Project report on working capital mgmt

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Project report on working capital mgmt

  1. 1. A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT
  2. 2. 2 SAAB MARFIN MBA Working Capital Management Table of Contents Summer Project Certificate 2 Industry Guide Declaration 3 Faculty Guide Declaration 4 Acknowledgement 5 Executive Summary 7 Objectives of the Study 8 Methodology of the Study 9 Limitations of the Study 9 IFFCO – The Organization 10 Chapter 1 Working Capital Management 29 Data Analysis 30 Findings 58 Conclusion and Suggestions 59 Chapter 2 Cash Management 61 Cash Management at IFFCO 62 Observations 73 Conclusion 76 Suggestions 77 References 78 Appendix A Working Capital Management 79 B Cash Management 108 C Financial Statement 112 D Significant Financial Indicators 116 E Provisional highlights of IFFCO performance during 2008-09 117 F Value Added Statement 118 G Some of the well known fertilisers used in India 119 H Some Calculations 120
  3. 3. 3 SAAB MARFIN MBA Working Capital Management Executive Summary Indian Farmers Fertiliser Co-operative Limited (IFFCO) is a Multistate Co-operative Society. It was a unique venture in which the farmers of the country through their own Co-operative Societies created this new institution to safeguard their interests. IFFCO manufactures Urea and NPK/ DAP fertilizers and sells them to the co-operative societies. The project is Working Capital Management of IFFCO. The objectives of the project are: To analyse the working capital and working capital management policies at IFFCO To analyse the cash management practices at IFFCO The study is mainly based on the secondary data which refers to that form of information that has already been collected and is available. The analysis of working capital is based on ratio analysis to monitor overall trends in working capital and to identify areas requiring closer management. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital. From the analysis of the components of working capital, it was found that the organization is utilizing its funds properly, the inventory is managed efficiently and the organization is able to get sufficient short term financing. It is clear that the working capital of IFFCO is in sound position. The suggestions can be made in the management of inventory by implementation of JIT or Kanban and management of liquid assets including the subsidy provided by the government. The Cash Management System at IFFCO is very sound and efficient. It has enabled the organization to manage its funds in a proper manner resulting in better utilization and availability of funds in cash deficit periods. IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are providing IFFCO with facilities such as cash management services,
  4. 4. 4 SAAB MARFIN MBA Working Capital Management personalized financial MIS to enable IFFCO to accelerate the collection and payment of funds, debit sweep option, Anywhere banking facility, etc. The suggestion that can be given to the organization is the implementation of RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer) facilities which will improve the cash transfer at IFFCO. Objectives of the Study To analyse the Working Capital and Working Capital Management policies at IFFCO To understand Working Capital Management of the organization To analyze Liquidity position of the organization To find out the Profitability and operating efficiency of the organization To understand the importance of Working Capital Management To analyze the short term financing patterns, which affect the working capital of the organization To study the factors that affects the Working Capital Management at IFFCO To analyze the data and information of the previous years to know the actual position of funds, investments and liabilities of the organization To identify some broad policy measures to improve the working capital position of the organization To estimate the working capital requirements of the organization in the near future To analyse the Cash Management Practices at IFFCO To understand the cash management process followed at the organization To study the factors both intrinsic and extrinsic that influences the cash management at the organization
  5. 5. 5 SAAB MARFIN MBA Working Capital Management To study and analyze the changes being brought about the existing cash management system To study the salient features, methodology and advantages of the new cash management system being implemented at the organization To suggest some recommendations to the organizations for the improvement of the cash management practices and the new cash management MIS Methodology of the study The basic type of research used to prepare this report is Descriptive. The study is mainly based on the secondary data which refers to that form of information that has already been collected and is available. These include some internal sources within the company and externally these sources include books and periodicals, published reports and data of IFFCO and the annual reports of the company. Interaction with the various employees of the marketing accounts department has also been a major source of information. No primary data has been used as a part of this study. The analysis of working capital is based on ratio analysis to monitor overall trends in working capital and to identify areas requiring closer management. Limitations of the Study
  6. 6. 6 SAAB MARFIN MBA Working Capital Management The following are the limitations of this summer project training: The study is limited to five financial years i.e. from 2005-2009. The data used in this study has been taken from the Financial Statements & their related schedules of IFFCO Ltd., New Delhi as per the requirement. Some of the information that was essential for this study cannot however be given in this report due to their confidential nature. The scope and area of the study was limited to corporate office of IFFCO, New Delhi only. IFFCO – The Organization Indian Farmers Fertiliser Co-operative Limited (IFFCO) was registered on November 3, 1967 as a Multi-unit Co-operative Society. It was a unique venture in which the farmers of the country through their own Co-operative Societies created this new institution to safeguard their interests. The numbers of co-operative societies associated with IFFCO have risen from 57 in 1967 to 38, 155 at present. On the enactment of the Multistate Cooperative Societies act 1984 & 2002, the Society is deemed to be registered as a Multistate
  7. 7. 7 SAAB MARFIN MBA Working Capital Management Cooperative Society. The byelaws of the Society provide a broad frame work for the activities of IFFCO as a Cooperative Society. IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAP plant at Kandla both in the state of Gujarat in 1975. Another Ammonia - urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981. The ammonia - urea unit at Aonla was commissioned in 1988. In 1993, IFFCO had drawn up a major expansion programme of all the four plants under overall aegis of IFFCO VISION 2000. The expansion projects at Aonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus all the projects conceived as part of Vision 2000 have been realised without time or cost overruns. All the production units of IFFCO have established a reputation for excellence and quality. A new growth path has been chalked out to realise newer dreams and greater heights through Vision 2010 which is presently under implementation. As part of the new vision, IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2005. As a result of these expansion projects and acquisition, IFFCO's annual capacity has been increased to 3.69 million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes of P2O5. Mission IFFCO's mission is "to enable Indian farmers to prosper through timely supply of reliable, high quality agricultural inputs and services in an environmentally sustainable manner and to undertake other activities to improve their welfare."
  8. 8. 8 SAAB MARFIN MBA Working Capital Management To provide to farmers high quality fertilizers in right time and in adequate quantities with an objective to increase crop productivity. To make plants energy efficient and continually review various schemes to conserve energy. Commitment to health, safety, environment and forestry development to enrich the quality of community life. Commitment to social responsibilities for a strong social fabric. To institutionalise core values and create a culture of team building, empowerment and innovation which would help in incremental growth of employees and enable achievement of strategic objectives. Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for stake holders. Building a value driven organisation with an improved and responsive customer focus. A true commitment to transparency, accountability and integrity in principle and practice. To acquire, assimilate and adopt reliable, efficient and cost effective technologies. Sourcing raw materials for production of phosphatic fertilisers at economical cost by entering into Joint Ventures outside India. To ensure growth in core and non-core sectors. A true Cooperative Society committed for fostering cooperative movement in the country. IFFCO is emerging as a dynamic organisation, focussing on strategic strengths, seizing opportunities for generating and building upon past success, enhancing earnings to maximise the shareholders' value. Vision
  9. 9. 9 SAAB MARFIN MBA Working Capital Management To augment the incremental incomes of farmers by helping them to increase their crop productivity through balanced use of energy efficient fertilizers, maintain the environmental health and to make cooperative societies economically & democratically strong for professionalized services to the farming community to ensure an empowered rural India. Vision 2010 Encouraged by the success of Vision 2000, IFFCO has charted on a new course of action to realise a fresh set of dreams. A high powered committee has been constituted to steer the organisation through this Road Map. Activities being actively pursued through the strategy are: Phosphoric Acid plant Foray into Power Sector to set up a 500 MW power project Ammonia Plant for supplies to Kandla Unit IFFCO Kisan Bazar IFFCO Bank Multi Commodity Exchange Acquisition of Fertilizer Plants Nellore Fertilizer Project Agri business The Approach To achieve their mission, IFFCO as a cooperative society, undertakes several activities covering a broad spectrum of areas to promote welfare of member cooperatives and farmers. The activities envisaged to be covered are exhaustively defined in IFFCO’s Bye-laws. The Commitment The thirst for ever improving the services to farmers and member co-operatives is insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty to drive hunger away from India in an ecologically sustainable manner is the prime mission.
  10. 10. 10 SAAB MARFIN MBA Working Capital Management Plants owned by IFFCO Kalol Unit (Ammonia - Urea complex) P. O. Kasturinagar, District Gandhinagar, Gujarat - 382423 Kandla Unit (NPK/DAP plant) P. O. Kandla, Gandhidham, Kandla (Kachchh), Gujarat - 370201 Phulpur Unit (Ammonia - urea complex) P. O. Ghiyanagar, District Allahabad, Uttar Pradesh - 212404 Aonla Unit (Ammonia - Urea unit) P. O. IFFCO Township, Paul Pothen Nagar, Bareilly, Uttar Pradesh - 243403 Paradeep Unit (NPK/DAP and Phosphoric Acid Fertiliser unit) Village Musadia, P. O. Paradeep, District Jagatsinghpur, Orissa - 754142 Production and Sales During the year 2008-09 IFFCO produced 71.68 Lakh (7.168 million) MT (Metric Tonnes) of fertiliser material, consisting of 40.68 lakh MT of Urea and 31.00 lakh MT NPK/DAP. It contributes 21.4% of country’s total nitrogenous fertiliser production and 27% of total phosphatic fertiliser production in the same period. PRODUCTION (in LAKH MT) YEAR UREA NPK / DAP TOTAL 2006-07 37.87 32.26 70.13 2007-08 39.63 28.84 68.47 2008-09 40.68 31 71.68
  11. 11. 11 SAAB MARFIN MBA Working Capital Management PLANT WISE PRODUCTION Unit 2008-09 2007-08 Production Capacity Utilization Production Capacity Utilization (Lakh MT) (percent) (Lakh MT) (percent) UREA Kalol 5.60 102.80 5.45 100.00 SALES OF FERTILIZER MATERIAL (in Lakh MT) Material 2008-09 2007-08 2006-07 UREA 58.69 54.29 52.41 NPK/ DAP 53.89 38.95 33.69 TOTAL 112.58 93.24 86.10
  12. 12. 12 SAAB MARFIN MBA Working Capital Management Phulpur –I 6.63 120.30 6.30 114.30 Phulpur – II 8.40 97.20 9.24 106.90 Aonla – I 9.87 114.10 8.76 101.30 Aonla – II 10.18 117.80 9.89 114.40 SUB TOTAL UREA 40.68 110.30 39.63 107.40 NPK / DAP Kandla 17.94 74.30 20.18 83.50 Paradeep 13.06 68.00 8.66 45.10 SUB TOTAL NPK / DAP 31.00 71.40 28.84 66.50 TOTAL PRODUCTION 71.68 89.20 68.47 85.30 All India Capacity, Production and Capacity Utilization of Fertilizer Industry Year N P2O5 Capacity Production Capacity Utilization (%) Capacity Production Capacity Utilization (%) 2004-05 12208 11304.9 93.4 5480.4 4038.4 75.5 2005-06 12288.4 11332.9 94.5 5459.6 4202.6 78.5 2006-07 12290.4 11524.9 95.6 5736.3 4440 78.5 2007-08 12290.4 10902.8 95.2 5874.6 3714.3 64.7 2008-09 12290.4 10900.2 95.2 5892.3 3417.3 58.5 Sector Wise Capacity and Production of N and P2O5 (capacity: As on 1.11.20 (production: 2008 April-Ma (Figures in '000 tonne nutri Sector N P2O5 Capacity Production Capacity Production NP/NPKs SSP Total NP/NPK SSP To
  13. 13. 13 SAAB MARFIN MBA Working Capital Management s Public 3591.5 2973.2 386.7 - 386.7 191.7 - 191 Private 6030.3 4829.9 2860.1 1225 4085.1 1903.9 405.4 230 Cooperative 3423.4 3133.1 1712.8 - 1712.8 916.3 - 916 Total 13045.2 10900.2 4959.6 1225 6184.6 3011.9 405.4 341 Capacity and Investment in the Fertilizer Industry Year / Period Capacity During the Investments During the Period ( in Rs. Crore ) Period (in '000 tonnes) Sectors N P2O5 Public Cooperative Private Total 2004-2005 62 39 - - 10 10 (as on 1.11.2004) 12229 5427 7474.5 4231.5 14227.9 25933.9 2005-2006 -21 1 - - 3 3 (as on 1.11.2005) 12208 5428 7474.5 4231.5 14230.9 25936.9 2006-2007 52 243 350 - 35 385 (as on 1.11.2006) 12260 5671 7824.5 4231.5 14265.9 26321.9 2007-2008 30 204 - - 15 15 (as on 1.11.2007) 12290 5875 7824.5 4231.5 14280.9 26336.9 2008-2009 - 17 - - 55 55 (as on 1.11.2008) 12290 5892 7824.5 4231.5 14335.9 26391.9 2009-2010 755 293 - 350 470 820 (as on 1.11.2009) 13045 6185 7824.5 4581.5 14805.9 27211.9 BIO – FERTILISERS Bio-fertilisers are capable of fixing atmospheric nitrogen when suitable crops are inoculated with them. Bio-fertilisers are low cost, effective,
  14. 14. 14 SAAB MARFIN MBA Working Capital Management environmental friendly and renewable source of plant nutrients to supplement fertilisers. Integration of chemical, organic and biological sources of plant nutrients and their management is necessary for maintaining soil health for sustainable agriculture. The bacterial organisms present in the bio-fertiliser either fix atmospheric nitrogen or solubilise insoluble forms of soil phosphate. The range of nitrogen fixed per ha/year varies from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg for groundnut, 60 - 80 kg for soybean and 50 - 55 kg for moongbean. All India Production and Dispatches of Bio Fertilizers ( in tonnes) Year Production Dispatches 2004-05 10479 10427.6 2005-06 11752.4 11357.6 2006-07 15871 15745 2007-08 20111.1 20100 2008-09 24455 24400 Prices of IFFCO's Fertilisers (Applicable only within India) UREA NPK DAP MOP N-46% 10-26-26 12-32-16 20:20:00 18-46-0 K-60% M.R.P. 4830 7197 7637 6295 9350 4455 Local Taxes Extra, where ever applicable. Joint Ventures of IFFCO Indian Potash Limited (IPL)
  15. 15. 15 SAAB MARFIN MBA Working Capital Management The Society holds an investment of Rs. 2.68 Crore (2008-09) in Indian Potash Limited (IPL) with equity share holding of 34 per cent in the paid up equity share capital of IPL. IPL is primarily engaged in trading of imported Potassic and Non-Potassic Fertilisers. Industries Chimiques Du Senegal (ICS) The Society holds 18.54 per cent equity (2008-09) in ICS, which manufactures Phosphoric Acid for exports and Phosphatic Fertilisers for domestic consumption. ICS has the capacity to produce 660000 MT of Phosphoric Acid (as P2O5) per year. The Government of Senegal and IFFCO signed an Agreement on 16th July, 2007 and Amendment on 14th January, 2008, for the debt restructuring and recapitalisation of ICS. Post restructuring and recapitalisation, the new Board has been reconstituted and the IFFCO Consortium has taken over the management control of ICS. Indo Egyptian Fertilisers Company, SAE (IEFC) The Society promoted a joint venture in Egypt, namely ‘Indo Egyptian Fertilisers Company SAE’ (IEFC) along with El Nasr Mining Company of Egypt to set up a Phosphoric Acid plant with a capacity of 1500 tonnes P2O5 per day. IEFC was incorporated in Egypt as a Joint Stock Company on 15th November, 2005 with shareholding of IFFCO and its affiliates at 76 percent and El Nasr Mining Co. Egypt holding 24 per cent equity. Oman India Fertiliser Company (OMIFCO) Oman India Fertiliser Company (OMIFCO) is a Joint Venture Company in Oman in which the Society has invested an amount of Rs. 329.08 Crore (2008-09) to acquire 25 percent equity in OMIFCO, which has an installed capacity of 16.52 lakh tonne Urea and 2.5 lakh tonne surplus Ammonia. OMIFCO commenced commercial production at its plant at Sur (Oman) with effect from 14th July, 2005.
  16. 16. 16 SAAB MARFIN MBA Working Capital Management Jordan India Fertilizer Company (JIFCO) IFFCO and Jordan Phosphate Mines Company (JPMC), Jordan have formed a Limited Liability Joint Venture Company, namely Jordan India Fertilizer Company (JIFCO) on 6th March, 2008 in Amman, Jordan under the ‘Free Zone’ system to set up a phosphoric acid plant of capacity 1500 tonnes per day P2O5 at Eshidiya in Jordan. In this company, IFFCO holds 52 per cent equity, while JPMC holds 48 per cent equity. Aria Chemicals (Orissa) Limited Aria Chemicals (Orissa) Ltd. is a joint venture between IFFCO and Aria Chemicals Private Limited, Chennai wherein IFFCO holds 40 percent equity in this project. This Company will set up an Aluminium Fluoride facility at Paradeep. Sector Diversification of IFFCO IFFCO-TOKIO General Insurance Company Limited (ITGI) IFFCO TOKIO General Insurance Company Limited (ITGI) was formed as a Joint Venture Company in the year 2000 for underwriting general insurance business in India. Out of total equity capital of Rs. 247 Crore in ITGI, the Society and its associates hold 74 percent equity and Tokio Marine Asia holds 26 percent. ITGI had launched products like, ‘Barish Bima Yojna’, ‘Mausam Bima Yojna’ and ‘Kisan Suvidha Bima Yojna’ to cater to the insurance requirements of the farmers. During the year ITGI has launched various micro insurance policies like ‘Janta Bima Yojna’, ‘Jansuraksha Bima Yojna’, ‘Janswasthya Bima Yojna’ and ‘Mahila Suraksha Bima Yojna’ to provide protection to the farmers and their families and also poorer sections for their household goods, personal accident and health. IFFCO Chhattisgarh Power limited (ICPL)
  17. 17. 17 SAAB MARFIN MBA Working Capital Management The Society has diversified into the Power Sector by incorporating a Joint Venture Company namely ‘IFFCO Chhattisgarh Power Limited’ (ICPL) with Chhattisgarh State Electricity Board (CSEB) to set up a 1320 MW coal-based Mega Power Plant in District Surguja of Chhattisgarh. The Society will hold 74 per cent equity in ICPL. National Commodity and Derivatives Exchange Ltd. (NCDEX) The Society holds 12 percent equity in the Paid-up Share Capital (Rs. 30 Crore) and the entire preference capital of Rs. 10 Crore in the National Commodity and Derivative Exchange Limited (NCDEX). NCDEX is a demutualised, on-line national level commodity exchange providing a trading platform for futures trading in commodities in the country and offers its market participants opportunity at price discovery and price risk hedging. Currently, NCDEX offers contracts in 56 commodities, that is, 42 agricultural commodities, 2 bullion, 6 metals, 2 energy and 3 polymers and 1 environment (carbon credit). National Collateral Management Services Ltd. (NCMSL) Along with other reputed institutions, IFFCO co-promoted National Collateral Management Services Limited (NCMSL) in the year 2004. The Society holds 13.56 per cent of the paid up equity capital in NCMSL. NCMSL is engaged in providing various risk management services related to commodities like Storage and Preservation services, Collateral Management services, Procurement services, Quality Testing and Certification services and Information services. Freeplay Energy India Pvt. Ltd. During the year 2008-09, the Society made an investment of Rs. 4.83 Crore to acquire 30 percent shareholding in Freeplay Energy India Pvt. Ltd. (FPEI), which is engaged in the field of non-conventional energy products and devices suitable for rural India. These products are being marketed to co-operative societies through Society’s another
  18. 18. 18 SAAB MARFIN MBA Working Capital Management subsidiary company, that is, ‘IFFCO Kisan Sanchar Ltd’. The utility of these products has been greatly appreciated by the rural farmers. Organizations promoted by IFFCO IFFCO has promoted several institutions and organisations to work for the welfare of farmers, strengthening cooperative movement, improve Indian agriculture. Indian Farm Forestry Development Cooperative (IFFDC) Indian Farm Forestry Development Cooperative, a multi-state cooperative society promoted by IFFCO, has been implementing afforestation projects in Uttar Pradesh, Rajasthan & Madhya Pradesh. The Society has been floated under contribution agreement signed between IFFCO and India - Canada Environment Facility (ICEF). Development of Primary Farm Forestry Cooperative Societies (PFFCS) is an important activity undertaken towards afforestation of waste lands. High participation of women is an important feature of the IFFDC. Cooperative Rural Development Trust (CORDET) IFFCO promoted Cooperative Rural Development Trust (CORDET) in the year 1979 to provide education and training to farmers on various aspects of crop production, horticulture, animal husbandry, farm machinery etc. IFFCO Kisan Sewa Trust (IKST) Objective: A Relief Trust for the Welfare of the Victims of Natural Calamities Kisan Sewa Trust Fund was created out of contributions from: IFFCO Employees of IFFCO Cooperative Societies and others TOTAL Rs 100 million Rs 10 million Rs 90 million Rs 200 million
  19. 19. 19 SAAB MARFIN MBA Working Capital Management IFFCO had always been in the forefront of activities for the rescue of victims of natural calamities. Every year significant contributions, both monetary as well as in kind, are made by IFFCO along with separate contributions by the employees. IFFCO Kisan Sanchar Limited (IKSL) IFFCO Kisan Sanchar Limited was incorporated in April, 2007 with the objective to use the information technology to empower farmers in rural areas and to strengthen the cooperative network in the country. The highlight of IKSL’s services in the rural telecom domain continues to be Valued Added Services (VAS) extended to the subscribers. Five free voice messages of immediate relevance to people living in rural areas, a Help Line with experts to provide information inputs to the farmers and several other innovative activities for subscribers constitute a major source of knowledge transfer. An ambitious project 'ICT Initiatives for Farmers and Cooperatives' is launched to promote e-culture in rural India. IFFCO obsessively nurtures its relations with farmers and undertakes a large number of agricultural extension activities for their benefit every year. At IFFCO, the thirst for ever improving the services to farmers and member co-operatives is insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty to drive hunger away from India in an ecologically sustainable manner is the prime mission. All that IFFCO cherishes in exchange is an everlasting smile on the face of Indian Farmer who forms the moving spirit behind this mission. IFFCO, to day, is a leading player in India's fertiliser industry and is making substantial contribution to the efforts of Indian Government to increase food grain production in the country. IFFCO is also behind several other companies with the sole intention of benefitting farmers. The distribution of IFFCO's fertiliser is undertaken through over 38155
  20. 20. 20 SAAB MARFIN MBA Working Capital Management co-operative societies. The entire activities of Distribution, Sales and Promotion are co-ordinated by Marketing Central Office (MKCO) at New Delhi assisted by the Marketing offices in the field. In addition, essential agro-inputs for crop production are made available to the farmers through a chain of 158 Farmers Service Centre (FSC). Subsidiaries of IFFCO Kisan International Trading FZE (KIT) Kisan International Trading FZE (KIT) was set up as a wholly owned subsidiary of the Society in Dubai in April 2005. KIT has become a leading international trading organisation, which handles the import and export of various fertilisers and fertiliser Raw Materials and Intermediates. IFFCO Kisan Bazar Ltd. IFFCO Kisan Bazar Ltd. (IKBL) was incorporated on 26th February, 2004 as IFFCO’s wholly owned subsidiary company for inter-alia undertaking business in agri-inputs and consumer goods for the benefit of farmers/cooperatives. Business and Financial Review of Subsidiaries and Associates Even in the year of global economic meltdown, the business portfolio has been steadily growing in tandem with the high growth aspirations. The organization have stepped up investments in related businesses through various Joint Ventures and Associate Companies in order to strengthen themselves further by looking at new opportunities that are unfolding and create value addition in the core fertiliser sector. On 31st March 2009, the total investments were Rs. 914 Crore in comparison to Rs.770.57 Crore on 31st March 2008 as per the following break-up: (Rs. In Crore) As on 31st March 2009 2008
  21. 21. 21 SAAB MARFIN MBA Working Capital Management Investment in Jt. Ventures/Subsidiaries 888.27 750.13 Investment in Business Associates 25.73 20.44 Total 914.00 770.57 Financial Performance As per its tradition, the Society has again exhibited an impressive financial performance in all its major parameters, namely, Revenue Growth and Resource Utilisation, testifying to the robustness of its Corporate Strategy of creating multiple drivers of growth in spite of constraints in the availability of raw materials, the Global Economic Meltdown and inordinate delays in receipt of large subsidy amounts from the Government of India. This was possible due to higher production, sales volume and improvement in operating efficiencies. The Society achieved the highest ever sales turnover of Rs 32,933 Crore. This represents an increase of 170 per cent over the previous year. While, the sales volume of fertiliser material increased by 20 per cent to 112.58 lakh MT fertiliser during 2008-09, as against 93.24 lakh MT in the previous year, the major increase in the sales turnover was on account of substantial increase in the commodity prices. The performance is even more satisfying when viewed in the light of the challenging business environment of the fertiliser industry. Sources and Uses of Funds The Cash Flow from Operating, Investing and Financing activities as reflected in the Cash Flow Statement is summarised in the following table: (Rs. In Crore) 2008-09 2007-08 Cash provided by operating activities 1560 1072 Cash Used in Investing activities (6578) (970)
  22. 22. 22 SAAB MARFIN MBA Working Capital Management Cash provided by financing activities 4844 (190) Decrease in cash and cash equivalents (174) (88) Corporate Governance The Society has consistently followed transparent, democratic and professional practices in Corporate Governance since its inception. We have carved out a strong ‘Cooperative Identity’ and are making sincere efforts to uphold the ‘Cooperative Values’ by cherishing ‘Cooperative Principles’. The Society’s endeavour has been to achieve the highest levels of transparency, accountability and full disclosure to its shareholders in a bid to uphold the spirit of Cooperative Principles and Cooperative Values by following the charter as lay down by International Cooperative Alliance (ICA). The activities of the Society have been conducted within the provisions of the Multi State Cooperative Societies Act/Rules and IFFCO Bye-laws. A separate detailed report on Corporate Governance is given along with the Annual Report. Financial Ratings The Society’s excellent credit ratings with bankers and rating agencies allows access to short term funds including foreign currency borrowings at competitive rates. Ratings assigned by different Rating Agencies to the Society were as under: CRISIL Ratings Rating for Governance and Value Creation (GVC) Practices of IFFCO CRISIL has, assigned a “GVC Level 2” rating to IFFCO. This rating indicates that the capability of the Society with respect to wealth creation for all its stakeholders, while adopting sound corporate governance practices, is high. Rating for the Rs. 100 crore Commercial Paper Programme of IFFCO CRISIL has assigned a “P1+ (pronounced “P One Plus”) rating to IFFCO’s Rs.100 Crore Commercial Paper Programme. This rating
  23. 23. 23 SAAB MARFIN MBA Working Capital Management indicates that the degree of safety with regard to timely payment of interest and principal on the instrument is Very Strong. Rating for the Rs. 400 crore Bonds Programme of IFFCO CRISIL has assigned the rating on IFFCO’s Long Term Borrowing Programme to AA/Stable. The rating indicates high degree of safety with regard to timely payment of interest and principal on the instrument. FITCH Ratings Rating for the Rs. 100 crore Commercial Paper Programmes of IFFCO FITCH Ratings has assigned a National Short Term Rating of ‘F1+ (Ind)’to IFFCO’s Rs. 100 crore Commercial Paper Programme. This rating indicates that the degree of safety with regard to timely payment of interest and principal on the instrument is Very Strong. Rating for Long Term Borrowing Programme of IFFCO FITCH Ratings assigned National Long - Term Rating of ‘AA+ (Ind)’ to the Long Term Debt Programme of IFFCO. The outlook on the Long Term Rating is “Stable”. This rating indicates high degree of safety with regard to timely payment of interest and principal on the instrument. CARE Ratings PR 1+ (P One Plus) rating to IFFCO’s Working Capital facilities/Short Term Loans having tenure of up to one year. CARE AA’ (Double A) rating to External Commercial Borrowings and other existing long term borrowings having tenure of over one year.
  24. 24. 24 SAAB MARFIN MBA Working Capital Management Value Added Value Added is the wealth which an enterprise has been able to create through the collective effort of capital, management and employees. In economic terms, value added is the market price of the output of an enterprise less the price of the goods and services acquired by transfer. Value Added can provide a useful measure in gauging performance and activity of the company. Figure: Allocation of Value Added Significant Accounting Policies 1. Basis of Preparation of Financial Statements The Financial Statements are prepared on accrual basis of accounting under the historical cost convention in accordance with the generally accepted accounting principles in India, the Accounting Standards issued by the Institute of Chartered Accountants of India and the relevant provisions of Multi State Co-operative Societies Act, 2002. 2. Use of Estimates The preparation of financial statements, in conformity with the generally accepted accounting principles, require estimates and assumptions to be made that affect the reported amount of assets and
  25. 25. 25 SAAB MARFIN MBA Working Capital Management liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Difference between the actual results and estimates are recognized in the period in which the results materialise. 3. Fixed Assets (i). Fixed Assets are stated at historical cost less accumulated depreciation. Cost comprises of the purchase price and any attributable cost of bringing the asset to its working condition for its intended use. (ii). Assets retired from active use and held for disposal are shown separately under Fixed Assets at lower of net book value and estimated realisable value. 4. Expenditure incurred during Construction Period In respect of new/major expansion of units, the indirect expenditure incurred during construction period up to the date of the commencement of commercial production, which is attributable to the construction of the project, is capitalised on proportionate basis. 5. Intangible Assets An intangible asset is recognised where it is probable that the future economic benefits attributable to the asset will flow to the Society and the cost of the asset can be measured reliably. Such assets are stated at cost less accumulated amortisation. 6. Impairment of Assets At each balance sheet date an assessment is made whether any indication exists that an asset has been impaired. If any such indication exists, an impairment loss i.e. the amount by which the carrying amount of an asset exceeds its recoverable amount, is provided in the books of account. 7. Investments i) Long Term Investments are carried at cost. Provision for diminution in the value of such investments is made to recognise a decline, other than temporary, in the value of the investments.
  26. 26. 26 SAAB MARFIN MBA Working Capital Management ii) Current Investments are valued at lower of cost and fair value determined on an individual investment basis. 8. Depreciation / Amortisation (a) Depreciation on Fixed Assets is provided on Straight Line Method as follows: (i) In respect of assets acquired up to 31st March, 1990 at the rates prescribed under Income tax Act, 1961 and rules framed there under. (ii) In respect of assets acquired after 31st March,1990 at the rates based on schedule XIV to the Companies Act,1956 except for fixed assets taken over at Paradeep Unit which are depreciated based on useful life of such assets. (b) Assets are depreciated to the extent of 95% of the original cost except assets individually costing up to Rs.5000/- which are fully depreciated in the year of acquisition. (c) Railway wagons under "Own Your Wagon Scheme" are depreciated over a period of ten years. (d) Machinery Spares which can be used only in connection with an item of Plant & Machinery and its use is expected to be irregular, are fully depreciated over the remaining useful life of the related asset. (e) Premium paid for acquisition of leasehold land, other than those acquired under perpetual lease basis, is amortised over the period of lease. (f) Leasehold Buildings are fully depreciated over the period of lease in case period of lease is less than the useful life derived from the rates as per Schedule- XIV of Companies Act. (g) Additions to assets are depreciated for the full year irrespective of the date of addition and no depreciation is provided on assets sold/ discarded during the year. However, in the case of capitalisation of project, depreciation is
  27. 27. 27 SAAB MARFIN MBA Working Capital Management provided on a pro-rata basis from the date of commencement of commercial production. (h) Intangible assets are amortised over their estimated useful lives but not exceeding ten years when the asset is available for use. 9. Provisions, Contingent Liabilities and Contingent Assets (a) Provisions are recognised for liabilities that can be measured by using a substantial degree of estimation, if: i) The Company has a present obligation as a result of a past event; ii) A probable outflow of resources embodying economic benefits is expected to settle the obligation; and iii) The amount of the obligation can be reliably estimated. (b) Contingent liability is disclosed in case of : i) Present obligation arising from a past event when it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. ii) Possible obligation, unless the probability of outflow in settlement is remote. (c) Reimbursement expected in respect of expenditure required to settle a provision is recognised only when it is virtually certain that the reimbursement will be received. (d) Contingent assets are neither recognised nor disclosed in the financial statements. 10. Operating Leases Assets acquired on leases wherein a significant portion of the risks and rewards of ownership are retained by the lessors are classified as operating leases. Lease rentals paid for such leases are recognised as an expense on straight line basis over the term of lease. 11. Prior Period Income / Expenditure Income/Expenditure items relating to prior period(s) not exceeding Rs.2,00,000/- each is treated as Income/ Expenditure for the current year.
  28. 28. 28 SAAB MARFIN MBA Working Capital Management 12. Pre-Paid Expenses Expenditure up to Rs.50000/- in each case except Insurance Premium is accounted for in the year in which the same is incurred.
  29. 29. 29 SAAB MARFIN MBA Working Capital Management CHAPTER 1 Working Capital Management
  30. 30. 30 SAAB MARFIN MBA Working Capital Management Data Analysis Operating Cycles 1. Days Inventory Outstanding (DIO) Days Inventory Outstanding (DIO) = Average Inventory Cost of Goods sold (COGS) / 365 (in Rs. Crores) Year Average Inventory COGS DIO (number of days) 2004-05 976.03 6809.48 52.317 2005-06 1225.57 9166.48 48.801 2006-07 1901.79 9578.09 72.473 2007-08 1930.52 11336.77 62.155 2008-09 1654.23 31496.75 19.170 Analysis The smaller the number of days of inventory outstanding, the more efficient a company is. IFFCO day inventory outstanding is around 19 days for the year 2008-09 which is very good. Inventory is held for less time and less money is tied up in inventory. Instead, money is freed up for things like research and development, marketing or even share buybacks and dividend payments.
  31. 31. 31 SAAB MARFIN MBA Working Capital Management The DIO had always been showing a decreasing trend apart from the period of 2006-07 in which inventory was build up due to the purchase of Paradeep plant. 2. Days Sales Outstanding Days Sales Outstanding (DSO) = Average Accounts Receivable Net Sales / 365 Year Avg. A/c Receivables (in crores) Net Sales (in Crores) DSO (number of days) 2004-05 397.025 7396.87 19.591 2005-06 399.495 9942.93 14.665 2006-07 418.04 10330.11 14.771 2007-08 387.72 12162.82 11.635 2008-09 410.495 32933.30 4.550 Analysis Days Sales Outstanding (DSO) looks at the number of days needed to collect on sales and involves Accounts Receivables. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Most of sales of IFFCO are on cash basis and sales to large institutions only are on credit basis. The DSO for the year 2008-09 is 4.550, which is
  32. 32. 32 SAAB MARFIN MBA Working Capital Management very good for the company. The DSO is showing a decreasing trend meaning that the days to collect on sales are decreasing every year. 3. Days Payable Outstanding Days Payable Outstanding (DPO) = Average Accounts Payable Cost of Goods sold (COGS) / 365 (in Rs. Crores) Year Average Accounts Payable COGS DPO (number of days) 2004-05 728.425 6809.48 39.045 2005-06 934.165 9166.48 37.198 2006-07 913.425 9578.09 34.809 2007-08 833.87 11336.77 26.847 2008-09 1664.225 31496.75 19.286 Analysis This involves the company's payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential.
  33. 33. 33 SAAB MARFIN MBA Working Capital Management The DPO of IFFCO is around 19 days for the year 2008-09. It is also observed that DPO is decreasing every year. From the data provided, it is found out that IFFCO had sufficient funds to make payments of its own bills and make investments in various activities. 4. Gross Operating Cycle Gross Operating cycle (GOC) = DIO + DSO (in Days) Year DIO DSO GOC 2004-05 52.317 19.591 71.908 2005-06 48.801 14.665 63.466 2006-07 72.473 14.771 87.244 2007-08 62.155 11.635 73.791 2008-09 19.170 4.550 23.720 Analysis Gross operating cycle is a tool which measures the total number of days from the day the purchases are made or the stock arrives to the day all the
  34. 34. 34 SAAB MARFIN MBA Working Capital Management collections are made. Cash is said to be blocked till the collections have been collected. So the sooner the cash is received from the consumers the better is for the company as they get cash for further production. IFFCO gross operating cycle is around 24 days. This is very good for the company as a fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables. 5. Cash Conversion Cycle (CCC) Cash Conversion Cycle (CCC) = DIO + DSO - DPO (in Days) Year DIO DSO DPO CCC 2004-05 52.317 19.591 39.045 32.863 2005-06 48.801 14.665 37.198 26.269 2006-07 72.473 14.771 34.809 52.435 2007-08 62.155 11.635 26.847 46.943 2008-09 19.170 4.550 19.286 4.434
  35. 35. 35 SAAB MARFIN MBA Working Capital Management Analysis The cash conversion cycle (CCC) measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. IFFCO CCC is of around 4.4 days in the year 2008-09. This means that the company is able to generate the cash within this period after making it payments of its own bills. Since it is very low, it is good for the company. Ratios related to Inventory Management 1. Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods sold (COGS) Average Inventory (in Rs. Crores) Year COGS Average Inventory Inventory Turnover Ratio 2004-05 6809.48 976.03 6.977 2005-06 9166.48 1225.57 7.479 2006-07 9578.09 1901.79 5.036 2007-08 11336.77 1930.52 5.872 2008-09 31496.75 1654.23 19.040
  36. 36. 36 SAAB MARFIN MBA Working Capital Management Analysis The inventory turnover ratio at IFFCO is 19.040 in 2008-09. It means that that the company is turning its inventory of finished goods into sales 19.040 times in a year and is in good position. There had been a decrease in the inventory turnover ratio from 7.479 in 2005-06 to 5.036 in 2006-07. During this period, there was a large amount of inventory in the company because of the purchase of the Paradeep production plant. During all other period, the turnover is always increasing. 2. Inventory to Working Capital Ratio Inventory to Working Capital Ratio = Inventory X 100 Working Capital Year Inventory (in Crores) Working Capital (in Crores) Inventory to Working Capital Ratio 2004-05 931.50 1499.14 62.136 2005-06 1519.64 3387.39 44.862 2006-07 2283.94 4880.05 46.802 2007-08 1577.10 4404.17 35.809 2008-09 1731.36 4490.10 38.559
  37. 37. 37 SAAB MARFIN MBA Working Capital Management Analysis The Inventory to Working Capital Ratio measures how well the company is able to generate cash using working capital at its current inventory level. An increasing inventory to working capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much working capital invested in inventory, they may have difficulty having enough working capital to make payments on short term liabilities and accounts payable. Inventory to working capital ratio for IFFCO has been decreasing consistently with increasing very marginally in the year 2006-07 and in 2008-09. 3. Inventory to Current Assets Ratio Inventory to Current Assets Ratio = Inventory X 100 Current Assets Year Inventory (in Crores) Current Assets (in Crores) Inventory to Current Assets Ratio 2004-05 931.50 2603.98 35.772 2005-06 1519.64 4748.98 31.999 2006-07 2283.94 6081.28 37.557 2007-08 1577.10 5775.74 27.306
  38. 38. 38 SAAB MARFIN MBA Working Capital Management 2008-09 1731.36 7672.99 22.564 Analysis The Inventory to Current Assets Ratio measures that how much percentage of current assets is formed by the inventories. An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent and it may be difficult to convert them into cash immediately. Normally, less than 50 % of current assets are treated as average position of inventory. IFFCO has shown a decrease in this ratio over the past years, which indicates a GOOD inventory position for IFFCO and, the ratio was never been above 38%. 4. Inventory to Sales Ratio Inventory to Sales Ratio = Inventory X 100 Sales Year Inventory (in Crores) Sales (in Crores) Inventory to Sales Ratio 2004-05 931.50 7396.87 12.593
  39. 39. 39 SAAB MARFIN MBA Working Capital Management 2005-06 1519.64 9942.93 15.284 2006-07 2283.94 10330.11 22.110 2007-08 1577.10 12162.82 12.967 2008-09 1731.36 32933.30 5.257 Analysis The Inventory to Sales Ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. As per the data of IFFCO, this ratio had increased initially till the year 2006-07 but is falling down consistently after that time, which is a POSITIVE sign indicating good movement of inventory. Ratios related to Receivable Management 1. Debtors turnover ratio Debtor Turnover Ratio = Net Sales Average Accounts Receivable
  40. 40. 40 SAAB MARFIN MBA Working Capital Management Year Net Sales (in Crores) Avg. A/c Receivables (in Crores) Debtor Turnover Ratio 2004-05 7396.87 397.03 18.631 2005-06 9942.93 399.50 24.888 2006-07 10330.11 418.04 24.711 2007-08 12162.82 387.72 31.370 2008-09 32933.30 410.50 80.227 Analysis This ratio is also known as Accounts Receivable Turnover Ratio and measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers. IFFCO have a high and increasing Accounts Receivable Turnover which is a Positive Sign. The company is able to turnover its debtors 80.227 times in a year. 2. Average collection period Average Collection Period = 360 Debtor Turnover Ratio
  41. 41. 41 SAAB MARFIN MBA Working Capital Management Year Sales (in Crores) Average Debtors (in Crores) Debtor Turnover Ratio Average Collection Period 2004-05 7396.87 397.03 18.631 19.323 2005-06 9942.93 399.50 24.888 14.465 2006-07 10330.11 418.04 24.711 14.569 2007-08 12162.82 387.72 31.370 11.476 2008-09 32933.30 410.50 80.227 4.487 Analysis The Average Collection Period represents the average number of days for which a firm takes to collect accounts receivables. It measures the quantity of debtors. The Average Collection Period for IFFCO was around 4.5 days in 2008-09. This is extremely good considering the fact that IFFCO is a fertilizer company, and functions as a cooperative. The maximum collection period during this five year period is around 17 days in the year 2005-06 and is decreasing since then. 3. Debtors to current assets ratio Debtors to = Debtors X 100
  42. 42. 42 SAAB MARFIN MBA Working Capital Management Current Assets Ratio Current Assets Year Debtors (in Crores) Current Assets (in Crores) Debtors to Current Assets Ratio 2004-05 324.59 2603.98 12.465 2005-06 474.40 4748.98 9.990 2006-07 361.68 6081.28 5.947 2007-08 413.76 5775.74 7.164 2008-09 407.23 7672.99 5.307 Analysis Debtors to Current Assets Ratio indicates the position of debtors in total current assets. This ratio is calculated by debtors with current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect of other current assets, it indicates poor recovery of the company. As Per the table, the Debtors to Current Assets Ratio for IFFCO decreased from 2004-05 to 2006-07 and then increased in the year 2007-08 and then decreasing onwards. The decrease is a healthy sign showing proper realization of debts in 2008-09.
  43. 43. 43 SAAB MARFIN MBA Working Capital Management 4. Debtors to working capital ratio Debtors to Working Capital Ratio = Debtors X 100 Working Capital Year Debtors (in Crores) Working Capital (in Crores) Debtors to Working Capital Ratio 2004-05 324.59 1499.14 21.652 2005-06 474.40 3387.39 14.005 2006-07 361.68 4880.05 7.411 2007-08 413.76 4404.17 9.395 2008-09 407.23 4490.10 9.070 Analysis Working capital is directly related with the position of debtors. If debtors are lower as compared to Working Capital, then it indicates proper and smooth utilization of working capital. But on the other hand, the amount of debtor is very large in that condition, Working capital blocked and operational efficiency is directly affected. From the data, it can be seen that this ratio for IFFCO has been decreasing which is good for the company. There was a increment in the year 2007-08 due to increase in the debtors but again it continued to decrease.
  44. 44. 44 SAAB MARFIN MBA Working Capital Management 5. Debt to Equity Ratio Debt to Equity Ratio = Debt Total Equity Year Debt (in Crores) Equity (in Crores) Debt to Equity Ratio 2004-05 647.09 3301.15 0.196 2005-06 5035.39 3555.38 1.416 2006-07 6486.12 3641.84 1.781 2007-08 6775.64 3688.66 1.837 2008-09 12802.78 3958.87 3.234 Analysis The ratio shows the extent to which debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firm’s operations due to the increasing interference and pressure from creditors. A low debt-equity ratio implies a greater claim of owners than capital. At IFFCO, this ratio is increasing every year. It means that increase in debt of the company is more than the increase in the equity. In the year 2008-09, it increased to 3.234 from 1.837 in the year 2007-08 because of the major increase in the short term loans from the banks.
  45. 45. 45 SAAB MARFIN MBA Working Capital Management Ratios Related to Cash Management 1. Working capital ratio or current ratio Current Ratio = Current Assets Current Liabilities Year Current Assets (in Crores) Current Liabilities (in Crores) Current Ratio 2004-05 2603.98 1104.84 2.357 2005-06 4748.98 1361.58 3.488 2006-07 6081.28 1201.23 5.063 2007-08 5775.74 1371.57 4.211 2008-09 7672.99 3182.89 2.411 Analysis Working Capital Ratio is used to analyze the short term solvency of the company. Usually a ratio of 2:1 is considered to be the best current ratio. Higher the ratio, greater is the ability of the firm to meet its short term obligations.
  46. 46. 46 SAAB MARFIN MBA Working Capital Management Current Ratio at IFFCO is always greater than 2 in all five years for which data has been analyzed indicating that IFFCO never really face a major problem in meeting its short-term liabilities. 2. Liquid ratio or Acid-test ratio or Quick ratio Quick Ratio = Current Assets - Inventories Current Liabilities Year Current Assets (in Crores) Inventories (in Crores) Quick Assets (in Crores) Current Liabilities (in Crores) Quick Ratio 2004-05 2603.98 931.50 1672.48 1104.84 1.514 2005-06 4748.98 1519.64 3229.34 1361.58 2.372 2006-07 6081.28 2283.94 3797.34 1201.23 3.161 2007-08 5775.74 1577.10 4198.64 1371.57 3.061 2008-09 7672.99 1731.36 5941.63 3182.89 1.867 Analysis
  47. 47. 47 SAAB MARFIN MBA Working Capital Management Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be satisfactory. This is so because if the quick assets are equal to the current liabilities then the company may be able to meet its entire short-term obligations pretty conveniently. The quick ratio of the company is above 1 for all the five years. The quick ratio was 3.161 and 3.061 during the year 2006-07 and 2007-08 respectively. This is due to large amount of inventory at IFFCO during that period. However, the reason for this is the purchase of Paradeep production plant during that period. 3. Cash to current assets ratio Cash to Current Asset Ratio = Cash X 100 Current Assets Year Cash (in Crores) Current Assets (in Crores) Cash to Current Asset Ratio (%) 2004-05 199.10 2603.98 7.646 2005-06 98.22 4748.98 2.068 2006-07 330.84 6081.28 5.440 2007-08 243.32 5775.74 4.213 2008-09 69.63 7672.99 0.907
  48. 48. 48 SAAB MARFIN MBA Working Capital Management Analysis The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of cash at hand and cash at bank. Upon analyzing the data of the past 5 years for IFFCO it was observed that the cash balances formed only a very small percentage of the current assets. In the last 5 years, the highest was 7.65% in the year 2004-05 after which it is decreasing. The ratio had variations in this period an in the year 2008-09, it was 0.91%. This is a POSITIVE SIGN as it shows effective utilization of the funds of the organization and there is not much of idle cash with the organization. 4. Sales to current assets ratio Sales to Current Asset Ratio = Sales Current Assets Year Sales (in Crores) Current Assets (in Crores) Sales to Current Asset Ratio 2004-05 7396.87 2603.98 2.841 2005-06 9942.93 4748.98 2.094 2006-07 10330.11 6081.28 1.699 2007-08 12162.82 5775.74 2.106 2008-09 32933.30 7672.99 4.292
  49. 49. 49 SAAB MARFIN MBA Working Capital Management Analysis The Sales to Current Assets Ratio basically measures how well a company is making use of its assets in generating sales. An increasing sale to current assets ratio is a POSITIVE SIGN as it indicates that the company has a healthy production scenario because of which most of inventory is being converted into sales for the company. IFFCO has shown a decrease in its sales to current assets ratio from 2004-05 to 2006-07 after which it is constantly increasing which implies that the company is doing well and inventory is not being held up at any stage in the production process. 5. Working capital turnover ratio Working Capital = Current Assets - Current Liabilities Working Capital Turnover Ratio = Sales Average Working Capital Year Sales (in Crores) Working Capital (in Crores) Working Capital Turnover Ratio
  50. 50. 50 SAAB MARFIN MBA Working Capital Management 2004-05 7396.87 1580.36 4.680 2005-06 9942.93 2443.27 4.070 2006-07 10330.11 4133.72 2.499 2007-08 12162.82 4642.11 2.620 2008-09 32933.30 4447.14 7.406 Analysis IFFCO has a high working capital turnover ratio. A high or increasing Working Capital Turnover is usually a Positive Sign, showing the company is better able to generate sales from its Working Capital. The company has been able to gain more Net Sales with the smaller amount of Working Capital in 2008-09 as compared to that in 2007-08. The working capital turnover had been decreasing from 4.860 in the year 2004-05 to 2.499 in 2006-07 but it increasing since then to 7.406 in the year 2008-09. 6. Sales to working capital ratio Working Capital = Current Assets - Current Liabilities Sales to Working Capital Ratio = Sales Average Working Capital
  51. 51. 51 SAAB MARFIN MBA Working Capital Management Year Sales (in Crores) Working Capital (in Crores) Sales to Working Capital Ratio 2004-05 7396.87 1580.36 4.680 2005-06 9942.93 2443.27 4.070 2006-07 10330.11 4133.72 2.499 2007-08 12162.82 4642.11 2.620 2008-09 32933.30 4447.14 7.406 Analysis The Sales to Working Capital ratio measures how well the company's working capital is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. The sales to working capital ratio has been increasing from 2007-08 for IFFCO which is good as it implies that the company is generating more & more sales and is able to utilize its working capital more efficiently with the passing years. The decrease of the ratio in the previous years was due to the increase in inventory holding which was required for the Paradeep production plant. Profitability Ratios 1. Return on Assets Return on Assets = Profit After Tax
  52. 52. 52 SAAB MARFIN MBA Working Capital Management (ROA) Average Total Assets Analysis ROA is an indicator of how profitable a company is relative to its total assets. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. At IFFCO, the ROA is increasing from the year 2006-07 which is good for the company. Earlier it was decreasing as there was increase in the assets due to purchase of the production plants. 2. Return on Equity Return on Equity (ROE) = Profit After Tax Average Equity Year Profit After Tax (in Crores) Average Total Assets (in crores) ROA 2004-05 319.64 4449.22 0.072 2005-06 341.35 6709.33 0.051 2006-07 175.02 9855.58 0.018 2007-08 257.59 10830.24 0.024 2008-09 360.01 14151.13 0.025
  53. 53. 53 SAAB MARFIN MBA Working Capital Management Year Profit After Tax (in Crores) Average Equity (in crores) ROE 2004-05 319.64 3205.37 0.100 2005-06 341.35 3428.27 0.100 2006-07 175.02 3598.61 0.049 2007-08 257.59 3665.25 0.070 2008-09 360.01 3823.77 0.094 Analysis Return on Equity measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity. ROE shows how well a company uses investment funds to generate earnings growth. From the data, IFFCO ROE had always been good. There was a decrease in the year 2006-07 due to the purchase of Paradeep plant which increased the purchases of the organization.
  54. 54. 54 SAAB MARFIN MBA Working Capital Management 3. Return on Capital Employed Year Profit Before Tax (in Crores) Average Capital Employed (in crores) ROCE 2004-05 470.92 4449.22 0.1058 2005-06 481.90 6709.33 0.0718 2006-07 251.25 9855.58 0.0255 2007-08 380.52 10830.24 0.0351 2008-09 441.95 14151.13 0.0312 Analysis ROCE is used to prove the value the business gains from its assets and liabilities. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities. At IFFCO, ROCE had shown variable changes. This is due to the variable increments in the capital employed (majorly the loan funds) as compared to the profit before tax. Return on Capital Employed (ROCE) = Profit Before Tax Average Capital Employed
  55. 55. 55 SAAB MARFIN MBA Working Capital Management 4. Net Profit Margin Net Profit Margin = Profit After Tax Sales Year Profit After Tax (in Crores) Sales (in Crores) Net Profit Margin 2004-05 319.64 7396.87 0.043 2005-06 341.35 9942.93 0.034 2006-07 175.02 10330.11 0.017 2007-08 257.59 12162.82 0.021 2008-09 360.01 32933.30 0.011 Analysis Net profit margin ratio establishes a relationship between net profit and sales and indicates management’s efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firm’s ability to turn each rupee sales into net profit. From the data, IFFCO have a variable net profit margin. The sales turnover depend upon the element of subsidy which is decided by the government from time - to - time depending on the condition of international market. During the year 2008-09, the component of subsidy increased tremendously due to high international fertilizer price. Looking at the turnover of 2008-09,
  56. 56. 56 SAAB MARFIN MBA Working Capital Management the subsidy amounted to Rs. 25545.60 crores vis-à-vis to subsidy amounted to Rs. 6194.35 crores for the year 2007-08. Loans and Advances to Current Assets Loans and Advances to Current Assets Ratio = Loans and Advances X 100 Current Assets Year Loans and Advances (in Crores) Current Assets (in Crores) Loans and Advances to Current Assets Ratio 2004-05 1148.77 2603.98 44.116 2005-06 2656.70 4748.98 55.943 2006-07 3104.82 6081.28 51.055 2007-08 3541.56 5775.74 61.318 2008-09 5464.77 7672.99 71.221 Analysis As per the data, it can be clearly said that the position of the Loans & Advances with respect to current assets is increasing every year (a marginal decrease in the year 2006-07) which is very Good for IFFCO. The ratio was around 44.116% in 2004-05 which had increased to 71.221% in 2008-09.
  57. 57. 57 SAAB MARFIN MBA Working Capital Management Loans and Advances to Working Capital Loans and Advances to Working Capital Ratio = Loans and Advances X 100 Working Capital Year Loans and Advances (in Crores) Working Capital (in Crores) Loans and Advances to Working Capital Ratio (%) 2004-05 1148.77 1499.14 76.629 2005-06 2656.70 3387.39 78.429 2006-07 3104.82 4880.05 63.623 2007-08 3541.56 4404.17 80.414 2008-09 5464.77 4490.10 121.707 Analysis
  58. 58. 58 SAAB MARFIN MBA Working Capital Management This ratio shows how significant Loans & Advances Are to Working Capital and that Loans & Advances plays an important role in working capital management of IFFCO. This ratio shows that the company has more cash in hand and can utilize these funds as per the company requirement. At IFFCO, this ratio has always been increasing which is good for the organization. This means that company is having enough cash and utilizing it effectively. Working Capital Position Working Capital = Current Assets - Current Liabilities Year Current Assets (in Crores) Current Liabilities (in Crores) Working Capital (in Crores) 2004-05 2603.98 1104.84 1499.14 2005-06 4748.98 1361.58 3387.40 2006-07 6081.28 1201.23 4880.05 2007-08 5775.74 1371.57 4404.17 2008-09 7672.99 3182.89 4490.10 Analysis
  59. 59. 59 SAAB MARFIN MBA Working Capital Management Working Capital Position indicates changes in Current Assets and Current Liabilities over the study period and also during a particular year. Working capital position shows operational efficiency & proper utilization of short term resources in an organization. The trend of working capital with respect to Current Assets and Current Liabilities for IFFCO is increasing. This shows a GOOD GROWTH of the company. The Working Capital is managed properly & efficiently by the organization. However, there was decrease in the year 2007-08 due to decrease in the level of inventory. Comparison with some competitors in the Industry IFFCO Coromandel International National Fertilizers Fertilizers and Chemicals Travancore Chambal Fertilizers Net Worth 3958.87 1127.14 1470.70 647.94 1234.35 Sales Turnover 32933.30 9374.98 5127.10 706.89 4595.53 Net Profit 360.01 496.38 97.46 42.95 230.56 Inventory 1731.36 1347.51 348.68 412.60 316.82 Total Current Assets 7672.99 3726.38 1525.51 823.53 1566.28 Total Current Liability 3182.89 1755.02 886.65 392.21 1288.58 Working Capital 4490.10 1971.36 638.86 431.32 277.70 Total Assets 17303.77 2926.50 1851.19 1457.77 3982.04 Working Capital to Sales Turnover 0.136 0.210 0.125 0.610 0.060 Inventory to Working Capital 0.386 0.684 0.546 0.957 1.141 Working Capital Ratio 2.41 2.12 1.72 2.10 1.22
  60. 60. 60 SAAB MARFIN MBA Working Capital Management Findings After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that Current assets are increasing more than current liabilities. But the current ratio has decreased as the percentage increase in current liabilities is more than the current assets. Cash and Bank Balances have decreased during this period which indicates proper utilization of funds at IFFCO. Position of inventory is Very Good in current assets (22.564%). Inventory Turnover Ratio increases consistently, which shows greater degree of utilization of inventory during the study period. Position of Debtors to Current Assets is 5.307%. This ratio had decreased during this period with an increase in the year 2007-08. This increase was due to the significant increase in the debts of the company. Loans and Advances are increasing every year and contribute majorly to current assets. This means that the company is not facing any problem to get the required short term financing. Working Capital Turnover 7.41 6.21 7.06 1.97 9.63 Inventory to Current Assets 0.226 0.362 0.229 0.501 0.202 Inventory to Sales 0.053 0.144 0.068 0.584 0.069 Net Profit Margin 0.011 0.053 0.019 0.061 0.050
  61. 61. 61 SAAB MARFIN MBA Working Capital Management Large part of working capital is involved in maintaining inventory and it depends on the level of inventory every year. Working capital of the company had increased till 2006-07 after which it has remain constant with small changes. Debt to equity ratio increased during the year 2008-09 as the debt increased due to increase in short term borrowings. Inventory as a component of current assets was high during the beginning of the period after which it has continuously decreasing. Net profit margin decreased in the year 2008-09 because of the significant increase in the raw material prices and consequent increase in subsidy. Looking on the trends, IFFCO has been able to manage the profits. The major variation in the ratios during this period is due to the purchase of Paradeep production plant. Conclusions and Suggestions
  62. 62. 62 SAAB MARFIN MBA Working Capital Management Working capital is one of the most important aspects of operational efficiency of business. Working Capital plays a very important role in the functioning of any organization. Both the current assets and current liabilities are very much influencing factors on the working capital of an organization. After the discussion and analysis of the financial position of IFFCO Ltd., it is clear that the working capital of IFFCO is in sound position. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital. In current assets, there are two most important factors, Debtors and Inventory that affect working capital. In IFFCO Ltd., Inventory and Debtors are efficiently managed to strengthen the position of the organization both in short term and long terms. After analyzing and interpreting the financial data of INDIAN FARMERS FERTILIZER COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis, the following suggestions were given to the organization for further betterment & improvement in the working capital: The present status and levels of current assets is extremely good and therefore it requires proper maintenance. The current percentage of inventory is high which is not good for operational efficiency and sound working capital and thus, it need to be controlled by using various inventory management techniques such as JIT or Kanban. Another alternative would be to have varying stock or inventory levels during the different seasons or even months and, thereby, altering the production to suit such needs. Cash balances have a lower percentage in current assets. This requires some concern as cash and bank balances are the most liquid of all current assets.
  63. 63. 63 SAAB MARFIN MBA Working Capital Management As the sales turnover majorly consists of subsidiary, the company shall also depend less on subsidy which is dependent on the annual budget fixed by the government of India, i.e., when the total outflow of any financial year is more than the budgeted subsidiary, the manufacturers/ importers have to wait for additional budget or their subsidiary get realized in the next financial year. As the Government of India wants the fertilizers to be supplied at minimum price, they are compensating manufacturers/ importers by means of subsidy. The government should device a method whereby the price of fertilizers should increase every year to some extent. This will reduce the subsidy burden on the government and companies will be able to realize cash against their sales.
  64. 64. 64 SAAB MARFIN MBA Working Capital Management CHAPTER 2 Cash Management
  65. 65. 65 SAAB MARFIN MBA Working Capital Management CASH MANAGEMENT AT IFFCO IFFCO, a large co-operative society, has been generating large amount of profits over the years from the date of its commercial production. Its internal sources generation has been adequate enough to finance the working capital need besides its other long term commitments though to meet its working capital requirements. The main objective of Cash Management of IFFCO is not different from the basic objective of cash. Figure: Cash flow at the Organization The cash is collected by Marketing Central Office (Mkco) and is transferred to the Head Office (HO). From the Head Office, the cash is provided to the plants depending on their requirements. The plants produce fertilizers and the sale of products provides cash which is collected by Marketing Central Office. Sales are often termed as Release Order (RO). The fertilizers are sold to corporate societies and most of the payments are made on prepaid basis. The payments are done through the means of demand drafts/ pay orders. The system of payment through cheques is not
  66. 66. 66 SAAB MARFIN MBA Working Capital Management used further. There are very few service centres which transacts in cash. There is very small amount of credit for a defined credit period, only to large federations. The Field Representatives (FR) takes Demand Drafts/ pay orders from the corporate societies before the Release Order. IFFCO has been effectively managing the cash in the following ways: To measure the cash flow time line and assess the magnitude of savings that could result from the alternative management strategies. To compare the length of timeline with that of other companies in the industry or standard set by the company. To not permit cash to stand idle for as much as a day To know the requirements of funds at various units at different periods of time Repayment of loans and debt has been one of the prime objectives To make every effort to speed up the flow Bankers of IFFCO Indian Overseas Bank State Bank of India Bank of Baroda Standard Chartered Bank The Maharashtra State Cooperative Bank Ltd. The West Bengal State Cooperative Bank Ltd. Madhya Pradesh State Cooperative Bank Ltd. The Karnataka State Cooperative Bank Ltd. The Punjab State Cooperative Bank Ltd. The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC) ICICI Bank Ltd. IDBI Bank Ltd. HDFC Bank Ltd.
  67. 67. 67 SAAB MARFIN MBA Working Capital Management Punjab National Bank Axis Bank BNP Paribas Implementation of Cash Management at IFFCO In order to effectively manage its cash, so as to sustain liquidity and profitability, IFFCO has chosen to go for a Centralized Cash Management System. The Centralized Cash Management System means that the cash of IFFCO is basically managed from the Head Office situated at New Delhi. In order to smoothly manage the cash, IFFCO takes the service of IOB, its main bank from the consortium of bank. IOB plays the part of maintaining the daily fund position of IFFCO i.e. on a daily basis the cash inflows and outflows are recorded in computer and are daily analyzed by the cash and bank section of IFFCO, which also carries out its daily position on the fund statement book. This Centralized Cash Management at IFFCO also helps in to check the idle cash, which would otherwise have a cost structure attaches to it. Through this system, the cash is not allowed to remain idle at various branches and is used by the co-operative giant to pay its short term liabilities, which may arise. This system of centralized cash management gives an added advantage to IFFCO to effectively implement a policy of cash flow timeline management. IFFCO maintains a strict vigil on the movement of funds for collection and payments both. Although manufacturing units are independent enough to issue cheques, but they still have to inform the head office. It also prepares the budgets and forecasts and matches the actual with that, so as to have a proper control over transaction.
  68. 68. 68 SAAB MARFIN MBA Working Capital Management A very efficient Management Information System has been introduced at IFFCO which facilitates: Forecasting of cash flows on monthly basis or weekly or daily basis, Helps in cash planning A Consolidated Statement is prepared at the corporate office which forms the main basis for planning of funds flow for the continuing month. Sales Procedure in IFFCO In IFFCO, there are three systems of sales: 1. Sales through Societies In the case of Sales through societies, Demand Drafts are received in advance by IFFCO, i.e. no credit sales are allowed to them. The Demand Drafts are collected from them and then they are either deposited with the concern district bank or are sent to state office for deposit with the respective bank. 2. Sales through Federation In the case of Sales through Federation, the sales are normally made on credit basis with a defined credit period. The payments are normally received by IFFCO’s State Office and are deposited with the respective bank. 3. Sales through IFFCO’s Own Service Centre The sales through IFFCO’s own outlets are made on cash basis. These outlets are called as Farmers Service Outlet (FSC). The funds are deposited with the bank on daily basis and are transferred by the bank to IFFCO’s state office. In IFFCO, all the realization of sale proceeds is centralized to IFFCO’s Delhi Office i.e. the funds are ultimately reaching Delhi for utilization, for IFFCO’s manufacturing units. The funds that are sent to Delhi are then again
  69. 69. 69 SAAB MARFIN MBA Working Capital Management redistributed to the manufacturing units and all the other offices, farmer service centers, cooperative societies etc. for meeting their expenses. Collection Procedure In earlier times, Field Representatives takes the Demand Drafts/ pay orders and deposits into Area Office. From Area Office it goes to State Office. From State Office, Demand Draft goes to Marketing Central Office and in the end, to the Head Office. This process takes around six days. Due to this delay, the transaction cost was high and there was a loss of interest on the payments received. After the implementation of CMS, bank services are hired for better management of cash. The Field Representatives collects the Demand Drafts from the societies. The bank agent collects these Demand Drafts and deposits them into the State offices, either in person or through courier. From State Offices, the drafts get deposited into the banks through bank agents only. The bank then transfers the money to the Head Office. This process takes one day or a maximum of two days. Thus, it saves at least four days and cash of the organization. There are different banks for different state offices. For the service provided by the banks, different banks charge the organization differently. Cash savings can be classified as follows: Direct savings Direst Savings are the savings on the interest of the days for which the organisation has received its cash earlier. Indirect savings It includes administrative cost reduction (transaction and transportation cost). Since the bank is agreement bound, in case of delays, it covers up some of the losses of the organisation. The savings can be explained as following. The collection through CMS in the year 2008-09 was approximately Rs. 5250 crores. As there is more than one bank in the CMS, an approximate interest rate of 8 % p.a. is taken for calculations. Also, a difference of four days is taken. On calculating, the
  70. 70. 70 SAAB MARFIN MBA Working Capital Management interest comes out to be Rs. 4.6 crores. This means that IFFCO saves around Rs. 4.6 crores in the year 2008-09 due to implementation of CMS. Cash Management Services (CMS) The Cash Management Services (CMS) is a technology driven system in which bank is under contractual obligation to make payment at the designated branch on the stipulated date as agreed in the agreement. Under this system, the banks pick up the Demand Drafts from IFFCO’s designated locations and pool the same with them. A High Value Demand Draft of the consolidated amount is deposited by the collecting bankers in IFFCO’s central account for which IFFCO receives the credit the same day. Thus, the amounts which are collected on day zero are received on IFFCO’s Central Account on day one. Salient features of Cash Management Services (CMS) Cash Management is the stewardship or proper use of an entity’s cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. At the same time, the organization has the responsibility to use timely, reliable and comprehensive financial information systems. Cash Management helps the organization in: Eliminating idle cash balances Monitoring exposure and reducing risks Ensuring timely deposit of collections Properly timing the disbursements Reducing the interest costs Improving the liquidity as it reduces the transit time enabling the firm to realize drafts earlier. Better accounting and Reconciliations as detailed information on drafts deposited are made available on a daily, weekly/periodically basis, thus simplifying accounting, reconciliation and query resolution. Customized Management Information System (MIS) as per requirements of the firm can also be made available.
  71. 71. 71 SAAB MARFIN MBA Working Capital Management Interconnectivity with the branch offices increases as these banks provide a host of internet software on the CMS account that allows the firm to view current account balances, download statements, view CMS collections, effect payments/receive payments online, plus a host of other activities. Collection Services by these banks ensure quick realization of local and outstation drafts on day zero and provide the funds in a central collection account on day one. Costs and Benefits of CMS Before the introduction of cash management services, various branches of banks at area offices used to take 2-3 days in transferring the funds to IFFCO’s Central Account. But with the coming of the CMS, the amount which are collected (as a high value drafts) on day zero, are received on IFFCO’s Central Account on day one. Due to late transfer of funds, late payments were made due to which IFFCO was losing a lot of amount of money in the form of interests and penalties. But now, since the transfer of funds is done through CMS, IFFCO is saving a lot of interest as the cash credit utilization has been reduced to the extent of amount received in that account. With the introduction of CMS, there is a timely remittance of funds and in the case the bank with whom the CMS agreement has been made fails to make timely remittance, then they are bound to pay interest on late transfer of funds. DETAILS OF STATE WISE EXISTING CMS BANKS NAME OF BANK STATE PICK UP LOCATION SERVICE CHARGES PAY OUT DAY HSBC Punjab Chandigarh NIL Day 1 Haryana Chandigarh NIL Day 1 Rajasthan Jaipur NIL Day 1 West Bengal Kolkata NIL Day 0 (HV)
  72. 72. 72 SAAB MARFIN MBA Working Capital Management Day 1 Maharashtra Mumbai NIL Day 0 (HV) Day 1 Pune NIL Day 1 Nagpur NIL Day 1 Aurangabad NIL Day 2 Other Districts NIL Day 2 BNP PARIBAS Nasik 0.15/1000 Day 2 Kholapur 0.15/1000 Day 2 Other Districts 0.15/1000 Day 2 Standard Chartered Assam Assam NIL Day 1 Bank A. P. A. P. NIL Day 1 Karnataka Karnataka NIL Day 1 Tamil Nadu Tamil Nadu NIL Day 1 Orissa Orissa NIL Day 1 Kerala Kerala NIL Day 1 HDFC Bank HP NIL Day 2 J & K NIL Day 1 Bihar Patna NIL Day 1 Gaya NIL Day 2 Bhagalpur NIL Day 2 Muzzafarpur NIL Day 2 Jharkhand Ranchi NIL Day 2 Uttaranchal Dehradoon NIL Day 2 Haldwani NIL Day 2 Rudraprayag NIL Day 2 ICICI Bank Uttar Pradesh Lucknow NIL Day 0 (HV) Day 1 All 13 Area Offices 0.02/1000 Day 1 IOB Gujrat Ahemdabad NIL Day 1 Chhatisgarh Raipur NIL Day 1 MP Bhopal NIL Day 1 SBI Uttar Pradesh FSC NIL Day 1 Axis Bank Uttar Pradesh 38 Districts NIL Day 1
  73. 73. 73 SAAB MARFIN MBA Working Capital Management HV: High Value FSC: Farmers Service Centre Cash Management Services (CMS) Agreement through the HSBC Bank Introduction of Cash Management Services (CMS) IFFCO is availing the cash management services of m/s HSBC bank for remittances of sale proceeds in the states of Punjab, Haryana, Rajasthan, West Bengal and Maharashtra. Collection services agreement was made on 28th December’2001 between IFFCO and HSBC. The bank will be providing its services known as Collection Services in the manner and subject to terms and conditions set out hereunder: 1. These services shall cover instruments (demand drafts/ pay orders) favouring IFFCO and marked “A/c Payee only”, that are Locally payable at specified HSBC branch locations Locally payable at other specified locations Outstation instruments payable at specified locations Outstation instruments payable at all other locations 2. Demand drafts etc., pickups by courier services shall be arranged at IFFCO’s offices in Mumbai, Pune, Aurangabad, Nagpur, at 1000 hrs and 1430 hrs by HSBC free of charge. This will aid HSBC in maintaining their service levels of Day 1 credits for Mumbai, Day 1 credit for Pune, Day 1 credit for Nagpur and Day 2 credit for Aurangabad for all cheques picked up on Day 0. (Day 0 being the date of collection in the clearing locations.) 3. HSBC shall refund interest @ HSBC PLR 15.50% - 4 % to IFFCO in case of delayed credits to IFFCO’s account. IFFCO will be required to pay interest @ HSBC PLR 15.50% - 4% to HSBC in case of demand draft returns for the period during which the bank will be out of funds.
  74. 74. 74 SAAB MARFIN MBA Working Capital Management 4. In the unlikely event of an instrument being misplaced whilst in transit after being picked up/ acknowledged by HSBC’s courier and credit not made available to IFFCO as per the contracted agreement, HSBC shall pay interest to IFFCO @ HSBC PLR 15.50% - 4% for the delayed period to a maximum period of 30 days. HSBC shall provide all assistance to IFFCO to procure a duplicate demand draft to put a stop payment in order that a duplicate instrument is issued at the earliest. 5. In the event drafts are lost in transit, HSBC shall debit IFFCO for the same, and HSBC’s statement intimating the non-payment of the instrument(s) will be final and binding on IFFCO. 6. HSBC can make MIS available at the check pickup points, the State Offices as well as Marketing Head office in New Delhi to aid reconciliation and to help IFFCO exercised greater control on the collections. The MIS can be amended to contained draft wise or deposit slip wise details as per IFFCO’s requirements. Management information system (MIS) report MIS report contains the demand draft number, amount collected and the cheques deposit slip number. Marketing Central Office checks the amount collected by different State Offices and verifies it to that collected by banks. A customized MIS provided by HSBC bank can include: Daily report of deposits made at various locations Location wise report Credit Forecast report Monthly cumulative report-date wise/location wise Monthly charging statement Monthly draft return statement Customized reports as per mutual agreement
  75. 75. 75 SAAB MARFIN MBA Working Capital Management HSBC has a large pool account which has a dummy account of IFFCO. The bank takes one day for realization of money and deposits it directly in the account of Head Office at New Delhi. The bank provides details to Marketing Central Office (Mkco) and other offices (SO, AO, FR) through Management Information System (MIS) report. If there is any mismatch in the value of MIS report or any other problem/ query, the department contacts it immediate lower department only. In CMS, the banks used are as follows: The HSBC Bank BNP Paribas Indian Overseas Bank Standard Chartered Bank The ICICI Bank State Bank of India, HDFC Bank Axis Bank The collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFC Bank and Axis Bank are deposited into the centralized account of IOB whereas the collection of HSBC bank is deposited into centralized account of SBI. SBI manages the collection of 5 states only out of total of 20 states. As
  76. 76. 76 SAAB MARFIN MBA Working Capital Management the money comes into these banks, it is transferred to the Head Office by the evening. Through Head Office, the money is distributed into various departments as per the requirements. For Collecting Payment Current Features 1. DDs collected by the state/area offices are picked up by an authorized agent of the banks and sent for collection. 2. Banks also pick up the high value instruments from the pickup location before the high value cut off time, present for clearing and effect the pooling on the same day at the nodal account. 3. Banks gives credit to the main pooling account on a pre agreed day. 4. The collections are transferred the same day to the cash credit account of IFFCO as per the standing instructions through a high value instrument. 5. Banks gives detailed management information system report as per the requirements of IFFCO. 6. This collection account is used for funding the disbursement of manufacturing units. Reporting The month wise projections of collections for the year are made in advance. Daily reports of collection against sales proceeds are made and are submitted in the higher departments for comparison with the projections. Disbursement of Funds
  77. 77. 77 SAAB MARFIN MBA Working Capital Management In addition to CMS, IFFCO has an innovative disbursement scheme known as Anywhere Banking Overdraft Account facility with IDBI and HDFC Bank. Under this scheme, the balances of all the state offices maintain are transferred to the Central Account having overdraft facilities whereby the balances with the state offices remain zero. Anywhere banking (ANB) Facility ANB facility offers IFFCO the flexibility of making at par payments across multiple locations by using a single current account maintained at Delhi. All the payments are made through IDBI and HDFC banks. IDBI is used in 17 states and HDFC in 3 states (Jammu, Assam, HP). Overdraft limit of IDBI is Rs. 229 crores whereas that of HDFC bank is Rs. 20 crores. Till the overdraft amount is being paid, interest is debited by the bank to Head Office through Marketing Central Office. For all transactions within the local region (within the New Delhi offices), IOB is used. It also transacts all the local expenses of the Marketing Central Office. All payments are made through cheques only. But, all employee payments and reimbursements are made through cash. Advantages of ANB Facility Better Fund Management by Reducing Idle Balances: ANB obviates the need to maintain idle funds at multiple locations leading to better funds management. Minimum Multiple Bank Account: ANB obviates the need for having multiple accounts at different locations. It, thus, reduces the number of bank accounts at different locations leading to lower administrative load and reduces bank reconciliation. No service charges: As there is no need of transfer of funds under anywhere banking system, the organization saves service charges which they used to pay earlier under the traditional system.
  78. 78. 78 SAAB MARFIN MBA Working Capital Management Observations 70 % of Sales activity in the business of fertilizers is in Monsoons and the balance 30% is spread throughout the rest of the year. The month from April to September is known as Kharif Season and from October to March is known as Rabi Season. The GOI is estimating the demand based on Kharif and Rabi season and is allocating the supply plans accordingly. Investments made by IFFCO As on 31st March 2009, the Society holds Government of India Fertilizer Bonds amounting to Rs. 6,638.95 Crores (previous year Rs. 646.16 Crores) bearing different rates of interest as per details hereunder: Investments (in Rs. Crores) As at 31.03.2009 As at 31.03.2008 7.95% Fertilizer Companies GOI Special Bonds, 2026 646.16 7.00% Fertilizer Companies GOI Special Bonds, 2022 2900.97 6.20% Fertilizer Companies GOI Special Bonds, 2022 2106.33 6.65% Fertilizer Companies GOI Special Bonds, 2023 1631.65 TOTAL 6638.95 646.16 Since the GOI was short of funds, they have issued the above bonds which have disturbed the cash position of the society. Subsidies from government The entire fertilizer industry gets subsidy from the government of India. In IFFCO, since the society is dealing in Urea and Phosphate Fertilizer, there are two system of claiming subsidy.
  79. 79. 79 SAAB MARFIN MBA Working Capital Management The subsidy on urea is received on the retention price fixed for the group of companies. That is, under this the subsidy is given as a difference between the sales price and the retention price. Retention Price includes cost of production (i.e. cost of raw materials, utilities, fixed cost, freight cost, marketing & selling & distribution expenses). Norms are set in by GOI for fixing retention price from time to time. The basic intention of following the retention price scheme is to give fertilizers to the farmers at a subsidized rate. In addition to the retention price subsidy, GOI is also reimbursing Freight towards primary and secondary freights to the manufacturers of controlled fertilizers (Urea) to cover the cost of transportation from the production plants to the consumption centres. Nitrogenous Fertilisers are under the Concession Scheme as notified by Government of India (GOI) from time to time. The subsidy on Nitrogenous Fertilisers is decided on month to month basis depending upon the input price escalation/ de-escalation based on the norms prescribed or notified under the subsidy scheme. The GOI is also reimbursing the actual fright on primary transportation and fixed amount on secondary transportation. The Phosphatic Fertilizer has been decontrolled and Concession on Phosphatic Fertilisers has been accounted for based on monthly concession rate as notified by Government of India. Pending notification of monthly concession rate applicable for the period January, 2009 to March, 2009, the same has been accounted for on an estimated basis in line with the known policy parameters. However, in order to make available the fertilizer at a low rate to the farmers, the government is allowing subsidy to the manufacturers. This amount is notified by the government for every month on the basis of the raw material prices of fertilizer.
  80. 80. 80 SAAB MARFIN MBA Working Capital Management Central Subsidy on Fertilizers Year Urea Decontrolled Total Subsidy Imported Indigenous Total P & K Fertilizers on all Fertilizers 2004-05 494 10243 10737 5142 15879 2005-06 1211 10653 11864 6596 18460 2006-07 3274 12650 15924 10298 26222 2007-08 6606 16450 23056 16934 39990 2008-09 10981 19517 30498 65351 95849 2009-10 5948 9780 15728 34252 49980* *budgeted In the year 2008-09, there was a large increase in the subsidy. This was due to the increase in the prices of the imported raw materials and finished goods (for resale). The price for these goods is usually US$370 per metric tonne but during 2008-09 it was US$1200 per metric tonne. Conclusion The organization IFFCO is basically a Farmer’s Organization. It functions in the cooperative sector of India and is owned by the Government of India along with the cooperative societies. IFFCO is one of the most profitable and financially secure fertilizer companies in India. The generation of funds through sale is a seasonal factor. 70% of Sales activity in the business of fertilizers is in Monsoons and the balance 30% is spread throughout the rest of the year. The month from April to
  81. 81. 81 SAAB MARFIN MBA Working Capital Management September is known as Kharif Season and from October to March is known as Rabi Season. Thus, it becomes imperative for the organization to have such cash management system in place that would enable the organization to plan the excess cash obtained during surplus periods and ploughs them back into the operations of the organization during deficit periods. The Cash Management System at IFFCO is very sound and efficient. It has enabled the organization to manage its funds in a proper manner resulting in better utilization and availability of funds in cash deficit periods. Today IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are providing IFFCO with facilities such as cash management services, personalized financial MIS to enable IFFCO to accelerate the collection and payment of funds, debit sweep option, Anywhere banking facility, etc. All these facilities have helped IFFCO in having faster, more secure and more reliable collection and payments of funds and cheques from its various Area/State Offices. However, despite all the advantages of this New Cash Management System such as receiving the proceeds from the sale of fertilizers within First day of sale, reduction in the amount of interest loss suffered by IFFCO due to late arrival of payments, daily report of deposits made at various locations, location wise report, credit forecast report, monthly cumulative report date wise/ location wise, monthly charging statement, monthly cheque return statement, customized reports as per mutual agreement etc. the cash management system can be further improved. Suggestions to Improve the Cash Management System By making an analysis of all the collection at other locations and implementing the same at state offices also.
  82. 82. 82 SAAB MARFIN MBA Working Capital Management At present, the banks with whom the CMS agreements have been made are not the consortium members of IFFCO’s Lead bank. In case, these banks are also included as consortium members, IFFCO shall have an additional advantage as they shall be in the position to utilize their payments directly from their Cash Credit Accounts. IFFCO should focus on implementation of RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer) facilities which will improve the cash transfer at IFFCO. References Books
  83. 83. 83 SAAB MARFIN MBA Working Capital Management Brealey, R A, Myers, S C, Alan, F and Mohanty, P 2008. Principles of Corporate Finance. Tata McGraw-Hill Publications, New Delhi, 8th SIE Edition. Chandra, T K, Seti, Kuldeep and Robertson, C 2010. Fertilizers Statistics 2008-09. Fertilizers Association of India (FAI), New Delhi. Ramachandran, N and Kakani, Ram 2008. Financial Accounting for Management. Tata McGraw-Hill Publications, 2nd Edition. Pandey, I M 2005. Financial Management. Vikas Publishing House, 9th Edition Reports Annual reports of IFFCO Agreement files of IFFCO Websites and Internet www.iffco.nic.in www.wikipedia.com www.investopedia.com www.fert.nic.in www.faidelhi.org www.moneycontrol.com
  84. 84. 84 SAAB MARFIN MBA Working Capital Management Appendix A: Working Capital Management Working Capital Management is the interaction between current assets and current liabilities. The current assets refer to those assets, which in ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. Decisions relating to working capital and short term financing are referred to as Working Capital Management. This involves managing the relationship between a firm's short-term assets and its short-term liabilities. The major thrust is on managing the current assets because a current liability arises in context of current assets. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing of: Accounts receivable (current asset) Inventory (current assets), Accounts payable (current liability), and Cash (current asset) The management of current assets is similar to that of fixed assets in the sense that in both cases the firm analyses their effects on its return and risk. However, the management of fixed and current assets differs in THREE ways: 1. In the management of fixed assets, time is very important consequently, discounting and compounding aspects of time element play a significant role in capital budgeting and a minor one in the management of current assets. 2. Large holdings of current assets especially cash strengthen times liquidity (and reduces riskiness) but also reduces overall profitability. 3. The levels of fixed as well as current assets depend upon the “expected sales”, but it is only the current assets, which can be adjusted with sales fluctuations in short runs.
  85. 85. 85 SAAB MARFIN MBA Working Capital Management In examining the management of current assets, answers will be sought to the following questions: What is the need to invest funds in the current assets? How much funds should be invested in each type of current assets? What should be the proportion of long term and short term funds to finance current assets? What appropriate sources of funds should be there to finance current assets? 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. Working Capital Management is a significant part of financial management. Its importance arises from two reasons: Investment in current represents assets a substantial portion of total management. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed assets investment and long term financing are also responsive to variations in sales. However this relationship is not as close and direct as it is in the case of Working Capital Management. Hence in this study an attempt has been made to analyze the size and composition of working capital and whether such an investment has increased or declined over a period of time. Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is involved in the most vital decision of the allocation of capital. There is a need to have a broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in the most efficient manner .One of the most important task of financial manager is to select an assortment of appropriate sources of finance for the current assets. Normally the excess of current assets over current liabilities should be financed by

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