990s. But the quantities have been relatively tiny. In

contrast, imports have been huge. Not surprisingly, the gap between imports and exports has

widened over time.

India turned into a significant net importer of newsprint in 2005, when it was the world’s fifth

largest importer of newsprint. The top four world importers in descending order were the United

States of America, the United Kingdom, Germany and China. Leading suppliers of newsprint to

India were Canada and Russia, together accounting for 60-70 per cent of India’s total imports.

In 2005, India’s net imports satisfied 53 per cent of its total consumption of 1.3 million tons

of newsprint. To put India’s newsprint consumption in perspective, Australia’s newsprint

consumption for the same year was 0.8 million ton and Korea’s 1.0 million ton. Continuing with

international comparison: India was the third largest consumer of newsprint in Asia, with Japan

the second largest at 3.9 million tons and China the largest at 4.1 million tons.

Based on the estimated model and specific assumptions about future prices of newsprint and

economic growth rates, we forecast that consumption of newsprint in India could be 3.1 to 3.7

million tons by 2010.

The demand of the newsprint is dependable on literacy rate of the population, number of

magazines and newspaper etc. The increase in rate of literacy now will hike newsprint demand.

It’s estimated that newsprint segment will grow by 6-7% in the next coming years.

WORLD SCENARIO

International trade in the paper industry has not been significant. In the world, United States

consumption of paper and cardboard averages about 300 kilogram per person each year. Nearly

64 million metric tons of paper and cardboard are produced in the United States annually. Paper

industry tends to be concentrated in those countries that are industrially advanced and have

abundant supplies of fibrous raw material wood.

There is large-scale international trade for wood pulp; pulpwood is flowing from those countries

with large forest resources to those countries that are under-developed. The Chinese are credited

with the invention of paper in AD 105. From China the knowledge of papermaking traveled

gradually westward and the Arabs are known to have made paper in the eighth century. As the

art progressed westward through Morocco and through Spain in Europe, the process was

constantly improved.

The major restructuring programmes embarked upon world’s leading paper companies in 2005

will not begin to be reflected in full year results until the end of the 2006 financial year. Hence

International Paper, Stora Enso and Svenska Cellular (SCA) retained their one-two-three spot in

Paper and Pulp International top 100 for 2005 and each with an increase in net sales. For the top

100 as a whole, net sales from pulp paper and converting operations were up 3.7% and $ 281,

175.6 million. Earning however remained depressed at a combined total of $ 17, 905.1 million,

compared to $ 19,764.4 million for same for same top 100 companies year earlier.

The future of this industry is very bright. Word paper and board demand has grown rapidly over

three consecutive years reaching to a record of 359 million tons in 2004. The growth has been in

the east and south, namely Asia-Pacific, Eastern Europe and South America. The new forecast

for long term paper demand and supply looks at what seems contradictory-a slowing demand but

an explosive growth. The shift in growth from west to east and from north to south was particular

dramatic in 2001 to 2204. In this period Asia accounted for 64% of the global demand growth,

while North America and Western Europe contributed only 11% and 10% respectively. Eastern

Europe only has 4% of global market, but earned 9% of the global demand growth in that period.

If prospects are modest in the industrial west, they are dramatic in the BRIC countries with

Asia’s share of global production raising from 35% to 42% Asia will be responsible for 60% of

the growth of which china and India will be the leaders.

INDIAN SCENARIO

Newsprint is a special type of paper used in newspaper and magazines. At present there are 22

newsprint-manufacturing units in our country with a total capacity of 600000 TPA, of which 5

public sectors unit alone constitutes 63% of the total capacity. Demand for newsprint, which is

dependent on the literacy rate and growth of newspaper and magazines publishing industry has

increased every year. Imports have a significant impact on the industry. Newsprint pricing is

expected to grow by around 6.5% per annum while supply may grow at a much slower pace The

total manufacturing capacity of 6 Lakhs tons constitutes by 22 mills manufacturing newsprint in

the country, of which 5 are public sector units. Wood based units constitute about 58% of the

total capacity while agro and waste paper based unit’s accounts for 23% and 19% of the

newsprint capacity respectively. All public sector units with the exception of TNP are wood

based.

The paper industry in India is more than a century old. At present there are over 600 paper mills

manufacturing a wide variety of items required by the consumers.

 These paper mills are manufacturing industrial grades, cultural grades and other specialty

papers. The paper industry in India could be classified into 3 categories according to the raw

material consumed.

1. Wood based

2. Agro based &

3. Waste paper based

While the numbers of wood based mills are around 20 and balance 580 mills are based on non-

conventional raw materials.

The Govt. of India has relaxed the rules and regulations and also relicensed the paper industry to

encourage investment into this sector and joint ventures are allowed and some of the joint

ventures have also started in India. The paper industry in India is looking for state-of-art

technologies to reduce its production cost and to upgrade the technology to meet the international

standards.

It is estimated that the paper industry would be growing at the present rate of 7-8% of

compounded rate and would require 9.5-10 million MT by the end of the decade from the

existing production of around 6.7 million tones.

resulting in increased imports.

Estimated Demand of Paper in the Country  

The demand is growing @ 7% to 8% CAGR per Annum and is likely to reach to 9.5-10

million MT by the end of decade

Projected Demand in Million Tones is 8.100 by 2006-07, 8.500 by 2007-08 and 9.00

respectively.

The Indian paper industry has been exposed to direct competition from international players in

the recent times after import duties where lowered to favor the entry of such competitors. From

a height of 140%, the duties were reduced to a low of 20% in as span of 5 years. The import

duties have been currently fixed at 30%. The newsprint mills have been adversely affected by

this decision of the government. Due to overall all rise in costs, the paper mill began activities to

generate the economies of scale .Several of the mills went on a cost cutting measure by

generating their own power and electricity via co-generation. The medium sized paper mills too

followed the suit observing the success of the large scaled mills. In spite of these measures being

taken ,the Indian paper industry still confronts various other challenges, such as uncertain

market condition. Due to these reasons some small companies are compelled to shut down as

they could not meet the rising cost of operation and could not confirm to the norms and standards

set by Pollution Control Board.

The share of newsprint in the total cost of production of newspapers is likely to vary across

newspapers and over time. However, the fact that this share for the Hindustan Times group of

newspapers in India is currently around 40 to 50 per cent shows that newsprint is a major

material input into production of newspapers (HT Media Ltd, 2006).

Over the 25 years, production, imports, exports and consumption of newsprint in India have all had rising trends . Some computed trend growth rates indicated that the average annual growth rate of production was 7.6 per cent, imports 5.4 per cent and consumption 6 per cent. In the first half of the period, the consumption growth rate was 3.8 per cent a year; the rate more than doubled to 8.8 per cent in the second half, indicating acceleration in newsprint consumption by India's newspapers.

STATE SCENARIO

Hindustan newsprint ltd is a government company in the central public sectors. Hindustan

Newsprint Ltd was incorporated as a wholly owned subsidiary of the Hindustan Paper

Corporation limited (HPC) on June 07, 1983. HNL produces exceptional quality newsprint for

the Indian and International market. The strength properties of HNL newsprint are comparable to

the best in world market. In 1998, HNL became the first newsprint manufacturers in the country

to achieve the coveted ISO-9002 certification.

CHAPTER-3

HINDUSTAN NEWSPRINT LIMITED

PROFILE

COMPANYPROFILE

Hindustan Newsprint Limited (HNL) is a Government of India Enterprise under the

administrative jurisdiction of the Department of Heavy Industry, Ministry of Heavy Industries

and Public Enterprises. HNL was incorporated as a wholly owned subsidiary of the Hindustan

Paper Corporation limited (HPC) on June 07, 1983.

The Government of India had established HPC on May 29, 1970 for developing indigenous

capacity in production of paper and newsprint with a view to reduce dependence on imports.

HPC launched the Kerala Newsprint Project (KNP) in 1976. The Kerala Newsprint mill rolled

out the first newsprint reel on February 26, 1982 and went into commercial production with

effect from November 01, 1982. HNL took over the business of KNP with effect from October

01, 1983.

The core competence of HNL lies in its highly skilled technical manpower, which is rated as the

best in the domestic Newsprint industry and the quality of its product , which is comparable with

international standards. The fact that HNL maintains its profitable track record in a very

challenging post-liberalized business environment characterized by abysmally low import duties

(3%) which is quite lower than even the WTO bound rates (25%) without any protection, support

or preferential treatment stands testimony to the international competitiveness of the company.

Business mission

“The objective of HNL is to be a dominant player in Indian pulp and paper industry by adopting

world class environment friendly technologies and best practices”.

Today, HNL produces exceptional quality newsprint for the Indian and International market. The

strength properties of HNL newsprint are comparable to the best in world market. It is a matter

of great pride for the company that its product is always compared with imported newsprint.

HNL, with its state-of-the-art technology, has emerged in its short span of operations as a

company that is truly contemporary in a global context.

The Quality Management System has been recertified to ISO 9001: 2000 in November 2002.

HNL is also certified to ISO 14001: 1996 in October 2000 for its Environment Management

System. The QMS was recertified in 2003. Fully integrated enterprise resource planning (ERP)

system in vogue since the year 2001 has enabled the company to streamline the processes and

procedures and made it an agile user of IT.

Presently, the company is in the process of implementing a strategic business plan for up scaling

its production capacity with up gradation of the product portfolio. Cabinet committee on

economic affairs (CCEA), Government of India has accorded approval for the project on May 9,

2006. The expansion cum diversification project(EDP),includes a 1,70,000 tons per annum paper

machine ,100 tons per day De-inking plant and a power block consisting of a 150 tons per hour

boiling and a 25 MW Turbo generator with all the associated facilities.

EDP is a brown field project. It would closely integrate the present manufacturing facility with

the proposed one. The EDP configuration is tightly optimized by maximizing the utilization of

present space, land, infrastructure, and auxillaries etc.Environment-friendly and state -of -the -art

technology solutions are formulated as part of the process configuration. The product grades

from the EDP are slated to compete with the best in class . Maphlitho/non-surface sized paper,

copier paper and film coated varieties are included in the product portfolio of EDP.

With the launch of EDP, HNL expects to seize the emerging opportunities in the writing and

printing segments of the industry. In addition, EDP will upscale the capacity to reasonable levels

while significantly mitigating the risks inherent with a single product.

The Company has established an OH&S Management system in accordance with the

requirement of OHSAS standard, 18001:2007. The Occupational Health and Safety Assessment

Series (OHSAS) specification gives requirement for an Occupational Health and Safety

Management System to enable the organization to control its OH&S risk and improve its

performance. A system of this kind enables an organization to develop an OH&S policy,

establishes objectives and processes to achieve the policy commitments, take action needed to

improve its performance and demonstrate the conformity of the system to the requirements

OHSAS standards to support good OH&S practices, in tune with Socio-Economic needs.

HNL AS A RESPONSIBLE CORPORATE CITIZEN

It is said that in today’s fast changing technological situation, one has to keep running to stay at

the same place. Keeping in view this dictum,HNL has been making continuous effort to upgrade

its technology, to modernize its machines and equipments and fully utilize their inbuilt capacity,

to reduce cost, to eliminate waste, to conserve scarce resources like energy, raw materials, etc

and to implement effective measures for environmental protection. At the same time, HNL has

also implemented several welfare schemes not only for its employees and their families but also

to the general public at large in the neighboring areas.HNL has also substantially contributed all

these years to the revenues of both state and central governments. On the whole , HNL has

emerged as a very responsible corporate citizen.

HNL’S credentials in pollution control and in piloting environment friendly methodologies for

newsprint production have been widely acknowledged. Kerala state pollution control Board has

awarded the company with first place among among large scale industries in the year 2005 and

second place in 2006 in making substantial and sustained efforts in pollution control. HNL has

been ranked with ‘two leaves ‘rating in the green rating exercises conducted in the years 1999

and 2004 by centre for science and environment (CSE) New Delhi.

At HNL, pollution control is an integral part of production. In tune with National priorities and

social obligations, HNL has adopted a policy of reciprocating the gifts of nature.

The effluent treatment system initially installed at a cost of Rs.46 million has been upgraded in

1994 with an additional investment of Rs.52 million. Annually the company spends Rs.25

million for effluent treatment. In-plant control measures have substantially lowered fresh water

consumption. Generation of waste water is minimal and in keeping with the national standards.

HNL is the only mill in the country, which, in addition to meeting all parameters for effluent

treatment, decolorizes the effluent before discharge. HNL is also the first to substitute 90% of

chlorine in bleaching with environment friendly Hydrogen peroxide thereby reducing toxic

discharges.

HNL has been successful in bringing down solid waste to near zero level.

Entire fly ash has been utilized by an auxiliary unit for producing Portland Pozzolona

cement.       

Bottom ash is used for making construction bricks.

Lime sludge is reburned to produce the lime required in the production process.

Chipper waste, DIP sludge and effluent sludge are utilized as secondary fuel in FBC boilers.

HNL has Electro Static Precipitators (ESP) and Dust Collectors to control atmospheric

pollution and to preserve the lush green vegetation of over 30,000 trees around the plant, this is

no small achievement. The United Nations Environmental Programme (UNEP) has selected

HNL as the model paper mill in the Asia Pacific Region under its NIEM programme. Besides

this, HNL has bagged the Kerala State Pollution Control awards in 1997-98, 1999-2000 and

2002 for the best pollution control measures and processes adopted in the mill.

A survey of the Indian Pulp and Paper Industry, the first-ever "Green Rating" exercise in the

country by the Centre for Science and Environment (CSE) and supported by the Union Ministry

of Environment and Forest and the United Nations Development Programme (UNDP) has rated

HNL among the first five environment friendly paper mills.

Newsprint of HNL has following characteristics:-

Capacity to see through, as the newspaper is printed on both sides.

Suitable to run with the modern high printing process without any break.

Brightness level at par with that of the imported newsprint.

Less bulky newspaper due to low gram mage.

Capacity to absorb instantaneously the mineral oil present in the printing ink to avoid

blurring of impression.

The Environmental Management System which has been ISO 14001 certified since October

2000 is in place in the company, focusing on continual improvement in pollution abatement

measures and adhering to the norms prescribed by the Kerala State Pollution Control Board. The

Company has already met the majority of action points as per charter on Corporate

Responsibility for Environmental Protection (CREP).

The company has given due importance to the development of Human Resources by imparting

need based training to the employees to equip them to meet their individual task demands as well

as organizational objectives.

Management of the company is vested in the hands of Board of Directors, including a chairman.

The number of directors of the company should not be not less than two and more than twelve.

The chairman and M.D of HPC (Hindustan Paper Corporation) shall be chairman of the

company and all other directors are appointed by HPC with the approval of the President of

India. Presently,Sri. Raji Philip is the chairman and Sri. N. P. Prabhu is the MD of the company.

AWARDS

MOU Excellence Award

Hindustan Paper Corporation was bestowed with the prestigious MoU Excellence Award for

performance during the FY 2005-06.

The Memorandum of Understanding (MoU) is a mutually negotiated agreement between the

Public Sector Enterprises (PSEs) and the Government of India. Under this agreement, a PSE

undertakes to achieve the targets set out at the beginning of each financial year. The MoU covers

both financial and non-financial parameters and the performance is measured on a weighted 5-

point scale. The MoU award was given only to the top ten PSEs securing excellent rating.   

National Energy Conservation   Award  

Hindustan Newsprint Limited has been selected for the certificate of Merit in the Pulp and Paper

sector for the National Energy Conservation Awards-2005.

State Pollution Control Board Award  

 Hindustan Newsprint Limited bagged the second prize for pollution control activities in the

category of large-scale industries, instituted by Kerala State Pollution Control Board for the year

2007.The award was a true recognition to the sustained efforts and commitment of HNL in

preserving the environment

Productivity Award

Hindustan Newsprint Limited got productivity award for the year 2007-2008.

Production Process

a) Input Requirements

Fibrous raw materials like wood, reed, bamboo etc.

Old Newspaper (ONP) and Old Magazines (OMG) for De-Inking Plant

Chemicals used in pulp and paper making like caustic soda, hydrogen peroxide etc.

Packing materials like kraft paper, grey board etc

Imported machineries and spares

General spares like motors, bearings etc.

Fuels like coal, furnace oil etc.

Fiberous raw material:

HNL meets a major portion of its requirement for fibrous raw materials from forest sources. The

credit for the superior quality of HNL newsprint goes to the unique raw material: Reed

(Ochlandra travancorica) which is a specialty of Kerala forests. The company has a long-term

agreement with the Government of Kerala for the supply of Eucalyptus wood and Reed from

state forests. Dwindling forest resources has led to this supply getting diminished in the past few

years.

HNL has developed appropriate alternatives by:

Raising captive plantations using own resources and technical know-how on land allotted

for that purpose by Govt. of Kerala, and also on vacant land made available by various

institutions like Railways.

Encouraging pulp wood cultivation on agricultural land through implementation of farm

forestry schemes.

Procuring raw materials from neighbouring states where they are available.

Buying Eucalyptus, Bamboo and other 'pulpable' raw materials from local suppliers and

farmers directly under "Purchase at Gate" scheme.

Farm forestry scheme is implemented with the active participation of voluntary /

Nongovernmental Organizations (NGOs). Pulp wood seedlings of various species such as

Eucalyptus, Acacia, Mangium, Bamboo, Reeds etc. are distributed through NGOs.

High yielding clonal pulp wood plantlets developed at HNL clonal complex are also

distributed at subsidised rates. Approximately 155 lakh seedlings have been distributed

through this scheme among farmers all over Kerala.

Purchase at gate scheme was launched in 1998 as a complementary programme to Farm

Forestry scheme. As per this scheme, pulp wood materials are purchased directly from farmers

at a remunerative price at the company gate doing away with middle men.

Brief description about process flow:

CUSTOMERS

Newspapers printed on HNL newsprint greet millions of Indians daily morning. It is the

information carrier to millions. HNL Newsprint is preferred by the major publishing houses in

the country. Malayala Manorama, Mathrubhumi, Deshabhimani, Kerala Kaumudi, Mangalam,

Madhyamam, The Hindu, The New Indian Express, Sanmarg, Ananda Bazaar Patrika, Eenadu,

Vartha, Andhra Jyothi, Vijay Anand Printers, Deccan Chronicle, Deccan Herald, Lokprakashan,

Dinamalar, Sandesh, Thuglak, Kalki, Rashtra Deepika, Chandrika etc. are the majors among

HNL customers across the country. HNL is also establishing its market in Srilanka and Malaysia.

E arnings Per Share

Table 1

Year Face value of a share EPS

2004-2005 10 0.51

2005-2006 10 0.9

2006-2007 10 3.87

2007-2008 10 1.39

2008-2009 10 1.26

Number of Employees

HNL has a rich pool of qualified and experienced managerial and technical personnel with

total staff strength of 1035 permanent employees, out of which 761 employees (74% of the total

manpower) are technical staff, 89 supervisors and seniors, 185 officers. The company has a good

strength of contract workers also. The company has a harmonious industrial relation with the

management and trade unions.

The following four shifts are practicing at HNL i.e. General shift, A Shift, B Shift, C

Shift. The timing is as follows:

General Shift: 9 AM to 5.15 PM

A Shift: 6 AM to 2 PM

B Shift: 2 PM to 10 PM

C Shift: 10 PM to 6AM

PROGRESS MADE BY HNL

HNL has made steady progress in all its activities ever since its commissioning in the early

1980’s. Production, productivity and profitability were continuously registering upward trends.

During the year, 2003-04, HNL could achieve a peak production of 1, 12,555 tonnes of 49/45

GSM Newsprint. In matters of Human Resource development, HNL has made spectacular

progress. The officers and employees have been continuously upgrading and sharpening their

knowledge skills and innate capabilities. They form a dedicated and committed team. It is this

dedicated team of officers and employees, which is responsible for the continuous progress made

by the company in fulfilling its objective.

PRODUCT PROFILE

HNL produces a wide range of newsprint grades. Initially, the company was producing 52 GSM

(Grams per Square Meter) newsprint. Later, to meet changing market demands, HNL

commenced production of 48.8 GSM newsprint. As requirement for newsprint with still lower

GSM increased, HNL started production of 45 GSM newsprint also. HNL maintains consistent

quality in all grades of newsprint that it manufactures. At the time of commissioning in 1982,

HNL was producing newsprint having brightness of just 48-50 % ISO. Later, it switched over to

a superior and eco-friendly technology in bleaching using Hydrogen Peroxide (H202). This

change enhanced the brightness to 53-55% ISO. The company’s competitors soon followed suit.

Always a step ahead, HNL further advanced the brightness levels and is at present producing

newsprint with 55 - 58 % ISO.

Better brightness, better product!

Salient Features

Grammage 48.8 / 45 GSM

Colour Standard / Pink

Brightness 55 - 58 % ISO

Size of reel 34 cm to 163 cm

Today, brightness level is at par with that of imported newsprint. Further improvements are

possible by putting a premium value on the product.

In terms of quality, HNL newsprint has an enviable position in the domestic newsprint market

being comparable to the world-class product standards. HNL is highly customer focused and

cherishes good relationship with them. Regular visits are made by HNL’s production managers

to newspaper establishments to understand the customers’ demands. It is found that press room

operators favour HNL newsprint for its excellent runability and printing properties. The

production technology at HNL is modified to match exacting requirements of sophisticated high-

speed printing machines. The quality of the product is given primary importance in the quality

policy at HNL.

Newsprint is the major input for the newspaper industry. Quality newsprint provides excellent

prints to satisfy the discerning and demanding readers - the ultimate customers of the product

HNL commands leadership position in the domestic newsprint market. HNL’s current product

range is from 48.8 GSM to 45 GSM, standard and pink newsprint. Quality of HNL newsprint is

well accepted in the market and services of HNL's marketing department have been appreciated

by customers across the country.

Today, HNL produces exceptional quality newsprint for the Indian and International market.

The strength properties of HNL newsprint are comparable to the best in world market. It is a

matter of great pride for the company that its product is always compared with imported

newsprint. HNL, with its state-of-the-art technology, has emerged in its short span of operations

as a company that is truly contemporary in a global context.

OPERATIONAL AND FINANCIAL LEVERAGE

During the year 2008-2009 under review company could reach almost equal levels of operational

performance when compared with previous year. The company as a whole was dismaying with

the production of 1,08,005MTY as against the highest ever achieved production of 1,16,111 MT

in the previous year and sales of 87,476MT with sales turn over of Rs 297.67in the year ending

31st march 2009against 116111MT at a value of Rs 298.61 crore during the previous year.

The highlights performance of the company during financial year 2008-2009 together with

corresponding figure for the previous year are given below:

PRODUCTION SUMMARY

PARTICULA

RS

INSTALLE

D

CAPACITY

(MT)

2008-2009 2007-2008

PRODUCTIO

N

(MT)

CAPACITY

UTILIZATIO

N %

PRODUCTIO

N

(MT)

CAPACITY

UTILIZATIO

N %

Saleable news

print 100000 108005 108 116111 116

Chemi

mechanical

pulp

60000 50118 84 50846 85

Chemical pulp 27400 15545 57 16478 60

De linked pulp 33000 29880 91 34805 105

FINANCIAL RESULTS

PARTICULARS 2007-2008 2008-2009

Sales income 29861 29767

Operating profit (PBDIT) 3049 3446

Interest 59 134

Cash profit (PBDT) 2990 3312

Depreciation and write-off 1180 1202

Profit before tax 1810 2110

Profit after tax 1154 1264

FUNCTIONS OF FINANCE DEPARTMENT

Finance department is maintaining a computerized material accounting system. The GRV’s

received from the stores are placed against the purchase order and the supplies bill. They are

given to the computer section and in batches. The issue vouchers also received in the stores from

various departments is fed to the computer. The computer section maintains a master file

schedule approximately 40,000 items. This is updated on monthly basis. GRV/IV (issue voucher)

transactions are also created on monthly basis. These transactions are matched with the master

and priced stores ledger and are prepared on a monthly basis. The following are statements

prepared every month:-

Price stored ledger.

GRV analysis for material receipt accounting.

IV analysis for consumption accounting.

Stock statements.

Cost center wise issues analysis for costing purpose.

Financial accounting functions

The major functions of the finance department are as follows:

Establishment section.

Work section.

Sales section.

Cash section.

Purchase bill section.

Price stored ledger section.

Raw material section.

Compilation section.

Costing and MIS section.

Insurance

Establishment section:

The establishment section‘s function are the preparation of salary, PF accounting, income tax,

ESI accounting, leave accounting, accounting of loans and advances, bonus calculations,

incentive calculation etc. The functions of this section are:

Concurrence- administration power is delegated to various officers subjected to financial

concurrence. The proposal relating to establishment matters are to be examined in this

section with reference the rules, procedures, budget provisions, pervious practices etc and

concurred in before competent authority approves it.

Payment- all payments relating to the establishment matters are to be released from

establishment section. The claims and other regular payments are checked with reference to

the rules and sanction and payment vouchers are prepared and send to cash section under the

sign of delegated officers for releasing payment.

Accounting- all the payments are debited to relevant head of accounts as per the

nomenclature prescribed the compilation section. Manual compilation sub-ledger is to be

maintained for the payment, as per the requirements.

Work section.

Work section deals with various contracts for issuing the work order and also checks the bills

received from contractors duly certified by concerned departments and makes the payments.

Work section also prepares the journal entries for general ledger. The entries are done manually.

Making payments for civil, mechanical, electrical and other contract bills.

Maintaining the EMD and security deposit register.

Maintaining records for bank guarantee.

Preparation of contractor sub ledger.

Preparation of annual accounts closing schedules.

Sales section

Sales section receives the dispatch advices, RNI allocation etc from the distribution section and

forwards to the compilation section for preparing invoice and sales accounting. Based on the

output received from compilation section the necessary journal entries are prepared for general

ledger. Computer section also maintains sundry debtors sub debtor.

Cash section.

Cash section prepares all bank vouchers for the receipt. All the cash/bank vouchers for payment

are received in the cash section from various sections. These vouchers are sent to the compilation

section. This data is maintained in the compilation section for the general ledger.

Receipt and payment of cash against voucher and the accounting.

Preparation and issue of the cheque and DDs against vouchers received from section,

preparation of the bank receipt and fund management and investment of surplus funds.

Purchase bill section

Purchase bill section receives a copy of the purchase order from the purchase department, they

also receives bills cashed by suppliers for payment. A copy of payment voucher is sent to the

computer section for purchase analysis and sundry creditors accounting. They prepare journal

entries for general ledger. The functions are as follows:-

Making payments for purchase of the spare parts, consumable stores, diesel oil, lubricant

chemical, craft paper, stationery, items, medicines, coal, capital items, and imported items.

Payment of transportation bills of authorization transporter.

Marinating EMD and SD register.

Marinating records for bank guarantees follow up action for extension.

Deduction and remittances of income tax.

Valuation of GRV’s and adjusting advances.

Compilation of purchase analysis and preparation of journal vouchers for final accounts.

Preparation of sundry creditors sub ledger.

Preparation of closing schedules.

Price stored ledger section.

PSL section receives GRV’s and issues vouchers from the stores. GRV’s after pricing and also

posting the debtors/creditors accounting member and IV’s after posting the debtors/creditors

numbers are sent to the compilation section for processing the price ledger and GRV/IV analysis.

PSL section prepares the journal entries for the general ledger and based on the computer output.

Raw material section.

Raw material procurement section receives token from the log yard through the laboratory and

forward to the compilation section for processing the transportation bills and royalty statement.

They also prepare journal entries for general ledger.

Compilation section.

Compilation section receives the cash/bank vouchers and journal vouchers from other sections

for processing the transportation bill and forwards to compilation section for preparing cash/bank

books, general ledger, profit and loss account and balance sheet. They also receive inputs

regarding adds/deletion of fixed assets and forwards to the computer section for preparing fixed

assets register, depreciation calculation etc.

Compilation of monthly accounts.

Compilation and finalization of annual accounts.

Furnishing of CMA data and periodical statements to bankers.

Corporate taxation matters.

Arranging loan funds from financial institutions and its accounting.

Fixed assets and its depreciation.

Liaison with statutory and government auditors.

Furnishing of information to various agencies and other miscellaneous assignments.

Calculation of bonus and productivity linked incentives.

Costing and MIS section.

Costing section is involved in preparing the cost sheet based on the budgeted cost. The inputs to

the costing system are received from the financial accounting system and also from technical

information cell. It’s organized as a part of finance department. Inputs relating to the production,

consumption of raw material and chemical and other utilities are received from plant through the

technical information all on a daily basis. Monthly cost sheets are prepared on the actual costs.

Comparative statements are prepared to analyze the cost variances between budgeted rate and

annual rate.

Insurance section

The major functions of the insurance section are:

To ensure adequate insurance cover for all the fixed assets, stock, plantation, cash, goods-in-

transit etc.

Reduce cost o insurance premium.

To ensure claims for the loss risen at times.

To follow up the claims to ensure speedy settlement.

CHAPTER -3

THEORETICAL REVIEW

BACKGROUND OF THE STUDY

In our present day economy, finance is defined as the provision of money at time when it

is required. Every business whether big, medium or small, needs finance to carry on its

operations and to achieve its target. Infact, finance is so indispensable today that its rightly said

to be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly

accomplish its objectives.

A firm is required to maintain a balance between liquidity and profitability while

conducting its day to day operations .liquidity is a precondition to ensure that the firm are able to

meet its short term obligations and its continued flow can be guaranteed from a profitable

venture. The importance of cash as an indicator of continuing financial health should not be

surprising in view of its crucial role within the business. This requires that business must be run

both efficiently and profitably. In the process, an asset-liability mismatch may occur which may

increase firm’s profitability in the short run but at a risk of its insolvency. On the other hand, too

much focus on liquidity will be at the expense of profitability. Thus, the manager of a business

entity is in a dilemma of achieving desired tradeoff between liquidity and profitability in order to

maximize the value of a firm

Working capital management deals with the most dynamic fields in finance, which needs

constant interaction between finance and other functional managers. The finance manager acting

alone cannot improve the working capital situation.

In recent times,a few case studies regarding management of working capital in selected

companies have been in order to make in-depth analysis of the several experts of working capital

management, The finding of such studies not only throws new lights on the technical loopholes

of management activities of the concerned companies , but also helps the scholars and

researchers to develop new ideas ,techniques and methods for effective management of working

capital.

An effort has been made to make an in-depth study of working capital management with special

reference to Hindustan Newsprint Limited, Kottayam.

LITERATURE REVIEW

WORKING CAPITAL MANAGEMENT

The funds required by every business organization can be broadly classified in to fixed capital and working capital. Fixed capital is need for the acquisition of fixed assets. Fixed assets constitute the basic tools or the means of production. Investment in fixed assets by itself is dead investment and the funds so locked up do not circulate. In the same every business organization requires some funds to carry on its operations and to produce goods for sale to earn profit. These funds, which are represented by the current capital used through the various stages of production and distribution, are invested in current assets.

“Working Capital” is the capital invested in different items of current assets needed for the business, Viz, inventory, debtors, cash and other current assets such as loans & advances to third parties. Those current assets are essential for smooth business operations and proper utilization of fixed assets. The firm should maintain sufficient level of working capital to produce upto a given capacity and maximize the return on investment in fixed assets. Shortage of working capital leads to lower capacity utilization, lower turnover and hence lower profits. Working capital, in excess of the amount required to produce to full capacity, is idle and consequently leads to decline in profits. Hence the dictum “Adequacy is a virtue, surfeit is not”.

IMPORTANCE OF ADEQUATE WORKING CAPITAL

The importance of adequate working capital in commercial undertakings can never be over emphasized. A concern needs funds for it’s day-to-day running. Adequacy or inadequacy of these funds would determine the efficiency with which the daily business may be carried on. Management of working capital is an essential task of the finance manager. He has to ensure that the amount of working capital available with his concern is neither too large nor too small for its requirements. A large amount of working capital would mean that the company has idle funds. Since funds have a cost, the company has to pay huge amount as interest on such funds. The various studies conducted by the Bureau of Public Enterprises have shown that one of the reason for the poor performance of public sector undertaking in our country has been the large amount of funds locked up in working capital. This results in over capitalization. Over capitalization implies that a company has too large funds for its requirements, resulting in a low rate of return a situation which implies a less than optimal use of resources. A firm has, therefore, to be very careful in estimating its working capital requirements.

If the firm has inadequate working capital, it is said to be under-utilized. Such a firm runs the risk of insolvency. This is because, paucity of working capital may lead to a situation where the firm may not be able to meet its liabilities. It is interesting to note that may firms which are otherwise prosperous (having good demand for their products and enjoying profitable marketing conditions) may fail because of lack of liquid resources.

CLASSIFICATION OF WORKING CAPITAL

Concept of working capital

There are two concepts of working capital they are:-

Balance Sheet concept and

Operating cycle concept

Under the Balance Sheet concept, there are two interpretations of working capital:

a) Gross working capital.

b) Net working capital.

SOURCES OF WORKING CAPITAL

ON THE BASIS OF CONCEPT ON THE BASIS OF TIME

GROSS WORKING CAPITAL

NET WORKING CAPITAL

PERMANENT WORKING CAPITAL

TEMPARORY WORKING CAPITAL

POSITIVE WORKING CAPITAL

NEGATIVE WORKING CAPITAL

REGULAR WORKING CAPITAL

RESERVE WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIAL WORKING CAPITAL

Gross Working Capital

In the broad sense, the term working capital refers to the gross working capital and represents the

amount of funds invested in current assets. Thus, the gross working capital is the capital invested

in total current assets of the enterprise. Current assets are those assets which in the ordinary

course of business can be converted into cash within a short period of normally one accounting

year.

Net Working Capital

In a narrow sense, the term working capital refers to the net working capital. Net working capital

is the excess of current assets over current liabilities.

Net Working Capital = Current assets – Current liabilities

Net working capital may be positive or negative. When the current assets exceed the current

liabilities, the working capital is positive and the negative working capital results when the

current liabilities are more than the current assets.

The task of the financial manager in managing working capital efficiently is to ensure sufficient

liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its

ability to satisfy short term obligations as they become due. Net working capital as a measure of

liquidity is not very useful for comparing the performance of different firms, but it is quite useful

for internal control. The net working capital helps in comparing the liquidity of the same firm

overtime. For purpose of working capital management, therefore, net working capital can be said

to measure the liquidity of the firm. In other words, the goal of working capital management is to

manage the current assets and liabilities in such a way that an acceptance level of net working

capital is maintained.

Nature of Working Capital

Working capital management is concerned with the problems that arise in attempting to manage

the current assets, the current liabilities and the interrelationship that exists between them. The

term current assets refer to those assets which in the ordinary course of business can be, or will

be, converted into cash within one year without undergoing a diminution in value and without

disrupting the operations of the firm. The major current assets are cash, marketable securities,

accounts receivable and inventory. Current liabilities are those liabilities which are intended, at

their inception, to be paid in the ordinary course of business, within a year, out of the current

assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable,

bank overdraft, and outstanding expenses.

The goal of working capital management is to manage the firm’s current assets and liabilities in

such a way that a satisfactory level of working capital is maintained. The current assets should be

large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each

of the short term sources of financing must be continuously managed to ensure that they are

obtained and used in the best possible way. The interaction between current asset and current

liabilities is, therefore, the best main theme of the theory of working capital management.

Working capital is very essential to maintain the smooth running of a business. No business can

run successfully without an adequate amount of working capital. Working capital management is

concerned with the problems that arise in attempting to manage the current assets, 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.

Source of Working Capital

The sources of working capital can be divided as Long-term source of working capital and Short-

term source of working capital. Long-term funds are required to create production facilities

through purchase of fixed assets such as plant and machinery, land and building, etc. Investments

in these assets represent that part of firm’s capital is blocked on a permanent or fixed basis and is

called fixed capital. Short-term funds are needed to manage the day-to-day operations of the

organization. It is a temporary working capital.

Working capital for the long-term purposes can be obtained by several ways. There are different

sources of long-term working capital:

1. Issue of shares.

2. Issue of debentures

3. Retained earnings

4. Sale of fixed assets

5. Security from employee and from customers.

Sources of Short-term Working Capital are:

1. Trade credit.

2. Credit paper.

3. Bank credit.

4. Public deposits.

5. Government assistance

6. Customer credit

Determinants of working capital

The need of working capital varies from month to month, year to year. For determining the

working capital needed by a business unit there is no set of rules to formulate. In order to

determine the proper or optimum amount of working capital of a business unit various factors

should be considered carefully as each of them having own importance and the importance of

various factors changes for a business unit overtime.The main factors that determine the working

capital requirements of the organization are as follows:

a) General nature of business

b) Size of business operations/scale of operations

c) Production cycle

d) Business cycle

e) Production policy

f) Credit policy

g) Growth and expansion

h) Vagaries and availability of raw material

i) Profit level

j) Terms of purchase and sales

k) Depreciation policy

a) General nature of business

The working capital requirements of an enterprise are basically related to the conduct of the

business. Enterprises fall into some board categories depending on the nature of their business.

For instance, public utilities have certain features which have a bearing on their working capital

needs. The two important features are (1) cash sales and (2) sale of services rather than

commodities.

b) Size of business operations/scale of operations

The size of business has also an important impact on its working capital needs. Size of a business

unit may be measured in terms of a scale of operation. Bigger the size of business unit, the larger

will be the amount of working capital required as because the larger business units are required

to maintain huge inventories and also spend more in carrying out the business operations

smoothly. A business unit carrying on activities on a small scale needs less working capital.

c) Production cycle

It refers to the time involved in the manufacture of goods. It covers the time-span between the

procurement of raw materials and the completion of the manufacturing process leading to the

production of finished goods. Funds have to be necessarily tied up during the process of

manufacture, necessitating enhanced working capital. The longer the time-span the larger will be

the tied-up and therefore the larger is the working capital needed and vice versa.

d) Business cycle

The working capital requirements are also determined by the nature of business cycle. Business

fluctuations leads to a cyclical and seasonal changes that, in turn cause a shift in the working

capital position, particularly for temporary working capital requirements. The variations in

business conditions may be in two directions;

Upward phase: When boom conditions prevail, Downswing phase: When economic activity is

marked by a decline. During in the upswing of business activity, the need for working capital is

likely to grow to cover the lag between increased sales and receipt of cash as well as to finance

purchase of additional material to cater to the expansion of the level of activity.

e)Production policy

The quantum of working capital is also determined by the production policy. The case of certain

lines of business, the demand for the product is seasonal. In such a case there are two options:

either they confine their production only to periods when goods are purchased or they follow a

steady production policy throughout the year and produce goods at a level to meet the peak

demand. The former option is inconvenient. The second option would require a sufficient

amount of working capital.

f) Credit policy

The credit policy relating to sales and purchases also affects the working capital. The credit

policy influences the requirements of working capital in two ways. (1) Through credit items

granted by the firm to its customers; (2) the credit term available to the firm from its creditors.

g) Growth and expansion

As a company grows, the working capital requirements will be more. It is very difficult to

determine the relationship between the volume of business of a company and the increase in its

working capital. The composition of working capital in a growing company also shifts with

economic circumstances and corporate practices. Other things being equal, growing industries

require more working capital than those that are static.

h) Vagaries and availability of raw material

The availability or otherwise of certain raw materials on a continuous basis without interruption

would sometimes affect the requirement of working capital. There may be some raw materials

which can’t be procured easily either because of their sources are few or they are irregular. To

sustain smooth production, therefore, the firm might be compelled to purchase and stock them

far in excess of genuine production needs. This will result in an excessive inventory of such

materials. Hence the volume of working capital to be kept will be increased.

i) Profit Level

The level of profits earned differs from enterprise. Higher profit margin would improve the

prospects of generating more internal funds thereby contributing to the working capital pool. The

net profit is source of working capital to the extent that it has been earned in cash.

j) Terms of purchase and sales

Terms of purchase and sales [cash or credit] also affect the amount of working capital. If a

company purchases all goods in cash and sells its finished products on credit, then the company

will require larger amount of working capital. On the other hand, a company purchasing all

goods on credit and allowing no credit to its customers will require lesser amount of working

capital. The length of period of period credit has also a bearing on working capital.

k) Depreciation policy

The depreciation policy through its effect on tax liability and retained earnings has an influence

on working capital. Depreciation is tax deductible. Higher the amount of depreciation the lower

the tax liability and more the cash profit. Similarly, the amount of net profits will be less if

higher depreciation is charged. If the dividend policy is linked with net profits, the firm can pay

fewer dividends by providing for more depreciation. Thus, depreciation is an indirect way of

retaining profits and preserving the firm’s working capital position.

STEPS INVOLVED IN WORKING CAPITAL MANAGEMENT

There are two steps involved in working capital management. They are

Forecasting the amount of working capital.

Forecasting the amount of working capital.

Determining the sources of working capital.

DIFFERENT ASPECTS OF WORKING CAPITAL MANAGEMENT

a. Management of inventory.

b. Management of accounts receivables.

c. Management of cash.

a. Management of inventory

Management of inventories means an optimum investment in inventories. It should neither be too

low affect the production adversely nor too high to block the funds unnecessarily.

The inventory management includes the following aspect:

Size of inventory- maximum level and minimum level.

Establishing time schedules, procedures and lot of sizes for new orders.

Ascertaining minimum safety levels.

Coordinating sales, production and inventory policies.

Providing proper facilities.

Arranging the receipts, disbursements and production and procurement of materials and

developing the form of recording these transactions.

Assigning responsibilities for carrying out inventory control functions.

Providing the report necessary for supervising the overall activities.

b. Management of account receivables .

It is the process of weighting the benefits as well as the costs of investments on accounts

receivables and taking such steps as regards as investment on accounts receivable which will

result in maximum results or benefits to the firm.

In other words, it means the maintaining of the accounts receivables at an optimum level or point

i.e., at such a level or point at which there is a trade off or balance between profitability and

costs.

Management of accounts receivables has three aspects. They are:

Establishing the credit policy of the concern

It involves:

a. Determination of the level of credit sales.

b. Determination of the credit standards.

c. Determination of the credit terms.

Establishing the collection policy of the concern

It means the determination of the policy and procedure to be followed for the collection of

accounts receivables.

Control of the maintaining the accounts receivables at the minimum possible level.

It means maintaining the accounts receivables at the minimum possible level

c. Management of cash

Cash management involves the efficient collection and disbursement of cash and any temporary

investment of cash while it resides with the firm. It is concerned with the managing of cash flows

into and out of the firm, cash flows with in the firm, and cash balances held by the firm at a point

of time by financing deficit or investing cash surplus.

METHODS OF ESTIMATING WORKING CAPITAL

There are two methods which are usually followed in determining working capital requirements.

There are:

1. Conventional method

According to the conventional method cash inflows and outflows are matched with each other.

Greater emphasis is laid on liquidity and greater importance is attached to current ratio, liquidity

ratio, etc…which pertains to the liquidity of a business.

2. Operating cycle method

In order to understand what gives rise to differences in the amount of timing of cash flows, one

should first think of the length of time which is required to convert cash into resources, resources

into final product, final product into receivables, receivables back into cash. The length of the

operating cycle is a function of a nature of a business. There are four major companies of the

operating cycle of a manufacturing company. These are:

The cycle starts with free capital in the form of cash and credit, followed by investment in

materials, manpower and other services

Production phase

Storage of the finished products terminating at the time –finished product is sold

Cash or accounts receivables collection period, which results in and ends at the point of dis-

investment of the free capital originally committed. New free capital then becomes available

for productive reinvestment. When new liquid capital becomes available for recommitment

to productive activity, a new operating cycle begins.

3. Cash cost technique

In this method, all transactions are shown in the working capital forecast on cost basis. For

forecasting working capital, the following information is required.

Costs to be defrayed on materials, wages and overheads.

Length of which time during raw materials are to remain in stock before they are put to

production.

Length of production cycle

Length of sale cycle denoting the period of time finished goods have to stay in the ware

house before sale

Period of credit availed of from creditors

Time- lag involved in the payment of wages and overhead expenses

4. Balance sheet method

In this method a forecast is made of the various assets and liabilities. Thereafter, the difference

between the two is taken out the difference will indicate the deficiency or surplus of cash.

WORKING CAPITAL CYCLE/ OPERATING CYCLE

The length of time involved in the conversion of cash into raw materials, raw materials into

work- in-progress, work –in-progress into finished goods, finished goods into debtors ,debtors

into cash again the operating cycle or working capital cycle.

The length of operating cycle or working capital cycle may differ from one firm to another,

depending upon the nature of the business.

WORKING CAPITAL POLICIES

A business firm can adapt any of the following working capital policies:

1. Conservative working capital policy

2. Aggressive working capital policy

3. Moderate working capital policy

Under Conservative approach, the firm carries high investment in current assets such as cash,

marketable securities and carries large amount of inventories and grants generous terms of credit

to customers resulting in a high level of debtors. The consequences of conservative working

capital policy are quick deliveries to customers and more sales due to generous credit terms.

Under Aggressive working capital policy, investment in current assets is very low. The firm

keeps less amount of cash and marketable securities, manages with less inventories and tight

credit terms resulting in low level of debtors. The consequences of aggressive working capital

policy are frequent production stoppages, delayed deliveries to customers and loss of sales. A

trade off between two costs namely carrying cost and shortage cost determines the optimal level

of current assets. Costs that rise with current assets i.e. that cost of financing a higher level of

current assets form carrying costs. Shortage costs are in the form of disruption in production

schedule, loss of sales and loss of goodwill.

The optimum level of current assets is denoted by the total costs (= carrying costs + shortage

costs) minimized at that level

Working capital financing strategies

After determining the level of current assets, the firm must determine how these should be

financed.

Investment in current assets can be broken into two parts

1. Permanent current assets

2. Temporary current assets

A firm requires a certain amount of current assets to meet even the minimum level of sales where

as temporary current assets reflects a variable component that moves in line with seasonal

fluctuations. Several strategies are available for financing capital requirements

The fixed proportion of working capital should be generally financed from the fixed capital

sources while the temporary or variable working capital requirements of a firm may be met from

the short term sources of capital. Based on this idea, we have 3 strategies possible.

Strategy A

Long term financing is used to meet fixed asset requirement as well as peak working capital

requirement. When the working capital requirement is less than its peak level, the surplus is

invested in liquid assets (cash & marketable securities)

Strategy B

Long term financing is used to meet fixed asset requirements, permanent working capital

requirement, and a portion of Fluctuating working capital requirement. During seasonal

upswings, short term financing is used. During seasonal downswings, surplus is invested in

liquid assets.

Strategy C

Long term financing is used to meet fixed asset requirement and permanent working capital

requirement. Short term financing is used to meet fluctuating working capital requirement.

Integrated Working Capital Policy

Working capital requirement of a firm is determined by considering two questions in mind.

1. What should be the level of current assets in relation to sales?

2. What should be the ratio of long term and short term financing?

Current Asset Policy

Question 1 tells one what should be the level of current assets to be maintained by the firm and

hence it gives rise to three types of current asset policy namely

a. Conservative approach : It is carrying more amount of current assets in relation to sales which

results in more carrying costs, relaxed credit terms and period and hence less turnover.

b. Moderate approach: It is always maintaining required amount of current assets depending

upon sales. c. Aggressive Approach:

It is managing with fewer current assets in relation to sales and hence may result in more

turnover, stringent credit terms and may lead to loss of customer goodwill and low liquidity.

CURRENT ASSETS POLICY GRAPH

Question 2 is about how the currents should be financed, either long term or short term

financing. Current assets being financed using long term funds namely Equity shares, Debentures

results in more costs of capital and relatively less profits whereas short term financing namely

short term loans from banks and financial institutions, overdrafts, trade credit, commercial paper

etc. results in more profits and relatively less costs A judicious mix of Current Asset policy and

Current Asset Financing Policy gives rise to an integrate Working Capital policy.

CURRENT ASSETCURRENT ASSET

SALESSALES

CONSERVATIVE APPROACHCONSERVATIVE APPROACH

MODERATE APPROACHMODERATE APPROACH

AGRESSIVE APPROACHAGRESSIVE APPROACH

Reason for selection of the topic

Working capital management is concerned with the problems that arise in attempting to manage

current assets; the current liabilities and the relationship arise between them. It is one of the

important aspects of the overall financial management. Working capital is the business lifeblood.

Every manager’s primary task is to help keep it flowing, and use the cash flow to generate

profits. If a business is operating profitably, then it should in theory, generate cash surplus if it

doesn’t generate surpluses, the business will eventually run out of cash and expire. Proper

management of working capital is very important for the success of an enterprise. Just a

circulation of blood is essential in the human body for maintaining life; working capital is very

essential to maintain the smooth running of a business.

It’s also an important yardstick to measure a company's operational and financial efficiency. This

aspect must form part of the company's strategic and operational thinking. Efforts should

constantly be made to improve the working capital position. This will yield greater efficiency

and improve customer satisfaction.

CHAPTER- 4

DATA ANALYSIS AND

INTERPRETATION

CURRENT ASSET DETAILS

a) CURRENT ASSETS OF HNL from 31/3/2004 to 31/3/2009

Table 1

Rs. In Lakhs)

Year Inventory Debtors Cash & Bank

Other current assets

Loans & advances

Total current assets

2004-2005 7074 2468 1148 7 2455 13152

2005-2006 6820 1593 2712 25 2727 13877

2006-2007 7068 1436 4773 34 2325 15636

2007-2008 7024 901 5610 51 2591 16177

2008-2009 14415 4298 375 23 2803 21914

Source : Annual report of HNL

INTERPRETATION

The total current asset in the year 2004-2005 was RS13152 Lakhs. In the last year 2008-2009 the current asset was RS 21914 Lakhs. If it is largest amount compared to other years. The reason in that current asset in the year 2009 was increased with inventories and sundry debtors.

GRAPHICAL REPRESENTATION OF CURRENT ASSETS OF HNL

Figure 1

CURRENT LIABILITY DETAILS

CURRENT LIABILITIES OF HNL from 31/3/2004 to 31/3/2009

Table 2 (Rs inLakhs)

Year Creditors Advance from

Customers

Security Deposits

Liability

To govt

& local

Bodies

Other Current

Liabilities

Provisions Total Current

Liabilities

2004-2005 2304 18 552 70 143 967 4054

2005-2006 1303 31 630 128 156 2151 4399

2006-2007 1388 39 885 209 112 2575 5208

2007-2008 2136 96 972 130 137 1760 5231

2008-2009 5360 26 1257 77 89 1343 8152

Source Annual Report

INTERPRETATION

In the year 2009; the current liability was RS 8152LAKHS. It is the largest amount compared to all previous year. The major reason for increased current liability was increased the amount of sundry creditors and security deposits.

The smallest amount of total current liability was in the year 2004. It was RS 4054 LAKHS The major reason for decreased current liability in the year 2004 was decreased the amount other liability &advance from custom.

GRAPHICAL REPRESENTATION OF CURRENT LIABILITY DETAILS

Figure 2

CALCULATION OF WORKING CAPITAL from 31/3/2004 to 31/3/2009

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

Table 3

(Rs in Lakhs)

Year CURRENT ASSET CURRENT LIABILITY WORKING CAPITAL

2004-2005 13150 4054 9096

2005-2006 13877 4955 8922

2006-2007 15636 6080 9556

2007-2008 16177 5243 10934

2008-2009 21913 8618 13295

Source Annual Report

From the year 2004-05 there was an increasing trend in the level of Working Capital, in the

2004-05 the Working Capital stood at Rs 9096 Lakhs. The increasing trend in the period there

after was due to the increase in the level of Current Assets. In the 2008-2009 the Level of

Working Capital reached to Rs 13295 Lakhs.

GRAPHICAL REPRESENTATION OF WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

Figure3

Table showing schedule of changes in Working Capital for the year 2004-2005 and 2005-2006

PARTICULARS 2004-2005 2005-2006 INCREASE DECREASE

CURRENT

ASSETS

Stock 7073.94 6820.06 253.88

Debtors 2467.93 1593.40 874.53

Cash 1148.21 2711.69 1563.48

Other current

Assets

7.11 24.59 17.48

Loans and

advances

2454.70 2666.21 211.51

Total 13151.89 13815.95

CURRENT LIABILITY

Creditors 2304.87 1302.74 1002.13

Advances from

customers

17.74 30.55 12.81

Security deposit 552.31 630.45 78.14

Liability to

government

69.58 128.17 58.59

Other liability 862.43 712.84 149.59

Provisions 966.89 2150.67 1183.78

Total 4773.82 4955.42

WC 8378.07 8860.53

Increase in WC 482.46 482.46

Total 8860.53 8860.53 2944.19 2944.19

Table-4 Rs in Lakhs

Table showing schedule of changes in Working Capital for the year 2005-2006 and 2006-2007

PARTICULARS 2005-2006 2006-2007 INCREASE DECREASE

CURRENT

ASSETS

Stock 6820.06 7068.87 248.81

Debtors 1593.40 1436.21 157.19

Cash 2711.69 4773.14 2061.45

Other current

Assets

24.59 34.04 9.45

Loans and

advances

2727.46 2324.83 402.63

Total 13877.2 15637.09

CURRENT LIABILITY

Creditors 1302.74 1387.85 1002.13 85.11

Advances from

customers

30.55 39.26 8.71

Security deposit 630.45 885.17 254.72

Liability to

government

128.17 209.45 81.28

Other liability 712.84 983.46 149.59 270.62

Provisions 2150.67 2574.81 424.14

Total 4955.42 6080

WC 8921.78 9557.09

Increase in WC 635.31 635.31

Total 10428 10428 2319.71 2319.71

Table-5 Rs in Lakhs

Table showing schedule of changes in Working Capital for the year 2006-2007 and 2007-2008

PARTICULARS 2005-2006 2006-2007 INCREASE DECREASE

CURRENT

ASSETS

Stock 7068.87 7023.97 44.9

Debtors 1436.21 901.31 534.9

Cash 4773.14 5610.37 837.23

Other current

Assets

34.04 50.63 16.59

Loans and

advances

2324.83 2590.67 265.84 .

Total 15637.09 16176.95

CURRENT LIABILITY

Creditors 1387.85 2136.39 748.54

Advances from

customers

39.26 96.01 56.75

Security deposit 885.17 972.41 87.24

Liability to

government

209.45 130.24 79.21

Other liability 112.02 136.54 24.52

Provisions 2574.81 1760.40 814.41

Total 5208.56 5231.99

WC 10428.53 10944.96

Increase in WC 516.43 516.43

Total 10944.96 10944.96 2013.28 2013.28

Tables -6 Rs in Lakhs

Table showing schedule of changes in Working Capital for the year 2007-2008 and 2008-2009

PARTICULARS 2007-2008 2008-2009 INCREASE DECREASE

CURRENT

ASSETS

Stock 7023.97 14415.30 7391.33

Debtors 901.31 4297.76 3396.45

Cash 5610.37 374.70 5235.67

Other current

Assets

50.63 22.50 28.13

Loans and

advances

2590.67 2802.56 211.9

Total 16176.95 21912.82

CURRENT LIABILITY

Creditors 2136.39 5360.33 3223.94

Advances from

customers

96.01 26.33 69.68

Security deposit 972.41 1256.84 284.43

Liability to

government

130.24 77.06 53.18

Other liability 136.54 88.91 47.63

Provisions 1760.40 1342.53 417.87

Total 5231.99 8152

WC 10944.96 13760.82

Increase in WC 2815.86 2815.86

Total 13760.82 13760.82 11588.03 11588.03

Table-7 Rs in Lakhs

RATIO ANALYSIS

a) Liquidity ratio:- Liquidity refers to affirms ability to meet its obligations in the short term, usually one year. These ratios are based on the relationship between current assets and current liabilities. The important ratios are current ratio, acid test ratio and cash ratio.

1.CURRENT RATIO

Current Ratio is the ratio of Current Assets to the Current Liabilities. It shows the ability of a firm to cover its Current Liabilities with the Current Assets.

CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES

Table 8

(Rs in Lakhs)

Year CURRENT ASSET CURRENT LIABILITY CURRENT RATIO

2004-2005 13150 4054 3.24

2005-2006 13877 4955 2.80

2006-2007 15636 6080 2.57

2007-2008 16177 5243 3.09

2008-2009 21913 8618 2.54

Source Annual Report

GRAPHICAL REPRESENTATION OF CURRENT RATIO = CURRENT ASSETS – CURRENT LIABILITIES

Inference

Current ratio is optimum at 2:1 i.e. Current Assets should be 2 times that of Current Liability.

But this rule need not work well in real life situation as it depends on many other factors.

Since the availability of the raw materials are seasonal in nature and the industry uses imported

Materials and Stores the Company have to stock them for a longer period to avoid lead time.

Both these components make the Inventory level very high in turn resulting in a higher Current

Assets level over the Current Liability, this in turn lead to a higher Current Ratio.

Over the period of analysis the Current Ratio of the company never went below 2.5:1. For the

last 5 years i.e. from the year 2004-2009, the Company was stable in maintaining its Current

Ratio. In the year 2009 the Companies Current Ratio was at 2.54:1 which is best as per the above

rule.

Overall the Company is found satisfactory with its Current Ratio

2. Acid test Ratio=Quick Assets/C Liabilities

Table-9 Rs in Lakhs

Year QUICK ASSETS CURRENT LIABILITIES QUICK RATIO

2001-2002 6005.14 4446.85 1.35

2002-2003 5678.87 4054.79 1.40

2003-2004 7044.71 3082.84 2.29

2004-2005 6076 4771.89 1.27

2005-2006 6995.89 4955.42 1.41

2006-2007 8568.22 6080 1.4

2007-2008 9152.98 5262.6 1.74

2008-2009 7497.52 8617.8 0.87

AVERAGE 5937.5 1.3

Source Annual Report

GRAPHICAL REPRESENTATION OF Acid Test Ratio = Quick Assets/ Current Liabilities

Inference

The Liquid Ratio shows the actual liquidity of a firm. As a convention the Liquid Ratio of 1:1 is

considered satisfactory. The company has been efficient in maintaining its Liquid Assets over its

Current liability.

Over the period of analysis the Company has maintained its Quick Assets more than its Current

Liabilities till 2008.But in the year2009 the company had stepped into severe liquidity crisis and

the quick ratio had gone below the ideal ratioi.e 0.87 The Company was successful in

maintaining its Liquid Ratio below 2:1 after the year 2004-05 thereby increasing the efficiency

of the firm. The Liquid Ratio of the Company is not at a satisfactory level. The Company is not

in a safe position.

b) LEVERAGE RATIO

Financial leverages refer to the debt finance. Leverage ratios helps in assessing the risk assessing the risk arising from the use of debt capital. The important ratios are debt equity ratio, debt assets ratio, interest coverage ratio, and fixed coverage ratio.

1) Debt equity ratio=outsiders fund/shareholders funds

Table-10 (Rs in Lakhs)

Year Debt Equity Debt Equity Ratio

2001-2002 375.39 19419.59 0.02

2002-2003 3610.7 18930.73 0.19

2003-2004 4754.13 19153.89 0.25

2004-2005 4280.56 19292.46 0.22

2005-2006 3195.94 19825.29 0.16

2006-2007 1402.44 21569.10 0.07

2007-2008 787.7 23883.81 0.03

2008-2009 3265.5 23977.43 0.14

Source Annual Report

GRAPHICAL REPRESENTATION OF Debt equity ratio=outsiders fund/shareholders funds

INFERENCE

This ratio shows the relative contribution of the creditors and owners. In general, the lower this

ratio the higher the degree of protection enjoyed by the firm. So the company was having a low

ratio till 2007-2008 i.e. 0.03 which is favorable. But in the year 2008-09 it rose to 0.14.This ratio

ascertains the soundness of long term financial policies of the company.

2) Debt Asset Ratio

DEBT ASSET RATIO=DEBT/ASSETS

Table 11 (Rs in Lakhs)

Year Debt Assets Debt Asset Ratio

2001-2002 375.39 22245.62 0.02

2002-2003 3610.7 24795.04 0.15

2003-2004 4754.13 26395.31 0.18

2004-2005 4280.56 26437.71 0.16

2005-2006 3195.94 26795.96 0.12

2006-2007 1402.44 26578.82 0.05

2007-2008 787.7 23883.81 0.03

2008-2009 3265.5 30487.51 0.12

Source Annual Report

GRAPHICAL REPRESENTATION OF- Debt Asset Ratio

INFERENCE

This ratio measures the extent to which borrowed funds support the firm’s assets. It is related to

the debt equity ratio and so the lower the ratio the more sound the form is said to be. As shown

this ratio is high during 2003-2004, but decreased during 2005-2006 and continued this decline

till 2007-2008 but then rose to0 .12 in the year 2008-09 which is not favorable.

CURRENT ASSET TURNOVER RATIO (CATR)

The Sales to current assets ratio is best measured over several periods and needs to be compared to industry averages, as the amount of current assets varies widely among companies and industries. A decreasing current assets turnover ratio is generally a negative sign, indicating the company may have slowed production, decreasing the amount of inventory and resultantly the current assets.

CATR=NET SALES CURRENT ASSETS

Table 12

(Rs in Lakhs)

Year SALES CURRENT ASSETS Current assets Turnover Ratio

2004-2005 27393 13150 2.08

2005-2006 30296 13877 2.19

2006-2007 31519 15636 2.01

2007-2008 29861 16177 1.84

2008-2009 29767 21913 1.36

Source Annual Report

GRAPHICAL REPRESENTATION OF CURRENT ASSETS TURNOVER RATIO

Inference

The Current Assets Turnover Ratio shows the number of times the Current Assets are being

turned over in a stated period. It also shows how well the Current Assets are being used in the

business. A high ratio indicates high degree of efficiency in asset utilization

The Company was found satisfactory with the level Current Assets turnover ratio. There was an

increasing trend in the ratio till the 2005-06 after that the ratio gradually started decreasing; this

was because of the increase in the level of Current Assets during the period. In the year 2008-

2009 current asset turnover ratio was 1.36.

WORKING CAPITAL TURNOVER RATIO (WCTR)

A high or increase working capital turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of working capital, or it has been able to reduce its working capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio.

WCTR = NET SALES/WORKING CAPITAL

Table 13 (Rs in Lakhs)

Year SALES WPRKING CAPITAL Working Capital Turnover Ratio

2004 -2005 27393 9096 3.01

2005 -2006 30296 9478 3.19

2006 -2007 31519 10428 3.02

2007 -2008 29861 10946 2.72

2008 -2009 29767 13295 2.24

Source Annual Report

GRAPHICAL REPRESENTATION OF- WCTR = NET SALES/WORKING CAPITAL

Inference

This ratio measures the number of times the Working Capital is turned over. The Company could

maintain a satisfactory level of Working Capital Turnover Ratio in the period of analysis.

The Working Capital Turnover Ratio stood at the highest level in the year 2005-06. Owing to

lower Unit Net Sales Realization during the year 2007-08 the Working Capital turnover of the

Company decreased to 2.72 from 3.02 in the 2006-07.It further decreased to 2.24 in the year

2008-2009.

\

d) Profitability ratio:- Profitability reflects the final results of the business operations. There are two aspects of profitability ratios: profit margin ratio and rate of return ratios. Profit

margin ratio shows the relationship between profit and sales. Rate of return ratio reflects the relationship between profit and investments.

1) Net profit margin ratio =net profit/net sales

Table -14 (Rs in Lakhs)

Year Net Profit Net sales Net Profit Margin Ratio

2001-2002 407.23 23375.95 0.02

2002-2003 -488.91 21457.4 -0.02

2003-2004 502.46 25267.61 0.02

2004-2005 421.55 27393.28 0.02

2005-2006 1568.11 30296.34 0.05

2006-2007 3192.31 31519.30 0.10

2007-2008 1153.69 29860.84 0.04

2008-2009 1263.56 29767.37 0.04

Source Annual Report

GRAPHICAL REPRESENTATION OF- Net profit margin ratio =net profit/net sales

INFERENCE

This ratio explains the per rupee profit generating capacity of sales. If the cost of sales is lower than the net profit will be higher and then we divide it with the net sales, the result is the sales efficiency. This ratio is very useful for proprietors and prospective investors because it reveals the overall profitability of the firm. The ratio was high in the year2006-2007 but in the year 2007-2008 it has declined to 0.04 and still continuing so there is a chance of increasing the ratio through improved efficiency of the concern

OPERATING CYCLE ANALYSIS

CREDITORS PAYMENT PERIOD

The Creditors payment period is the time taken to set off the Creditors of the Company. It starts from the date at which the purchases are made and ends when the payments are made to the Creditors.

The Creditors Payment Period can be calculated using the formula:-

Average Trade Creditors/Average Credit Purchases per day

Table -15

Year

Credit

Purchases

(Rs in Lakhs)

Average

Credit

Purchases

(RS in Lakhs)

Opening

Creditors

(Rs in Lakhs)

Closing

Creditors

(Days)

Average

Creditors

(Rs in Lakhs)

Creditors

Payment

Period

(Days)

2004-2005 9112 26.14 1280 2305 1792.5 68.56

2005-2006 9404 26.12 2305 1303 1804 69.05

2006-2007 9873 27.42 1303 1388 1345.5 49.06

2007-2008 11119 30.88 1388 2136 1762 57.04

2008-2009 20452 56 2136 5360 3748 66.9

CREDITORS PAYMENT PERIOD

INFERENCE

The Creditors payment period is the time taken to set off the Creditors of the Company. It starts from the date at which the purchases are made and ends when the payments are made to the Creditors. The average creditor’s payment period is between 45-90 days .So the Creditors payment period is considered satisfactory at HNL.

DEBTORS COLLECTION PERIOD

The Debtors collection period is the time taken for the collection of Debtors. It starts from the sale of finished goods to the customers on credits till the collection of receivables from them.

It can be calculated using the formula:-

Average Book Debts/Average credit sales per day

Table-16

Year

Opening Debtors

(Rs in Lakhs)

Closing

Debtors

(RS in Lakhs)

Credit

Sales

(Rs in Lakhs)

Average

Credit

Sales/day

(Days)

Average

Book

Debts

(Rs in Lakhs)

Debtors

Collection

Period

(Days)

2004-2005 3955 2468 20544 57.06 3211.5 56.27

2005-2006 2468 1593 22722 63.11 2030.5 32.17

2006-2007 1593 1436 23639 65.66 1514.5 23.06

2007-2008 1436 901 22395 62021 1168.5 18.78

2008-2009 901 4298 21368 58.5 2599.5 44.4

DEBTORS COLLECTION PERIOD

INFERENCE

The Debtors collection period is the time taken for the collection of Debtors. It starts from the sale of finished goods to the customers on credits till the collection of receivables from them. Till 2007-08 the analysis reveals that the company is able to collect its dues rapidly from its customers. On an average of 35 days the company’s funds are locked up with their customers, which indicate the soundness of the credit policy of the company is not satisfactory. Debtors collection period was high in the year 2008-09;as it rose to 44.4 days. So effective collection methods should be adopted.

RAW MATERIAL INVENTORY PERIOD

Raw Material inventory period is the time period for which the Raw Materials are kept in the inventory. The duration of the Raw material stage depends on the regularity of supply, transportation time, degree of perish ability, price fluctuation and economies of bulk purchases.

Average Stock of Raw Materials/Consumption of Raw Materials per day

Table-17

Year

Consumption of

Raw Materials

Per day

(Days)

Average Stock

Of Raw Materials

(Rs in

Lakhs)

Raw Material

And

Stores Inventory

Period

(Days)

2004-2005 20.9 1659.41 79.3

2005-2006 21.9 1815.55 82.9

2006-2007 22.3 2100.24 94.1

2007-2008 24.9 2234.47 89.7

2008-2009 26 9644.02 156

RAW MATERIALS & STORES INVENTORY PERIOD

INFERENCE

Raw Material inventory period is the time period for which the Raw Materials are kept in the inventory. The duration of the Raw material stage depends on the regularity of supply, transportation time, degree of perish ability, price fluctuation and economies of bulk purchases. It was low in the year 2005-06 but in 2008-09 it showed an inclined trend.

WORK IN PROCESS INVENTORY PERIOD

The WIP inventory period is time taken for the conversion of a Raw Material into finished product. The duration of the WIP inventory period depends on the length of manufacturing cycle, consistency in capacities at different stages, and efficient coordination of various inputs.

Average WIP Inventory/Cost of production per day

Table-18

Year

Cost of

Production

(Rs in Lakhs)

Average WIP

Inventory

(Rs in

Lakhs)

Cost of

Production/Day

(Rs in

Lakhs)

Work in

Process

Inventory

Period

(Days)

2004-2005 21813 85 60.59 1.40

2005-2006 22081 68.5 61.33 1.11

2006-2007 21747 77 60.40 1.27

2007-2008 23024 77 63.95 1.20

2008-2009 30268 89 82.9 1.2

WORK IN PROCESS INVENTORY PERIOD

INFERENCE

The WIP inventory period is time taken for the conversion of a Raw Material into finished product. The duration of the WIP inventory period depends on the length of manufacturing cycle, consistency in capacities at different stages, and efficient coordination of various inputs. Five years of analysis reveals that the company is showing an favorable work in process inventory period.

FINISHED GOODS INVENTORY PERIOD

The Finished goods inventory is the time period for which finished products are stored in godown. The duration of this stage depends on the pattern of production and sales.

Average Finished goods inventory/Average Cost of goods sold per day

Table-19

Year

Average Stock

(Rs in Lakhs)

CGS per day

(Rs in Lakhs)

Finished

Goods

Inventory

Period

(Days)

2004-2005 0 60.59 0

2005-2006 0 61.33 0

2006-2007 0 60.40 0

2007-2008 0 63.95 0

2008-2009 4249.46 77.3 55

FINISHED GOODS INVENTORY PERIUOD

INFERENCE

The Finished goods inventory is the time period for which finished products are stored in godown. The duration of this stage depends on the pattern of production and sales .The finished goods inventory period was 55 days in the year 2008-09 as its finished stock level was high as 20529 MT as on 31.3.2009 as against the track record of NIL stock position at the end of the immediately preceeding 4 financial years.

OPERATING CYCLE

Length of operating cycle = Creditors payment period + Debtors collection period + Raw materials inventory period + Work-in-period inventory period + Finished goods inventory period

Table-20 (In Days)

Year

Debtors

Collection

Period

(in days)

Finished

Goods

Inventory

period

Raw material

And stores

Inventory

period

Work in

Process

Inventory

period

Duration

Of

Operating

Cycle

2004-2005 56.27 0 79.3 1.4 136.97

2005-2006 32.17 0 82.9 1.11 116.18

2006-2007 23.06 0 94.1 1.27 118.43

2007-2008 18.78 0 89.7 1.2 109.68

2008-2009 44.4 55 156 1.2 256.6

DURATION of OPERATING CYCLE

Inference

The Working Capital requirement depends on the level of operations and the length of the

operating cycle. Monitoring the duration of the operating cycle is an important ingredient of

Working Capital control.

In the period of analysis it was found the HNL has an operating of 90.180days which is fairly

normal. But the operating cycle was lengthiest during 2008-2009 since there was increase in the

creditors payment period and debtors collection period compared to previous years So the

duration of operating cycle rose to 257days.Higher the ratio the less favorable it is because it

would have a similar margin of operating profit for the payment of dividend and the creation of

reserves.

WORKING CAPITAL LEVERAGE

Working capital leverage reflects the sensitivity of return on investment to change in the level of current assets. To express the formula for working capital leverage the following symbols can be used:-

CA - Value of Current Asset (Gross Working Capital)

ΔCA - Change in the level of current assets

FA - Value of net fixed assets

TA - Value of total assets (TA=CA+FA)

WCL - Working Capital Leverage

WCL = CA/(TA+ACA)If there is an increase in the level of Current Assets

WCL = CA/(TA-ACA)If there is a decrease in the level of Current Assets

Calculation of Working Capital Leverage

Table21 (Rs in Lakhs)

Year CA Δ CA FA TA WCL

2004 -2005 13150 31 17230 30380 0.43

2005 -2006 13877 664 17744 31621 0.44

2006 -2007 15636 1821 16738 32374 0.48

2007 -2008 16177 540 15923 32100 0.50

2008 -2009 21913 5717 15480 37393 0.51

Source Annual Report

GRAPHICAL REPRESENTATION OF- Calculation of Working Capital Leverage

Inference

There is an increase in the level of Working Capital Leverage of the Company in the year 2008-

09. A higher level of Working Capital Leverage means that the Firm is more sensitive to the

changes in Current Asset.

The Company is having its Working Capital Leverage below 1 on all the years which means that

the Companies Return on Investments are not affected to a great extend by the changes in the

Current Assets.

PRODUCTION HIGHLIGHTS

Table 22

(Rs in Lakhs)

Year Installed Capacity of Saleable Newsprint

(In MT)

Actual

Production

(In MT)

Sales

(In MT)

Capacity

Utilization

2004 -2005 100000 112202 112202 112%

2005 -2006 100000 113050 113050 113%

2006 -2007 100000 112565 112565 113%

2007 -2008 100000 116111 116111 116%

2008 -2009 100000 108005 108005 108%

Source Annual Report

GRAPHICAL REPRESENTATION OF- Capacity Utilization

Inference

During the year 2007-08 the Company could reach higher levels of operational performance by

establishing record in production at 116111 MT as against 112565MT in the year 2006-07 with a

sales turnover of Rs 298.61 crores which was less by Rs 16.58 crores compared to the highest

ever turnover of Rs 315.19 achieved during the previous year .But in the year 2008-09 the

company’s operational performance declined to 108% owing to lower Unit Net Sales

Realization. The Company could not maintain the NIL stock position

CHAPTER- 5

FINDINGS

SUGGESTIONS AND CONCLUSIONS

FINDINGS

1. The company has performed exceptionally well during the year 2008-2009 inspite of

economic meltdown which had hit the domestic newsprint market badly.

2. Actual production has been increasing consistently but was low in 2008-2009 when

compared with the previous year.

3. Upkeep of machinery and equipments has been one of the impeding factors in realizing

production target.

4. Great fluctuations in the loans and advances.

5. The current ratio of HNL is satisfactory .The company is fully utilizing its assets.

6. The quick ratio is also satisfactory because the ratio is nearest to the ideal ratio.

7. The debt equity ratio is not favorable from long term creditor’s point of view.

8. The debt asset ratio is not favorable in the year 2008-2009 so there will be adverse affect in

the financial strength of the business enterprise.

9. Considerable reduction of variable cost is already achieved by replacing chemical pulp by

deinked pulp.

10. The company could notch up impressive capacity utilization of 108% during the year 2008-

2009.

11. The company has exercised control over its fixed expenses through extensive cost cutting

measures.

12The Company has accumulated lossess of 0.04lakhs for the sale of fixed assets in the current

financial year.

13. Cash position of HNL has declined from 5610.37 to 374.70 in the current financial year.

14. The company was not successful in maintaining a satisfactory operating cycle.

15. The company has maintained proper records showing full particulars, including

Quantitative details and situation of fixed assets.

SUGGESTIONS

The company has a sound working capital managements system. The company continued to

maintain higher levels of operational and financial performance by achieving production and

sale of 108005 MT as against 116111 MT last year and setting new record in sales turnover at

Rs.297.61 crores inspite of the onset and onslaught of economic melt down in general and

removal of customs duty on imported newsprint in particular badly hit the domestic newsprint

market.

In our opinion and to the best of knowledge of information about the company does not have

accumulated losses as at the end of the financial year and the company has not incurred cash

losses in the current financial year and in the immediately preceding financial year.

The major sources of Working Capital of HNL are Sundry Debtors, Sundry Creditors, and

Advances from customers and Provisions. A large chunk of working capital is blocked in the

HNL. The internal control procedures need to be more ad equals so as to be commensurate

with the size of the company and the nature of its business with regard to accounting, handling,

control and valuation of inventories, so that it does not block a huge amount of money in

inventory.

The bad/doubtful debts for the last five years are showing an increasing trend. This should be

given due attention as it implies the provision for bad debts made in the previous years were

not sufficient as compared to the reality. So effective collection methods should be adopted.

Quick ratio of HNL from 2004-2005 to 2007-08 is more than ideal ratio 1:1.But in the year

2008-09 it has declined to 0.87 .So. Management has to take actions to maintain the ratios at

the standard level as it is important for the concern to keep its liquid assets at least equal to the

liquid liabilities at all times. The cash position should be improved as early as possible since it

is at an alarmingly low level.

CONCLUSION

A study conducted in Hindustan Newsprint LTD Kottayam; enable to get practical touch to the

topic Working Capital Management of the company. The management of working capital plays

an important role in maintaining the financial health of the company during the normal course

of business. The company should maintain sufficient level of working capital to produce upto a

given capacity and maximize the return on investment in fixed assets .Shortage of working

capital leads to lower capacity utilization.

To maintain the solvency of the business and continue production,it is necessary that adequate

funds be available to pay the bills for material , labor ,selling and administrative expenses and

other cost of doing business .The prompt payment of b ills to suppliers of materials ensures a

continued supply of raw materials and established credit for the future or for reasonable

operations.

A skilled inventory management helps the company to maintain inventories at an optimum

level, thereby keeping the inventory cost minimum and at the same time ,there is no stock out

cost , which may result in loss of sale or stoppage of production.

The maintenance of receivables involves direct and indirect costs .Direct cost includes the cost

of investments allowances and con cessions to customers and also losses on account of bad

debts. Prompt collection reduces the receivables to the minimum dictated by the credit policy

and helps the management to optimize the investment in receivables. In fact the receivables in

an organization should be managed in a way that the sales are expanded to an extent where risk

remains within the acceptable limits.

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.

CHAPTER-7

BIBLIOGRAPHY

BIBLIOGRAPHY

REFERENCES

BOOKS

[1] Dr. Prasanna Chandra (IIM B), Financial Management Theory and Practice, Second Edition,

Tata Mc-Graw Hill Publications, New Delhi, pp- 245-265

[2] Pandey,”Financial Management”, Vikas Publishing House Pvt Ltd, pp108-157,808-939

[3]Sharma,”Working Capital Management”Surabhi Pulications, 103-173.

WEBSITE

[1]http://www.hnlonline.com

OTHER SOURCES

[1]Annual Report of the company, Year 2001-02 to 2008-09

[2]Articles issued by the Company

[3]Monthly Statement of Operational Data (MSOD)

[4]Journals, Magazines issued by the Company.