Description
This report talks about the working capital calculation of GNFC -Bharuch
ACKNOWLEGMENT
This project has been a wonderful learning. I am very thankful to have got this opportunity to
work on a satisfying project on “STUDY OF WORKING CAPITAL MANAGEMENT OF GNFC.”
I am very thankful to the management of GNFC for providing me the golden opportunity to do
this project. I would like to thank Mr.N.K.Patadia (AGM-TC) to grant me. I also express out thank to
Mr.I.P.Bhatt (SM-TC).
I am immensely grateful to Mr.A.K.Trivedi (GM-Finance) who has guided me during the project
and special thanks to Mr.D.R.Panchal (PS-Finance) who has guided me and helped me a lot.
I am also thankful to manager Mr. R.B.Kayastha (Banking Section) who has guided me for
studying working capital management.
I am also thankful to chief managers Mrs.J.M.Kavina, Mr.V.C.Bhatt, senior managers
Mr.U.N.Gohil,
Mr.P.H.Gadhi,
Mr.U.V.Parmar,
Mr.R.M.Patel,
and
managers
Mr.A.B.shah,
Mr.R.B.Shah, Mr.A.R.Shah, Mr.R.S.Patel, Mr.M.H.Dave, Mr.N.N.Modi, Mr. M.S. Talukdar, in
charge of different section for making me aware about their particular section.
Niyati Patel
INDEX
Sr No.
Content
1.
Company Profile
2.
Study Of Finance Department
3.
Working Capital Management
4.
Calculation of operating cycle of GNFC
5.
Calculation of Working Capital
6.
Cash management
7.
Inventory management
8.
Receivables management
9.
Findings
10.
Conclusion
Page No.
COMPANY PROFILE
GUJARAT NARMADA VALLEY FERTILIZER COMPANY LIMITED (GNFC) is the joint
sector enterprise promoted by the Government of Gujarat and the Gujarat State Fertilizer Company
Ltd (GSFFC). It was set up and located in Bharuch, Gujarat in 1976.
GNFC started its manufacturing and marketing operation by setting up in 1982, one of the
world’s largest single-stream ammonia-urea fertilizer company. Over the next few years, GNFC
successfully commissioned different projects in fields as diverse as chemicals, fertilizer and
electronics.
GNFC today has extended its profile much beyond fertilizers through a process of horizontal
integration. Chemicals/Petrochemicals, Energy Sector, Electronics/Telecommunication
and
Information Technology from ambition and challenging additions to its corporate portfolio. GNFC
has enterprising, strategic view towards expansion and diversification.
Gujarat Narmada Valley Fertilizers and Chemicals Limited (‘the Company’ or ‘GNFC’) operates
businesses mainly in the Industrial Chemicals, Fertilizers and Information Technology (‘IT’)
Products space. Serving a diverse set of customers, the Company is now an established leader in
most of its chosen lines of business.
GNFC today is one of the leaders in fertilizer industry. The Company is engaged in
manufacturing and selling fertilizers such as Urea and Ammonium Nitrophosphate under the brand
name of “NARMADA”.
The Company has set up core chemical and petrochemical plants such as Methanol, Formic Acid,
Nitric Acid, Acetic Acid, Toluene Di - Isocyanate, Aniline, Ammonium Nitrate, Ethyl Acetate,
Methyl Formate etc. The Company is one of the largest producers of Formic Acid and Acetic Acid in
the country. The Company has India’s largest single stream plant of Aniline. The company is the only
manufacturer of Toluene Di-Isocynate in South East Asia and Indian Sub Continent. The Company’s
chemicals enjoy high brand value in niche market.
The Company provides several cutting-edge IT services and solutions covering Digital
Signatures Certificate (DSC), E-procurement, E-Governance projects, Data centres and CCTV
surveillance systems etc. under Brand name of
code solutions. It remains the market leader in
Digital Certificate business maintaining about 40% market share.
Board of Directors
Shri G. R. Aloria
IAS
Chairman
Dr. J. N. Singh
IAS
Director
Smt. Mamta Verma
IAS
Director
Prof. Arvind Sahay
Director
Shri Chandrasekhar Mani
Director
Shri Sunil Parekh
Director
Shri Piruz Khambatta
Director
Shri H. V. Patel
IAS
Director
Dr. Rajiv Kumar Gupta
IAS
Managing Director
Executive Directors
Shri R. T. Bhargava
Executive Director
Shri P. A. Mankad
Executive Director
Shri K. B. Garvalia
Executive Director
Shri Y. B. Gandhi
Executive Director
Shri R. B. Panchal
Company Secretary & Executive Director
Chief Financial Officer
Shri Vikram Mathur
General Manager & CFO
Registered Office:
P. O. Narmadanagar- 392015
District: Bharuch
Gujarat, INDIA
Products:
?
?
?
?
?
?
?
?
?
?
?
?
?
Methanol
Acetic Acid
Toluene Di-isocyanate
Aniline
Formic Acid
Concentrated-Nitric Acid
Weak Nitric Acid
Ammonium Nitric (Melt)
Methyl Formate
Nitrobenzene (NB)
Calcium Carbonate
Hydrochloric Acid
Ortho Toluene Diamine
Services:
1. Fertilizer plant
? GNFC started fertilizer manufacturing and marketing operation by setting up in 1982, one
of the world’s largest single-stream ammonia-urea fertilizer complexes.
? GNFC today is one of the leaders in fertilizer industry. The company is engaged in
manufacturing and selling fertilizer such as Urea, Ammonium Nitro phosphate and
calcium Ammonia Nitrate under the umbrella Narmada. GNFC has to phosphate and
calcium Ammonia plant, a reference plant in the world of fuel oil based technology along
with the world’s largest single stream urea plant.
2. Chemical plant
? GNFC has kept pace with changing times and its vision is always focused on growth. Even
as the company was implementing its fertilizer complex, plans were underway for
expansion and diversification in related areas. This resulted in the up of core chemical and
petrochemical plants such as Methanol, Formic Acid, Nitric Acid and Acetic Acid.
? These industrial chemicals are used by a wide range of manufacturers, processors and
chemical operators in India and even abroad. While methanol finds application in
chemicals, resign etc. Formic acid is used mainly in rubber, textiles, tanneries and
pharmaceuticals industries. Both methanol and formic acid are regularly being exported to
international markets.
3. IT Tower
? An it division of GNFC it offers digital certificates that can integrate with application such
as emails, workflow, enterprise wide application, or secure VPNs. The digital certificates
can use by individuals, corporate and governments to secure online B2B/B2C applications
and other online transactions.
? It has promoted a portal called www.nprocure.com offering end-to-end electronic
procurement services provider. It also designs and builds world class data center
infrastructures and also offers a wide range of security services which include managed IT
services & secure infrastructure design & building services.
ORGANISATIONAL STRUCTURE
Board of Directors
Chairperson & Managing Director
Executive Director
General Manager
Additional General Manger
Chief Manager
Senior Manager
Manager
Senior Officer
Officer
Staff
FINANCE DEPARTMENT
GNFC have a finance department for transacting all types of financial dealings. The finance
department is the integral part of any organization which plays pivotal role in all organization.
Because money is the medium without which we can even think to do anything. And finance
department can only solve the problems which are arises for the money .finance department dealing
with the sources of fund and application of the fund. To take any operation any operation in the
consideration we must have to budget it according to the financial condition of the organization. And
foremost is that to handle this financial department GNFC has its own latest technology through
which it can run financial activity smoothly.
Finance department mainly divided in the following section:
?
?
?
?
?
?
?
?
Bills Payment Section
Marketing Account Section
Bank Section
Establishment Section
Insurance Section
Indirect Tex Section
Central Account Section
Concurrence Section
? Stores Account Section
WORKING CAPITAL MANAGEMENT
? Working capital, also known as net working capital, is a financial metric which represents
operating liquidity available to a business. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. It is calculated as current assets minus
current liabilities. If current assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.
? 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. The management of working capital involves managing
inventories, accounts receivable and payable and cash.
Concepts of working capital:
? There are two concepts of working capital-gross and net.
? Gross working capital refers to the firm’s investment in total current assets.
? Net working capital refers to the difference between current assets and current liabilities. Net
working capital is positive when CA exceed CL and negative when CL exceeds CA.
? A finance manager should ensure there is sufficient liquidity in the firm’s operations. This is
possible only when the CA and CL are managed efficiently. Liquidity of the firm is defined as the
firm’s ability to meet its short-term obligations as and when payable.
Objective:
Liquidity V. Profitability
The basis objective of working capital management is to maintain the smooth functioning of the
normal business operations of a firm. The company has to decide on the sufficient quantity of
working capital to be maintained. A company following a conservative approach will have more
current assets at its disposal. Holding large amount of CA is not very advisable as the firms lose on
the profitability aspect. They can earn more by putting these resources to alternative uses or by
investing CA into short term investment avenues. This approach is dynamic wherein only small
amounts of cash are held by companies and the rest put to alternative uses.
Need for Working Capital:
Different firms have different requirements of working capital. One of the objectives, the firm should
earn good returns from its operations which mean that earning a steady amount of profit requires
good amount of sales. The firm should invest adequately in current assets to enable it to generate
sales continuously without any break. Sales do not convert into cash instantaneously and there is
always on operating cycle involved in the conversion of sales into cash.
Operating cycle:
It is the length of time required to convert sales into cash. This involves three phases:
? Acquisition of resources-procuring raw materials, labour, fuel, etc.
? Manufacture of the product-conversion of raw material into inventory.
? Sale of the product-conversion of sales into cash or credit in which case the firm has accounts
receivable.
The length of the operating cycle is the sum total of:
? Raw Material storage period
? Conversion period
? Average collection period
This total is referred to as Gross Operating Cycle (GOC). Form this; the firm has to make payables
which are the Average Payment Period. Subtracting payables deferrals from GOC, we get Net
Operating Cycle or the Cash Conversion Cycle.
Calculation of Operating Cycle of GNFC:
1) Inventory Conversion Period
The inventory conversion is the sum of raw material conversion period, work in process and finished
goods conversion period:
ICP=RMCP + WIPCP + FGCP
i)
Raw Material Conversion Period ( RMCP )
RMCP = Average raw material inventory
Raw material consumption per day
Raw material consumption per day = Raw material consumption / 360
Average raw material inventory = (Opening stock of RM + Closing stock of RM)/2
Average raw material inventory
2007-08
2008-09
2009-10
4041.71
5274.76
5522.39
Raw Material consumption per
214.71
292.01
341.99
19
18
16
day
Raw Material Conversion
Period (RMCP) (in days)
i)
Work in Process Conversion Period (WIPCP)
WIPCP = Average work in process inventory
Cost of production per day
Average work in process inventory = (Opening WIP + Closing WIP) / 2
Cost of production per day = (Raw material consumed + power, fuel and other Utilities + stores
chemicals + Opening WIP – Closing WIP) / 360
2007-08
2008-09
2009-10
2422.75
1793.73
2013.60
Cost of Production per day
367.30
377.15
433.86
Work in Process Conversion
7
5
5
Average Work in Process
Inventory
Period (WIPCP) (in days)
i)
Finished Goods Conversion Period (FGCP)
FGCP = Average Finished goods Inventory
Cost of goods sold per day
2007-08
2008-09
2009-10
Average finished goods
4351.26
Inventory
Raw Material Conversion Period
8795.65
2007-08
11532.51
2008-09
2009-10
19
18
(RMCP)
(in days)
Cost
of goods
sold per day 455.18
592.60
Work ingoods
Process
Conversion
Finished
conversion
10 Period
Period (FGCP) (in days)
715
16
765.97
5
15
5
(WIPCP) (in days)
Finished Goods Conversion Period
10
15
15
36
38
36
(FGCP) (in days)
Inventory Conversion Period (ICP) (in
days)
1) Inventory Conversion Period (ICP):
40
38
36
35
36
Raw Material Conversion Period (RMCP) (in days)
30
25
20
Work in Process Conversion Period (WIPCP) (in days)
18
16
15
19
15
10
5
0
15
Finished Goods Conversion Period (FGCP) (in days)
10
7
5
5
Inventory Conversion Period (ICP) (in days)
2005-06
2006-07
2007-08
From the above calculation we can see that since last 3 years the ICP is nearer to 37days. For
maintaining operating cycle successfully this conversion period of inventory is fair for GNFC.
2) Debtors conversion Period (DCP) :
Debtors conversion period =
Debtors * 360
Credit Sales
2007-08
2008-09
2009-10
Debtors
36117.55
51742.25
50126
Credit Sales per day
596.55
649.82
953.86
80
53
Debtors Conversion
60
Period (DCP) (in days)
Debtors Conversion Period
80
80
70
60
53
60
50
40
30
20
10
0
2005-06
2006-07
2007-08
Debitor conversion period (DCP) (in days)
The debtors’ conversion period represents the length of time required to collect the sales receipts. It
can be called process of cash inflow. From the above calculation the conversion periods are
fluctuating. It was highest in 2006-07 i.e. 80days which affects adversely to the firm. In 2007-08 it
decreases from 80days to 53 days which is fair for GNFC.
3) Gross Operating Cycle (GOC):
Gross operating cycle = Inventory conversion period + Debtors Conversion Period
2005-06
2006-07
2007-08
Inventory Conversion Period 36
(In days)
38
36
Debtors Conversion Period (In 60
days)
80
53
Gross Operating cycle (In days)
118
96
96
Gross Operating Cycle
118
120
96
100
96
80
60
Gross Operating Cycle (in days)
40
20
0
2005-06
2006-07
2007-08
From the above calculation we can say that gross operating cycle is highest in 2006-07 i.e. 118 days
because of high collection period. In 2007-08 it is decreased to 89 days because of low collection
period. The time taken in completing one round from cash outflow to cash inflow takes nearly 90
days.
4) Payable Deferred Payment (PDP):
PDP =
Average Creditors * 360
Credit Purchase
Credit purchase = raw material consumed + power fuel and other utilities + stores and chemicals
+ packing material + purchase of good for sale + closing stock of raw material + closing stork of
stores and spares – (opening stock of raw material + opening stock of stores and spares)
2005-06
2006-07
2007-08
Average Creditors
21275.35
21045.27
34782.22
Credit Purchase Per Day
410.39
551.51
678.89
Payable Deferred Payment (PDP) (In Days)
52
38
51
60
52
51
50
38
40
30
20
10
0
2005-06
2006-07
2007-08
Payabe l De fe rre d Payme nt (PDP) (In days)
Payable deferred payment is the time that lapse between the dates of various resources received on
credit and the date when payment is made. In the last 3 days it is highest in 2005-06 i.e. 52days. An
increase in the length of the operating cycle, without a corresponding increase in payable deferred
period, creates the further working capital financing needs. The days are lowest in 2006-07 i.e.
38days.
5) Net operating cycle (NOC):
Net operating cycle = gross operating cycle + payable deferred period
Gross operating cycle (GOC)
(in days)
Payable deferred payment (PDP)
(in days)
Net operating cycle (NOC)
(in days)
2005-06
2006-07
2007-08
96
118
89
52
38
51
44
80
38
80
80
70
60
50
44
38
40
30
20
10
0
2005-06
2006-07
Net Ope rating Cycle (NOC) (In days)
2007-08
The difference between gross operating cycle and payable deferred period is known as net operating
cycle. The operating cycle is 44 days in 2005-06 which goes up in 2006-07 i.e. 80days. An increase
in the length of operating cycle creates further working capital financing needs. In 2007-08 the cycle
days are reduced to a noticeable level. The change in 2006-07 is because of higher collection period
and lower payable deferred period.
6) Current Asset to Fixed Asset Ratio:
Higher of current asset to fixed asset is useful to measure a level of current asset. The three policies
are follows:
? Higher CA / FA ratio indicates conservative current asset policy. It implies greater
liquidity and lower risk.
? Lower CA/FA ratio indicates aggressive current asset policy. It implies higher risk and
poor liquidity.
? Between these two extreme levels, there is an average current asset policy.
2005-06
2006-07
2007-08
Current Asset
88426.02
141029.06
120397.18
Fixed Asset
85109.61
110632.68
107022.88
CA / FA (Times)
1.04
1.27
1.12
1.4
1.2
1.27
1.12
1.04
1
0.8
0.6
0.4
0.2
0
2005-06
2006-07
2007-08
CA / FA (Times)
From the above data we can say that GNFC is following average policy. In 2005-06 current asset was
slightly greater than fixed asset and 2007-08 it follows greater difference. The ratio is highest in
2006-07 i.e. 1.27 which indicates conservative current asset policy. It shows greater liquidity and
lower risk of the company.
Determinants of working capital:
A firm should plan its operations in such a way that there is neither too much nor too little working
capital. The following factors are identified as significant factors affecting the composition of
working capital or current assets:
? Nature of business: working capital requirements are basically influenced by the nature of
business. Trading organizations invest little on fixed asset and are have a large stock of
finished goods, accounts receivable (arising out of credit sales) and accounts payables (due to
credit purchases). In contrast, public utilizes do not have large stocks of current asset and they
invest heavily on fixed assets.
? Nature of Raw Material Used: the nature of raw material also influences the quantum of
inventory. For example, if the raw material is based on the agricultural produce, the
seasonality of production affects the raw material requirements. Consequently, the percentage
of raw material inventory to total current asset will be very high.
? Sales and Demand Conditions/ Business Cycle: companies which are growing will have large
quantities of finished goods inventory. Sales depend on the demand conditions which vary
depending on the seasonality and cyclicality of product demand.
? Processing Technology: the manufacturing cycle comprises the purchase and use of raw
material and production of finished goods. Longer the manufacturing cycle, larger is the
firm’s requirement of working capital. This will also lead to an extended manufacturing time
span and larger tie-up of funds in inventory.
? Credit Policy: the credit policy of the firm affects the working capital. The credit terms to be
granted to customers depend on the industry norms. If the industry standard is 45 days and
the firm restricts its credit terms to 20 days, it works heavily on the company’s sales. On the
other hand, if the company follows the industry standard and grants credit of 45 days, extra
efforts are to be put in towards collection. Incidence of bad debts is higher in such cases.
? Operation Efficiency: use of working capital is improved and the velocity of cash conversion
cycle is stepped up. Better utilization of resources improves profitability and helps in
reducing the pressure on working capital.
Decision Criteria:
? Working capital management entails short term decisions – generally, relating to the next one
year period which is “reversible”. These decisions are therefore not taken on the same basis
as capital investment decisions (NPV or related, as above) rather they will be based on cash
flows and / or profitability.
? One measure of cash flow is provided by the cash conversion cycle the net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter- relatedness of decisions relating to
inventories, account receivable and payable, and cash. Because this number effectively
corresponds to the time that firm’s cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
? In this context, the most useful measure of profitability is return on capital (ROC). The result
is shown as a percentage, determined by dividing relevant income for the 12 months by
capital employed; return on equity (ROE) shows this result for the firm’s shareholders. Firm
value is enhanced when, and if the return on capital, which results from working capital
management, exceeds the cost of capital, which results from capital investment decisions as
above. ROC measures are therefore useful as a management tool, in that they link short-term
policy with long-term decision making. See economic value added (EVA).
Management of working capital:
Management uses a combination of policies and techniques for the management of working capital.
These policies aim at managing the current asset (generally cash and cash equivalents, inventories
and debtors) and the short term financing, such that cash flows and returns are acceptable.
? Cash management: identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.
? Inventory management: indentify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and minimizes reordering costs and
hence increases cash flow; i.e. credit terms which will attract customers, such that any
revenue and hence return on capital (or vice versa) discounts and allowances.
? Short term financing: identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be
necessary to utilize a bank loan (or overdraft), or to “convert debtors to cash” through
“factoring”.
Calculation of gross working capital:
Gross working capital refers to the current assets of the firm. Current assets are the assets which can
be converted into cash within a year and it includes cash, short term securities, debtors, bills
receivables etc.
Sources of funds
Current assets
Inventories
2005-06
2006-07
2007-08
26957.87
38848.52
38599.79
Sundry debtors
42957.30
60527.55
38968.35
Cash and bank balance
5501.95
13047.91
15141.34
Interest accrued
141.48
141.48
447.65
Loan and advances
12867.42
28465.60
27240.05
Gross working capital
88426.02
141029.06 120397.18
160000
141029.06
140000
120397.18
120000
100000
88426.02
80000
Gross Working Cpital
60000
40000
20000
0
2005-06
2006-07
2007-08
From the above last 3 days data we can see that gross working capital is highest in 2006-07.
Inadequate amount of working capital can threaten. The solvency of the firm because of its inability
to meets its current obligation. Here we can see the major proportion of current asset investment is
done into account receivable and investment in current asset should be judge adequately account to
the need of business firm. Excessive investment in current assets should be avoided because it affects
the firm’s profitability, as idle firm investment earns nothing.
Calculation of Net Working Capital of GNFC Ltd.:
Net working capital is a difference between current assets and current liabilities.
Net working capital= current asset – current liabilities
Sources of funds
Current asset
Inventories
Sundry debtors
2005-06
2006-07
2007-08
26957.87
38848.52
38599.79
42957.30
60527.55
38968.35
5501.95
13047.91
15141.34
141.48
141.48
447.65
Loan and advances
12867.42
28465.60
27240.05
(A) Total Current Assets
Current liabilities
88426.02
26444.51
141029.06
44245.09
120397.18
Cash and bank balance
Interest accrued
Liabilities
Provisions
35272.92
10902.56
9723.65
13594.99
(B) Total Current Liabilities
37347.07
53968.74
48867.19
Net Working Capital (A-B)
51078.95
87060.32
71529.99
87060.32
90000
80000
71529.99
70000
60000
51078.95
50000
40000
30000
20000
10000
0
2005-06
2006-07
2007-08
Net Working Capital (A-B)
Net working capital can be positive or negative. For GNFC it is highest in 2006-07 i.e. 87060.32
which decrease in 2007-08 by 71529.99. so it is positive. Excessive investment in current assets
should be avoided because it affects the firm’s profitability.
Cash Management
Cash is the most important current asset for a business operation. It is the force that drives business
activities and also the ultimate output expected by the owners. The firm should keep sufficient cash
at all time. Excessive cash will not contribute to the firm’s profits and shortage of cash will disrupt
its manufacturing operation. The term ‘cash’ can be used in tow senses in a narrow sense it means the
current and other cash equivalents such as cheques, drafts and demand deposits in banks. In a
broader sense, it includes near cash asset like marketable securities and time deposits in banks. The
distinguishing nature of this kind of asset is that they can be converted into cash very quickly. Cash
in its own form is an idle asset. Unless employed in some form or another, it does not earn any
revenue. Cash management is concerned with
? Management of cash flows into and out of the firm,
? Cash management within the firm and
? Management of cash balances held by the firm deficit financing or investing surplus cash.
Motives of holding cash:
There are four motives of holding cash. They are:
? Transaction motive: This refers to a firm holding cash to meet its routine expenses which are
incurred in the ordinary course of business. A firm will need finances to meet a plethora of
payment like wages, salaries, rent, selling expenses, taxes, interests, etc. The necessity to
hold cash will not arise if there were a perfect coordination between the inflows and
outflows. These two never coincide.
? Precautionary motive: This refers to the need to hold cash to meet some exigencies which
cannot be foreseen. Such unexpected need may arise due sudden slow-down in collection of
accounts receivable, cancellation of etc. the moneys held to meet such unforeseen
fluctuations in cash flows are called precautionary balances.
? Speculative motive: This relates to holding cash to take advantage of unexpected changes in
business scenario which are not normal in the usual course of firm’s dealings. It may also
result in investing in profit- backed opportunities as the firm comes across.
? Compensating motive: this is yet another motive to hold cash to compensate bank for
providing certain services and loans. Banks provide variety of services like cheque
collection, transfer of funds through DD, MT, etc. To avail these purposes, the customers
need to maintain minimum balance in their account at all times. The balance so maintained
cannot be utilized for other purpose. Such balances are called compensating balances.
Objectives:
? Meeting payments schedule and
? Minimize funds committed to cash balance.
? Meeting payments schedule:
In the normal course of functioning, a firm will have to make many payments by cash to its
employees, suppliers, infrastructure bills, etc. it will also receive cash through sales of its
products and collection of receivables. Both these do not happen simultaneously. A basic
objective of cash management is therefore to meet the payment schedule in time. Trade credit
refers to the credit extended by the supplier of goods and services in the normal course of
business transactions.
? Minimize funds committed to cash balances:
Trying to achieve the second objective is very difficult. A high level of cash balances will help
the firm to meet its first objective discussed above, but keeping excess reserves is also not
desirable as funds in its original form is idle cash and a non earning asset. The aim of cash
management is therefore to have an optimal level of cash by bringing about a proper
synchronization inflows and check the spells of cash deficits and cash surpluses.
Factors for efficient cash management:
The efficiency of cash management can be augmented by controlling a important factors
described below:
? Prompt billing and mailing: There is a time lag between the dispatch of goods and
preparation of invoice. Reduction of this gap will bring in early remittances.
? Collection of cheques and remittances of cash: It is generally found that there is a delay in
the receipt of cheques and their deposits into banks. The delay can be reduced by
speeding up the process of collection and depositing cash or other instrument from
customers. The concept of ‘float’ helps firms to a certain extent in cash management.
Float arises because o the practice of banks not crediting firm’s account in its books when
a cheque is deposited by it and not debit firm’s account in its books when cheque is issued
by it until the cheques is cleared and cash is realized or paid respectively. Whenever
cheques are deposited with the bank, credit balance increases in the firm’s books but not
in bank’s books until the cheque is cleared and money realized. This refers to ‘collection
float’. Likewise the firm may take benefit of ‘payment float’. The difference between
payment float and collection float is called as ‘net float’. When net float is positive, the
balance in the firm’s books is less than the bank’s book’s when net float is negative; the
firm’s book balance is higher than in the bank’s books.
Cash forecasting and budgeting:
Cash budget is a device to plan for and control cash receipts and payments. It gives a summary of
cash flows over a period of time. Cash budgets are prepared under three methods:
1. Receipts and payments method
2. Income and expenditure method
3. Balance sheet method
Cash management at GNFC
GNFC uses short period cash budget method. It prepare cash budget on quarterly basis. They make
budget every month for the next three months. Cash budget is prepared by inflow and outflow as
well as receipt and disbursement.
Cash budget format:
Details of cash flow: Actual for Dec-2007 v/s projection for the period
Jan 2008 to March 2008 (Rs. In lacks)
Actual
Dec
2007
Year to
date
Projections
Jan
2008
Feb
March
2008
2008
A. Opening Balance
B. Receipts
Sub Total
C. Payment
Sub Total
D. Net Cash Inflow (B-C)
E. Closing Balance (A+D)
F. Total Cash Credit Limit
Cash collections:
GNFC is selling its all product on cash as well as credit basis. It is own cash management system
with BANK OF BRODA and ICICI. GNFC has non operative sales collection amount at each of
its sales office for cash collection where only cheques are deposited by the customer, cash not be
withdrawn. The fund is transferred at BOB (Bharuch) to the GNFC cash credit account.
Cash disbursement:
Company has deal with certain fixed expenses every month i.e. salaries, telephone payments,
electricity charges, dealer payments etc. supplier payments are done by cheque, inter bank credit
or imported account.Almost all transactions at GNFC are done by cheques on cash transaction.
Minor expenses are done on cash basis. So at GNFC there is nothing like optimum cash balance.
Surplus cash investment:
Company receives cash from selling its products. If there is surplus cash after all cash
disbursement GNFC invest that surplus fund as fixed deposit for very short time period. On the
contrary if company is in deficit then bank gives cash credit facility. The interest rate is now
9.25%. it is a consortium rate of all banks. The rate is counted as PLR 3.5% second source is
short term t inter corporate loan from GSFC for 90 days and HDFC for 120 days.
Inventory Management
? The team ‘inventory’ refers to the stockpile of products. Inventory comprises of those assets
which will be sold off in the near future and moneys recovered. Inventory consists of three
types of assets – raw materials, semi – finished goods (work in progress) and finished goods.
Raw material inventory consists of those items which are purchased by the firm to be
converted into finished goods. Work in progress inventory consists of partially complete
goods, that is, items currently being used in the production process. Finished goods stock
represent completed products ready to be sold.
? The chief responsibility of a finance Manager of a firm is to see to it that the actions of the
firm ultimately lead to wealth maximization of shareholders. Also he should ensure
availability of sufficient raw materials for smooth production and sufficient finished goods
stock to satisfy sales demands. These two conflicting is a basis of trade-off between costs and
benefits associated with the inventory levels.
Role of Inventory in Working Capital:
Inventories form an important part of a firm’s working capital. Some characteristic features about
inventory are as follows:
1. Current asset: Inventories will be converted to cash within a year.
2. Level of liquidity: Inventories are looked at as next to cash. A firm having fast-moving goods
in its stock can convert the products quickly to cash. Such stocks are called as highly liquid
stocks.
3. Liquidity lags: Inventories have three types of legs:
a. Creation lag: Raw materials are purchased on credit (creation of accounts payable)
and used to produce finished goods. There is always a lag in payment whether goods
are purchased or manufactured. This liquidity lag offers a benefit to the firm.
b. Storage lag: The goods held for sale cannot be converted into cash immediately.
Whether the goods are fast-moving, the firm realize its cash after a certain period.
c. Sale lag: Instant cash realized when goods are sold on cash basis but in competitive
situations, firms should give some credit period to their customers to enhance their
sales volumes. This results in accounts in accounts receivable and this lag is a cost to
the firm.
Purpose:
The goal of inventory holding is to efficiency through cost reduction and to increase sales volume.
The following are the other benefits accruing from holding inventories:
? Sales: Customers purchase goods only when need arises. On the other hand. Firms the goods
they want are not available most of them look at other substitutes.
? Avail quantity discounts: suppliers give discounts for purchases. Such discounts increase the
firm’s profits. Firms may go in for large orders to benefit from discounts offered by dealers.
? Reducing ordering costs and time: every time a firm places an order, it incurs certain
administrative expenses and some time is lost in processing these forms to get necessary
approvals. Each of these varies with the number of order placed. To save on and costs, the
firms may think about placing big orders
? Reduce risk of production shortages: manufacturing firms require a whole lot of raw
materials and spares. Even if one item is missing or is not available immediately, the entire
production process goes for a toss and the firm incurs heavy losses. To avoid such situation
firms maintain the required stores and inventories in sufficient quantities.
Cost associated with inventories:
? Successful inventory management is a trade of between high and low levels of inventory. The
inventory cost can classify as under.
? Material costs: these are the costs of purchasing the goods and the related cost such as
transportation and handling costs associated with it.
? Ordering costs: the expenses incurred to place orders with suppliers and replenish inventory
of raw materials are known as ‘ordering cost’. Ordering costs include requisitioning.
Purchase ordering, transporting, receiving, inspecting and handling at the warehouse.
? Carrying costs: carrying cost include storage, insurance, taxes, deterioration, spoilage,
obsolescence, salaries o in storage. The greater the inventory, the greater is the carrying cost.
? Cost of funds tied up in inventory: whenever a firm commits its resources to inventory, it is
using funds that otherwise might have been available for other activities. The firm is losing
on the opportunity cost. If the finds were not locked up in inventory, they would have earned
a return.
? Cost o running out of goods: these are the costs associated with the inability to provide
materials to the production department when they ask for or not providing finished goods to
the marketing department when demand is there warehouse keeper, maintenance of building
etc. carrying cost generally are to the tune of 25% of the value of inventory.
Inventory management at GNFC
At GNFC there are total 140000 items in inventory whose total value is Rs.1001000000.
Bifurcation of inventories:
Mechanical spares
Catalyst and chemical spares
Electrical items
Instrumentation items
Other miscellaneous item
57%
12%
11%
10%
10%
Mechanical spares
10%
10%
Catalyst and chemical spares Electrical items
11%
57%
12%
Instrumentation items Other miscellaneous item
In 57% mechanical spares, there are some item which are not come into daily use. These item are
very costly and carrying cost is also high.
Material planning control system is available for the management of inventory at GNFC.
This system is useful to control the minimum maximum level of inventory. Some inventories costs
are very less and required time to time in the production.
GNFC use SAP system for maintaining the inventory as well as the dead stock. SAP system is very
useful and effective. The important benefit is the is helps in reducing the work load.
Sales to inventory turnover ratio (2007-08) = sales/ inventory
=343391.21/ 38599.79
=8.89 times
The sales to inventory turnover ratio is 8.89 tines, which shows good management of inventory.
Inventory management techniques:
Many mathematical models are available to handle inventory management problems.
Some of the techniques are as follows:
1.
2.
3.
4.
5.
1.
Codification System
ABC System
Economic Oder Quantity ( EOQ)
FSN Analysis
HML Analysis
Codification system
Codification refers to assigning a unique code or name to each item based on its use, characteristics,
importance and other features. It is the process of allocating a code after logical grouping and sub
groping considering material types and application.
Advantages:
?
?
?
?
?
It helps in avoiding duplication of items.
It is the starting point for standardization.
It identifies all the items logically.
It helps to group the similar items together.
It lays the foundation for an efficient purchase organization by helping to form specialized
commodity base purchase sections. Since items are identified by sources of supply, it is
possible to bulk together to take advantage of bulk discount.
2. ABC system
Monitoring a large number and types of inventory becomes very difficult in a big company given the
amount involved. In such cases, ABC analysis enable the management to monitor the stocks in a
proper manner. The firm therefore classifies inventories into three different categories – A group –
items with high attention. Rigorous, sophisticated and intensive control measures are used for such
item monitoring. Items under the C group represent least value items needing simple control large.
The B group stands midway. They are neither too expensive nor very cheap. These items require
reasonable attention. The ABC analysis concentrates on important items and is therefore known as
“Control by Importance and Exception”. It is also known as Proportion Value Analysis as items are
classified according to the importance of their value.
Advantages of ABC analysis:
It ensures closer control on costly items in which lies the greater part of company’s resources.
Clerical costs are greatly reduced as stocks are maintained at optimum level. It helps in achieving the
main objective of inventory control at minimum cost.
3. Economic Order Quantity (EOQ)
EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an
item of inventory based on its expected usage. The optimum level of inventory is referred to as the
Economic Order Quantity. It is the economic lot size. EOQ is defined as level of inventory order that
total cost associated with the inventory management. It is the level one unit beyond which is
additional cost to the firm and one unit below may hamper production process. The model in
inventory control.
? Constant or uniform demand: The firm knows with certainty the annual consumption of a particular
item of inventory.
? Constant unit price: The EOQ model is based on the assumption that the per unit piece of material
does not change and is constant irrespective of the order size.
? Constant carrying costs: Unit carrying costs are known to vary substantially as the size of inventory
increases or decreases. Firms derive economies of scale by increasing order size. However, the EOQ
model assumes the carrying costs to be constant.
? Constant ordering costs: Ordering costs are assumed to be constant whatever the numbers of orders
are and whatever the size is.
Economic Order Quantity:
Optimum Production Quantity,
?2AS/C
The formula for EOQ model is
Where A refers to the annual usage,
S refers to ordering cost,
C refers to cost of carrying inventory per unit per annum.
Re-order Point:
In the EOQ model, it was assumed that there is no time lag between ordering and procuring of
materials. Therefore the re-order point for replenishing the stocks occurs at that level when the
inventory level drops to zero and because of instant delivery by suppliers, the stock levels bounce
back. But rarely do we come across such situations in real life. There is always a lead time between
ordinary data and receipt of materials.
Due to this, the recorder level is always higher zero.
Re-order point = Normal Consumption during lead time + Safety stock
Recorder level = Average usage *Lead time
Safety stock
In order to avoid a stock-out situation, the firms should maintain a safety stock which will act as a
buffer or a cushion against a possible shortage of inventory. Safety stock may be defined as the
minimum additional inventory to meet an unanticipated increase in usage resulting from an unusual
high demand
4. FSN Analysis
At GNFC FSN analysis is carried out for consumable items, which are used by multiuser. FSN
means fast moving, slow moving and non moving items analysis.
Norms established by GNFC for different items
Fast moving items
? It should have more than 5 issue transaction in a year.
? There should be multi users.
For fast moving items close watch is required and annual rate contracts are made to avoid stock
outs. Here frequency of review is more.
Slow moving items,
? Items should have transactions between 1 to 5 items in a year.
? There should be multi users.
For slow moving items consumption pattern is studied. Normally these
items are for specific
users and levels can be kept low but users should given their requirement or shutdown. Here
frequency of review is less.
Nonmoving items
? Items have no issue transactions for last 3 years.
? Items should have some quantity available in all the past 3 years.
For non moving items reports are made at the closing of the financially year. The report is circulated
to all concerned department. The departments study the use of equivalent materials against other
similar material. After that the excess material is declared for disposal and that items are removed
from the list.
5. HML Analysis
HML analysis refers to high value, Medium value and low value items. In this analysis the unit value
of the items is considered. Here the analysis is mainly focus to control the unit prices of high value
items and negotiate the prices. This analysis is done for electrical, instrumentation and other items.
At GNFC
?
?
Items having value more than or equal to 100000Rs. Is called high value items.
Items having value more than or equal to 25000Rs. and below 100000Rs. is called medium
?
value items.
Items having value less than25000Rs. is called low value items.
Zero inventories:
GNFC is maintaining the zero inventories for raw material like oil, gas etc. Zero inventories takes
place when the company has made contract with suppliers to provide row material on demand.
GNFC has contract with GAIL for providing gas as and when required. The supply of gas on demand
help to save inventory and cost reduction also.
For lubricants GNFC has done negotiation with IOC (Indian Oil Corporation). It has provided
accommodation in the plant which is called IOC depot. IOC keeps the stock at the depot and GNFC
use it when it is required. Till that GNFC does not need to pay anything for it. GNFC has to look
after the material of depot. IOC pays charges for that to the company. This helps to reduce the
transaction cost.
Import substitution
Import substitution refers to find out the domestic suppliers for the item which are imported. GNFC
has done the same for the item which are imported. It has developed supplier connection in domestic
market and market contracts with them.
GNFC has positive experience by contracting with local vendors. It has obtained lots of saving and
benefits by adopting import substitution technique.
Pricing of inventories
There are different ways of valuing inventories. Firms should choose that system which gives them
the maximum benefit.
Fist In Fist Out (FIFO): a firm adopting this method prices the raw material at that rate at which the
material were received. The goods received first are issued first and once the first set of consignment
is completely exhausted, the second set is not utilized. This is logical method of issues which is used
by almost all companies.
Last in first out (FIFO): in the LIFO method, the consignment last received is first issued and if this
is not sufficient, only then the previous set in the warehouse is utilized. This system is useful when
the companies want to price their product on the basis of total cost incurred plus a percentage of
profit.
Weighted average method: the pricing of materials is done on weighted average method where in
weights are assigned to the quantities held and accordingly priced. This is one of the most widely
used methods as it gives importance to the balances in stores in their proportion of availability.
Standard price method: under this method, the material is priced at a standard cost which is
predetermined. When the material is purchased, the stock account will be debited with the standard
price. The difference between the purchase price and the standard price will be carried to a variance
account.
Replacement or current price method: this method prices the issues at the value that is realizable at
the time of issue.
Receivable Management
Businesses sell goods on credit to increase the volume of sale. In the present era of intense
competition, one way to improve sale deals is to offer relaxed payment conditions to customers.
Finished goods get converted to receivables when sold on credit terms. Trade credit is a marketing
tool that tries to bridge the gap between production and distribution of company’s products. Trade
credit creates receivables or book debts which the firm hopes to realize in the near future. The
receivables are a very important component assets.
Objectives:
The term ‘receivables’ is defined as ‘debt owed to the firm by customers arising from the sale of
goods or services in the ordinary course of business’. The main objective of having receivables in the
current assets is to promote and encourage sales which will lead to increased profits. In competitive
situations, the firms will be forced to offer goods on credit keeping in line with competitor’s
strategies. All firms therefore grant credit to increase sales, profits and to meet competition.
Costs Associated with Maintaining Receivables:
The following are the different costs incurred with the extension of credit and accounts receivable:
? Capital cost: A firm offering goods on credit can surely expect higher sales but some of the
firm’s resources remain blocked in them as there is a time lag between a credit sale and cash
receipt from customers. The cost of use of additional capital to maintain its obligations will
definitely have an effect on the firm’s profits.
? Collection cost: These are the costs incurred in collecting receivables. They are administrative in
nature and these costs include(a)additional expenses on the creation and maintenance of staff,
stationery, postage, registers etc.
? Delinquency cost: This cost arises out of the failure of customers to meet their obligations when
payment on credit sales becomes due after the expiry of credit period. Additional costs in the
form of reminders, legal charges etc. will be incurred.
? Default cost: The firm may not be able to recover its dues because of its customers’ inability to
pay off their debts. Such dues are bad debts and go on to reduce the profits of the company. The
size of the receivables is determined by the firm’s credit policy and the level of its sales.
Receivables management at GNFC:
At GNFC the receivables are approx. 35% of current assets. The company credit policy varies from
15 days to 90 days. On every 30 days company prepares the receivables list which shows the total
receivables and due date for each bill. The list is prepared by accounting department. Account
department co ordinates with marketing department for collection of receivables.
Credit policy:
The credit policy of a company can be regarded as a tradeoff between increased credit sales leading
to higher profits and the cost of having large cash locked up in receivables. The credit policy to be
adopted in businesses largely depends upon competitors’ strategies. If the competitors are grating a
15 day credit period and if the firm decides to extend the credit period to30days, the firm will be
flooded with customers’ demand for company’s products. Firms average investment in account
receivable 90days credit per month.
The credit policy is a framework to determine
(a) Credit standards,
(b) Period of credit,
(c) Cash discount to be offered and
(d) Collection program.
All these variables listed influence the amount of sales, the amount of sales, and the amounts
locked up in receivables and the bad debts incidence.
Credit Standards :
The term ‘credit standard’ represents the criteria for extending credit to customers. The quantitative
basis for setting credit standards are credit rating, references, average payment period and ratio
analysis. Professional credit rating agencies’ help may be sought to rate a customer’s
creditworthiness. After rating, the customers are rated as ‘excellent’, ‘very good’, ‘good’,’ average’,
‘poor’ , etc. The overall credit standards can be divided into (a) tight or restrictive and (b) liberal or
easy-going.
Credit period:
This refers to the time given to customers to pay for their purchase. It is generally expressed in days
like 15 days or 30 days. Generally, firms give a discount if payments are made within a said period
beyond which they will not lose on the benefit that can be availed. Increasing the credit period will
bring in new sales and new customers decrease, which is not desirable.
Cash Discounts:
Firms offer cash discount to induce prompt payment s. Cash discounts has implications on sales
volume, average collection period, investment in receivables, incidence of bad debt losses and
profits. Change in discount rate will bring in additional sales-granting a discount implies reduced
pieces and this factor brings in new sales.
GNFC is providing 14% discount on the total amount to the clients’ if they pay before due date.
Collection Program:
The success of a collection program will be depended on the collection policy. The objective of a
collection policy is to achieve timely collection of receivables, thereby releasing funds locked up in
receivables and minimize bad debts occurrence. The collection program consists of the following:
? Monitoring receivables
? Informing customers about the due date for payment
? Initiating legal action to overdue customers after sending repeated notices
Collection policy should be so formulated that it is not too rigorous as it acts as an irritant to
customers, leading to bad relationship with them.
Credit policy at GNFC
? The company sales its product on both cash and credit basis.
? Daily reporting of sales is done for organizations.
? The Company follows a rigorous system of credit evaluation for both corporate client and
dealers. The customers are required to make payments through cheques.
? ICRA rating is the standard for selecting and granting credit to customer
? Clients are required to give pre signed cheques to the GNFC for purchasing the product.
? Company has non operative sales collection account at each sales office for cash collection.
? If clients pay before due date then interest is charged @ 16% per year on total amount. If
clients pay before due date then 14% discount is given on the total amount.
? If the cheque bounces from the account then 0.75% of total amount or 5000 Rs. whichever is
higher is charged to customer.
? Prorate of quantity: if GNFC doesn’t have quantity if product then it is entitled to follow all
the conditions.
Credit evaluation of client is done for the purpose of extending credit to them. GNFC has presently
implemented credit rating model developed by ICRA rating agency for assessing the clients’ credit
worthiness. They want to change the credit rating agency from ICRA to CARE.
In GNFC different monitoring technique of account receivable are used. It is to collection period and
monitoring the top 10 customers of GNFC.
FINDINGS
? The value of gross working capital is highest in 2006-07 i.e. 141029.06 Major proportion of
investment is done into account receivables and inventories.
? The value of net working capital is increasing and highest in 2006-07 i.e. 87060.32 which
indicates good liquidity position of GNFC.
? The inventory conversion period is on an average 37days during last 3 years. It means average
37days time is required for producing and selling the product.
? Debtors’ conversion period is highest in 2006-07 i.e.80days which goes down in 2007-08 i.e.
53days. Lower collection period is good for the company.
? Gross operating cycle is highest in 2006-07 i.e. 118 days due to high inventory conversation
period and debtor’s conversation period.
? Payable deferred payment is 2006-07 i.e. 38 days. It is 51 days in 2007-08.
? The net operating cycle is higher in 2006-07 due to higher collection period and lower payable
deferred period.
? Current assets to fixed assets ratio is higher in 2006-07 i.e. 1.27 GNFC is following average
policy in which there is an equal level of risk and liquidity.
CONCLUSION
From the above calculation and information we can say that GNFC is managing its working capital
very effectively. All three components of working capital i.e. cash management are operating very
successfully at the company. Major transactions are done through cheque. Company has sound
liquidity position. Its investing the major portion of surplus fund in FD only. The company has good
inventory management. It is maintaining zero inventories. GNFC uses different techniques for
monitoring receivables management. In short the all over working capital management of GNFC is
proper.
doc_861570724.docx
This report talks about the working capital calculation of GNFC -Bharuch
ACKNOWLEGMENT
This project has been a wonderful learning. I am very thankful to have got this opportunity to
work on a satisfying project on “STUDY OF WORKING CAPITAL MANAGEMENT OF GNFC.”
I am very thankful to the management of GNFC for providing me the golden opportunity to do
this project. I would like to thank Mr.N.K.Patadia (AGM-TC) to grant me. I also express out thank to
Mr.I.P.Bhatt (SM-TC).
I am immensely grateful to Mr.A.K.Trivedi (GM-Finance) who has guided me during the project
and special thanks to Mr.D.R.Panchal (PS-Finance) who has guided me and helped me a lot.
I am also thankful to manager Mr. R.B.Kayastha (Banking Section) who has guided me for
studying working capital management.
I am also thankful to chief managers Mrs.J.M.Kavina, Mr.V.C.Bhatt, senior managers
Mr.U.N.Gohil,
Mr.P.H.Gadhi,
Mr.U.V.Parmar,
Mr.R.M.Patel,
and
managers
Mr.A.B.shah,
Mr.R.B.Shah, Mr.A.R.Shah, Mr.R.S.Patel, Mr.M.H.Dave, Mr.N.N.Modi, Mr. M.S. Talukdar, in
charge of different section for making me aware about their particular section.
Niyati Patel
INDEX
Sr No.
Content
1.
Company Profile
2.
Study Of Finance Department
3.
Working Capital Management
4.
Calculation of operating cycle of GNFC
5.
Calculation of Working Capital
6.
Cash management
7.
Inventory management
8.
Receivables management
9.
Findings
10.
Conclusion
Page No.
COMPANY PROFILE
GUJARAT NARMADA VALLEY FERTILIZER COMPANY LIMITED (GNFC) is the joint
sector enterprise promoted by the Government of Gujarat and the Gujarat State Fertilizer Company
Ltd (GSFFC). It was set up and located in Bharuch, Gujarat in 1976.
GNFC started its manufacturing and marketing operation by setting up in 1982, one of the
world’s largest single-stream ammonia-urea fertilizer company. Over the next few years, GNFC
successfully commissioned different projects in fields as diverse as chemicals, fertilizer and
electronics.
GNFC today has extended its profile much beyond fertilizers through a process of horizontal
integration. Chemicals/Petrochemicals, Energy Sector, Electronics/Telecommunication
and
Information Technology from ambition and challenging additions to its corporate portfolio. GNFC
has enterprising, strategic view towards expansion and diversification.
Gujarat Narmada Valley Fertilizers and Chemicals Limited (‘the Company’ or ‘GNFC’) operates
businesses mainly in the Industrial Chemicals, Fertilizers and Information Technology (‘IT’)
Products space. Serving a diverse set of customers, the Company is now an established leader in
most of its chosen lines of business.
GNFC today is one of the leaders in fertilizer industry. The Company is engaged in
manufacturing and selling fertilizers such as Urea and Ammonium Nitrophosphate under the brand
name of “NARMADA”.
The Company has set up core chemical and petrochemical plants such as Methanol, Formic Acid,
Nitric Acid, Acetic Acid, Toluene Di - Isocyanate, Aniline, Ammonium Nitrate, Ethyl Acetate,
Methyl Formate etc. The Company is one of the largest producers of Formic Acid and Acetic Acid in
the country. The Company has India’s largest single stream plant of Aniline. The company is the only
manufacturer of Toluene Di-Isocynate in South East Asia and Indian Sub Continent. The Company’s
chemicals enjoy high brand value in niche market.
The Company provides several cutting-edge IT services and solutions covering Digital
Signatures Certificate (DSC), E-procurement, E-Governance projects, Data centres and CCTV
surveillance systems etc. under Brand name of
code solutions. It remains the market leader inDigital Certificate business maintaining about 40% market share.
Board of Directors
Shri G. R. Aloria
IAS
Chairman
Dr. J. N. Singh
IAS
Director
Smt. Mamta Verma
IAS
Director
Prof. Arvind Sahay
Director
Shri Chandrasekhar Mani
Director
Shri Sunil Parekh
Director
Shri Piruz Khambatta
Director
Shri H. V. Patel
IAS
Director
Dr. Rajiv Kumar Gupta
IAS
Managing Director
Executive Directors
Shri R. T. Bhargava
Executive Director
Shri P. A. Mankad
Executive Director
Shri K. B. Garvalia
Executive Director
Shri Y. B. Gandhi
Executive Director
Shri R. B. Panchal
Company Secretary & Executive Director
Chief Financial Officer
Shri Vikram Mathur
General Manager & CFO
Registered Office:
P. O. Narmadanagar- 392015
District: Bharuch
Gujarat, INDIA
Products:
?
?
?
?
?
?
?
?
?
?
?
?
?
Methanol
Acetic Acid
Toluene Di-isocyanate
Aniline
Formic Acid
Concentrated-Nitric Acid
Weak Nitric Acid
Ammonium Nitric (Melt)
Methyl Formate
Nitrobenzene (NB)
Calcium Carbonate
Hydrochloric Acid
Ortho Toluene Diamine
Services:
1. Fertilizer plant
? GNFC started fertilizer manufacturing and marketing operation by setting up in 1982, one
of the world’s largest single-stream ammonia-urea fertilizer complexes.
? GNFC today is one of the leaders in fertilizer industry. The company is engaged in
manufacturing and selling fertilizer such as Urea, Ammonium Nitro phosphate and
calcium Ammonia Nitrate under the umbrella Narmada. GNFC has to phosphate and
calcium Ammonia plant, a reference plant in the world of fuel oil based technology along
with the world’s largest single stream urea plant.
2. Chemical plant
? GNFC has kept pace with changing times and its vision is always focused on growth. Even
as the company was implementing its fertilizer complex, plans were underway for
expansion and diversification in related areas. This resulted in the up of core chemical and
petrochemical plants such as Methanol, Formic Acid, Nitric Acid and Acetic Acid.
? These industrial chemicals are used by a wide range of manufacturers, processors and
chemical operators in India and even abroad. While methanol finds application in
chemicals, resign etc. Formic acid is used mainly in rubber, textiles, tanneries and
pharmaceuticals industries. Both methanol and formic acid are regularly being exported to
international markets.
3. IT Tower
? An it division of GNFC it offers digital certificates that can integrate with application such
as emails, workflow, enterprise wide application, or secure VPNs. The digital certificates
can use by individuals, corporate and governments to secure online B2B/B2C applications
and other online transactions.
? It has promoted a portal called www.nprocure.com offering end-to-end electronic
procurement services provider. It also designs and builds world class data center
infrastructures and also offers a wide range of security services which include managed IT
services & secure infrastructure design & building services.
ORGANISATIONAL STRUCTURE
Board of Directors
Chairperson & Managing Director
Executive Director
General Manager
Additional General Manger
Chief Manager
Senior Manager
Manager
Senior Officer
Officer
Staff
FINANCE DEPARTMENT
GNFC have a finance department for transacting all types of financial dealings. The finance
department is the integral part of any organization which plays pivotal role in all organization.
Because money is the medium without which we can even think to do anything. And finance
department can only solve the problems which are arises for the money .finance department dealing
with the sources of fund and application of the fund. To take any operation any operation in the
consideration we must have to budget it according to the financial condition of the organization. And
foremost is that to handle this financial department GNFC has its own latest technology through
which it can run financial activity smoothly.
Finance department mainly divided in the following section:
?
?
?
?
?
?
?
?
Bills Payment Section
Marketing Account Section
Bank Section
Establishment Section
Insurance Section
Indirect Tex Section
Central Account Section
Concurrence Section
? Stores Account Section
WORKING CAPITAL MANAGEMENT
? Working capital, also known as net working capital, is a financial metric which represents
operating liquidity available to a business. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. It is calculated as current assets minus
current liabilities. If current assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit.
? 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. The management of working capital involves managing
inventories, accounts receivable and payable and cash.
Concepts of working capital:
? There are two concepts of working capital-gross and net.
? Gross working capital refers to the firm’s investment in total current assets.
? Net working capital refers to the difference between current assets and current liabilities. Net
working capital is positive when CA exceed CL and negative when CL exceeds CA.
? A finance manager should ensure there is sufficient liquidity in the firm’s operations. This is
possible only when the CA and CL are managed efficiently. Liquidity of the firm is defined as the
firm’s ability to meet its short-term obligations as and when payable.
Objective:
Liquidity V. Profitability
The basis objective of working capital management is to maintain the smooth functioning of the
normal business operations of a firm. The company has to decide on the sufficient quantity of
working capital to be maintained. A company following a conservative approach will have more
current assets at its disposal. Holding large amount of CA is not very advisable as the firms lose on
the profitability aspect. They can earn more by putting these resources to alternative uses or by
investing CA into short term investment avenues. This approach is dynamic wherein only small
amounts of cash are held by companies and the rest put to alternative uses.
Need for Working Capital:
Different firms have different requirements of working capital. One of the objectives, the firm should
earn good returns from its operations which mean that earning a steady amount of profit requires
good amount of sales. The firm should invest adequately in current assets to enable it to generate
sales continuously without any break. Sales do not convert into cash instantaneously and there is
always on operating cycle involved in the conversion of sales into cash.
Operating cycle:
It is the length of time required to convert sales into cash. This involves three phases:
? Acquisition of resources-procuring raw materials, labour, fuel, etc.
? Manufacture of the product-conversion of raw material into inventory.
? Sale of the product-conversion of sales into cash or credit in which case the firm has accounts
receivable.
The length of the operating cycle is the sum total of:
? Raw Material storage period
? Conversion period
? Average collection period
This total is referred to as Gross Operating Cycle (GOC). Form this; the firm has to make payables
which are the Average Payment Period. Subtracting payables deferrals from GOC, we get Net
Operating Cycle or the Cash Conversion Cycle.
Calculation of Operating Cycle of GNFC:
1) Inventory Conversion Period
The inventory conversion is the sum of raw material conversion period, work in process and finished
goods conversion period:
ICP=RMCP + WIPCP + FGCP
i)
Raw Material Conversion Period ( RMCP )
RMCP = Average raw material inventory
Raw material consumption per day
Raw material consumption per day = Raw material consumption / 360
Average raw material inventory = (Opening stock of RM + Closing stock of RM)/2
Average raw material inventory
2007-08
2008-09
2009-10
4041.71
5274.76
5522.39
Raw Material consumption per
214.71
292.01
341.99
19
18
16
day
Raw Material Conversion
Period (RMCP) (in days)
i)
Work in Process Conversion Period (WIPCP)
WIPCP = Average work in process inventory
Cost of production per day
Average work in process inventory = (Opening WIP + Closing WIP) / 2
Cost of production per day = (Raw material consumed + power, fuel and other Utilities + stores
chemicals + Opening WIP – Closing WIP) / 360
2007-08
2008-09
2009-10
2422.75
1793.73
2013.60
Cost of Production per day
367.30
377.15
433.86
Work in Process Conversion
7
5
5
Average Work in Process
Inventory
Period (WIPCP) (in days)
i)
Finished Goods Conversion Period (FGCP)
FGCP = Average Finished goods Inventory
Cost of goods sold per day
2007-08
2008-09
2009-10
Average finished goods
4351.26
Inventory
Raw Material Conversion Period
8795.65
2007-08
11532.51
2008-09
2009-10
19
18
(RMCP)
(in days)
Cost
of goods
sold per day 455.18
592.60
Work ingoods
Process
Conversion
Finished
conversion
10 Period
Period (FGCP) (in days)
715
16
765.97
5
15
5
(WIPCP) (in days)
Finished Goods Conversion Period
10
15
15
36
38
36
(FGCP) (in days)
Inventory Conversion Period (ICP) (in
days)
1) Inventory Conversion Period (ICP):
40
38
36
35
36
Raw Material Conversion Period (RMCP) (in days)
30
25
20
Work in Process Conversion Period (WIPCP) (in days)
18
16
15
19
15
10
5
0
15
Finished Goods Conversion Period (FGCP) (in days)
10
7
5
5
Inventory Conversion Period (ICP) (in days)
2005-06
2006-07
2007-08
From the above calculation we can see that since last 3 years the ICP is nearer to 37days. For
maintaining operating cycle successfully this conversion period of inventory is fair for GNFC.
2) Debtors conversion Period (DCP) :
Debtors conversion period =
Debtors * 360
Credit Sales
2007-08
2008-09
2009-10
Debtors
36117.55
51742.25
50126
Credit Sales per day
596.55
649.82
953.86
80
53
Debtors Conversion
60
Period (DCP) (in days)
Debtors Conversion Period
80
80
70
60
53
60
50
40
30
20
10
0
2005-06
2006-07
2007-08
Debitor conversion period (DCP) (in days)
The debtors’ conversion period represents the length of time required to collect the sales receipts. It
can be called process of cash inflow. From the above calculation the conversion periods are
fluctuating. It was highest in 2006-07 i.e. 80days which affects adversely to the firm. In 2007-08 it
decreases from 80days to 53 days which is fair for GNFC.
3) Gross Operating Cycle (GOC):
Gross operating cycle = Inventory conversion period + Debtors Conversion Period
2005-06
2006-07
2007-08
Inventory Conversion Period 36
(In days)
38
36
Debtors Conversion Period (In 60
days)
80
53
Gross Operating cycle (In days)
118
96
96
Gross Operating Cycle
118
120
96
100
96
80
60
Gross Operating Cycle (in days)
40
20
0
2005-06
2006-07
2007-08
From the above calculation we can say that gross operating cycle is highest in 2006-07 i.e. 118 days
because of high collection period. In 2007-08 it is decreased to 89 days because of low collection
period. The time taken in completing one round from cash outflow to cash inflow takes nearly 90
days.
4) Payable Deferred Payment (PDP):
PDP =
Average Creditors * 360
Credit Purchase
Credit purchase = raw material consumed + power fuel and other utilities + stores and chemicals
+ packing material + purchase of good for sale + closing stock of raw material + closing stork of
stores and spares – (opening stock of raw material + opening stock of stores and spares)
2005-06
2006-07
2007-08
Average Creditors
21275.35
21045.27
34782.22
Credit Purchase Per Day
410.39
551.51
678.89
Payable Deferred Payment (PDP) (In Days)
52
38
51
60
52
51
50
38
40
30
20
10
0
2005-06
2006-07
2007-08
Payabe l De fe rre d Payme nt (PDP) (In days)
Payable deferred payment is the time that lapse between the dates of various resources received on
credit and the date when payment is made. In the last 3 days it is highest in 2005-06 i.e. 52days. An
increase in the length of the operating cycle, without a corresponding increase in payable deferred
period, creates the further working capital financing needs. The days are lowest in 2006-07 i.e.
38days.
5) Net operating cycle (NOC):
Net operating cycle = gross operating cycle + payable deferred period
Gross operating cycle (GOC)
(in days)
Payable deferred payment (PDP)
(in days)
Net operating cycle (NOC)
(in days)
2005-06
2006-07
2007-08
96
118
89
52
38
51
44
80
38
80
80
70
60
50
44
38
40
30
20
10
0
2005-06
2006-07
Net Ope rating Cycle (NOC) (In days)
2007-08
The difference between gross operating cycle and payable deferred period is known as net operating
cycle. The operating cycle is 44 days in 2005-06 which goes up in 2006-07 i.e. 80days. An increase
in the length of operating cycle creates further working capital financing needs. In 2007-08 the cycle
days are reduced to a noticeable level. The change in 2006-07 is because of higher collection period
and lower payable deferred period.
6) Current Asset to Fixed Asset Ratio:
Higher of current asset to fixed asset is useful to measure a level of current asset. The three policies
are follows:
? Higher CA / FA ratio indicates conservative current asset policy. It implies greater
liquidity and lower risk.
? Lower CA/FA ratio indicates aggressive current asset policy. It implies higher risk and
poor liquidity.
? Between these two extreme levels, there is an average current asset policy.
2005-06
2006-07
2007-08
Current Asset
88426.02
141029.06
120397.18
Fixed Asset
85109.61
110632.68
107022.88
CA / FA (Times)
1.04
1.27
1.12
1.4
1.2
1.27
1.12
1.04
1
0.8
0.6
0.4
0.2
0
2005-06
2006-07
2007-08
CA / FA (Times)
From the above data we can say that GNFC is following average policy. In 2005-06 current asset was
slightly greater than fixed asset and 2007-08 it follows greater difference. The ratio is highest in
2006-07 i.e. 1.27 which indicates conservative current asset policy. It shows greater liquidity and
lower risk of the company.
Determinants of working capital:
A firm should plan its operations in such a way that there is neither too much nor too little working
capital. The following factors are identified as significant factors affecting the composition of
working capital or current assets:
? Nature of business: working capital requirements are basically influenced by the nature of
business. Trading organizations invest little on fixed asset and are have a large stock of
finished goods, accounts receivable (arising out of credit sales) and accounts payables (due to
credit purchases). In contrast, public utilizes do not have large stocks of current asset and they
invest heavily on fixed assets.
? Nature of Raw Material Used: the nature of raw material also influences the quantum of
inventory. For example, if the raw material is based on the agricultural produce, the
seasonality of production affects the raw material requirements. Consequently, the percentage
of raw material inventory to total current asset will be very high.
? Sales and Demand Conditions/ Business Cycle: companies which are growing will have large
quantities of finished goods inventory. Sales depend on the demand conditions which vary
depending on the seasonality and cyclicality of product demand.
? Processing Technology: the manufacturing cycle comprises the purchase and use of raw
material and production of finished goods. Longer the manufacturing cycle, larger is the
firm’s requirement of working capital. This will also lead to an extended manufacturing time
span and larger tie-up of funds in inventory.
? Credit Policy: the credit policy of the firm affects the working capital. The credit terms to be
granted to customers depend on the industry norms. If the industry standard is 45 days and
the firm restricts its credit terms to 20 days, it works heavily on the company’s sales. On the
other hand, if the company follows the industry standard and grants credit of 45 days, extra
efforts are to be put in towards collection. Incidence of bad debts is higher in such cases.
? Operation Efficiency: use of working capital is improved and the velocity of cash conversion
cycle is stepped up. Better utilization of resources improves profitability and helps in
reducing the pressure on working capital.
Decision Criteria:
? Working capital management entails short term decisions – generally, relating to the next one
year period which is “reversible”. These decisions are therefore not taken on the same basis
as capital investment decisions (NPV or related, as above) rather they will be based on cash
flows and / or profitability.
? One measure of cash flow is provided by the cash conversion cycle the net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter- relatedness of decisions relating to
inventories, account receivable and payable, and cash. Because this number effectively
corresponds to the time that firm’s cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
? In this context, the most useful measure of profitability is return on capital (ROC). The result
is shown as a percentage, determined by dividing relevant income for the 12 months by
capital employed; return on equity (ROE) shows this result for the firm’s shareholders. Firm
value is enhanced when, and if the return on capital, which results from working capital
management, exceeds the cost of capital, which results from capital investment decisions as
above. ROC measures are therefore useful as a management tool, in that they link short-term
policy with long-term decision making. See economic value added (EVA).
Management of working capital:
Management uses a combination of policies and techniques for the management of working capital.
These policies aim at managing the current asset (generally cash and cash equivalents, inventories
and debtors) and the short term financing, such that cash flows and returns are acceptable.
? Cash management: identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.
? Inventory management: indentify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and minimizes reordering costs and
hence increases cash flow; i.e. credit terms which will attract customers, such that any
revenue and hence return on capital (or vice versa) discounts and allowances.
? Short term financing: identify the appropriate source of financing, given the cash conversion
cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be
necessary to utilize a bank loan (or overdraft), or to “convert debtors to cash” through
“factoring”.
Calculation of gross working capital:
Gross working capital refers to the current assets of the firm. Current assets are the assets which can
be converted into cash within a year and it includes cash, short term securities, debtors, bills
receivables etc.
Sources of funds
Current assets
Inventories
2005-06
2006-07
2007-08
26957.87
38848.52
38599.79
Sundry debtors
42957.30
60527.55
38968.35
Cash and bank balance
5501.95
13047.91
15141.34
Interest accrued
141.48
141.48
447.65
Loan and advances
12867.42
28465.60
27240.05
Gross working capital
88426.02
141029.06 120397.18
160000
141029.06
140000
120397.18
120000
100000
88426.02
80000
Gross Working Cpital
60000
40000
20000
0
2005-06
2006-07
2007-08
From the above last 3 days data we can see that gross working capital is highest in 2006-07.
Inadequate amount of working capital can threaten. The solvency of the firm because of its inability
to meets its current obligation. Here we can see the major proportion of current asset investment is
done into account receivable and investment in current asset should be judge adequately account to
the need of business firm. Excessive investment in current assets should be avoided because it affects
the firm’s profitability, as idle firm investment earns nothing.
Calculation of Net Working Capital of GNFC Ltd.:
Net working capital is a difference between current assets and current liabilities.
Net working capital= current asset – current liabilities
Sources of funds
Current asset
Inventories
Sundry debtors
2005-06
2006-07
2007-08
26957.87
38848.52
38599.79
42957.30
60527.55
38968.35
5501.95
13047.91
15141.34
141.48
141.48
447.65
Loan and advances
12867.42
28465.60
27240.05
(A) Total Current Assets
Current liabilities
88426.02
26444.51
141029.06
44245.09
120397.18
Cash and bank balance
Interest accrued
Liabilities
Provisions
35272.92
10902.56
9723.65
13594.99
(B) Total Current Liabilities
37347.07
53968.74
48867.19
Net Working Capital (A-B)
51078.95
87060.32
71529.99
87060.32
90000
80000
71529.99
70000
60000
51078.95
50000
40000
30000
20000
10000
0
2005-06
2006-07
2007-08
Net Working Capital (A-B)
Net working capital can be positive or negative. For GNFC it is highest in 2006-07 i.e. 87060.32
which decrease in 2007-08 by 71529.99. so it is positive. Excessive investment in current assets
should be avoided because it affects the firm’s profitability.
Cash Management
Cash is the most important current asset for a business operation. It is the force that drives business
activities and also the ultimate output expected by the owners. The firm should keep sufficient cash
at all time. Excessive cash will not contribute to the firm’s profits and shortage of cash will disrupt
its manufacturing operation. The term ‘cash’ can be used in tow senses in a narrow sense it means the
current and other cash equivalents such as cheques, drafts and demand deposits in banks. In a
broader sense, it includes near cash asset like marketable securities and time deposits in banks. The
distinguishing nature of this kind of asset is that they can be converted into cash very quickly. Cash
in its own form is an idle asset. Unless employed in some form or another, it does not earn any
revenue. Cash management is concerned with
? Management of cash flows into and out of the firm,
? Cash management within the firm and
? Management of cash balances held by the firm deficit financing or investing surplus cash.
Motives of holding cash:
There are four motives of holding cash. They are:
? Transaction motive: This refers to a firm holding cash to meet its routine expenses which are
incurred in the ordinary course of business. A firm will need finances to meet a plethora of
payment like wages, salaries, rent, selling expenses, taxes, interests, etc. The necessity to
hold cash will not arise if there were a perfect coordination between the inflows and
outflows. These two never coincide.
? Precautionary motive: This refers to the need to hold cash to meet some exigencies which
cannot be foreseen. Such unexpected need may arise due sudden slow-down in collection of
accounts receivable, cancellation of etc. the moneys held to meet such unforeseen
fluctuations in cash flows are called precautionary balances.
? Speculative motive: This relates to holding cash to take advantage of unexpected changes in
business scenario which are not normal in the usual course of firm’s dealings. It may also
result in investing in profit- backed opportunities as the firm comes across.
? Compensating motive: this is yet another motive to hold cash to compensate bank for
providing certain services and loans. Banks provide variety of services like cheque
collection, transfer of funds through DD, MT, etc. To avail these purposes, the customers
need to maintain minimum balance in their account at all times. The balance so maintained
cannot be utilized for other purpose. Such balances are called compensating balances.
Objectives:
? Meeting payments schedule and
? Minimize funds committed to cash balance.
? Meeting payments schedule:
In the normal course of functioning, a firm will have to make many payments by cash to its
employees, suppliers, infrastructure bills, etc. it will also receive cash through sales of its
products and collection of receivables. Both these do not happen simultaneously. A basic
objective of cash management is therefore to meet the payment schedule in time. Trade credit
refers to the credit extended by the supplier of goods and services in the normal course of
business transactions.
? Minimize funds committed to cash balances:
Trying to achieve the second objective is very difficult. A high level of cash balances will help
the firm to meet its first objective discussed above, but keeping excess reserves is also not
desirable as funds in its original form is idle cash and a non earning asset. The aim of cash
management is therefore to have an optimal level of cash by bringing about a proper
synchronization inflows and check the spells of cash deficits and cash surpluses.
Factors for efficient cash management:
The efficiency of cash management can be augmented by controlling a important factors
described below:
? Prompt billing and mailing: There is a time lag between the dispatch of goods and
preparation of invoice. Reduction of this gap will bring in early remittances.
? Collection of cheques and remittances of cash: It is generally found that there is a delay in
the receipt of cheques and their deposits into banks. The delay can be reduced by
speeding up the process of collection and depositing cash or other instrument from
customers. The concept of ‘float’ helps firms to a certain extent in cash management.
Float arises because o the practice of banks not crediting firm’s account in its books when
a cheque is deposited by it and not debit firm’s account in its books when cheque is issued
by it until the cheques is cleared and cash is realized or paid respectively. Whenever
cheques are deposited with the bank, credit balance increases in the firm’s books but not
in bank’s books until the cheque is cleared and money realized. This refers to ‘collection
float’. Likewise the firm may take benefit of ‘payment float’. The difference between
payment float and collection float is called as ‘net float’. When net float is positive, the
balance in the firm’s books is less than the bank’s book’s when net float is negative; the
firm’s book balance is higher than in the bank’s books.
Cash forecasting and budgeting:
Cash budget is a device to plan for and control cash receipts and payments. It gives a summary of
cash flows over a period of time. Cash budgets are prepared under three methods:
1. Receipts and payments method
2. Income and expenditure method
3. Balance sheet method
Cash management at GNFC
GNFC uses short period cash budget method. It prepare cash budget on quarterly basis. They make
budget every month for the next three months. Cash budget is prepared by inflow and outflow as
well as receipt and disbursement.
Cash budget format:
Details of cash flow: Actual for Dec-2007 v/s projection for the period
Jan 2008 to March 2008 (Rs. In lacks)
Actual
Dec
2007
Year to
date
Projections
Jan
2008
Feb
March
2008
2008
A. Opening Balance
B. Receipts
Sub Total
C. Payment
Sub Total
D. Net Cash Inflow (B-C)
E. Closing Balance (A+D)
F. Total Cash Credit Limit
Cash collections:
GNFC is selling its all product on cash as well as credit basis. It is own cash management system
with BANK OF BRODA and ICICI. GNFC has non operative sales collection amount at each of
its sales office for cash collection where only cheques are deposited by the customer, cash not be
withdrawn. The fund is transferred at BOB (Bharuch) to the GNFC cash credit account.
Cash disbursement:
Company has deal with certain fixed expenses every month i.e. salaries, telephone payments,
electricity charges, dealer payments etc. supplier payments are done by cheque, inter bank credit
or imported account.Almost all transactions at GNFC are done by cheques on cash transaction.
Minor expenses are done on cash basis. So at GNFC there is nothing like optimum cash balance.
Surplus cash investment:
Company receives cash from selling its products. If there is surplus cash after all cash
disbursement GNFC invest that surplus fund as fixed deposit for very short time period. On the
contrary if company is in deficit then bank gives cash credit facility. The interest rate is now
9.25%. it is a consortium rate of all banks. The rate is counted as PLR 3.5% second source is
short term t inter corporate loan from GSFC for 90 days and HDFC for 120 days.
Inventory Management
? The team ‘inventory’ refers to the stockpile of products. Inventory comprises of those assets
which will be sold off in the near future and moneys recovered. Inventory consists of three
types of assets – raw materials, semi – finished goods (work in progress) and finished goods.
Raw material inventory consists of those items which are purchased by the firm to be
converted into finished goods. Work in progress inventory consists of partially complete
goods, that is, items currently being used in the production process. Finished goods stock
represent completed products ready to be sold.
? The chief responsibility of a finance Manager of a firm is to see to it that the actions of the
firm ultimately lead to wealth maximization of shareholders. Also he should ensure
availability of sufficient raw materials for smooth production and sufficient finished goods
stock to satisfy sales demands. These two conflicting is a basis of trade-off between costs and
benefits associated with the inventory levels.
Role of Inventory in Working Capital:
Inventories form an important part of a firm’s working capital. Some characteristic features about
inventory are as follows:
1. Current asset: Inventories will be converted to cash within a year.
2. Level of liquidity: Inventories are looked at as next to cash. A firm having fast-moving goods
in its stock can convert the products quickly to cash. Such stocks are called as highly liquid
stocks.
3. Liquidity lags: Inventories have three types of legs:
a. Creation lag: Raw materials are purchased on credit (creation of accounts payable)
and used to produce finished goods. There is always a lag in payment whether goods
are purchased or manufactured. This liquidity lag offers a benefit to the firm.
b. Storage lag: The goods held for sale cannot be converted into cash immediately.
Whether the goods are fast-moving, the firm realize its cash after a certain period.
c. Sale lag: Instant cash realized when goods are sold on cash basis but in competitive
situations, firms should give some credit period to their customers to enhance their
sales volumes. This results in accounts in accounts receivable and this lag is a cost to
the firm.
Purpose:
The goal of inventory holding is to efficiency through cost reduction and to increase sales volume.
The following are the other benefits accruing from holding inventories:
? Sales: Customers purchase goods only when need arises. On the other hand. Firms the goods
they want are not available most of them look at other substitutes.
? Avail quantity discounts: suppliers give discounts for purchases. Such discounts increase the
firm’s profits. Firms may go in for large orders to benefit from discounts offered by dealers.
? Reducing ordering costs and time: every time a firm places an order, it incurs certain
administrative expenses and some time is lost in processing these forms to get necessary
approvals. Each of these varies with the number of order placed. To save on and costs, the
firms may think about placing big orders
? Reduce risk of production shortages: manufacturing firms require a whole lot of raw
materials and spares. Even if one item is missing or is not available immediately, the entire
production process goes for a toss and the firm incurs heavy losses. To avoid such situation
firms maintain the required stores and inventories in sufficient quantities.
Cost associated with inventories:
? Successful inventory management is a trade of between high and low levels of inventory. The
inventory cost can classify as under.
? Material costs: these are the costs of purchasing the goods and the related cost such as
transportation and handling costs associated with it.
? Ordering costs: the expenses incurred to place orders with suppliers and replenish inventory
of raw materials are known as ‘ordering cost’. Ordering costs include requisitioning.
Purchase ordering, transporting, receiving, inspecting and handling at the warehouse.
? Carrying costs: carrying cost include storage, insurance, taxes, deterioration, spoilage,
obsolescence, salaries o in storage. The greater the inventory, the greater is the carrying cost.
? Cost of funds tied up in inventory: whenever a firm commits its resources to inventory, it is
using funds that otherwise might have been available for other activities. The firm is losing
on the opportunity cost. If the finds were not locked up in inventory, they would have earned
a return.
? Cost o running out of goods: these are the costs associated with the inability to provide
materials to the production department when they ask for or not providing finished goods to
the marketing department when demand is there warehouse keeper, maintenance of building
etc. carrying cost generally are to the tune of 25% of the value of inventory.
Inventory management at GNFC
At GNFC there are total 140000 items in inventory whose total value is Rs.1001000000.
Bifurcation of inventories:
Mechanical spares
Catalyst and chemical spares
Electrical items
Instrumentation items
Other miscellaneous item
57%
12%
11%
10%
10%
Mechanical spares
10%
10%
Catalyst and chemical spares Electrical items
11%
57%
12%
Instrumentation items Other miscellaneous item
In 57% mechanical spares, there are some item which are not come into daily use. These item are
very costly and carrying cost is also high.
Material planning control system is available for the management of inventory at GNFC.
This system is useful to control the minimum maximum level of inventory. Some inventories costs
are very less and required time to time in the production.
GNFC use SAP system for maintaining the inventory as well as the dead stock. SAP system is very
useful and effective. The important benefit is the is helps in reducing the work load.
Sales to inventory turnover ratio (2007-08) = sales/ inventory
=343391.21/ 38599.79
=8.89 times
The sales to inventory turnover ratio is 8.89 tines, which shows good management of inventory.
Inventory management techniques:
Many mathematical models are available to handle inventory management problems.
Some of the techniques are as follows:
1.
2.
3.
4.
5.
1.
Codification System
ABC System
Economic Oder Quantity ( EOQ)
FSN Analysis
HML Analysis
Codification system
Codification refers to assigning a unique code or name to each item based on its use, characteristics,
importance and other features. It is the process of allocating a code after logical grouping and sub
groping considering material types and application.
Advantages:
?
?
?
?
?
It helps in avoiding duplication of items.
It is the starting point for standardization.
It identifies all the items logically.
It helps to group the similar items together.
It lays the foundation for an efficient purchase organization by helping to form specialized
commodity base purchase sections. Since items are identified by sources of supply, it is
possible to bulk together to take advantage of bulk discount.
2. ABC system
Monitoring a large number and types of inventory becomes very difficult in a big company given the
amount involved. In such cases, ABC analysis enable the management to monitor the stocks in a
proper manner. The firm therefore classifies inventories into three different categories – A group –
items with high attention. Rigorous, sophisticated and intensive control measures are used for such
item monitoring. Items under the C group represent least value items needing simple control large.
The B group stands midway. They are neither too expensive nor very cheap. These items require
reasonable attention. The ABC analysis concentrates on important items and is therefore known as
“Control by Importance and Exception”. It is also known as Proportion Value Analysis as items are
classified according to the importance of their value.
Advantages of ABC analysis:
It ensures closer control on costly items in which lies the greater part of company’s resources.
Clerical costs are greatly reduced as stocks are maintained at optimum level. It helps in achieving the
main objective of inventory control at minimum cost.
3. Economic Order Quantity (EOQ)
EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an
item of inventory based on its expected usage. The optimum level of inventory is referred to as the
Economic Order Quantity. It is the economic lot size. EOQ is defined as level of inventory order that
total cost associated with the inventory management. It is the level one unit beyond which is
additional cost to the firm and one unit below may hamper production process. The model in
inventory control.
? Constant or uniform demand: The firm knows with certainty the annual consumption of a particular
item of inventory.
? Constant unit price: The EOQ model is based on the assumption that the per unit piece of material
does not change and is constant irrespective of the order size.
? Constant carrying costs: Unit carrying costs are known to vary substantially as the size of inventory
increases or decreases. Firms derive economies of scale by increasing order size. However, the EOQ
model assumes the carrying costs to be constant.
? Constant ordering costs: Ordering costs are assumed to be constant whatever the numbers of orders
are and whatever the size is.
Economic Order Quantity:
Optimum Production Quantity,
?2AS/C
The formula for EOQ model is
Where A refers to the annual usage,
S refers to ordering cost,
C refers to cost of carrying inventory per unit per annum.
Re-order Point:
In the EOQ model, it was assumed that there is no time lag between ordering and procuring of
materials. Therefore the re-order point for replenishing the stocks occurs at that level when the
inventory level drops to zero and because of instant delivery by suppliers, the stock levels bounce
back. But rarely do we come across such situations in real life. There is always a lead time between
ordinary data and receipt of materials.
Due to this, the recorder level is always higher zero.
Re-order point = Normal Consumption during lead time + Safety stock
Recorder level = Average usage *Lead time
Safety stock
In order to avoid a stock-out situation, the firms should maintain a safety stock which will act as a
buffer or a cushion against a possible shortage of inventory. Safety stock may be defined as the
minimum additional inventory to meet an unanticipated increase in usage resulting from an unusual
high demand
4. FSN Analysis
At GNFC FSN analysis is carried out for consumable items, which are used by multiuser. FSN
means fast moving, slow moving and non moving items analysis.
Norms established by GNFC for different items
Fast moving items
? It should have more than 5 issue transaction in a year.
? There should be multi users.
For fast moving items close watch is required and annual rate contracts are made to avoid stock
outs. Here frequency of review is more.
Slow moving items,
? Items should have transactions between 1 to 5 items in a year.
? There should be multi users.
For slow moving items consumption pattern is studied. Normally these
items are for specific
users and levels can be kept low but users should given their requirement or shutdown. Here
frequency of review is less.
Nonmoving items
? Items have no issue transactions for last 3 years.
? Items should have some quantity available in all the past 3 years.
For non moving items reports are made at the closing of the financially year. The report is circulated
to all concerned department. The departments study the use of equivalent materials against other
similar material. After that the excess material is declared for disposal and that items are removed
from the list.
5. HML Analysis
HML analysis refers to high value, Medium value and low value items. In this analysis the unit value
of the items is considered. Here the analysis is mainly focus to control the unit prices of high value
items and negotiate the prices. This analysis is done for electrical, instrumentation and other items.
At GNFC
?
?
Items having value more than or equal to 100000Rs. Is called high value items.
Items having value more than or equal to 25000Rs. and below 100000Rs. is called medium
?
value items.
Items having value less than25000Rs. is called low value items.
Zero inventories:
GNFC is maintaining the zero inventories for raw material like oil, gas etc. Zero inventories takes
place when the company has made contract with suppliers to provide row material on demand.
GNFC has contract with GAIL for providing gas as and when required. The supply of gas on demand
help to save inventory and cost reduction also.
For lubricants GNFC has done negotiation with IOC (Indian Oil Corporation). It has provided
accommodation in the plant which is called IOC depot. IOC keeps the stock at the depot and GNFC
use it when it is required. Till that GNFC does not need to pay anything for it. GNFC has to look
after the material of depot. IOC pays charges for that to the company. This helps to reduce the
transaction cost.
Import substitution
Import substitution refers to find out the domestic suppliers for the item which are imported. GNFC
has done the same for the item which are imported. It has developed supplier connection in domestic
market and market contracts with them.
GNFC has positive experience by contracting with local vendors. It has obtained lots of saving and
benefits by adopting import substitution technique.
Pricing of inventories
There are different ways of valuing inventories. Firms should choose that system which gives them
the maximum benefit.
Fist In Fist Out (FIFO): a firm adopting this method prices the raw material at that rate at which the
material were received. The goods received first are issued first and once the first set of consignment
is completely exhausted, the second set is not utilized. This is logical method of issues which is used
by almost all companies.
Last in first out (FIFO): in the LIFO method, the consignment last received is first issued and if this
is not sufficient, only then the previous set in the warehouse is utilized. This system is useful when
the companies want to price their product on the basis of total cost incurred plus a percentage of
profit.
Weighted average method: the pricing of materials is done on weighted average method where in
weights are assigned to the quantities held and accordingly priced. This is one of the most widely
used methods as it gives importance to the balances in stores in their proportion of availability.
Standard price method: under this method, the material is priced at a standard cost which is
predetermined. When the material is purchased, the stock account will be debited with the standard
price. The difference between the purchase price and the standard price will be carried to a variance
account.
Replacement or current price method: this method prices the issues at the value that is realizable at
the time of issue.
Receivable Management
Businesses sell goods on credit to increase the volume of sale. In the present era of intense
competition, one way to improve sale deals is to offer relaxed payment conditions to customers.
Finished goods get converted to receivables when sold on credit terms. Trade credit is a marketing
tool that tries to bridge the gap between production and distribution of company’s products. Trade
credit creates receivables or book debts which the firm hopes to realize in the near future. The
receivables are a very important component assets.
Objectives:
The term ‘receivables’ is defined as ‘debt owed to the firm by customers arising from the sale of
goods or services in the ordinary course of business’. The main objective of having receivables in the
current assets is to promote and encourage sales which will lead to increased profits. In competitive
situations, the firms will be forced to offer goods on credit keeping in line with competitor’s
strategies. All firms therefore grant credit to increase sales, profits and to meet competition.
Costs Associated with Maintaining Receivables:
The following are the different costs incurred with the extension of credit and accounts receivable:
? Capital cost: A firm offering goods on credit can surely expect higher sales but some of the
firm’s resources remain blocked in them as there is a time lag between a credit sale and cash
receipt from customers. The cost of use of additional capital to maintain its obligations will
definitely have an effect on the firm’s profits.
? Collection cost: These are the costs incurred in collecting receivables. They are administrative in
nature and these costs include(a)additional expenses on the creation and maintenance of staff,
stationery, postage, registers etc.
? Delinquency cost: This cost arises out of the failure of customers to meet their obligations when
payment on credit sales becomes due after the expiry of credit period. Additional costs in the
form of reminders, legal charges etc. will be incurred.
? Default cost: The firm may not be able to recover its dues because of its customers’ inability to
pay off their debts. Such dues are bad debts and go on to reduce the profits of the company. The
size of the receivables is determined by the firm’s credit policy and the level of its sales.
Receivables management at GNFC:
At GNFC the receivables are approx. 35% of current assets. The company credit policy varies from
15 days to 90 days. On every 30 days company prepares the receivables list which shows the total
receivables and due date for each bill. The list is prepared by accounting department. Account
department co ordinates with marketing department for collection of receivables.
Credit policy:
The credit policy of a company can be regarded as a tradeoff between increased credit sales leading
to higher profits and the cost of having large cash locked up in receivables. The credit policy to be
adopted in businesses largely depends upon competitors’ strategies. If the competitors are grating a
15 day credit period and if the firm decides to extend the credit period to30days, the firm will be
flooded with customers’ demand for company’s products. Firms average investment in account
receivable 90days credit per month.
The credit policy is a framework to determine
(a) Credit standards,
(b) Period of credit,
(c) Cash discount to be offered and
(d) Collection program.
All these variables listed influence the amount of sales, the amount of sales, and the amounts
locked up in receivables and the bad debts incidence.
Credit Standards :
The term ‘credit standard’ represents the criteria for extending credit to customers. The quantitative
basis for setting credit standards are credit rating, references, average payment period and ratio
analysis. Professional credit rating agencies’ help may be sought to rate a customer’s
creditworthiness. After rating, the customers are rated as ‘excellent’, ‘very good’, ‘good’,’ average’,
‘poor’ , etc. The overall credit standards can be divided into (a) tight or restrictive and (b) liberal or
easy-going.
Credit period:
This refers to the time given to customers to pay for their purchase. It is generally expressed in days
like 15 days or 30 days. Generally, firms give a discount if payments are made within a said period
beyond which they will not lose on the benefit that can be availed. Increasing the credit period will
bring in new sales and new customers decrease, which is not desirable.
Cash Discounts:
Firms offer cash discount to induce prompt payment s. Cash discounts has implications on sales
volume, average collection period, investment in receivables, incidence of bad debt losses and
profits. Change in discount rate will bring in additional sales-granting a discount implies reduced
pieces and this factor brings in new sales.
GNFC is providing 14% discount on the total amount to the clients’ if they pay before due date.
Collection Program:
The success of a collection program will be depended on the collection policy. The objective of a
collection policy is to achieve timely collection of receivables, thereby releasing funds locked up in
receivables and minimize bad debts occurrence. The collection program consists of the following:
? Monitoring receivables
? Informing customers about the due date for payment
? Initiating legal action to overdue customers after sending repeated notices
Collection policy should be so formulated that it is not too rigorous as it acts as an irritant to
customers, leading to bad relationship with them.
Credit policy at GNFC
? The company sales its product on both cash and credit basis.
? Daily reporting of sales is done for organizations.
? The Company follows a rigorous system of credit evaluation for both corporate client and
dealers. The customers are required to make payments through cheques.
? ICRA rating is the standard for selecting and granting credit to customer
? Clients are required to give pre signed cheques to the GNFC for purchasing the product.
? Company has non operative sales collection account at each sales office for cash collection.
? If clients pay before due date then interest is charged @ 16% per year on total amount. If
clients pay before due date then 14% discount is given on the total amount.
? If the cheque bounces from the account then 0.75% of total amount or 5000 Rs. whichever is
higher is charged to customer.
? Prorate of quantity: if GNFC doesn’t have quantity if product then it is entitled to follow all
the conditions.
Credit evaluation of client is done for the purpose of extending credit to them. GNFC has presently
implemented credit rating model developed by ICRA rating agency for assessing the clients’ credit
worthiness. They want to change the credit rating agency from ICRA to CARE.
In GNFC different monitoring technique of account receivable are used. It is to collection period and
monitoring the top 10 customers of GNFC.
FINDINGS
? The value of gross working capital is highest in 2006-07 i.e. 141029.06 Major proportion of
investment is done into account receivables and inventories.
? The value of net working capital is increasing and highest in 2006-07 i.e. 87060.32 which
indicates good liquidity position of GNFC.
? The inventory conversion period is on an average 37days during last 3 years. It means average
37days time is required for producing and selling the product.
? Debtors’ conversion period is highest in 2006-07 i.e.80days which goes down in 2007-08 i.e.
53days. Lower collection period is good for the company.
? Gross operating cycle is highest in 2006-07 i.e. 118 days due to high inventory conversation
period and debtor’s conversation period.
? Payable deferred payment is 2006-07 i.e. 38 days. It is 51 days in 2007-08.
? The net operating cycle is higher in 2006-07 due to higher collection period and lower payable
deferred period.
? Current assets to fixed assets ratio is higher in 2006-07 i.e. 1.27 GNFC is following average
policy in which there is an equal level of risk and liquidity.
CONCLUSION
From the above calculation and information we can say that GNFC is managing its working capital
very effectively. All three components of working capital i.e. cash management are operating very
successfully at the company. Major transactions are done through cheque. Company has sound
liquidity position. Its investing the major portion of surplus fund in FD only. The company has good
inventory management. It is maintaining zero inventories. GNFC uses different techniques for
monitoring receivables management. In short the all over working capital management of GNFC is
proper.
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