Chapter-2

THEORETICAL BACKGROUND
OF WORKING CAPITAL MANAGEMENT

1
MEANING OF WORKING CAPITAL:-
In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a business can be classified under two main
categories
• Fixed capital
• Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day to
day operations. Long term funds are required to create production facilities through purchase
of fixed assets such as plant and machinery, land, building, furniture etc. Investment in these
assets represents that part of firm capital, which is blocked on a permanent or fixed basis
called fixed capital. Funds are also needed for short term purposes i.e. for the purchase of raw
material, payment of wages and other day to day operations of business. These funds are
known as working capital. In other words, working capital refers to that firm’s Capital, which
is required for short – term assets or current assets. Funds thus invested in current assets keep
revolving last and being constantly converted into cash and this cash flow is again converted
into other current assts. Hence it is known as circulating or short – term capital.

CONCEPT OF WORKING CAPITAL:

1. Gross Working Capital

It is simply called working capital refers to the firm’s investment in current assets so the
total current assets of the firm are known as gross working capital.

2. Net Working Capital

It represents the difference between current assets and current liabilities. Net working
capital may be positive or negative. Positive net working capital is that when current
assets are more than current liabilities. But when current liabilities become more than
current assets than it is negative working capital.

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In brief we can say that working capital is too much necessary for the smooth functioning and
proper utilization of fixed assets.

TYPES OF WORKING CAPITAL:

1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also
arises continuously. But the magnitude of current assets needed is not always same; it
increases and decreases over time. However there is always a minimum level of
current assets. This level is known as permanent or fixed working capital.

2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can
be shown in the following diagram:-

Amount of Working
Capital Temporary capital

Permanent Capital

Time
Chart 1.1:Chart Showing Temporary working capital

3
NEED FOR WORKING CAPITAL:
The need for working capital cannot be overemphasized. The need of working capital arises
due to the time gap between production and realization of cash from sales. So the working
capital or investment in current assets becomes necessary need for working capital. It arises
due to following reasons:-

A. OPERATING CYCLE
“Operating cycle is the time duration requires for converting sales into cash after the
conversion of resources into inventories.”
First of all a firm purchase Raw Material, then after some processing it is converted
into work–in–progress and after this further processing is done to convert work–in–progress
in finished goods. After the raw material is converted into finished goods, sales are made.
Sales are no always full cash sales; there are credit sales also. These credit sales after some
period are converted into cash. So the whole process takes the time. This time taken is known
as the length of operating cycle. So operating cycles includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)

So operating cycle can be known as following:-

Raw Material

Work in
Progress

Cash Collection
from
Debtors Sales
Finished Goods

Credit Cash Sales

Sales
Chart1.2: Chart showing operating cycle

4
If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types
1. Gross Operating cycle
2. Net operating cycle

1. Gross Operating cycle

Gross Operating cycle is the total time period from the conversion of Raw Material
into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP

2. Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to us
for payment to them. So this reduces our requirement of working capital. This also affects
the operating cycle. Operating cycle’s length reduces with so many days as provided by
the creditors to us. The difference between gross operating cycle and period allowed by
the creditors for payment is known as net operating cycle.
NOC = GOC – CPP

B. 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
reasons more working capital is required because funds will be involve in these safeties
stocks.

5
 DETERMINENTS OF WORKING CAPITAL:

Followings are the main determinants of working capital.

1. Nature and Size of Business :
The working capital of a firm basically depends upon nature of its business for e.g. Public
utility undertakings like electricity; water supply needs very less working capital because
offer only cash sales whereas trading & financial firms have a very less investment in
fixed assets but require a large sum of money invested in working capital.
The size of business also determines working capital requirement and it may be measured
in terms of scale of operations. Greater the size of operation, larger will be requirement of
working capital.

2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital. Manufacturing
cycle starts with the purchase and use of Raw Material and completes with the production
of finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa.

3. Seasonal variation:
In certain industries raw material is not available throughout the year. They have to buy
raw material in bulk during the season to ensure an uninterrupted flow and process them
during the year. Generally, during the busy season, a firm requires large working capital
than in the slack season.
.
4. Production Policy:
Production policy also determines the working capital level of a firm. If the firm has
steady production policy, it may require need of continuous working capital. But if the
firms adopt a fluctuating production policy means to produce more during the lead
demand season then the more working capital may require at that time but not in other
period during a financial year. So the different productions policy arises different type of
need of working capital.

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 5. Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the firm has
liberal credit policy, hence the more credit period will be provided to the debtors so this
will lead to more working capital requirement. With the liberal credit policy operating
cycle length increases and vice versa.

6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are
growing, more working capital will be needed due to arises need of more Raw Material,
finished goods and credit sales.

7. Business Cycle:
Business cycle refers to alternate expansion and contraction in general business. In a
period of boom, larger amount of working capital is required where as in a period of
depression lesser amount of working capital is required.

8. Earning Capacity & Dividend Policy:

If the firm has enough earnings and it is not paying dividend then it will not be in need of
external borrowings. If firm wants to increase its earning power then more working capital
will be required also to pay more dividend more profits are needed which give rise to
more working capital. Company is paying 42% dividend to its shareholder.

9. Price Level Changes:

Changes in the price level also effects the working capital requirements. Generally, the
rising prices will require the firm to maintain larger amount of working capital as more
funds will be required to maintain the same current assets.

10. Condition of Supply:

The inventory of raw material, spares and stores depends on the condition of supply. If
the supply is prompt the firm can manage with small inventory. However if the supply is
unpredictable then the firm to ensure continuity of production, should acquire stocks as
and when they are available and have to carry larger inventory on an average.

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 11. Other Factors:
Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, time lag.
etc. also influence the requirement of working capital.

So these are the main determinants of working capital. The importance of influence of
these determinants on working capital may differ from firm to firm.

MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT

The management of working capital is concerned with two problems that arise in attempting
to manage the current assets, current liabilities and the inter relationship that asserts between
them.
The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital is
maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as
well as excessive working capital position is bad for business.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. What should be the appropriate mix of short term financing and long term
financing for financing these current assets?

1. Current assets in relation to sales:-

If the firm can forecast accurately the factors, which effect the working capital, the
investment in current assets, can be designed uniquely. When uncertainty characteristics the
above factors, as it usually does the investment in current assets cannot be specified uniquely.

8
In case of uncertainty, the outlay on current assets should consist of base component meant to
meet normal requirement and a safety component meant to cope with unusual requirement.
The safety component depends upon low conservative or aggressive in the current assets
policy of a firm. If the firm purchases a very conservative current asset policy it would carry
a high level of current assets in relation to sales. If a firm adopts a moderate current assets
policy it would carry moderate level of current assets in relation to sales, finally is a firm
follows a highly aggressive current assets policy, it would carry a low level of current assets
in relation to sales.
MCF is following current assets policy showing moderate level of current assets in relation to
sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for Financing
of current assets:-

There are three approaches in this regard, which are discussed below:

HEDGING APPROACH
This approach is also called matching approach. In this approach there is a proper matching
of expected life of asset with the duration of fund. Usually, according to this approach long-
term sources are used for financing permanent current assets and fixed
assets & short-term sources are used for financing temporary current assets:

Temporary current assets

Short term financing

A
S Term financing
S
E Permanent current assets
T Long term financing
S

Fixed Assets

Time

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CONSERVATIVE APPROACH
In this approach there is more reliance on long-term financing in comparison to short-term
financing. Even some part of the temporary current comparison to finance from long-term
sources because long-term sources are less risky in comparison to short-term
sources.

Temporary Current Assets

A Short-term financing
S
S
E
T
S
Permanent Current Assets
Fixed Assets Long-term financing

Time

AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing and even a part of permanent
current assets is financed from short-term finance.

Temporary current assets Short term financing

A
S
S
E
T
S Permanent current assets Long term financing

Fixed Assets

Time
In MCF, the current assets are financed from short term sources as well as long term sources,
so they follow conservative approach.

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 Chapter- 2
OUTLINE OF THE STUDY

11
Outline of the study
The management of working capital is very important aspect of any company. It involves the
study of day to day affairs of the company. The motive behind the study is to develop an
understanding about the working capital management in the running business organization
and to help the company in developing the efficient working capital management. So it helps
in future planning and control decisions.

Objectives of the study

• To study the liquidity position of the company

• To analyze the working capital management practiced at MCF and suggest for
improvement in existing system

• To know overall efficacy of MCF by comparing with industry

• To render recommendations for effective management of working capital

Scope of the study

The present study relates to all the aspects of working capital management and
efficacy of MCF

Methodology
Research design: The present study is undertaken in the form of Analytical research
because, we don’t have any control on the variable. Here I have reported the facts already
available and analyzed those information in a critical manner

Data sources

The entire project is based on the Secondary data, which comprises the data collected through
Balance Sheet, reference books and articles

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 Chapter- 2
PROFILE OF THE GROUP AND UNIT

13
United Breweries Group or UB Group, based in Bangalore, is a conglomerate of different
companies with a major focus on the brewery (beer) and alcoholic beverages industry. The
company markets most of its beer under the Kingfisher brand and has also
launched Kingfisher Airlines, an airline service in India, with international flights operating
recently. United Breweries is India's largest producer of beer with a market share of around
48% by volume.[1]

The group is headed by Dr. Vijay Mallya who is also a member of the Indian Parliament.
United Breweries now has greater than a 40% share of the Indian brewing market with 79
distilleries and bottling units across the world. Recently UB financed a takeover of the spirits
business of the rival Shaw-Wallace company giving it a majority share of India's spirits
business. The group owns the Mendocino Brewing Company in the United States.

The business of UB group can be divided into four categories, they are.
1. Beverages

2. Fertilizers

3. Aviation

4. Engineering

1. Beverages

Beverage alcohol can be divided into three groups. That is

a. Spirits( United Spirits Limited)

b. Wine

c. Beer

United Spirits Limited (USL) - the INR 5700 crore spirits arm of the UB Group – is India’s
largest and the world’s 2nd largest spirits company. USL was earlier McDowell and
Company Limited. USL has a portfolio of more than 140 brands, of which 19 are millionaire

14
brands* (selling more than a million cases a year) and enjoys a strong 59% market share for
its first line brands in India. United Spirits recorded global sales of 90 million cases for the
fiscal year that ended on March 31, 2009.

United Spirits’ brands have won the most prestigious of awards across flavors, ranging from
the Mondial to International Wine and Spirit Competition (IWSC) to International Taste and
Quality Institute (ITQI); a total of 108 awards and certificates (as of June 2009). The
company is known to be an innovator in the industry and has several firsts to its credit such as
the first pre-mixed gin, the first Tetrapack in the spirits industry in India, the first single malt
manufactured in Asia and the first diet whisky in the world.
United Spirits has a global footprint with exports to over 37 countries. It has 79
manufacturing and bottling units across the country and in Nepal and is supported by a robust
distribution network to deliver its products to customers located across India. USL has a
committed 7500-strong workforce spread across its offices and distilleries in the country.

United Spirits represents the merged entities of the erstwhile McDowell & Co. Limited,
Phipson Distillery Limited, United Spirits Limited, Herbertsons Limited, Triumph Distillers
and Vintners Private Limited, Baramati Grape Industries Limited, United Distillers India
Limited, McDowell International Brands Limited and Shaw Wallace Distilleries Limited. The
erstwhile McDowell & Co. Limited was first established as a proprietary business in 1826.

USL acquired Balaji Distilleries Limited in 2008. This acquisition gave the company the
strategic advantage to consolidate the Group’s leadership position in a critical, large and
growing State like Tamil Nadu. Currently, the procedural formalities are underway for the
acquisition which will take retrospective effect from April 1, 2009.
Table 2.1: products of United Spirits limited
Whisky Brandy Rum Vodka & Gin
Bagpiper Mc dowell’s No1 Celebration Rum White Mischief
Mc Dowell’s No1 Honey Bee Old cask Rum Romanov
Director’s Special John Ex Shaw Old Adventure Rum Blue Riband
Old tavern
Haywards
Mc dowels Green La

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Wine ( Kingfisher Bohemia)
A taste nurtured in Cape Floral Kingdom, South Africa, one of the world’s oldest, most eco-
friendly wine growing regions, Kingfisher Bohemia is enriched by a 500-million year old soil
and the unique climate typical of that area. The resulting flavour is fruity, delectable and goes
Well with any food or occasions .

Kingfisher Bohemia is the result of a partnership between Kingfisher and The Company of
Wine People (COWP), a key player in the South African wine industry, both locally and
abroad.

Beer (United Breweries Limited (UBL))

The beginning of what is today The UB Group is rooted in the flagship company, United
Breweries Limited, (UBL) also referred to as the Beer Division of the UB Group. Led by Mr.
Kalyan Ganguly, President & Managing Director, it has around 48% market share in the
country.

United Breweries Limited has an association with brewing, dating back over five decades;
starting with 5 breweries in South India in 1915. From bullock cart-loaded barrels or
'hogsheads' of frothing ale, the Beer business has gone on to become the undisputed 'king' in
The Indian beer market

Here innovative, creative and aggressive marketing is complemented by a strong distribution

network. A management focused on building brand equity on one hand and exploiting it to
the hilt on the other with concerted emphasis on quality.
Its flagship brand 'Kingfisher', has achieved international recognition consistently and has
won many awards in International Beer Festivals. Kingfisher Premium Lager beer is
currently available in 52 countries outside India and leads the way amongst Indian beers in
the International market. It has been ranked amongst the top 10 fastest growing brands in the
UK.

2. Aviation

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Kingfisher Airlines Limited, is India's largest airline operating more than 400 flights a day
and having a wide network of destinations, with regional and long-haul international services.
Kingfisher is one of six airlines in the world to have a five-star rating from Skytrax. In May
2009, Kingfisher Airlines carried more than a million passengers, giving it the highest market
Share among airlines in India

The airline started operations on 9 May 2005. At the launch of the airline, Dr. Mallya said
"we are committed to achieving our ambition of making Kingfisher Airlines India's largest
private airline both in capacity and market share by 2010. The airline ushered in a new era of
luxury in India's domestic aviation sector with its brand new aircraft with stylish red interiors,
and smartly dressed crew and ground staff. Kingfisher was the first Indian airline to have in-
flight entertainment (IFE) systems on every seat with guests being able to watch live TV in-
flight.

Kingfisher took to the international skies, giving its guests a world-class experience. The
brand-new fleet incorporates the latest technology and each aircraft is fitted with a
personalized in-flight entertainment system and top quality programming content from
around the world creating an environment to cherish.

3. Fertilizers

Mangalore Chemicals and Fertilizers Limited (MCF), with a turnover of over Rs.2,470 Crore
(FY 2008-2009), is the only manufacturer of chemical fertilizers in the state of Karnataka.
The factory is strategically located at Panambur, 9 km north of Mangalore City, on the banks
of the Gurpur River, in front of the New Mangalore Port. The plant is well connected, both by
rail and road. The West Coast National Highway (NH-l7) from Kochi to Mumbai separates
MCF from the New Mangalore Port.

The Company is a part of the UB Group with Group shareholding of 30.44%. Dr. Vijay
Mallya is Chairman of the Board of Directors. The operations are managed by a team of
highly dedicated and experienced professionals.

4. Engineering

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UB Engineering- the UB Group's Engineering Division - is one of the foremost Indian
engineering companies in the field of installation of industrial plants. UB Engineering's
activities are strongly focused on the Turnkey Division for projects in Power, Fertilizers, Oil
& Gas, Fire Fighting, Effluent Treatment, Agrotech and other sectors like - concept to
commissioning, on-site fabrication, installation, overhauling and maintenance. The range of
its operations and concept to commissioning services combined with excellent track record in
industrial construction worldwide has allowed UB Engineering to cut across geographical
and political boundaries.

Fully experienced in erecting plants running into millions of dollars in India and abroad,
specialised multi-disciplinary teams adapt their skills to engineering and constructing smaller
and medium size plants with speed and efficiency.

INDUSTRY PROFILE
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Indian Fertilizer Industry
Indian fertilizer industry is one industry with immense scopes in the future. India is Primarily
agriculture oriented country and its economy is highly dependent on the agrarian produce.
The majority of the population of India lives in rural areas and the foremost occupation in the
villages is agriculture. Developments pertaining to different industries are being made on a
massive scale to change the country’s economy from an agrarian one to a industrial one. It is
extremely important for the fertilizer industry in India to have development in terms of
technologically advanced manufacturing process and innovative new age products. The first
fertilizer manufacturing unit in India was set up in the year 1906 at Ranipat in Chennai

In the present scenario, there are more than 57 large and 64 medium and small fertilizer
production units under the Indian fertilizer industry. The main products manufactured by the
fertilizer industry in India are phosphate based fertilizers, nitrogenous fertilizers, and
complex fertilizers. The fertilizer industry in India with rapid growth is all set to make a long
lasting global impression.
Some of the public sector companies in India are
• National Fertilizers Limited

• Rashtriya Chemical And Fertilizers Limited

• Madras Fertilizers Limited

• Steel Authority Of India Limited

• Paradeep Phosphates Limited

Some of the Private sector companies in India are

• Chambal Fetilizers and Chemicals Limited

• Balaji Fertilizers Private Limited

• Bharath Fertilizer Industries Limited

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 • Gugurat Narmada Valley Fertilizers Co. Ltd

• Karnataka Agro Chemicals

Pricing Policy of the Government

To encourage balanced fertilizer use and make fertilizers available to farmers at affordable
prices, the central government determines and notifies the selling price of the urea as well as
decontrolled P&K fertilizers and Complex fertilizers. The current selling price of Urea and
P&K are less than the cost of production, the difference between selling price and cost of
production is borne by Government as subsidy. Stage 3rd of the NPS (New Pricing Scheme)
for urea announced by the government of India in March 2007 expires by 31-03-2010. The
policy specifies that all Naphtha/ furnace oil/ LSHS based unit should convert to gas by 31-
03-2010. Despite readiness of the company for, non availability of gas within this deadline is
concern.
The policy on phosphatic fertilizer has been recently announced based on the
recommendation of the Tariff Commission effective from 1-4-2008 with some deviations.
The concession for the indigenous DAP is restricted at the same level of imported DAP, as
against higher rate of concession given in the past. Under the new policy, concession for
complex fertilizers will be unit based which amounts to rolling back to unit based pricing
policy. A positive feature about this policy is recognition to sulphur as a nutrient and price
compensation for usage of sulphur in manufacture of complex fertilizers.
The government of India also recently announced nutrient based pricing of subsidized
fertilizers effective from 18-06-2008, resulting in the reduction of prices of complex
fertilizers to the farmers. This, however, will lead to the additional subsidy out go to the
extent of reduction in MRPs to the farmers, as there is no reduction in cost of productio

Because of this type of fertilizer pricing policy and control on the raw material the production
of the fertilizer is shrunken. The pricing policy of the Government will affect the profitability
of the company

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 COMPANY PROFILE

Background:
Mangalore Chemical and fertilizers (MCF) is a big part of India’s growing Agricultural
industry. It is an ISO 14001 and OHSAS certified company. The company is a part of UB
group with Shareholding of 30% by Dr. Vijay Mallya is Chairman of the Board of Directors.
The operations are managed by a team of highly dedicated and experienced professionals.
MCF, with a turnover of Rs.2470 crore (FY2008-09), is the only manufacturer of chemical
fertilizers in Karnataka. The factory is strategically located at Panambur, 9km from
Mangalore City, on the banks of Gurpur River, in front of the New Mangalore Port. The Plant
is well connected, both by rail and road. The National Highway (NH 17) from Kochi to
Mumbai separates MCF from NMPT. NMPT is an all weather port capable of handling ships
up to 30ft draft. Naphtha, fuel oil, Ammonia, Phosphoric Acid the main raw materials are
obtained through the port.
The design and engineering of the ammonia/urea plants was done by Humphreys and
Glasgow limited, London, a leading international firm in the fertilizer field and their
associates, Humphreys and Glasgow consultants Pvt. Ltd, Mumbai. (The firm is now merged
with Jacobs Engineering, USA). The Phosphate Plant is designed and engineered by Toyo
Engineering Corporation of ABC and SAP respectively.
Manufacturing both nitrogenous and phosphate fertilizers, MCF has an annual manufacturing
capacity of more than two million metric tonnes of ammonia and three million metric tonnes
of urea. The company sells its products ( including specialty fertilizers) under Mangala
brand. UB group owns about 30% of the company with smaller stakes held by the Karnataka
Government and various financial institutions.

Milestones of the Company

1966 Incorporated a “Malbar Chemicals and Fertilizers Pvt Ltd” by Duggal Enterprise
1969 Govt of India stepped in as promoter after Duggal Enterprise withdrew
1971 The company was renamed as Mangalore Chemical and Fertilizer Ltd
1972 construction of the ammonia and urea plants commenced

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1976 ammonia and urea plants were commissioned and commercial production commenced
1979 Government of India took over the management
1982 commercial production of ABC started
1986 the captive power plant commissioned and commercial production of
Di- Ammonium Phosphate commenced
1990 Government of India decided to induct professional management to retrieve the
company for wich UB group was selected.
1996 revival of the company commenced rated capacity of achieved in the urea Plant for
the first time since inception and a marginal profit being declared after many years of
continuous losses
2000 Ammonia Plant revamped
2003 Urea plant revamped with 12% increase in production capacity
2004 DAP plant revamped 20:20 production added 20% increase in production capacity
2006 100TPD Sulphuric Acid Plant commissioned
2008 Installation of imported fertilizer handling unit

Nature of Business Carried

Mangalore Chemical and fertilizers (MCF) is a big part of India’s growing agricultural
Industry. It Manufactures the chemical fertilizers such as Mangala Urea, Mangala DAP,
Ammonium Bi Carbonate, mangala 20:20:00:13, sulphuric acid etc. MCF also imports some
of other products and being sold here in India. It is implemented to all over in India

VISSION, MISSION, and QUALITY STATEMENT

VISSION 2012
“To cross turnover of Rs.3000 crores and to make PBT of Rs.250crores”
MISSION
“To create value for farmers, consumers and other stake holders by providing integrated
agriculture solution and leveraging our competencies to develop synergetic business”
QUALITY STATEMENT
“Building quality into our workplace, products and service is essential to successful future for
our customers, employees, suppliers’, communication and shareholders

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Product Profile of MCF
Mangala Urea: A nitrogenous fertilizer, suitable for most crops and soil conditions.
Offered in prill form, free flowing, easy to apply and completely soluble in water.
Mangala DAP: Nitrogenous complex fertilizer, black in colour and granular form, it is free
flowing, soluble in water suitable for most crops and soill conditions, used for initial
application
Mangala AMBICA(ABC): Ammonium Bi Carbonate a food grade product used as leavening
agent, its mainly used in food industry. Product extinctions have successfully been made for
leather industry and in making jaggery. Its a white crystalline product of high purity.
Mangala 20:20:00:13: it contains 20 percent nitrogen, 20 percent potassium, and 13 percent
sulphur, which is suitable for all crops at initial stage and crop dressing. These are in
granules of light grey, which makes it easy to apply.
Sulpuric acid: it is produced mainly for augmenting the requirement for manufacturing of
DAP and 20/20.

Table 2.2: Table Showing Ownership Pattern of MCF, Mangalore as on 31.03.2009

Categories Number of Shares Percentage of Total
UB Group - Promoters 36076775 30.44
Government 3759884 3.17
Financial Institution/ Banks 2918346 2.46
Mutual Funds 148975 0.13
Insurance Companies 207887 0.18
Bodies Corporate 12761662 10.77
Foreign Institution 200270 1.69
Public 56393665 47.58
Others (Clearing House, Foreign 4247686 3.58
Nationals, NRI’s Societies and Trust)
TOTAL 118515150 100

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Achievements and Award
From the 1996-97 performance of the company improved dramatically. Production levels of
in all plants increased considerably. In fact the rated capacity of Urea was manufactured for
the first time in 1996-97 since inception in 1976.

Following are the awards received by MCF

1. FAI awards for ‘Improvement in overall performance of a company’, for three
consecutive years 1996-97, 1997-98, 1998-99
2. Letter of recognition from Directorate General of Factory Advisory Service and
Labour Institution (DGFASLI) for maintaining good safety an occupational health
standards in 1997.
3.Commercial taxes department award for ‘ Honest Tax Paying Businessmen’. Its an
unique initiative taken by government of Karnataka to honour the prompt tax payers.
Mr P C Jain, senior Vice President (Works), MCF on 18th march 2007.

McKinsey’s 7s model

24
The 7-S-Model is better known as McKinsey 7-S. This is because the two persons who
developed this model, Tom Peters and Robert Waterman, have been consultants at McKinsey
& Co at that time. They published their 7-S-Model in their article “Structure Is Not
Organization” (1980) and in their books “The Art of Japanese Management” (1981) and “In
Search of Excellence” (1982).
The 7’s model of McKinsey is a Value Based Management (VBM) model that describes how
one can holistically and effectively organise a company. Together these factors determine the
way in which a corporation operates.
Elements of 7’s model are,
1. Structure

2. Strategy

3. System

4. Skill

5. Style

6. Staff

7. Shared values

The first three element Structure, Strategy and System are considered as the hardware of
success. The next four elements skills, style, staff, shared values are the software of the
company

Chart 2.1: chart showing 7S model

I. Structure

25
 Structure refers to the way in which the organisation units relate to each other, that is
centralised , decentralised, matrix, network, functional, divisional etc. The Board of
Directors frames the organisational structure of MCF. They have a formal organisation
structure that is flexible to changing conditios. It is revised time to time to increase
growth opportunities. The structure shows delegation of authority and responsibility
which is used to co ordinate activities of various departments.
The structure followed in MCF is functional organisation structure. Here functional
structure is classified as technical and non-technical. In MCF the works director plays a
very important role. The chairman looks after the whole company and he is in top
position of the company followed by the managing directors.
Table2.3: Table Showing Persons appointed in Important Designation
Name Designation
Dr. Vijay Mallya Chairman
Deepak Ananad Managing Director
Prabhakar Rao Director (Works)
Apollo Fernandes Vice President HR
H.M. Kshetrapal Senior Vice President Marketing
S. Ramprasad Vice President( Legal) and Company
secretary
A.Rudrachary Sr. Vice President Commercial
K. Raghuveeran Vice President Finance

Finance Head
R.L Kamath

Treasury, Project
Finance Management accounting,
Accounting Accounting Commercial taxes
M Suresh Rao H.L Rao Sudag
Kamath

Import/Repairs & Treasury, Project

B.P, Insurance Raw materials accounting,
Maintenance Bills Workmen payroll & MGT Staff
accounting, Commercial taxes,
Vincent statutory returns and Costing budgeting
Payrols & Benefits transport bills.
Goveas P.S Dinakar Indrayadav Pauline D’Souza Divakar
P.S Karanth Acharya

Raw material
accounting, FICC
& CAPEX
R.V Shroff

Chart 2.2:Organisational structure of Finance Department

STAFF:

26
 The staffs in the MCF is classified into two categories, they are technical staffs and
non technical staffs. In MCF the staffs are well trained and usually are well versed with the
latest technology when they enter the company, MCF also has some training programmes
particularly to the staff members. At present the company has 879 employees, out of them
652 are of managerial, 141 workmen and remaining 86 of contract workers. The company
recruits outstanding management, engineering and agriculture graduates who are put in the
jobs after extensive practical training. All employees undergo a unique change program
“Mangala Initiative for Change”. This program focuses on the personal change and facilities,
improved relationships and increases contribution at home, work and the workers around
them. The company has its own township in Mangalore 8 km from the plant that houses
nearly 200 families.

SKILLS:
MCF possesses labour forces with various Skills. The company encourages and
provides training for the development of skills depending on whether the employees is at the
operating level or at the superior level.
The superiority level skill is leadership, motivation, communication and
administration. MCF will give training to develop these skills and conduct self development
programs. MCF expects all its employees to be experts in particular areas.
At the operational level employee require to posses various skill in relation to their
job and other aspect like self development, work culture, etc the skill possessed by the
workers at the operational level includes latest techniques in welding technology, material
management and handling production control, etc. All employees are trained in order to
improve their skill so as to help them to maximize their overall efficiency and productivity.
The personal and administration department will keep updating the technical and
professional skill of the employee in order to change the organizational out door, to bring
changes in the attitude and develop good organizational culture.
Here the skills are divided into two categories:
o Managerial

o Technical

STYLE:

27
 Style of leadership or relationship refers to the manner in which individuals use their
talents, values, knowledge, judgment and attitudes to lead and guide others. In any
organization style of leadership determines the success or failure of the establishment to a
very greater extent.
MCF follows participative style of management. The management of MCF
encourages the employees to participate in decision making. They constantly try to improve
interpersonal relationship and improve team building. The authority and responsibility is
clearly defined. Managers provide enough flexibility to the employees in carrying out their
work. The style of functioning is procedural and no discrimination exists between employees.
MCF maintains good industrial relations.
MCF considers human resources as its main resources. It counts land and building,
machinery or any other asset after that of human assets. The management of the firm believes
that the profitability and potential for the growth depends on attitude, resourcefulness,
integrity, courage and dedication of the employees at all level of the organization.

SHARES VALUES:
Pollution Control Measures:
With the aim of ensuring minimum disturbance to the ecology, all possible
precautions have been taken to avoid pollution. As a good corporate citizen, the company has
gone beyond merely complying with the pollution control norms. We are committed to
preserving and maintaining the ecological balance. Change from a chromate- based program
to a non toxic phosphate based system was made in the cooling water treatment system in
1991.
Welfare Measures: Mangala Raitha Suraksha Vima Yojana
The company has introduced an innovative Accident Insurance Scheme for its
customer, farmers called the ‘Mangala Raitha Suraksha Vima Yojana’ from September 2002.
The scheme is open to all Mangala farmers in the Company’s marketing territory. The
nominee of the insured gets a financial benefit up to Rs.25000 in the event of accidental death
or partial disablement. The entire expenses of this Group Insurance Policy are met by the
company at no cost to the farmer. So far 1, 49,360 policies have been distributed. Ten
farming families have so far benefited from this scheme.
Sports, Environmental and Other activities:
o Providing assistance to pursue training in sports.

28
 o Conducting public awareness program about environment, Fire Fighting and Safety
awareness in surrounding villages.

o Providing assistance for beach cleaning.

o Providing teachers for the special school which is meant for mentally challenged kids.

STRATEGY:
MCF Ltd has implemented various strategies for the upliftment and up gradation of
the company. The strategies used by the company have helped them in achieving their goals.
MCF has used such a strategy keeping in consideration of people living around the company.
Following are the important strategies applied by MCF:

1) Differentiation Strategy:

It produces different products such as Mangala Ammonia, Mangala DAP, and

Mangala Urea etc and supplies it to needed agriculture areas. Since it has different
products under one brand name it can cover or attract more market.

2) Low Cost Strategy:

From the competitors information it is clear that it has applied lowest cost
strategy when it is compared to competitors’ price

3) Eco- Friendly Measures:

a. Waste water Treatment:

The waste water treatment plant which has been installed in the company
treats factory waste water which contains sulphide, carbon monoxide, phosphate etc.
this water treatment meets the Karnataka State Pollution Control Board (KSPCB)
which helps in treatment oil separation, chemical treatment and filtration of the
treated waste water. This treated water is discharged into the sea at a distance of 900m
and at a depth of 605m. The location of discharging point was selected by the

29
 National Institute Oceanography after carrying out a detailed study on the effect of
this water on marine life. The quantity of treated waste water and the marine
environment around the discharge point is being monitored by an independent agency
throughout the year
b. Waste Elimination Measures:

The factory has taken sufficient measures for the purpose of waste elimination.
An adequate pollution control facility according to the environmental standards has
been placed most priority given by the factory management.

Some of the other measures adopted by MCF are:-

o Liquid Effluence: This evades used in production process Gets contaminated with oil
and other pollutes and has to be treated before discharging from factory.

o Gaseous Emissions: Controlling of gaseous emissions, particularly with respect to

sulphur dioxide, is one of the major tasks of the factories.

o Solid Waste: Chemical is the main hazardous solid waste generating in the factories.

SYSTEM:
System refers to all the rules and regulations both formal and informal that
compliment the organization structure. It includes production plans, control system, cost
accounts procedure, capitol budgeting system, and performance evaluation system. These
systems include both Core Process system and The Support system.
a. Core Process System:
The core process system includes the primary activities like product
development, demand management and order fulfillment.
MCF develops new products and tests them in market in order to know the
market for that product. MCF has introduced three new products in the market i.e.
Complex Fertilizers, Granulated fertilizers and Muriate of Potash. It is also having
the plan to introduce one more product into the market. While introducing the new
product into the market it conducts various tests and market research and
depending on the results of test marketing and research the production of particular
product takes place.

30
 The production will depend on the decision taken by the Vice President. Vice
President Prepares the production plan Monthly wise and product wise for every
year, taking into consideration government rules and regulations, policies, financial
position and health of the plant. Production plan will be set after discussing with
the area officers, managers and dealers by considering crop pattern, rainfall and
irrigation pattern.
MCF will fulfill the demand by quickly delivering the product and also
delivering good quality product to the customers. MCF will get orders from various
area offices and will supply the goods to various offices or the dealers. MCF will
understand the needs of the customers and provide good quality product and satisfy
customers.

b. Support System:
The various support systems include capital resourcing, human resourcing,
and intimation resourcing and control system.
The financial performance of MCF is very progressive. Capital of the
company has been increased with the strong financial discipline and straight
control exercised over cost. The working capital management could be effectively
managed and also cumulative preference shares have been redeemed. MCF is now
smoothly doing the costing, payroll activities preparation and maintenance of
personnel and production budget.
Production capacity of the industry has increased since 2000 and has achieved
380000 MT productions. Production Capacity has increased to 340000 to 380000
per anum.
All round improvement in the plant safety equipment reliability and
performance was achieved through intensive training program, implementing Key
result area, 5’s and Total Production Maintenance techniques. The employee
suggestion scheme was introduced in the year 2003 in order to get enthusiastic
response. All the employees participate in decision making. Information flow top
to bottom and bottom to top is running smoothly and effectively.

31
Chapter- 4
Data Analysis

32
 Chapter- 4.1
Working Capital Analysis

1.OPERATING CYCLE ANALYSIS

33
Operating cycle refers to the time period which starts from the raw material purchases and
ends with realization of receivable. So it is total time gap between raw material purchases to
total debtors’ collection. This is also known as working capital cycle. Operating cycle is
therefore expressed in terms of months or weeks or days. The higher the operating cycle
period, higher the working capital requirement. It comprises of raw material conversion
period, WIP conversion period, FG conversion period and debtors’ conversion period and
creditors period. The basic reason for calculating operating cycle is to find out the means for
reducing the duration of operating cycle because if duration of operating cycle will be less
than working capital requirement will be less.
OC = R + W + F + D – C
Where,
R = raw material conversion period
W = work in process period
F = finished goods conversion period
D = debtor collection period
C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

34
 Raw materials conversion period is the averge time taken to convert materials into work
in progress. By using following formula we get raw material conversion period
RMCP = Average Raw Material Stock X 360
Raw Materials consumed during the year

Table4.1.1 Table Showing Raw Material Consumption

period
Average Raw Materials Raw Material
Year Consumed consumed RMCP
2005 4172.21 54327.51 44
2006 4784.96 69765.6 32
2007 5858.48 76465.67 30
2008 9310.03 85814.45 44
2009 11687.43 146282.4 49

Chart 4.1.1: Chart Showing Raw Material Conversion Period

Here we get the time taken to convert raw materials to work in progress. Currently its 49 it
has increased from 44 in 2008.

(2) Work in Progress Conversion Period (WIPCP)

35
 Work in progress conversion period refers to convert work in progress to finished goods.
By applying following formula we’ll get WIPCP.

WIPCP = Average stock in progress X 360

Cost of Production

Table 4.1.2: Table Showing Work In Progress conversion Period

Average Work Cost of
Year In Progress production WIPCP
2005 0 82801.05 0
2006 1943 107590.6 7
2007 5978 126510.3 17
2008 6786 157476 16
2009 10374 238098.3 16

Chart 4.1.2: Chart showing Work In Progress Conversion Period

Here we get how many days how many days it takes to convert work in progress to finished
good. The time taken to convert work in progress conversion is 16 days and it remained the
same when compared to 2008.

(3) Finished Goods Conversion Period (FGCP)

36
 Finished goods conversion period refers to average time taken to sell the finished goods .
following formula can be used to get FGCP
FGCP = Average Finished goods inventory X 360 X 360
Cost of goods sold
Table 4.1.3: Table showing Finished Goods Conversion Period
Average Cost Of
Finished Goods
Year Goods sold Period
85108.0
2005 2237.75 6 13
133252.
2006 3778.415 1 16
104746.
2007 6593.625 7 18
160670.
2008 2598.595 2 9
244146.
2009 1795.815 9 4

Chart 4.1.3: Chart Showing Finished Goods Conversion Period

Here we get how many days it takes to sell the finished goods. Currently its 4 days compared
to 9 in 2008. Because of this company saves lot of amount in storage of inventory.

37
(4) Debtors’ Conversion Period (DCP)
Debtors conversion period refers to the time taken by the company to collect the amount of
the credit sales. Debtors conversion period can be found out using following formula.
DCP = Average Debtors X 360
Credit Sales

Table4.1.4: Table Showing Debtors Conversion Period

Average
Year Debtors Cr Sales Days
2005 5294.28 87919.4 22
108384.
2006 2877.425 1 10
137255.
2007 3188.4 9 8
162539.
2008 4589.695 1 10
247197.
2009 2153.69 9 3

Chart 4.1.4: Chart Showing Debtors Conversion Period

Here we find out the days required for converting credit Sales to cash. Lesser the number of
days more is the benefit for the MCF. Currently the number of days required for Debtors
conversion period is only 3compared to 10 in last year. This is only a calculated figure
because the company grants credit for a period upto 30 to 45 days. As the conversion period
38
is only 3 company need only little amount of working capital, so the company is having great
advantage

(5) Credit Conversion Period (CCP)

Credit conversion period refers to the average time taken by the firm in payment to its
suppliers. We get credit conversion period by using following formula
CCP = Average Creditors
X 360
Credit Purchases
Table 4.1.5: Table showing Credit Conversion Period
Average
Year Creditors Purchases Days
2005 5294.28 478496 16
2006 2877.425 583905 13
2007 3188.4 928911 16
2008 4589.695 1166141 12
2009 2153.69 1260930 11

Chart 4.1.5: Chart showing Credit Conversion Period

Here we got how many days in average the company takes to make the payement. During the
current year the number days stands at 11 compared to 12 in previous year. As the days have
reduced the company is gaining credit worthiness in the eyes of suppliers. But its loosing the
opportunity cost,

39
Gross Operating Cycle
The total of inventory conversion period and debtors conversion period is known as gross
operating cycle.

Gross Operating Cycle = Inventory Conversion Period+ Debtors conversion Period

Table4.1.6: Table Showing Gross Operating Cycle

RMCP WIPCP FGCP DCP GOCP
44 0 13 22 79
32 7 16 10 64
30 17 18 8 73
44 16 9 10 78
49 16 4 3 72

Chart4.1.6: Chart showing Gross Operating Cycle

As Gross operating cycle refers to the time taken to convert raw material to inventory and
collection of debtors, lesser the duration better is the condition of company collection policy.

40
The gross operating cycle is 72 in 2009 which is reduced by 6 days compared to 78 in 2008.
This is favorable for the company

Net Operating Cycle

Net operating cycle is the difference between gross operating cycle and payables deferral

period. It is also known as cash conversion period. interpreted as the number of days
between the payment for inputs and getting cash by sales of commodities manufactured from
that input. The fundamental formula that is applied for the calculation of cash conversion
cycles as follows:

Net Operating Cycle = RMCP + WIPCP + FCP + DCP – CCP

Table 4.1.7: table showing gross operating cycle

RMCP WIPCP FGCP DCP CCP NOC
44 0 13 22 16 64
32 7 16 10 13 51
30 17 18 8 16 57
44 16 9 10 12 67
49 16 4 3 11 61

Chart 4.1.7: Chart showing gross operating cycle

Here we find out how many days it takes us to get the money back which we have paid while
buying raw materials. Now the days required to get the cash converted is 61 is compared to

41
67 in 2008, it means that the time taken for cash conversion is reducing which is good for te
company. And less amount of working capital is required.

3. Computation of Ratios
Ratio analysis is a technique of financial analysis and working capital management. It is a
technique of calculating various ratios from figures available in the financial statements and
companies ratios of previous years or with those of other concerns or with the standard ratios
and drawing further conclusion.

Nature of Ratios

Ratio analysis is the process of establishing different ratios in order to help the
management in taking decisions. It involves following four steps:

o Selection of relevant data from the financial statements.

o Calculation of relevant data from selected data

o Comparison of those ratios with those of previous years or with those of other
organization or with the standard ratio.

o Drawing conclusion based on the interpretation of ratios.

Importance of ratio analysis

Ratio analysis of the financial statements of an organization is much of importance to

a number of persons such as shareholders, creditors, employees, customers, legal authorities
and general public for making decisions. Following are the relevant points reviling
importance of ratio analysis.

o Measuring the general efficiency: Ratios enable the people to summarize and simplify
the mass of accounting data. They act as an index of efficiency of the enterprise.

o Measuring financial solvency: Ratios are the useful tools in hands of the management
to evaluate firm’s performance over a period of time. They point out the firm’s
liquidity position to meet its short-term and long-term obligation.

o Forecasting and planning: Ratio analysis is a important tool to the management in its
budgeting activities. Ratio analysis enables the management to prepare properly

42
 different budgets, to formulate scientific business policies and to prepare the future
plan of action.

o Decision making: Ratio analysis through light on the degree of efficiency of

management and to extent of utilization of the enterprise. Helps the management in
taking decisions.

o Taking corrective action: Ratio analysis helps in making inter-firm comparisons. If

the comparison shows unfavourable variations corrective steps can conveniently be
taken.

Limitation of ratio analysis

Ratio analysis is no doubt an important tool of financial management but ratios must
be used carefully because of its following drawbacks:

o Most important drawback of ratio analysis is that there is no consistency and

uniformity in the definition of different ratios.

o Inaccurate financial statements: Ratios are calculated from figure contained in

financial statements. If the data in financial statements happen to be inaccurate, ratios
calculated on the basis of that turnout to be ineffective.

o Difficulty in establishing standard ratios: Ratios convey proper meaning only when
they are compared with the standard ratios already developed. But it’s very difficult to
set standard ratios under changing socio-economic environment. Further, even the
standard ratio may have to be changed from time to time.

o No proper basis for comparison: Ratios facilitate inter-firm comparison but it’s very
difficult to evaluate differences in factoring affecting one firm’s performance in
relation to another. Several differences exists, those such as age of the plan, size of the
firm, degree of mechanism etc. In fact no two firms are identical in every respect.
Thus ratios of one firm cannot be fully comparable with those of other firm.

o Quality aspect ignored: Ratios express relationship between two variables to measure
efficiency. But quality places a very important role presenting overall efficiency of
the enterprise, which is ignored in the ratio analysis.

43
(A) Liquidity Ratio:

a. Current Ratio

The current ratio is the ratio of total current assets to total current liabilities. It
calculated by dividing current assets by current liabilities

Current ratio = Current assets/current Liabilities

Table 4.1.8: Table Showing Current Ratio of MCF, Mangalore (Rs in Lakhs)
CURRENT
YEAR CURRENT ASSETS LIABILITIES CURRENT RATIO
2005 30226.71 10586.02 2.85
2006 48738.93 20926.23 2.33
2007 53382.81 22984.66 2.32
2008 76053.09 29547.63 2.57
2009 78835.35 30190.6 2.61

Chart 4.1.8: Bar chart showing current ratio of MCF, Mangalore

44
The current ratio of a firm measures the firm’s short term solvency. i.e ability to meet the
short term obligation. It indicates the rupees of current assets available for each rupees of
current obligation payable. Higher the current ratio higher is the amount available to pay for
meeting current obligation. By looking into table 4.8 we can say that the average current ratio
of the company for the past five years is showing very good, which shows the ability to pay
off the current obligation is high.
The company is in very liquid situation where the company’s current ratio is more than the
standard 2:1 this is mainly because of high inventory in those periods. It can be seen that only
in the year 2006 there was a marginal decline in current ratio by .053 compared to previous
year this is mainly because of stringent credit management in terms of over extended account
received. It shows that company had a good short term financial solvency and liquidity
position.

b. Quick Ratio

This ratio is also known as quick ratio or acid test ratio. It is a more rigorous test of liquidity
than the current ratio. It is based on those current assets which are highly liquid. Inventory
and prepaid expenses are excluded because they are deemed to be least liquid component of
current assets. A high quick ratio is the indication that the firm is liquid and has the ability to
meet its current liabilities in time and on the other hand low ratio represents liquidity position
is not good.
Quick Ratio = Quick or Liquid Assets
Current Liabilities
Quick Assets = Current Assets – Inventory – Prepaid Expenses

Table 4.1.9: Table Showing Quick Ratio of MCF, Mangalore (Rs in Lakhs)
CURRENT
YEAR QUICK ASSETS LIABILITIES CURRENT RATIO
2005 20817.47 10586.02 1.97
2006 34513.8 20926.23 1.65
2007 39186.53 22984.66 1.70
2008 58985.64 29547.63 2.00
2009 61758 30190.6 2.05

45
 Chart 4.1.9: Bar chart showing quick ratio of MCF, Mangalore

Interpretation: Quick Ratios refer to current assets which can be converted into cash
immediately or at a short notice. Quick ratio represent a rigorous measure of firms ability to
service short term laibility. From the above table 4.2 we can say that the company is having
sufficient money to meet current obligation.
In the current year 2009 company showed a quick ratio of 2.05:1. It indicates there is a jump
of .05 because of reduction in the inventory from 14225 crores to 9409 crores, the company
is in liquid postion as the ratio is around 2:1 in all years. Totally we can say that company is
maintaing its liquidity position more than the industry standard of 1:1. MCF could have
invested the same amount in other profitable channels to get more returns.

46
 c. ABSOLUTE LIQUID RATIO

Although receivables are generally more liquid than inventories yet there may be doubt
regarding their realization into cash in time. Absolute liquid ratio shows the relationship
between liquid assets which include cash, bank and marketable securities.
Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities

Table 4.1.10 table showing Cash Ratio of MCF, Mangalore (Rs in Lakhs)
YEAR CASH QUICK LIABILITIES CURRENT RATIO
2005 1609.05 10586.02 0.15
2006 365.46 20926.23 0.02
2007 1584.58 22984.66 0.07
2008 5991.1 29547.63 0.20
2009 1609.05 30190.6 0.05

Chart 4.1.10: Chart showing Cash Ratio of MCF, Mangalore

The acceptable standard for this ratio is 0.5:1. Thus spinning we can say that in all the years,
it is below the standard due to very less cash and bank balance maintained because major
cash receipts and payments are handled by corporate office. It is very less in 2005-06, 2008-
09 due to increased cost of production
d. WORKING CAPITAL TURNOVER RATIO :

47
Working capital turnover ratio indicates the velocity of the utilization of net working capital.
This ratio measures the efficiency with which the working capital is being used by a firm.
Working Capital Turnover Ratio = Sales
Net Working Capital
Table 4.1.11: Table showing Working Capital Turnover Ratio of MCF, Mangalore
Working Capital
YEAR Sales (Rs.lakhs) working capital Turnover Ratio
2005 87919.4 19640.69 4.48
2006 108384.1 27812.7 3.90
2007 137255.86 30398.15 4.52
2008 162539.14 46505.46 3.50
2009 247197.93 48644.75 5.08

Chart 4.11: Chart showing Working Capital Turnover Ratio of MCF, Mangalore

This ratio indicates the number of times the working capital is turned over in the course of a
year. A high working capital ratio indicates the effective utilization of working capital and
less working capital ratio indicates less utilization. In the year 2009 the working capital is
well utilized where the ratio is 5 times which indicates that working capital is being well
utilized and proves efficient management.

3. Common size statement analysis

48
This analysis is mainly to see the composition of working capital. Its purpose is to see the
percentage of each asset to the total asset and percentage of each liability to total liability.
Table 4.1.12: table showing balance sheet of MCF. Managalore (Rs.lakhs)
Percent Percent
Mar- age to
Mar- age to
Particulars 09 total 08 total
LIABILITIES
11854.8 11854.8
Capital 6 14.40 6 14.40
27064.8 25425.5
Reserves & Surplus 1 32.89 1 32.20
39120.4 35575.4
Secured Loans 9 47.53 3 45.05
unsecured loans 559.01 0.68 2425.46 3.07
deferred tax liability, 3701.96 4.50 3689.61 4.67
82301.1 78970.
TOTAL 3 100 87 100

ASSETS
61005.9 58129.0
Gross Block 6 74.13 1 73.61
29013.8 27221.3
Less: Depreciation 8 35.26 2 34.47
31992.0 30907.
Net Block 8 38.87 69 39.14
1557.1
capital work in progress 1659.3 2.02 2 1.97
33651.3 32464.
net Fixed Assets 8 40.89 81 41.11
Current Assets, Loans &
advances
17077.3 17068.0
Inventories 5 20.75 5 21.61
Sundry Debtors 905 1.10 1701.19 2.15
Cash & Bank Balances 1609.05 1.96 5991.1 7.59
other current assets 195.63 0.24 482.63 0.61
59048.3 50810.7
loans and advances 2 71.75 2 64.34
78835.3 76053.
current assests 5 95.79 69 96.31
Less: Current Liabilities and 29547.6
provisions 30190.6 36.69 3 37.42

49
 48644.7 46506.
NET CURRENT ASSETS 5 59.11 06 58.89
P & L A/c 190.28 0.23 0.00
82296. 78970
TOTAL 13 100 .87 100

The major portion of current asset is blocked in the loans and advances. More than 70% of
current assets is blocked in the form of Loans and advances. The amount blocked in terms of
loans and advances has increased which has increased the need of working capital. But the
portion of inventories has been decreased from 21% - 20% in 2009. Even the cash balance
has decreased from 7.59%- 2% in 2009. But the sundry debtors’ percentage has fallen from
2%-1% in 2009. Overall the current asset has decreased but the current liability has also
increased marginally. Because of which there is increased need for working capital in the
business.

4. ANALYSIS ON THE BASIS OF CHANGES IN WORKING CAPITAL

Table 4.1.13: table showing changes in Balance sheet between 2008 and
2009(Rs.lakhs)
Mar- Mar- Changes in
Particulars 09 08 balance sheet
LIABILITIES
11854.8 11854.8
Capital 6 6 0
27064.8 25425.5
Reserves & Surplus 1 1 1639.3
39120.4 35575.4
Secured Loans 9 3 3545.06
unsecured loans 559.01 2425.46 -1866.45
deferred tax liability, 3701.96 3689.61 12.35
82301.1 78970.8
TOTAL 3 7 3330.26

ASSETS
61005.9 58129.0
Gross Block 6 1 2876.95
29013.8 27221.3
Less: Depreciation 8 2 1792.56
Net Block 31992.0 30907.6 1084.39

50
 8 9
capital work in progress 1659.3 1557.12 102.18
33651.3 32464.8
net Fixed Assets 8 1 1186.57
Current Assets, Loans &
advances
17077.3 17068.0
Inventories 5 5 9.3
Sundry Debtors 905 1701.19 -796.19
Cash & Bank Balances 1609.05 5991.1 -4382.05
other curret assets 195.63 482.63 -287
59048.3 50810.7
loans and advances 2 2 8237.6
78835.3 76053.6
current assests 5 9 2781.66
Less: Current Liabilities and 29547.6
provisions 30190.6 3 642.97
48644.7 46506.0
NET CURRENT ASSETS 5 6 2138.69
P & L A/c 190.28 190.28
82296. 78970.
TOTAL 13 87 3325.26

As we have a look on the schedule of changes in working capital over the years 2008 and
2009 we can see that inventories and loans granted have increased, but debtors, cash balance
and other current asset have decreased among current assets. And current liabilities have also
increased. Because of which we can say that the amount of working capital have increased.

51
 Chapter- 4.2

MANAGEMENT OF INVENTORY

52
 MANAGEMENT OF INVENTORY

Inventory is very important part of current assets. Approximately 60% part of current assets
is inventories. So the proper management of inventory is required for successful working
capital management. As the larger amount of funds is involved in the inventories, so it must
be carried with care for proper utilization of funds.

Nature of Inventories
MCF has classified its inventories into four major categories, namely;
(a) Raw Material: These are those basic inputs which are converted
into work-in-progress after the manufacturing process. Raw materials are purchased
for production and storage purpose.
(b) Work-in-Progress: These inventories are semi-manufactured
products. These products are those which are ready for sale.
(c) Finished Goods: These are completely manufactured products.
These products are those which are ready for sale.
Here is one another type of inventory also which is not directly related with
production but facilitate in production process. These inventories are known as
supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.

53
OBJECTIVES OF INVENTORY MANAGEMENT
There are so many objectives of inventory management. These objectives may differ from
firm to firm. The main objectives of inventory management are:
 To make adequate investment in inventories so that funds can be best utilized.
 Smooth production in present and future.
 Time availability of inventories.
 Smooth and uninterrupted sale processes.
 Minimize the cost related with inventories.
 To meet the future price change.
 To get adequate return on investment.

INVENTORY MANAGEMENT TECHNIQUES

For inventories management the two questions must be answered. First, that how much be
ordered in one order so that excess or insufficient inventories can be avoided. Secondly, when
the order should be placed, so that timely availability of inventory is there. To get answer of
these two questions we use two techniques which are following:

1) ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to know
how much we must order in single time. So that all the cost related with inventory are
minimum. Determining an optimum inventory level involves two types of costs (a) Ordering
Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes the total of
ordering and carrying costs.
(a) Ordering Costs – All these costs which are incurred in placing one order. It
includes; requisition, transportation, receiving, inspecting, clerical and staff services.
Ordering costs are fixed per order. Therefore they decline as the order size increases.
(b) Carrying Costs – Cost incurred for maintaining a given level of inventory are
called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs
vary with inventory.
To calculate economic order quantity there is formula:
EOQ = 2AO/C
Where,

54
A = Annual requirement
O = Ordering cost per order
C = Carrying cost of inventory

2) REORDER POINT
Reorder point is that inventory level at which an order should be placed to replenish the
inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage (c)
EOQ
Lead Time is the time normally taken in replenishing inventory after the order has been
placed.
Average Usage is the inventory used on average daily basis or average weekly basis.
So, Reorder Point = Lead Time x Average Usage
If the firm also maintains safety stock then the reorder point will be:
Reorder Point = (Lead Time x Average Usage) + Safety Stock
So when the inventory of reorder point will be in store then the order will be placed for
purchase of inventory. In this way, the production process will not stop because the inventory
will be available for that period.

INVENTORY MANAGEMENT IN MCF

Inventory Management of MCF is systematic and organised. MCF has a different stores
department. All the inventories except raw material purchases are handled by stores
department. Stores department does its work very efficiently.

INVENTORY PLANNING
For the planning of inventory requirement, budgets are prepared by different departments as
per requirements. The material issued during the budget period will not be more than the
budget. This rule is strictly followed. For Naptha, requirements are planned in consultation
with production department. Stores department have nothing to do with it.

PURCHASE OF RAW MATERIAL

As in MCF raw material are purchased in the following procedure. First of all the
requirement for raw materials are determined by the production department every week in the
form of ‘Purchase Requisition’ which contains name of Raw materials and the quantity. The
quantity will be decided by the system. This requirement is sent to Purchase departments.
55
Purchase department will invite tender from a minimum of four Vendor. All these Tenders
will be sealed, and seal will be opened in Finance Department and comparison will be made
between the Tenders and lowest tender will be selected. Finally best tender will be selected
and sent back to Purchase department.

STORAGE CAPACITY OF MCF

Regarding Raw Material Inventory, MCF has 2 terminals which facilitates direct unloading
from a ship. Ammonia is stored in 10,000MT atmospheric pressure storage tank. And
Phosphoric Acid is unloaded into two tanks of 8000MT each capacity.

Regarding Finished Product Inventory, MCF has installed 20000MT capacity silo to handle
fertilizer imported through ships to India. Where the Materials will be directly sent Silo for
Bagging and dispatch.
For products manufactured at MCF Mangalore unit, two Silo of 30000 and 10000 MT have
been installed.
ISSUING OF INVENTORY
When any department requires any inventory, it sends its requirement to stores department.
The maximum time within the requirement must be met is 72 hours.
Material is issued on the basis of monthly weighted average method.

INSPECTION OF INVENTORIES
Inspection of inventory is made at the end of month randomly. The stock taking of all the
items is not possible keeping in view number of items.

SAFETY STOCK OF INVENTORIES

For the continuous production process, safety stock of inventories is maintained. Inventories
stock is maintained according to supply period and as per their requirement.

INVENTORY CONTROL
Inventory control is done by budgets. As the budgets are prepared for the planning purpose.
Total requirements for inventory during financial period are determined by budget. When the
material is issued to any department then the total amount of material issue is deducted from
the budget of that good and balance is calculated, only this balance quantity of inventories

56
will be issued during the remaining financial period. These records are maintained on daily
basis. For different units, the records are prepared separately.
For inventory control not any ABC analysis or VED analysis is done. The company also
doesn’t follow standardized system of inventory like EOQ. In case of raw material as the
input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the
cotton season. In case of spares & stores, the inventory is easily available in market;

therefore, the same is procured on requirement basis. The company always maintains stock of
critical items, the failure / non-availability of which can cause less of production. As all the
units of group are in spinning the stock of critical items, where the high value is involved in
financial terms, the inventory is maintained in single unit. This could save lot of money
which can be utilized in another area and it also helps to maintain inventory at optimum level.
So we can say that overall inventory management of MCF is quite satisfactory.

ABC Analysis
Table 4.2.1: Table showing ABC Analysis of Finished goods
Items % of total Usage Value(Rs.) Usage Value% Category

Mangala Urea A
Mangala DAP
Mangala 14.39 585.87 10.47 B
20:20:20
TR Mop
17:17:17 70.22 92.83 1.82 C
TR Urea
TR DAP
TR SSP
TR Zinc Sulphate
Gypsum
TR Filler
TR Neem
ABC

By looking at the table we can see 15.39% of the quantity of items and items valuing
87.71% belonging to ‘A’ category. 14.39% of the quantity of items and items valuing 10.47%

57
belongs to ‘B’ category and 70.22% the quantity of items and items valuing only 1.82%
belong to ‘C’ category.
The items coming under A,B and C respective are listed below:
o A category- Mangala Urea, Mangala DAP

o B category- Mangala 20:20:20, TR Mop

o C category- 17:17:17, TR Urea, TR DAP, TR SSP, TR Zinc Sulphate,

Gypsum, TR Filler, TR Neem, ABC.

This implies that the Mangala Urea and Mangala DAP should be given strict supervision as it
comes under ‘A’ category followed by ‘B’ and then followed by ‘C’.
ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN MCF
I. INVENTORY TURNOVER RATIO
It indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which the firm is to manage inventory. A high inventory
turnover indicates efficient management of inventory because more frequently the stocks are
sold, the lesser amount of money is required to finance the inventory.
Inventory (Raw Material) Turnover Ratio = Cost of Goods sold.
Average Inventory
Table 4.2.2: Table showing Inventory Turnover Ratio of MCF, Mangalore
Cost of goods sold Average Stock turnover
YEAR (Rs.crs) Inventory ratio
2005 790.55 87.87 9.00
2006 976.86 118.17 8.27
2007 1238.11 142.1 8.71
2008 1468.14 156.32 9.39
2009 2179.01 170.73 12.76

58
 Chart 4.2.2: Chart showing Inventory Turnover Ratio of MCF, Mangalore
Inventory turnover ratio indicates how many times stock has turned over during the year.
Higher the ratio higher is the management of inventory. Here the ratio has increased during
the year 2009. Where the ratio was only 8.27 in 2006 and now it has increased to 12.76 over
the years. This indicates the company is effectively managing the inventories. And only less
part of working capital is needed for inventory because of less inventory holding period.
II. INVENTORY HOLDING PERIOD
The number of days inventory is also known as average inventory period or inventory
holding period. A high number of days inventory indicates that there is a lack of demand
for the product being sold. A low days inventory ratio (inventory holding period) may
indicate that the company is not keeping enough stock on hand to meet demands.

Inventory holding Period = 365

Inventory Turnover Ratio

TABLE 4.2.3: Table showing inventory Holding Period of MCF, Mangalore

YEA Inventory Turnover Holding period

R Ratio (Days)
200
5 9.00 41
200
6 8.27 44
200
7 8.71 42
200 9.39 39

59
 8
200
9 12.76 29

Chart 4.2.3: Chart showing inventory to working capital turnover ratio of MCF, Mangalore
Here if the number of days of Inventory holding period is high indicates there is less demand
for the products. Where as in MCF the holding period is decreasing every year which is a
good indicator for company’s progress. Holding period in 2006 was 42 days which went on
reducing every year, now it’s 29. This shows that the increasing acceptance and demand for
the products of MCF and saves a lot of expenses incurred for holding of inventory.
III. INVENTORY TO WORKING CAPITAL RATIO:
Percentage measure of a firm's capability to finance its inventories from its available cash.
Numbers lower than 100 are preferable as they indicate high liquidity. Numbers higher than
100 suggest that the inventories are too large in relation to the firm's financial strength This
ratio is usually calculated to study the liquid financial position of business enterprises.

Inventory to working capital ratio = Inventory/ working Capital *100

TABLE 4.2.3: Table showing inventory to working capital turnover ratio of MCF
Inventory to
Inventory(Rs.lakhs working
YEAR ) working capital Capital ratio
2005 9409.24 19640.69 47.91
2006 14225.13 27812.7 51.15

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 2007 14195.68 30398.15 46.70
2008 17068.05 46505.46 36.70
2009 17077.35 48644.75 35.11

Here we can observe that the percentage of inventory in total inventory has been decreased
over the years. During 2006 it was very high where upto 51 percent of total working capital is
in the form of inventory which goes on reducing. In the current year its only 35 percent of
total working capital is the form of inventory. And because of reduction of Inventory percent
in the working capital we can say that the company is in good liquidity position.

61
 Chapter- 4.3

RECEIVABLES MANAGEMENT

RECEIVABLES MANAGEMENT

Accounts receivables are simply extension of credit to the firm’s customers, allowing them a
reasonable period of time in which to pay for the goods. Most firms treat accounts receivables
as a marketing tool to promote sales and profits. They represent extension of credit and
investment of funds and must be carefully managed. Every firm must develop a credit policy
that includes setting credit standard, defining credit terms and employing methods for timely
collection of receivables. The receivables (including the debtors and the bills) constitute a
significant portion of working capital and are an important element of it. The receivables
emerge whenever goods are sold on credit and customers receivables are created when a firm
sells goods or services to its customers and accepts, instead of the immediate cash payment
the promise to pay within specified period. Thus, receivables are a type of loan extended by

62
the seller to the buyer to facilitate the purchase process. As against the ordinary type of loan
the trade credit in the form of receivables is not a profit making service but an inducement or
facility to the buyer-customer of the firm.
Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up the
sale, which ultimately results in pushing up the profits earned by the firm. At some time
selling goods on credit result in blocking of funds in accounts receivables. Additional funds
are required for operating needs of business, which involves extra costs in terms of interest.
Moreover, increase in receivables also increase chances of bad debts.
The creation of accounts receivables is beneficial as well as dangerous. The finance manager
has to follow a policy which uses cash funds as economically as possible by extending
receivables without adversely affecting the chance of increasing sales and making more
profits. Receivables Management generally means what type of credit policy a firm should
adopt so that sales and profits can be promoted on the one hand and funds can be
economically utilized on the other hand.
So the receivables management must be attempted by adopting a systematic approach and
considering the following of receivables management:
(1) THE CREDIT POLICY
(2) CREDIT CONTROL

1. CREDIT POLICY
It may be defined as the set of parameters and principles that govern the extension of
credit to the customers. This requires the determination of
(i) The credit standard i.e. The conditions that the customers must meet before
being granted credit and
(ii) The credit terms i.e. the terms and conditions on which the credit is extended
to the customers.
These are discussed as follows:
The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of the
customers. Therefore, to be on a safer side, it must set credit standard which should be
applied in selecting customers for credit sales. The credit standards of a firm represent the
basic criteria for the extension of a credit to customer.
So the credit standard is the combination of three C’s
63
These are:
(i) Character of a person
(ii) Capacity of a person
(iii) Condition of a person

Credit Terms
The credit terms refers to the set of stipulation under which the credit is extended to the
customers. The credit terms may relate to the following:
(a) Credit Period – The credit period is an important aspect of the credit policy. It
refers to the length of time customers are allowed to pay for their purchases. It may
differ from one market to another market. The credit period generally varies from 15
days to 60 days. In some cases the credit period may be zero and only cash sales are
made. It refers to the time duration in terms of net date e.g. if a firm’s credit terms are
“net 30”; it means the customers are expected to pay within 30 days from the date of
sales. As much the credit period will be shorter, it will be beneficial for a firm. But the
firm has to lengthen its credit period to increase sales. But one must compare the cost
of extended credit with the incremental profits. If this cost is less then it will be
(b) beneficial for company to increase the credit period.

(c) Discount Terms – It is reduction in payment offer to customer to induce them to

repay credit obligation within a specified period of time. In practice credit terms
would include:
(i) The rate of cash discount
(ii) The cash discount period
(iii) The net credit period

2. CREDIT CONTROL
The next important step in the management of receivables is the control of these receivables.
Following are the directions for controlling the receivables.
(1) The Collection Procedure – The overall collection procedure of the firm should
neither be too lenient nor too strict. A strict collection policy can affect the goodwill
and damage the growth prospects of the sales. If a firm has a lenient credit policy, the
customer with a natural tendency towards slow payments may become slower to settle

64
 his accounts. One possible way of ensuring early payments from customers may be to
charge interest on over due balances.
(2) Monitoring of receivables – To control the level of receivables, the firm should
apply regular checks and there should be a continuous monitoring system. For this,
number of measures are available as follows:
(i) A common method to monitor the receivables is the collection period or
number of day’s outstanding receivables.
(ii) Another technique available for monitoring the receivables is known as
ageing schedule. Ageing schedule down book debts according to the length of time of
which they have been outstanding. The ageing schedule provides more information
about collection experience. It helps to shot out the slow paying debtors. The
Performa of the ageing schedule prepared by the MCF is as follows:

As earlier discussed, credit sales are too much necessary to increase the total sales. The main
reason behind this is cut-throat competition. There are also many competitors of MCF in the
market, s to compare with them; MCF has to make credit sales. 20% to 30% of current assets
of MCF are sundry debtors. MCF has a good receivable policy as it has large amount of
credit sales.

I. CREDIT POLICY OF MCF

MCF does not directly make sales. Sales are made by area office. So the sales process is
decentralized. As the sales process, debtors are also collected by the Area office directly.
Corporate office just receives the amount from the sales of concerned area office. But it does
not have any record of outstanding debtors. It sends the credit note to MCF after receiving
amount against any debtors. So record for outstanding debtors is maintained by Area office
itself. Area office sends fortnightly reports to corporate office which records the data about
65
the outstanding debtors for different periods. In these reports debtors outstanding for one
month or six months are shown separately. In this way, corporate office comes to know about
age segments of different customers. Corporate office may avoid selling goods to those
customers who have not paid for a long period.

CREDIT POLICY VARIABLES

1. Credit Standards – MCF provides credit to customers after getting information
about that customer. For this market research is done by marketing department to
know about reputation of customer in the market and financial position of him.
From the records of customers having MCF and from financial record of those
customers, the ability to pay is determined. Thus customer is only known after
getting information about him and then credit is provided.
2. Credit Terms
(a) Credit Period – For different products MCF provide different credit period.
These credit terms are according to the nature of product which are following:

Scrap / waste - cash basis

Imported Fertilizers
Manufactured Fertilizers
(b) Cash Discount –
Advance payment
15 days credit
Afterwards
- 40 days
- 15 days
- 1 % C.D. prior to material dispatch
- Interest free
- 18 % p.a. interest chargeable

II. CREDIT CONTROL

Collection efforts made by MCF:
Due to cut-throat competition MCF has to make credit sales. To collect the funds MCF has
adopted a decentralized method. MCF has established its Area Office in different cities as in
Bangalore, Hassan, Davangere, Hubli, Raichur, Callicut, Coimbuttur, Trichy, Nellor,
Kholapur , and these centers collect money from the debtors and send it to corporate office.
The number of Area Office and city depends upon the number of customers to minimize the
bad debts and to accelerate the collections and sales.
66
Commission is also paid to agents This percentage is only on the basis of the realization
amount.

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN MCF

DEBTORS TURNOVER RATIO

This ratio indicates the number of times average debtors are turned over during a year. The
higher the value of debtor turnover ratio the more liquid is the debtors. Similarly low debtor
turnover ratio implies less liquid debtors.
Debtors turnover ratio = Sales
Avg. Debtors
Table 4.3.1: Table Showing Receivable Turnover Ratio of MCF, Mangalore
Receivables
YEAR Sales(Rs.lakhs) Average Debtors Turnover
2005 87919.4 5294.28 16.61
2006 108384.1 2877.43 37.67
2007 137255.86 3188.40 43.05

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 2008 162539.14 4589.70 35.41
2009 247197.93 2153.69 114.78

Chart 4.3.1: Chart Showing Receivable Turnover Ratio of MCF, Mangalore

As we can observe that, the debtors turnover ratio of the company has increased from 35
times in year 2008 to 114 times in year 2009. Increasing RTR is good for the company as it
assures that the sundry debtors are more liquid.

Debtor Conversion Period (DCP)

The average no. of days for which a firm has to wait before its receivables is converted into
cash.
DCP = 360
DTR

Table 4.3.2: showing debtors Conversion Period of MCF, Mangalore

Receivables Debt collection
YEAR Turnover Period (Days)
2005 16.61 22
2006 37.67 10
2007 43.05 8
2008 35.41 10
2009 114.78 3

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 Chart 4.3.2: Chart showing Debtors Collection Period of MCF, Mangalore
The DCP of the spinning mill has decreased from 10days in year 2008 to 3 days in year 2009
which is quite a good fact as lower DCP assures less time period for the conversion of
receivables into cash.

Chapter- 4.4

CASH MANAGEMENT
69
 CASH MANAGEMENT
Cash management refers to management of cash balance and the bank balance and also
includes the short term deposits. The cash is important current asset for the operation of the
business. Cash is the most liquid and can be used to make immediate payments. Insufficiency
of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its
other assets immediately. On the other hand extreme liquidity may take uneconomic
investments. This underlines the significance of cash management.
The term cash includes coins, currency and cheques held by the firm ad balances in its bank
accounts. Sometimes near- cash items such as marketable securities of bank item deposits are
included in cash.
A financial manager is required to manage the cash flows (both inflows and outflows) arising
out of the operations of the firm. For this he will have to forecast the cash inflows from sales
and outflows for costs etc. This will enable the financial manager to identify the timings as
well as amount of future cash flows. Cash management does not end here and the financial
manager may also be required to identify the sources from where cash may be produced on a
short term basis or the outlets where excess cash may be invested for a short term.

70
Cash is the basic input needed to keep the business running on continuous basis. It is also the
ultimate output expected to realize by selling the product manufactured by the firm. Cash
shortages will simply disturb the firm’s manufacturing operations where excessive cash will
simply remain idle. Thus, firm should keep sufficient cash neither more nor less. Hence, a
major function of the financial manager is to maintain a sound cash position. Cash
management is one of the key areas of working capital management. A part from the fact that
it is the most liquid current asset, cash is the common denominator to which all the current
assets can be reduced because the major liquid asset i.e. receivables and inventory get
eventually converted into cash. Cash management is concerned with the managing of:
 Cash inflows and outflows of the unit
 Cash flows within the unit
 Cash balance held by the unit at a point of time by financing deficit or investing
surplus cash

MOTIVES FOR HOLDING CASH

Transaction Motive
It means a firm holds cash for conduct of business. The daily requirements of cash come
under this motive. So enough cash for smooth business is required for transaction motive.
Precautionary Motive
Under this motive cash is held for most contingencies in future. There may be so many
reasons due to which the emergency of cash arises. These reasons can be:
(i) Sudden rise in the demand which leads to more production
(ii) Due to inflation
(iii) Due to any miss-happening in future like loss by fire theft etc. the cash is held for
precautionary motive in advance. This cash may be held as marketable securities
which are highly liquid and low risky.
Speculative Motive
The speculative motive relates to holding of cash for investing in profit making opportunity
as and when arises. The opportunity may arise in securities, in material purchasing or in any

71
other type. By holding cash for speculative motive, the firm can choose most profitable
opportunity, yet by enlarge, business firm do not engage in speculations because the primary
motive to hold cash are transaction and precautionary motive.
In MCF, it holds cash only for transaction motive. Speculation and precautionary motives
cash is held by corporate office. If the MCF requires some more cash to meet any future
contingency then it informs about it to corporate office and corporate office sends cash to
MCF as per requirement. But the MCF has to give the reasons for extra cash to corporate
office.

The firm should evolve strategies regarding the following four facts of cash management:
(1) Cash Planning
(2) Managing the cash flow
(3) Optimum cash level
(4) Investing surplus cash

1. CASH PLANNING
Cash planning is a technique to plan to control the use of cash. Cash planning can help to
anticipate future cash flows and the need of the form and reduces the possibility of idle cash.
Cash planning may redone on daily, weekly and monthly basis. Cash budget is the most
significant device to plan for and control cash receipt and payments.

The unit under the study makes cash planning through following tools:
 Cash Budget
 Rolling cash flow statement
 Daily cash flow statement

The cash budgets are prepared by the firm on monthly and yearly basis. Through cash budget
the unit can make estimates of cash receipts and disbursement during a future period of time.
There estimates show the requirement of cash in the unit.

72
Another device used for cash planning is six monthly rolling cash flow statement prepared on
monthly basis. This statement shows the projections of inflows and outflows of cash during
the next six months.
This statement can help in taking various decisions, if the unit wants to make any capital
payment, these statements can tall when there is surplus of cash and payments can be made
during the month.
Daily cash flow statement is prepared to see the daily cash position. There estimations are
sent to corporate office at Bangalore so that needed cash is obtained at night time.

2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and
outflows without any loss to the unit and without impairing its goodwill in the market. These
are made at head office Ludhiana so the main source of cash inflows to MCF is the cash
credit limit, which is as follows:

Table 4.4.1: Table showing Credit Limit Available to MCF, Mangalore

Banks Main Limit Sub-limit transfer to
(in crores) LDH Unit (in crores)
Peak Normal
Corporation Bank
Axis Bank 300crores 300 crores 500 crores in month.
State Bank of India

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for
fulfilling day-to-day requirements of working capital. The daily bank-position of sub-limits is
fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds get
transferred from main limits. The interest rate paid for this is near about 11.25%. The cash
credit limits are sanctioned by the bank against the hypothecation stocks and fluctuating
assets as security.

73
The unit can withdraw from these limits as and when needed. The amount received from the
sale of Fertilizers is debited at head office in main limit. To exchange the efficiency of cash
management the surplus funds are transferred to other units if those units need cash thus
increasing the overall profitability.
Main outflow of the unit is on raw material cost. Different types of raw material are
purchased from different states. Cash outflows also arise on account of purchase of stores,
spares and all other material normal credit for these products is mainly 30 to 60 days and full
credit period is used.

3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the
optimum level i.e. neither it is too high that it remains idle and the firm losses interest on it,
nor it is too low that the firm is always in cash tight position. The unit always keep 1.5 lacs
for the routine expenses, around the days of wages the amount is approx. 4 lacs per day is
kept in hand, thus the unit maintains the appropriate amount of cash balance and meets the
firms obligations as and when they due.

4. INVESTING IDLE CASH

The company has very good system of managing its current assets. The current assets of the
unit are managed at corporate level and the unit seeks funds according to their requirements
calculated on day-to-day basis. Hence there are no idle funds at unit level.
As the funds are monitored / controlled at corporate level, therefore, it becomes the prime
responsibility of H.O. to have a good policy of investing idle funds in an appropriate security
keeping in view the requirement of funds in the future and liquidity of the security in which
the investment is being made.

74
Chapter- 5

75
 FINDINGS, SUGGESTIONS AND
CONCLUSION

Findings
The Analysis of working capital management of MCF using ratio analysis provides following
findings.

1. The MCF is in a favorable liquidity position. The liquidity ratios namely Current
Ratio and quick ratio are favourable. Current ratio has increased from 2.57 to 2.61 in
the year2009 from 2008. In case of quick ratio it raised from 1.99 to 2.05 in the year
2009 from 2008. These ratios show favourable liquidity position, high liquidity may
impact adversely on profitability.

2. Operating Cycles of the organistion is very less which is good. As it helps in lower
working capital needs. Gross operating cycle and net operating cycle have reduced
from 78 to 72 and 67 to 61during 2009 compared to 2008.
76
3. The activities ratio like Inventory to working capital ratio is decreasing which is a
favorable sign. The ratio have decreased from 36 in 2008 to 35 in 2009. And even the
inventory holding period has also decreased from 39 in 2008 to 29 in 2009. By this
the requirement of working capital has also decreased

4. The collection period of debt has reduced from10 days in 2008 to 3 days 2009 though
the company gives a credit period of 30 days . This is favorable condition to MCF as
the company needs less amount of working capital.

5. The portion of inventory is high in current assets is high compared to other assets in
all the years, but the portion is reducing over the years, which is favourable to
company.

6. The company gets the funds for working capital management from the nationalized
banks upto 300 crores.

7. The profits has decreased in 2009. The 2009 accounting year witnessed a negative
rate in growth rate of profit of -55%. The reason for negative growth in profit may be
assigned to increase in expenditure. The rate of increase in expenses for the last year
was 101%. This increase is because of increasing cost of raw material from 1130
crores in 2008 to 1796 crores in 2009. Total expense of MCF has increased from 1532
to 2273 crores.

8. The products of MCF are sold to farmers through area office located in Karnataka,
TamilNadu and kerala.

These are the findings from the analysis of financial statements of organization except
in case of profit.

77
Suggestion:

1. The study showed, over the gross profit Ratio has been increasing where as the
Net profit ratio has decreased. So the administrative and distributive expenses
should be controlled.

2. As per the balance sheet the reserves and surplus of the company is 19770 crores,
it is more than the capital issued of 11855 crores. This additional amount can be
used for upgrading the plant.

3. The company is in the good liquidity position with the current ratio 2.61 and the
quick ratio of 2.05. This increase is mainly due to increase in cash and bank
balance. Since cash and bank balance is non earning current assets, the company
has to take steps to reduce them.

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 4. The debt equity ratio is just 1.02. Company can raise funds through debt source
but the interest coverage ratio has decreased. This decrease is due to increase in
interest and other financial charges

5. Profit and loss trend show that the profit has come down in the last year, so the
company should take necessary steps to minimize expenditure.

6. MCF can concentrate in intensifying its distribution channel by increasing area

office. currently there are only 10 area office located only in South India,

Conclusions:
The present study ‘Analysis of working Capital Management at MCF, Mangalore’ is
undertaken through the ratio analysis. This gives an image of the quantitative aspect of the
company’s financial aspect. Ratios are calculated from current year numbers and are then
compared to previous years, and industry standards.

By conducting an analysis of working capital management of MCF, Mangalore, it is found

that working capital management is managed in a professional manner. The company has
maintained industrial standard .MCF has sufficient funds to meet its all its obligations

Cash management and receivable management are efficient because of centralized control on
these. Safety measures for inventories are also quiet sufficient in MC F. Overall the working
capital management of MCF is very much efficient and well managed.

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 Annexure 1: Bibliography

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd.

Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill.
Van Horne, Jame C; Fundamentals of Financial Management.
Rustagi R.P.; Principles of Financial Management.
Annual Reports of Mangalore Chemicals and fertilizers

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Annexure 2: Balance sheet:

Mangalore Chemical and Fertilizers, Mangalore

Mar- Mar- Mar- Mar- Mar-
09 08 07 06 05
LIABILITIES
11854.8 11854.8 11854.8 11854.8 11854.
Capital 6 6 6 6 86
27064.8 25425.5 22887.3 21206.9 19769.
Reserves & Surplus 1 1 2 8 77
39120.4 35575.4 17567.4 14818.9 7325.6
Secured Loans 9 3 5 8 6
2824.8
unsecured loans 559.01 2425.46 5275.5 6550.15 1
2936.7
deferred tax liability, 3701.96 3689.61 3561.34 3298.44 9
82301. 78970. 61146. 57729. 57729.
TOTAL 13 87 47 41 41

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ASSETS
61005.9 58129.0 55747.5 53503.4 47716.
Gross Block 6 1 4 4 86
29013.8 27221.3 25653.1 23250.
Less: Depreciation 8 2 4 24106.4 66
31992. 30907. 30094. 29397. 24466.
Net Block 08 69 4 04 2
1557.1
capital work in progress 1659.3 2 648.92 519.67 605
33651. 32464. 30743. 29916. 25071.
net Fixed Assets 38 81 32 71 2
Current Assets, Loans &
advances
17077.3 17068.0 14195.6 14225. 9409.2
Inventories 5 5 8 13 4
Sundry Debtors 905 1701.19 3739.1 1318.85 2218
Cash & Bank Balances 1609.05 5991.1 1584.58 365.46 446.03
other curret assets 195.63 482.63 511.79 2446.48 222.07
78835. 76053. 53382. 48738. 30226.
current assests 35 69 81 93 71
Less: Current Liabilities and 29547.6 22984.6 20926.2 10586.
provisions 30190.6 3 6 3 02
48644. 46506. 30398. 27812. 27812.
NET CURRENT ASSETS 75 06 15 7 7
P & L A/c 190.28
82296 78970 61141 57729 5288
TOTAL .13 .87 .47 .41 3.9

Annexure 3: Profit and loss account

Profit & Loss account ------------------- in Rs. Cr. -------------------
Mar' Mar Mar Mar Mar
05 '06 '07 '08 '09
12mt 12 12 12 12
Particulars hs mths mths mths mths
Income
879.1 1,083.8 1,372.5 1,627.6 2,471.9
Sales Turnover 9 4 6 7 8

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 Excise Duty 1.17 1.53 1.51 2.28 2.36
878.0 1,082.3 1,371.0 1,625.3 2,469.6
Net Sales 2 1 5 9 2
Other Income 6.97 1.98 5.39 -3.5 -93.72
Stock Adjustments -7.66 46.51 -35.92 -0.6 -6.85
877. 1,130. 1,340. 1,621. 2,369.
Total Income 33 80 52 29 05
Expenditure
1,130.0 1,796.1
Raw Materials 600.9 792.31 938.55 3 7
127.0
Power & Fuel Cost 4 169.65 193.7 259.61 278.39
Employee Cost 25.61 29.39 32.68 40.87 43.81
Other Manufacturing
Expenses 13.26 13.76 17.68 17.34 31.57
Selling and Admin
Expenses 47.41 58.69 66.55 66.24 100.86
Miscellaneous Expenses 13.96 10.28 17.91 17.52 21.36
Preoperative Exp
Capitalised 0 0 0 0 0
828. 1,074. 1,267. 1,531. 2,272.
Total Expenses 18 08 07 61 16

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