working capital management - iffco - kalol unit

7/25/2019 Working Capital Management - IFFCO - Kalol Unit

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A

PROJECT REPORT

ON

OF

KALOL UNIT

Submitted By:

Kumbhar Vijay C. Roll No: !""#$

%ear: &"!"!!

'(der The )uida(*e o+

,r. P. K. Priya(

Submitted i( -artial +ulllme(t o+ there/uireme(t

For the a0ard o+ the de1ree o+

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). 2. Patel Po3t1raduate 4(3titute o+ 5a(a1eme(t6

Vidhya(a1ar6 A(a(d.

E7EC'T4VE S'55AR%

Every business needs adequate liquid resources in order to maintain day-to-day cash

fow. It needs enough cash to pay wages and salaries as they all due and to pay creditors i

it is to keep its workorce and ensure its supplies. Maintaining adequate working capital is

not ust important in the short-term! su"cient liquidity must be maintained in order to

ensure the survival o the business in the long-term as well. Even a pro#table business may

ail i it does not have adequate cash fow to meet its liabilities as they all due. $hereore!

when businesses make investment decisions they must not only consider the #nancial outlay

involved with acquiring the new machine or the new building! etc! but must also take

account o the additional current assets that are usually involved with any e%pansion o

activity. Increased production tends to engender a need to hold additional stocks o raw

materials and work in progress. Increase sales usually mean the level o debtors will

increase. & general increase in the #rm's scale o operations tends to imply a need or

greater levels o cash.

(y minimi)ing the amount o unds tied up in current assets! #rms are able to reduce

#nancing costs and*or increase the unds available or e%pansion. $he importance o e"cient

+orking ,apital Management is indisputable. (usiness viability relies on its ability to

eectively manage receivables! inventory! and payables. (y minimi)ing the amount o unds

tied up in current assets and liabilities back towards their optimal levels. $he de#nition o

working capital is airly simple it is the dierence between an organi)ation's current assets

and its current liabilities.

$hus our proect concentrates on the important aspects o the +orking ,apital

Management in the organi)ation lie. $here are many private as well as government

companies. $he company we have selected or our proect is the ,ooperative /ociety which

is I00, 2 3&44.

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Indian 0armers 0ertili)ers ,o-operative limited 6I00,7! today is a leading player in

India's ertili)er industry and is making substantial contribution to the eorts o Indian

8overnment to increase ood grain production in the country. Indian armers 0ertili)ers

,ooperative 4imited! popularly known as I00, emerged as a pioneer venture on the hori)on

o ertili)er production and marketing with the obective o attaining sel su"ciency in ood

grain production.

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PREFACE

&ny science without its practical application or knowledge is considered to be

unsystematic. /ince management is a developing science! the students o Management

course are required to undergo a proect. Management o working capital plays a

signi#cant role in the organi)ation as the blood plays its role in the human body .It not

only provides energy to the business but simultaneously it is essential or the success o

any business organi)ation management o working capital has close implication with the

two important actors that udge the overall success o the business pro#tability and

solvency. :ow2a-days! the maor problem aced by every business organi)ation is o

#nance because o drastic changes in the si)e and scale o business and increased

competition! which results in the increase in credit business and shortage o #nancial

brackets. In such an environment! the working capital management has occupied one o

the key positions in the business management.

It gives me great pleasure to acknowledge my indebtness to all those who have

helped me completing this proect and bringing it out in its present orm. I am very

grateul to my guide under whose kind supervision and able guidance! this work has

completed.

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ACKNO89E,)E5ENT

It was a great pleasure working at I00,-3alol. +e take this opportunity to e%tend our

gratitude towards all those persons who have directly or indirectly contributed to this

proect.

0irst o all! we are grateul to 5r. B.A.Shah6 ,ire*tor )e(eral 5a(a1er Trai(i(1;

who gave us opportunity to undertake this proect at I00,-3alol! and also or his help and

tips whenever needed.

+e would like to thank 5r. A(il Aroda6 ,)5 Fet Patel

A=C3;or sharing their ideas with us. +e thank all o them or their valuable time! which! in

spite o being e%tremely busy. +e also appreciate the supportive attitude o all the head o

departments and the sta o I00,.


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,EC9ARAT4ON

I! Vijay C. Kumbhar! the undersigned! an M(& student o ).2.Patel Po3t

)raduate 4(3titute o+ Bu3i(e33 5a(a1eme(t6 S.P.'(i?er3ity6 A(a(d do hereby

declare that this report titled =8or>i(1 Ca-ital 5a(a1eme(t> o Indian 0armers and

0ertili)er ,o-operative 4td 6I00,o7 3alol ?nit! under the guidance o @r. A.3.Aryan! 0aculty o

0inance Management! submitted in partial ul#llment o the requirement or the summer

internship proect during the Aost 8raduate @egree in Master o (usiness &dministration

studies.

$his is my original work and has not been previously submitted by any student any

(usiness school or ?niversity. $he #ndings and conclusions o this report are based on my

personal study and e%perience! during the tenure o my summer internship.

AlaceB

@ateB

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CERT4F4CATE

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1. Introduction to the

study

1.1 bective o the study

1.5 /cope o the study

1.9 Fesearch Methodology

1.; 4imitation o the study


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!.! OBJECT4VE OF ST',%

To a(aly@e the 8or>i(1 Ca-ital a(d 8or>i(1 Ca-ital 5a(a1eme(t -oli*ie3 at

4FFCO

$o understand +orking ,apital Management o the organi)ation

$o analy)e 4iquidity position o the organi)ation

$o #nd out the Aro#tability and operating e"ciency o the organi)ation

$o understand the importance o +orking ,apital Management

$o analy)e the short term #nancing patterns! which aect the working capital

o the organi)ation

$o study the actors that aects the +orking ,apital Management at I00,

$o analy)e the data and inormation o the previous years to know the actual

position o unds! investments and liabilities o the organi)ation

$o identiy some broad policy measures to improve the working capital

position o the organi)ation

$o estimate the working capital requirements o the organi)ation in the near

uture

To a(aly@e the Ca3h 5a(a1eme(t Pra*ti*e3 at 4FFCO

$o understand the cash management process ollowed at the organi)ation

$o study the actors both intrinsic and e%trinsic that infuences the cash

management at the organi)ation

$o study and analy)e the changes being brought about the e%isting cash

management system

$o study the salient eatures! methodology and advantages o the new cash

management system being implemented at the organi)ation

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$o suggest some recommendations to the organi)ations or the improvement

o the cash management practices and the new cash management MI/

!.& SCOPE OF T2E ST',%

$he scope o the study is identi#ed ater and during the study is conducted. $he

study o working capital is based on tools like trend &nalysis! Fatio &nalysis! working capital

leverage! operating cycle etc.

0urther the study is based on last < years &nnual Feports o I00, and even actors

like ,ompetitor's analysis! industry analysis were not considered while preparing this

proect.

!.# RESEARC2 5ET2O,O9O)%

.#.!. ,ata *olle*tio(

.#.!.!. Primary data:$he primary is collected #rst times. Arimary @ata is collected on thebasis o personal interviews.

.#.!.&. Se*o(dary data:/econdary data are those data which is already collected and

stored. /econdary data can easily get rom the &nnual Feports!Hournals etc. o the company. It will save the time! money and eorts tocollect the data. /econdary data also made available through trademaga)ines! books! Internet etc. $his proect has a limited primary datacollection based on the interview o the 8eneral Manger! 0inance andother concerned member o #nance department. (ut primary datacollection has certain limitation 6con#dential data inormation7./econdary data is gathered rom the annual reports! Fed erringArospectus! and Internet. $he aim o data collection is to gainamiliarity and to achieve new insights into the +orking ,apitalManagement o the company.

Aroect is based on B17 &nnual Feport o 5JJC-JD57 &nnual Feport o 5JJD-J97 &nnual Feport o 5JJ-JG

1J


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;7 &nnual Feport o 5JJG-1J


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!. 9454TAT4ONS OF T2E ST',%

$he ollowing are the limitations o this summer proect trainingB

$he data used in this study has been taken rom the 0inancial /tatements K theirrelated schedules o I00, 4td.! :ew @elhi as per the requirement.

/ome o the inormation that was essential or this study cannot however be given in

this report due to their con#dential nature.

$he scope and area o the study was limited to corporate o"ce o I00,! :ew @elhi

only.

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19

5. Indian 0ertili)er

Industry

5.1 Introduction

5.5 Aast! Aresent K 0uture o

0ertili)er Industry

5.9 I00, in 0ertili)er

Industry


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&.! 4NTRO,'CT4ON

India is basically an agricultural country which economy dependslargely upon its agrarian produce. &gricultural sphere contributes about 5


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&.& PAST6 PRESENT < F'T'RE OF FERT494ER 4N,'STR% 4N

4N,4A

&.&.!. Produ*tio(:

ne o Indias key budgetary subsidies is or ertiliser! estimated at around ?/N 5.billion during 5JJJ-J1. &s an element or attaining sel su"ciency in ood production! theIndian 8overnment has over many decades maintained the necessity o producing asigni#cant percentage o national ertiliser consumption. India produces about GJ per cent oits requirements or nitrogen ertilisers! mainly urea! and about DJ per cent o phosphateertilisers! while importing all potassium ertilisers. @omestic production o urea by variousgovernment-owned manuacturing units is about 51 million tons. /i%ty per cent o Indiasinstalled nitrogen ertiliser capacity is based on gas! with the remaining ;J per cent basedon the now more e%pensive naphtha or uel oil eed stocks. (oth domestic and importedertilisers are sold to armers at a set price! somewhat well below the prevalent world prices.

&.&.&. Pri*e3 a(d Co3t3:

Indias production costs or urea! until a ew years ago was below world prices!currently average well above world levels and vary across manuacturing units in thecountry! ranging rom ?/N 1JJOton to more than ?/N9JJOton. igh domestic prices and highta%es on naphthaOuel oilOlow sulur eed stocks in most states are a maor actor in pushingthe costs up.

+hereas! the import price or urea ranges rom ?/N1


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+$ and its implicationsB &s is common knowledge! all nitrogen ertiliser imports arechanneled through the government! which subsidises the price o imported as well asdomestic ertiliser. $he imports o phosphate and potassium ertilisers are ree! but thegovernment still subsidi)es their sale! though in the case o phosphate ertilisers domesticproduction gets a higher subsidy than imported products.

?ntil recently! ertiliser had a )ero duty! though in the last year the governmentimposed a #ve per cent customs duty! despite the act that the government pays theadditional cost. +$ commitments should eventually orce the government to endchanneled imports o urea. $he tari on phosphate ertiliser is bound at < per cent but ureait is not. $hough! India would be able to levy urea taris to protect domestic industry againstimports but that would complicate armer subsidies and it would no longer be able to paydierential subsidies on domestic and imported ertilisers. $hus it is e%pected that theertili)er subsidy to both armers and industry will get cut or reduced over a short period otime. $o study the impacts o the +$ agreements on the Indian ertiliser industry! theertili)er ministry has set up a task orce which is being headed by the secretary or ertiliser.

&.&.. The Cha(1ed S*e(ario:

India has been importing as much as CJ-C< per cent o all #nished di-ammoniumphosphate 6@&A7 rom the ?nited /tates. /ince decontrolling phosphatic ertili)er imports theIndian government has constantly adusted the levels o subsidies to @&A producers andimporters! with higher subsides going to producers. $he subsidy or imports has not matchedrecent hikes in world prices or @&A! making it uneconomical or private players to importthe product. $he government-owned ertiliser trading company has stepped in to cover theimport shortall at a loss! but the company this time has not chosen rom traditional ?/.

/eeing this step as a maor loss to the ?/ ertiliser industry! the representatives romthe ?/ industry have initiated inormal discussions with the Indian government and tradeo"cials to check what has evolved as a Precanali)ationP o @&A imports and reversal o theeorts to liberali)e ertili)er imports. It may be interesting to note here that the imports o#nished di-ammonium phosphate 6@&A7! rom the ?nited /tates has reduced rom ?/N 5JJ-9JJ million down to nil in the current year.

&.&.D. Ratio(ali3i(1 Fertili3er Sub3idie3:

$he deadly combination o rising production costs! increased pressure to cutsubsidies and possible new trade requirements is driving a push or reorm in the Indianertiliser sector.

$he comple%ity o the problem has triggered a heated debate on how best to make atransition rom a protected pricing environment to a market driven regime. $he high-powered anumantha Fao ,ommittee 6F,7 on ertiliser pricing in 1GG recommendedgradually deregulating the industry! discontinuing the FA/ or urea plants and instituting a

uniorm subsidy based on a reerral price.

$he Ministry o ,hemicals and 0ertili)ers released a drat long-term ertiliser policybased on the F, report! in Huly this year 65JJJ7! which aims to adopt a single retentionprice or the entire industry! while providing some cost reimbursements to less e"cient unitsusing naphtha and uel oil or a limited period. $he ertiliser ministry has also started severalProad-showsP to invite the views o armers! consumer organi)ations! media! industry!and government o"cials on the drat ertili)er policy to incorporate their views in the #nalversion.

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Meanwhile! the E%penditure Feorms ,ommission 6EF,7! set up by the #nanceministry in /eptember 5JJJ! recommended gradually phasing out ertili)er subsidies by5JJC! with a seven per cent annual real increase in urea prices. $he EF, proposed group!rather than unit! pricing or the industry component o the subsidy.

$o protect small armers! the EF, recommends the distribution o subsidi)ed

ertili)ers o 15J kgs or each cultivator. & ew are o the view that the FA/ be replaced witha fat rate o subsidy o Fs. 1 to the Future:

$hough! varying in detail! most o the recommendations are basically similar! such as- end the FA/ and adopt uniorm industry subsidy that is phased out over time. Manyrecommend phasing out or at least reducing armer subsidies. @uring most o the history oertili)er subsidies! armers were penali)ed by receiving below world prices or ood grain.

$oday! in act! armers get more than world prices! so little usti#cation remains orsubsidi)ing a key input.

0urther there is evidence that the skewed ertiliser applications encouraged by thesubsidies is one actor behind Indias relatively low yields. Ending subsidies could in the endimprove agricultural output. Even though India imports only a modest portion o its ertiliserneeds! it is maor importer in the world market. Importing a larger share o its needs couldpush up world prices! which at any rate can be volatile given the dependence on carbon-based eed stocks! so much greater reliance on imports is not necessarily a sound solution.

$he main need! according to e%perts! is to encourage a more fe%ible and e"cient domesticindustry and to rationalise input prices. 8iven the distortions that have built up! the ertiliserindustry will need to receive continued government support in some orm or the other duringa transition period.

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1

9. I00, at a glance

9.1 istory

9.5 Qision

9.9 Mission

9.; 4imitation o the study


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Ty-e ,ooperative

Fou(ded :ew @elhi! India6:ovember J9 1GCD7

2ead/uarter3 :ew @elhi! India

Key -eo-le ?./. &wasthi! Managing @irector

8eb3ite httpBOOwww.ico.nic.in

#.!.2i3tory:

@uring mid- si%ties the ,o-operative sector in India was responsible or distribution o

DJ per cent o ertili)ers consumed in the country. $his /ector had adequate inrastructure to

distribute ertili)ers but had no production acilities o its own and hence dependent on

publicOprivate /ectors or supplies. $o overcome this lacuna and to bridge the demand

supply gap in the country! a new cooperative society was conceived to speci#cally cater to

the requirements o armers. It was a unique venture in which the armers o the country

through their own ,o-operative /ocieties created this new institution to saeguard their

interests. $he number o co-operative societies associated with I00, has risen rom


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I00, commissioned an ammonia - urea comple% at 3alol and the :A3O@&A plant at

3andla both in the state o 8uarat in 1GD


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#..V4S4ON &"!D

I00, successully implemented its earlier ,orporate Alans namely =QI/I: 5JJJ>!

=MI//I: 5JJ and RQI/I: 5J1J' which resulted into becoming one o the largest producer

and marketer o ,hemical 0ertilisers by e%pansion o I00,'s e%isting units! setting up oint

venture companies overseas and diversi#cation into new sectors.

I00, has now visualised a comprehensive Alan entitled RQI/I:-5J1


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#.. 4NVEST5ENTS O'TS4,E 4FFCO

A3 o( #!."#.&"!";

4(dia( Pota3h 9td 4P9;

I00,'s Equity B Fs. 5.C ,roreAercentage o Equity held B 9;L&ctivity BMarketing o Aotash and Imported 0ertili)ers

4(du3trie3 Chimi/ue3 du Se(e1al 4CS; 4 < 44I00,'s Equity B Fs. J.9D ,roreAercentage o Equity held B 1.


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Jorda( 4(dia Fertili3er Com-a(y J4FCO;Aroect ,ost B ?/@ C;J MillionI00, Equity B


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#.H. 4FFCO CAS2 A8AR,S 4N COOPERAT4ON

$he (oard o @irectors in the year 1G5 had approved giving a best cooperator &ward

on an annual basis! to an individual who has contributed ma%imum towards development o

,ooperative Movement. $he amount o ,ash &ward was #%ed at Fs.1J!JJJO- along with a

citation. $his amount was enhanced by the (oard in the year 1G rom Fs.1J!JJJO- to

Fs.5

$he (oard o @irectors in the year 1GG9 while approving I00, ,ash &ward on

,ooperation or the years 1GGJ-1GG1 K 1GG1--1GG5 to the (est ,ooperators! inter-alia

approved that in addition to the =(est ,ooperator &ward>! =I00, /ahakarita (andhu &ward>

may also be instituted rom the year 1GG9-G;. $he amount o both the &wards namely

=I00, ,ash &ward on ,ooperation to the (est ,ooperator>! 6ii7 =I00, /ahakarita (andhu

&ward>! was #%ed at Fs.. In the year 5JJJ it was decided that the

amount or each award be increased rom Fs. &ward or the

5;


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year 5JJC-JD was conerred on /hri ?./. /inghdev o ,hhatisgarh /tate.

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I00,s ,orporate 0ilm +ins :,?Is &ward.

I00, +ins AF/I &ward

Ahulpur ?nit +ins :ational Energy ,onservation &ward-5JJC

&onla ?nit wins :ational Energy ,onservation &ward-5JJC

I00, 3alol +ins P:ational Energy ,onservation &wardB 5JJCP

3andla ?nit wins 0&I Ari)e

3alol unit +ins 8uarat /tate /aety &ward

3andla ?nit +ins - 8olden Aeacock Environment Management &ward

Ahulpur ?nit bags :ational Energy &ward rom onourable Aresident o India

(est Managed +ork 0orce &ward or I00,

I00, &onla ?nit +ins :ational /aety ,ouncil o India /aety &ward-5JJ;

I00, &onla +ins :ational /aety &ward

#.$. BANKERS

Indian verseas (ank /tate (ank o India (ank o (aroda /tandard ,hartered (ank. $he Maharashtra /tate

,ooperative (ank 4td. $he +est (engal /tate

,ooperative (ank 4td. Madhya Aradesh /tate

,ooperative (ank 4td.

$he 3arnataka /tate

,ooperative (ank 4td. $he Aunab /tate

,ooperative (ank 4td. I,I,I (ank 4td. I@(I (ank 4td. $he ongkong and

/hanghai (anking

,orporation 4td.

#.I. A',4TORS

!; 5=3. S. 5a(( < Co.6

,hartered &ccountants!

1JJC! 1Jth 0loor!

Qikrant $ower!

Faendra Alace!

:ew-@elhi-11J JJ.

5C


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5D


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&; 5=3 S. 5oha( < Co.6


8-;D! ,onnaught ,ircus!

:ew @elhi-11J JJ1.

#; 5=3. ). S. 5athur < Co.


&-1CJ! @eence ,olony!

:ew @elhi-11J J5;.

5


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#.!". 4FFCOKA9O9

2ead O+ the '(it: Mr. . @. Mistry X /enior 8eneral ManagerProdu*tio( Ca-a*itie3:

&mmonia- ?rea ,omple% ,ommissioned in 1GDRa0 5aterial3

Parti*ular3 '(it &"!"!!

:atural 8as 68&I47 MM/M9 J&ssociated 8as 68&I47 MM/M9 J8asO F-4:8 MM/M9 ;5;/pot 8as MM/M; GFI4 8as MM/M9 ;13

,handra! $ 3! /eti! 3uldeep and Fobertson! , 5J1J. Fertili@er3

Stati3ti*3 &""$"I. 0ertili)ers &ssociation o India 60&I7! :ew

@elhi.

Famachandran! : and 3akani! Fam 5JJ. Fi(a(*ial A**ou(ti(1

+or 5a(a1eme(t. $ata Mc8raw-ill Aublications! 5ndEdition.

Aandey! I M 5J1J. Fi(a(*ial 5a(a1eme(t. Qikas Aublishing

ouse! 1JthEdition

Re-ort3

&nnual reports o I00,

&greement #les o I00,

8eb3ite3 a(d 4(ter(et

www.ico.nic.in

www.wikipedia.com

www.investopedia.com

www.ert.nic.in

www.aidelhi.org
http://www.faidelhi.org/http://www.faidelhi.org/


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A--e(diG A: 8or>i(1 Ca-ital 5a(a1eme(t

+orking ,apital Management is the interaction between current assets and current

liabilities. $he current assets reer to those assets! which in ordinary course o

business can be! or will be turned into cash within one year without undergoing a

diminution in value and without disrupting the operation o the #rm.

@ecisions relating to working capital and short term #nancing are reerred to as +orking

,apital Management. $his involves managing the relationship between a #rms short-

term assets and its short-term liabilities. $he maor thrust is on managing the current

assets because a current liability arises in conte%t o current assets.

$he goal o working capital management is to ensure that a #rm is able to continue its

operations and that it has su"cient ability to satisy both maturing short-term debt

and upcoming operational e%penses. $he management o working capital involves

managing oB

&ccounts receivable 6current asset7 Inventory 6current assets7! &ccounts payable 6current liability7! and ,ash 6current asset7

$he management o current assets is similar to that o #%ed assets in the sense that

in both cases the #rm analyses their eects on its return and risk. owever! the

management o #%ed and current assets diers in $FEE waysB

1. In the management o #%ed assets! time is very important consequently! discounting

and compounding aspects o time element play a signi#cant role in capital budgeting

and a minor one in the management o current assets.5. 4arge holdings o current assets especially cash strengthen times liquidity 6and

reduces riskiness7 but also reduces overall pro#tability.9. $he levels o #%ed as well as current assets depend upon the =e%pected sales>! but it

is only the current assets! which can be adusted with sales fuctuations in short runs.

In e%amining the management o current assets! answers will be sought to the

ollowing questionsB

+hat is the need to invest unds in the current assets[ ow much unds should be invested in each type o current assets[


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+hat should be the proportion o long term and short term unds to #nance current

assets[ +hat appropriate sources o unds should be there to #nance current assets[

& company can be endowed with assets and pro#tability but short o liquidity i its

assets cannot readily be converted into cash. Aositive working capital is required to ensure

that a #rm is able to continue its operations and that it has su"cient unds to satisy both

maturing short-term debt and upcoming operational e%penses.

+orking ,apital Management is a signi#cant part o #nancial management. Its

importance arises rom two reasonsB

Investment in current represents assets a substantial portion o total management. Investment in current assets and the level o current liabilities have to be geared

quickly to changes in sales. $o be sure! #%ed assets investment and long term

#nancing are also responsive to variations in sales. owever this relationship is not as

close and direct as it is in the case o +orking ,apital Management.

ence in this study an attempt has been made to analy)e the si)e and composition o

working capital and whether such an investment has increased or declined over a period o

time.

0inancial manager now a day is responsible or shaping the ortunes o the

enterprise! and is involved in the most vital decision o the allocation o capital. $here is a

need to have a broader and arsighted outlook and must ensure that the unds o the

enterprise are utili)ed in the most e"cient manner .ne o the most important task o

#nancial manager is to select an assortment o appropriate sources o #nance or the current

assets. :ormally the e%cess o current assets over current liabilities should be #nanced by

long-term sources. Arecisely it is not possible to #nd out which long term sources has been

used to #nance current assets! but it can be e%amined as to what proportion o current

assets has been #nanced by long term unds. $hereore! an attempt has been made in this

regard.

In working capital analysis the direction o change over a period o time is o crucial

importance. :ot only that! analysis o working capital trends provides a base to udge

whether the practice and prevailing policy o the management with regards to the working

capital is good enough or an improvement is to be made in managing the working capital

unds.


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ence in this study! an attempt is made about the trends o the working capital

management o selected enterprise. In addition! to have higher pro#tability the #rms

may sacri#ce solvency and maintained a relatively low o current assets. +hen the

#rms do so their pro#tability will improve and less are tied up in the idle current

assets! but their solvency will be threatened. ence! an attempt is made to study the

association o pro#tability with the working capital ratios. +ith this view! an eort has

been made in this proect report to make an in-depth study o I00, in respect o its

perormance and its working capital management.

Ty-e3 o+ Ca-ital

Every business needs unds or two purposes or its establishment to carry out its day-to-day

operations. ,apital required or business can be classi#ed under two main categoriesB

17 0i%ed ,apital

57 +orking ,apital

FiGed Ca-ital

4ong term unds are required to create production acilities through purchase o #%ed assets

such as plant K machinery! land! buildings! urniture! etc. investments in these assets

represents that part o #rm's capital! which is blocked on a permanent or #%ed basis

and is called #%ed capital.

8or>i(1 Ca-ital

0unds are also needed or short-term purpose or the purchase o raw materials! payment o

wages and other day-to-day e%penses! etc. $hese unds are known as +orking

,apital. $here are two concepts o working capitalB

1. 8ross working ,apital5. :et working ,apital

)ro33 8or>i(1 Ca-ital8ross working capital reers to the #rm's investment in current assets. ,urrent assets

are the assets which can be converted into cash within an accounting year or within an

operating cycle. $he items comprising o current assets areB

,ash Marketable securities &ccounts receivable


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:otes or bills receivable Arepaid e%penses Merchandise inventory Manuacturing inventory

Net 8or>i(1 Ca-ital:et +orking ,apital reers to the dierence between the current assets and current

liabilities. ,urrent liabilities are those claims o outsiders which are e%pected to mature or

payment within an accounting year or the operating cycle o the business. $he items

comprising o current liabilities areB

&ccounts Aayable &cceptance Aromissory :otes Aayable &ccrued 4iabilities Estimated 4iabilities or Arovisions

(ank verdrat ,ontingent 4iabilities

:et working capital can be positive or negative. & positive net working capital will arise

when current assets e%ceed current liabilities. & negative net working capital occurs when

current liabilities are in e%cess o current assets. I current assets are less than current

liabilities! an entity has a working capital de#ciency! also called a working capital de#cit.

8ORK4N) CAP4TA9 C'RRENT ASSETS C'RRENT 94AB494T4ES

&n increase in working capital indicates that the business has either increased current assets6that is received cash! or other current assets7 or has decreased current liabilities.

Ty-e3 o+ 8or>i(1 Ca-ital

+orking ,apital can be urther divided into two types namelyB

17 Aermanent or #%ed working capital57 Qariable or temporary working capital

Perma(e(t or FiGed 0or>i(1 *a-ital

$here is always a minimum level o current assets which is continuously required by a

#rm to carry on its business operations. Aermanent or 0i%ed working capital is the minimum

level o current asset. It is permanent in the same way as the #rms #%ed assets are.

@epending upon the changes in production and sales! the need or working capital! over and

above permanent working capital will fuctuate. 0or e%ampleB every #rm has to maintain a

minimum level o raw material! work-in-progress! #nished goods and cash balance. &s the


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business grows! the requirements o permanent working capital also increase due to the

increases in current assets.

Tem-orary or Variable 8or>i(1 Ca-ital

Qariable working capital is the e%tra working capital needed to support the changing

production and sales activities o the #rm. (oth kinds o working capital 2 permanent and

temporary 2 are necessary to acilitate production and sale through the operating cycle. (ut

the #rm to meet liquidity requirements that will last only temporarily creates a temporary

working capital. Qariable working capital can be urther classi#ed as seasonal working

capital and special working capital. Most o the enterprises have to provide additional

working capital to meet the seasonal and special needs. $he capital required to meet the

seasonal needs o the enterprise is called seasonal working capital. /pecial working capital

is that part which is required to meet the special e%igencies such as launching o e%tensive

marketing campaigns or conducting research etc.

$emporary working capital diers rom Aermanent working capital in the sense that it is

required or short periods and cannot be permanently employed gainully in the

business.

+orking,apital6in

Fs.7

$e

mporary

+orking

,apital

Aer

manent

+orking

,apital


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$he other approach is the &ggressive &pproach in which the #rm goes or ewer

investments in current assets! thus leaving more amounts o unds or investment

in more pro#table ventures. $his approach imparts greater AF0I$&(I4I$V to the

company. &n ideal policy would be the moderate policy! which strikes a balance

between the two approaches. ,hoosing the pattern o #nancing $he management o #nancing the chosen level o current assets once again

takes into consideration the attitude o management towards risk.

,etermi(a(t3 o+ 8or>i(1 Ca-ital$he working capital requirements o a concern depend upon a large number o

actors. It is not possible to rank them because all such actors are o dierent importance

and the infuence o individual actors changes or a #rm over time. owever the ollowing

are the actors generally infuencing the working capital requirementsB :ature or character o business

$he working capital requirements o a #rm basically depend upon the nature

o the business. Aublic undertakings like electricity! water supply! and railways need

very limited working capital because they oer cash sales only and supply services.

$rading and #nancial #rms require less investment in #%ed assets but have to invest

large amounts in current assets! as they need large amount o working capital. $he

manuacturing undertakings also require si)able working capital along with #%ed

investments. /i)e o business

$he working capital requirements o a concern are directly infuenced by the

si)e o the business. 8reater the si)e o a business unit! generally larger will be therequirements o working capital.

Manuacturing processIn manuacturing business! the requirements o working capital increase in

direct proportion to length o manuacturing process. 4arger the process period o

manuacture! larger is the amount o working capital required. $he longer the

manuacturing time! the raw material and other supplies have to be carried ar a

longer period in the process with progressive increment o labor and service costs the

#nished product is #nally obtained.


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&bility to ace crises

&dequate working capital enables a concern to ace business crises in

emergencies such as depression because during such periods! generally! there is

much pressure on working capital.

Fegular payments o salaries! wages and other day-to-day commitments

& company which has ample working capital can make regular payments o

salaries! wages and other day-to-day commitments which raise the morale o its

employees! increases their e"ciency! reduces wastages and costs and enhances

production and pro#ts.

Easy loans

& concern having adequate working capital! high solvency and good creditstanding can arrange loans rom the banks and others on easy and avorable terms.

Fegular supply o raw materials

/u"cient working capital ensures regular supply o raw materials and continuous

production.

Bala(*ed 8or>i(1 Ca-ital

Every business concern should have adequate working capital to run its business operations.

It should have neither redundant or e%cess working capital nor inadequate or

shortage o working capital. (oth E%cess! as well as short +orking capital positions is

bad or any business.

@isadvantages o Fedundant or E%cessive +orking ,apital

E%cessive working capital means idle unds! which earn no pro#t or the business!

and hence the business cannot earn proper rate o return on investments.

+hen there is a redundant working capital! it may lead to unnecessary purchasing

and accumulation o inventories causing more changes o thet! losses and waste.

E%cessive working capital implies e%cessive debtors and deective credit policy!

which may cause higher incidents o bad debts.

+hen there is e%cessive working capital! relations with the bank and other #nancial

institutions may not be maintained.


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It may result into overall ine"ciency in the organi)ation and also due to low rate o

return on investments the value o shares may also alls.

,a(1er3 o+ 4(ade/uate 8or>i(1 Ca-ital

& concern! which has inadequate working capital! can pay its short-term liabilities in

time. $hus! it will lose its reputation and shall not be able to get good credits

acilities.

It becomes di"cult or the #rm to e%ploit avorable market conditions and undertake

pro#table proects due to lack o working capital.

$he #rm cannot pay day-to-day e%penses o its operations and creates ine"ciencies!

increase costs and reduces the pro#ts i the business.

It becomes impossible to utili)e e"ciently the #%ed assets due to non-availability o

liquid unds.

It cannot buy its requirements in bulk and cannot avail o discounts! etc. and also the

rate o return on investments also alls with the alls with the shortage o working

capital.

433ue3 i( 8or>i(1 Ca-ital

$he #nancial manager must determine levels and composition o current assets. e

must see that right sources are tapped to #nance current assets! and that current liabilitiesare paid in time.

$here are many aspects o working capital management which make it an important

unction o the #nancial managerB

$ime +orking capital management requires much o the #nancial manager's time. Investment +orking ,apital represents a large portion o the total investment in

assets. ,ritically working ,apital management has great signi#cance or all #rms but it is

very critical or small #rms. 8rowth $he need or working capital is directly related to the #rm's growth.

It is necessary or a #nancial manager to manage working capital in the best possible

way to get the ma%imum bene#t.

0inancial manager should pay special attention to the management o current assets

on a continuing basis. &ctions should be taken to curtail unnecessary investment in current

assets.


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$here is a direct relationship between a #rm's growth and its working capital needs.

&s sales grow! the #rm needs to invest more in inventories and debtors. $hese needs

become very requent and ast when sales grow continuously. $he #nancial manager should

be aware o such needs and #nance them quickly. ,ontinuous growth in sales may also

require additional investment in #%ed assets.

$he #nance manager should pay particular attention to levels o current assets and

the #nancing o current assets.

Poli*ie3 +or Fi(a(*i(1 Curre(t A33et3

& #rm can adopt dierent #nancing policies vis-\-vis current assets. $hree types o

#nancing may be distinguishedB

4ong-term #nancing $he sources o long-term #nancing include ordinary share

capital! preerence share capital! debentures! long-term borrowings rom #nancial

institutions and reserve and surplus 6retained earnings7. /hort-term #nancing $he short-term #nancing is obtained or a period less than one

year. It is arranged in advance rom banks and other suppliers o short-term #nance

in the money market. /hort-term #nances include working capital unds rom banks!

public deposits! commercial paper! actoring o receivable etc. /pontaneous #nancing /pontaneous #nancing reers to the automatic sources o

short-term unds arising in the normal course o business. $rade 6suppliers7 credit

and outstanding e%penses are e%amples o spontaneous #nancing. $here is no

e%plicit cost o spontaneous #nancing. & #rm is e%pected to utili)e these sources o

#nances to the ullest e%tent. $he real choice o #nancing current assets! once the

spontaneous sources o #nancing have been ully utili)ed! is between the long-term

and short-term sources o #nances.

@epending on the mi% o short-term and long-term #nancing! the approach

ollowed by a company may be reerred to asB

Matching approach ,onservative approach &ggressive approach

A--roa*he3 to 8or>i(1 Ca-ital 5a(a1eme(t$he obective o working capital management is to maintain the optimum balance o

each o the working capital components. $his includes making sure that unds are held as

cash in bank deposits or as long as and in the largest amounts possible! thereby ma%imi)ing

the interest earned. owever! such cash may more appropriately be PinvestedP in other

assets or in reducing other liabilities.+orking ,apital Management takes place on two levelsB


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Fatio analysis can be used to monitor overall trends in working capital and to identiy

areas requiring closer management $he individual components o working capital can be eectively managed by using

various techniques and strategies

+hen considering these techniques and strategies! departments need to recogni)e

that each department has a unique mi% o working capital components. $he emphasis that

needs to be placed on each component varies according to department. 0or e%ample! some

departments have signi#cant inventory levels others have little i any inventory.

0urthermore! working capital management is not an end in itsel. It is an integral part

o the departments overall management. $he needs o e"cient working capital

management must be considered in relation to other aspects o the departments #nancial

and non-#nancial perormance.$he main purposes o +orking ,apital Fatio &nalysis areB

$o indicate working capital management perormance and

$o assist in identiying areas requiring closer management

$hree key points need to be taken into account when analy)ing #nancial ratios. $hese

key points are as ollowsB

$he results are based on highly summari)ed inormation. ,onsequently! situations!

which require control! might not be apparent! or situations! which do not warrant

signi#cant eort! might be unnecessarily highlighted.

@ierent departments ace very dierent situations. ,omparisons between them! orwith global =ideal> ratio values! can be misleading.

Fatio analysis is somewhat one-sided avourable results mean little! whereas

unavourable results are usually signi#cant.

owever! #nancial ratio analysis is valuable because it raises questions and indicates

directions or more detailed investigation.

/ources o ,ash

$he various sources o cash that provide the money to und the working capital

include the ollowingB

E%isting cash reserves

Aayables 6credit rom suppliers7

:ew equity or loans rom shareholders

(ank overdrats or lines o credit

4ong term loans


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Aro#t or net income

4(?e(tory 5a(a1eme(t

Inventories constitute the most signi#cant part o current assets. Inventories are

stock o the product! a company is manuacturing or sale and components to make that

product. $he various orms o inventory in a ertili)er manuacturing company areB


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Faw Materials are those basic inputs that are converted into the #nished products

through the process o manuacturing.

+ork-In-Arogress inventories are semi-manuactured products.

0inished 8oods inventories are completely manuactured products.

/tores K /pares! loose tools! chemical catalysts! packing K ,onstruction materials

Obje*ti?e3 o+ 4(?e(tory 5a(a1eme(t

$he problems aced by an organi)ation in the conte%t o inventory management areB

$o maintain a large si)e o inventory or e"cient and smooth production K sales

operation

$o maintain minimum investment in inventories to ma%imi)e pro#tability

$o ensure continuous supply o materials! spares K #nished goods.

$o avoid both overstocking K under stocking o inventory

$o eliminate duplicate stock orders. $his is possible with the help o a centrali)ed

purchasing system.

$o design proper organi)ation or inventory management

(oth E%cessive K Inadequate Inventories are not desirable. $he obective o Inventory

Management is to determine K maintain the optimum level o inventory investment. $he

optimum level o inventory will lie between two danger points o e%cessive K inadequate

inventories.

E%cessive stocks can place a heavy burden on the cash resources o a business.

Insu"cient stocks can result in lost sales! delays or customers etc.

$he key is to know how quickly the stocks are moving or how long each item o stock sits on

shelves beore being sold. &verage stock holding periods are infuenced by the nature

o the business.

$he key issue or a business is to identiy the ast and slow stock movers with the obective

o establishing optimum stock levels or each category and thereby minimi)e the

cash tied up in the stocks.

0actors to be considered when determining the optimum stock levels includeB


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&pply tight controls to the signi#cant ew items K supply control or the remaining.

/ell o outdated or slow moving merchandise.

,onsider the idea o outsourcing the manuacturing o the product to another

manuacturer.


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Feview security procedures to minimi)e losses through deterioration! pilerage!

wastage K damages.

$o acilitate urnishing o data or short-term K long-term planning K control o

inventory

Feceivable Management

&ccounts Feceivable reers to the amount owed by the debtors to the business. $hey are

usually created because o trade credit that is given to the customers o the

business.

$hese receivables have three characteristicsB

It involves an element o risk! which should be careully analy)ed.

It is based on economic value

It implies uturity.

$o maintain a proper fow o unds in the business in order to make timely payments to the

creditors! to buy raw materials K to run the day-to-day activities o the business! it is

essential that the debtors make their payments on time. $he interval between the

date o sale K the date o payment has to be #nanced out o the working capital.

$hus! trade debtors represent investment.

Obje*ti?e3 o+ Re*ei?able 5a(a1eme(t

$he obective o Feceivable Management is to promote sales K pro#ts until that point is

reached where the returns that the company gets rom unding receivables is less

than the cost that the company has to incur in order to und these receivables.

owever! to maintain these receivables the company has to incur certain costs such

asB

&dditional und requirements or the company 2 +hen a #rm maintains receivables!

some o its resources remain blocked in them so to #nance the activities during that

time gap the #rm requires unds.

&dministrative ,osts

,ollecting ,osts

@eaulting ,osts


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$he si)e o receivables or investment in Feceivable Management is determined by the #rm's

credit policy K level o sales. Feceivable management is the process o making the

decision o selection o trade debtors in which the unds could be invested or to

whom money can be given.

Feceivable management involves the careul consideration o the ollowing aspectsB -

0orming the credit policy

E%ecuting the credit policy

0ormulating K e%ecuting the collection policy

$he ,redit Aolicy is the policy ollowed by the company with respect to the credit standards

adopted! any incentive in the orm o cash discount oered! and also the period over

which the discount can be utili)ed by the customers K the collection eort made by

the company. &ll these variables underlying a company's credit policy infuence the

volume o sales and hence the pro#ts o the company.

working capital management - iffco - kalol unit

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