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A Project Study Report On

Training Undertaken at RSSML

Titled WORKING CAPITAL MANAGEMENT


Submitted in partial fulfillment for the Award of degree of Master of Business Administration

Submitted By: -

Submitted To: -

PREFACE
The work and experience gained during training period has increased my knowledge many folds. In this limited space and restricted standard a brief and comprehensive account has been produced in the light of recent- work and latest information available from various-sources. Business organization is a dynamic entity. it has relations with vast variety of people, i.e. owners, creditors, customers & govt., who are interested in its financial performance. Business organization communications information through its financial statement balance sheet & income statement. Users of financial statements can have better insight into the financial strength &weaknesses of the firm if they properly analyze, establish proper relationship, in these statements. Business organization has many departments &activities to perform such as financial department, personnel department, marketing department and reduction department. Financial department is the blood 4nerves of the organization and working capital is the blood, circulating in the nerves of the body of organization. It is in this context that, I have taken up the study entitled,- "Working Capital Management" at Rajasthan state mines and minerals ltd. (RSMML). Ratio analysis technique has also been used for analyzing the same. This project is submitted in the fulfillment of the degree of "Masters of business administration".

ACKNOWLEDGEMENTS
Life is a journey of excellence. Every mile that one reaches during the eternal journey is marked by the guidance of the near and dear ones and the endeavor of mine is no exception. The immense pleasure and joy one derives on the completion of assigned job is beyond description. It is the duty of the concerned person to pay this respect & acknowledge the advice, guidance & assistance received from all the persons to an accomplishment. I owe a deep depth of gratitude to the college authorities Dr. Dipin Mathur Associate Professor & Programme Coordinator, MBA for giving me the opportunity to work on this project, his valuable help and keen interest, constant encouragement, inspiration and critical supervision during the entire course of this project, without his help and guidance, I wouldnt have got the opportunity to successfully complete the project report. I extend my deep sense of thankfulness to Mrs. Kalpana Agarwal (Chief Personnel & Administration) who allowed me to do my project in RSMML, Udaipur. It is with great pleasure & relief I am presenting this work today. The present study is a teamwork reflecting the efforts of many. I am extremely thankful to Mr. Rajendra Rao (Company Secretary, RSMML) for providing me the necessary information & helped me to understand the various aspects regarding my project report. I shall ever remain indebted to Mr. B.L. Salvi (Deputy Manager HRD) for his constant support, guidance & encouragement. I also extend my deep gratitude to Mr. Amit Sharma (Company Secretary, RSMML) for providing me proper guidance in carrying out my project work. I extend my deep sense of thankfulness to all my faculty members who gave me continuous support in completing my project work.

CONTENTS
S.NO.
01. 02. 03. 04. 05.

TOPIC NAME

PAGE NO.

INTRODUCTION OF INDUSTRY INTRODUCTION OF COMPANY RESERCH METHODLOGY FACTS AND FINDING INTERPRETATION & ANALYSIS SWOT ANALYSIS CONCLUSION SUGGESTION BIBILOGRAPHY

06.

07.

08.

EXECUTIVE SUMMARY

Practical knowledge has inestimable value for a student because theoretical knowledge is incomplete if it is not correlated with the practical knowledge. The work and experience gained during training period has increased my knowledge many folds. In this limited space a brief and comprehensive account has been produced in the light of recent work done on calculation of Management of Working Capital at RSMML through latest information available from various sources. The most important task of a financial manager is to Management of Working Capital and interpret the financial results in such a manner, that it can be clearly understood and also provides favorable and satisfactory information to the shareholders.

Chapter-1

Introduction of Industry

INTRODUCTION
Rajasthan State Mines and Minerals limited (in short RSMML) is one of the leading and progressive undertakings of the Government of Rajasthan. It occupies a place of pride in production and marketing of non-metallic minerals of India. RSMML is multi mineral and multi location enterprise engaged in

mining of Rock Phosphate, Lignite, SMS grade Limestone and Gypsum. RSMML is not only the leader in Mining & Selling of Rock Phosphate, Gypsum across the country, but also global pioneer in technology in open cast mining and mineral beneficiation of Carbonate Rock Phosphate. Besides minerals, RSMML has also forayed into Energy Sector and has setup 15 MW installed capacity Wind Power Project at Jaisalmer, Rajasthan.

CORPORATE PROFILE OF RSSML


Rajasthan State Mines & Minerals Limited (RSMML) is one of the premier public sector enterprises of the Government of Rajasthan, primarily engaged in mining and marketing of industrial minerals in the State. The very objective of the company is to achieve cost effective technological innovations in the mining of minerals and to diversify into mineral based downstream projects. Apart from the above, the Company is also aiming at long-term fuel supply to lignite based power projects, apart from setting up wind energy farms at Jaisalmer. This company is professionally managed and remains focused towards increasing productivity and growth.

AMALGAMATION
The Department of Company Affairs, Government of India (Order No, issued year 2003, witnessed completion of amalgamation of Rajasthan State Mineral Development Corporation Limited (RSMDC), another Rajasthan State Government PSU with Rajasthan State Mines & Minerals Limited (RSMML). S.O.207 (E) dated 19th February 2003) under Section 396 of the Companies Act, 1956 and the same has come into effect from 20 th February, 2003, the date of its publication in the Gazette of India (Extraordinary).

STRATEGIC BUSINESS UNITS & PROFIT CENTERS


After amalgamation, the following four mineral based Strategic Business Units & Profit Centers (SBU & PC) namely Rock Phosphate, Lignite, Gypsum and Limestone have been set up as a part of corporate restructuring: -

Strategic Business Unit and Profit Center Rock phosphate at Udaipur.

Strategic Business Unit and Profit Centre Gypsum at Bikaner. Strategic Business Unit and Profit Centre Limestone at Jodhpur. Strategic Business Unit and Profit Centre Lignite at Jaipur.

The year 2004-05 will be remembered as a year of achievement as for the first time profit before tax crossed 100 crores and settled at Rs. 118.5 crores in comparison to profit before tax of Rs. 44.95 crores in 2003-04. The Company started a number of R&D activities to further strengthen its R&D activities. Generous contributions were made for creation of life saving medical infrastructure in 8 project districts. The highest ever dividend of Rs. 15,51,03,000/- was declared on 22nd February 2005. Indeed it was a proud moment for the company, which started as a small entity excavating gypsum in 1947.

RSMML today has broken away from its monopolistic moorings and welcomes competition. From a small backwaters company, it is now rated as a technologically advanced company and an innovator. It boasts of a highly trained and competent workforce and strong financial base. It has established itself as the most successful public sector company in Rajasthan.

HIGHLIGHTS

1.

The company has achieved highest ever production and sales during in the year 2004-05.

2.

The revenue of the company has increased from Rs. 4301 millions to Rs. 5108 millions.

3.

RSMML declared the highest ever dividend to the Government of Rajasthan for Rs. 15,50,82,956 being presented to Hon'ble Chief Minister Smt. Vasundhara Raje.

2005-06

2006-07

2007-08

4.

Completion of the projects for doubling the capacity of the Industrial Beneficiation Plant from 1500 TPD to 3000 TPD for beneficiation of low grade rock phosphate ore to high-grade concentrate.

5.

Successful commissioning of the third phase of 5 MW Wind power project at Jaisalmer. Together with the two plants already in operation,

the total capacity is now 15 MW and the power generated is of grid quality. 6. Registration of Companys Wind Power Project with Executive Board of Clean Development Mechanism under UNFCCC.

The revenue of the company has increased from Rs. 6364 millions to Rs. 9723 millions in the year 2008-09.

CHAPTER -2

Company Profile

PRODUCTS

We are producing following product: -

Lignite It is suitable for power production, cement and agriculture uses.

Gypsum We are producing following products :o Run of Mine (ROM) Gypsum It is used for manufacture of cement and land reclamation. o Gypsum Powder

It is used for manufacture of cement and land reclamation.

ROM Selenite It is used for manufacture of Plaster of Paris and Ceramics.

Limestone We are producing following products: o Low Silica Limestone Low Silica Limestone is used in steel plants with BOF technology as a flux. o Chemical grade Limestone Chemical grade limestone is used mainly in chemical industries producing quick lime and hydrated lime. It is also used in White Cement and Grey Cement plants for the same purpose.

Rock phosphate

We are producing following products:-

Crushed " size High Grade Rock Phosphate (SSP Manufacturing Units)

Crushed " size High Grade Rock Phosphate (DAP/ Nitro phosphate Manufacturing Units)

Crushed " size High Grade Rock Phosphate (DAP/ Nitro phosphate Manufacturing Units)

Beneficiated Rock Phosphate Concentrate (Fertilizer plants)

Ground Low Grade Rock Phosphate (RAJPHOS) (Fertilizer for direct application to acidic soils)

Crushed " size Medium Grade Rock Phosphate (SSP Manufacturing Units)

Mineral Deposits

RESEARCH AND DEVELOPMENT

The company has developed the organic fertilizer called Phosphate Rich Organic Manure (PROM) by using high-grade rock phosphate with farmyard waste and other organic matter. The field trials conducted through the different agricultural universities in the country have shown that the agronomic efficacy of this new P-fertilizer is higher than that of the complex phosphatic fertilizers available in the market today. PROM is suitable to neutral and alkaline soils, which will prove to be a boon to the Indian farmers. In the long run, this product will be a winner as it has significant price advantage vis-a-vis the other chemical fertilizers. Commercialization of the PROM technology will help utilization of waste and also help in conservation of the mineral rock phosphate as PROM shows good residual effect. The company has put a major thrust on the R & D activities in the recent past and several new R&D projects have been taken up. Research project taken up for development of fused CaMg phosphate to utilize the vast reserves of low-grade ore of rock phosphate.

Converting tailing rejects of IBP to Direct Application Fertilizer for Magnesium deficient soils.

Research project taken up for possible commercial production of BioDiesel from Jetropha plant.

Beneficiation of low-grade gypsum for producing high grade 80% + material for cement industry.

R&D efforts on apatite mineral to be used in jewelry and decoration. (Moving towards value added product)

Company has started a Training and Consultancy Center at Jaipur, Rajasthan.

Research project taken up for development of fused Ca-Mg phosphate to utilize the vast reserves of low-grade ore of rock phosphate. Converting tailing rejects of IBP to Direct Application Fertilizer for Magnesium deficient soils.

Research project taken up for possible commercial production of BioDiesel from Jetropha plant.

Beneficiation of low grade gypsum for producing high grade 80% + material for cement industry. R&D efforts on apatite mineral to be used in jewelry and decoration. (moving towards value added product)

Company has started a Training and Consultancy Center at Jaipur, Rajasthan

ENVIRONMENT AND SAFETY


As a responsible corporate citizen, RSMML accords equal importance to ecological and social sectors. The company is concerned about not only the economic bottom-line reflected by the impressive performance on all quarters and higher profitability but also the benefits and impacts of our operations, processes and products on the environment and the health and safety of our employees and the community. RSMML has constructed a huge dam of 200 Mcft. Fresh water storage capacity on Jhamari River, which has helped in recharging the regional water table. Extensive afforestation/planatation work is being done in and around all mines.

The Industrial Beneficiation Plant is "Zero discharge plant". The wastewater is treated at acid water treatment plant, resulting in a saving of about 1.5 million CuM of fresh water.

Regular monitoring and control of different environmental parameters i.e. air, water, dust, noise and heat etc. Installation of dust extraction system at crushing and screening plant and at Central Gypsum Grinding Unit, Rawla, Bikaner. The mined out area is being back filled simultaneously to reclaim the land. Sajjan Niwas Garden established in 1883 has been adopted by RSMML and is being restored to its pristine glory.

Company has a safety and health policy. Company follows statutory requirements as per Mines Act 1952. Every year Safety week celebrated at different units under the aegis of Director General of Mines Safety (DGMS). A well equipped vocational training center at Phosphate SBU caters to need of various training regarding safety and occupational health for the employees.

SOCIAL RESPONSIBILITY
As a responsible corporate entity committed to discharge its social obligations, operation. These contributions have been in the areas of

RSMML

has

been

contributing

generously

towards

the

development of the areas located near its mining sites and other areas of

Medical & Health Care Drinking water Education Environment Development of village infrastructure

The Company has been providing medical, educational and other facilities to the villages situated around its mines. To improve the medical infrastructure of Udaipur region, which is predominantly a tribal district, RSMML has contributed Rs. 3.05 crores for establishment of Cardio-Thoracic Surgery Centre and Neo-Natal Special Care Unit at the M.B. Government Hospital, Udaipur.

A Contribution of Rs. 2.888 crores has been made to the Chief Minister Fund for development of Medical and Health infrastructure facilities in project districts. The contribution has been made to Medical colleges / District Hospitals at Udaipur, Bikaner, Jodhpur, Barmer, Sri Ganganagar, Jaisalmer, Hanumangarh and Nagaur. Memorandum of Understanding has also been entered with

Government of Rajasthan for utilization of these funds. Medical Camps are being regularly organized in the villages around the mine location and project areas of the company where free check-up and medicines are provided. RSMML has provided land for the project for setting up a 100-bedded multi super specialty hospital at Udaipur under a JV arrangement with M/s American International Health Management Limited, Udaipur. Total capital investment on the hospital envisaged Rs. 200 millions. Other works for development of village infrastructure include :

Contribution to Panchayats for schools. Improvement in village Goshalas.

Medical Camps are being regularly organized in the villages around the mine location and project areas of the company where free check-up and medicines are provided.

RSMML has provided land for the project for setting up a 100 bedded multi super specialty hospital at Udaipur under a JV arrangement with M/s American International Health Management Limited, Udaipur.

Education & Mid-Day Meal Company is providing full assistance in running a secondary school for children of nearby villages at Jhamarkotra Rock Phosphate Mines, Udaipur. Company has contributed Rs. 1.10 crores for setting up centralised kitchen for Mid-Day Meal scheme of government. Company has contributed Rs. 34.20 lacs for " Shala Swasthya Program" for children at Bikaner city. According high priority to fulfill its social responsibilities, the company regularly takes up works related to socio-economic development along with environment

restoration and management in the areas where the company has major mining operations and other business activities.

SUPPLY OF PORTABLE WATER


Supplying 7 million liters per day of potable water from Jhamarkotra mines to city of Udaipur since 1994-95. Recently company has commenced supply of 6 million liters per day of potable water from Kanpur mines in addition to the present supply of 7 million liters per day. With this, RSMML caters to the potable water needs of more than 2 lacs people of the water-starved Udaipur City. Supply of potable water from Jhamarkotra mines to 7 nearby villages on a permanent basis since last 8 years. Adequate potable water supply is ensured through a permanent pipeline & 75000 liters capacity GLR in each village.

Medical & Health Full Fledged dispensaries at Mine site and Corporate Office; Managed by Qualified Doctors and paramedical staff Regular annual Monitoring of Occupational Health Health facilities extended to employees dependents at mine site Company also extends medical facility to village population in & around mine site Recently, comprehensive health check up, covering all the 2200 employees, has been conducted with the help of National Institute of Miners Health, Nagpur, India. Other works for development of village infrastructure include: Contribution to Panchayats for schools. Improvement in village Goshalas.

According high priority to fulfill its social responsibilities, the company regularly takes up works related to socio-economic development along with environment

restoration and management in the areas where the company has major mining operations and other business activities.

Financial Performance
Rs. In millions Indicator Total Revenue Profit Before Tax Profit After Tax Net Worth Capital Employed Contribution Exchequer Share Capital Earning per Share Output per Employee to State 2004-05 5108.9 1185.5 776.2 2825.2 3549.5 1163.5 775.5 10.31 2.37 2005-06 5411.6 1418.9 950.4 3553.4 4111.8 1186.6 775.5 12.26 2.53 2006-07 5700.18 1561.11 1024.04 4536.34 5157.72 1123.66 775.5 13.2 2.68 2007-08 6364.12 1867.51 1223.81 5576.95 6349.33 1380.52 775.5 15.78 3.14 2008-09 9723.47 1778.94 1206.76 6596.69 7306.69 4071.55 775.5 15.56 5.09

CORPORATE OFFICE : 4, Meera Marg, Udaipur- 313 004- INDIA. Phone : +91-294-2528681 to 85 Fax : +91-294-2523170 +91-294-2521727 E-mail: isnfo@rsmm.com

REGISTERED OFFICE : C-89-90, Janpath, Lal Kothi Scheme, Jaipur - 302 004, INDIA Phone : +91-141-2743734 +91-141-2743934 Fax : +91-141-2743735 E-mail : rsmmljpr@sancharnet.in

Introduction of working capital management in RSSML


FINANCIAL MANAGEMENT
Finance - Finance is one of the basic functions of all economic activity business needs money to make more money but it should be properly managed. Finance refers to money or funds available to a firm.

Financial management - Financial management may be defined as planning, organizing, directing, and controlling of financial activity in business enterprises. According to solemn, Financial management is concerned with efficient use of an important economic resource namely capital fund. Financial management is concern with procurement & utilization of funds. It involves decision making in three areas 123. Investment of funds. Financing of different activities. Disposal of profit.

The finance manager is primarily concerned with arranging finances in desired quantity, critical analysis of the available investment opportunities & controlling the funds.Thus management of finance is crucial of success of business. The financial manager must see that funds are procured in manner that risks cost and control consideration are properly manage in firm and there is optimum utilization of funds.

Objective - The objective provide a framework for optimum financial decision


making. GENERAL OBJECTIVES-To provide general knowledge of company's approach to resource management. To get familiar with the company's management process and procedures to plan, estimate, implement, monitor and evaluate; including internal control procedures. Student should acquire knowledge and skills to be applied in leadership roles to financial and resource management activities. SPECIFIC OBJECTIVES Acquire general knowledge of the company, manages

organization structure and responsibilities for resource management. Know how the company establishes goals and objectives at various levels of the organization and how plans are developed to accomplish these objectives.

Understand how the company establishes standards to measure performance and identity deviations and other problems. How are solutions implemented and monitored.

Understand management standard techniques and procedure; including analytical techniques used to perform trend analysis and performance measurement.

To become familiar with the application' of various management information systems that supports the operations of the company and the relationship of the various systems.

Knowledge of data management techniques and procedures, including potential capabilities to interface with other organization.

Understand the human resource programs formulated by management; to include lessons learned, incorporation of future training, program etc.

Financial affairs of R.S.M.M.L.


Financial affairs of R.S.M.M.L. are managed through drafting short term & long term budgets, which are the company estimates of the requirement of funds in the particular budget period short term budget are usually for period of one month to six month while company consider budget for months & above to be long term budget. Every department prepares its budget as per requirement. The budgets are then presented to finance controller, one month before the budget period or next financial controller, one month before the budget period or next financial year for preparation of master budget this assists the financial controller in decision making process. One of the most important decision that finance manager has to take is Investment decision.

Investment decision
The decision related to selection of asset in which, funds will be invested by a firm. Long term asset - Those assets which yield return over a period of in future.

Short term & current asset - Those assets which in normal course of business are convertible into cash within a year Financial decision making with reference to long term asset is known as Capital budgeting. Financial decision making with reference to current asset & short- term asset is know as Working Capital decision. Capital budgeting is probably the most crucial financial decision for a firm. It relates to the selection of an asset or investment proposal or course of action whose benefits are likely to be available in future over the lifetime of the project. Whether the assets will be accepted or not will depends upon the relative benefits and return, as well as the risk associated with it. Working capital is concerned with the management of current assets. If a firm does not have adequate working capital, it may become illequid and consequently may not have ability to meet its current obligations and, thus, invite the risk of bankruptcy. If the current assets are to large, profitability is adversely affected. The balance sheet of the year 2007-2008 shows that the working capital for the year stood at Rs. 29958.061acs

WORKING CAPITAL MANAGEMENT

MEANING OF WORKING CAPITAL MANAGEMENT


Management of working capital means management of all aspects of current assets and current liabilities.

According to Smith, K.V. Working Capital Management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that exist between them. T the term working capital refers to the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). Current Assets are resources which are in cash or will soon be converted into cash in "the ordinary course of business. Current Liabilities are commitments which will soon require cash settlement in "the ordinary course of business. Thus :

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of Working Capital are reported under the following headings:

Current Assets
Liquid Assets (cash and bank deposits) Inventory Debtors and Receivables Short-term loans & advances Raw materials Work in progress Finished product Temporary investment Prepaid expenses

Accrued incomes

Current Liabilities
Bank Overdraft Creditors and Payables Outstanding expenses Short-term loans Dividend payable Provision for taxation Working capital management is management for the short-term assets & its short- term liabilities. This is of critical importance to a firm. Managers spend about 70% managing for the short-term. This makes sense. Every day companies take in money, write receipts, balance checkbooks, record receivable records, manage inventory and the like. Also short-term management should not be discounted. As the old saying goes, "If you can make it in the short-term long enough, you don't need to worry about the longterm." Cash budget may be utilized in managing working capital. Working capital has to do with the short-term accounts of a firm current assets and current liabilities. Net working capital is defined as current assets less current liabilities. The secret to good working capital management is simple "use someone else's money every chance you get and don't let anyone else use yours." Within reason, of course. To do that, the following strategies might be employed; again within reason. A Company wouldn't want to stretch out its payables for so long a period that it's forced out of business.

Stretch out accounts payable as long as possible. If a bill is due on the 13th, don't pay it on the 10th. If a company has enough clout they can negotiate longer terms with vendors.

Turn receivables as quickly as possible. Make it easy for customers to pay prepaid envelopes, discounts, etc.

Turn inventories as quickly as possible. Inventories may be a big investment for a firm and they earn no interest. Just-in-time inventory methods and some other strategies are used to hold down a firm's investment in inventories.

CLASSIFICATION OF WORKING CAPITAL


Working capital may be classified on the basis of : Concepts, i.e Gross working capital &Net working capital Time, i.e Permanent working capital & Temporary working capital

To ensure effective utilization of fixed facilities & for maintaining Circulation of current assets

Gross working capital


It refers to the firm's investment in current asset current assets are the assets which can be converted into cash within an accounting year and include cash short term securities, debtors, bills receivables and stock.

Net working capital


It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payments within an accounting year and include creditors, bills payable, and outstanding expenses net working capital can be positive and negative. A positive net working capital will arise when current assets exceed current liabilities. A negative working capital occurs when current liabilities are in excess of current assets.

PERMANENT WORKING CAPITAL


This refers to that minimum amount of investment in all current assets which is required at all times to carry out minimum level of business activities. It represents the current assets required on a continuing basis over the entire year.

Tandon committee has referred to this type of working capital as core current assets. The following are the characteristics of this type of working capital:1. Amount of permanent working capital remains in the business in one form or another. This is particularly important from the point of view of financing. The suppliers of such working capital should not expect its return during the lifetime of the firm. 2. It also grows with the size of the business. Permanent working capital is permanently needed for the business and therefore it should be financed out of long-term funds.This is the reason why the current ratio has to be substantially more than 1.

TEMPORARY OR VARIABLE WORKING CAPITAL


The amount of such working capital keeps on fluctuating from time to time on the basis of business activities. In other words, it represents additional current assets required at different times during the operating year.

Temporary

Amount of working

permanent

Capital (Rs.) Time

Temporary Amount of working Capital (Rs.) permanent

Time

Adequacy of working capital


The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital position are dangerous from the firm, s point of view.

Dangers of excessive working capital are as follows It results, in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, theft waste & losses increase. It indicates defective credit policy and slack collection period. Excessive working capital makes management complacent which degenerates into managerial efficiency. Excessive working capital means idle funds which means no profit for the business & the business cannot run properly. The redundant working capital gives rise to speculative transactions.

Inadequate working capital is also bad and has following dangers

It stagnates growth. It become difficult for the firm to undertake profitable projects for non- availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firms profit targets.

Operating inefficiencies creep in when it becomes difficult even to meet day to day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds. Shortage of working capital funds renders the firms unable to avail attractive credit opportunity etc.

The firm losses its reputation when it is not in position to honour its shortterm obligations.

It cannot buy its requirements in bulk. Factors affecting working capital. Factors requiring considerations while estimating working capital.

NEED FOR WORKING CAPITAL


For the effective operation of the business, working capital is required along with the fixed capital. Working capital is needed for the purchase of raw material and for the payment of various day to day expenses. There will be hardly any business which does not require working capital. The need for working capital is different in different businesses. Financial management aims at maximizing the wealth of shareholders. To achieve this objective, it is necessary to earn adequate profits. The profit depends largely on sales but sales do not results cash immediately. To increase sales goods are to be sold on credit, the collection of which takes place after time terms. Thus, there exists a gap between the sales of goods and realization of cash. During this period expenses are to be incurred to continue business operations. For this purpose, working capital is required. The need of working capital can be explained with the help of operating cycle or cash cycle.

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR FUTURE


These needs may be of Raw Material or Finished Goods. Sometimes because of non-availability of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw material becomes necessary for company. In the similar way due to sudden arise of demand of finished goods in future more finished goods are kept in stock. For both reason more working capital is required because funds will be involve in these safeties stocks.

FACTORS AFFECTING THE WORKING CAPITAL

The following are the factors that affect the working capital The nature of the business Size of the business Production policy Technology Manufacturing process Seasonal variation Credit policy Market and demand conditions Working capital cycle Business cycle Rate of growth of business Earning capacity and dividend policy Price level change

FACTORS

REQUIRING

CONSIDERATION

WHILE

ESTIMATING

WORKING CAPITAL The cost incurred on material, wages and overheads. The length of time for which raw materials are store in warehouse before they are issued for production. The length of production cycle of work. Average credit period allowed to customer. The amount of cash required for the day to day expenses of the business. The average amount of cash required to make advance payment.

COMPONENT OF WORKING CAPITAL MANAGEMENT


Working Capital Management involves management of different components of working capital such as cash, inventories, accounts receivables, creditors, debtors etc. Years Net Profit Change in % 2006-07 1195816024 -45.27% 2007-08 3148053854 163.26% 2008-09 5699574452 81.05%

6000 5000 4000 3000 2000 1000 0 Net Profit (inlacs) 2006-07 Year 2007-08 Year 2008-09

SCOPE OF WORKING CAPITAL MANAGEMENT


The study is conducted at CADBURY INDIA LTD-BADDI, H.P. for 6 weeks duration. The study of Working Capital Management is purely based on secondary data and all the information is available within the company itself in the form of records. To get proper understanding of this concept, I have done the study of the annual report of the company. So scope of the study is limited up to the availability of official records and information provided by the employees. The study is supposed to be related to the period of last five years.

DETERMINATION OF FINANCIAL MIX


Hedging Approach - Hedging refer to the process of matching maturities of debt with the maturities of financial needs. According to this approach maturity of the source of funds should match the nature of the assets to be financed. The Hedging approach suggests that long term funds should- be used to finance the fixed portion of current assets requirement, in manner similar to the financing of fixed assets .the permanent portion of funds required should be financed with long term funds and the seasonal portion with short term funds. Conservative approachThis approach suggest that the estimated

requirement of total funds should be met from long term sources, the short-

term funds should be restricted to only emergency situation or when there is an unexpected outflow of funds. Trade-off approach - The third- approach of trade off between the hedging and conservative approach strikes a balance and provides a financial plan that lies between these two extremes. Trade-off is required because it has been shown that hedging approach is associated with high profit & high risk while conservative approach provides low profit and low risk. Neither approach by itself would serve the purpose of efficient working capital management. The exact trade-off between risk and profitability will differ from case to case according to perception of the decision-makers.

MANAGING WORKING CAPITAL


Working capital refers to all aspects of the administration of both current assets and current liabilities. In other words, working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them. Moreover, different components of working capital are to be properly balanced in such a way that during one complete production or trade cycle the cash should be available for purchase of fresh material and for running the business including operating expenses, after realization of sale proceeds of earlier cycle without any hurdles. In the absence of such situation, the financial position in respect of the firms liquidity may not be satisfactory in spite of satisfactory liquidity ratio. Working capital management policy have a great effect on firms profitability, liquidity and its structural health. A finance manager should therefore, chalk out appropriate working capital management policies in respect of each of the components of working capital so as to ensure higher profitability, proper liquidity and sound structural health of the organization.

In order to achieve this objective the finance manager has to perform basically following two functions: 1) Estimating the amount of working capital. 2) Sources from which these funds have to be raised . ESTIMATING WORKING CAPITAL REQUIREMENTS: In order to determine the amount of working capital needed by a firm, a number of factors viz. production policies, nature of business, length of manufacturing process, rapidity of turnover, seasonal fluctuations, etc. are to be considered by the finance manager. TECHNIQUES FOR ASSESSMENT OF WORKING CAPITAL REQUIREMENTS: 1. ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHOD: -

Since working capital is the excess of current assets over current liabilities, an assessment of the working capital requirements can be made by estimating the amounts of different constituents of working capital e.g., inventories, accounts receivable, cash, accounts payable, etc.

2. PERCENT OF SALES APPROACH:-

This is a traditional and simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements, a ratio can be determined for estimating the working capital requirements in future. 3.OPERATING CYCLE APPROACH: -

According to this approach, the requirements of working capital depend upon the operating cycle of the business.The operating cycle begins with the acquisition of raw materials and ends with the collection of receivables

It may be broadly classified into the following four stages viz. 1. Raw materials and stores storage stage. 2. Work-in-progress stage. 3. Finished goods inventory stage. 4. Receivables collection stage.

The duration of the operating cycle for the purpose of estimating working capital requirements is equivalent to the sum of the durations of each of these stages less the credit period allowed by the suppliers of the firm. Symbolically the duration of the working capital cycle can be put as follows O=R+W+F+D-C Where, O=Duration of operating cycle; R=Raw materials and stores storage period; W=Work-in-progress period; F=Finished stock storage period; D=Debtors collection period; C=Creditors payment period. Each of the components of the operating cycle can be calculated as follows:R= Average stock of raw materials and stores Average raw materials and stores consumptions per day

W=Average work-in-progress inventory Average cost of production per day D=Average book debts Average credit sales per day

C=Average trade creditors Average credit purchases per day After computing the period of one operating cycle, the total number of operating cycles that can be computed during a year can be computed by dividing 365 days with number of operating days in a cycle. The total expenditure in the year when year when divided by the number of operating cycles in a year will give the average amount of the working capital requirement.

Management of different components of working capital


Working capital management involves management of different components of working capital such as cash, inventories, accounts receivable, creditors, etc.

(1) MANAGEMENT OF CASH It is the duty of the finance manager to provide adequate cash to all segments of the organization. He also has to ensure that no funds are blocked in idle cash since this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost.

Meaning of cash The term cash with reference to cash management is used in two senses. In a narrower sense it includes coins, currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks.In a broader sense it also includes near-cash assets such as, marketable securities and time deposits with banks. Such securities or deposits can immediately be sold or converted into cash if the circumstances require. The term cash management is generally used for management of both cash and near-cash assets.

Motives for holding cash A distinguishing feature of cash as an asset, irrespective of the firm in which it is held, is that it does not earn any substantial return for the business. In spite of this fact cash is held by the firm with following motives 1.Transaction motive A firm enters into a variety of business transactions resulting in both inflows and outflows. In order to meet the business obligation in such a situation, it is necessary to maintain adequate cash balance. Thus, cash balance is kept by the firms with the motive of meeting routine business payments. 2.Precautionary motive A firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies such as floods, strikes, presentment of bills for payment earlier than the expected date, unexpected slowing down of collection of accounts receivable, sharp increase in prices of raw materials, etc. The more is the possibility of such contingencies more is the cash kept by the firm for meeting them.

3.Speculative motive A firm also keeps cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business. Such motive is, therefore, of purely a speculative nature. For example-A firm may like to take advantage of an opportunity of purchasing raw materials at the reduced price on payment of immediate cash or delay purchase of raw materials in anticipation of decline in prices.

4.Compensation motive Banks provide certain services to their clients free of charge. They, therefore, usually require clients to keep a minimum cash balance with them, which help them to earn interest and thus compensate them for the free services so provided.Business firms normally do not enter into speculative activities and,

therefore, out of the four motives of holding cash balances, the two most important motives are the compensation motive.

Objectives of cash management There are two basic objectives of cash management: 1. To meet the cash disbursement needs as per the payment schedule; 2. To minimize the amount locked up as cash balances.

1.Meeting cash disbursements The first basic objective of cash management is to meet the payments Schedule. In other words, the firm should have sufficient cash to meet the various requirements of the firm at different periods of times. The business has to make payment for purchase of raw materials, wages, taxes, purchases of plant, etc. The business activity may come to a grinding halt if the payment schedule is not maintained. Cash has, therefore, been aptly described as the oil to lubricate the ever-turning wheels of the business, without it the process grinds to a stop.

2.minimizing funds locked up as cash balances The second basic objective of cash management is to minimize the amount locked up as cash balances. In the process of minimizing the cash balances, the finance manager is confronted with two conflicting aspects. A higher cash balance ensures proper payment with all its advantages. But this will result in a large balance of cash remaining idle. Low level of cash balance may result in failure of the firm to meet the payment schedule. The finance manager should, therefore, try to have an optimum amount of cash balance keeping the above facts in view. Cash management - - - - - basic problems Cash management involves the following four basic problems:

1. Controlling levels of cash; 2. Controlling inflows of cash; 3. Controlling outflows of cash; 4. Optimum investment of surplus cash.

1. Controlling levels of cash One of the basic objectives of cash management is to minimize the level of cash balance with the firm. This objective is sought to be achieved by means of the following: (i) Preparing cash budget: Cash budget or cash forecasting is the most significant device for planning and controlling the use of cash. It involves a projection of future cash receipts and cash disbursements of the firm over various intervals of time. It reveals to the finance manager the timings and amount of expected cash inflows and outflows over a period studied. With this information, he is better able to determine the future cash needs of the firm, plan for the financing of these needs and exercise control over the cash and liquidity of the firm. Thus in case a cash budget is properly prepared it correctly reveals the timings and size of net cash flows as well as the periods during which the excess cash may be available for temporary investment. In a small company, the preparation of cash budget or a cash forecast does not involve much of complications and, therefore, relatively a minor job. However, in case of big companies, it is almost a full time job handled by a senior person, namely, the budget controller or the treasurer. (ii) Providing for unpredictable discrepancies: Cash budget predicts discrepancies between cash inflows and outflows on the basis of normal business activities. It does not take into account discrepancies between cash inflows and cash outflows on account of unforeseen circumstances such as strikes, short-term recession, floods, etc. a certain

minimum amount of cash balance has, therefore, to be kept for meeting such unforeseen contingencies. Such amount is fixed on the basis of past experience and some intuition regarding the future. (iii) Consideration of short costs: The term short cost refers to the cost incurred as a result of shortage of cash. Such costs may take any of the following forms: (a) The failure of the firm to meet its obligations in time may result in legal action by the firms creditors against the firm. This cost is in terms of fall in the firms reputation besides financial costs incurred in defending the suit; (b) Borrowing may have to be resorted to at high rate of interest. The firm may also be required to pay penalties, etc., to banks for not meeting the obligations in time.

(iv) Availability of other sources of funds: A firm can avoid holding unnecessary large balance of cash for contingencies in case it has adequate arrangements with its bankers for borrowing money in times of emergencies. For such arrangements the firm has to pay a slightly higher rate of interest than that on a long-term debt. But considerable saving in interest costs will be effected because such interest will have to be paid only for shorter period. 2. Controlling inflows of cash Having prepared the cash budget, the finance manager should also ensure that there is no significant deviation between the projected cash inflows and the projected cash outflows. This requires controlling of both inflows as well as outflows of cash.Speedier collection of cash can be made possible by adoption of the following techniques, which have been found to be quite useful and effective.

(i) Concentration Banking:

Concentration banking is a system of decentralizing collections of accounts receivables in case of large firms having their business spread over a large area. According to this system, a large number of collection centers are established by the firm in different areas selected on geographical basis. The firm opens its bank accounts in local banks of different areas where it has its collection centers. The collection centers are required to collect cheques from their customers and deposits them in the local bank account. Instructions are given to the local collection centers to transfer funds over a certain limit daily telegraphically to the bank at the head office. This facilitates fast movements of funds. The companys treasurer on the basis of the daily report received from the head office bank about the collected funds can use them for disbursement according to needs.

This system of concentration banking results in the following advantages: (a) The mailing time is reduced since the collection centers themselves collect cheques from the customers and immediately deposit them in local bank accounts. Moreover, when the local collection centres are also used to prepare and send bills to the customers in their areas, the mailing time in sending bills to the customer is also reduced; (b) The time required to collect cheques is also reduced since the cheques deposited in the local bank accounts are usually drawn on banks in that area. This helps in quicker collection of cash.

(ii) Lock-box system: Lock-box system is a further step in speeding up collection of cash. In case of concentration banking cheques are received by collection centres who, after processing, deposit them in the local bank accounts. Thus, there is time gap between actual receipt of cheques by a collection centre and its actual depositing in the local bank account.Lock-box system has been devised to eliminate delay on account of this time gap.According to this system, the firm hires a post-office box and instructs its customers to mail

their remittances to the box. The firms local bank is given the authority to pick the remittances directly from the post-office box. The bank picks up the mail several times a day and deposits the cheques in the firms account. Standing instructions are given to the local bank to transfer funds to the head office bank when they exceed a particular limit. The Lock-Box system offers the following advantages: (a) All remittances are handled by the banks even prior to their de3posits with them at a very low cost; (b) The cheques are deposited immediately upon receipt of remittances and the collecting process starts much earlier than that under the system of concentration banking.

3.control over cash flows An effective control over cash outflows or disbursements also helps a firm in conserving cash and reducing financial requirements. However, there is a basic difference between the underlying objective of exercising control over cash inflows and cash outflows. In case of the former, the objective is the maximum acceleration of collections while in the case of latter, it is to slow down the disbursements as much as possible. The combination of fast collections and slow disbursements will result in maximum availability of funds. A firm can advantageously control outflows of cash if the following considerations are kept in view: (i) Centralized system of disbursement should be followed as compared to decentralized system in case of collections. All payments should be made from a single control account. This will result in delay in presentment of cheques for payment by parties who are away from the place of control account. (ii) Payments should be made on the due dates, neither before nor after. The firm should neither lose cash discount nor its prestige on account of delay in payments. In other words, the firm should pay within the terms offered by the suppliers.

(iii)

The firm may use the technique of playing float for maximizing the availability of funds. The term float refers to the period taken from one stage to another in the cash collection process.

4. Investing surplus cash (i) Determination of the amount of surplus cash; (ii) Determination of the channels of investments.

(i) Determining of surplus cash Surplus cash is the cash in excess of the firms normal cash requirements. While determining the amount of surplus cash, the finance manager has to take into account the minimum cash balance that the firm must keep to avoid risk or cost of running out of funds. Such minimum level may be termed a safety level of cash.

(ii) Determining of channels of investments The finance manager can determine the amount of surplus cash, by comparing the actual mount of cash available with the safety or minimum level of cash. Such surplus may be either of a temporary or a permanent nature.

Criteria for investment In most of the companies there are usually no written instructions for investing the surplus cash. It is left to the discretion and judgement; he usually takes into consideration the following factors: (i) Security:

This can be ensured by investing money in securities whose price remain more or less stable. (ii) Liquidity: This can be ensured by investing money in short-term securities including short-term fixed deposits with bank. (iii) Yield: Most corporate managers give less emphasis to yield as compared to security and liquidity of investment. They, therefore, prefer short-term government securities for investing surplus cash. However, some corporate managers follow aggressive investment policies, which maximize the yield on their investments.

(iv)

Maturity:

Surplus cash is available not for an indefinite period. Hence, it will be advisable to select securities according to their maturities keeping in view the period for which surplus cash is available. If such selection is done carefully, the finance manager can maximize the yield as well as maintain the liquidity of investments.

Cash management models Several types of cash management models have been recently designed to help in determining optimum cash balance. These models are interesting and are beginning to be used in practice. Two of such models are given below:

1. Baumol model: This model was suggested by William J Baumol. It is similar to one used for determination of economic order quantity. According to this model, optimum

cash level is that level of cash where the carrying costs and transactions costs are the minimum.

Carrying costs This refers to the cost of holding cash, namely, the interest foregone on marketable securities. They may also be termed as opportunity cost of keeping cash balance.

Transaction costs This refers to the cost involved in getting the marketable securities converted into cash. This happens when the firm falls short of cash and to sell the securities resulting in clerical, brokerage, registration and other costs. There is an inverse relationship between the two costs. When one increases, the other decreases, the other decreases. Hence, optimum cash level will be at that point where these two costs are equal. The formula for determining optimum cash balance can be put as follows:

C=

2U x P S

Where, C = Optimum cash balance U = Annual (or monthly) cash disbursements P = Fixed costs per transaction S = Opportunity cost of one rupee p.a. (p.m)

2. Miller-Orr Model

Baumol model is not suitable in those circumstances when the demand for cash is not steady and cannot be known in advance. Miller-Orr model helps in determining the optimum level of cash in such circumstances. It deals with cash management problem under the assumption of stochastic or random cash flows by laying down control limits for cash balances. These limits consist of an upper limit (h), lower limit (o) and return point (z). When cash balance reaches the upper limit, a transfer of cash equal to h-z is affected to marketable securities. When it touches the lower limit, a transfer equal to z-o from marketable securities to cash is made. No transaction between cash to marketable securities and marketable securities to cash is made during the period when the cash balance stays between the high and low limits.

The model is illustrated in the form of the following chart

Upper control limit h

Cash balance z Return point

O Time

Lower control limit

The above chart shows that when cash balances reaches the upper limit, an account equal to h-z is invested in the marketable securities and cash balance comes down to z level. When cash balance touches the lower limit marketable securities of the value of z-o are sold and the cash balance again goes up to z level. The upper limit and lower limit are set on the basis of opportunity cost of holding cash; degree of likely fluctuation in cash balances and the fixed costs associated with securities transactions.

(2) MANAGEMENT OF INVENTORIES Inventories are good held for eventual sale by a firm. Inventories are thus one of the major elements, which help the firm in obtaining the desired level of sales. Kinds of inventories Inventories can be classified into three categories.

(i) Raw materials: These are goods, which have not yet been committed to production in a manufacturing firm. They may consist of basic raw materials or finished components. ii) Work-in-progress: This includes those materials, which have been committed to production process but have not yet been completed. (iii) Finished goods: These are completed products awaiting sale. They are the final output of the production process in a manufacturing firm. In case of wholesalers and retailers, they are generally referred to as merchandise inventory. The levels of the above three kinds of inventories differ depending upon the nature of the business.

Benefits of holding inventories Holding of inventories helps a firm in separating the process of purchasing, producing and selling. In case a firm does not hold sufficient stock of raw materials, finished goods, etc., the purchasing would take place only when the firm receives the order from a customer. It may result in delay in executing the order because of difficulties in obtaining/ procuring raw materials, finished goods, etc. thus inventories provide cushion so that the purchasing, production and sales functions can proceed at optimum speed.

The specific benefits of holding inventories can be put as follows:

(i) Avoiding losses of sales If a firm maintains adequate inventories it can avoid losses on account of losing the customers for non-supply of goods in time.

(ii) Reducing ordering cost The variable cost associated with individual orders, e.g., typing, checking, approving and mailing the order, etc., can be reduced if a firm places a few large orders than numerous small orders. (iii) Achieving efficient production runs Maintenance of large inventories helps a firm in reducing the set-up cost associated with each production run.

Risks and costs associated with inventories Holding of inventories exposes the firm to a number of risks and costs. Risk of holding inventories can be put as follows: (i) Price decline

This may be due to increase in the market supply of the product, introduction of a new competitive product, price cutting by the competitors, etc. (ii) Product deterioration this may due to holding a product for too long a period or improper storage conditions. (iii) Obsolescence This may be due to change in customers taste, new production technique, improvements in the product design, specifications, etc.

The costs of holding inventories are as follows: (i) Materials cost This includes the cost of purchasing the goods, transportation and handling charges less any discount allowed by the supplier of the goods. (ii) Ordering cost This includes the variable cost associated with placing an order for the goods. The fewer the orders, the lower will be the ordering costs for the firm. (iii) Carrying cost This includes the expenses for storing the goods. It comprises storage costs, insurance costs, spoilage costs, cost of funds tied up in inventories, etc. Management of inventory Inventories often constitute a major element of the total working capital and hence it has been correctly observed, good inventory management is good financial management.Inventory management covers a large number of issues including fixation of minimum and maximum levels; determining the size of the inventory to be carried ; deciding about the issue price policy; setting up receipt and inspection procedure; determining the economic order quantity; providing proper storage facilities, keeping check on obsolescence and setting up effective information system with regard to the inventories. However, management inventories involves two basic problems:

(i) (ii)

Maintaining a sufficiently large size of inventory for efficient and smooth production and sales operations; Maintaining a minimum investment in inventories to minimize the direct-indirect costs associated with holding inventories to maximize the profitability.

Inventories should neither be excessive nor inadequate. If inventories are kept at a high level, higher interest and storage costs would be incurred. On the other hand, a low level of inventories may result in frequent interruption in the production schedule resulting in underutilization of capacity and lower sales.

objective of inventory management


(i) (ii) (iii) (iv) (v) Ensuring a continuous supply of materials to production department facilitating uninterrupted production. Maintaining sufficient stock of raw material in periods of short supply. Maintaining sufficient stock of finished goods for smooth sales operations. Minimizing the carrying costs. Keeping investment in inventories at the optimum level.

Techniques of inventory management Effective inventory requires an effective control over inventories. Inventory control refers to a system which ensures supply of required quantity and quality of inventories at the required time and the same time prevent unnecessary investment in inventories. The techniques of inventory control/ management are as follows:

1. Determination of Economic Order Quantity (EOQ) Determination of the quantity for which the order should be placed is one of the important problems concerned with efficient inventory management. Economic Order Quantity refers to the size of the order, which gives

maximum economy in purchasing any item of raw material or finished product. It is fixed mainly taking into account the following costs. (i) Ordering costs: It is the cost of placing an order and securing the supplies. It varies from time to time depending upon the number of orders placed and the number of items ordered. The more frequently the orders are placed, and fewer the quantities purchased on each order, the greater will be the ordering costs and vice versa. (ii) Inventory carrying cost: it is the cost of keeping items in stock. It includes interest on investment, obsolescence losses, store-keeping cost, insurance premium, etc. The larger the value of inventory, the higher will be the inventory carrying cost and vice versa. The former cost may be referred as the cost of acquiring while the latter as the cost of holding inventory. The cost of acquiring decreases while the cost of holding increases with every increase in the quantity of purchase lot. A balance is, therefore, struck between the two opposing factors and the economic ordering quantity is determined at a level for which aggregate of two costs is the minimum.

Formula: Q= 2U x P

Where, Q = Economic Ordering Quantity U = Quantity (units) purchased in a year (month) P = Cost of placing an order

S = Annual (monthly) cost of storage of one unit.

2. Determination of optimum production quantity The EOQ model can be extended to production runs to determine the optimum production quantity. The two costs involved in this process are: (i) (ii) Set up costs; Inventory carrying cost.

The set up cost is of the nature of fixed cost and is to be incurred at the time of commencement of each production run. Larger the size of the production run, lower will be the set-up cost per unit. However, the carrying cost will increase with increase in the size of the production run. Thus, there is an inverse relationship between the set-up cost and inventory carrying cost. The optimum production size is at that level where the total of the set-up cost and the inventory carrying cost is the minimum. In other words, at this level the two costs will be equal. The formula for EOQ can also be used for determining the optimum production quantity as given below:

E=

2U x P S

Where E = Optimum production quantity U = Annual (monthly) output P = Set-up cost for each production run S = Cost of carrying inventory per annum (per month) (3) MANAGEMENT OF ACCOUNTS RECEIVABLES

Accounts receivables (also properly termed as receivables) constitute a significant portion of the total currents assets of the business next after inventories. They are direct consequences of trade credit which has become an essential marketing tool in modern business. When a firm sells goods for cash, payments are received immediately and, therefore, no receivables are credited. However, when a firm sells goods or services on credit, the payments are postponed to future dates and receivables are created. Usually, the credit sales are made on open account, which means that, no, formal acknowledgements of debt obligations are taken from the buyers. The only documents evidencing the same are a purchase order, shipping invoice or even a billing statement. Meaning of receivables Receivables are assets accounts representing amounts owed to the firm as a result of sale of goods / services in the ordinary course of business. They, therefore, represent the claims of a firm against its customers and are carried to the assets side of the balance sheet under titles such as accounts receivables, customer receivables or book debts. They are, as stated earlier, the result of extension of credit facility to then customers a reasonable period of time in which they can pay for the goods purchased by them.

Purpose of receivables Accounts receivables are created because of credited sales. Hence the purpose of receivables is directly connected with the objectives of making credited sales. The objectives of credited sales are as follows: (i) Achieving growth in sales: If a firm sells goods on credit, it will generally be in a position to sell more goods than if it insisted on immediate cash payments. This is because many customers are either not prepared or not in a position to pay cash when they purchase the goods. The firm can sell goods to such customers, in case it resorts to credit sales.

(ii) Increasing profits: increase in sales results in higher profits for the firm not only because of increase in the volume of sales but also because of the firm charging a higher margin of profit on credit sales as compared to cash sales.

(iii) Meeting competition: A firm may have to resort to granting of credit facilities to its customers because of similar facilities being granted by the competing firms to avoid the loss of sales from customers who would buy elsewhere if they did not receive the expected output. Costs of maintaining receivables The costs with respect to maintenance of receivables can be identified as follows:

1. Capital costs: Maintenance of accounts receivables results in blocking of the firms financial resources in them. This is because there is a time lag between the sale of goods to customers and the payments by them. The firm has, therefore, to arrange for additional funds top meet its own obligations, such as payment to employees, suppliers of raw materials, etc., while awaiting for payments from its customers. Additional funds may either be raised from outside or out of profits retained in the business. In both the cases, the firm incurs a cost. In the former case, the firm has to pay interest to the outsider while in the latter case, there is an opportunity cost to the firm, i.e., the money which the firm could have earned otherwise by investing the funds elsewhere. 2. Administrative costs: The firm has to incur additional administrative costs for maintaining accounts receivable in the form of salaries to the staff kept for maintaining accounting

records relating to customers, cost of conducting investigation regarding potential credit customers to determine their creditworthiness, etc. 3. Collection costs: The firm has to incur costs for collecting the payments from its credit customers. Sometimes, additional steps may have to be taken to recover money from defaulting customers. 4. Defaulting costs: Sometimes after making all serious efforts to collect money from defaulting customers, the firm may not be able to recover the overdues because of the of the inability of the customers. Such debts are treated as bad debts and have to be written off since they cannot be realized. Factors affecting the size of receivables The size of the receivable is determined by a number of factors. Some of the important factors are as follows: (1) Level of sales: This is the most important factor in determining the size of accounts receivable. Generally in the same industry, a firm having a large volume of sales will be having a larger level of receivables as compared to a firm with a small volume of sales. Sales level can also be used for forecasting change in accounts receivable. (2) Credited policies: The term credit policy refers to those decision variables that influence the amount of trade credit, i.e., the investment in receivables. These variables include the quantity of trade accounts to be accepted, the length of the credit period to be extended, the cash discount to be given and any special terms to be offered depending upon particular circumstances of the firm and the customer. A firms credit policy, as a matter of fact, determines the amount of risk the firm is willing to undertake in its sales activities. If a firm has a lenient or a relatively liberal credit policy, it will experience a higher level of receivables as compared to a firm with a more rigid or stringent credit policy.

This is because of two reasons: (i) A lenient credit policy encourages even the financially strong customers to make delays in payments resulting in increasing the size of the accounts receivables; (ii) Lenient credit policy will result in greater defaults in payments by financially weak customers thus resulting in increasing the size of receivables.

(3) Terms of trade:The size of the receivables is also affected by terms of trade (or credit terms) offered by the firm. The two important components of the credit terms are: (i) (ii) Credit period; Cash discount.

(i) Credit period: The term credit period refers to the time duration for which credit is extended to the customers. It is generally expressed in terms of net days. For example-If a firms credit terms are net 15, it means the customers are expected to pay within 15 days from the date of credit sale.

(ii) Cash discount: Most firms offer cash discount to their customers for encouraging them to pay their dues before the expiry of the credit period. The terms of the cash discounts indicate the rate of discount as well as the period for which the discount has been offered. (4) MANAGEMENT OF ACCOUNTS PAYABLE Management of accounts payable is as much important as management of accounts receivable. There is a basic difference between the approach to be adopted by the finance manager in the two cases. Whereas the underlying

objective in case of accounts receivable is to maximize the acceleration of the collection process, the objective in case of accounts payable is to slow down the payments process as much as possible. But it should be noted that the delay in payment of accounts payable may result in saving of some interest costs but it can prove very costly to the firm in the form of loss credit in the market. The finance manager has, therefore, to ensure that the payments after obtaining the best credit terms possible. Overtrading and undertrading The concepts of overtrading and undertrading are intimately connected with the net working capable position of the business. To be more precise they are connected with the cash position of the business. OVERTRADING: Overtrading means an attempt to maintain or expand scale of operations of the business with insufficient cash resources. Normally, concerns having overtrading have a high turnover ratio and a low current ratio. In a situation like this, the company is not in a position to maintain proper stocks of materials, finished goods, etc., and has to depend on the mercy of the suppliers to supply them goods at the right time. It may also not be able to extend credit to its customers, besides making delay in payment to the creditors. Overtrading has been amply described as overblowing the balloon. This may, therefore, prove to be dangerous to the business since disproportionate increase in the operations of the business without adequate resources may bring its sudden collapse. Causes of overtrading The following may be the causes of over-trading:

(i) Depletion of working capital: Depletion of working capital ultimately results in depletion of cash resources. Cash resources of the company may get depleted by premature repayment of long-term loans, excessive drawings, dividend payments, purchase of fixed assets and excessive net trading losses, etc.

(ii) Faulty financial policy: Faulty financial policy can result in shortage of cash and overtrading in several ways: (a) Using working capital for purchase of fixed assets. (b) Attempting to expand the volume of the business without raising the necessary resources, etc

(iii) Over-expansion: In national emergencies like war, natural calamities, etc., a firm may be required to produce goods on a larger scale. Government may pressurize the manufacturers to increase the volume of production without providing for adequate finances. Such pressure results in over-expansion of the business ignoring the elementary rules of sound finance.

(iv) Inflation and rising prices: Inflation and rising prices make renewals and replacements of assets costlier. The wages and material costs also rise. The manufacturer, therefoe, needs more money even to maintain the existing level of activity.

(v) Excessive taxation: Heavy taxes result in depletion of cash resources at a scale higher than what is justified.The cash position is further strained on account of efforts of the company to maintain reasonable dividend rates for their shareholders

Consequences of overtrading The consequences of over-trading can be summarized as follows:

(i) Difficulty in paying wages and taxes: This is one of the most dangerous consequences of overtrading. Nonpayments of wages in time create a feeling of uncertainty, insecurity and dissatisfaction in all ranks of the labour. Non-payments of taxes in time may result in bringing down the reputation of the company considerably in the business and government circles. (ii) Costly purchases: The company has to pay more for its purchases on account of its inability to have proper bargaining, bulk buying and selecting proper source of supplying quality materials. (iii) Reduction in sales: The company may have to suffer in terms of sales because the pressure for cash requirements may force it to offer liberal cash discounts to debtors for prompt payments, as well as selling goods at throwaway prices. (iv) Difficulties in making payments: The shortage of cash will force the company to persuade its creditors to extend credit facilities to it. Worry, anxiety and fear will be the managements constant companions. (v) Obsolete plant and machinery: Shortage of cash will force the company to delay even the necessary repairs and renewals. Inefficient working, unavoidable breakdowns will have an adverse effect both on volume of production and rate of profit. Symptoms and remedies for overtrading The situation of overtrading should be remedied at the earliest possible opportunity, i.e., as soon as its first symptoms are visible. The symptoms can be put as follows: (a) A higher increase in the amount of creditors as compared to debtors. This is because of firms inability to pay its creditors in time and exercising of undue pressure on debtors for payments; (b) Increased bank borrowing with corresponding increase in inventories;

(c) Purchase of fixed assets out of short-term funds; (d) A fall in the working capital turnover (working capital/sales) ratio. (e) A low current ratio and high turnover ratio.

The cure for overtrading is easier to prescribe but difficult to follow. The cure is simple-reduce the business or increase finance. Both are difficult. However, arrangement of more finance is better. If this is not possible, the only advisable course left will be to sell the business as a going concern.

UNDERTRADING: It is the reverse of overtrading. It means improper and underutilization of funds lying at the disposal of the undertaking. In such a situation the level of trading is low as compared to the capital employed in the business. It results in increase in the size of inventories, book debts and cash balances. Undertrading is a matter of fact an aspect of overcapitalization. The basic cause of undertrading is, therefore, underutilization of the firms resources. Such underutilization may be due any one or more of the following causes: Conservative policies followed by the management; Non-availability or shortage of basic facilities necessary for production such as, raw materials, power, labour, etc; General depression in the market resulting in fall in the demand of companys products;

The symptoms of undertrading are the following: (i) (ii) (iii) A very high current ratio; Low turnover ratios; An increase in working capital turnover (working capital/ sales) ratio.

Consequences of undertrading The following are the consequences of undertrading:

(i) The profits of the firm show a declining trend resulting in a lower return on capital employed (ROI) in the business. (ii) The value of the shares of the company on the stock exchange starts falling on account of lower profitability; (iii) There is loss to the reputation of the firm on account of lower profitability and creation of impression in the minds of investors that the management is inefficient.

Remedies for undertrading The condition of undertrading is set in because of underutilization of the firms resources. The situation can, therefore, be remedied by the management by adopting a more dynamic and result-oriented approach. The firm may go for diversification and undertaking new profitable jobs, projects, etc., resulting in a better and efficient utilization of the firms resources. Key Working Capital Ratios The following, easily calculated ratios are important measures of working capital utilization.

Ratio Stock Turnover (in days)

Formulae

Result

Interpretation On average, you turn over the value of

Average Stock 365/ Cost Goods Sold of * = x days

your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. = x days It takes you on average x days to collect monies due to you. If your official credit-

terms are 45 day and it takes you 65 Receivabl es (in days) Payables Ratio days) Debtors * Sales Creditors * = x days days... why ? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) his will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Ratio Total Current =x times Assets/ Total Current Liabilities Current Liabilities _are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than l times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Quick Ratio Current Assets Inventory)/ Total Current (Total Similar to the Current Ratio but takes

Ratio 365/-

(in 365/ Cost of Sales (or Purchases)

= x times account of the fact that it may take time to convert inventory into cash. -

Liabilities Working Capital Ratio payables)/Sa les (Inventory + As s % A high percentage means that working Receivables sales capital needs are high relative to your sales.

"ABOUT R.S.M.M.L." RSMML, has adopted the Conservative Approach for

determining its financial- mix. INVENTORY MANAGEMENT


Managing Inventory is juggling act Excessive stock can place heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delay for customer etc. Know Your Inventory and Successfully Manage it. Successful Inventory Management starts with the important insights into setting-up your Inventory Management System, including how to enter inventory items, kits and transactions and how to use these tools to count and update your physical inventory. To give you a well-rounded foundation of knowledge. Master These Functions 1 2. 3. 4. Learn the features and setup Inventory Management Enter inventory items and kits Enter transactions for inventory items Effectively use the related tools for counting and updating inventory

5.

Learn the steps for successfully closing a period

INVENTORY MANAGEMENT IN RSMML


Company maintains inventory management system at its phosphate and limestone divisions. It has adopted selective inventory control - ABC analysis. It tends to measure the significance of each item of inventory in terms of its value. The high value items are classified as "A item" and would be under the tightest control. "C items" represent relatively least value and would be under simple control. "B items" fall in between these two categories and require reasonable attention of management. The ABC analysis concentrate on important items and also known as control by importance and exception.

Sr. 1

A class items. High consumption value

B Class items Moderate consumption value

C Class items Low consumption value

Rigorous value analysis & strict control

Moderate value analysis & Minimum value analysis moderate control & lower control

A class items are handled by senior officers

B class items are handled C class items are fully by middle management delegated

Maximum follow up Periodical follows up. & expediting

Follow up and expediting in exceptional cases

Advantages of ABC analysis 1. 2. Time - Can implement faster than a replacement system. Cost - Is much less expensive to develop, implement and operate since the information is needed less often for management strategic decisions, e.g., once per year or when the process is changed.

3. 4. 5.

Politics - Does not require corporate approval. Audit -- Does not require approval from external auditors. Type of information - Can use subjective information obtained from interviews, that might be difficult to verify.

6.

GAAP - External reporting does not require the detail and complexity of ABC costing.

7.

Expertise - Few have the knowledge and experience to develop a single system.

In R.S.M.M. there helds a monthly meeting to review total inventory

RECEIVABLE MANAGEMENT (debtors)


A receivable policy should concentrate on reducing funds locked in receivables & has its base on a proper marketing plan. The functions that the company should perform are as follows (1) (2) Establish clear credit practices as a matter of company policy Make sure that these practices are `clearly understood by staff, suppliers & customers. (3) One should be prompt while accepting . new accounts and especially a larger ones. (4) (5) (6) .

Check out each customer thoroughly before offering credit. Establish credit limits for each customers & stick to them. Systematic monitoring and review of receivables should be carried but to ensure that they are recycled in time.

(7)

Actions plans for recovery should be implemented in case of defaulting customers.

Receivables management in R.S.M.M -

1.

Company has its collection centers at Calcutta; Delhi, Jaipur, Cochin, Lucknow, Bokara where customers can deposits money for where immediate credit is given to them.

2.

Discount of 5% is offered for prompt payment & delayed payment interest is charged at 16%. The customers are required to make payment by demand draft. Local customers could pay by cheque.

3.

Company sells its customer only through letter of credit/cash. Initially new dealers are given no credit. After dealing with company for some time, they are granted credit. Maximum credit extended to 180 days.

4.

Top level management committee receives position of receivables fortnightly.

5.

In exceptional cases company has approached for criminal/civil proceeding against defaulters.

PAYABLE MANAGEMENT (Creditors) Creditors are vital part of effective cash management & should be managed carefully to enhance the cash positions management of creditors is just as important as the management of debtors. The major prerequisite of payables management are the finalization of the procurement plan.

It also involves (1) Formulating general and specific policies and norms for payment which has to be followed while finalizing all procurement, costs.

(2)

Making financial arrangement like, L/Cs or BCs to exploit benefits of cash discount, immediate delivery.

(3)

The system should also enable timely review of payable, monitoring delays & review of policies.

Payables management in R.S.M.M In R.S.M.M.L company prepares ageing schedule. It follows FIFO system i.e. first come first out i.e.-the creditors who lends credit first, payment are madefirst to them and so on. If the company offers credits, company enjoys it & in case, discounts are offered company utilize it.

CASH MANAGEMENT

Cash is a life blood of business & its task of manager to manage cash efficiently keeping in view safety liquidity and profitability The firm should evolve strategies regarding the following five facts of cash management. 1 Cash inflows and outflows should be planned to projects surplus or deficit for each period of the planning period. 2. 3. 4. The flow of cash should be properly managed. The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. 5. The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities, and interoperate lending.

Cash Management in R.S.M.M.-

RSMML prepares its monthly cash budget on the basis of cash/capital budget prepares in advance. Every department has to inform their requirements a month earlier & marketing department has to ensure the collection.

WORKING CAPITAL FINANCING


The assessment of working capital is always made for future period. While the financial statement reveals the financial position of a concern at some point of time in the past. The calculation based on such statements is not workable. Moreover, the newly established units may not provide any financial statement of the past. The working capital is always assessed on the basis of projection for next year. The projection which are submitted to the banks are critically examined in relation past performance of the unit, the future prospects & market for the ultimate product - production capacity & rate of inflation. Therefore it requires careful scrutiny of the different data. After determining the level of working capital, a firm has to decide how it is to be financed. The need for working capital materials, work in process, finished goods & receivable typically fluctuates during the year. Although long term funds partly finance current assets and provide the margin money for working capital, such assets are virtually exclusively supported by short term sources. The main sources of working capital finance are; trade credit; bank credit; commercial papers.

The main sources of working capital are (1) trade credit (2) bank credit (3) commercial paper

TRADE CREDIT
Trade credit refers to the credit that customer gets from supplier of goods in the normal course of business. The buying firms do not have to pay cash immediately for the purchase made. This deferral payment is a short term financing called trade credit. It is a major source of financing for firms. In India, it contributes to about one third of the short term financing. Particularly small firms are heavily dependent on the trade credit as a source of finance since they find it difficult to raise funds from banks and other sources in the capital markets. Trade credit is mostly an informal arrangement and is granted on an open account basis. A supplier sends goods to the buyer on credit, which the buyer accepts and thus, in effects formally acknowledges it as a debt he does not sign any legal instrument. Once the trade links have been established between the buyer and the seller, they have each other's mutual confidence and trade credit becomes a routine activity, which may be periodically reviewed by the supplier. Trade credit appears as a sundry creditor on the buyer's balance sheet. . Trade credit may also take the form of bills payable. When the buyer's signs a bill a negotiable instrument to obtain trade credit it appears on the buyer's b/s as bills payable. Benefits of trade credit 1. Trade credit is relatively easy to obtain, except in case of financially very unsound firms. 2. Flexibility is another advantage of trade credit. Trade credit grows with the growth in firm's sales. 3. Trade credit is an informal, spontaneous s source of finance.

BANK FINANCE

Banks are the main institutional sources of working capital finance in India. A bank considers a firm's sales and production plans and desirable levels of current assets in determining its working capital requirement. The approved by bank for the firm's working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system banks may fix separate limits for the `peak level' credit requirements and normal non-peak level' credit requirement indicating the periods during which the separate limits will be utilized by the borrower. Forms of bank finance A firm can draw funds in following forms (a) Overdraft - Under the overdraft facility, the borrower is allowed to withdraw funds in excess of the balance in his current account upto a certain specific limit during a stipulated period. Though overdrawn amount is repayable on demand, they generally continue for a long period by annual renewals of the limits. It is a very flexible arrangement from the borrower point of view since he can withdraw and repay funds whenever he desires within the overall stipulations. Interest is charge on daily balances-on the amount actually withdrawn subject to some minimum changes. The borrower operates the account through cheques. (b) Cash Credit - The cash credit facility is similar to the overdraft arrangement. Under the cash credit facility, a borrower is allowed to withdraw funds from the bank upto the sanctioned credit limit. He is not required to borrow the entire sanctioned credit once, rather he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit account. There is no commitment charge, therefore interest is payable on the amount actually utilized by the borrower. Cash credit limits are sanctioned against the security of current assets. Though funds are repayable on demand, banks usually do not recall such advances unless they are compelled by adverse circumstances.

(c)

Purchase-or discounting of bill - Under discounting of bill, a borrower obtains credit from a bank against its bills. The bank purchases or discounts the borrower's bills. The amount provided under this agreement is covered within the overall cash credit or overdraft limit. Before purchasing the bills, the bank satisfies itself as to the' credit worthiness of the drawer. Though the term `bills purchased' implies that the bank becomes owner of the bills, bank hold bills as security for the credit. When a bill is discounted, the borrower is paid the discounted amount of the bill. The bank collects the full amount of maturity.

(d)

Working capital loan - A borrower may sometimes require ad hoc or temporary accommodation in excess of the sanctioned credit limit to meet unforeseen contingencies. Banks provide such loans through a demand loan account or a separate `non-operable' cash credit account. The borrower is required to pay a higher rate of interest above the normal rate of interest on such additional credit.

The banks which have finance, the working capital need of R.S.M.M.L. is

Different banks for working R.S.M.M.L. are as follows Name of bank Bank of Rajasthan State bank of India Bank of Baroda Punjab national bank Oriental bank of commerce TOTAL Sanctioned limit (in Rs. crores) 3000 1000 600 600 600 5800

The investors in CPs can be corporate bodies, banks, mutual funds, UTI, LIC, GIC and NRI's on non repatriation basis. The discount and

finance house of India also participates by quoting its bid and offer prices. The holder of CPs would present them for payment to issuer on maturity.

COMMERCIAL PAPER Commercial paper is an important money market Instrument in advanced countries like the U.S.A. to raise short- term funds. In India, the reserve bank of India introduced the commercial paper scheme in the Indian money market in 1989. Commercial paper as it is known in advanced countries, is a form of unsecured promissory note issued by firms to raise short-term funds. The commercial paper market in U.S.A. is a blue-chip market where financially sound and highest rated companies are -able to issue commercial papers. The buyers of commercial paper include banks, insurance companies, unit trusts and firms with surplus funds to invest for a short period with minimum of risk. Advantages of commercial paper a. It is an alternative source of raising short term finance and proves to be handy during periods of tight bank credit. b. It is a cheaper source of finance in comparison to the bank credit. Usually interest yield on commercial paper is less than the prime rate of interest. c. From investors point of view it provides an opportunity to make a safe, short term investment of surplus funds. Framework of Indian CP market : The commercial papers emerged as source of short term financing in the early nineties. It is regulates by RBI. The present framework is given below. CPs can be issued for periods ranging between 15 days and one year. Renewal of CPs is treated as fresh issue. The maximum amount that a company can raise by way of cps is 100%.

The minimum size of issue is Rs.25 lacs and the minimum unit of subscription is Rs.5 lacs.

A company can issue CPs only if it has minimum tangible net worth of Rs.4 crore, a fund based working limits of Rs. 4 crore or mo

Chapter-3

Research Methodology

Research Define:Research is common parlance to refer to a search for knowledge. Research comprises defining problem, formulation hypothesis or suggesting solution, collecting, organizing or evaluating data and reaching conclusion and at last carefully testing conclusion to determine whether fit the formulated hypothesis. Research is a careful investigation or enquiries for new facts in any branch of knowledge. Researchers are basically systematic enquiry with customers critical examination with objective to search new facts or interpret know facts in light.

R E

Rational way of thinking expert and exhaustive treatment

S E A R C H-

search for solution Exactness Analytical Relationship of facts Careful recording Honesty and Hard work

TITLE OF THE STUDY The topic of my study is WORKING CPITAL MANAGEMENT in RSSML

OBJECTIVE
The objective of present study is The objective is analysis of various financial statements & there interpretation in order to assess the `WORKING CAPITAL MANAGEMENT' OF R.S.M.M.L. Ratio analysis technique has been used for analyzing the same.

SCOPE
The scope of this study has been limited to RAJASTHAN STATE MINES AND MINERALS LTD having its corporate office at Udaipur. For the purpose of this study, RAJASTHAN STATE MINES AND MINERALS LTD was selected keeping in 'view the easy accessibility & convenience in collecting data/information.

RESEARCH DESIGN
Research design constitutes the blue print for the collection, measurement and analysis of data. As such the design includes an outline of what the research will do from writing the hypothesis and its operational implications to the final analysis of data. The research design here is descriptive.

DATA COLLECTION
For research we need two types of data: Primary data-the data, which are collected from the field under the control and supervision of an investigator, is known as primary data. This type of data is generally collected for the first time. In my research there is no requirement of primary data. Secondary data-if datas are collected from journals, magazines, annual reports of companies, etc. then such data are called as secondary data. In order to achieve my objectives secondary data are utilized for the purpose of doing various calculations. In each of these sources of data, the process of data collection has already been done by the respective organization. In secondary data I needed the financial data of the company. So the sources of data collection for the purpose of my research are: Annual report of the organization 1. Balance sheet of the organization 2. Profits and loss account of the organization

Website of the organization

LIMITATION:During the process of a research a person comes across the following limitation: I have used secondary source of data for gather relevant information because collection of datas by primary data was not possible within six weeks.

CHAPTER 4

FACTS

AND FINDINGS

RATIO ANALYSIS FOR WORKING CAPITAL


1. NET WORKING CAPITAL

The difference between current assets and current liabilities excluding short term borrowing is called net working capital and net current assets. NWC is sometimes used as a measure of a firm's liquidity. It is considered that, between two firm's, the one having the larger NWC has the greater ability to meet its current obligation. This is not necessarily so; the measure of liquidity is a relationship, rather than the difference between current assets and current liabilities. NWC, however, measures the firm's potential reservoir of funds. It can be related to net assets. Net working capital = current asset -current liabilities

TABLE 1 AND CHART 1

Year

Computation

Net working capital RS. (in lacs)

2006-2007 2007-2008
31000 30000 29000 28000 27000 26000 25000 24000

42850.01-16361.67 50577.77-20569.70

26488.34 29958.07

Net working capital

2006-2007 2007-2008

2. WORKING CAPITAL TURNOVER RATIO


Working capital turnover ratio measures the efficiency for the firm in maintaining & utilizing its capital. Higher the ratio more efficient, utilization of capital. Lower the ratio, under utilization of available resources & production capacity. Working capital turnover = Cost of good sold . Net working capital

Cost of good sold

= Opening stock + purchase + direct expenses -closing stock

Net working capital = current assets - current liabilities. TABLE 2 AND CHART 2

Year 2006-2407

Computation 33894.12/26488.34

Days 1.27

200 2002
1.3 1.29 1.28 1.27 1.26 1.25 2006-2007 2007-2008

39228.86/2995807

1.30

Working capital turnover ratio

3. CURRENT RATIO The current ratio is calculated by dividing current assets by current liabilities.Current assets include cash and those assets, which can be converted into cash within a year, such as marketable securities, debtors and inventories. Prepaid expenses are also included in current assets-as they represent the payments that will not be made by the firm in the future. All obligations maturing within a year are included in current liabilities. Current liabilities include creditors, bills payable, accrued expenses, short term bank loan, income-tax liability and long-term debt maturing in current liability. A ratio of greater than one means that the firm has more current assets. them current claims against them. Current ratio = TABLE 3 AND CHART 3 Current assets Current liabilities

Year 2006-2007

Computation 42850.01/16361.67

Ratio 2.62

2007-2008

50527.77/20569.70

2.46

2.65 2.6 2.55 2.5 2.45 2.4 2.35 2006-2007 2007-2008

Working capital turnover ratio

4. QUICK RATIO This ratio establishes a relationship between quick or liquid assets and current liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. Other assets whish are considered to be relatively liquid and included in quick assets are book debts and marketable securities. Inventories are considered to be less liquid. Inventories normally require some time for realizing into cash; their value also has a tendency to fluctuate: The quick ratio is found out by dividing quick assets by current liabilities. Quick ratio = Current assets - inventories Current liabilities TABLE 4 AND CHART 4

Year

Computation 42850.01-4368.52 /

Ratio

2006-2007

16361.67

2.35

50527.77-3830.32 / 2007-2008
2.36 2.34 2.32 2.3 Quick ratio 2.28 2.26 2.24 2.22 2006-2007 2007-2008

20569.70

2.27

5.

COLLECTION PERIOD -

The average number of days for which book remains outstanding is called the average collection period. Average collection period (in days) = debtors * 365 sales

TABLE 5 AND CHART 5

Year 2006-2007 2007-2008

Computation 5249.68*365 / 53088.19 6593.03*365 / 60153.99

Days 36 40

41 40 39 38 37 36 35 34 2006-2007 2007-2008 Average collection period

CHAPTER -5

ANALYSIS & INTERPRETATION

TABLE 1 AND CHART 1

With the increase in current asset, working capital increases and with the decrease in current asset, working capital decreases. On the other hand current liabilities have inverse relationship i.e. working capital increases with the decrease in current liabilities and vice versa. In 2007-2008 current asset increases and current liabilities also increases but the proportion of increase in current asset was greater, results in increase in' working capital.

TABLE 2 AND CHART 2 The higher the ratio the more efficient is the management & utilization of capital. The graphs represent that in 2006 - 2007 the working capital patio was 1.27 which has increased to 1.30 in 2007-2008. This means in the year 2007-2008 more effective utilization of capital have been done.

TABLE 3 AND CHART 3 As a conventional rule, a current ratio of 2:1 is considered satisfactory. In 2006-2007 current ratio was very high about 2.62 depicting value of current asset very high. This is not favorable, as too much investment in current asset and idle investments earn nothing. In 2007-2008 company has tried to improve by decreasing the ratio to 2.46 which is mainly due to increase in current liabilities but still not reached to standard ratio.

TABLE 4 AND CHART 4 Quick ratio is better measure of liquidity than current ratio. A Quick ratio of 1:1 is considered to represent satisfactory current financial condition as a firm can easily meet current claim. It was about 2.3 5 in 2006-2007 and decreased to 2.27 in 2007-2008. TABLE 5 AND CHART 5

In 2006-2007 the collection period was 3 6 days which has increased in 20072008 to 40 days, which is not a good sign. Average collection period when decreases year by year, it is better for company because it is taking less time to encash its debtors.

CHAPTER-6

SWOT ANALYSIS

A modern tool for systematic analysis that facilities matching the external threats and opportunities with the internal weakness and strengths of the organization SWOT analysis of R.S.M.M.L is done in the following way for the better understanding of the companys position:-

STRENGTHS Jhamarkotra rock phosphate mines of R.S.M.M.L is one of the largest well -mechanized open cast mines of Asia, which is most modern and scientifically laid out mine.

Industrial beneficiation plant of R.S.S.M.L converting low grade ore of rock phosphate into higher grade concentrate is the only plant of its kind in the world.

In R.S.S.M.L, research and development activities are integral part of the business activities. Extensive computerization along with advanced software is being used for evaluation of natural resources and financial analysis to optimize resource utilization.

The service condition and welfare facilities given to the workmen are attractive and handsome. The employees are satisfied with the facilities and services given by the company. The rate of labor or employee turnover is almost zero and since its inception, no strike or lock- out in the organization.

R.S.M.M.L |is having a HRD department who is arranging training and development programmes for their executives and workmen, refresher courses are being arranged by their vocational training centre, VTC at Jhamarkotra mines under the supervision of manager rank executives.

R.S.M.M.L has its own and separate marketing department at corporate office in Udaipur.

WEAKNESSES Optimum capacity utilization is not done at the mines. The prices of rock phosphate offered by R.S.M.M.L are very high in comparison to the other suppliers including the foreign suppliers. The services offered by R.S.M.M.L to their customers, especially after sales services is not very satisfactory. The quality of service should be improved.

The supplies of material by R.S.M.M.L to the parties are not proper. The supply is not regular which may be due to the non- availability of transport medium, i.e., railway wagons that often restrict the production process.

OPPORTUNITIES

In the era of economic liberalization, R.S.M.M.L may expedite the matter for obtaining ISO- 9000 or 9002 in order to access an extra mileage for their brand quality.

Most of the customers have strong faith on the quality of materials offered by R.S.S.M.L. R.S.M.M.L may convert this faith into business by targeting potential & occasional buyers and by improving the quality of the present service.

The management of R.S.S.M.L may periodically get the first hand information about the existing products and services offered by R.S.S.M.L. This may increase the market reputation of the company.

There are many opportunities for the organization for expansion and diversification of its activities in India as well as abroad.

THREATS

The government of India has controlled entire business of phosphatic fertilizers and as such any change in the government policies in future may adversely affect the company business.

The national reserves are of depleting nature. It is a threat of exhaustion of the deposits in future.

70% of the total demand of rock phosphate is being full filled by import from foreign suppliers. Any reduction in prices by the foreign suppliers may adversely affect the Indian market.

CHAPTER-7

CONCLUSION

CONCLUSION

i.

Current ratio which is measure of short term solvency, was very high in 2006-2007 about 2.60 but succeeding years company has tried to improve it by decreasing the ratio which is due to increase in current liabilities about 2.42.

ii.

Working capital turnover ratio was 1.27 in 2006-2007 which has increased to 1.30 in 2007-2008.This means more effective utilization of capital has been done in 2007-2008. The effective utilization has increased.

iii.

Cash and Bank balance has been increased from Rs 17983.89 lacs in 2006-2007 to Rs. 22019.47 lacs in 2007-2008.

iv.

Inventory has been decreased from Rs. 4368.52 lacs in 2006-2007 to Rs. 3830.32 lacs in 2007-2008.This shows that inventory has been utilized &improvement in purchasing

v.

RSMML is consistent in profitability. The dividends are been regularly paid. The profit before tax increase from Rs. 15611.05 in 2006-2007 to Rs. 18675.13 in 2007-2008.

CHAPTER-8

SUGGESTIONS

SUGGESTIONS

Current 'ratio of 2:1 is considered satisfactory. But it has been seen that current ratio of RSMML is very high which is not favorable, as more investment in current assets &idle investment earn nothing. So the Company should try to find avenues where these idle funds can be invested to yield maximum profit to the company.

Working capital management needs to be more strengthened. There is possibility of managing the current assets & liabilities in a' more effective and efficient manner.

As far as financing of working capital is concerned it reveals a satisfactory position.

The collection period must be reduced for the benefits of the firm.

A Quick ratio of 1:1 is considered to represent satisfactory current financial condition, as a firm can easily meet, current claim. The firm should try to maintain 1:1 ratio.

BIBLIOGRAPHY
Financial Management (I.M.Pandey)

Financial Management (Khan & Jain) Profile of the Company Annual Reports of the company i.e. Balance Sheet & Profit & Loss Accounts