Working Capital Management

Submitted To:
Prof.Arthi

Group # 3
Rakesh Soni Suvrat Sajjan Ravi Jhawar Manan Zaveri Deepali Kunjeer Ramchand 062 069 080 085 113 120

About Tata Steel

y The world s 10th largest steel company. y The world s 2nd most geographically diversified steel

producer. y A balanced global presence in over 50 markets and manufacturing operations in 26 countries. y One of the world s lowest cost producers of steel. y A shareholder base of over 800 k people. y An employee strength over 81k across 5 continents.

Working Capital
y Firms need money to pay for their day to day activities. y The funds available to do this, is known as the firms

working capital. y Managing the working capital needs of the organization is important, because shortage of funds could disrupt the day to day operations y But holding excess funds the interest burden of the firm starts mounting & eating into its profits.

Working Capital
There are two concepts of Working Capital y Gross working capital: Gross working capital is the sum total of all the current assets. y Net working capital: Net working capital is the difference between current assets and current liabilities. Current Assets Bank or cash balances Marketable securities Debtors Inventory Current Liabilities Outstanding expenses Bank over draft Short term loans Creditors

Working capital management at Tata Steel

y The two most important elements in the business cycle

that absorbs cash are inventory and Debtors

y Tata Steel endeavor to shorten the cycle

By collecting money from debtors quicker ii. By reducing inventory levels relative to sales
i. y The aim is to reduce the interest burden and free

additional funds to support growth in its Operations and Sales

Working capital management at Tata Steel

y Working capital management includes the following at

Tata Steel: y Debtors Management y Bank / Cash Management y Inventory Management

Debtors Management
y Credit worthiness 1. Ability to pay 2. Willingness to pay

Credit management department 1. Process 2. Debtors control 3. Interest collection

y

CALCULATION OF CUSTOMER PROFITABILITY AT TATA STEEL

Gross Realization Excise Freight = Net Realization We deduct Sales Commission Handling Charges Cost of Rejection Cost of Credit Establishment cost of Marketing Division Inventory carrying costs = Net of Net Realization Net of Net Realization Cost of production = Net Profitability of the customer

CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES) This module is very exhaustive It begins by capturing the essential information relating to sales like : Products to be purchased by the customer Tonnage on cash Tonnage on credit Invoice price (Rs. / MT) Credit period (Days) Proposed credit (Rs. Lacs) Total tonnage Future expected Monthly lifting potential (MT)

CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES)

A customer might already have an account with Tata Steel. In such cases the accounts status of the customer as on the date when credit sales is being made are also entered into Lotus Notes. These includes the amounts of outstanding and overdue as on a particular date, Cheque payment history, existing credit limit, interest free credit period, Guarantee provided, level of secured and unsecured credit.

CREDIT MANAGEMENT MODULE (BASED ON LOTUS NOTES)

It also mentions whether the customers company has been rated by a credit rating agency or not, its relationship with Tata Steel level of Management Quality. referred to the BIFR. All details of relevant financial figures of the current financial year and the past two years are recorded in Lotus Notes. On the basis of these financial figures the credit management group calculates the Z-score of the customer which forms the Corporate Bankruptcy Prediction.

Process
y ZERO SCORE FORMULA

Z = 1.2A + 1.4B + 3.3C + 0.6D + 1.0E Where Z = score A = Working capital / Total Assets B = Retained earnings / Total Assets C = Earnings before interest & tax / Total Assets D = Market Value of Equity / Total Liabilities E = Sales / Total Assets

Debtors control
Factoring i. Recievable purchases ii. Channel finance
 

Letter of credit

Interest collection
y Tata Steel charges an interest to its customers if the payment y y y y

made is late after the due date. The details on interest payment are mentioned at the time of credit sales in the Sales Order or the MOU. However, these need to be accepted by the customer. All the transactions are recorded in the SAP system which acts as a database and which is kept updated. When the credit sales are made, all information like invoice date, interest free credit period, money receipt date, etc. are all recorded in SAP with respect to separate transaction. Thus, SAP automatically calculates the interest that has to be charged to each customer for every delay in payment.

Working Capital Management at Tata Steel

Over-Draft Management
y Two of its main banks that constitute more than 90% of

the operational activities are State Bank of India and the Central Bank of India.
3.5 3 2.5 2 1.5 1 0.5 0 Over-Draft scenario on monthly basis

10

11

About Tata Steel

Ratios
FY 10
Inventory Turnover Ratio Debtor Turnover Ratio Average R.M Holding Average F.G Held 10.90 46.58 60.63 21.78

FY 09
9.36 41.29 74.12 27.88

About Tata Steel

Net Working Capital Comparison
FY 10
Year

FY 09 5707.05

FY 08 3,613.70

FY 07 10,646.16

Current Asset (in Cr) Current Liabilities (in Cr) Net Working Capital (in Cr)

6747.01

6653.09

6039.86

3,855.26

3,523.20

93.92

-332.81

-241.56

7122.96

About Tata Steel

WORKING CAPITAL TURNOVER RATIO
Net sales Net working capital
Particulars
Net Sales(Cr)

FY 10
25755.52

FY 09
25945.45 -332.81 -77.96

Working Capital 93.92 Ratio 274.23

THANK YOU