Description
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
A SUMMER INTERNSHIP REPORT ON
AN ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC
Submitted to L.J. Institute of Management Studies
In requirement of partial fulfilment of Master’s of Business Administration (MBA) 2 year full time Program of Gujarat Technological University
Submitted on: 18th July 2011
Submitted by: Harshit R. Doctariyawala Batch No.: 2010-12
Enrolment No.:107290592065
DECLARATION
I, Harshit R. Doctariyawala, hereby declare that this report is prepared on the basis of training taken at „Gujarat Narmada Valley Fertilizers Company Limited? for the period of 1 st June, 2011 to 15th July, 2011.
I ensure about the authentication of the material and give guarantee that there will not be any misuse of data. Data used will only be taken for the academic purpose and will not be used for commercial or any other purpose.
This project report is entirely an outcome of my own efforts and is not submitted either in part or in whole to or copied from any project submitted to any other university or institute for any other degree.
Date: 15th July, 2011 Place: Bharuch
Harshit R. Doctariyawala L.J. Institute of Management Studies, Ahmedabad.
PREFACE
Summer project is a part of the academic requirement incorporated in the curriculum of Master of Business Administration Programme. For the students are required to undertake industrial training. It helps the students to understand the theoretical knowledge of today?s business world. This exercise enables to get practical exposure to realities of corporate world in action and practice.
A great knowledge comes from the combination of better book education and a good training. Keeping this in mind, the Gujarat Technological University has introduced a Summer Training Programme, and thus I got a truly rewarding chance to get the best feel and experience of the real world economic environment in the best possible manner. I have undergone for training at “Gujarat Narmada Valley Fertilizers Company Limited” from 1st June, 2011 to 15th July, 2011. For this purpose, I had undergone a research project work on “ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED”.
During this project work, students get an opportunity to glance into the real business world. In this reference I had studied the real activities and the bottlenecks come in the progress of corporate while managing working capital.
For the primary data has been collected by personal discussion with senior officers of finance department and secondary data has been collected from last five years annual report and company?s website. The importance of working capital management is understood with the help of my project guide as well as with the help of statistical tools that I used to conduct my research.
I have sincerely tried my best for precise and meaningful report construction.
ACKNOWLEDGEMENT
I have been able to prepare my report successfully and I acknowledge a special thanks to all those people without whose support it was impossible for me to make the project report. It has been an enriching experience for me to undergo my summer training at GNFC Limited, Bharuch.
First of all I would like to thank the management of GNFC for granting me permission to take training in their organization. I am thankful to Mr. N.K. Patadia (AGM) and Mr. D.C. Jadeja (Manager) GNFC for giving me an opportunity to carry out the study and prepare this project at GNFC and also for providing me better co-operation, guidance and other facilities during training period.
I have been benefited greatly by knowing of various concepts as I visited various websites for the interpretation of financial ratios.
I would hereby take this opportunity to show my gratitude towards my guide for what I have learnt during my training. A good response, feedback and co-operation are given by her. She helped me in gaining knowledge and solving my queries.
So,
I
would
like
to
give
my
sincere
thanks
to
Mr.
Siddarth
Singh
bist
who provided support in every aspect whenever I felt the need and for providing me this opportunity to work and achieve an unforgettable learning experience. Thanking You, Harshit R. Doctariyawala
CERTIFICATE
It is hereby certified that the work incorporated in the thesis submitted entitled “ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED” submitted by Harshit R. Doctariyawala comprises the result of independent and original investigation carried out me. The material which obtained (and used) from other sources has been duly acknowledged in the thesis.
Date: Place: Signature of the student
It is certified that the work mentioned above is carried out under my guidance.
Date: Place: Signature of the faculty guide
An analysis of working capital management
Table of Contents
Sr. N0. 1 2 3 4 5 6 List of Tables List of Charts Executive Summary Industry Profile Company Profile Finance Department Particulars Page No. 2 4 7 9 14 26
Introduction to Project : “An Analysis of
7
Working Capital Management”
Conceptual Framework and Literature review Research Process Data Analysis and Interpretation Findings of study Conclusion and recommendations Bibliography Annexure
52
8 9 10 11 12 13 14
55 75 77 117 119 121 123
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Chapter - I List of tables
Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Particulars Calculation of gross working capital Calculation of net working capital Raw material conversion period Work in progress conversion period Finish good conversion period Total inventory conversion period Debtors conversion period Creditors conversion period Gross operating cycle Net operating cycle Total investment in working capital Current ratio Quick ratio Current assets to total assets ratio Total investment in inventories Inventory turnover ratio Inventory to current assets ratio Inventory to sales ratio Investment in sundry debtors Receivables turnover ratio Average collection period Receivables to current assets ratio Debt-Equity ratio Page No. 55 57 77 79 81 83 84 86 88 89 90 91 92 93 94 95 96 98 99 100 101 102 103
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24 25 26 27 28 29 30 31 32 33 34
Investment in cash and bank balance Cash turnover ratio Cash to current assets ratio Sales to current assets ratio Working capital turnover ratio Return on assets Net profit margin Loans and advancements to current assets ratio Loans and advancements to working capital ratio Balance sheet of 2005-06 to 2009-10 Profit and loss account of 2005-06 to 2009-10
105 106 107 108 109 111 112 113 117 123 125
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Chapter - II List of charts
Sr. N0. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Particulars Share holding pattern of GNFC Raw material conversion period Work in progress conversion period Finish good conversion period Total inventory conversion period Debtors conversion period Creditors conversion period Gross operating cycle Net operating cycle Total investment in working capital Current ratio Quick ratio Current assets to total assets ratio Total investment in inventories Inventory turnover ratio Inventory to current assets ratio Inventory to sales ratio Investment in sundry debtors Receivables turnover ratio Average collection period Receivables to current assets ratio Debt-Equity ratio Investment in cash and bank balance Page No. 15 78 80 82 83 84 87 88 89 90 91 92 93 94 95 96 98 99 100 101 102 103 105
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24 25 26 27 28 29 30 31
Cash turnover ratio Cash to current assets ratio Sales to current assets ratio Working capital turnover ratio Return on assets Net profit margin Loans and advancements to current assets ratio Loans and advancements to working capital ratio
106 107 108 109 111 112 113 117
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Executive Summary
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Chapter - III Executive Summary
This is a summer training report prepared at “Gujarat Narmada Valley Fertilizer Company Limited”. I have tried to cover the glimpse of overall working of the organization. GNFC is a large fertilizer and petrochemical company established on 10th May, 1976. The various departments that are covered in this project are marketing department, human resource department and finance department. In GNFC, all departments work dependent to each other and structure is line authority.
GNFC has two aims like to do social work for society and to make India a economically strong country. It gives full agricultural services as well as education about crop, soil, seeds and fertilizer to the farmers.
Working capital constitutes the most significant part in all companies. Because of large amount of working capital maintained by firms it is very important to manage working capital efficiently and effectively. This management of working capital carries a favourable impact on the company?s profit.
By understanding the great importance of working capital in overall operation of the company, the analysis had been done on “working capital management” at GNFC.
The study on working capital management has been done with objective of analyzing working capital position of the company, studying operating cycle of the company, studying various working capital ratios and to analyze liquidity position of the company. For that purpose the data has been analyzed for the last 5 years. They have been collected from primary as well as secondary sources. The data has been analyzed with the help of ratio analysis, graphical method and descriptive analysis. From the above study it has been analyzed that working capital position of the company is sound.
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Industrial Profile
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Chapter - IV 4. INDUSTRIAL PROFILE
4.1 Industry overview:
Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth.
India is the third largest producer and consumer of fertilizer in the world after china and the United States.
The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the production, pricing and distribution of fertilizers.
Like every developing economy, the economy of India is also agro based. Agriculture accounts for nearly 1/4th of India?s GDP and more importantly about 2/3rd of the country? population is dependent on agriculture and allied activities for their livelihood.
As per statistics nearly 225 lacks MT of fertilizer nutrients are required every year in this country. The demand of fertilizers was so high that India had to import almost 30% of its requirement from other countries.
Therefore, to achieve the economic growth, agriculture base of the country must be strengthened. To attain this objective, agriculture practices have to be improved from their traditional pattern to a higher technological track involving better irrigation and use of better quality seeds, fertilizers, insecticides and pesticides.
Therefore, chemical fertilizers are key player in this process and fertilizer industries plays quite a major role in increasing food production in the country and also helps to modernize the outlook of the common farmers and make them innovative and respective to the new technology change.
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Fertilizer production is of permanent importance for this country because fertilizer increases agriculture productivity. On the one hand population is increasing and on the other hand the land is fixed. So we have to produce more without any increase arable land area. This can be done if productivity goes up. And fertilizer plays a major role in productivity escalation.
As this is a vital commodity it is in the interest of the nation that farmers get fertilizer at reasonable rate and in adequate quantity. Looking to the poor economic condition of Indian farmers government of India framed fertilizer policy in 1977 based on Maratha committee report.
The purpose behind introducing this was to supply fertilizer to farmers at a price they can afford, so as to increase the consumption of fertilizer to increase the food production and ensure fair returns to fertilizer producers.
With this twin objective, Retention Price Scheme (RPS) for fertilizers came into picture. In this scheme government has brought the fertilizer under the purview of Essential Commodities Act (ECA) in which the retail price of fertilizer to the farmer is notified by the Government of India from time to time. Government of India fixes the price of fertilizers in such a way that manufacturer?s cost of production including cost of marketing is covered and the manufacturer gets a 12% post tax return on net worth of the unit at pre-defined capacity utilization.
Norms are fixed for consumption of raw material, utilities, services, capacity utilization etc. The price so fixed is called Retention Price (RP). This price is reviewed every three years.
In a nutshell, fertilizers cannot be sold in open markets and producing unit has almost nil say right in fixing fertilizer price. The work of administering the Retention Price Scheme (RPS) is entrusted to Fertilizer Industry Co-ordination Committee (FICC), which works under the control of department of chemicals and fertilizers.
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4.2 Fertilizer Industry Scenario in India
In India, first of all in 1996, a Single Super Phosphate (SSP) manufacturing unit was set up at ranipat near Chennai with annual capacity of 6000 tons.
4.2.1 Public Sector:
? The Fertilizer And Chemicals Travancore Ltd. (FACT) ? Hindustan Fertilizer Corporation Ltd. (HFC) ? Madras Fertilizer Ltd. (MFL) ? Hindustan Copper Ltd. (HCL) ? Naively Lignite Corporation Ltd. (NLC) ? Pyrites, Phosphates And Chemicals Ltd. (PPCL) ? Pradeep Phosphates Ltd. (PPL) ? Rastriya Chemicals and Fertilizers Ltd. (RCFL) ? National Fertilizer Ltd. (NFL) ? Gujarat State Fertilizer Company Ltd. (GSFC)
4.2.2 Joint Sector:
? Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)
4.2.3 Co-operative Sector:
There are only two fertilizer manufacturing societies in co-operative sector. ? Indian Farmers Fertilizers Cooperative Ltd. (IFFCO) ? Krishak Bharati Cooperative Ltd. (KRIBHCO)
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4.2.4 Private Sector:
There are 13 companies in private sector, which are producing fertilizer. ? Hindustan Lever Ltd. (HLL) ? Hari Fertilizer. ? ICI India Ltd. ? Indo Gulf Fertilizers and Chemicals Corporation Ltd. ? Mangalore chemicals and Fertilizers Ltd. (MCFL) ? Southern Petro Chemicals Industries Corporations Ltd. ? Nagarjuna Fertilizer and Chemicals Ltd. (NFCL) ? Shri Ram Fertilizers and Chemicals Ltd. ? Tuticorian Alkali Chemicals and Fertilizer Ltd. ? Zuari Agro Chemicals Ltd. ? Bindali Agro Chemicals Ltd. ? Chambal Fertilizer and Petrochemical Corporation Ltd. (CFPCL) ? E.D.I. Passy (I) Ltd.
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Company Profile
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Chapter - V 5.1 COMPANY PROFILE
Name of the company: Gujarat Narmada Valley Fertilizer Company Ltd. Type: Public sector Scale: Large scale Registered office: P.O. Narmadanagar -392015, Dist. Bharuch, Gujarat (India).
Telephone:
(02642) 247001 to 247015
Fax:
(02642) 247057
Date of establishment: 10th May, 1976
Website:
www.gnfc.in
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Promoters:
Government of Gujarat Gujarat State Fertilizers Company Ltd.
5.2 SHAREHOLDING PATTERN
Source: www.gnfc.in
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5.3 GNFC AT A GLANCE
Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC) is a joint sector enterprise promoted by the Government of Gujarat and the Gujarat State Fertilizers Company Ltd. (GSFC). It was set up in Bharuch, Gujarat in 1976.
Located at Bharuch in an extremely prosperous industrial belt, GNFC draws on the resources of the natural wealth of the land as well as the industrially reach reserves of the area.
GNFC started its manufacturing and marketing operations in 1982, by setting up one of the world?s largest single stream ammonia-urea fertilizer complexes.
Over the next few years, GNFC successfully commissioned different projects in the diverse fields like chemicals, fertilizers and electronics.
Since inception, GNFC has worked towards an extensive growth as a corporation.
GNFC today has extended its profile much beyond fertilizers through a process of horizontal integration.
Chemicals/Petrochemicals, Energy sector, Electronics/Telecommunications and Information Technology form ambitious and challenging additions to its corporate portfolio. GNFC has an enterprising, strategic view towards expansion and diversification.
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5.4 VISION AND MISSION STATEMENT
5.4.1 Vision:
To be a technology driven, environmentally responsible joint sector company manufacturing fertilizers, commodity and specialty chemicals maintaining highest standards of operational excellence and innovation for creating sustainable nature for all stake holders.
5.4.2 Mission statement:
We shall
Be the leading provider of chemicals and agricultural inputs through adoption of state of the art technologies and business process.
Have a firm commitment to quality, environment, health and safety.
Enrich human resources and promote teamwork, innovativeness and integrity.
Achieve sustainable economic growth based on corporate excellence driven by ethical business practices, professionalism, dynamism and social responsibility.
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5.5 GNFC BOARD OF DIRECTORS
5.5.1 Board of Directors
Shri. A.K. Joti Shri. Anand Mohan Tiwary Shri. M.M. Srivastava Shri. D.J. Pandian Shri. R.K. Tripathy Shri. G.C. Murmu Dr. TT Ram Mohan Shri. D.C. Anjaria Dr. Ashok Shah
IAS IAS IAS IAS IAS IAS
Chairman Managing Director Director Director Director Director Director Director Director
5.5.2 Executive Directors
Shri. J.S. Kochar Shri. K.C. Jatania
Executive director-II Executive Director & Chief Finance Officer
Source: www.gnfc.in/aboutus/boardofdir.html
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5.6 KEY PRODUCT PROFILE
4,45,500 MTPA Technology: From M/s Linde AG, Germany. Texaco, USA.
AMMONIA
BASF, Germany. Haldor topsoe, Denmark. Use: In the manufacture of Urea, Ammonium Nitrophosphate, And Weak Nitric Acid. 1,50,000 MTPA Technology: From ICI, UK. Product conforms to highest purity grade of US Federal AA. Use: - Acetic Acid
METHANOL (99.85%)
- Formaldehyde - Pentaerythritol - DMT - TAME - Pharmaceutical and other intermediate etc. 10,000 MTPA, the country’s largest production capacity. Technology: From Kemira OY, Finland. High quality produced
FORMIC ACID (85%)
Formic Acid through Methyl Formate route. Use: - Coagulant in obtaining rubber from latex. - Fixing of dyes in leather and textile industries. - Intermediate in the manufacture of basic drugs etc.
ACETIC ACID (GLACIAL)
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1, 00,000 MTPA, the country’s largest production capacity. Technology: M/s BP Chemicals, UK. The only manufacturer in
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the country to employ methanol route. Use: In the manufacture of Acetic Anhydride, Vinyl Acetate
Monomer (VAM), Purified Terephthatic Acid (PTA), Monochloro Acid, Acetates and Diketene Derivatives etc. 66,000 MTPA, the country’s largest production capacity of COCENTRATED NITRIC ACID (CNA) superior-grade CNA. Technology: M/s Plinke, Germany. Use: In the manufacture of Dyes, Dye intermediates, Drugs,
Nitrobenzene, Aniline, Nitro Chlorobenzene, Nitro Toluene, TDI and other Nitro Derivatives etc. 2, 47,500 MTPA capacity.
WEAK NITRIC Technology: M/s UHDE, Germany. ACID(WNA) Use: In the manufacture of fertilizers. 6, 36,000 MTPA capacity. Technology: M/s UHDE, Germany. UREA Use: In the manufacture of fertilizers, Ammonium Nitrate and other explosives, Glyxal, Sodium Nitrate, H- Acid, Nitrobenzene and other Nitro derivatives etc. 1, 42,500 MTPA capacity. Technology: M/s BASF, Germany. AMMONIUM Use: Basic application during sowing time. NITROPHOSPHATE
CALCIUM
1, 42,500 MTPA capacity.
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AMMONIUM NITRATE
Technology: M/s UHDE, Germany. Use: - In all upland crops, especially commercial and cash crops. - To avoid soil acidity or alkalinity
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5.7 AWARDS:
? National Safety Council, USA: Good Safety Performance. ? National Productivity Council: Best Productivity - First, Second & Third Prizes, Best Productivity for Nitrogenous Fertilizers. ? Ministry of Labour, GOI: Good Safety Performance (Thrice) ? Federation of Indian Chamber of Commerce & Industry (FICCI) : Best Environment Preservation & Pollution Control. ? Indian Chemicals Manufacturers Association (ICMA) : Environmental Control & Safety. ? Fertilizer Association of India (FAI) : For research paper Best Technical Innovation - pure CO2 enhancement scheme in Ammonia plant Best Technical Innovation implemented in fertilizer industry (twice) Best Overall Performance of an operating unit for P2O5 in complex fertilizers ? All India Organization of Employers: Outstanding Contribution in the field of Industrial Relations. ? National Energy Conservation Award, Dept. of Energy, Government of India : Energy Conservation Award, Second Prize. ? Government of India: Award for Energy Conservation. ? Jawaharlal Nehru Memorial National Award: Effective Energy Conservation Award. ? National Suggestion Scheme: Two awards for the company, one for the employee. ? Indian National Suggestion Scheme (INSAAN) : Prizes in different years (thrice), Excellence in Suggestion Scheme for the Company, Second Prize to the employee (twice). ? Texaco Development Corporation (TDC), USA : Licensee of the year for operating gassifier on more than rated capacity for over a decade. ? Labour & Employment Dept., Government of Gujarat: Shram Bhushan Award & Rajya Shram Ratna Award to the employees. ? Indian Institute of Chemical Engineers (IICE): ICI Award for Excellence in Process / Product Development. ? Dept. of Scientific & Industrial Research, Ministry of Science & Technology, GOI FICCI: National Award for R&D efforts. ? World Environment Foundation: Golden Peacock Eco Innovation Award.
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? Fertilizers Association of India: Transfer of Improved Farm Technology Award at the national level. ? Computer Society of India: CSI-Nihilent e-Governance Award for the best technology implementation for e-Governance projects. ? The Government of Gujarat Project e Procurement handled by
Code Solutions – A Division of GNFC Ltd. has won the CSI-Nihilent e-Governance Awards 2006-2007 in the category of Government to Business. Award ceremony held at Bangalore on December 1, 2007 at 42nd Computer Society of India (CSI).
5.8 ACHIEVEMENTS:
? Set up the world's largest single stream, fuel oil based Ammonia - Urea plant. ? All fertilizers under the brand name of Narmada, along with extensive support activities, have been well accepted by the country's farmer community.. ? India's largest producer of Formic Acid, Acetic acid and Methanol. ? India's only manufacturer of Glacial Acetic Acid through the cutting-edge Methanol route. ? India's largest single stream plant of Aniline. ? The only manufacturer of Toluene Di-isocyanate in South East Asia. ? Record capacity utilizations in all plants, defying the vintage through ingeniously innovative maintenance measures. ? Development of the first indigenous, eco-friendly technology for H2S removal, CATSOL, a much awarded product of the Company's R&D labs.
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5.9 CONTRIBUTIONS TO THE SOCIETY:
A trust formed by GNFC, Narmada Rural Development Society (NARDES), works for the less privileged by organising or supporting eye check up camps, blood donation camps, book banks, self-employment programs, relief and rebuilding operations after disasters including village adoption, women empowerment programs and senior citizens activity club.
Efforts towards improving quality of life of GNFC employees include creating a township with all amenities, building recreation and sports complex, hospital, establishing a school and colleges or institutions for science, commerce, BBA, MBA, MCA and post graduate diploma courses.
5.10 SOCIAL COMMITMENTS:
Large Lush green landscape with beautiful surroundings nestles Narmada nagar, a peaceful adobe for those who make GNFC what it is.
A club house, tennis court, swimming pool and an open air theatre provide recreations for GNFC personnel. Narmada nagar also has a 32-bed hospital with modern systems and equipments.
Narmada nagar is designed to serve the ideals of community living, encourage fraternity among all GNFC members and integrate the various interests and inclinations of all the individuals.
GNFC is wedded to the prosperity of the farmers. It interacts with them on selection of seeds, on correct usage of fertilizers, on scientific farming methods and on land and water management.
A large soil testing laboratory offering free service, mobile fertilizer sales units, field demonstrations and farmers? camps – all provides direct linkage with farmers.
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Finance Department
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Chapter - VI 6. FINANCE DEPARTMENT
Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.
GNFC possesses a well-organized and highly efficient finance department. It is responsible for funds within as well as outside the organization. The finance department?s main function is to take decision, harmonize individual motives and enterprise goals.
6.1 SECTIONS OF FINANCE DEPARTMENT:
Finance department of GNFC is divided into different sections. Finance department includes total 10 sections. 1. Bank fund section 2. Bills payment section 3. Central Accounting section 4. Marketing Accounting section 5. Stores Accounting section 6. Concurrence section 7. Establishment section 8. Budget and cost section 9. Insurance section 10. Taxation section
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Hierarchy for Finance Department
MD
ED
GM
AGM
CM
SR.MANAGER
MANAGER
OFFICERS
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6.1.1 BANK SECTION:
The bank section in the finance department is a very important section in any company because it carries out various critical activities which are needed for the funds and other cash operations of a company.
6.1.1.1 FUNCTIONS:
? The major task of bank section in GNFC is to negotiate with banks and to get best rate
for finance.
? They have to see that working capital requirement also get satisfied. ? There is one time sanction of working capital in a year. ? GNFC has Rs.430 Crores fund based limit of working capital, while non fund based
limit is Rs.400 Crores.
? Fund based limit is decided on the basis of debtors and inventories of the company i.e.
current assets.
? Non fund based limit includes bank guarantee, letter of credit. ? Long term working capital is only given for the projects. For this appraisal is
necessary and is given by Finance department.
? In case company is having surplus fund, that fund is deposited in the bank as fixed
deposit.
? Bank section has to decide upon whether to go for purchase of equipment or go for
leasing. In case of leasing they have to find out EMI.
The banking section of this company also does many such important activities which are divided into two activities. They are as under.
1. Operational Activity 2. Funds management Activity
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The Operational Activity department deals with four understated activities: ? ? ? ? Issue of cheques Deposit Cheque signing authority Bank reconciliation
The Funds Management section deals with the managing of funds and cash operations activities which are as under,
6.1.1.2 Maintaining of Cash Credit with the banks:-
There are 6 banks with the company maintains such facility. The main bank financing the company is Bank of Baroda. Other are State Bank of India, Canara Bank, Bank of India, ICICI Bank and HDFC Bank.
6.1.1.3 Managing working capital finance and such facility with the banks:-
The Maximum Permissible Bank Finance(MPBF) of Rs. 375 crore is the facility provided to the company. Every year such limit is sanctioned to the company. Every month the statements of debtors, stock and creditors is prepared and based on that the monthly limit is fixed by the bank which is 75% of the total working capital, the standard margin set by the banks.
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6.1.2 BILLS PAYMENT SECTION:
The bills payment section is divided into five different sections depending on the nature of payments incurred and to be made for different activities and expenses. The different parts or sections are as under, 1. Raw materials payment 2. Purchase payment 3. Project/works payment 4. Services payment 5. Foreign payment
Let us see them in detail:
6.1.2.1 Raw materials payment section:
This section deals with the payments for the purchase of raw materials of the company. Thus the functions of this section are Record the transactions of purchase of raw material. Payments done for the purchases and their expenses incurred.
The raw materials which are purchased by the company are I. II. III. IV. V. Oil Gases Coal Chemicals – Caustic soda, Lime, Hydrated lime Rock phosphate
6.1.2.2 Purchase order payment section:
This section has mainly to do with functions which are, To do the payments for the purchases of raw materials To prepare a material requirement report for the request made by the concerned department.
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6.1.2.3 Project / works payment section:
The works payment section deals with the payment for the replacements, civil construction and repairing, breakdown maintenance etc. There are two types of contractor?s bills:
1. First and final bill. 2. Running nature.
There are three types of categories in works payment: I. II. Bill for up to Rs.5000 (minimum) sign of AGM level is required. Above Rs.5000 and below Rs.50000; for that purpose it has to prepare service order for 5000 to 50000 in the vendor code. It comes under TDS of which the rate on consultancy is more i.e. 5% +10% surcharge + 2% education sales. III. Above Rs.50000 – sealed tenders are issued with quotation and it is sent to concurrence department.
6.1.2.4 Services payment section:
This section makes payment for expenses like; Security, Administrative operation, Freight, Transportation, Labor, Stationary and office items, Telecom and Annual maintenance Contracts etc.
Payment modes: ? Cash mode: 1. Temporary advance 2. Departmental impressed money 3. Cash reimbursement ? Cheque mode: Above Rs.20000 company does not pay cash but it gives cheque instead and the company has to give statutory information for that.
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6.1.2.5 Foreign payment section:
This section deals with the payment for all the import purchases of raw materials and other spare parts etc. For that material there is an annual policy of one year taken by the company.
During the time of purchase, general vendor registration is done. Inquiry is plotted form the vendor?s quotation only. After seeing the quotations a statement is prepared by the purchase department and then it is sent to the finance department for the final decision. Then annual contract is done by the party.
Then security deposit for PBG (Performance Bank Guarantee) is made. After this inspection department sees it and goods receipt is issued and the payment is done for the same.
This procedure remains same for the indigenous goods also but with different payment terms. The company has to do its payment for these imported goods through a Letter of Credit which is issued by the bank of the respective countries of the companies and the terms laid down by them.
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6.1.3 CENTRAL ACCOUNTING SECTION:
The central accounting section deals with the consolidation of all the accounting done by the various other sections of the company. Each section has to account for respective areas by way of payment from the parties or through passing the journal vouchers.
6.1.3.1 Accounting work in central accounts section:
Provision of depreciation on various fixed assets. Depreciation is charged against the utilization of and passage of time of fixed assets. It is charged as expenses to the profit and loss account for each year. The amount of depreciation is worded out as per the provisions of the companies Act, 1956.
The company act has specified different rates of depreciation under different methods. There are different rates for different kind of fixed assets like building, plant and machinery, vehicles, furniture etc.
Accounting of sale of fixed assets is also done here in central account, where they have to calculate the profit or loss of the assets.
6.1.3.2 Consolidation of Accounts:
They have SAP system, which has got FAS package. All the accounting entries passed in the FAS package. At the end of the take a run of a system and close the books of the month.
While closing the books of accounts, the general ledger is prepared, which shows the transactions booked under the particular head during the given period. From general ledger, a head wise summary is prepared, which is called Trial Balance.
The accounts (Balance sheet and profit & loss account) are prepared from the trial balance.
The accounts are prepared in accordance the provisions of the companies Act, which specify the format and the manner in which it is to be prepared.
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While preparing the accounts, it also requires complying with the accounting standard issued by the Institute of Chartered Accountants Of India. It also requires disclosing additional information for better presentation of the accounts.
6.1.3.2 Audit:
After preparing the accounts, it requires to audit by the practicing firm of chartered accounts, called statutory auditors. They have M/s CC Chokshi and Co. CA, Ahmedabad as out statutory auditor. During the year the auditors come here to audit the books of accounts maintained by company. They audit their books as per the requirements of Co Act and as per standard practice and norms.
The auditors make sure that all the relevant provisions of the Co. Act, accounting standards, fundamental accounting principles, accounting rules etc are followed properly and consistently. After satisfactory audit of the accounts, the statutory of the accounts, they give qualified audit report.
After completion of the audit, the accounts are printed along with additional information as required by the co Act and the same to be sent to each shareholder.
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6.1.4 MARKETING ACCOUNTING SECTION:
The main function of this section is to do the collection of cash from the various sales from the indigenous and the exported products which are fertilizers and industrial products. Mostly the company gets the sales income through the industrial products.
6.1.4.1 Functions: 1. Cash collection from the exported products. 2. To check the terms and conditions of the Letter of Credit. 3. Cash collection.
Company uses different marketing network for different products. So fund collection method also differs from product to product.
6.1.4.2 Fertilizer products:
For sale of fertilizer products, company uses wide distribution network of regional offices and 23 area offices. For Gujarat, company opened 62 Narmada Khedut Sahay Kendra.
Generally company approves credit as follows: Product Urea CAN ANP Credit period 30 days 60 days 60 days
Company determines credit period based on marketing strategy.
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6.1.4.3 Industrial products:
The major customers for the industrial products of GNFC are as under ? Reliance industries ? Reliance petrochemicals ? IPCL ? Kanoria chemicals ? Simalin chemicals
Thus the main activities performed by marketing account section are: Preparation of sales summary. Preparation of journal ledger. Provide guidance for collection of debts.
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6.1.5 STORES ACCOUNTING SECTION:
Stores accounting section is responsible for making all the accounting entries related to store and valuation of inventories. Stores department when receives any material it sends material receiving report to store accounting section.
When store department issues material to plant or any department, they inform the stores accounting section. Sometimes plants return the material to store department. The stores accounting section makes reverse entry for that.
Stores accounting section prepares monthly report which shows how much store is issued, how much is remaining in stock, how much is returned by a plant etc. Store accounting section also prepares final accounts for stores.
This section is mainly concerned with the accounting. It deals mainly with the MRR, MIV and MRV. It maintains an account for any material received, issued or returned so that they are able to know the inventory at any point of time.
According to code of the item debited to the different account codes are given below.
Code 1 to 100 items 101 to 200 items 201 to 250 items 251 onwards items
Particulars Assign to capital and liability Assign to assets side Assign to income code(credit) Assign to expense code(debit)
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6.1.6 CONCURRENCE SECTION:
This section deals with concurrence procedure. Concurrence means pre-audit. As per company policy, no purchase order can be placed without concurrence section. The main objective of financial concurrence is to get a competitive rate. The concurrence procedure involves approval by authorities of any purchases of goods or services, making contracts, capital expenditure and other marketing related expenses.
Whenever company receives tenders, it should be opened in the presence of finance officer. After opening tenders, technical analysis is done by indented person. Then concurrence section comes into picture.
The main activity of concurrence section is to prepare comparative statement mainly includes – rate, days of credit, sales tax, excise duty, insurance and freight.
The concurrence section keeps the control on the amount specified for the expenditure of budget and expenses.
In the SAP system, budget section has defined different cost center and on the front of the cost center the annual amount of expenditure is defined so that the concurrence section officer can take decision regarding the expenses of that cost center.
After verifying comparative statement concurrence section invite party for negotiation and try to obtain more comparative rates.
The department invites quotation and review them and finally the best bid is found out is given the contract. E-tendering is also done by this section.
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6.1.7 ESTABLISHMENT SECTION:
The establishment section has the function of making the employee related payments like; wages, salary, perks and other facilities like medical facilities, reimbursement of telephone bills, LTC (leave travel concession).
6.1.7.1 DIFFERENT PAYMENTS MADE BY THE COMPANY:
6.1.7.1.1 Medical facilities:
The company has tied up with certain hospitals in various cities like, Mumbai, Ahmadabad, and Surat. All the medical expenditures incurred by the employee are passed on to the company directly if treatment is taken in any of these hospitals.
6.1.7.1.2 Loans and advances:
Loans are given to the employees for various uses such as; For construction of house. For purchase of vehicle. For the marriage of children.
All the loans are given on the basis of certain norms and conditions which are taken care of by this section. The calculation of taxes partially and fully, and the interest thereon the loan is handled by this section.
The employees are also provided with advances like; For the purchase of food grains. For the festivals.
6.1.7.1.3 Maintenance of employee’s record:
For the efficient working of the HRM system the establishment section is integrated with the SAP system which is connected to the HR department.
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This system maintains the entire record of the employee from the date of his joining, salary of the employee, total expenditure incurred, information regarding family and education of children of employee etc.
The data so recorded in the HRM system is summarized and transformed to the SAP system. The SAP system gives support in tax calculation, deduction and also help in how much and how to file the return. It gives control on payment for the professional tax gratuity and pay fund for gratuity and pension.
6.1.7.1.4 Other expenditures payment:
1. School for children 2. Sports and recreation club 3. LTC and travelling expenses 4. Electricity and maintenance of house 5. Telephone expense reimbursement
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6.1.8 BUDGET AND COSTING SECTION:
6.1.8.1 BUDGET:
A budget is a quantitative and monetary expression of future activities which acts as a barometer to monitor for the business.
This section prepares the detailed estimates of all expenditures to be undertaken during a financial year as per the production capacity and market conditions for the products of the company.
Also it deals with the costing of the requirements of raw materials, labor, utilities, maintenance, imports etc. is calculated with consideration of inflation and volatility of fuel prices to find out the total fund requirement during the financial year.
6.1.8.1.1 Sales budget:
Based on marketing survey, it prepares monthly product wise sales budget. And at the end of month, actual sales are compared with budgeted sales.
6.1.8.1.2 Production budget:
Production budget is prepared on the basis of targeted sales and capacity of plants. They also prepare monthly production budget for each product.
6.1.8.1.3 Stock budget:
It is prepared based on the sales and production budget. Budget section is also responsible for finding the difference in actual figures and budgeted figures.
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6.1.8.2 BUDGETORY CONTROL:
Strategic or long term planning requires specification of objectives toward which the future operation should be directed. These objectives should answer a number of fundamental questions about the company?s future growth and development.
Objective therefore should establish the direction in which the management of the company wishes to be handled. The mission of an organization describes in very general terms the broad purpose and reason for an organization existence, the nature of the business it is in and the customer it seeks to serve and satisfy.
6.1.8.2.1 Objective of budgeting:
1. Plan and co-ordinate all the activities of business. 2. Quantify expectation in physical and monetary terms. 3. Co-ordinate all actions. 4. Provide a base for control of function. 5. Examine area of uncertainty and risk.
6.1.8.2.2 Process of budgeting:
1. Communicating details of budget policy and guidelines to those responsible for the preparation of budget. 2. Determining the limiting factor. 3. Negotiation of budget with superior. 4. Initial preparation of various budgets. 5. Final acceptance of review budget. 6. Ongoing review of budget.
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6.1.8.2.3 Human factor in budgeting: ? Participation of employee at various levels in preparation. ? Greater acceptance or resistance to the budget from members of family ownership. ? Resistance from employee to the language of budget and approach to budgeting. ? Resistance from employee to the penalty and reward system shown in the budgetary control system. ? Unexpected response to the budget, from lender and government institute.
6.1.8.2.4 Budgeting process in GNFC:
The budgeting process in the company starts with the distribution of circular from the costing department to the respective departments for preparing their budget proposal for discussions and revision approval on the basis of ZBB situation. This activity is done in the month of December/January.
The budget and costing department also sends the reports regarding the resources consumed during current financial year with reference to the approved budget.
It provides budget provision for the year vis-a-vis actual is providing to the concerned budget controller, to enable to estimate project for next year.
On this basis the concern department prepares its budget for the coming financial year on its projection for expenses and production/ sales/ service plan.
In this process the plant monitoring group plays an important role in preparing budget for all production departments of fertilizer and industrial product division.
If required, finance department also interacts with the concern operation department. PMG also co-ordinates with the marketing department.
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6.1.9 INSURANCE SECTION:
This section is responsible for the plant and machinery and other assets of the company. The company has a mega risk policy which is insured by a consortium of insurers which covers all the plants and machinery and assets and also damages to the third parties dur to operations of the company. The insurance section in the company?s finance department takes care of all the policies undertaken by the company. It looks after the new policies to be taken for a particular asset. And it deals with the renewal of the old policies as and when required by a particular plant or department.
Thus the various functions of this department may be seen as under
1. This section assesses the risk associated with the insurable assets from the Act-of-God and Non-Act-of-God perils for the assets uninsured. 2. It takes the stock of goods in the company premises prior to valuation. 3. It also does the valuation of assets for calculating the value of sum insured. 4. It selects the insurance policy best suited for the coverage of perils faced by the assts of the company. 5. It makes regular payments of premiums. 6. It handles all the insurance claims for settlements.
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6.1.10 TAXATION SECTION:
This section performs the function of collection and payment of service tax, excise duty, customs duty etc. to the government as per the prevailing rates and regulations at any given time. This section also files return of the tax paid to the government as per requirements i.e. quarterly, yearly etc.
6.1.10.1 Vat/service tax:
Enforced in Gujarat from 1/04/06. This tax is revenue for the state government for which the laws are framed and controlled by it only. Every organization registered under it are given a TIN (Tax Identification Number) no., with an 11 digit code.
6.1.10.1.1 Payment:
Payment of tax is to be done within 22 days of the previous month.
6.1.10.1.2 Return:
A type of statement in which information is to be provided which declared by the government. It should have the sales volume of the company, amount of VAT collected on sales, value of purchases.
The return may be filed monthly, quarterly or annually. The quarterly returns are to be filed and paid on or before 22nd July. And 30 days are given for filling returns for the monthly and quarterly returns. The annual returns are to be filed within 90 days by the department i.e. on or before 30th June.
6.1.10.1.3 Assessment: The assessment is done to check for; Demand to pay Demand not to pay Refund
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The information provided by the company has to be checked by the department for arriving at a conclusion that whether the information given by the company is same as shown for the returns filed. It also checks whether the company has to pay something to the government.
6.1.10.1.4 Appeal:
Appeal can be done to the Department then to the Tribunal then to the High Court and then if not solved as the case may be to the Supreme Court.
6.1.10.2 Central sales tax:
The central sales taxes are collected by the central government and the revenue arising from it belongs to respective state.
The central government has come into picture to decrease the competition between two states which are entering into transactions. For this purpose the government issues two forms which are c-form and H-form.
6.1.10.3 Service tax:
The service taxes comes under the purview of central government and the rules and regulations for it are been fixed by the central government itself.
The service tax was implemented in the year 1994 at that time the rate was 5%. In September 2004 it has increased by 3% and had been 8%. Further in May 2005 it had increased by 2% as 10% rate. Now since June 2006 it had increased by 2% and it has remained 12% on the basic amount till now.
6.1.10.4 Application / Registration:
There are two ways where the service provider makes application. 1. Voluntary application: where no amount is to be deposited.
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2. Compulsory registration: if the total service value crosses Rs.8 lac. If the service provider?s value reaches/crosses Rs.7 lac, he has to get registered with the department but not to make payment of tax till it crosses Rs.8 lac. After that registration number is given on the basis of PAN no.
6.1.10.5 Payment:
Government gives only 5 days to make payment that means in particular month if the service provider raises any invoice he has to prepare an account in his books of account.
Whenever the amount for the service provided is received within 5 days of the amount received from the client, the liability toward government rises.
Payment can be done in two ways: 1. To corporate sector: monthly basis 2. To others: quarterly basis
6.1.10.6 Return:
In the service tax the filing of return is based for 6 months that is April to September October to March
6.1.10.7Assessment:
The assessment here is self based where the information is assumed to be correct. But if during a case assessment is done and some information is found to be not disclosed there is penalty for it.
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6.1.10.8 Cenvat:
CENVAT is availed against the excise duty paid. Whatever amount is received back as a setback it is CENVAT like input tax credit (I.T.C.) in VAT.
Whatever amount is paid as a service tax like for purchasing goods on which excise duty is paid that amount is set back given as CENVAT.
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Project on Working capital Management
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TABLE OF CONTENTS Sr. No.
1 2 3 4 5 6 7 8 Introduction Conceptual Framework and Literature review Research Process Data Analysis and Interpretation Findings of study Conclusion and recommendation Bibliography Annexure
Particulars
Page No.
52 55 75 77 117 119 121 123
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Introduction to Working Capital Management
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Chapter - VII 7.1 INTRDUCTION TO WORKING CAPITAL MANAGEMENT
A manufacturing concern needs finance not only for acquiring fixed assets but also for its day to day operations. It has to obtain raw materials, process the raw materials, pay wages and salaries, store finished goods for marketing and granting credit to the customers.
A non manufacturing concern may not require funds for purchase of raw material and their processing. But it needs finance for storing goods and providing credit to its customers. Similarly a concern engaged in providing services may not keep inventories, but it may have to provide credit facilities to its customers. Thus all the enterprises engaged in manufacturing, trading or providing services require finance for its day to day operations.
7.2 NEED FOR WORKING CAPITAL
The basic objective of financial management is to maximize the shareholders wealth. This is possible when the company earns sufficient profit. The amount of such profit largely depends on the magnitude of sales. However, sales do not cover instantaneously. There always a time gap between sales of goods and receipt of cash. Additional capital is required to have uninterrupted business operations, the amount will be locked up in the current assets like account receivables, stock etc. This actually happens due to the “cash cycle” or “operating cycle”. By the time the cash is converted back into cash. If it is not provided, the business operations will be affected to a greater extent and hence this part of finance has to be managed well.
Working capital is essential for the day to day operations of a business and hence it is the lifeblood of any business. The basic theme of working capital management is to provide adequate support for smooth and efficient functioning of normal day to day business operations by striking a trade-off between the three dimensions of working capital i.e. liquidity, profitability and risk. In the present environment of cut throat competition,
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business does not have any other option than cutting the cost of its operations in order to be competitive as well as financially healthy. It is in this context that effective management of working capital plays a vital role. Due to this reason the need of analyzing working capital management of the company arises and research is done for analyzing day to day capital management of GNFC Limited.
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Conceptual Framework and Literature Review
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Chapter - VIII 8. CONCEPTUAL FRAMEWORK AND LITERATURE REVIEW
8.1 Concepts of working capital
There are two concepts of working capital:
8.1.1 Gross working capital: The term “gross working capital” refers to the sum of all current assets of the enterprise employed in the business process. This is a going concern, so the finance manager is highly concerned with the management of assets with a view to bring about productivity from other assets.
Calculation of Gross Working Capital It refers to the firm?s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year or operating cycle and it includes cash, shortterm securities, debtors, bills receivables and inventories. Rs. in lacs Sources of Funds Current assets Inventories Sundry Debtors Cash & bank balance Interest accrued Loan & advances Gross Working Capital 26,957.87 43,012.40 5,501.95 141.48 12,663.63 88,277.33 38,846.52 60,527.55 13,047.91 141.48 28,465.60 38,599.79 38,968.35 15,141.34 447.65 27,240.05 21,725.62 99,214.37 25,385.93 99,896.44 43,075.71 28,871.65 5,541.39 40,503.38 1,668.11 32,339.02 2005-06 2006-07 2007-08 2008-09 2009-10
1,41,029.06 1,20,397.18
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The gross working capital of company contains current asset. The value of gross working capital fluctuates up and down in last five years. It was highest in 2006-07. Investment in current asses should be judged adequately, not more or less, to the need of the business. Excessive investment in current assets should be avoided because it impairs firm?s profitability, as the idle investment earns nothing. Inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet the current obligations. Here we can see that most of the investment in current assets is done in account receivables and inventories.
8.1.2 Net Working Capital: The “net working capital” can be defined as the difference between current assets and current liabilities. It is that portion of current assets which is financed by long term funds.
Thus, the gross concept is in nature of quantitative definition that focuses attention on the level of current assets for given activity. Whereas net working concept is in nature of a quantitative definition which highlights the character of the sources from which the funds have been procured to support that portion of current assets which is in excess of current liabilities.
In conclusion, we can say that working capital management includes both the management of current assets and current liabilities. The goal of working capital management is to manage the firm?s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.
The major thrust is on management of current assets, this is because current liabilities arise in context of current assets.
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Calculation of Net Working Capital
It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within the current year and include creditors, bills payable and outstanding expenses.
Rs. in lacs Sources of Funds Current assets Inventories Sundry Debtors Cash & bank balance Interest accrued Loan & advances (A)Total Current Assets Current Liabilities Liabilities Provisions (B)Total Current Liabilities Net Working Capital(A - B) 26,295.87 10,902.56 37,198.43 44,245.09 9,723.65 53,968.74 35,272.20 13,594.99 48,867.19 23,666.91 13,269.69 36,936.60 28,147.07 14,158.65 42,305.72 26,957.87 43,012.40 5,501.95 141.48 12,663.63 88,277.33 38,846.52 60,527.55 13,047.91 141.48 28,465.60 38,599.79 38,968.35 15,141.34 447.65 27,240.05 21,725.62 99,214.37 25,385.93 99,896.44 43,075.71 28,871.65 5,541.39 40,503.38 1,668.11 32,339.02 2005-06 2006-07 2007-08 2008-09 2009-10
1,41,029.06 1,20,397.18
51,078.90
87,060.32
71,529.99
62,277.77
57,590.72
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8.2 TYPES OF WORKING CAPITAL
There are two types of working capital. The classification is done on the basis of time. They are: 1. Permanent working capital 2. Temporary or variable working capital
1. Permanent working capital: This type of working capital represents current assets required on a continuous basis over the entire year. A manufacturing enterprise has to maintain minimum amount of inventories necessary to ensure uninterrupted production as well as sales. It has following characteristics:
-
It is classified on the basis of the time factor. It constantly changes from one asset to another and continuous to remain in the business process.
-
Its size increases with the growth of business operation.
2. Temporary working capital: This type of working capital represents the additional assets which are required at different times during the operating year i.e. additional inventory, extra cash etc. Seasonal working capital is the additional amount of current assets particularly cash, receivables and inventory, which is required during the more active season of the year. The characteristics of variable working capital are:
-
It is not always gainfully employed, though it may change from one asset to another, as permanent working capital does.
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8.3 FACTORS DETERMINING WORKING CAPITAL
In order to determine the amount of working capital needed by the firm, a number of factors have to be considered by finance manager. These factors are explained below:
1. Nature of business: The composition of current assets is a function of the size of a business and to the industry to which it belongs. Small companies have smaller proportions of cash, receivable and inventory than large corporations. This difference becomes more marked in large corporations. Needs for working capital are thus determined by the nature of an enterprise.
2. Size of business: The working capital requirements are also determined by the size of the business. The size of the business has also an impact on its working capital needs. Size may be measured in terms of scale of operations. A firm with larger scale of operation will need more working capital than a small firm 3. Firms’ production policy: A firm having uniform production policy will have to pile stock of materials during the off season periods and thus incurs greater inventory costs and risk. The effect of seasonal fluctuations upon working capital can be offset by pursuing the policy of adjusting production plan to seasonal changes. In case, inventories are kept at minimum levels but the production manager must shoulder the responsibility of constantly varying production schedules in accordance with the changing demand. 4. Firms’ credit policy: Credit control includes factors such as the volume of credit sales, terms of credit sales, collection policy etc. With a sound credit control policy, it is possible for a firm to improve its cash inflow.
5. Access to money market:
The working capital requirements of a firm are
conditioned by the firm?s access to different sources of money market. Thus, the firm with readily available credit from banks at liberal terms will be able to get with less working capital than a firm without such facilities.
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6. Growth and expansion of business: Working capital requirement of an enterprise tend to increase in correspondence with growth in volume of sales. Additional current assets will be needed to support increased scale of operations. It can further be noted that a growing enterprise require additional funds continuously to fulfil the increasing needs of the business.
7. Profit margin and dividend policy:
Magnitude of working capital in a firm is
dependent upon its profit margin and dividend policy. As a matter of fact, a high net profit margin reduces the working capital requirement of the firm because it contributes towards the working capital pool. To the extent net profit has been earned in cash, it becomes working capital.
Distribution of high proportion of profits in the form of cash dividend results in a drain of cash resources and thus reduces company?s working capital to that extent. Where the management follows conservative dividend policy and retain larger portion of net profits, the company?s working capital position is strengthened.
8. Operating efficiency of firm:
Operating efficiency of the firm results in optimum
utilization of resources at minimum cost. If a firm successfully controls operating costs, it will be able to improve net profit margin which will in turn release greater funds for working capital purposes.
9. Co-ordination in activities of a firm: Where the production and distribution are coordinated, pressure on working capital will be minimized. In the absence of coordination in production and distribution policies, demand for working capital is reduced.
10. Business fluctuations: Seasonal fluctuations in sales affect the level of variable working capital. Often, the demand for product may be of a seasonal nature. Business expands during the period of prosperity and contracts during the period of depression.
11. Technological development: Technological developments in the area of production can have sharp effect on the need of working capital.
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12. Import policy: Import policy of the government may also have bearing on the levels of working capital of the enterprise, since they have to arrange funds for importing goods at specified times.
13. Taxation policy: In the event of regressive taxation policy, as it exists today in India, imposing heavy tax burden on business enterprise will have very little profits for distribution and retention purposes. Due to it, they have to borrow additional funds to meet their increased working capital needs. Thus pressure on working is minimized particularly when liberal taxation is followed.
14. Transportation and communication developments: Where the means of transport and communication in a country are not well developed, industries require additional funds to maintain huge inventory of raw material and other accessories which would otherwise not be needed where the transport and communication system are highly developed.
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8.4 COMPONENTS OF WORKING CAPITAL
8.4.1 Inventories: The term inventories include stock of raw material, work in progress as well as finished goods. The estimation of each of them will be made as follows:
I.
Stock of raw materials: The average amount of raw materials to be kept in stock will depend on the quantity of raw materials require for production during a particular period and the average time taken in obtaining fresh delivery. Suitable adjustments may have to be made to provide for the contingencies.
II.
Work- in-progress: The cost of work-in-progress includes raw materials, wages and overheads. In determining the amount of work-in-progress, the time period for which the goods will be in the course of production process is more important.
III.
Finished goods: The period for which the goods have to remain in warehouse before sales is an important factor in determining the amount locked in finished goods.
8.4.2 Sundry debtors: The amount of funds locked in sundry debtors will be computed on the basis of credit sales and the time lag in collection of payment.
8.4.3 Sundry creditors: The lag in payment to suppliers of raw materials, goods etc and the likely credit purchase to be made during the period will help in estimating the amount of outstanding expenses.
8.4.4 Outstanding expenses: The time lag in payment of wages and other expenses will help in estimating the amount of outstanding expenses.
8.4.5 Cash and bank balance: The amount of money to be kept as cash on hand or cash at bank can be estimated on the basis of past experience.
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8.5 INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of a large majority of companies of India. Because of large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is therefore imperative to manage inventories effectively and efficiently in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The reduction in „excessive? inventories carries a favourable impact on the company?s profitability.
8.5.1 Objective of inventory management
1. To maintain a large size of inventories of raw material and work-in-progress for efficient and smooth production and of finished goods for uninterrupted sales operations. 2. To maintain a minimum investment in inventories to maximize profitability.
An effective inventory management should Ensure a continuous supply of raw material to facilitate uninterrupted production. Maintain sufficient stocks of raw material in periods of short supply and anticipate price changes. Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service. Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level.
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8.6 CASH MANAGEMENT
8.6.1 Factors of Cash management:
Cash is the most important current aspect for the operations of the business and is the basic input needed to keep the business running on a continuous basis. It is also the ultimate output expected to be realized at seeing the service or product manufactured at the firm. The firm should keep sufficient cash neither max nor less. Cash shortage will disrupt the firm?s manufacturing operation, while excessive cash will simply remain idle without contributing anything towards the firm?s profitability. Thus a major function of the financial manager is to maintain a sound cash position.
The term cash includes coins, currency and cheque hold by the firm and balances in its bank account. Sometimes near cash items such as marketable securities or bank time deposits are also included in cash. The basic characteristics of near cash assets are that they can readily be converted into cash. Generally, when a firm has excess cash it invests in marketable securities. This kind of investment contributes some profit to the firm.
Cash management is concerned with managing of cash flows into and out of the firm. Cash flows within the firm and cash balances held, by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by the cash management cycle, which is shown in the figure below:
Collection
Information & control
Borrow or Invest
Payments
Sales generate cash, which has to be disbursed out. The surplus cash has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks
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to accomplish this cycle at minimum cost. At the same time it also seeks to achieve liquidity and control. The management of cash is very important because it is very difficult to produce cash inflows and outflows accurately and also there is no perfect coincidence and synchronization between cash inflows and outflows. So and obvious aim of the firm is how it can manage its cash affairs? So as to keep cash balances at a minimum level and to invest the surplus cash funds in profitable opportunities.
In order to resolve the uncertainty about cash flows prediction, the firm should develop some strategies for cash management. The main aspect or strategies of cash management are as follows.
8.6.1.1 Cash planning: Cash inflows and outflows should be planned to project cash surplus or deficit purpose. for cash period of the planning periods. Cash budget should be prepared for this
8.6.1.2 Managing the cash flows: The flow of cash should be properly managed. The inflows of cash should be accelerated, while as far as possible the outflow of cash should be decelerated.
8.6.1.3 Optimum cash level: The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.
8.6.1.4 Investing surplus cash: The surplus cash balance should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities etc.
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8.6.2 Cash planning:
Cash flows are inseparable parts of the business operations of all firms. The firm needs cash to invest in inventories, receivables and fixed assets and to make payment for operating expense in order to maintain growth in sales and earnings. It is possible that a firm may be making adequate profits, but may suffer from the shortage of cash or its growing needs may be consuming cash very fast. The poor cash position of the firm can be corrected, if its cash inflows exceed cash outflows. Such excess cash may remain idle, again such excess cash can be anticipated and properly invested if cash planning is recorded. Thus, cash planning can help anticipate future cash flows and needs of the firm and reduces the possibility of the idle cash balance and cash deficits.
Cash planning is a technique to plan for and control the use of cash. It protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. The forecasts may be based on the present operations or the anticipated future operations. Cash plans are very crucial in developing the overall operating plans of the firm?s cash planning. It may be done on daily, weekly or monthly basis.
8.6.3 Cash budgeting:
Cash budget is the most significant device to plan for and control the cash receipts and payments. A cash budget is a summary of the firms expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. This information helps the financial manager to determine the future cash needs of the firm plan for the financing of these needs and exercise control over the cash and liquidity of the firm. Cash budget can be of quarters, month, weeks or even days.
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8.6.4 Cash budgeting process at GNFC:
The budgeting process in GNFC starts with the distribution of circular from the budget and costing section to the respective departments for preparing their budget proposals for discussion and revision before approval on the basis of ZBB and flexible budgeting as applicable practically for a given situation. This activity is generally done in the month of December and January.
Budgeting section first of all prepare yearly budget and then at the end of every three months this budget will be revised and if any fluctuation is there than it can be corrected and this three monthly budget further revised at the end of every month.
The budget and costing section first of all sends the reports regarding the resources consumed during the current financial year with reference to the approved budget. It provides budget provision for the year vise-a-vise actual is provided to the concerned budget controller to estimate project for the next year. On this basis the concerned department prepares its budget for the coming financial year on its projections for expenses and production or sales or service plans. In this process the Plant Monitoring Group (PMG) for the plants, plays an important role in preparing budget for all production departments of fertilizers and IP division. This is a monitoring group for the plants which has the function of monitoring and planning of all plants by keeping in concern their inter relationship and dependencies and then planning the requirement and availability of resources on the basis of priority for production and bottlenecks in production process of various products. PMG interacts with regard to budgeting input norms of raw material and various utilities. If required, financial department also interacts with the concerned operational department. PMG also co-ordinates with marketing department to understand and get estimates of proposed demand for each product specifically to plan their product on this basis. It complies the data of month wise projected production for various product departments and the same is provided to financial department. Based on targeted production planning, marketing department plans their product wise, month wise sales budget and also provides the likely product realization. Marketing department also provides the budgeted selling and distribution expenditures region wise as well as product wise and other administrative expenditures. The data so provided by various
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budget centres are considered and complied in the presentable formats after discussion with the concern budget center controller.
The latest input price of raw material, chemical, catalyst and etc is being considered in projection of the directors.
A lot of factors are considered while deciding the cash requirements of the company such as the production of last few years, sales of last few years, cost of production, availability of raw materials etc. thereafter the decision on the requirements of cash are arrived. Then a copy of approved budget is provided to all members of the company.
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8.7 DETERMINANTS OF CASH REQUIREMENTS
1. Terms of purchase and sale: Terms on which the goods are bought and sold decide to a large extent, the amount of cash reserve that a firm will have to hold. If a business firm can manage to buy material on credit terms but sells its product on cash, it can run its affairs with a little cash balance. The reserve tendency will be found when the firm makes purchases on cash basis but it has to sell its product to customers on credit terms.
2. Collection period of receivables: If speed of collection of accounts receivables in a firm is quick, the firm need not to carry large balance. However, owing to liberal credit and collection policies, poor collection machinery and other factor collection period of receivables in the firm is long, the firm will have to maintain relatively substantial reserve of cash to meet normal business expenses.
3. Amount of current liabilities and maturity period: A firm with large amount of current liabilities will have to hold larger than one with small amount of current liabilities. Furthermore, maturity periods of these liabilities should also be considered while deciding the level of cash holding. 4. Nature of demand of firm’s product: Where demand of the firm?s product is highly susceptible to changes in economic conditions, the firm will have to hold large cash balance to strengthen its liquidity position. This tendency is usually observed in undertakings engaged in luxuries products.
5. Credit position of the firm: A firm having established good image in the market circle can carry its business with little cash balance because the firm gets liberal credit facilities from other business enterprise.
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8.7.1 INVESTMENT OF SURPLUS FUNDS
Companies often have surplus funds for short periods of time before they are required for capital expenditures, loan repayment or some other purpose. Instead of allowing these surplus funds to accumulate in current account where they earn no interest, companies invest them in a variety of short term investments like term deposits with banks, money market with mutual funds, and so on. Managing the investment of surplus funds is a very important responsibility of the financial manager.
In GNFC, the surplus funds that are left are invested in fixed deposits with banks, so that interest can be earned on it. Recently government has given the permission to invest in mutual funds so some part of the surplus fund is also being invested in it.
8.8 WORKING CAPITAL FINANCING
Financing of additional working capital requirement becomes a real problem to a finance manager of a concern unit. Commercial banks play the most important role in providing working capital finance, particularly in the Indian context. In the view of the mounting inflation, the Reserve Bank of India has taken up certain fiscal measures to check the money supply in the economy. The balancing need has to be either by long term borrowing or by issuing equity or by earning sufficient profits and retaining the same for coping with the additional working capital requirement.
In GNFC, for raising working capital there is a consortium of banks from whom the working capital funds are raised. The working capital limit is to be sanctioned every year. For getting funds the company has to show last 3 years actual data and 2 years estimated data to the banks. Balance sheet, cash flow statement and ratios are shown to the banks.
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8.9 OPERATING CYCLE
The duration of time needed to complete the below cycle of events in case of a manufacturing firm is called operating cycle. Conversion of cash into raw material Conversion of raw material into work-in-progress Conversion of work-in-progress into finished goods Conversion of debtors and bills receivables into cash
The operating cycle of a manufacturing unit can be shown as given in the following chart.
A/C Receivables
Cash
Finished goods
Raw materials
Work-in-progress
The time gap between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle, whereas the time gap between the payment of raw material purchases and the collection of cash for sales is referred to as the cash cycle. The operating cycle is the sum of the inventory period and account receivable period. Before going into detail of inventory management techniques followed by GNFC, the operating cycle is being calculated to show the relationship between the time the production process takes to convert raw materials into finished goods product and from finished product to generate sales to recovery of bills receivable.
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8.10 LITERATURE REVIEW
Since the literature related to the analysis of working capital management is wide in nature and scope, the most important literature found in the form of popular write-ups, published or unpublished research studies, and articles of researchers are reviewed in this section.
Vijayasaradhi and Rajeswara Rao (1978) carried out a research study on the Indian public enterprises and indicated that an increasing trend in the investment of current assets, unlike in fixed assets, resulted in higher carrying costs, which in turn, negatively affected the position of the sector.
The study carried out by Dr. J. panda (1986) on small scale units of Orissa revealed that management of working capital was neglected by a majority of sample units that led to incurrence of loss.
Harinath (personal communication) in his study on working capital management in small scale industries of cuddapah district of Andhra Pradesh suggested that in order to enhance the profitability, industries should adopt effective working capital management.
Sarvanam (2001) made a study on working capital management in ten selected non-banking financial companies. He concluded that the sample firms, with the help of statistical tools, had placed more importance on the liquidity aspect.
Debashish Sur (1997) conducted a study on working capital management in Colgate (Palmolive) India ltd. He observed that working capital management is not satisfying the conventional standard.
Indrasena Reddy and Someshwar Rao (1996) conducted a study on working capital management in HCL. He used seven ratios and statement of changes in working capital and concluded that the company?s working capital management is not up to the expected level. It needs to be improved by the effective utilization and control of current assets.
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Eljelly (2004) elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. Liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio.
Ghosh and Maji (2003), in their paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992-93 to 2001- 02. For measuring the efficiency of working capital management, performance, utilization and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target efficiency levels of the individual firms, this paper tested the speed of achieving the target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian cement industry as a whole did not perform remarkably well during this period.
B. A Ranjith Appuhami (2008) conducted a study to find the impact of Firms' Capital Expenditure on Working Capital Management. The author used the data collected from listed companies in the Thailand Stock Exchange. The study used Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a proxy for working capital measurement and develop multiple regression models. The empirical research found that firms' capital expenditure has a significant impact on working capital management. The study also found that the firms' operating cash flow, which was recognized as a control variable, has a significant relationship with working capital management, which is consistent with findings of previous similar researches. The findings enhance the knowledge base of working capital management and will help companies manage working capital efficiently in growing situations associated with capital expenditure.
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Research Process
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Chapter - VIIII 9. RESEARCH PROCESS
9.1 Subject of study: Subject of study is “Analysis of working capital management at GNFC limited.”
9.2 Objective of the study: To analyze working capital position of the company. To study the operating cycle of the company. To study various working capital ratios of the company. To analyze liquidity position of the company.
9.3 Data collection: The research is descriptive in nature. The research includes the facts or information already available. The information are used to analyze working capital and critical evaluation of the working capital. Data has been collected through primary and secondary method.
9.3.1 Primary data has been collected by personal discussion with senior officers of finance department.
9.3.2 Secondary data has been collected from last five years annual reports, magazines, journals, internet and some write ups provided by the company.
9.4 Tools of data analysis: The following tools have been used for the purpose of analyzing the data collected from company. Ratio analysis Graphical method Descriptive statistics
9.5 Limitations of the study: Time period is too short. The limitation of statistical tools used, may be the limitation of the study. Majority of findings are based on the secondary data.
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Data analysis and Interpretation
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CHAPTER – X 10. DATA ANALYSIS AND INTERPRETATION 10.1 Inventory conversion period:
10.1.1 Raw Material Conversion Period (RMCP):
Raw material conversion period =
Average raw material inventory Raw material consumption per day
Raw material consumption per day = Raw material consumption / 360
Average stock of raw material inventory = (opening stock of RM + closing stock of RM) / 2
Rs. in Lac Particulars Opening stock of R.M. Closing stock of R.M. Average R.M. R.M. consumption per year R.M. consumption per day R.M. conversion period (Days) 2005-06 2,803.82 5,279.61 4041.72 2006-07 5,279.61 5,269.92 5,274.76 2007-08 5,269.92 5,774.87 5,522.40 2008-09 5,774.87 6,406.32 6090.6 2009-10 6,406.32 10,133.78 8270.05
77,297.37 1,05,123.23 1,23,118.41 1,23,605.50 1,24,761.39
214.72
292.01
341.99
343.35
346.56
19
18
16
18
24
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Interpretation: The smaller the number of days of Raw material conversion period, the more efficient a company is. GNFC Raw material conversion period is around 16 days for the year 2007-08 which shows very efficient management. Raw material is held for less time and less money is tied up in it. By comparing 5 years data, 2009-10 shows the highest Raw material conversion period which is 24 days.
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10.1.2 Work in progress conversion period (WIPCP):
Work in progress conversion period = Average work in progress inventory Cost of production per day
Average stock in WIP = (Opening of WIP + Closing of WIP) / 2 Cost of production = Opening of WIP + Manufacturing exp. – Closing WIP Per day 360
Rs. in Lac Particulars Opening stock of WIP Closing stock of WIP Average WIP inventory Manufacturing Expenses Cost of production per day WIP conversion period (Days) 2005-06 1,838.22 3,007.29 2,422.76 2006-07 3,007.29 580.18 1,793.74 2007-08 580.18 3,447.03 2,013.61 2008-09 3,447.03 1,968.82 2707.93 2009-10 1,968.82 252 1110.41
1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75
319.38
420.53
485.84
507.88
498.05
8
4
4
5
2
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Interpretation: The smaller the number of days of Work in progress conversion period, the more efficient a company is. GNFC Work in progress conversion period is around 2 days for the year 2009-10 which shows very efficient management. Work in progress is held for less time and increase in sales and profit. By comparing 5 years data, 2005-06 shows the highest Work in progress conversion period which is 8 days.
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10.1.3 Finish goods conversion period (FGCP): Finish goods conversion period = Average finish goods inventory Cost of goods sold per day
Average stock of finish goods = (Opening FG + Closing FG)/ 2
Cost of goods = Opening FG + Cost of Production + Admin. & sales exp. + Sold Per day Excise Duty – Closing FG 360
Rs. in Lac Particulars Opening stock of FG Closing stock of FG Average finish goods inventory Cost of Production Admin. & sales expenses Purchase of FG Excise Duty Cost of goods sold per day FG conversion period (Days) 2005-06 4,764.67 3,937.86 4,351.27 2006-07 3,937.86 13,653.44 8,795.65 2007-08 13,653.44 9,411.58 11,532.51 2008-09 9,411.58 11,252.97 10332.28 2009-10 11,252.97 3,250.04 7251.51
1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75 12,870.76 24,667.72 13,375.67 466.35 15,313.18 40,212.52 21,739.87 601.43 17,751.56 63,665.56 21,952.96 792.73 14,544.48 30,641.17 14,222.41 663.69 20,606.90 6,264.59 9,833.12 617.46
9
15
15
16
12
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Interpretation: The smaller the number of days of Finish goods conversion period, the more efficient a company is. GNFC Finish goods conversion period is around 9 days for the year 2005-06 which is very good. Finish goods is held for less time and less money is tied up in it. By comparing 5 years data year the highest Finish goods conversion period is for 2008-09.
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10.1.4 Total inventory conversion period:
Inventory conversion period = RM Conversion period + WIP Conversion period + FG Conversion period
Particulars RM conversion period (Days) WIP conversion period (Days) FG conversion period (Days) Inventory conversion period (Days)
2005-06 2006-07 2007-08 2008-09 2009-10 19 8 9 36 18 4 15 37 16 4 15 35 18 5 16 39 24 2 12 38
Interpretation: The smaller the number of days of inventory outstanding, the more efficient a company is. GNFC Inventory conversion period is around 35 days for the year 2007-08 which is very good. Inventory is held for less time and less money is tied up in inventory. Instead, money is freed up for things like research and development, marketing or even share buybacks and dividend payments. By comparing 5 years data we can conclude that the inventory conversion is almost consistent for all the years. The highest conversion period is observed in 2008-09.
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10.1.5 Debtors conversion period:
Debtors conversion period =
Average Debtors Total Credit sales per Day
Average Debtors= (Opening Debtors + Closing Debtors) / 2
Total Credit sales per Day= Total Credit Sales / 360
Rs. in Lac Particulars Opening Debtors Closing Debtors Average Debtors Total Credit sales Total Credit sales per Day Debtors conversion period (Days) 2005-06 28,958.77 43,012.40 35,985.59 2006-07 43,012.40 60,527.55 51,770 2007-08 60,527.55 38,968.35 49,747.95 2008-09 38,968.35 28,871.65 33,920 2009-10 28,871.65 1,668.11 15,269.88
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 633.70 821.30 1014.84 850.63 753.55
57
63
49
40
20
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Interpretation: Debtors conversion period looks at the number of days needed to collect on sales and involve Accounts Receivables. While cash-only sales have a Debtors conversion period of zero, people do use credit extended by the company, so this number is going to be positive. The Debtors conversion period for the year 2009-10 is 20 days, which is very good for the company. The Debtors conversion period is showing a decreasing trend meaning that the days to collect on sales are decreasing every year.
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10.1.6 Creditors conversion period:
Creditors conversion period = Average Creditors Total Credit Purchase per Day
Average Creditors = (Opening Creditors + Closing Creditors) / 2
Total Credit purchase per Day = Total Credit purchase / 360
Total Credit purchase = Opening of RM + Purchase of RM + Purchase of FG + Power, fuel & other utilities + Stores & chemicals + packing expense – Closing Of RM Rs. in Lac Particulars Opening Creditors Closing Creditors Average Creditors Total Credit purchase Total Credit purchase per Day Creditors conversion period (Days) 2005-06 2006-07 2007-08 2008-09 2009-10
19,998.32 22,701.03 39,389.51 30,174.94 17,018.55 22,701.03 39,389.51 30,174.94 17,018.55 22,752.84 21,349.68 31,045.27 34,782.23 23,596.75 19,885.70 1,75,032 486.2 44 2,23,560 621.0 50 2,86,344 795.4 44 2,59,164 719.9 33 2,09,268 581.3 34
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Interpretation: This involves the company's payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential. The Creditors conversion period of GNFC is around 34 days for the year 2009-10. It is also observed that Creditors conversion period is decreasing every year. From the data provided, it is found out that GNFC had sufficient funds to make payments of its own bills and make investments in various activities.
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10.1.7 Gross operating cycle:
Gross operating cycle = Inventory conversion period + Debtors conversion period
Particulars Inventory conversion period Debtors conversion period Gross operating cycle (Days)
2005-06 36 57 93
2006-07 37 63 100
2007-08 35 49 84
2008-09 39 40 79
2009-10 38 20 58
Interpretation: Gross operating cycle is a tool which measures the total number of days from the day the purchases are made or the stock arrives to the day all the collections are made. Cash is said to be blocked till the collections have been collected. So the sooner the cash is received from the consumers the better is for the company as they get cash for further production. GNFC gross operating cycle is around 58 days in 2009-10. This is very good for the company as a fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables.
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10.1.8 Net operating cycle:
Net operating cycle = Inventory conversion period + Debtors conversion period – Creditors Conversion period
Particulars Inventory conversion period Debtors conversion period Creditors conversion period Net operating cycle (Days)
2005-06 36 57 44 49
2006-07 37 63 50 50
2007-08 35 49 44 40
2008-09 39 40 33 46
2009-10 38 20 34 24
Interpretation: The Net Operating cycle (NOC) measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. GNFC NOC is of around 24 days in the year 2009-10. This means that the company is able to generate the cash within this period after making it payments of its own bills. Since it is very low, it is good for the company.
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10.2 Working capital position:
10.2.1 Working capital: Working capital = Current Assets – Current Liabilities
Rs. in Lac Particulars Current Assets Current Liabilities Working Capital 2005-06 88,277.33 37,198.43 51,078.90 2006-07 1,41,029.06 53,968.74 87,060.32 2007-08 1,20,397.05 48,867.19 71,529.99 2008-09 1,23,638.71 36,936.60 86,702.11 2009-10 99,896.44 42,305.72 57,590.72
Interpretation: Working Capital Position indicates changes in Current Assets and Current Liabilities over the study period and also during a particular year. Working capital position shows operational efficiency & proper utilization of short term resources in an organization. From the above chart we can say that working capital in GNFC is not consistent and it goes up and down year by year. By comparing 5 years data we can conclude that highest working capital has been achieved bin 2006-07 and lowest was arrived in 2005-06.
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10.3 Liquidity analysis ratio:
10.3.1 Current ratio:
Current ratio = Current Assets / Current Liabilities Rs. in Lac Particulars Current Assets Current Liabilities Current ratio 2005-06 88,277.33 37,198.43 2.37 2006-07 1,41,029.06 53,968.74 2.61 2007-08 1,20,397.05 48,867.19 2.46 2008-09 1,23,638.71 36,936.60 3.35 2009-10 99,896.44 42,305.72 2.36
Interpretation: Working Capital Ratio is used to analyze the short term solvency of the company. The ideal current ratio is 2:1 but in GNFC all the year current ratio is higher than ideal ratio. So GNFC is able to meet its current liabilities out of total current assets and never really face a major problem in meeting its short-term liabilities, which is good sign for the company. The best current ratio observed was 3.35 in year 2008-09.
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10.3.2 Quick ratio:
Quick ratio = Liquid Assets / Current Liabilities Liquid Assets = Current Assets – Inventories Rs. in Lac Particulars Current Assets Inventories Liquid Assets Current Liabilities Quick ratio 2005-06 88,277.33 26,957.87 61,319.51 37,198.43 1.65 2006-07 1,41,029.06 38,846.52 1,02,182.54 53,968.74 1.89 2007-08 1,20,397.05 38,599.79 81,797.39 48,867.19 1.67 2008-09 1,23,638.71
43,075.71
2009-10 99,896.44
40,503.38
80,563 36,936.60 2.18
59,393.06 42,305.72 1.40
Interpretation: Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be satisfactory. This is so because if the quick assets are equal to the current liabilities then the company may be able to meet its entire short-term obligations pretty conveniently. In GNFC all the year ratio is higher than the ideal ratio which is a indicator of positive financial position. The highest quick ratio of 2.18 was observed in 2008-09 due to large
amount of inventory at GNFC during that period.
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10.3.3 Current assets to total assets ratio:
CA to TA ratio = Current assets / Total assets
Rs. in Lac Particulars Current Assets Total Assets CA to TA ratio 2005-06 88,277.33 2,00,070.03 0.4412 2006-07 1,41,029.06 2,69,387.05 0.5235 2007-08 1,20,397.05 2,86,384.91 0.4204 2008-09 1,23,638.71 2,97,393.7 0.4157 2009-10 99,896.44 1,30,763.36 0.7639
Interpretation: Current assets to total assets are fluctuating year by year. In 2006-07 it is increasing trend whereas in 2007-08 and 2008-09 it is decreasing trend. Again in 2009-10 it shows increasing trend. By comparing 5 years data we can conclude that CA to TA ratio is highest for the year 2009-10 that is 0.7639. In GNFC all the year current assets are higher side in the total assets, so company has to think about decreasing current assets by investing extra money in reliable funds so that profitability can be increased.
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10.4 Working capital position:
10.4.1 Inventories:
10.4.1.1 Investment in inventories: Rs. in Lac Particulars Stores & spares Raw material Work in progress Finish goods Total inventories 2005-06 14,733.11 5,279.61 3,007.29 3,937.86 26,957.87 2006-07 19,342.98 5,269.92 580.18 13,653.44 38,846.52 2007-08 19,966.31 5,774.87 3,447.03 9,411.58 38,599.79 2008-09 23,447.60 6,406.32 1,968.82 11,252.97 43,075.71 2009-10 26,867.56 10,133.78 252.00 3,250.04 40,503.38
Interpretation: From the above chart we can say that total investment in inventories is fluctuating year by year but the overall trend is increase in total inventories. The higher the inventory means higher the block of funds and lowers the profit. So increasing trend is not a good sign for company. By comparing 5 years data we can conclude that 2005-06 is best as it shows lowest investment in inventories.
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10.4.1.2 Inventory turnover ratio:
Inventory turnover ratio = Cost of goods sold / average inventory Cost of goods sold = Sales – gross profit
Average inventory = (opening of inventories + closing of inventories) / 2
Rs. in Lac Particulars Sales Gross profit Cost of goods sold Opening of inventories Closing of inventories Average inventories Inv. Turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68
1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95 26,075.42 26,957.87 26,516.65 6.92 26,957.87 38,846.52 32,902.20 7.50 38,846.52 38,599.79 38,723.16 7.95 38,599.79 43,075.71 40,837.75 6.63 43,075.71 40,503.38 41,789.55 5.97
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Interpretation: From the above chart we can say that in 2005-06 inventory turnover ratio is 6.92 times. In 2006-07 it is 7.50 times, in 2007-08 it is 7.95 times, in 2008-09 it is 6.63 times and in 200910 it is 5.97 times. High inventory turnover ratio is better than a low ratio. High inventory turnover ratio shows good inventory management. A good inventory turnover ratio of 7.95 was observed in 2007-08. It means that that the company is turning its inventory of finished goods into sales 7.95 times in a year.
10.4.1.3 Inventory to current assets ratio:
Inventory to current assets ratio = Inventory / current assets
Rs. in Lac Particulars Inventory Current assets Inv. To CA ratio 2005-06 26,957.87 2006-07 38,846.52 2007-08 38,599.79 2008-09 43,075.71 2009-10 40,503.38 99,896.44 0.4055
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.3054 0.2754 0.3206 0.3484
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Interpretation: The Inventory to Current Assets Ratio measures that how much percentage of current assets is formed by the inventories. An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent and it may be difficult to convert them into cash immediately. Normally, less than 0.50 of current assets are treated as average position of inventory.
GNFC has shown increase in the ratio over past few years. So it is not a good sign but it has never gone above 0.41.
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10.4.1.4 Inventory to sales ratio:
Inventory to sales ratio = Inventory / Sales Rs. in Lac Particulars Inventory Sales Inventory to sales ratio 2005-06 26,957.87 2006-07 38,846.52 2007-08 38,599.79 2008-09 43,075.71 2009-10 40,503.38
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 0.1182 0.1314 0.1057 0.1407 0.1493
Interpretation: The Inventory to Sales Ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. as per last 5 years data the lowest ratio was observed in 2007-08 which shows good movement of inventory but since that it is increasing which is not a good sign.
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10.4.2 Sundry debtors:
10.4.2.1 Investment in sundry debtors: Rs. in Lac Particulars Sundry debtors 2005-06 43,012.40 2006-07 60,527.55 2007-08 38,968.35 2008-09 28,871.65 2009-10 1,668.11
Interpretation: From the above chart we can say that in 2005-06 sundry debtors are Rs. 43,012.40 lac. In 2006-07 it is 60,527.55 lac, in 2007-08 it is 38,968.35 lac, in 2008-09 it is 28,871.65 lac and in 2009-10 it is 1,668.11 lac. The lower the sundry debtors means lower the block of funds in sundry debtors. So company can invest that fund in profitable areas and that increases profitability. By comparing 5 years data we can say that sundry debtors are decreasing year by year which is a good sign and lowest sundry debtors were observed in 2009-10.
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10.4.2.2 Receivables (debtors) turnover ratio:
Receivables turnover ratio = Credit sales / average accounts receivables
Rs. in Lac Particulars Credit sales Opening of receivables Closing of receivables Average receivables Rece. Turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 28,958.77 43,012.40 35,985.59 6.34 43,012.40 60,527.55 51,769.98 5.71 60,527.55 38,968.35 49,747.95 7.34 38,968.35 28,871.65 33,920 9.02 28,871.65 1,668.11 15,269.88 17.76
Interpretation: This ratio is also known as Accounts Receivable Turnover Ratio and measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers.
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GNFC have a high and increasing Accounts Receivable Turnover which is a Positive Sign. By comparing 5 years data we can say that receivables turnover ratio is increasing year by year. Highest receivables turnover ratio was observed in 2009-10.
10.4.2.3 Average collection period:
Average collection period =
360 Receivables turnover ratio
Rs. in Lac Particulars Credit sales Opening of receivables Closing of receivables Average receivables Rece. Turnover ratio Average collection period (Days) 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 28,958.77 43,012.40 35,985.59 6.34 57 43,012.40 60,527.55 51,769.98 5.71 63 60,527.55 38,968.35 49,747.95 7.34 49 38,968.35 28,871.65 33,920 9.02 40 28,871.65 1,668.11 15,269.88 17.76 20
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Interpretation: The Average Collection Period represents the average number of days for which a firm takes to collect accounts receivables. It measures the quantity of debtors. The Average Collection Period for GNFC was around 20 days in 2009-10. This is extremely good considering the fact that IFFCO is a fertilizer company. The maximum collection period during this five year period is around 63 days in the year 2006-07 and is decreasing since then.
10.4.2.4 Receivables to current assets ratio:
Receivables to current assets ratio = Receivables / current assets
Rs. in Lac Particulars Receivables Current assets Rece. To CA ratio 2005-06 43,012.40 2006-07 60,527.55 2007-08 38,968.35 2008-09 28,871.65 2009-10 1,668.11 99,896.44 0.0167
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.4872 0.4292 0.3237 0.2335
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Interpretation: Debtors to Current Assets Ratio indicate the position of debtors in total current assets. This ratio is calculated by debtors with current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect of other current assets, it indicates poor recovery of the company. Lower receivable to current assets ratio is better than the higher one for the company. By comparing 5 years data we can say that receivable to current assets ratio is decreasing year by year which shows good performance for company. The lowest receivable to current assets ratio was observed in 2009-10.
10.4.2.5 Debt - equity ratio: Debt – equity ratio = Total debt / Equity share capital
Rs. in Lac Particulars Total debt Equity share capital Debt – equity ratio 2005-06 27,236.53 14,647.62 1.86 2006-07 35,158.48 15,543.74 2.26 2007-08 31,351.38 15,543.74 2.02 2008-09 35,589.95 15,543.74 2.29 2009-10 55,505.53 15,541.88 3.57
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Interpretation: The ratio shows the extent to which debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firm?s operations due to the increasing interference and pressure from creditors. A low debt-equity ratio implies a greater claim of owners than capital By comparing 5 years data we can conclude that debt- equity ratio is increasing year by year and 2005-06 is the best year for the company. In 2009-10 it reaches to 3.57 because of the major increase in the short term loans from the banks.
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10.4.3 Cash and bank balances:
10.4.3.1 Investment in cash and bank balances: Rs. in Lac Particulars Cash and bank balances 2005-06 5,501.95 2006-07 13,047.91 2007-08 15,141.34 2008-09 5,541.39 2009-10 32,339.02
Interpretation: From the above chart we can say that in 2005-06 cash and bank balances are 5,501.95 lac. In 2006-07 they are 13,047.91 lac, in 2007-08 they are 15,141.34 lac, in 2008-09 they are 5,541.39 lac and in 2009-10 they are 32,339.02 lac. High cash and bank balances mean company is able to meet its expenses easily. By comparing 5 years data we can say that cash and bank balances are fluctuating year by year. The highest cash and bank balance was observed in 2009-10.
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10.4.3.2 Cash turnover ratio:
Cash turnover ratio = (cost of sales - depreciation) / cash Cost of sales = sales – gross profit
Rs. in Lac Particulars Sales Gross profit Cost of sales Depreciation Cash Cash turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68
1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95 8,859.43 5,501.95 31.74 10,957.02 13,047.91 18.07 11,051.70 15,141.34 19.59 11,972.57 5,541.39 53.10 11,695.92 32,339.02 8.03
Interpretation: From the above chart we can say that in 2005-06 cash turnover ratio is 31.74 times. In 200607 it is 18.07 times, in 2007-08 it is 19.59 times, in 2008-09 it is 53.10 times and in 2009-10 it is 8.03 times. By comparing 5 years data we can conclude that there are large fluctuations in cash turnover ratio year by year. The highest cash turnover ratio was observed in 2008-09 and the lowest cash turnover ratio was observed in 2009-10.
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10.4.3.3 Cash to current assets ratio:
Cash to current assets ratio = Cash / current assets
Rs. in Lac Particulars Cash Current assets Cash to CA ratio 2005-06 5,501.95 2006-07 13,047.91 2007-08 15,141.34 2008-09 5,541.39 2009-10 32,339.02 99,896.44 0.3237
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.0623 0.0925 0.1258 0.0448
Interpretation: The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of cash at hand and cash at bank. Upon analyzing the data of the past 5 years for GNFC it was observed that the cash balances formed only a very small percentage of the current assets. In last 5 years highest was observed in 2009-10 which is 0.3237. The lowest was observed in 2008-09 which is 0.0448. This is a positive sign as it shows effective utilization of the funds of the organization and there is not much of idle cash with the organization.
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10.4.3.4 Sales to current assets ratio:
Sales to current assets ratio =
Sales Current assets
Rs. in Lac Particulars Sales Current assets Sales to CA ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 2.58 2.10 3.03 2.48 99,896.44 2.72
Interpretation: The Sales to Current Assets Ratio basically measures how well a company is making use of its assets in generating sales. An increasing sale to current assets ratio is a positive sign as it indicates that the company has a healthy production scenario because of which most of inventory is being converted into sales for the company. GNFC has shown a decrease in its sales to current assets ratio from 2005-06 to 2007-08 after which it is constantly increasing which implies that the company is doing well and inventory is not being held up at any stage in the production process.
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10.4.3.5 Working capital turnover ratio:
Working capital turnover ratio =
Sales Average working capital
Average working capital = Current Assets – Current Liabilities
Rs. in Lac Particulars Sales Average working capital Working capital turnover ratio 51,078.90 87,060.32 71,529.99 86,702.11 57,590.72 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75
4.47
3.40
5.11
3.53
4.71
Interpretation: GNFC has a high working capital turnover ratio.
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The Working Capital turnover ratio measures how well the company's working capital is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Increasing Working Capital turnover ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales.
The company has been able to gain more Net Sales with the smaller amount of Working Capital in 2007-08 as compared to that in 2006-07. The working capital turnover had been decreasing from 5.11 in the year 2007-08 to 3.53 in 2008-09 but it increasing then to 4.71 in the year 2009-10.
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10.5 PROFITABILITY RATIOS:
10.5.1 Return on assets:
Return on assets =
Profit after tax Total assets
Rs. in Lac Particulars Profit after tax Total assets Return on assets 2005-06 29,472.30 2006-07 32,646.65 2007-08 37,288.30 2008-09 22,751.73 2,97,393.7 0.0765 2009-10 12,383.74 1,30,763.36 0.0947
2,00,070.03 2,69,387.05 2,86,384.91 0.1473 0.1212 0.1302
Interpretation: ROA is an indicator of how profitable a company is relative to its total assets. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.
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At GNFC in last 5 years, highest ROA was observed in 2005-06 since than it is decreasing and in 2009-10 it reaches to 0.0947.
10.5.2 Net profit margin:
Net profit margin =
Profit after tax Sales
Rs. in Lac Particulars Profit after tax Sales Net profit margin 2005-06 29,472.30 2006-07 32,646.65 2007-08 37,288.30 2008-09 22,751.73 2009-10 12,383.74
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 0.1292 0.1104 0.1021 0.0743 0.0456
Interpretation: Net profit margin ratio establishes a relationship between net profit and sales and indicates management?s efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firm?s ability to turn each rupee sales into net profit.
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From the data, GNFC have a decreasing net profit margin. The sales turnover depend upon the element of subsidy which is decided by the government from time - to - time depending on the condition of international market. In last 5 years, due to increase in subsidy the net profit margin is decreasing.
10.5.3 Loans and advances to current assets:
Loans and advances to current assets = Loans and advances Current assets
Rs. in Lac Particulars Loans and advances Current assets Loans and advances to current assets 2005-06 12,663.63 2006-07 28,465.60 2007-08 27,240.05 2008-09 21,725.62 2009-10 25,385.93 99,896.44
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71
0.1435
0.2018
0.2263
0.1757
0.2541
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Interpretation: As per the data, it can be clearly said that the position of the Loans & Advances with respect to current assets is increasing every year (a marginal decrease in the year 2008-09) which is very good for GNFC. The ratio was around 14.35% in 2005-06 which had increased to 25.41% in 2009-10.
10.5.4 Loans and advances to working capital:
Loans and advances to working capital = Loans and advances Working capital
Rs. in Lac Particulars Loans and advances Working capital Loans and advances to working capital 2005-06 12,663.63 51,078.90 0.2480 2006-07 28,465.60 87,060.32 0.3270 2007-08 27,240.05 71,529.99 0.3110 2008-09 21,725.62 86,702.11 0.2506 2009-10 25,385.93 57,590.72 0.4408
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Interpretation: This ratio shows how significant Loans & Advances Are to Working Capital and that Loans & Advances plays an important role in working capital management of GNFC. This ratio shows that the company has more cash in hand and can utilize these funds as per the company requirement. At GNFC, this ratio has been in the increasing trend which is good for the organization. This means that company is having enough cash and utilizing it effectively. In last 5 years, highest ratio was observed in 2009-10.
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Findings
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Chapter - IX 11. FINDINGS
After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that
? Current ratio is almost constant which shows that there is uniform increase or decrease in current assets and current liabilities.
? Cash and Bank Balances have increased during this period which indicates improper utilization of funds at GNFC.
? Position of inventory is very good in current assets (40.55%). Inventory Turnover Ratio increases during first 3 years of study but decreased in last 2 years, which shows average performance of utilization of inventory during the study period.
? Position of debtors to current assets is 1.67%. This ratio had decreased constantly from 48.72% to 1.67% during the study period which shows significant decrease in the debtors of the company.
? Loans and Advances are increasing every year and contribute majorly (25%) to
current assets. This means that the company is not facing any problem to get the required short term financing.
? Large part of working capital is involved in maintaining inventory and it depends on the level of inventory every year.
? There are huge up and down fluctuations in the working capital of the company during the study period.
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? Debt to equity ratio is constantly increasing during last 5 years except small decrease in the year 2007-08. The increase in debt is due to increase in the borrowings.
? Net profit margin has been constantly decreasing in last 5 years because of the
significant increase in the raw material prices, decrease in the subsidy and consequent increase in cost of production. Looking to the trends, GNFC has been able to manage the profits but the percentage is decreasing. Profit is realized because of sales of industrial chemicals.
? Net operating cycle of GNFC has decreased to 18 days in 2009-10 means company is
now able to generate cash in very short period.
? Company?s production and operation department are quite efficient and do optimum use of raw materials but sometimes raw material conversion period takes longer time because of shutdown or breakdown in the plant. This happens as all plants are interlinked with each other.
? Debtors conversion period and creditors conversion period has also decreasing trend
in the study period which shows efficient performance of the company.
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Conclusion
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Chapter - IIX 12. CONCLUSION AND RECOMMENDATIONS
? The management field requires practical exposure to the outside corporate world to learn the management skills. I got the golden opportunity to complete my Summer Internship Project in GNFC. I had a very good experience and was able to gain good idea about the company and the financial department. I am sure that this experience will not only be useful to me for academic purpose but it will also be useful to me in my future career. ? My project work involved the study on „Working Capital Management?. In this project the study was conducted through the analysis of the operating cycle and ratios related to working capital. From the analysis I reached to the conclusion that the GNFC has a very sound Working Capital Management. In the year 2009-10 the company had very good credit policy through which the collection period was reduced which was good for the company. From the ratio analysis it is concluded that the liquidity and solvency position of the company is strong and the company is managing its working capital very efficiently.
? Working capital is one of the most important aspects of operational efficiency of business. Working Capital plays a very important role in the functioning of any organization. Both the current assets and current liabilities are very much influencing factors on the working capital of an organization.
? After the discussion and analysis of the financial position of GNFC, it is clear that the working capital of GNFC is in sound position. Working capital is not only measured by current assets & current liabilities but also there are some other factors that have an influenced on the working capital.
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? In current assets, there are two most important factors, Debtors and Inventory that affect working capital. In GNFC, Inventory and Debtors are efficiently managed to strengthen the position of the organization both in short term and long terms.
After analyzing and interpreting the financial data of GUJARAT NARMADA VALLEY FERTILIZER COMPANY LIMITED (GNFC) with the help of Ratio Analysis, the following recommendations are given to the organization for further betterment & improvement in the working capital:
? The present status and levels of current assets is extremely good and therefore it requires proper maintenance.
? The current percentage of inventory is high which is not good for operational efficiency and sound working capital and thus, it need to be controlled by using various inventory management techniques such as JIT. Another alternative would be to have varying stock or inventory levels during the different seasons or even months and, thereby, altering the production to suit such needs.
? The working capital turnover ratio was highest in the year 2007-08 i.e. 5.1 times and then next year it was reduced to 3.53 times and then it was slightly improved in the year 2009-10 to 4.71 which needs to improve more in the future.
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Bibliography
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Chapter - IIIX 13. BIBLIOGRAPHY
13.1 Reference books: ? P. Janki Ramudu & Durga Rao, “Working Capital Management: A Review of Research”, Finance India, Vol. XXII No.1. ? Pandey I. M, Financial Management 9th edition, Vikas Publishing House Private Limited. ?
Patel D. R, Working Capital Management, Accounting and financial Management, Atul Prakashan.
13.2 Web sites: ? www.gnfc.in
13.3 Annual reports of GNFC: ? ? ? ? ?
2005-06 2006-07 2007-08 2008-09 2009-10
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Annexure
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Chapter - IIIX ANNEXURE 14.1 BALANCE SHEET:
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Particulars SOURCES OF FUNDS: Shareholder's Funds: Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax: Deferred Tax Liabilities Less: Deferred Tax Assets TOTAL APPLICATION OF FUNDS: Fixed Assets: Gross Block Less: Depreciation/Impairment Net Block Capital Work In Progress Investments: Current Assets, Loans & Advances: Interest accrued on Investments Inventories Sundry Debtors Govt. of India Fertilizer Bonds Cash & Bank Balances Loans & Advances Less: Current Liabilities & Provisions
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31.3.2010
31.3.2009
31.3.2008
31.3.2007
31.3.2006
15,541.88 15,543.74 15,543.74 15,543.74 14,647.62 1,92,363.00 1,85,867.88 1,69,026.13 1,41,518.60 1,03,080.80 2,07,904.88 2,01,411.62 1,84,569.87 1,57,062.34 1,17,728.42 29,000.53 26,505.00 55,505.53 10,284.95 25,305.00 35,589.95 31,046.38 305 31,351.38 34,836.37 322.11 35,158.48 26,761.36 475.17 27,236.53
25,526.32 26,305.75 23,598.65 24,033.56 18,765.00 2,479.09 2,850.22 2002.18 836.07 759.49 23,047.23 23,455.53 21,596.47 23,197.49 18,005.51 2,86,457.64 2,60,457.10 2,37,517.72 2,15,418.31 1,61,970.46
3,08,424.97 1,91,489.85 1,16,935.12 1,02,980.34 2,19,915.46 8,951.46
3,02,799.58 1,79,851.06 1,22,948.52 41,967.41 1,64,915.93 8,839.06
2,75,053.07 1,68,030.19 1,07,022.88 25,921.16 1,32,944.04 33,043.69
2,67,728.77 2,13,788.79 1,57,096.09 1,28,679.18 1,10,632.68 85,109.61 2,875.04 4,862.82 1,13,507.72 89,972.43 14,850.27 21,820.27
40,503.38 1,668.11
43,075.71 28,871.65 24,424.34 32,339.02 5,541.39 15,141.34 13,047.91 25,385.93 21,725.62 27,240.05 28,465.60 99,896.44 1,23,638.71 1,20,397.18 1,41,029.06
447.65 38,599.79 38,968.35
141.48 38,846.52 60,527.55
141.48 26,957.87 43,012.40 5,501.95 12,663.63 88,277.33
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Current Liabilities Provisions Net Current Assets Miscellaneous Expenditure: VRS Compensation Premium on Prepayment TOTAL
28,147.07 14,158.65 42,305.72 57,590.72
23,666.91 13,269.69 36,936.60 86,702.11
35,272.20 13,594.99 48,867.19 71,529.99
44,245.09 9,723.65 53,968.74 87,060.32
26,295.87 10,902.56 37,198.43 51,078.90 98.81
2,86,457.64 2,60,457.10 2,37,517.72
98.81 215418.31 1,62,970.46
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14.2 PROFIT & LOSS ACCOUNT:
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Particulars INCOME: Sales & Service Less: Excise Duty Sales (Net) Lease Rent Less: Equalization A/C Other Income Expenditure: Purchase Manufacturing Expenses Stock of Finished Goods & Stock in Process Marketing, Administration & Other Expenses Personnel Expenses Interest (Net) Depreciation/Amortization Prior Period Adjustments Research & Development Expenses Profit Before Tax Less: Provision for Current Tax Add: Provision for Deferred Tax Less: Provision for FBT Add: Provision for Taxation Profit After Tax Add: Balance from Previous Year Add: P & L A/C Amount Available for Appropriation Appropriation: General Reserve Proposed Dividend Tax on Dividend Balance Carried to Balance Sheet
2009-10
2008-09
2007-08
2006-07
2005-06
2,71,277.75 3,06,228.02 3,65,344.17 2,95,666.61 2,28,133.38 9,833.12 14,222.41 21,952.96 21,739.87 13,375.67 2,61,444.63 2,92,005.61 3,43,391.21 2,73,926.74 2,14,757.71 15.82 1.95 709.31 0 3.61 181.92 15.82 (1.66) 527.39 8,628.26 6,534.06 4,916.63 3,534.35 7,995.62 2,70,072.89 2,98,539.67 3,48,323.66 2,77,459.43 2,23,280.72 6,264.59 30,641.17 63,665.56 40,212.52 24,667.72 1,77,580.75 1,81,360.00 1,77,770.92 1,48,964.90 1,16,146.61 9,719.75 20,606.90 19,682.71 2,338.20 11,695.92 (363.18) 14,544.48 22,131.15 2,692.18 11,972.57 1,375.01 17,751.56 19,016.67 70.77 11,051.70 0 (5,077.09) 15,313.18 16,886.56 1,263.66 10,957.02 0 (342.26) 12,870.76 13,305.02 3,624.00 8,859.43 (6.06)
195.39 190.85 2,48,084.21 2,63,169.22 2,90,702.19 2,28,520.75 1,78,625.22 21,988.68 35,370.45 57,621.47 48,938.68 44,655.50 10,013.24 10,527.66 20.797.27 17,444.74 15,968.00 (408.3) 1,859.06 681.93 564.88 1,167.00 232 222.1 192.25 382.2 4.27 780.08 0 12,383.74 22,751.73 37,288.30 32,646.65 29,472.30 49,164.41 0 0 61,548.15 10,000.00 5,051.11 838.93 45,658.11 61,548.15 52,322.23 0 0 75,073.96 20,000.00 5,051.11 858.44 49,164.41 75,073.96 47,761.80 0 0 85,050.10 25,000.00 6,605.30 1,122.57 52.322.23 85,050.10 35.977.83 6,678.86 186.33 75,489.67 20,000.00 6,605.30 1,122.57 47,761.80 75,489.67 33,603.86 0 0 63,706.16 20,000.00 6,225.24 873.09 35,977.83 63,706.16
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doc_489112249.pdf
A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
A SUMMER INTERNSHIP REPORT ON
AN ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC
Submitted to L.J. Institute of Management Studies
In requirement of partial fulfilment of Master’s of Business Administration (MBA) 2 year full time Program of Gujarat Technological University
Submitted on: 18th July 2011
Submitted by: Harshit R. Doctariyawala Batch No.: 2010-12
Enrolment No.:107290592065
DECLARATION
I, Harshit R. Doctariyawala, hereby declare that this report is prepared on the basis of training taken at „Gujarat Narmada Valley Fertilizers Company Limited? for the period of 1 st June, 2011 to 15th July, 2011.
I ensure about the authentication of the material and give guarantee that there will not be any misuse of data. Data used will only be taken for the academic purpose and will not be used for commercial or any other purpose.
This project report is entirely an outcome of my own efforts and is not submitted either in part or in whole to or copied from any project submitted to any other university or institute for any other degree.
Date: 15th July, 2011 Place: Bharuch
Harshit R. Doctariyawala L.J. Institute of Management Studies, Ahmedabad.
PREFACE
Summer project is a part of the academic requirement incorporated in the curriculum of Master of Business Administration Programme. For the students are required to undertake industrial training. It helps the students to understand the theoretical knowledge of today?s business world. This exercise enables to get practical exposure to realities of corporate world in action and practice.
A great knowledge comes from the combination of better book education and a good training. Keeping this in mind, the Gujarat Technological University has introduced a Summer Training Programme, and thus I got a truly rewarding chance to get the best feel and experience of the real world economic environment in the best possible manner. I have undergone for training at “Gujarat Narmada Valley Fertilizers Company Limited” from 1st June, 2011 to 15th July, 2011. For this purpose, I had undergone a research project work on “ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED”.
During this project work, students get an opportunity to glance into the real business world. In this reference I had studied the real activities and the bottlenecks come in the progress of corporate while managing working capital.
For the primary data has been collected by personal discussion with senior officers of finance department and secondary data has been collected from last five years annual report and company?s website. The importance of working capital management is understood with the help of my project guide as well as with the help of statistical tools that I used to conduct my research.
I have sincerely tried my best for precise and meaningful report construction.
ACKNOWLEDGEMENT
I have been able to prepare my report successfully and I acknowledge a special thanks to all those people without whose support it was impossible for me to make the project report. It has been an enriching experience for me to undergo my summer training at GNFC Limited, Bharuch.
First of all I would like to thank the management of GNFC for granting me permission to take training in their organization. I am thankful to Mr. N.K. Patadia (AGM) and Mr. D.C. Jadeja (Manager) GNFC for giving me an opportunity to carry out the study and prepare this project at GNFC and also for providing me better co-operation, guidance and other facilities during training period.
I have been benefited greatly by knowing of various concepts as I visited various websites for the interpretation of financial ratios.
I would hereby take this opportunity to show my gratitude towards my guide for what I have learnt during my training. A good response, feedback and co-operation are given by her. She helped me in gaining knowledge and solving my queries.
So,
I
would
like
to
give
my
sincere
thanks
to
Mr.
Siddarth
Singh
bist
who provided support in every aspect whenever I felt the need and for providing me this opportunity to work and achieve an unforgettable learning experience. Thanking You, Harshit R. Doctariyawala
CERTIFICATE
It is hereby certified that the work incorporated in the thesis submitted entitled “ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED” submitted by Harshit R. Doctariyawala comprises the result of independent and original investigation carried out me. The material which obtained (and used) from other sources has been duly acknowledged in the thesis.
Date: Place: Signature of the student
It is certified that the work mentioned above is carried out under my guidance.
Date: Place: Signature of the faculty guide
An analysis of working capital management
Table of Contents
Sr. N0. 1 2 3 4 5 6 List of Tables List of Charts Executive Summary Industry Profile Company Profile Finance Department Particulars Page No. 2 4 7 9 14 26
Introduction to Project : “An Analysis of
7
Working Capital Management”
Conceptual Framework and Literature review Research Process Data Analysis and Interpretation Findings of study Conclusion and recommendations Bibliography Annexure
52
8 9 10 11 12 13 14
55 75 77 117 119 121 123
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Chapter - I List of tables
Sr. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Particulars Calculation of gross working capital Calculation of net working capital Raw material conversion period Work in progress conversion period Finish good conversion period Total inventory conversion period Debtors conversion period Creditors conversion period Gross operating cycle Net operating cycle Total investment in working capital Current ratio Quick ratio Current assets to total assets ratio Total investment in inventories Inventory turnover ratio Inventory to current assets ratio Inventory to sales ratio Investment in sundry debtors Receivables turnover ratio Average collection period Receivables to current assets ratio Debt-Equity ratio Page No. 55 57 77 79 81 83 84 86 88 89 90 91 92 93 94 95 96 98 99 100 101 102 103
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24 25 26 27 28 29 30 31 32 33 34
Investment in cash and bank balance Cash turnover ratio Cash to current assets ratio Sales to current assets ratio Working capital turnover ratio Return on assets Net profit margin Loans and advancements to current assets ratio Loans and advancements to working capital ratio Balance sheet of 2005-06 to 2009-10 Profit and loss account of 2005-06 to 2009-10
105 106 107 108 109 111 112 113 117 123 125
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Chapter - II List of charts
Sr. N0. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Particulars Share holding pattern of GNFC Raw material conversion period Work in progress conversion period Finish good conversion period Total inventory conversion period Debtors conversion period Creditors conversion period Gross operating cycle Net operating cycle Total investment in working capital Current ratio Quick ratio Current assets to total assets ratio Total investment in inventories Inventory turnover ratio Inventory to current assets ratio Inventory to sales ratio Investment in sundry debtors Receivables turnover ratio Average collection period Receivables to current assets ratio Debt-Equity ratio Investment in cash and bank balance Page No. 15 78 80 82 83 84 87 88 89 90 91 92 93 94 95 96 98 99 100 101 102 103 105
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24 25 26 27 28 29 30 31
Cash turnover ratio Cash to current assets ratio Sales to current assets ratio Working capital turnover ratio Return on assets Net profit margin Loans and advancements to current assets ratio Loans and advancements to working capital ratio
106 107 108 109 111 112 113 117
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Executive Summary
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Chapter - III Executive Summary
This is a summer training report prepared at “Gujarat Narmada Valley Fertilizer Company Limited”. I have tried to cover the glimpse of overall working of the organization. GNFC is a large fertilizer and petrochemical company established on 10th May, 1976. The various departments that are covered in this project are marketing department, human resource department and finance department. In GNFC, all departments work dependent to each other and structure is line authority.
GNFC has two aims like to do social work for society and to make India a economically strong country. It gives full agricultural services as well as education about crop, soil, seeds and fertilizer to the farmers.
Working capital constitutes the most significant part in all companies. Because of large amount of working capital maintained by firms it is very important to manage working capital efficiently and effectively. This management of working capital carries a favourable impact on the company?s profit.
By understanding the great importance of working capital in overall operation of the company, the analysis had been done on “working capital management” at GNFC.
The study on working capital management has been done with objective of analyzing working capital position of the company, studying operating cycle of the company, studying various working capital ratios and to analyze liquidity position of the company. For that purpose the data has been analyzed for the last 5 years. They have been collected from primary as well as secondary sources. The data has been analyzed with the help of ratio analysis, graphical method and descriptive analysis. From the above study it has been analyzed that working capital position of the company is sound.
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Industrial Profile
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Chapter - IV 4. INDUSTRIAL PROFILE
4.1 Industry overview:
Fertilizer sector is a very crucial for Indian economy because it provides a very important input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self sufficiency in food grains as well as in rapid and sustained agriculture growth.
India is the third largest producer and consumer of fertilizer in the world after china and the United States.
The growth of the Indian fertilizer industry has been largely determined by the policies pursued by the government. The government exercised extensive controls on the production, pricing and distribution of fertilizers.
Like every developing economy, the economy of India is also agro based. Agriculture accounts for nearly 1/4th of India?s GDP and more importantly about 2/3rd of the country? population is dependent on agriculture and allied activities for their livelihood.
As per statistics nearly 225 lacks MT of fertilizer nutrients are required every year in this country. The demand of fertilizers was so high that India had to import almost 30% of its requirement from other countries.
Therefore, to achieve the economic growth, agriculture base of the country must be strengthened. To attain this objective, agriculture practices have to be improved from their traditional pattern to a higher technological track involving better irrigation and use of better quality seeds, fertilizers, insecticides and pesticides.
Therefore, chemical fertilizers are key player in this process and fertilizer industries plays quite a major role in increasing food production in the country and also helps to modernize the outlook of the common farmers and make them innovative and respective to the new technology change.
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Fertilizer production is of permanent importance for this country because fertilizer increases agriculture productivity. On the one hand population is increasing and on the other hand the land is fixed. So we have to produce more without any increase arable land area. This can be done if productivity goes up. And fertilizer plays a major role in productivity escalation.
As this is a vital commodity it is in the interest of the nation that farmers get fertilizer at reasonable rate and in adequate quantity. Looking to the poor economic condition of Indian farmers government of India framed fertilizer policy in 1977 based on Maratha committee report.
The purpose behind introducing this was to supply fertilizer to farmers at a price they can afford, so as to increase the consumption of fertilizer to increase the food production and ensure fair returns to fertilizer producers.
With this twin objective, Retention Price Scheme (RPS) for fertilizers came into picture. In this scheme government has brought the fertilizer under the purview of Essential Commodities Act (ECA) in which the retail price of fertilizer to the farmer is notified by the Government of India from time to time. Government of India fixes the price of fertilizers in such a way that manufacturer?s cost of production including cost of marketing is covered and the manufacturer gets a 12% post tax return on net worth of the unit at pre-defined capacity utilization.
Norms are fixed for consumption of raw material, utilities, services, capacity utilization etc. The price so fixed is called Retention Price (RP). This price is reviewed every three years.
In a nutshell, fertilizers cannot be sold in open markets and producing unit has almost nil say right in fixing fertilizer price. The work of administering the Retention Price Scheme (RPS) is entrusted to Fertilizer Industry Co-ordination Committee (FICC), which works under the control of department of chemicals and fertilizers.
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4.2 Fertilizer Industry Scenario in India
In India, first of all in 1996, a Single Super Phosphate (SSP) manufacturing unit was set up at ranipat near Chennai with annual capacity of 6000 tons.
4.2.1 Public Sector:
? The Fertilizer And Chemicals Travancore Ltd. (FACT) ? Hindustan Fertilizer Corporation Ltd. (HFC) ? Madras Fertilizer Ltd. (MFL) ? Hindustan Copper Ltd. (HCL) ? Naively Lignite Corporation Ltd. (NLC) ? Pyrites, Phosphates And Chemicals Ltd. (PPCL) ? Pradeep Phosphates Ltd. (PPL) ? Rastriya Chemicals and Fertilizers Ltd. (RCFL) ? National Fertilizer Ltd. (NFL) ? Gujarat State Fertilizer Company Ltd. (GSFC)
4.2.2 Joint Sector:
? Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)
4.2.3 Co-operative Sector:
There are only two fertilizer manufacturing societies in co-operative sector. ? Indian Farmers Fertilizers Cooperative Ltd. (IFFCO) ? Krishak Bharati Cooperative Ltd. (KRIBHCO)
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4.2.4 Private Sector:
There are 13 companies in private sector, which are producing fertilizer. ? Hindustan Lever Ltd. (HLL) ? Hari Fertilizer. ? ICI India Ltd. ? Indo Gulf Fertilizers and Chemicals Corporation Ltd. ? Mangalore chemicals and Fertilizers Ltd. (MCFL) ? Southern Petro Chemicals Industries Corporations Ltd. ? Nagarjuna Fertilizer and Chemicals Ltd. (NFCL) ? Shri Ram Fertilizers and Chemicals Ltd. ? Tuticorian Alkali Chemicals and Fertilizer Ltd. ? Zuari Agro Chemicals Ltd. ? Bindali Agro Chemicals Ltd. ? Chambal Fertilizer and Petrochemical Corporation Ltd. (CFPCL) ? E.D.I. Passy (I) Ltd.
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Company Profile
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Chapter - V 5.1 COMPANY PROFILE
Name of the company: Gujarat Narmada Valley Fertilizer Company Ltd. Type: Public sector Scale: Large scale Registered office: P.O. Narmadanagar -392015, Dist. Bharuch, Gujarat (India).
Telephone:
(02642) 247001 to 247015
Fax:
(02642) 247057
Date of establishment: 10th May, 1976
Website:
www.gnfc.in
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Promoters:
Government of Gujarat Gujarat State Fertilizers Company Ltd.
5.2 SHAREHOLDING PATTERN
Source: www.gnfc.in
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5.3 GNFC AT A GLANCE
Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC) is a joint sector enterprise promoted by the Government of Gujarat and the Gujarat State Fertilizers Company Ltd. (GSFC). It was set up in Bharuch, Gujarat in 1976.
Located at Bharuch in an extremely prosperous industrial belt, GNFC draws on the resources of the natural wealth of the land as well as the industrially reach reserves of the area.
GNFC started its manufacturing and marketing operations in 1982, by setting up one of the world?s largest single stream ammonia-urea fertilizer complexes.
Over the next few years, GNFC successfully commissioned different projects in the diverse fields like chemicals, fertilizers and electronics.
Since inception, GNFC has worked towards an extensive growth as a corporation.
GNFC today has extended its profile much beyond fertilizers through a process of horizontal integration.
Chemicals/Petrochemicals, Energy sector, Electronics/Telecommunications and Information Technology form ambitious and challenging additions to its corporate portfolio. GNFC has an enterprising, strategic view towards expansion and diversification.
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5.4 VISION AND MISSION STATEMENT
5.4.1 Vision:
To be a technology driven, environmentally responsible joint sector company manufacturing fertilizers, commodity and specialty chemicals maintaining highest standards of operational excellence and innovation for creating sustainable nature for all stake holders.
5.4.2 Mission statement:
We shall
Be the leading provider of chemicals and agricultural inputs through adoption of state of the art technologies and business process.
Have a firm commitment to quality, environment, health and safety.
Enrich human resources and promote teamwork, innovativeness and integrity.
Achieve sustainable economic growth based on corporate excellence driven by ethical business practices, professionalism, dynamism and social responsibility.
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5.5 GNFC BOARD OF DIRECTORS
5.5.1 Board of Directors
Shri. A.K. Joti Shri. Anand Mohan Tiwary Shri. M.M. Srivastava Shri. D.J. Pandian Shri. R.K. Tripathy Shri. G.C. Murmu Dr. TT Ram Mohan Shri. D.C. Anjaria Dr. Ashok Shah
IAS IAS IAS IAS IAS IAS
Chairman Managing Director Director Director Director Director Director Director Director
5.5.2 Executive Directors
Shri. J.S. Kochar Shri. K.C. Jatania
Executive director-II Executive Director & Chief Finance Officer
Source: www.gnfc.in/aboutus/boardofdir.html
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5.6 KEY PRODUCT PROFILE
4,45,500 MTPA Technology: From M/s Linde AG, Germany. Texaco, USA.
AMMONIA
BASF, Germany. Haldor topsoe, Denmark. Use: In the manufacture of Urea, Ammonium Nitrophosphate, And Weak Nitric Acid. 1,50,000 MTPA Technology: From ICI, UK. Product conforms to highest purity grade of US Federal AA. Use: - Acetic Acid
METHANOL (99.85%)
- Formaldehyde - Pentaerythritol - DMT - TAME - Pharmaceutical and other intermediate etc. 10,000 MTPA, the country’s largest production capacity. Technology: From Kemira OY, Finland. High quality produced
FORMIC ACID (85%)
Formic Acid through Methyl Formate route. Use: - Coagulant in obtaining rubber from latex. - Fixing of dyes in leather and textile industries. - Intermediate in the manufacture of basic drugs etc.
ACETIC ACID (GLACIAL)
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1, 00,000 MTPA, the country’s largest production capacity. Technology: M/s BP Chemicals, UK. The only manufacturer in
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the country to employ methanol route. Use: In the manufacture of Acetic Anhydride, Vinyl Acetate
Monomer (VAM), Purified Terephthatic Acid (PTA), Monochloro Acid, Acetates and Diketene Derivatives etc. 66,000 MTPA, the country’s largest production capacity of COCENTRATED NITRIC ACID (CNA) superior-grade CNA. Technology: M/s Plinke, Germany. Use: In the manufacture of Dyes, Dye intermediates, Drugs,
Nitrobenzene, Aniline, Nitro Chlorobenzene, Nitro Toluene, TDI and other Nitro Derivatives etc. 2, 47,500 MTPA capacity.
WEAK NITRIC Technology: M/s UHDE, Germany. ACID(WNA) Use: In the manufacture of fertilizers. 6, 36,000 MTPA capacity. Technology: M/s UHDE, Germany. UREA Use: In the manufacture of fertilizers, Ammonium Nitrate and other explosives, Glyxal, Sodium Nitrate, H- Acid, Nitrobenzene and other Nitro derivatives etc. 1, 42,500 MTPA capacity. Technology: M/s BASF, Germany. AMMONIUM Use: Basic application during sowing time. NITROPHOSPHATE
CALCIUM
1, 42,500 MTPA capacity.
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AMMONIUM NITRATE
Technology: M/s UHDE, Germany. Use: - In all upland crops, especially commercial and cash crops. - To avoid soil acidity or alkalinity
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5.7 AWARDS:
? National Safety Council, USA: Good Safety Performance. ? National Productivity Council: Best Productivity - First, Second & Third Prizes, Best Productivity for Nitrogenous Fertilizers. ? Ministry of Labour, GOI: Good Safety Performance (Thrice) ? Federation of Indian Chamber of Commerce & Industry (FICCI) : Best Environment Preservation & Pollution Control. ? Indian Chemicals Manufacturers Association (ICMA) : Environmental Control & Safety. ? Fertilizer Association of India (FAI) : For research paper Best Technical Innovation - pure CO2 enhancement scheme in Ammonia plant Best Technical Innovation implemented in fertilizer industry (twice) Best Overall Performance of an operating unit for P2O5 in complex fertilizers ? All India Organization of Employers: Outstanding Contribution in the field of Industrial Relations. ? National Energy Conservation Award, Dept. of Energy, Government of India : Energy Conservation Award, Second Prize. ? Government of India: Award for Energy Conservation. ? Jawaharlal Nehru Memorial National Award: Effective Energy Conservation Award. ? National Suggestion Scheme: Two awards for the company, one for the employee. ? Indian National Suggestion Scheme (INSAAN) : Prizes in different years (thrice), Excellence in Suggestion Scheme for the Company, Second Prize to the employee (twice). ? Texaco Development Corporation (TDC), USA : Licensee of the year for operating gassifier on more than rated capacity for over a decade. ? Labour & Employment Dept., Government of Gujarat: Shram Bhushan Award & Rajya Shram Ratna Award to the employees. ? Indian Institute of Chemical Engineers (IICE): ICI Award for Excellence in Process / Product Development. ? Dept. of Scientific & Industrial Research, Ministry of Science & Technology, GOI FICCI: National Award for R&D efforts. ? World Environment Foundation: Golden Peacock Eco Innovation Award.
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? Fertilizers Association of India: Transfer of Improved Farm Technology Award at the national level. ? Computer Society of India: CSI-Nihilent e-Governance Award for the best technology implementation for e-Governance projects. ? The Government of Gujarat Project e Procurement handled by
Code Solutions – A Division of GNFC Ltd. has won the CSI-Nihilent e-Governance Awards 2006-2007 in the category of Government to Business. Award ceremony held at Bangalore on December 1, 2007 at 42nd Computer Society of India (CSI).5.8 ACHIEVEMENTS:
? Set up the world's largest single stream, fuel oil based Ammonia - Urea plant. ? All fertilizers under the brand name of Narmada, along with extensive support activities, have been well accepted by the country's farmer community.. ? India's largest producer of Formic Acid, Acetic acid and Methanol. ? India's only manufacturer of Glacial Acetic Acid through the cutting-edge Methanol route. ? India's largest single stream plant of Aniline. ? The only manufacturer of Toluene Di-isocyanate in South East Asia. ? Record capacity utilizations in all plants, defying the vintage through ingeniously innovative maintenance measures. ? Development of the first indigenous, eco-friendly technology for H2S removal, CATSOL, a much awarded product of the Company's R&D labs.
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5.9 CONTRIBUTIONS TO THE SOCIETY:
A trust formed by GNFC, Narmada Rural Development Society (NARDES), works for the less privileged by organising or supporting eye check up camps, blood donation camps, book banks, self-employment programs, relief and rebuilding operations after disasters including village adoption, women empowerment programs and senior citizens activity club.
Efforts towards improving quality of life of GNFC employees include creating a township with all amenities, building recreation and sports complex, hospital, establishing a school and colleges or institutions for science, commerce, BBA, MBA, MCA and post graduate diploma courses.
5.10 SOCIAL COMMITMENTS:
Large Lush green landscape with beautiful surroundings nestles Narmada nagar, a peaceful adobe for those who make GNFC what it is.
A club house, tennis court, swimming pool and an open air theatre provide recreations for GNFC personnel. Narmada nagar also has a 32-bed hospital with modern systems and equipments.
Narmada nagar is designed to serve the ideals of community living, encourage fraternity among all GNFC members and integrate the various interests and inclinations of all the individuals.
GNFC is wedded to the prosperity of the farmers. It interacts with them on selection of seeds, on correct usage of fertilizers, on scientific farming methods and on land and water management.
A large soil testing laboratory offering free service, mobile fertilizer sales units, field demonstrations and farmers? camps – all provides direct linkage with farmers.
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Finance Department
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Chapter - VI 6. FINANCE DEPARTMENT
Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operations.
GNFC possesses a well-organized and highly efficient finance department. It is responsible for funds within as well as outside the organization. The finance department?s main function is to take decision, harmonize individual motives and enterprise goals.
6.1 SECTIONS OF FINANCE DEPARTMENT:
Finance department of GNFC is divided into different sections. Finance department includes total 10 sections. 1. Bank fund section 2. Bills payment section 3. Central Accounting section 4. Marketing Accounting section 5. Stores Accounting section 6. Concurrence section 7. Establishment section 8. Budget and cost section 9. Insurance section 10. Taxation section
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Hierarchy for Finance Department
MD
ED
GM
AGM
CM
SR.MANAGER
MANAGER
OFFICERS
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6.1.1 BANK SECTION:
The bank section in the finance department is a very important section in any company because it carries out various critical activities which are needed for the funds and other cash operations of a company.
6.1.1.1 FUNCTIONS:
? The major task of bank section in GNFC is to negotiate with banks and to get best rate
for finance.
? They have to see that working capital requirement also get satisfied. ? There is one time sanction of working capital in a year. ? GNFC has Rs.430 Crores fund based limit of working capital, while non fund based
limit is Rs.400 Crores.
? Fund based limit is decided on the basis of debtors and inventories of the company i.e.
current assets.
? Non fund based limit includes bank guarantee, letter of credit. ? Long term working capital is only given for the projects. For this appraisal is
necessary and is given by Finance department.
? In case company is having surplus fund, that fund is deposited in the bank as fixed
deposit.
? Bank section has to decide upon whether to go for purchase of equipment or go for
leasing. In case of leasing they have to find out EMI.
The banking section of this company also does many such important activities which are divided into two activities. They are as under.
1. Operational Activity 2. Funds management Activity
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The Operational Activity department deals with four understated activities: ? ? ? ? Issue of cheques Deposit Cheque signing authority Bank reconciliation
The Funds Management section deals with the managing of funds and cash operations activities which are as under,
6.1.1.2 Maintaining of Cash Credit with the banks:-
There are 6 banks with the company maintains such facility. The main bank financing the company is Bank of Baroda. Other are State Bank of India, Canara Bank, Bank of India, ICICI Bank and HDFC Bank.
6.1.1.3 Managing working capital finance and such facility with the banks:-
The Maximum Permissible Bank Finance(MPBF) of Rs. 375 crore is the facility provided to the company. Every year such limit is sanctioned to the company. Every month the statements of debtors, stock and creditors is prepared and based on that the monthly limit is fixed by the bank which is 75% of the total working capital, the standard margin set by the banks.
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6.1.2 BILLS PAYMENT SECTION:
The bills payment section is divided into five different sections depending on the nature of payments incurred and to be made for different activities and expenses. The different parts or sections are as under, 1. Raw materials payment 2. Purchase payment 3. Project/works payment 4. Services payment 5. Foreign payment
Let us see them in detail:
6.1.2.1 Raw materials payment section:
This section deals with the payments for the purchase of raw materials of the company. Thus the functions of this section are Record the transactions of purchase of raw material. Payments done for the purchases and their expenses incurred.
The raw materials which are purchased by the company are I. II. III. IV. V. Oil Gases Coal Chemicals – Caustic soda, Lime, Hydrated lime Rock phosphate
6.1.2.2 Purchase order payment section:
This section has mainly to do with functions which are, To do the payments for the purchases of raw materials To prepare a material requirement report for the request made by the concerned department.
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6.1.2.3 Project / works payment section:
The works payment section deals with the payment for the replacements, civil construction and repairing, breakdown maintenance etc. There are two types of contractor?s bills:
1. First and final bill. 2. Running nature.
There are three types of categories in works payment: I. II. Bill for up to Rs.5000 (minimum) sign of AGM level is required. Above Rs.5000 and below Rs.50000; for that purpose it has to prepare service order for 5000 to 50000 in the vendor code. It comes under TDS of which the rate on consultancy is more i.e. 5% +10% surcharge + 2% education sales. III. Above Rs.50000 – sealed tenders are issued with quotation and it is sent to concurrence department.
6.1.2.4 Services payment section:
This section makes payment for expenses like; Security, Administrative operation, Freight, Transportation, Labor, Stationary and office items, Telecom and Annual maintenance Contracts etc.
Payment modes: ? Cash mode: 1. Temporary advance 2. Departmental impressed money 3. Cash reimbursement ? Cheque mode: Above Rs.20000 company does not pay cash but it gives cheque instead and the company has to give statutory information for that.
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6.1.2.5 Foreign payment section:
This section deals with the payment for all the import purchases of raw materials and other spare parts etc. For that material there is an annual policy of one year taken by the company.
During the time of purchase, general vendor registration is done. Inquiry is plotted form the vendor?s quotation only. After seeing the quotations a statement is prepared by the purchase department and then it is sent to the finance department for the final decision. Then annual contract is done by the party.
Then security deposit for PBG (Performance Bank Guarantee) is made. After this inspection department sees it and goods receipt is issued and the payment is done for the same.
This procedure remains same for the indigenous goods also but with different payment terms. The company has to do its payment for these imported goods through a Letter of Credit which is issued by the bank of the respective countries of the companies and the terms laid down by them.
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6.1.3 CENTRAL ACCOUNTING SECTION:
The central accounting section deals with the consolidation of all the accounting done by the various other sections of the company. Each section has to account for respective areas by way of payment from the parties or through passing the journal vouchers.
6.1.3.1 Accounting work in central accounts section:
Provision of depreciation on various fixed assets. Depreciation is charged against the utilization of and passage of time of fixed assets. It is charged as expenses to the profit and loss account for each year. The amount of depreciation is worded out as per the provisions of the companies Act, 1956.
The company act has specified different rates of depreciation under different methods. There are different rates for different kind of fixed assets like building, plant and machinery, vehicles, furniture etc.
Accounting of sale of fixed assets is also done here in central account, where they have to calculate the profit or loss of the assets.
6.1.3.2 Consolidation of Accounts:
They have SAP system, which has got FAS package. All the accounting entries passed in the FAS package. At the end of the take a run of a system and close the books of the month.
While closing the books of accounts, the general ledger is prepared, which shows the transactions booked under the particular head during the given period. From general ledger, a head wise summary is prepared, which is called Trial Balance.
The accounts (Balance sheet and profit & loss account) are prepared from the trial balance.
The accounts are prepared in accordance the provisions of the companies Act, which specify the format and the manner in which it is to be prepared.
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While preparing the accounts, it also requires complying with the accounting standard issued by the Institute of Chartered Accountants Of India. It also requires disclosing additional information for better presentation of the accounts.
6.1.3.2 Audit:
After preparing the accounts, it requires to audit by the practicing firm of chartered accounts, called statutory auditors. They have M/s CC Chokshi and Co. CA, Ahmedabad as out statutory auditor. During the year the auditors come here to audit the books of accounts maintained by company. They audit their books as per the requirements of Co Act and as per standard practice and norms.
The auditors make sure that all the relevant provisions of the Co. Act, accounting standards, fundamental accounting principles, accounting rules etc are followed properly and consistently. After satisfactory audit of the accounts, the statutory of the accounts, they give qualified audit report.
After completion of the audit, the accounts are printed along with additional information as required by the co Act and the same to be sent to each shareholder.
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6.1.4 MARKETING ACCOUNTING SECTION:
The main function of this section is to do the collection of cash from the various sales from the indigenous and the exported products which are fertilizers and industrial products. Mostly the company gets the sales income through the industrial products.
6.1.4.1 Functions: 1. Cash collection from the exported products. 2. To check the terms and conditions of the Letter of Credit. 3. Cash collection.
Company uses different marketing network for different products. So fund collection method also differs from product to product.
6.1.4.2 Fertilizer products:
For sale of fertilizer products, company uses wide distribution network of regional offices and 23 area offices. For Gujarat, company opened 62 Narmada Khedut Sahay Kendra.
Generally company approves credit as follows: Product Urea CAN ANP Credit period 30 days 60 days 60 days
Company determines credit period based on marketing strategy.
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6.1.4.3 Industrial products:
The major customers for the industrial products of GNFC are as under ? Reliance industries ? Reliance petrochemicals ? IPCL ? Kanoria chemicals ? Simalin chemicals
Thus the main activities performed by marketing account section are: Preparation of sales summary. Preparation of journal ledger. Provide guidance for collection of debts.
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6.1.5 STORES ACCOUNTING SECTION:
Stores accounting section is responsible for making all the accounting entries related to store and valuation of inventories. Stores department when receives any material it sends material receiving report to store accounting section.
When store department issues material to plant or any department, they inform the stores accounting section. Sometimes plants return the material to store department. The stores accounting section makes reverse entry for that.
Stores accounting section prepares monthly report which shows how much store is issued, how much is remaining in stock, how much is returned by a plant etc. Store accounting section also prepares final accounts for stores.
This section is mainly concerned with the accounting. It deals mainly with the MRR, MIV and MRV. It maintains an account for any material received, issued or returned so that they are able to know the inventory at any point of time.
According to code of the item debited to the different account codes are given below.
Code 1 to 100 items 101 to 200 items 201 to 250 items 251 onwards items
Particulars Assign to capital and liability Assign to assets side Assign to income code(credit) Assign to expense code(debit)
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6.1.6 CONCURRENCE SECTION:
This section deals with concurrence procedure. Concurrence means pre-audit. As per company policy, no purchase order can be placed without concurrence section. The main objective of financial concurrence is to get a competitive rate. The concurrence procedure involves approval by authorities of any purchases of goods or services, making contracts, capital expenditure and other marketing related expenses.
Whenever company receives tenders, it should be opened in the presence of finance officer. After opening tenders, technical analysis is done by indented person. Then concurrence section comes into picture.
The main activity of concurrence section is to prepare comparative statement mainly includes – rate, days of credit, sales tax, excise duty, insurance and freight.
The concurrence section keeps the control on the amount specified for the expenditure of budget and expenses.
In the SAP system, budget section has defined different cost center and on the front of the cost center the annual amount of expenditure is defined so that the concurrence section officer can take decision regarding the expenses of that cost center.
After verifying comparative statement concurrence section invite party for negotiation and try to obtain more comparative rates.
The department invites quotation and review them and finally the best bid is found out is given the contract. E-tendering is also done by this section.
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6.1.7 ESTABLISHMENT SECTION:
The establishment section has the function of making the employee related payments like; wages, salary, perks and other facilities like medical facilities, reimbursement of telephone bills, LTC (leave travel concession).
6.1.7.1 DIFFERENT PAYMENTS MADE BY THE COMPANY:
6.1.7.1.1 Medical facilities:
The company has tied up with certain hospitals in various cities like, Mumbai, Ahmadabad, and Surat. All the medical expenditures incurred by the employee are passed on to the company directly if treatment is taken in any of these hospitals.
6.1.7.1.2 Loans and advances:
Loans are given to the employees for various uses such as; For construction of house. For purchase of vehicle. For the marriage of children.
All the loans are given on the basis of certain norms and conditions which are taken care of by this section. The calculation of taxes partially and fully, and the interest thereon the loan is handled by this section.
The employees are also provided with advances like; For the purchase of food grains. For the festivals.
6.1.7.1.3 Maintenance of employee’s record:
For the efficient working of the HRM system the establishment section is integrated with the SAP system which is connected to the HR department.
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This system maintains the entire record of the employee from the date of his joining, salary of the employee, total expenditure incurred, information regarding family and education of children of employee etc.
The data so recorded in the HRM system is summarized and transformed to the SAP system. The SAP system gives support in tax calculation, deduction and also help in how much and how to file the return. It gives control on payment for the professional tax gratuity and pay fund for gratuity and pension.
6.1.7.1.4 Other expenditures payment:
1. School for children 2. Sports and recreation club 3. LTC and travelling expenses 4. Electricity and maintenance of house 5. Telephone expense reimbursement
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6.1.8 BUDGET AND COSTING SECTION:
6.1.8.1 BUDGET:
A budget is a quantitative and monetary expression of future activities which acts as a barometer to monitor for the business.
This section prepares the detailed estimates of all expenditures to be undertaken during a financial year as per the production capacity and market conditions for the products of the company.
Also it deals with the costing of the requirements of raw materials, labor, utilities, maintenance, imports etc. is calculated with consideration of inflation and volatility of fuel prices to find out the total fund requirement during the financial year.
6.1.8.1.1 Sales budget:
Based on marketing survey, it prepares monthly product wise sales budget. And at the end of month, actual sales are compared with budgeted sales.
6.1.8.1.2 Production budget:
Production budget is prepared on the basis of targeted sales and capacity of plants. They also prepare monthly production budget for each product.
6.1.8.1.3 Stock budget:
It is prepared based on the sales and production budget. Budget section is also responsible for finding the difference in actual figures and budgeted figures.
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6.1.8.2 BUDGETORY CONTROL:
Strategic or long term planning requires specification of objectives toward which the future operation should be directed. These objectives should answer a number of fundamental questions about the company?s future growth and development.
Objective therefore should establish the direction in which the management of the company wishes to be handled. The mission of an organization describes in very general terms the broad purpose and reason for an organization existence, the nature of the business it is in and the customer it seeks to serve and satisfy.
6.1.8.2.1 Objective of budgeting:
1. Plan and co-ordinate all the activities of business. 2. Quantify expectation in physical and monetary terms. 3. Co-ordinate all actions. 4. Provide a base for control of function. 5. Examine area of uncertainty and risk.
6.1.8.2.2 Process of budgeting:
1. Communicating details of budget policy and guidelines to those responsible for the preparation of budget. 2. Determining the limiting factor. 3. Negotiation of budget with superior. 4. Initial preparation of various budgets. 5. Final acceptance of review budget. 6. Ongoing review of budget.
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6.1.8.2.3 Human factor in budgeting: ? Participation of employee at various levels in preparation. ? Greater acceptance or resistance to the budget from members of family ownership. ? Resistance from employee to the language of budget and approach to budgeting. ? Resistance from employee to the penalty and reward system shown in the budgetary control system. ? Unexpected response to the budget, from lender and government institute.
6.1.8.2.4 Budgeting process in GNFC:
The budgeting process in the company starts with the distribution of circular from the costing department to the respective departments for preparing their budget proposal for discussions and revision approval on the basis of ZBB situation. This activity is done in the month of December/January.
The budget and costing department also sends the reports regarding the resources consumed during current financial year with reference to the approved budget.
It provides budget provision for the year vis-a-vis actual is providing to the concerned budget controller, to enable to estimate project for next year.
On this basis the concern department prepares its budget for the coming financial year on its projection for expenses and production/ sales/ service plan.
In this process the plant monitoring group plays an important role in preparing budget for all production departments of fertilizer and industrial product division.
If required, finance department also interacts with the concern operation department. PMG also co-ordinates with the marketing department.
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6.1.9 INSURANCE SECTION:
This section is responsible for the plant and machinery and other assets of the company. The company has a mega risk policy which is insured by a consortium of insurers which covers all the plants and machinery and assets and also damages to the third parties dur to operations of the company. The insurance section in the company?s finance department takes care of all the policies undertaken by the company. It looks after the new policies to be taken for a particular asset. And it deals with the renewal of the old policies as and when required by a particular plant or department.
Thus the various functions of this department may be seen as under
1. This section assesses the risk associated with the insurable assets from the Act-of-God and Non-Act-of-God perils for the assets uninsured. 2. It takes the stock of goods in the company premises prior to valuation. 3. It also does the valuation of assets for calculating the value of sum insured. 4. It selects the insurance policy best suited for the coverage of perils faced by the assts of the company. 5. It makes regular payments of premiums. 6. It handles all the insurance claims for settlements.
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6.1.10 TAXATION SECTION:
This section performs the function of collection and payment of service tax, excise duty, customs duty etc. to the government as per the prevailing rates and regulations at any given time. This section also files return of the tax paid to the government as per requirements i.e. quarterly, yearly etc.
6.1.10.1 Vat/service tax:
Enforced in Gujarat from 1/04/06. This tax is revenue for the state government for which the laws are framed and controlled by it only. Every organization registered under it are given a TIN (Tax Identification Number) no., with an 11 digit code.
6.1.10.1.1 Payment:
Payment of tax is to be done within 22 days of the previous month.
6.1.10.1.2 Return:
A type of statement in which information is to be provided which declared by the government. It should have the sales volume of the company, amount of VAT collected on sales, value of purchases.
The return may be filed monthly, quarterly or annually. The quarterly returns are to be filed and paid on or before 22nd July. And 30 days are given for filling returns for the monthly and quarterly returns. The annual returns are to be filed within 90 days by the department i.e. on or before 30th June.
6.1.10.1.3 Assessment: The assessment is done to check for; Demand to pay Demand not to pay Refund
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The information provided by the company has to be checked by the department for arriving at a conclusion that whether the information given by the company is same as shown for the returns filed. It also checks whether the company has to pay something to the government.
6.1.10.1.4 Appeal:
Appeal can be done to the Department then to the Tribunal then to the High Court and then if not solved as the case may be to the Supreme Court.
6.1.10.2 Central sales tax:
The central sales taxes are collected by the central government and the revenue arising from it belongs to respective state.
The central government has come into picture to decrease the competition between two states which are entering into transactions. For this purpose the government issues two forms which are c-form and H-form.
6.1.10.3 Service tax:
The service taxes comes under the purview of central government and the rules and regulations for it are been fixed by the central government itself.
The service tax was implemented in the year 1994 at that time the rate was 5%. In September 2004 it has increased by 3% and had been 8%. Further in May 2005 it had increased by 2% as 10% rate. Now since June 2006 it had increased by 2% and it has remained 12% on the basic amount till now.
6.1.10.4 Application / Registration:
There are two ways where the service provider makes application. 1. Voluntary application: where no amount is to be deposited.
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2. Compulsory registration: if the total service value crosses Rs.8 lac. If the service provider?s value reaches/crosses Rs.7 lac, he has to get registered with the department but not to make payment of tax till it crosses Rs.8 lac. After that registration number is given on the basis of PAN no.
6.1.10.5 Payment:
Government gives only 5 days to make payment that means in particular month if the service provider raises any invoice he has to prepare an account in his books of account.
Whenever the amount for the service provided is received within 5 days of the amount received from the client, the liability toward government rises.
Payment can be done in two ways: 1. To corporate sector: monthly basis 2. To others: quarterly basis
6.1.10.6 Return:
In the service tax the filing of return is based for 6 months that is April to September October to March
6.1.10.7Assessment:
The assessment here is self based where the information is assumed to be correct. But if during a case assessment is done and some information is found to be not disclosed there is penalty for it.
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6.1.10.8 Cenvat:
CENVAT is availed against the excise duty paid. Whatever amount is received back as a setback it is CENVAT like input tax credit (I.T.C.) in VAT.
Whatever amount is paid as a service tax like for purchasing goods on which excise duty is paid that amount is set back given as CENVAT.
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Project on Working capital Management
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TABLE OF CONTENTS Sr. No.
1 2 3 4 5 6 7 8 Introduction Conceptual Framework and Literature review Research Process Data Analysis and Interpretation Findings of study Conclusion and recommendation Bibliography Annexure
Particulars
Page No.
52 55 75 77 117 119 121 123
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Introduction to Working Capital Management
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Chapter - VII 7.1 INTRDUCTION TO WORKING CAPITAL MANAGEMENT
A manufacturing concern needs finance not only for acquiring fixed assets but also for its day to day operations. It has to obtain raw materials, process the raw materials, pay wages and salaries, store finished goods for marketing and granting credit to the customers.
A non manufacturing concern may not require funds for purchase of raw material and their processing. But it needs finance for storing goods and providing credit to its customers. Similarly a concern engaged in providing services may not keep inventories, but it may have to provide credit facilities to its customers. Thus all the enterprises engaged in manufacturing, trading or providing services require finance for its day to day operations.
7.2 NEED FOR WORKING CAPITAL
The basic objective of financial management is to maximize the shareholders wealth. This is possible when the company earns sufficient profit. The amount of such profit largely depends on the magnitude of sales. However, sales do not cover instantaneously. There always a time gap between sales of goods and receipt of cash. Additional capital is required to have uninterrupted business operations, the amount will be locked up in the current assets like account receivables, stock etc. This actually happens due to the “cash cycle” or “operating cycle”. By the time the cash is converted back into cash. If it is not provided, the business operations will be affected to a greater extent and hence this part of finance has to be managed well.
Working capital is essential for the day to day operations of a business and hence it is the lifeblood of any business. The basic theme of working capital management is to provide adequate support for smooth and efficient functioning of normal day to day business operations by striking a trade-off between the three dimensions of working capital i.e. liquidity, profitability and risk. In the present environment of cut throat competition,
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business does not have any other option than cutting the cost of its operations in order to be competitive as well as financially healthy. It is in this context that effective management of working capital plays a vital role. Due to this reason the need of analyzing working capital management of the company arises and research is done for analyzing day to day capital management of GNFC Limited.
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Conceptual Framework and Literature Review
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Chapter - VIII 8. CONCEPTUAL FRAMEWORK AND LITERATURE REVIEW
8.1 Concepts of working capital
There are two concepts of working capital:
8.1.1 Gross working capital: The term “gross working capital” refers to the sum of all current assets of the enterprise employed in the business process. This is a going concern, so the finance manager is highly concerned with the management of assets with a view to bring about productivity from other assets.
Calculation of Gross Working Capital It refers to the firm?s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year or operating cycle and it includes cash, shortterm securities, debtors, bills receivables and inventories. Rs. in lacs Sources of Funds Current assets Inventories Sundry Debtors Cash & bank balance Interest accrued Loan & advances Gross Working Capital 26,957.87 43,012.40 5,501.95 141.48 12,663.63 88,277.33 38,846.52 60,527.55 13,047.91 141.48 28,465.60 38,599.79 38,968.35 15,141.34 447.65 27,240.05 21,725.62 99,214.37 25,385.93 99,896.44 43,075.71 28,871.65 5,541.39 40,503.38 1,668.11 32,339.02 2005-06 2006-07 2007-08 2008-09 2009-10
1,41,029.06 1,20,397.18
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The gross working capital of company contains current asset. The value of gross working capital fluctuates up and down in last five years. It was highest in 2006-07. Investment in current asses should be judged adequately, not more or less, to the need of the business. Excessive investment in current assets should be avoided because it impairs firm?s profitability, as the idle investment earns nothing. Inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet the current obligations. Here we can see that most of the investment in current assets is done in account receivables and inventories.
8.1.2 Net Working Capital: The “net working capital” can be defined as the difference between current assets and current liabilities. It is that portion of current assets which is financed by long term funds.
Thus, the gross concept is in nature of quantitative definition that focuses attention on the level of current assets for given activity. Whereas net working concept is in nature of a quantitative definition which highlights the character of the sources from which the funds have been procured to support that portion of current assets which is in excess of current liabilities.
In conclusion, we can say that working capital management includes both the management of current assets and current liabilities. The goal of working capital management is to manage the firm?s current assets and current liabilities in such a way that a satisfactory level of working capital is maintained.
The major thrust is on management of current assets, this is because current liabilities arise in context of current assets.
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Calculation of Net Working Capital
It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within the current year and include creditors, bills payable and outstanding expenses.
Rs. in lacs Sources of Funds Current assets Inventories Sundry Debtors Cash & bank balance Interest accrued Loan & advances (A)Total Current Assets Current Liabilities Liabilities Provisions (B)Total Current Liabilities Net Working Capital(A - B) 26,295.87 10,902.56 37,198.43 44,245.09 9,723.65 53,968.74 35,272.20 13,594.99 48,867.19 23,666.91 13,269.69 36,936.60 28,147.07 14,158.65 42,305.72 26,957.87 43,012.40 5,501.95 141.48 12,663.63 88,277.33 38,846.52 60,527.55 13,047.91 141.48 28,465.60 38,599.79 38,968.35 15,141.34 447.65 27,240.05 21,725.62 99,214.37 25,385.93 99,896.44 43,075.71 28,871.65 5,541.39 40,503.38 1,668.11 32,339.02 2005-06 2006-07 2007-08 2008-09 2009-10
1,41,029.06 1,20,397.18
51,078.90
87,060.32
71,529.99
62,277.77
57,590.72
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8.2 TYPES OF WORKING CAPITAL
There are two types of working capital. The classification is done on the basis of time. They are: 1. Permanent working capital 2. Temporary or variable working capital
1. Permanent working capital: This type of working capital represents current assets required on a continuous basis over the entire year. A manufacturing enterprise has to maintain minimum amount of inventories necessary to ensure uninterrupted production as well as sales. It has following characteristics:
-
It is classified on the basis of the time factor. It constantly changes from one asset to another and continuous to remain in the business process.
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Its size increases with the growth of business operation.
2. Temporary working capital: This type of working capital represents the additional assets which are required at different times during the operating year i.e. additional inventory, extra cash etc. Seasonal working capital is the additional amount of current assets particularly cash, receivables and inventory, which is required during the more active season of the year. The characteristics of variable working capital are:
-
It is not always gainfully employed, though it may change from one asset to another, as permanent working capital does.
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8.3 FACTORS DETERMINING WORKING CAPITAL
In order to determine the amount of working capital needed by the firm, a number of factors have to be considered by finance manager. These factors are explained below:
1. Nature of business: The composition of current assets is a function of the size of a business and to the industry to which it belongs. Small companies have smaller proportions of cash, receivable and inventory than large corporations. This difference becomes more marked in large corporations. Needs for working capital are thus determined by the nature of an enterprise.
2. Size of business: The working capital requirements are also determined by the size of the business. The size of the business has also an impact on its working capital needs. Size may be measured in terms of scale of operations. A firm with larger scale of operation will need more working capital than a small firm 3. Firms’ production policy: A firm having uniform production policy will have to pile stock of materials during the off season periods and thus incurs greater inventory costs and risk. The effect of seasonal fluctuations upon working capital can be offset by pursuing the policy of adjusting production plan to seasonal changes. In case, inventories are kept at minimum levels but the production manager must shoulder the responsibility of constantly varying production schedules in accordance with the changing demand. 4. Firms’ credit policy: Credit control includes factors such as the volume of credit sales, terms of credit sales, collection policy etc. With a sound credit control policy, it is possible for a firm to improve its cash inflow.
5. Access to money market:
The working capital requirements of a firm are
conditioned by the firm?s access to different sources of money market. Thus, the firm with readily available credit from banks at liberal terms will be able to get with less working capital than a firm without such facilities.
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6. Growth and expansion of business: Working capital requirement of an enterprise tend to increase in correspondence with growth in volume of sales. Additional current assets will be needed to support increased scale of operations. It can further be noted that a growing enterprise require additional funds continuously to fulfil the increasing needs of the business.
7. Profit margin and dividend policy:
Magnitude of working capital in a firm is
dependent upon its profit margin and dividend policy. As a matter of fact, a high net profit margin reduces the working capital requirement of the firm because it contributes towards the working capital pool. To the extent net profit has been earned in cash, it becomes working capital.
Distribution of high proportion of profits in the form of cash dividend results in a drain of cash resources and thus reduces company?s working capital to that extent. Where the management follows conservative dividend policy and retain larger portion of net profits, the company?s working capital position is strengthened.
8. Operating efficiency of firm:
Operating efficiency of the firm results in optimum
utilization of resources at minimum cost. If a firm successfully controls operating costs, it will be able to improve net profit margin which will in turn release greater funds for working capital purposes.
9. Co-ordination in activities of a firm: Where the production and distribution are coordinated, pressure on working capital will be minimized. In the absence of coordination in production and distribution policies, demand for working capital is reduced.
10. Business fluctuations: Seasonal fluctuations in sales affect the level of variable working capital. Often, the demand for product may be of a seasonal nature. Business expands during the period of prosperity and contracts during the period of depression.
11. Technological development: Technological developments in the area of production can have sharp effect on the need of working capital.
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12. Import policy: Import policy of the government may also have bearing on the levels of working capital of the enterprise, since they have to arrange funds for importing goods at specified times.
13. Taxation policy: In the event of regressive taxation policy, as it exists today in India, imposing heavy tax burden on business enterprise will have very little profits for distribution and retention purposes. Due to it, they have to borrow additional funds to meet their increased working capital needs. Thus pressure on working is minimized particularly when liberal taxation is followed.
14. Transportation and communication developments: Where the means of transport and communication in a country are not well developed, industries require additional funds to maintain huge inventory of raw material and other accessories which would otherwise not be needed where the transport and communication system are highly developed.
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8.4 COMPONENTS OF WORKING CAPITAL
8.4.1 Inventories: The term inventories include stock of raw material, work in progress as well as finished goods. The estimation of each of them will be made as follows:
I.
Stock of raw materials: The average amount of raw materials to be kept in stock will depend on the quantity of raw materials require for production during a particular period and the average time taken in obtaining fresh delivery. Suitable adjustments may have to be made to provide for the contingencies.
II.
Work- in-progress: The cost of work-in-progress includes raw materials, wages and overheads. In determining the amount of work-in-progress, the time period for which the goods will be in the course of production process is more important.
III.
Finished goods: The period for which the goods have to remain in warehouse before sales is an important factor in determining the amount locked in finished goods.
8.4.2 Sundry debtors: The amount of funds locked in sundry debtors will be computed on the basis of credit sales and the time lag in collection of payment.
8.4.3 Sundry creditors: The lag in payment to suppliers of raw materials, goods etc and the likely credit purchase to be made during the period will help in estimating the amount of outstanding expenses.
8.4.4 Outstanding expenses: The time lag in payment of wages and other expenses will help in estimating the amount of outstanding expenses.
8.4.5 Cash and bank balance: The amount of money to be kept as cash on hand or cash at bank can be estimated on the basis of past experience.
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8.5 INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of a large majority of companies of India. Because of large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is therefore imperative to manage inventories effectively and efficiently in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The reduction in „excessive? inventories carries a favourable impact on the company?s profitability.
8.5.1 Objective of inventory management
1. To maintain a large size of inventories of raw material and work-in-progress for efficient and smooth production and of finished goods for uninterrupted sales operations. 2. To maintain a minimum investment in inventories to maximize profitability.
An effective inventory management should Ensure a continuous supply of raw material to facilitate uninterrupted production. Maintain sufficient stocks of raw material in periods of short supply and anticipate price changes. Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service. Minimize the carrying cost and time Control investment in inventories and keep it at an optimum level.
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8.6 CASH MANAGEMENT
8.6.1 Factors of Cash management:
Cash is the most important current aspect for the operations of the business and is the basic input needed to keep the business running on a continuous basis. It is also the ultimate output expected to be realized at seeing the service or product manufactured at the firm. The firm should keep sufficient cash neither max nor less. Cash shortage will disrupt the firm?s manufacturing operation, while excessive cash will simply remain idle without contributing anything towards the firm?s profitability. Thus a major function of the financial manager is to maintain a sound cash position.
The term cash includes coins, currency and cheque hold by the firm and balances in its bank account. Sometimes near cash items such as marketable securities or bank time deposits are also included in cash. The basic characteristics of near cash assets are that they can readily be converted into cash. Generally, when a firm has excess cash it invests in marketable securities. This kind of investment contributes some profit to the firm.
Cash management is concerned with managing of cash flows into and out of the firm. Cash flows within the firm and cash balances held, by the firm at a point of time by financing deficit or investing surplus cash. It can be represented by the cash management cycle, which is shown in the figure below:
Collection
Information & control
Borrow or Invest
Payments
Sales generate cash, which has to be disbursed out. The surplus cash has to be disbursed out. The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks
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to accomplish this cycle at minimum cost. At the same time it also seeks to achieve liquidity and control. The management of cash is very important because it is very difficult to produce cash inflows and outflows accurately and also there is no perfect coincidence and synchronization between cash inflows and outflows. So and obvious aim of the firm is how it can manage its cash affairs? So as to keep cash balances at a minimum level and to invest the surplus cash funds in profitable opportunities.
In order to resolve the uncertainty about cash flows prediction, the firm should develop some strategies for cash management. The main aspect or strategies of cash management are as follows.
8.6.1.1 Cash planning: Cash inflows and outflows should be planned to project cash surplus or deficit purpose. for cash period of the planning periods. Cash budget should be prepared for this
8.6.1.2 Managing the cash flows: The flow of cash should be properly managed. The inflows of cash should be accelerated, while as far as possible the outflow of cash should be decelerated.
8.6.1.3 Optimum cash level: The firm should decide about the appropriate level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.
8.6.1.4 Investing surplus cash: The surplus cash balance should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities etc.
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8.6.2 Cash planning:
Cash flows are inseparable parts of the business operations of all firms. The firm needs cash to invest in inventories, receivables and fixed assets and to make payment for operating expense in order to maintain growth in sales and earnings. It is possible that a firm may be making adequate profits, but may suffer from the shortage of cash or its growing needs may be consuming cash very fast. The poor cash position of the firm can be corrected, if its cash inflows exceed cash outflows. Such excess cash may remain idle, again such excess cash can be anticipated and properly invested if cash planning is recorded. Thus, cash planning can help anticipate future cash flows and needs of the firm and reduces the possibility of the idle cash balance and cash deficits.
Cash planning is a technique to plan for and control the use of cash. It protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. The forecasts may be based on the present operations or the anticipated future operations. Cash plans are very crucial in developing the overall operating plans of the firm?s cash planning. It may be done on daily, weekly or monthly basis.
8.6.3 Cash budgeting:
Cash budget is the most significant device to plan for and control the cash receipts and payments. A cash budget is a summary of the firms expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. This information helps the financial manager to determine the future cash needs of the firm plan for the financing of these needs and exercise control over the cash and liquidity of the firm. Cash budget can be of quarters, month, weeks or even days.
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8.6.4 Cash budgeting process at GNFC:
The budgeting process in GNFC starts with the distribution of circular from the budget and costing section to the respective departments for preparing their budget proposals for discussion and revision before approval on the basis of ZBB and flexible budgeting as applicable practically for a given situation. This activity is generally done in the month of December and January.
Budgeting section first of all prepare yearly budget and then at the end of every three months this budget will be revised and if any fluctuation is there than it can be corrected and this three monthly budget further revised at the end of every month.
The budget and costing section first of all sends the reports regarding the resources consumed during the current financial year with reference to the approved budget. It provides budget provision for the year vise-a-vise actual is provided to the concerned budget controller to estimate project for the next year. On this basis the concerned department prepares its budget for the coming financial year on its projections for expenses and production or sales or service plans. In this process the Plant Monitoring Group (PMG) for the plants, plays an important role in preparing budget for all production departments of fertilizers and IP division. This is a monitoring group for the plants which has the function of monitoring and planning of all plants by keeping in concern their inter relationship and dependencies and then planning the requirement and availability of resources on the basis of priority for production and bottlenecks in production process of various products. PMG interacts with regard to budgeting input norms of raw material and various utilities. If required, financial department also interacts with the concerned operational department. PMG also co-ordinates with marketing department to understand and get estimates of proposed demand for each product specifically to plan their product on this basis. It complies the data of month wise projected production for various product departments and the same is provided to financial department. Based on targeted production planning, marketing department plans their product wise, month wise sales budget and also provides the likely product realization. Marketing department also provides the budgeted selling and distribution expenditures region wise as well as product wise and other administrative expenditures. The data so provided by various
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budget centres are considered and complied in the presentable formats after discussion with the concern budget center controller.
The latest input price of raw material, chemical, catalyst and etc is being considered in projection of the directors.
A lot of factors are considered while deciding the cash requirements of the company such as the production of last few years, sales of last few years, cost of production, availability of raw materials etc. thereafter the decision on the requirements of cash are arrived. Then a copy of approved budget is provided to all members of the company.
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8.7 DETERMINANTS OF CASH REQUIREMENTS
1. Terms of purchase and sale: Terms on which the goods are bought and sold decide to a large extent, the amount of cash reserve that a firm will have to hold. If a business firm can manage to buy material on credit terms but sells its product on cash, it can run its affairs with a little cash balance. The reserve tendency will be found when the firm makes purchases on cash basis but it has to sell its product to customers on credit terms.
2. Collection period of receivables: If speed of collection of accounts receivables in a firm is quick, the firm need not to carry large balance. However, owing to liberal credit and collection policies, poor collection machinery and other factor collection period of receivables in the firm is long, the firm will have to maintain relatively substantial reserve of cash to meet normal business expenses.
3. Amount of current liabilities and maturity period: A firm with large amount of current liabilities will have to hold larger than one with small amount of current liabilities. Furthermore, maturity periods of these liabilities should also be considered while deciding the level of cash holding. 4. Nature of demand of firm’s product: Where demand of the firm?s product is highly susceptible to changes in economic conditions, the firm will have to hold large cash balance to strengthen its liquidity position. This tendency is usually observed in undertakings engaged in luxuries products.
5. Credit position of the firm: A firm having established good image in the market circle can carry its business with little cash balance because the firm gets liberal credit facilities from other business enterprise.
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8.7.1 INVESTMENT OF SURPLUS FUNDS
Companies often have surplus funds for short periods of time before they are required for capital expenditures, loan repayment or some other purpose. Instead of allowing these surplus funds to accumulate in current account where they earn no interest, companies invest them in a variety of short term investments like term deposits with banks, money market with mutual funds, and so on. Managing the investment of surplus funds is a very important responsibility of the financial manager.
In GNFC, the surplus funds that are left are invested in fixed deposits with banks, so that interest can be earned on it. Recently government has given the permission to invest in mutual funds so some part of the surplus fund is also being invested in it.
8.8 WORKING CAPITAL FINANCING
Financing of additional working capital requirement becomes a real problem to a finance manager of a concern unit. Commercial banks play the most important role in providing working capital finance, particularly in the Indian context. In the view of the mounting inflation, the Reserve Bank of India has taken up certain fiscal measures to check the money supply in the economy. The balancing need has to be either by long term borrowing or by issuing equity or by earning sufficient profits and retaining the same for coping with the additional working capital requirement.
In GNFC, for raising working capital there is a consortium of banks from whom the working capital funds are raised. The working capital limit is to be sanctioned every year. For getting funds the company has to show last 3 years actual data and 2 years estimated data to the banks. Balance sheet, cash flow statement and ratios are shown to the banks.
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8.9 OPERATING CYCLE
The duration of time needed to complete the below cycle of events in case of a manufacturing firm is called operating cycle. Conversion of cash into raw material Conversion of raw material into work-in-progress Conversion of work-in-progress into finished goods Conversion of debtors and bills receivables into cash
The operating cycle of a manufacturing unit can be shown as given in the following chart.
A/C Receivables
Cash
Finished goods
Raw materials
Work-in-progress
The time gap between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle, whereas the time gap between the payment of raw material purchases and the collection of cash for sales is referred to as the cash cycle. The operating cycle is the sum of the inventory period and account receivable period. Before going into detail of inventory management techniques followed by GNFC, the operating cycle is being calculated to show the relationship between the time the production process takes to convert raw materials into finished goods product and from finished product to generate sales to recovery of bills receivable.
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8.10 LITERATURE REVIEW
Since the literature related to the analysis of working capital management is wide in nature and scope, the most important literature found in the form of popular write-ups, published or unpublished research studies, and articles of researchers are reviewed in this section.
Vijayasaradhi and Rajeswara Rao (1978) carried out a research study on the Indian public enterprises and indicated that an increasing trend in the investment of current assets, unlike in fixed assets, resulted in higher carrying costs, which in turn, negatively affected the position of the sector.
The study carried out by Dr. J. panda (1986) on small scale units of Orissa revealed that management of working capital was neglected by a majority of sample units that led to incurrence of loss.
Harinath (personal communication) in his study on working capital management in small scale industries of cuddapah district of Andhra Pradesh suggested that in order to enhance the profitability, industries should adopt effective working capital management.
Sarvanam (2001) made a study on working capital management in ten selected non-banking financial companies. He concluded that the sample firms, with the help of statistical tools, had placed more importance on the liquidity aspect.
Debashish Sur (1997) conducted a study on working capital management in Colgate (Palmolive) India ltd. He observed that working capital management is not satisfying the conventional standard.
Indrasena Reddy and Someshwar Rao (1996) conducted a study on working capital management in HCL. He used seven ratios and statement of changes in working capital and concluded that the company?s working capital management is not up to the expected level. It needs to be improved by the effective utilization and control of current assets.
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Eljelly (2004) elucidated that efficient liquidity management involves planning and controlling current assets and current liabilities in such a manner that eliminates the risk of inability to meet due short-term obligations and avoids excessive investment in these assets. Liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using correlation and regression analysis. The study found that the cash conversion cycle was of more importance as a measure of liquidity than the current ratio.
Ghosh and Maji (2003), in their paper made an attempt to examine the efficiency of working capital management of the Indian cement companies during 1992-93 to 2001- 02. For measuring the efficiency of working capital management, performance, utilization and overall efficiency indices were calculated instead of using some common working capital management ratios. Setting industry norms as target efficiency levels of the individual firms, this paper tested the speed of achieving the target level of efficiency by an individual firm during the period of study. Findings of the study indicated that the Indian cement industry as a whole did not perform remarkably well during this period.
B. A Ranjith Appuhami (2008) conducted a study to find the impact of Firms' Capital Expenditure on Working Capital Management. The author used the data collected from listed companies in the Thailand Stock Exchange. The study used Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a proxy for working capital measurement and develop multiple regression models. The empirical research found that firms' capital expenditure has a significant impact on working capital management. The study also found that the firms' operating cash flow, which was recognized as a control variable, has a significant relationship with working capital management, which is consistent with findings of previous similar researches. The findings enhance the knowledge base of working capital management and will help companies manage working capital efficiently in growing situations associated with capital expenditure.
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Research Process
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Chapter - VIIII 9. RESEARCH PROCESS
9.1 Subject of study: Subject of study is “Analysis of working capital management at GNFC limited.”
9.2 Objective of the study: To analyze working capital position of the company. To study the operating cycle of the company. To study various working capital ratios of the company. To analyze liquidity position of the company.
9.3 Data collection: The research is descriptive in nature. The research includes the facts or information already available. The information are used to analyze working capital and critical evaluation of the working capital. Data has been collected through primary and secondary method.
9.3.1 Primary data has been collected by personal discussion with senior officers of finance department.
9.3.2 Secondary data has been collected from last five years annual reports, magazines, journals, internet and some write ups provided by the company.
9.4 Tools of data analysis: The following tools have been used for the purpose of analyzing the data collected from company. Ratio analysis Graphical method Descriptive statistics
9.5 Limitations of the study: Time period is too short. The limitation of statistical tools used, may be the limitation of the study. Majority of findings are based on the secondary data.
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Data analysis and Interpretation
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CHAPTER – X 10. DATA ANALYSIS AND INTERPRETATION 10.1 Inventory conversion period:
10.1.1 Raw Material Conversion Period (RMCP):
Raw material conversion period =
Average raw material inventory Raw material consumption per day
Raw material consumption per day = Raw material consumption / 360
Average stock of raw material inventory = (opening stock of RM + closing stock of RM) / 2
Rs. in Lac Particulars Opening stock of R.M. Closing stock of R.M. Average R.M. R.M. consumption per year R.M. consumption per day R.M. conversion period (Days) 2005-06 2,803.82 5,279.61 4041.72 2006-07 5,279.61 5,269.92 5,274.76 2007-08 5,269.92 5,774.87 5,522.40 2008-09 5,774.87 6,406.32 6090.6 2009-10 6,406.32 10,133.78 8270.05
77,297.37 1,05,123.23 1,23,118.41 1,23,605.50 1,24,761.39
214.72
292.01
341.99
343.35
346.56
19
18
16
18
24
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Interpretation: The smaller the number of days of Raw material conversion period, the more efficient a company is. GNFC Raw material conversion period is around 16 days for the year 2007-08 which shows very efficient management. Raw material is held for less time and less money is tied up in it. By comparing 5 years data, 2009-10 shows the highest Raw material conversion period which is 24 days.
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10.1.2 Work in progress conversion period (WIPCP):
Work in progress conversion period = Average work in progress inventory Cost of production per day
Average stock in WIP = (Opening of WIP + Closing of WIP) / 2 Cost of production = Opening of WIP + Manufacturing exp. – Closing WIP Per day 360
Rs. in Lac Particulars Opening stock of WIP Closing stock of WIP Average WIP inventory Manufacturing Expenses Cost of production per day WIP conversion period (Days) 2005-06 1,838.22 3,007.29 2,422.76 2006-07 3,007.29 580.18 1,793.74 2007-08 580.18 3,447.03 2,013.61 2008-09 3,447.03 1,968.82 2707.93 2009-10 1,968.82 252 1110.41
1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75
319.38
420.53
485.84
507.88
498.05
8
4
4
5
2
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Interpretation: The smaller the number of days of Work in progress conversion period, the more efficient a company is. GNFC Work in progress conversion period is around 2 days for the year 2009-10 which shows very efficient management. Work in progress is held for less time and increase in sales and profit. By comparing 5 years data, 2005-06 shows the highest Work in progress conversion period which is 8 days.
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10.1.3 Finish goods conversion period (FGCP): Finish goods conversion period = Average finish goods inventory Cost of goods sold per day
Average stock of finish goods = (Opening FG + Closing FG)/ 2
Cost of goods = Opening FG + Cost of Production + Admin. & sales exp. + Sold Per day Excise Duty – Closing FG 360
Rs. in Lac Particulars Opening stock of FG Closing stock of FG Average finish goods inventory Cost of Production Admin. & sales expenses Purchase of FG Excise Duty Cost of goods sold per day FG conversion period (Days) 2005-06 4,764.67 3,937.86 4,351.27 2006-07 3,937.86 13,653.44 8,795.65 2007-08 13,653.44 9,411.58 11,532.51 2008-09 9,411.58 11,252.97 10332.28 2009-10 11,252.97 3,250.04 7251.51
1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75 12,870.76 24,667.72 13,375.67 466.35 15,313.18 40,212.52 21,739.87 601.43 17,751.56 63,665.56 21,952.96 792.73 14,544.48 30,641.17 14,222.41 663.69 20,606.90 6,264.59 9,833.12 617.46
9
15
15
16
12
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Interpretation: The smaller the number of days of Finish goods conversion period, the more efficient a company is. GNFC Finish goods conversion period is around 9 days for the year 2005-06 which is very good. Finish goods is held for less time and less money is tied up in it. By comparing 5 years data year the highest Finish goods conversion period is for 2008-09.
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10.1.4 Total inventory conversion period:
Inventory conversion period = RM Conversion period + WIP Conversion period + FG Conversion period
Particulars RM conversion period (Days) WIP conversion period (Days) FG conversion period (Days) Inventory conversion period (Days)
2005-06 2006-07 2007-08 2008-09 2009-10 19 8 9 36 18 4 15 37 16 4 15 35 18 5 16 39 24 2 12 38
Interpretation: The smaller the number of days of inventory outstanding, the more efficient a company is. GNFC Inventory conversion period is around 35 days for the year 2007-08 which is very good. Inventory is held for less time and less money is tied up in inventory. Instead, money is freed up for things like research and development, marketing or even share buybacks and dividend payments. By comparing 5 years data we can conclude that the inventory conversion is almost consistent for all the years. The highest conversion period is observed in 2008-09.
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10.1.5 Debtors conversion period:
Debtors conversion period =
Average Debtors Total Credit sales per Day
Average Debtors= (Opening Debtors + Closing Debtors) / 2
Total Credit sales per Day= Total Credit Sales / 360
Rs. in Lac Particulars Opening Debtors Closing Debtors Average Debtors Total Credit sales Total Credit sales per Day Debtors conversion period (Days) 2005-06 28,958.77 43,012.40 35,985.59 2006-07 43,012.40 60,527.55 51,770 2007-08 60,527.55 38,968.35 49,747.95 2008-09 38,968.35 28,871.65 33,920 2009-10 28,871.65 1,668.11 15,269.88
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 633.70 821.30 1014.84 850.63 753.55
57
63
49
40
20
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Interpretation: Debtors conversion period looks at the number of days needed to collect on sales and involve Accounts Receivables. While cash-only sales have a Debtors conversion period of zero, people do use credit extended by the company, so this number is going to be positive. The Debtors conversion period for the year 2009-10 is 20 days, which is very good for the company. The Debtors conversion period is showing a decreasing trend meaning that the days to collect on sales are decreasing every year.
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10.1.6 Creditors conversion period:
Creditors conversion period = Average Creditors Total Credit Purchase per Day
Average Creditors = (Opening Creditors + Closing Creditors) / 2
Total Credit purchase per Day = Total Credit purchase / 360
Total Credit purchase = Opening of RM + Purchase of RM + Purchase of FG + Power, fuel & other utilities + Stores & chemicals + packing expense – Closing Of RM Rs. in Lac Particulars Opening Creditors Closing Creditors Average Creditors Total Credit purchase Total Credit purchase per Day Creditors conversion period (Days) 2005-06 2006-07 2007-08 2008-09 2009-10
19,998.32 22,701.03 39,389.51 30,174.94 17,018.55 22,701.03 39,389.51 30,174.94 17,018.55 22,752.84 21,349.68 31,045.27 34,782.23 23,596.75 19,885.70 1,75,032 486.2 44 2,23,560 621.0 50 2,86,344 795.4 44 2,59,164 719.9 33 2,09,268 581.3 34
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Interpretation: This involves the company's payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential. The Creditors conversion period of GNFC is around 34 days for the year 2009-10. It is also observed that Creditors conversion period is decreasing every year. From the data provided, it is found out that GNFC had sufficient funds to make payments of its own bills and make investments in various activities.
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10.1.7 Gross operating cycle:
Gross operating cycle = Inventory conversion period + Debtors conversion period
Particulars Inventory conversion period Debtors conversion period Gross operating cycle (Days)
2005-06 36 57 93
2006-07 37 63 100
2007-08 35 49 84
2008-09 39 40 79
2009-10 38 20 58
Interpretation: Gross operating cycle is a tool which measures the total number of days from the day the purchases are made or the stock arrives to the day all the collections are made. Cash is said to be blocked till the collections have been collected. So the sooner the cash is received from the consumers the better is for the company as they get cash for further production. GNFC gross operating cycle is around 58 days in 2009-10. This is very good for the company as a fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables.
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10.1.8 Net operating cycle:
Net operating cycle = Inventory conversion period + Debtors conversion period – Creditors Conversion period
Particulars Inventory conversion period Debtors conversion period Creditors conversion period Net operating cycle (Days)
2005-06 36 57 44 49
2006-07 37 63 50 50
2007-08 35 49 44 40
2008-09 39 40 33 46
2009-10 38 20 34 24
Interpretation: The Net Operating cycle (NOC) measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. GNFC NOC is of around 24 days in the year 2009-10. This means that the company is able to generate the cash within this period after making it payments of its own bills. Since it is very low, it is good for the company.
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10.2 Working capital position:
10.2.1 Working capital: Working capital = Current Assets – Current Liabilities
Rs. in Lac Particulars Current Assets Current Liabilities Working Capital 2005-06 88,277.33 37,198.43 51,078.90 2006-07 1,41,029.06 53,968.74 87,060.32 2007-08 1,20,397.05 48,867.19 71,529.99 2008-09 1,23,638.71 36,936.60 86,702.11 2009-10 99,896.44 42,305.72 57,590.72
Interpretation: Working Capital Position indicates changes in Current Assets and Current Liabilities over the study period and also during a particular year. Working capital position shows operational efficiency & proper utilization of short term resources in an organization. From the above chart we can say that working capital in GNFC is not consistent and it goes up and down year by year. By comparing 5 years data we can conclude that highest working capital has been achieved bin 2006-07 and lowest was arrived in 2005-06.
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10.3 Liquidity analysis ratio:
10.3.1 Current ratio:
Current ratio = Current Assets / Current Liabilities Rs. in Lac Particulars Current Assets Current Liabilities Current ratio 2005-06 88,277.33 37,198.43 2.37 2006-07 1,41,029.06 53,968.74 2.61 2007-08 1,20,397.05 48,867.19 2.46 2008-09 1,23,638.71 36,936.60 3.35 2009-10 99,896.44 42,305.72 2.36
Interpretation: Working Capital Ratio is used to analyze the short term solvency of the company. The ideal current ratio is 2:1 but in GNFC all the year current ratio is higher than ideal ratio. So GNFC is able to meet its current liabilities out of total current assets and never really face a major problem in meeting its short-term liabilities, which is good sign for the company. The best current ratio observed was 3.35 in year 2008-09.
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10.3.2 Quick ratio:
Quick ratio = Liquid Assets / Current Liabilities Liquid Assets = Current Assets – Inventories Rs. in Lac Particulars Current Assets Inventories Liquid Assets Current Liabilities Quick ratio 2005-06 88,277.33 26,957.87 61,319.51 37,198.43 1.65 2006-07 1,41,029.06 38,846.52 1,02,182.54 53,968.74 1.89 2007-08 1,20,397.05 38,599.79 81,797.39 48,867.19 1.67 2008-09 1,23,638.71
43,075.71
2009-10 99,896.44
40,503.38
80,563 36,936.60 2.18
59,393.06 42,305.72 1.40
Interpretation: Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be satisfactory. This is so because if the quick assets are equal to the current liabilities then the company may be able to meet its entire short-term obligations pretty conveniently. In GNFC all the year ratio is higher than the ideal ratio which is a indicator of positive financial position. The highest quick ratio of 2.18 was observed in 2008-09 due to large
amount of inventory at GNFC during that period.
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10.3.3 Current assets to total assets ratio:
CA to TA ratio = Current assets / Total assets
Rs. in Lac Particulars Current Assets Total Assets CA to TA ratio 2005-06 88,277.33 2,00,070.03 0.4412 2006-07 1,41,029.06 2,69,387.05 0.5235 2007-08 1,20,397.05 2,86,384.91 0.4204 2008-09 1,23,638.71 2,97,393.7 0.4157 2009-10 99,896.44 1,30,763.36 0.7639
Interpretation: Current assets to total assets are fluctuating year by year. In 2006-07 it is increasing trend whereas in 2007-08 and 2008-09 it is decreasing trend. Again in 2009-10 it shows increasing trend. By comparing 5 years data we can conclude that CA to TA ratio is highest for the year 2009-10 that is 0.7639. In GNFC all the year current assets are higher side in the total assets, so company has to think about decreasing current assets by investing extra money in reliable funds so that profitability can be increased.
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10.4 Working capital position:
10.4.1 Inventories:
10.4.1.1 Investment in inventories: Rs. in Lac Particulars Stores & spares Raw material Work in progress Finish goods Total inventories 2005-06 14,733.11 5,279.61 3,007.29 3,937.86 26,957.87 2006-07 19,342.98 5,269.92 580.18 13,653.44 38,846.52 2007-08 19,966.31 5,774.87 3,447.03 9,411.58 38,599.79 2008-09 23,447.60 6,406.32 1,968.82 11,252.97 43,075.71 2009-10 26,867.56 10,133.78 252.00 3,250.04 40,503.38
Interpretation: From the above chart we can say that total investment in inventories is fluctuating year by year but the overall trend is increase in total inventories. The higher the inventory means higher the block of funds and lowers the profit. So increasing trend is not a good sign for company. By comparing 5 years data we can conclude that 2005-06 is best as it shows lowest investment in inventories.
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10.4.1.2 Inventory turnover ratio:
Inventory turnover ratio = Cost of goods sold / average inventory Cost of goods sold = Sales – gross profit
Average inventory = (opening of inventories + closing of inventories) / 2
Rs. in Lac Particulars Sales Gross profit Cost of goods sold Opening of inventories Closing of inventories Average inventories Inv. Turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68
1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95 26,075.42 26,957.87 26,516.65 6.92 26,957.87 38,846.52 32,902.20 7.50 38,846.52 38,599.79 38,723.16 7.95 38,599.79 43,075.71 40,837.75 6.63 43,075.71 40,503.38 41,789.55 5.97
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Interpretation: From the above chart we can say that in 2005-06 inventory turnover ratio is 6.92 times. In 2006-07 it is 7.50 times, in 2007-08 it is 7.95 times, in 2008-09 it is 6.63 times and in 200910 it is 5.97 times. High inventory turnover ratio is better than a low ratio. High inventory turnover ratio shows good inventory management. A good inventory turnover ratio of 7.95 was observed in 2007-08. It means that that the company is turning its inventory of finished goods into sales 7.95 times in a year.
10.4.1.3 Inventory to current assets ratio:
Inventory to current assets ratio = Inventory / current assets
Rs. in Lac Particulars Inventory Current assets Inv. To CA ratio 2005-06 26,957.87 2006-07 38,846.52 2007-08 38,599.79 2008-09 43,075.71 2009-10 40,503.38 99,896.44 0.4055
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.3054 0.2754 0.3206 0.3484
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Interpretation: The Inventory to Current Assets Ratio measures that how much percentage of current assets is formed by the inventories. An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent and it may be difficult to convert them into cash immediately. Normally, less than 0.50 of current assets are treated as average position of inventory.
GNFC has shown increase in the ratio over past few years. So it is not a good sign but it has never gone above 0.41.
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10.4.1.4 Inventory to sales ratio:
Inventory to sales ratio = Inventory / Sales Rs. in Lac Particulars Inventory Sales Inventory to sales ratio 2005-06 26,957.87 2006-07 38,846.52 2007-08 38,599.79 2008-09 43,075.71 2009-10 40,503.38
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 0.1182 0.1314 0.1057 0.1407 0.1493
Interpretation: The Inventory to Sales Ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. as per last 5 years data the lowest ratio was observed in 2007-08 which shows good movement of inventory but since that it is increasing which is not a good sign.
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10.4.2 Sundry debtors:
10.4.2.1 Investment in sundry debtors: Rs. in Lac Particulars Sundry debtors 2005-06 43,012.40 2006-07 60,527.55 2007-08 38,968.35 2008-09 28,871.65 2009-10 1,668.11
Interpretation: From the above chart we can say that in 2005-06 sundry debtors are Rs. 43,012.40 lac. In 2006-07 it is 60,527.55 lac, in 2007-08 it is 38,968.35 lac, in 2008-09 it is 28,871.65 lac and in 2009-10 it is 1,668.11 lac. The lower the sundry debtors means lower the block of funds in sundry debtors. So company can invest that fund in profitable areas and that increases profitability. By comparing 5 years data we can say that sundry debtors are decreasing year by year which is a good sign and lowest sundry debtors were observed in 2009-10.
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10.4.2.2 Receivables (debtors) turnover ratio:
Receivables turnover ratio = Credit sales / average accounts receivables
Rs. in Lac Particulars Credit sales Opening of receivables Closing of receivables Average receivables Rece. Turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 28,958.77 43,012.40 35,985.59 6.34 43,012.40 60,527.55 51,769.98 5.71 60,527.55 38,968.35 49,747.95 7.34 38,968.35 28,871.65 33,920 9.02 28,871.65 1,668.11 15,269.88 17.76
Interpretation: This ratio is also known as Accounts Receivable Turnover Ratio and measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers.
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GNFC have a high and increasing Accounts Receivable Turnover which is a Positive Sign. By comparing 5 years data we can say that receivables turnover ratio is increasing year by year. Highest receivables turnover ratio was observed in 2009-10.
10.4.2.3 Average collection period:
Average collection period =
360 Receivables turnover ratio
Rs. in Lac Particulars Credit sales Opening of receivables Closing of receivables Average receivables Rece. Turnover ratio Average collection period (Days) 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 28,958.77 43,012.40 35,985.59 6.34 57 43,012.40 60,527.55 51,769.98 5.71 63 60,527.55 38,968.35 49,747.95 7.34 49 38,968.35 28,871.65 33,920 9.02 40 28,871.65 1,668.11 15,269.88 17.76 20
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Interpretation: The Average Collection Period represents the average number of days for which a firm takes to collect accounts receivables. It measures the quantity of debtors. The Average Collection Period for GNFC was around 20 days in 2009-10. This is extremely good considering the fact that IFFCO is a fertilizer company. The maximum collection period during this five year period is around 63 days in the year 2006-07 and is decreasing since then.
10.4.2.4 Receivables to current assets ratio:
Receivables to current assets ratio = Receivables / current assets
Rs. in Lac Particulars Receivables Current assets Rece. To CA ratio 2005-06 43,012.40 2006-07 60,527.55 2007-08 38,968.35 2008-09 28,871.65 2009-10 1,668.11 99,896.44 0.0167
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.4872 0.4292 0.3237 0.2335
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Interpretation: Debtors to Current Assets Ratio indicate the position of debtors in total current assets. This ratio is calculated by debtors with current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect of other current assets, it indicates poor recovery of the company. Lower receivable to current assets ratio is better than the higher one for the company. By comparing 5 years data we can say that receivable to current assets ratio is decreasing year by year which shows good performance for company. The lowest receivable to current assets ratio was observed in 2009-10.
10.4.2.5 Debt - equity ratio: Debt – equity ratio = Total debt / Equity share capital
Rs. in Lac Particulars Total debt Equity share capital Debt – equity ratio 2005-06 27,236.53 14,647.62 1.86 2006-07 35,158.48 15,543.74 2.26 2007-08 31,351.38 15,543.74 2.02 2008-09 35,589.95 15,543.74 2.29 2009-10 55,505.53 15,541.88 3.57
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Interpretation: The ratio shows the extent to which debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firm?s operations due to the increasing interference and pressure from creditors. A low debt-equity ratio implies a greater claim of owners than capital By comparing 5 years data we can conclude that debt- equity ratio is increasing year by year and 2005-06 is the best year for the company. In 2009-10 it reaches to 3.57 because of the major increase in the short term loans from the banks.
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10.4.3 Cash and bank balances:
10.4.3.1 Investment in cash and bank balances: Rs. in Lac Particulars Cash and bank balances 2005-06 5,501.95 2006-07 13,047.91 2007-08 15,141.34 2008-09 5,541.39 2009-10 32,339.02
Interpretation: From the above chart we can say that in 2005-06 cash and bank balances are 5,501.95 lac. In 2006-07 they are 13,047.91 lac, in 2007-08 they are 15,141.34 lac, in 2008-09 they are 5,541.39 lac and in 2009-10 they are 32,339.02 lac. High cash and bank balances mean company is able to meet its expenses easily. By comparing 5 years data we can say that cash and bank balances are fluctuating year by year. The highest cash and bank balance was observed in 2009-10.
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10.4.3.2 Cash turnover ratio:
Cash turnover ratio = (cost of sales - depreciation) / cash Cost of sales = sales – gross profit
Rs. in Lac Particulars Sales Gross profit Cost of sales Depreciation Cash Cash turnover ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68
1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95 8,859.43 5,501.95 31.74 10,957.02 13,047.91 18.07 11,051.70 15,141.34 19.59 11,972.57 5,541.39 53.10 11,695.92 32,339.02 8.03
Interpretation: From the above chart we can say that in 2005-06 cash turnover ratio is 31.74 times. In 200607 it is 18.07 times, in 2007-08 it is 19.59 times, in 2008-09 it is 53.10 times and in 2009-10 it is 8.03 times. By comparing 5 years data we can conclude that there are large fluctuations in cash turnover ratio year by year. The highest cash turnover ratio was observed in 2008-09 and the lowest cash turnover ratio was observed in 2009-10.
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10.4.3.3 Cash to current assets ratio:
Cash to current assets ratio = Cash / current assets
Rs. in Lac Particulars Cash Current assets Cash to CA ratio 2005-06 5,501.95 2006-07 13,047.91 2007-08 15,141.34 2008-09 5,541.39 2009-10 32,339.02 99,896.44 0.3237
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 0.0623 0.0925 0.1258 0.0448
Interpretation: The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of cash at hand and cash at bank. Upon analyzing the data of the past 5 years for GNFC it was observed that the cash balances formed only a very small percentage of the current assets. In last 5 years highest was observed in 2009-10 which is 0.3237. The lowest was observed in 2008-09 which is 0.0448. This is a positive sign as it shows effective utilization of the funds of the organization and there is not much of idle cash with the organization.
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10.4.3.4 Sales to current assets ratio:
Sales to current assets ratio =
Sales Current assets
Rs. in Lac Particulars Sales Current assets Sales to CA ratio 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 2.58 2.10 3.03 2.48 99,896.44 2.72
Interpretation: The Sales to Current Assets Ratio basically measures how well a company is making use of its assets in generating sales. An increasing sale to current assets ratio is a positive sign as it indicates that the company has a healthy production scenario because of which most of inventory is being converted into sales for the company. GNFC has shown a decrease in its sales to current assets ratio from 2005-06 to 2007-08 after which it is constantly increasing which implies that the company is doing well and inventory is not being held up at any stage in the production process.
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10.4.3.5 Working capital turnover ratio:
Working capital turnover ratio =
Sales Average working capital
Average working capital = Current Assets – Current Liabilities
Rs. in Lac Particulars Sales Average working capital Working capital turnover ratio 51,078.90 87,060.32 71,529.99 86,702.11 57,590.72 2005-06 2006-07 2007-08 2008-09 2009-10
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75
4.47
3.40
5.11
3.53
4.71
Interpretation: GNFC has a high working capital turnover ratio.
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The Working Capital turnover ratio measures how well the company's working capital is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Increasing Working Capital turnover ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales.
The company has been able to gain more Net Sales with the smaller amount of Working Capital in 2007-08 as compared to that in 2006-07. The working capital turnover had been decreasing from 5.11 in the year 2007-08 to 3.53 in 2008-09 but it increasing then to 4.71 in the year 2009-10.
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10.5 PROFITABILITY RATIOS:
10.5.1 Return on assets:
Return on assets =
Profit after tax Total assets
Rs. in Lac Particulars Profit after tax Total assets Return on assets 2005-06 29,472.30 2006-07 32,646.65 2007-08 37,288.30 2008-09 22,751.73 2,97,393.7 0.0765 2009-10 12,383.74 1,30,763.36 0.0947
2,00,070.03 2,69,387.05 2,86,384.91 0.1473 0.1212 0.1302
Interpretation: ROA is an indicator of how profitable a company is relative to its total assets. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.
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At GNFC in last 5 years, highest ROA was observed in 2005-06 since than it is decreasing and in 2009-10 it reaches to 0.0947.
10.5.2 Net profit margin:
Net profit margin =
Profit after tax Sales
Rs. in Lac Particulars Profit after tax Sales Net profit margin 2005-06 29,472.30 2006-07 32,646.65 2007-08 37,288.30 2008-09 22,751.73 2009-10 12,383.74
2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75 0.1292 0.1104 0.1021 0.0743 0.0456
Interpretation: Net profit margin ratio establishes a relationship between net profit and sales and indicates management?s efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firm?s ability to turn each rupee sales into net profit.
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From the data, GNFC have a decreasing net profit margin. The sales turnover depend upon the element of subsidy which is decided by the government from time - to - time depending on the condition of international market. In last 5 years, due to increase in subsidy the net profit margin is decreasing.
10.5.3 Loans and advances to current assets:
Loans and advances to current assets = Loans and advances Current assets
Rs. in Lac Particulars Loans and advances Current assets Loans and advances to current assets 2005-06 12,663.63 2006-07 28,465.60 2007-08 27,240.05 2008-09 21,725.62 2009-10 25,385.93 99,896.44
88,277.33 1,41,029.06 1,20,397.18 1,23,638.71
0.1435
0.2018
0.2263
0.1757
0.2541
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Interpretation: As per the data, it can be clearly said that the position of the Loans & Advances with respect to current assets is increasing every year (a marginal decrease in the year 2008-09) which is very good for GNFC. The ratio was around 14.35% in 2005-06 which had increased to 25.41% in 2009-10.
10.5.4 Loans and advances to working capital:
Loans and advances to working capital = Loans and advances Working capital
Rs. in Lac Particulars Loans and advances Working capital Loans and advances to working capital 2005-06 12,663.63 51,078.90 0.2480 2006-07 28,465.60 87,060.32 0.3270 2007-08 27,240.05 71,529.99 0.3110 2008-09 21,725.62 86,702.11 0.2506 2009-10 25,385.93 57,590.72 0.4408
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Interpretation: This ratio shows how significant Loans & Advances Are to Working Capital and that Loans & Advances plays an important role in working capital management of GNFC. This ratio shows that the company has more cash in hand and can utilize these funds as per the company requirement. At GNFC, this ratio has been in the increasing trend which is good for the organization. This means that company is having enough cash and utilizing it effectively. In last 5 years, highest ratio was observed in 2009-10.
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Findings
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Chapter - IX 11. FINDINGS
After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that
? Current ratio is almost constant which shows that there is uniform increase or decrease in current assets and current liabilities.
? Cash and Bank Balances have increased during this period which indicates improper utilization of funds at GNFC.
? Position of inventory is very good in current assets (40.55%). Inventory Turnover Ratio increases during first 3 years of study but decreased in last 2 years, which shows average performance of utilization of inventory during the study period.
? Position of debtors to current assets is 1.67%. This ratio had decreased constantly from 48.72% to 1.67% during the study period which shows significant decrease in the debtors of the company.
? Loans and Advances are increasing every year and contribute majorly (25%) to
current assets. This means that the company is not facing any problem to get the required short term financing.
? Large part of working capital is involved in maintaining inventory and it depends on the level of inventory every year.
? There are huge up and down fluctuations in the working capital of the company during the study period.
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? Debt to equity ratio is constantly increasing during last 5 years except small decrease in the year 2007-08. The increase in debt is due to increase in the borrowings.
? Net profit margin has been constantly decreasing in last 5 years because of the
significant increase in the raw material prices, decrease in the subsidy and consequent increase in cost of production. Looking to the trends, GNFC has been able to manage the profits but the percentage is decreasing. Profit is realized because of sales of industrial chemicals.
? Net operating cycle of GNFC has decreased to 18 days in 2009-10 means company is
now able to generate cash in very short period.
? Company?s production and operation department are quite efficient and do optimum use of raw materials but sometimes raw material conversion period takes longer time because of shutdown or breakdown in the plant. This happens as all plants are interlinked with each other.
? Debtors conversion period and creditors conversion period has also decreasing trend
in the study period which shows efficient performance of the company.
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Conclusion
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Chapter - IIX 12. CONCLUSION AND RECOMMENDATIONS
? The management field requires practical exposure to the outside corporate world to learn the management skills. I got the golden opportunity to complete my Summer Internship Project in GNFC. I had a very good experience and was able to gain good idea about the company and the financial department. I am sure that this experience will not only be useful to me for academic purpose but it will also be useful to me in my future career. ? My project work involved the study on „Working Capital Management?. In this project the study was conducted through the analysis of the operating cycle and ratios related to working capital. From the analysis I reached to the conclusion that the GNFC has a very sound Working Capital Management. In the year 2009-10 the company had very good credit policy through which the collection period was reduced which was good for the company. From the ratio analysis it is concluded that the liquidity and solvency position of the company is strong and the company is managing its working capital very efficiently.
? Working capital is one of the most important aspects of operational efficiency of business. Working Capital plays a very important role in the functioning of any organization. Both the current assets and current liabilities are very much influencing factors on the working capital of an organization.
? After the discussion and analysis of the financial position of GNFC, it is clear that the working capital of GNFC is in sound position. Working capital is not only measured by current assets & current liabilities but also there are some other factors that have an influenced on the working capital.
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? In current assets, there are two most important factors, Debtors and Inventory that affect working capital. In GNFC, Inventory and Debtors are efficiently managed to strengthen the position of the organization both in short term and long terms.
After analyzing and interpreting the financial data of GUJARAT NARMADA VALLEY FERTILIZER COMPANY LIMITED (GNFC) with the help of Ratio Analysis, the following recommendations are given to the organization for further betterment & improvement in the working capital:
? The present status and levels of current assets is extremely good and therefore it requires proper maintenance.
? The current percentage of inventory is high which is not good for operational efficiency and sound working capital and thus, it need to be controlled by using various inventory management techniques such as JIT. Another alternative would be to have varying stock or inventory levels during the different seasons or even months and, thereby, altering the production to suit such needs.
? The working capital turnover ratio was highest in the year 2007-08 i.e. 5.1 times and then next year it was reduced to 3.53 times and then it was slightly improved in the year 2009-10 to 4.71 which needs to improve more in the future.
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Bibliography
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Chapter - IIIX 13. BIBLIOGRAPHY
13.1 Reference books: ? P. Janki Ramudu & Durga Rao, “Working Capital Management: A Review of Research”, Finance India, Vol. XXII No.1. ? Pandey I. M, Financial Management 9th edition, Vikas Publishing House Private Limited. ?
Patel D. R, Working Capital Management, Accounting and financial Management, Atul Prakashan.
13.2 Web sites: ? www.gnfc.in
13.3 Annual reports of GNFC: ? ? ? ? ?
2005-06 2006-07 2007-08 2008-09 2009-10
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Annexure
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Chapter - IIIX ANNEXURE 14.1 BALANCE SHEET:
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Particulars SOURCES OF FUNDS: Shareholder's Funds: Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax: Deferred Tax Liabilities Less: Deferred Tax Assets TOTAL APPLICATION OF FUNDS: Fixed Assets: Gross Block Less: Depreciation/Impairment Net Block Capital Work In Progress Investments: Current Assets, Loans & Advances: Interest accrued on Investments Inventories Sundry Debtors Govt. of India Fertilizer Bonds Cash & Bank Balances Loans & Advances Less: Current Liabilities & Provisions
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31.3.2010
31.3.2009
31.3.2008
31.3.2007
31.3.2006
15,541.88 15,543.74 15,543.74 15,543.74 14,647.62 1,92,363.00 1,85,867.88 1,69,026.13 1,41,518.60 1,03,080.80 2,07,904.88 2,01,411.62 1,84,569.87 1,57,062.34 1,17,728.42 29,000.53 26,505.00 55,505.53 10,284.95 25,305.00 35,589.95 31,046.38 305 31,351.38 34,836.37 322.11 35,158.48 26,761.36 475.17 27,236.53
25,526.32 26,305.75 23,598.65 24,033.56 18,765.00 2,479.09 2,850.22 2002.18 836.07 759.49 23,047.23 23,455.53 21,596.47 23,197.49 18,005.51 2,86,457.64 2,60,457.10 2,37,517.72 2,15,418.31 1,61,970.46
3,08,424.97 1,91,489.85 1,16,935.12 1,02,980.34 2,19,915.46 8,951.46
3,02,799.58 1,79,851.06 1,22,948.52 41,967.41 1,64,915.93 8,839.06
2,75,053.07 1,68,030.19 1,07,022.88 25,921.16 1,32,944.04 33,043.69
2,67,728.77 2,13,788.79 1,57,096.09 1,28,679.18 1,10,632.68 85,109.61 2,875.04 4,862.82 1,13,507.72 89,972.43 14,850.27 21,820.27
40,503.38 1,668.11
43,075.71 28,871.65 24,424.34 32,339.02 5,541.39 15,141.34 13,047.91 25,385.93 21,725.62 27,240.05 28,465.60 99,896.44 1,23,638.71 1,20,397.18 1,41,029.06
447.65 38,599.79 38,968.35
141.48 38,846.52 60,527.55
141.48 26,957.87 43,012.40 5,501.95 12,663.63 88,277.33
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An analysis of working capital management
Current Liabilities Provisions Net Current Assets Miscellaneous Expenditure: VRS Compensation Premium on Prepayment TOTAL
28,147.07 14,158.65 42,305.72 57,590.72
23,666.91 13,269.69 36,936.60 86,702.11
35,272.20 13,594.99 48,867.19 71,529.99
44,245.09 9,723.65 53,968.74 87,060.32
26,295.87 10,902.56 37,198.43 51,078.90 98.81
2,86,457.64 2,60,457.10 2,37,517.72
98.81 215418.31 1,62,970.46
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14.2 PROFIT & LOSS ACCOUNT:
An analysis of working capital management
Particulars INCOME: Sales & Service Less: Excise Duty Sales (Net) Lease Rent Less: Equalization A/C Other Income Expenditure: Purchase Manufacturing Expenses Stock of Finished Goods & Stock in Process Marketing, Administration & Other Expenses Personnel Expenses Interest (Net) Depreciation/Amortization Prior Period Adjustments Research & Development Expenses Profit Before Tax Less: Provision for Current Tax Add: Provision for Deferred Tax Less: Provision for FBT Add: Provision for Taxation Profit After Tax Add: Balance from Previous Year Add: P & L A/C Amount Available for Appropriation Appropriation: General Reserve Proposed Dividend Tax on Dividend Balance Carried to Balance Sheet
2009-10
2008-09
2007-08
2006-07
2005-06
2,71,277.75 3,06,228.02 3,65,344.17 2,95,666.61 2,28,133.38 9,833.12 14,222.41 21,952.96 21,739.87 13,375.67 2,61,444.63 2,92,005.61 3,43,391.21 2,73,926.74 2,14,757.71 15.82 1.95 709.31 0 3.61 181.92 15.82 (1.66) 527.39 8,628.26 6,534.06 4,916.63 3,534.35 7,995.62 2,70,072.89 2,98,539.67 3,48,323.66 2,77,459.43 2,23,280.72 6,264.59 30,641.17 63,665.56 40,212.52 24,667.72 1,77,580.75 1,81,360.00 1,77,770.92 1,48,964.90 1,16,146.61 9,719.75 20,606.90 19,682.71 2,338.20 11,695.92 (363.18) 14,544.48 22,131.15 2,692.18 11,972.57 1,375.01 17,751.56 19,016.67 70.77 11,051.70 0 (5,077.09) 15,313.18 16,886.56 1,263.66 10,957.02 0 (342.26) 12,870.76 13,305.02 3,624.00 8,859.43 (6.06)
195.39 190.85 2,48,084.21 2,63,169.22 2,90,702.19 2,28,520.75 1,78,625.22 21,988.68 35,370.45 57,621.47 48,938.68 44,655.50 10,013.24 10,527.66 20.797.27 17,444.74 15,968.00 (408.3) 1,859.06 681.93 564.88 1,167.00 232 222.1 192.25 382.2 4.27 780.08 0 12,383.74 22,751.73 37,288.30 32,646.65 29,472.30 49,164.41 0 0 61,548.15 10,000.00 5,051.11 838.93 45,658.11 61,548.15 52,322.23 0 0 75,073.96 20,000.00 5,051.11 858.44 49,164.41 75,073.96 47,761.80 0 0 85,050.10 25,000.00 6,605.30 1,122.57 52.322.23 85,050.10 35.977.83 6,678.86 186.33 75,489.67 20,000.00 6,605.30 1,122.57 47,761.80 75,489.67 33,603.86 0 0 63,706.16 20,000.00 6,225.24 873.09 35,977.83 63,706.16
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An analysis of working capital management
Summer Internship report - LJMBA
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