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Project report on working capital mgmt

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Project report on working capital mgmt

Project report on working capital mgmt

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Project report on working capital mgmt Project report on working capital mgmt Document Transcript

  • A PROJECT REPORT ONWORKING CAPITAL MANAGEMENT
  • 2 SAAB MARFIN MBATable 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 Provisional highlights of IFFCO performance during E 117 2008-09 F Value Added Statement 118 G Some of the well known fertilisers used in India 119 H Some Calculations 120 Working Capital Management
  • 3 SAAB MARFIN MBAExecutive SummaryIndian Farmers Fertiliser Co-operative Limited (IFFCO) is a MultistateCo-operative Society. It was a unique venture in which the farmers of thecountry through their own Co-operative Societies created this new institutionto safeguard their interests. IFFCO manufactures Urea and NPK/ DAPfertilizers and sells them to the co-operative societies.The project is Working Capital Management of IFFCO. The objectives of theproject are: To analyse the working capital and working capital management policies at IFFCO To analyse the cash management practices at IFFCOThe study is mainly based on the secondary data which refers to that form ofinformation that has already been collected and is available. The analysis ofworking capital is based on ratio analysis to monitor overall trends inworking capital and to identify areas requiring closer management.Working capital is not measurable by only current assets & current liabilitiesbut there are some other factors also that have an influence on the workingcapital. From the analysis of the components of working capital, it was foundthat the organization is utilizing its funds properly, the inventory is managedefficiently and the organization is able to get sufficient short term financing.It is clear that the working capital of IFFCO is in sound position. Thesuggestions can be made in the management of inventory byimplementation of JIT or Kanban and management of liquid assets includingthe subsidy provided by the government.The Cash Management System at IFFCO is very sound and efficient. It hasenabled the organization to manage its funds in a proper manner resultingin better utilization and availability of funds in cash deficit periods. IFFCOhas a tie up with banks such as IOB, HSBC Bank, ICICI Bank that areproviding IFFCO with facilities such as cash management services, Working Capital Management
  • 4 SAAB MARFIN MBApersonalized financial MIS to enable IFFCO to accelerate the collection andpayment of funds, debit sweep option, Anywhere banking facility, etc. Thesuggestion that can be given to the organization is the implementation ofRTGS (Real Time Gross Settlement) and NEFT (National Electronic FundTransfer) 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 Working Capital Management
  • 5 SAAB MARFIN MBA 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 MISMethodology of the studyThe 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 ofinformation that has already been collected and is available. These includesome internal sources within the company and externally these sourcesinclude books and periodicals, published reports and data of IFFCO and theannual reports of the company. Interaction with the various employees of themarketing 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 overalltrends in working capital and to identify areas requiring closer management.Limitations of the Study Working Capital Management
  • 6 SAAB MARFIN MBAThe 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 ofco-operative societies associated with IFFCO have risen from 57 in 1967 to38, 155 at present. On the enactment of the Multistate Cooperative Societiesact 1984 & 2002, the Society is deemed to be registered as a Multistate Working Capital Management
  • 7 SAAB MARFIN MBACooperative Society. The byelaws of the Society provide a broad frame workfor the activities of IFFCO as a Cooperative Society.IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAPplant 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 fourplants under overall aegis of IFFCO VISION 2000. The expansion projects atAonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus allthe projects conceived as part of Vision 2000 have been realised withouttime or cost overruns. All the production units of IFFCO have established areputation for excellence and quality.A new growth path has been chalked out to realise newer dreams andgreater heights through Vision 2010 which is presently underimplementation. As part of the new vision, IFFCO has acquired fertiliser unitat Paradeep in Orissa in September 2005. As a result of these expansionprojects and acquisition, IFFCOs annual capacity has been increased to 3.69million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes ofP2O5.MissionIFFCOs mission is "to enable Indian farmers to prosper through timelysupply of reliable, high quality agricultural inputs and services in anenvironmentally sustainable manner and to undertake other activities toimprove their welfare." Working Capital Management
  • 8 SAAB MARFIN MBA 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 inthe country.IFFCO is emerging as a dynamic organisation, focussing on strategicstrengths, seizing opportunities for generating and building upon pastsuccess, enhancing earnings to maximise the shareholders value.Vision Working Capital Management
  • 9 SAAB MARFIN MBATo augment the incremental incomes of farmers by helping them to increasetheir crop productivity through balanced use of energy efficient fertilizers,maintain the environmental health and to make cooperative societieseconomically & democratically strong for professionalized services to thefarming community to ensure an empowered rural India.Vision 2010Encouraged by the success of Vision 2000, IFFCO has charted on a newcourse of action to realise a fresh set of dreams. A high powered committeehas 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 businessThe ApproachTo achieve their mission, IFFCO as a cooperative society, undertakes severalactivities covering a broad spectrum of areas to promote welfare of membercooperatives and farmers. The activities envisaged to be covered areexhaustively defined in IFFCO’s Bye-laws.The CommitmentThe thirst for ever improving the services to farmers and memberco-operatives is insatiable, commitment to quality is insurmountable andharnessing of mother earths bounty to drive hunger away from India in anecologically sustainable manner is the prime mission. Working Capital Management
  • 10 SAAB MARFIN MBAPlants 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 - 754142Production and SalesDuring 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 and31.00 lakh MT NPK/DAP. It contributes 21.4% of country’s total nitrogenousfertiliser production and 27% of total phosphatic fertiliser production in thesame 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 Working Capital Management
  • 11 SAAB MARFIN MBA SALES OF FERTILIZER MATERIAL (in Lakh MT)Material 2008-09 2007-08 2006-07UREA 58.69 54.29 52.41NPK/ DAP 53.89 38.95 33.69TOTAL 112.58 93.24 86.10 PLANT WISE PRODUCTION Unit 2008-09 2007-08 Capacity Capacity Production Production Utilization Utilization (Lakh MT) (percent) (Lakh MT) (percent)UREAKalol 5.60 102.80 5.45 100.00 Working Capital Management
  • 12 SAAB MARFIN MBAPhulpur –I 6.63 120.30 6.30 114.30Phulpur – II 8.40 97.20 9.24 106.90Aonla – I 9.87 114.10 8.76 101.30Aonla – II 10.18 117.80 9.89 114.40SUB TOTAL UREA 40.68 110.30 39.63 107.40NPK / DAPKandla 17.94 74.30 20.18 83.50Paradeep 13.06 68.00 8.66 45.10SUB TOTAL NPK / DAP 31.00 71.40 28.84 66.50TOTAL PRODUCTION 71.68 89.20 68.47 85.30All India Capacity, Production and Capacity Utilization of FertilizerIndustry Year N P2O5 Capacity Capacity Capacity Production Utilization Capacity Production Utilization (%) (%)2004-05 12208 11304.9 93.4 5480.4 4038.4 75.52005-06 12288.4 11332.9 94.5 5459.6 4202.6 78.52006-07 12290.4 11524.9 95.6 5736.3 4440 78.52007-08 12290.4 10902.8 95.2 5874.6 3714.3 64.72008-09 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 Working Capital Management
  • 13 SAAB MARFIN MBA sPublic 3591.5 2973.2 386.7 - 386.7 191.7 - 191Private 6030.3 4829.9 2860.1 1225 4085.1 1903.9 405.4 230Cooperative 3423.4 3133.1 1712.8 - 1712.8 916.3 - 916Total 13045.2 10900.2 4959.6 1225 6184.6 3011.9 405.4 341 Capacity and Investment in the Fertilizer Industry Investments During the Period ( in Rs. Year / Period Capacity During the Crore ) Period (in 000 tonnes) Sectors N P2O5 Public Cooperative Private Total2004-2005 62 39 - - 10 10(as on1.11.2004) 12229 5427 7474.5 4231.5 14227.9 25933.92005-2006 -21 1 - - 3 3(as on1.11.2005) 12208 5428 7474.5 4231.5 14230.9 25936.92006-2007 52 243 350 - 35 385(as on1.11.2006) 12260 5671 7824.5 4231.5 14265.9 26321.92007-2008 30 204 - - 15 15(as on1.11.2007) 12290 5875 7824.5 4231.5 14280.9 26336.92008-2009 - 17 - - 55 55(as on1.11.2008) 12290 5892 7824.5 4231.5 14335.9 26391.92009-2010 755 293 - 350 470 820(as on1.11.2009) 13045 6185 7824.5 4581.5 14805.9 27211.9BIO – FERTILISERSBio-fertilisers are capable of fixing atmospheric nitrogen when suitablecrops are inoculated with them. Bio-fertilisers are low cost, effective, Working Capital Management
  • 14 SAAB MARFIN MBAenvironmental friendly and renewable source of plant nutrients tosupplement fertilisers. Integration of chemical, organic and biologicalsources of plant nutrients and their management is necessary formaintaining soil health for sustainable agriculture. The bacterial organismspresent in the bio-fertiliser either fix atmospheric nitrogen or solubiliseinsoluble forms of soil phosphate. The range of nitrogen fixed per ha/yearvaries from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg forgroundnut, 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 24400Prices of IFFCOs 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 4455Local Taxes Extra, where ever applicable.Joint Ventures of IFFCO Indian Potash Limited (IPL) Working Capital Management
  • 15 SAAB MARFIN MBAThe Society holds an investment of Rs. 2.68 Crore (2008-09) in IndianPotash Limited (IPL) with equity share holding of 34 per cent in thepaid up equity share capital of IPL. IPL is primarily engaged in tradingof imported Potassic and Non-Potassic Fertilisers.Industries Chimiques Du Senegal (ICS)The Society holds 18.54 per cent equity (2008-09) in ICS, whichmanufactures Phosphoric Acid for exports and Phosphatic Fertilisersfor domestic consumption. ICS has the capacity to produce 660000 MTof Phosphoric Acid (as P2O5) per year. The Government of Senegal andIFFCO signed an Agreement on 16th July, 2007 and Amendment on14th January, 2008, for the debt restructuring and recapitalisation ofICS. Post restructuring and recapitalisation, the new Board has beenreconstituted and the IFFCO Consortium has taken over themanagement control of ICS.Indo Egyptian Fertilisers Company, SAE (IEFC)The Society promoted a joint venture in Egypt, namely ‘Indo EgyptianFertilisers Company SAE’ (IEFC) along with El Nasr Mining Company ofEgypt to set up a Phosphoric Acid plant with a capacity of 1500 tonnesP2O5 per day. IEFC was incorporated in Egypt as a Joint StockCompany on 15th November, 2005 with shareholding of IFFCO and itsaffiliates at 76 percent and El Nasr Mining Co. Egypt holding 24 percent equity.Oman India Fertiliser Company (OMIFCO)Oman India Fertiliser Company (OMIFCO) is a Joint Venture Companyin Oman in which the Society has invested an amount of Rs. 329.08Crore (2008-09) to acquire 25 percent equity in OMIFCO, which has aninstalled capacity of 16.52 lakh tonne Urea and 2.5 lakh tonne surplusAmmonia. OMIFCO commenced commercial production at its plant atSur (Oman) with effect from 14th July, 2005. Working Capital Management
  • 16 SAAB MARFIN MBA 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) Working Capital Management
  • 17 SAAB MARFIN MBAThe Society has diversified into the Power Sector by incorporating aJoint Venture Company namely ‘IFFCO Chhattisgarh Power Limited’(ICPL) with Chhattisgarh State Electricity Board (CSEB) to set up a 1320MW 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 theNational Commodity and Derivative Exchange Limited (NCDEX).NCDEX is a demutualised, on-line national level commodity exchangeproviding a trading platform for futures trading in commodities in thecountry and offers its market participants opportunity at pricediscovery and price risk hedging. Currently, NCDEX offers contracts in56 commodities, that is, 42 agricultural commodities, 2 bullion, 6metals, 2 energy and 3 polymers and 1 environment (carbon credit).National Collateral Management Services Ltd. (NCMSL)Along with other reputed institutions, IFFCO co-promoted NationalCollateral Management Services Limited (NCMSL) in the year 2004. TheSociety holds 13.56 per cent of the paid up equity capital in NCMSL.NCMSL is engaged in providing various risk management servicesrelated to commodities like Storage and Preservation services,Collateral Management services, Procurement services, Quality Testingand Certification services and Information services.Freeplay Energy India Pvt. Ltd.During the year 2008-09, the Society made an investment of Rs. 4.83Crore to acquire 30 percent shareholding in Freeplay Energy India Pvt.Ltd. (FPEI), which is engaged in the field of non-conventional energyproducts and devices suitable for rural India. These products are beingmarketed to co-operative societies through Society’s another Working Capital Management
  • 18 SAAB MARFIN MBA subsidiary company, that is, ‘IFFCO Kisan Sanchar Ltd’. The utility of these products has been greatly appreciated by the rural farmers.Organizations promoted by IFFCOIFFCO has promoted several institutions and organisations to work for thewelfare of farmers, strengthening cooperative movement, improve Indianagriculture. 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 NaturalCalamities Kisan Sewa Trust Fund was created out of contributions from: IFFCO Rs 100 million Employees of IFFCO Rs 10 million Cooperative Societies and others Rs 90 million TOTAL Rs 200 million Working Capital Management
  • 19 SAAB MARFIN MBA 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 islaunched to promote e-culture in rural India. IFFCO obsessively nurtures itsrelations with farmers and undertakes a large number of agriculturalextension activities for their benefit every year.At IFFCO, the thirst for ever improving the services to farmers and memberco-operatives is insatiable, commitment to quality is insurmountable andharnessing of mother earths bounty to drive hunger away from India in anecologically sustainable manner is the prime mission.All that IFFCO cherishes in exchange is an everlasting smile on the face ofIndian Farmer who forms the moving spirit behind this mission.IFFCO, to day, is a leading player in Indias fertiliser industry and is makingsubstantial contribution to the efforts of Indian Government to increase foodgrain production in the country.IFFCO is also behind several other companies with the sole intention ofbenefitting farmers.The distribution of IFFCOs fertiliser is undertaken through over 38155 Working Capital Management
  • 20 SAAB MARFIN MBAco-operative societies. The entire activities of Distribution, Sales andPromotion are co-ordinated by Marketing Central Office (MKCO) at New Delhiassisted by the Marketing offices in the field.In addition, essential agro-inputs for crop production are made available tothe 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 AssociatesEven in the year of global economic meltdown, the business portfolio hasbeen steadily growing in tandem with the high growth aspirations. Theorganization have stepped up investments in related businesses throughvarious Joint Ventures and Associate Companies in order to strengthenthemselves further by looking at new opportunities that are unfolding andcreate value addition in the core fertiliser sector.On 31st March 2009, the total investments were Rs. 914 Crore incomparison to Rs.770.57 Crore on 31st March 2008 as per the followingbreak-up: (Rs. In Crore) As on 31st March 2009 2008 Working Capital Management
  • 21 SAAB MARFIN MBAInvestment in Jt. Ventures/Subsidiaries 888.27 750.13Investment in Business Associates 25.73 20.44Total 914.00 770.57Financial PerformanceAs per its tradition, the Society has again exhibited an impressive financialperformance in all its major parameters, namely, Revenue Growth andResource Utilisation, testifying to the robustness of its Corporate Strategy ofcreating multiple drivers of growth in spite of constraints in the availabilityof raw materials, the Global Economic Meltdown and inordinate delays inreceipt of large subsidy amounts from the Government of India. This waspossible due to higher production, sales volume and improvement inoperating 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 112.58lakh MT fertiliser during 2008-09, as against 93.24 lakh MT in the previousyear, the major increase in the sales turnover was on account of substantialincrease in the commodity prices. The performance is even more satisfyingwhen viewed in the light of the challenging business environment of thefertiliser industry.Sources and Uses of FundsThe Cash Flow from Operating, Investing and Financing activities as reflectedin the Cash Flow Statement is summarised in the following table: (Rs. In Crore) 2008-09 2007-08Cash provided by operating activities 1560 1072Cash Used in Investing activities (6578) (970) Working Capital Management
  • 22 SAAB MARFIN MBACash provided by financing activities 4844 (190)Decrease in cash and cash equivalents (174) (88)Corporate GovernanceThe Society has consistently followed transparent, democratic andprofessional practices in Corporate Governance since its inception. We havecarved out a strong ‘Cooperative Identity’ and are making sincere efforts touphold the ‘Cooperative Values’ by cherishing ‘Cooperative Principles’. TheSociety’s endeavour has been to achieve the highest levels of transparency,accountability and full disclosure to its shareholders in a bid to uphold thespirit of Cooperative Principles and Cooperative Values by following thecharter as lay down by International Cooperative Alliance (ICA). The activitiesof the Society have been conducted within the provisions of the Multi StateCooperative Societies Act/Rules and IFFCO Bye-laws. A separate detailedreport on Corporate Governance is given along with the Annual Report.Financial RatingsThe Society’s excellent credit ratings with bankers and rating agencies allowsaccess to short term funds including foreign currency borrowings atcompetitive rates. Ratings assigned by different Rating Agencies to theSociety 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 Working Capital Management
  • 23 SAAB MARFIN MBA 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. Working Capital Management
  • 24 SAAB MARFIN MBAValue AddedValue Added is the wealth which an enterprise has been able to createthrough the collective effort of capital, management and employees. Ineconomic terms, value added is the market price of the output of anenterprise less the price of the goods and services acquired by transfer.Value Added can provide a useful measure in gauging performance andactivity of the company. Figure: Allocation of Value AddedSignificant 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 Working Capital Management
  • 25 SAAB MARFIN MBA 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. Working Capital Management
  • 26 SAAB MARFIN MBA 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 Working Capital Management
  • 27 SAAB MARFIN MBA 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. Working Capital Management
  • 28 SAAB MARFIN MBA12. 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. Working Capital Management
  • 29 SAAB MARFIN MBACHAPTER 1Working Capital Management Working Capital Management
  • 30 SAAB MARFIN MBAData AnalysisOperating Cycles 1. Days Inventory Outstanding (DIO) Days Inventory Average Inventory = Outstanding (DIO) Cost of Goods sold (COGS) / 365 (in Rs. Crores) Average DIO (number of Year COGS Inventory 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 19.170AnalysisThe smaller the number of days of inventory outstanding, the more efficienta company is. IFFCO day inventory outstanding is around 19 days for theyear 2008-09 which is very good. Inventory is held for less time and lessmoney is tied up in inventory. Instead, money is freed up for things likeresearch and development, marketing or even share buybacks and dividendpayments. Working Capital Management
  • 31 SAAB MARFIN MBAThe DIO had always been showing a decreasing trend apart from the periodof 2006-07 in which inventory was build up due to the purchase of Paradeepplant. 2. Days Sales Outstanding Days Sales Average Accounts Receivable Outstanding = (DSO) Net Sales / 365 Avg. A/c Net Sales DSO (number of Year Receivables (in Crores) days) (in crores) 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 4.550AnalysisDays Sales Outstanding (DSO) looks at the number of days needed to collecton sales and involves Accounts Receivables. While cash-only sales have aDSO of zero, people do use credit extended by the company, so this numberis going to be positive.Most of sales of IFFCO are on cash basis and sales to large institutionsonly are on credit basis. The DSO for the year 2008-09 is 4.550, which is Working Capital Management
  • 32 SAAB MARFIN MBAvery good for the company. The DSO is showing a decreasing trendmeaning that the days to collect on sales are decreasing every year. 3. Days Payable Outstanding Days Payable Average Accounts Payable = Outstanding (DPO) Cost of Goods sold (COGS) / 365 (in Rs. Crores) Average DPO (number of Year COGS Accounts Payable 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 19.286AnalysisThis involves the companys payment of its own bills or Accounts Payables. Ifthis can be maximized, the company holds onto cash longer, maximizing itsinvestment potential. Working Capital Management
  • 33 SAAB MARFIN MBAThe DPO of IFFCO is around 19 days for the year 2008-09. It is alsoobserved that DPO is decreasing every year. From the data provided, it isfound out that IFFCO had sufficient funds to make payments of its own billsand make investments in various activities. 4. Gross Operating Cycle Gross Operating = DIO + DSO cycle (GOC) (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 23.720AnalysisGross operating cycle is a tool which measures the total number of daysfrom the day the purchases are made or the stock arrives to the day all the Working Capital Management
  • 34 SAAB MARFIN MBAcollections are made. Cash is said to be blocked till the collections have beencollected. So the sooner the cash is received from the consumers the betteris for the company as they get cash for further production.IFFCO gross operating cycle is around 24 days. This is very good for thecompany as a fast turnover rate of these assets is what creates real liquidityand is a positive indication of the quality and the efficient management ofinventory and receivables. 5. Cash Conversion Cycle (CCC) Cash DIO + DSO - Conversion = DPO Cycle (CCC) (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 Working Capital Management
  • 35 SAAB MARFIN MBAAnalysisThe cash conversion cycle (CCC) measures how fast a company can convertcash on hand into even more cash on hand. The CCC does this by followingthe 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 thecompany is able to generate the cash within this period after making itpayments 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 Cost of Goods sold Turnover = (COGS) Ratio Average Inventory (in Rs. Crores) Average Inventory Year COGS 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 Working Capital Management
  • 36 SAAB MARFIN MBAAnalysisThe inventory turnover ratio at IFFCO is 19.040 in 2008-09. It means thatthat the company is turning its inventory of finished goods into sales 19.040times in a year and is in good position. There had been a decrease in theinventory turnover ratio from 7.479 in 2005-06 to 5.036 in 2006-07. Duringthis period, there was a large amount of inventory in the company becauseof the purchase of the Paradeep production plant. During all other period,the turnover is always increasing. 2. Inventory to Working Capital Ratio Inventory to Inventory = X 100 Working Working Capital Capital Ratio Inventory to Inventory Working Capital Year Working Capital (in Crores) (in Crores) 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 Working Capital Management
  • 37 SAAB MARFIN MBAAnalysisThe Inventory to Working Capital Ratio measures how well the company isable to generate cash using working capital at its current inventory level. Anincreasing inventory to working capital ratio is generally a negative sign,showing the company may be having operational problems. If a company hastoo much working capital invested in inventory, they may have difficultyhaving enough working capital to make payments on short term liabilitiesand accounts payable.Inventory to working capital ratio for IFFCO has been decreasing consistentlywith increasing very marginally in the year 2006-07 and in 2008-09. 3. Inventory to Current Assets Ratio Inventory to Inventory = X 100 Current Current Assets Assets Ratio Inventory to Inventory Current Assets Year Current Assets (in Crores) (in Crores) 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 Working Capital Management
  • 38 SAAB MARFIN MBA 2008-09 1731.36 7672.99 22.564AnalysisThe Inventory to Current Assets Ratio measures that how much percentageof current assets is formed by the inventories. An increasing inventory tocurrent assets ratio is a negative sign. It means that more & more percentageof current assets is being constituted by the inventories. This indicates pooroperational efficiency of the organization. Also it shows that the fundsinvested in current assets to meet obligations on a short notice are actuallyilliquid to some extent and it may be difficult to convert them into cashimmediately. Normally, less than 50 % of current assets are treated asaverage position of inventory.IFFCO has shown a decrease in this ratio over the past years, whichindicates a GOOD inventory position for IFFCO and, the ratio was never beenabove 38%. 4. Inventory to Sales Ratio Inventory Inventory to = X 100 Sales Ratio Sales Inventory Sales Inventory to Sales Year (in Crores) (in Crores) Ratio 2004-05 931.50 7396.87 12.593 Working Capital Management
  • 39 SAAB MARFIN MBA 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 5.257AnalysisThe Inventory to Sales Ratio measures the percentage of inventory thecompany currently has on hand to support the current amount of sales. Anincreasing Inventory to Sales ratio is generally a negative sign, showing thecompany may be having trouble keeping inventory down and/or Net Saleshave slowed, and can sometimes indicate larger financial problems thecompany may be facing.As per the data of IFFCO, this ratio had increased initially till the year2006-07 but is falling down consistently after that time, which is a POSITIVEsign indicating good movement of inventory.Ratios related to Receivable Management 1. Debtors turnover ratio Debtor Net Sales Turnover = Average Accounts Ratio Receivable Working Capital Management
  • 40 SAAB MARFIN MBA Avg. A/c Net Sales Debtor Turnover Year Receivables (in (in Crores) Ratio Crores) 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 80.227AnalysisThis ratio is also known as Accounts Receivable Turnover Ratio andmeasures the number of times Accounts Receivables were collected duringthe year. This is also a measure of how well the company collects sales oncredit from its customers.IFFCO have a high and increasing Accounts Receivable Turnover which isa Positive Sign. The company is able to turnover its debtors 80.227 times ina year. 2. Average collection period Average 360 Collection = Debtor Turnover Period Ratio Working Capital Management
  • 41 SAAB MARFIN MBA Average Debtor Average Sales Year Debtors Turnover Collection (in Crores) (in Crores) Ratio 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 4.487AnalysisThe Average Collection Period represents the average number of days forwhich a firm takes to collect accounts receivables. It measures the quantityof 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 thisfive year period is around 17 days in the year 2005-06 and is decreasingsince then. 3. Debtors to current assets ratio Debtors to = Debtors X 100 Working Capital Management
  • 42 SAAB MARFIN MBA Current Current Assets Assets Ratio Debtors Current Assets Debtors to Current Year (in Crores) (in Crores) 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 5.307AnalysisDebtors to Current Assets Ratio indicates the position of debtors in totalcurrent assets. This ratio is calculated by debtors with current assets. Ifdebtors are average or less than average, it indicates proper realization ofdebtors. On the other hand, if debtors are very heavy in respect of othercurrent assets, it indicates poor recovery of the company.As Per the table, the Debtors to Current Assets Ratio for IFFCO decreasedfrom 2004-05 to 2006-07 and then increased in the year 2007-08 and thendecreasing onwards. The decrease is a healthy sign showing properrealization of debts in 2008-09. Working Capital Management
  • 43 SAAB MARFIN MBA 4. Debtors to working capital ratio Debtors to Debtors = X 100 Working Working Capital Capital Ratio Debtors to Debtors Working Capital Year Working Capital (in Crores) (in Crores) 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 9.070AnalysisWorking capital is directly related with the position of debtors. If debtors arelower as compared to Working Capital, then it indicates proper and smoothutilization of working capital. But on the other hand, the amount of debtor isvery large in that condition, Working capital blocked and operationalefficiency is directly affected.From the data, it can be seen that this ratio for IFFCO has been decreasingwhich is good for the company. There was a increment in the year 2007-08due to increase in the debtors but again it continued to decrease. Working Capital Management
  • 44 SAAB MARFIN MBA 5. Debt to Equity Ratio Debt to Debt = Equity Ratio Total Equity Debt Equity Debt to Equity Year (in Crores) (in Crores) 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 3.234AnalysisThe ratio shows the extent to which debt financing has been used in thebusiness. A high ratio means that claims of creditors are greater than thoseof owners. A high level of debt introduces inflexibility in the firm’soperations due to the increasing interference and pressure from creditors. Alow debt-equity ratio implies a greater claim of owners than capital.At IFFCO, this ratio is increasing every year. It means that increase in debtof 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 majorincrease in the short term loans from the banks. Working Capital Management
  • 45 SAAB MARFIN MBARatios Related to Cash Management 1. Working capital ratio or current ratio Current Ratio Current Assets = Current Liabilities Current Current Assets Year Liabilities Current Ratio (in Crores) (in Crores) 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 2.411AnalysisWorking Capital Ratio is used to analyze the short term solvency of thecompany. 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 termobligations. Working Capital Management
  • 46 SAAB MARFIN MBACurrent Ratio at IFFCO is always greater than 2 in all five years for whichdata has been analyzed indicating that IFFCO never really face a majorproblem in meeting its short-term liabilities. 2. Liquid ratio or Acid-test ratio or Quick ratio Quick Ratio Current Assets - Inventories = Current Liabilities Current Quick Current Assets Inventories Assets Year Liabilities Quick Ratio (in (in Crores) (in (in Crores) Crores) Crores)2004-05 2603.98 931.50 1672.48 1104.84 1.5142005-06 4748.98 1519.64 3229.34 1361.58 2.3722006-07 6081.28 2283.94 3797.34 1201.23 3.1612007-08 5775.74 1577.10 4198.64 1371.57 3.0612008-09 7672.99 1731.36 5941.63 3182.89 1.867Analysis Working Capital Management
  • 47 SAAB MARFIN MBAPosition of Liquid ratio is very good. The Quick Ratio of 1:1 is consideredto be satisfactory. This is so because if the quick assets are equal to thecurrent liabilities then the company may be able to meet its entireshort-term obligations pretty conveniently.The quick ratio of the company is above 1 for all the five years. The quickratio was 3.161 and 3.061 during the year 2006-07 and 2007-08respectively. This is due to large amount of inventory at IFFCO during thatperiod. However, the reason for this is the purchase of Paradeep productionplant during that period. 3. Cash to current assets ratio Cash to Cash Current = X 100 Asset Ratio Current Assets Cash Current Assets Cash to Current Year (in Crores) (in Crores) 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 Working Capital Management
  • 48 SAAB MARFIN MBAAnalysisThe Cash to Current Assets Ratio indicates what percentage of current assetsis comprised of cash at hand and cash at bank.Upon analyzing the data of the past 5 years for IFFCO it was observed thatthe 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 itis 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 thefunds of the organization and there is not much of idle cash with theorganization. 4. Sales to current assets ratio Sales to Sales Current Asset = Ratio Current Assets Sales Current Assets Sales to Current Year (in Crores) (in Crores) 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 Working Capital Management
  • 49 SAAB MARFIN MBAAnalysisThe Sales to Current Assets Ratio basically measures how well a company ismaking use of its assets in generating sales. An increasing sale to currentassets ratio is a POSITIVE SIGN as it indicates that the company has a healthyproduction scenario because of which most of inventory is being convertedinto sales for the company.IFFCO has shown a decrease in its sales to current assets ratio from2004-05 to 2006-07 after which it is constantly increasing which impliesthat the company is doing well and inventory is not being held up at anystage in the production process. 5. Working capital turnover ratio Working Capital = Current Assets - Current Liabilities Working Sales Capital = Turnover Average Working Capital Ratio Sales Working Capital Working Capital Year (in Crores) (in Crores) Turnover Ratio Working Capital Management
  • 50 SAAB MARFIN MBA 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 7.406AnalysisIFFCO 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 WorkingCapital. The company has been able to gain more Net Sales with the smalleramount of Working Capital in 2008-09 as compared to that in 2007-08. Theworking capital turnover had been decreasing from 4.860 in the year2004-05 to 2.499 in 2006-07 but it increasing since then to 7.406 in theyear 2008-09. 6. Sales to working capital ratio Working Capital = Current Assets - Current Liabilities Sales to Sales Working = Capital Ratio Average Working Capital Working Capital Management
  • 51 SAAB MARFIN MBA Sales Working Capital Sales to Working Year (in Crores) (in Crores) 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 7.406AnalysisThe Sales to Working Capital ratio measures how well the companys workingcapital is being used to generate sales. Working Capital represents themajor items typically closely tied to sales, and each item will directly affectthis ratio. Increasing Sales to Working Capital ratio is usually a positive sign,indicating the company is more able to use its working capital to generatesales.The sales to working capital ratio has been increasing from 2007-08 forIFFCO 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 thepassing years. The decrease of the ratio in the previous years was due to theincrease in inventory holding which was required for the Paradeep production plant.Profitability Ratios 1. Return on Assets Return on Assets = Profit After Tax Working Capital Management
  • 52 SAAB MARFIN MBA (ROA) Average Total Assets Profit After Average Total Year Tax (in Assets ROA Crores) (in crores) 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 0.025AnalysisROA is an indicator of how profitable a company is relative to its totalassets. The ROA figure gives investors an idea of how effectively thecompany is converting the money it has to invest into net income. Thehigher the ROA number, the better, because the company is earning moremoney on less investment.At IFFCO, the ROA is increasing from the year 2006-07 which is good forthe company. Earlier it was decreasing as there was increase in the assetsdue to purchase of the production plants. 2. Return on Equity Return on Profit After Tax = Equity (ROE) Average Equity Working Capital Management
  • 53 SAAB MARFIN MBA Profit After Tax Average Equity Year ROE (in Crores) (in crores) 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 0.094AnalysisReturn on Equity measures the rate of return on the ownership interest ofthe common stock owners. It measures a firms efficiency at generatingprofits from every unit of shareholders equity. ROE shows how well acompany uses investment funds to generate earnings growth.From the data, IFFCO ROE had always been good. There was a decrease inthe year 2006-07 due to the purchase of Paradeep plant which increased thepurchases of the organization. Working Capital Management
  • 54 SAAB MARFIN MBA 3. Return on Capital Employed Return on Profit Before Tax Capital = Employed Average Capital Employed (ROCE) Average Capital Profit Before Tax Year Employed ROCE (in Crores) (in crores) 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 0.0312AnalysisROCE is used to prove the value the business gains from its assets andliabilities. It basically can be used to show how much a business is gainingfor its assets, or how much it is losing for its liabilities. At IFFCO, ROCE hadshown variable changes. This is due to the variable increments in thecapital employed (majorly the loan funds) as compared to the profit beforetax. Working Capital Management
  • 55 SAAB MARFIN MBA 4. Net Profit Margin Net Profit Profit After Tax = Margin Sales Profit After Tax Sales Year Net Profit Margin (in Crores) (in Crores) 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 0.011AnalysisNet profit margin ratio establishes a relationship between net profit andsales and indicates management’s efficiency in manufacturing, administeringand selling the products. This ratio is the overall measure of the firm’s abilityto turn each rupee sales into net profit.From the data, IFFCO have a variable net profit margin. The sales turnoverdepend upon the element of subsidy which is decided by the governmentfrom time - to - time depending on the condition of international market.During the year 2008-09, the component of subsidy increased tremendouslydue to high international fertilizer price. Looking at the turnover of 2008-09, Working Capital Management
  • 56 SAAB MARFIN MBAthe subsidy amounted to Rs. 25545.60 crores vis-à-vis to subsidy amountedto Rs. 6194.35 crores for the year 2007-08.Loans and Advances to Current Assets Loans and Loans and Advances to = Advances X 100 Current Assets Current Assets Ratio Loans and Loans and Current Assets Advances to Year Advances (in (in Crores) Current Assets Crores) 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 71.221AnalysisAs 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 marginaldecrease in the year 2006-07) which is very Good for IFFCO. The ratio wasaround 44.116% in 2004-05 which had increased to 71.221% in 2008-09. Working Capital Management
  • 57 SAAB MARFIN MBALoans and Advances to Working Capital Loans and Loans and Advances to Advances = X 100 Working Capital Working Capital Ratio Loans and Loans and Working Capital Advances to Year Advances (in (in Crores) Working Capital Crores) 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 4490.10 121.707Analysis Working Capital Management
  • 58 SAAB MARFIN MBAThis ratio shows how significant Loans & Advances Are to Working Capitaland that Loans & Advances plays an important role in working capitalmanagement of IFFCO. This ratio shows that the company has more cash inhand and can utilize these funds as per the company requirement.At IFFCO, this ratio has always been increasing which is good for theorganization. This means that company is having enough cash and utilizingit effectively.Working Capital Position Working Capital Current Assets - Current = Liabilities Current Current Assets Working Capital Year Liabilities (in Crores) (in Crores) (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 4490.10Analysis Working Capital Management
  • 59 SAAB MARFIN MBAWorking Capital Position indicates changes in Current Assets and CurrentLiabilities over the study period and also during a particular year. Workingcapital position shows operational efficiency & proper utilization of shortterm resources in an organization.The trend of working capital with respect to Current Assets and CurrentLiabilities for IFFCO is increasing. This shows a GOOD GROWTH of thecompany. The Working Capital is managed properly & efficiently by theorganization. However, there was decrease in the year 2007-08 due todecrease in the level of inventory.Comparison with some competitors in the Industry Fertilizers Coromandel National and Chambal IFFCO International Fertilizers Chemicals Fertilizers TravancoreNet Worth 3958.87 1127.14 1470.70 647.94 1234.35Sales Turnover 32933.30 9374.98 5127.10 706.89 4595.53Net Profit 360.01 496.38 97.46 42.95 230.56Inventory 1731.36 1347.51 348.68 412.60 316.82Total Current Assets 7672.99 3726.38 1525.51 823.53 1566.28Total Current Liability 3182.89 1755.02 886.65 392.21 1288.58Working Capital 4490.10 1971.36 638.86 431.32 277.70Total Assets 17303.77 2926.50 1851.19 1457.77 3982.04Working Capital to SalesTurnover 0.136 0.210 0.125 0.610 0.060Inventory to WorkingCapital 0.386 0.684 0.546 0.957 1.141Working Capital Ratio 2.41 2.12 1.72 2.10 1.22 Working Capital Management
  • 60 SAAB MARFIN MBAWorking CapitalTurnover 7.41 6.21 7.06 1.97 9.63Inventory to CurrentAssets 0.226 0.362 0.229 0.501 0.202Inventory to Sales 0.053 0.144 0.068 0.584 0.069Net Profit Margin 0.011 0.053 0.019 0.061 0.050FindingsAfter the analysis of the components of current assets & currentliabilities 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 Management
  • 61 SAAB MARFIN MBA 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 Working Capital Management
  • 62 SAAB MARFIN MBAWorking capital is one of the most important aspects of operationalefficiency of business. Working Capital plays a very important role in thefunctioning of any organization. Both the current assets and currentliabilities are very much influencing factors on the working capital of anorganization.After the discussion and analysis of the financial position of IFFCO Ltd., it isclear that the working capital of IFFCO is in sound position. Working capitalis not measurable by only current assets & current liabilities but thereare some other factors also that have an influence on the working capital.In current assets, there are two most important factors, Debtors andInventory that affect working capital. In IFFCO Ltd., Inventory and Debtorsare efficiently managed to strengthen the position of the organization bothin short term and long terms.After analyzing and interpreting the financial data of INDIAN FARMERSFERTILIZER COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis,the following suggestions were given to the organization for furtherbetterment & 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. Working Capital Management
  • 63 SAAB MARFIN MBAAs the sales turnover majorly consists of subsidiary, the company shallalso depend less on subsidy which is dependent on the annual budgetfixed by the government of India, i.e., when the total outflow of anyfinancial year is more than the budgeted subsidiary, themanufacturers/ importers have to wait for additional budget or theirsubsidiary get realized in the next financial year.As the Government of India wants the fertilizers to be supplied atminimum price, they are compensating manufacturers/ importers bymeans of subsidy. The government should device a method wherebythe price of fertilizers should increase every year to some extent. Thiswill reduce the subsidy burden on the government and companies willbe able to realize cash against their sales. Working Capital Management
  • 64 SAAB MARFIN MBACHAPTER 2Cash Management Working Capital Management
  • 65 SAAB MARFIN MBA CASH MANAGEMENT AT IFFCOIFFCO, a large co-operative society, has been generating large amount ofprofits over the years from the date of its commercial production. Its internalsources generation has been adequate enough to finance the working capitalneed besides its other long term commitments though to meet its workingcapital requirements. The main objective of Cash Management of IFFCO isnot different from the basic objective of cash. Figure: Cash flow at the OrganizationThe cash is collected by Marketing Central Office (Mkco) and is transferred tothe Head Office (HO). From the Head Office, the cash is provided to theplants depending on their requirements. The plants produce fertilizers andthe sale of products provides cash which is collected by Marketing CentralOffice. Sales are often termed as Release Order (RO).The fertilizers are sold to corporate societies and most of the payments aremade on prepaid basis. The payments are done through the means ofdemand drafts/ pay orders. The system of payment through cheques is not Working Capital Management
  • 66 SAAB MARFIN MBAused 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 largefederations. The Field Representatives (FR) takes Demand Drafts/ pay ordersfrom 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 flowBankers 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. Working Capital Management
  • 67 SAAB MARFIN MBA Punjab National Bank Axis Bank BNP ParibasImplementation of Cash Management at IFFCOIn order to effectively manage its cash, so as to sustain liquidity andprofitability, IFFCO has chosen to go for a Centralized Cash ManagementSystem. The Centralized Cash Management System means that the cash ofIFFCO is basically managed from the Head Office situated at New Delhi. Inorder to smoothly manage the cash, IFFCO takes the service of IOB, its mainbank from the consortium of bank. IOB plays the part of maintaining thedaily fund position of IFFCO i.e. on a daily basis the cash inflows andoutflows are recorded in computer and are daily analyzed by the cash andbank section of IFFCO, which also carries out its daily position on the fundstatement book.This Centralized Cash Management at IFFCO also helps in to check the idlecash, which would otherwise have a cost structure attaches to it. Throughthis system, the cash is not allowed to remain idle at various branches and isused by the co-operative giant to pay its short term liabilities, which mayarise. This system of centralized cash management gives an addedadvantage to IFFCO to effectively implement a policy of cash flow timelinemanagement. IFFCO maintains a strict vigil on the movement of funds forcollection and payments both. Although manufacturing units areindependent enough to issue cheques, but they still have to inform the headoffice. It also prepares the budgets and forecasts and matches the actualwith that, so as to have a proper control over transaction. Working Capital Management
  • 68 SAAB MARFIN MBAA very efficient Management Information System has been introduced atIFFCO which facilitates: Forecasting of cash flows on monthly basis or weekly or daily basis, Helps in cash planningA Consolidated Statement is prepared at the corporate office which formsthe main basis for planning of funds flow for the continuing month.Sales Procedure in IFFCOIn 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 DelhiOffice i.e. the funds are ultimately reaching Delhi for utilization, for IFFCO’smanufacturing units. The funds that are sent to Delhi are then again Working Capital Management
  • 69 SAAB MARFIN MBAredistributed to the manufacturing units and all the other offices, farmerservice centers, cooperative societies etc. for meeting their expenses.Collection ProcedureIn earlier times, Field Representatives takes the Demand Drafts/ pay ordersand deposits into Area Office. From Area Office it goes to State Office. FromState 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, thetransaction cost was high and there was a loss of interest on the paymentsreceived.After the implementation of CMS, bank services are hired for bettermanagement of cash. The Field Representatives collects the Demand Draftsfrom the societies. The bank agent collects these Demand Drafts anddeposits them into the State offices, either in person or through courier.From State Offices, the drafts get deposited into the banks through bankagents only. The bank then transfers the money to the Head Office. Thisprocess takes one day or a maximum of two days. Thus, it saves at least fourdays and cash of the organization. There are different banks for differentstate offices. For the service provided by the banks, different banks chargethe 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 theyear 2008-09 was approximately Rs. 5250 crores. As there is more than onebank in the CMS, an approximate interest rate of 8 % p.a. is taken forcalculations. Also, a difference of four days is taken. On calculating, the Working Capital Management
  • 70 SAAB MARFIN MBAinterest comes out to be Rs. 4.6 crores. This means that IFFCO saves aroundRs. 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 whichbank is under contractual obligation to make payment at the designatedbranch on the stipulated date as agreed in the agreement. Under this system,the banks pick up the Demand Drafts from IFFCO’s designated locations andpool the same with them. A High Value Demand Draft of the consolidatedamount is deposited by the collecting bankers in IFFCO’s central account forwhich IFFCO receives the credit the same day. Thus, the amounts which arecollected 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 cashresources. It serves as the means to keep an organization functioning bymaking the best use of cash or liquid resources of the organization. At thesame time, the organization has the responsibility to use timely, reliable andcomprehensive financial information systems. Cash Management helps theorganization 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. Working Capital Management
  • 71 SAAB MARFIN MBA 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 PICK UP SERVICE PAY OUTNAME OF BANK STATE LOCATION CHARGES DAYHSBC Punjab Chandigarh NIL Day 1 Haryana Chandigarh NIL Day 1 Rajasthan Jaipur NIL Day 1 West Bengal Kolkata NIL Day 0 (HV) Working Capital Management
  • 72 SAAB MARFIN MBA 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 2BNP PARIBAS Nasik 0.15/1000 Day 2 Kholapur 0.15/1000 Day 2 Other Districts 0.15/1000 Day 2StandardChartered Assam Assam NIL Day 1Bank 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 1HDFC 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 2ICICI Bank Uttar Pradesh Lucknow NIL Day 0 (HV) Day 1 All 13 Area Offices 0.02/1000 Day 1IOB Gujrat Ahemdabad NIL Day 1 Chhatisgarh Raipur NIL Day 1 MP Bhopal NIL Day 1SBI Uttar Pradesh FSC NIL Day 1Axis Bank Uttar Pradesh 38 Districts NIL Day 1 Working Capital Management
  • 73 SAAB MARFIN MBAHV: High ValueFSC: Farmers Service CentreCash Management Services (CMS) Agreement through the HSBCBankIntroduction of Cash Management Services (CMS)IFFCO is availing the cash management services of m/s HSBC bank forremittances of sale proceeds in the states of Punjab, Haryana, Rajasthan,West Bengal and Maharashtra. Collection services agreement was made on28th December’2001 between IFFCO and HSBC. The bank will be providing itsservices known as Collection Services in the manner and subject to termsand 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. Working Capital Management
  • 74 SAAB MARFIN MBA 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) reportMIS report contains the demand draft number, amount collected and thecheques deposit slip number. Marketing Central Office checks the amountcollected 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 Working Capital Management
  • 75 SAAB MARFIN MBAHSBC has a large pool account which has a dummy account of IFFCO. Thebank takes one day for realization of money and deposits it directly in theaccount of Head Office at New Delhi. The bank provides details to MarketingCentral Office (Mkco) and other offices (SO, AO, FR) through ManagementInformation 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 BankThe collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFCBank and Axis Bank are deposited into the centralized account of IOBwhereas the collection of HSBC bank is deposited into centralized account ofSBI. SBI manages the collection of 5 states only out of total of 20 states. As Working Capital Management
  • 76 SAAB MARFIN MBAthe money comes into these banks, it is transferred to the Head Office by theevening. Through Head Office, the money is distributed into variousdepartments as per the requirements.For Collecting PaymentCurrent 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.ReportingThe month wise projections of collections for the year are made in advance.Daily reports of collection against sales proceeds are made and aresubmitted in the higher departments for comparison with the projections.Disbursement of Funds Working Capital Management
  • 77 SAAB MARFIN MBAIn addition to CMS, IFFCO has an innovative disbursement scheme known asAnywhere Banking Overdraft Account facility with IDBI and HDFC Bank.Under this scheme, the balances of all the state offices maintain aretransferred to the Central Account having overdraft facilities whereby thebalances with the state offices remain zero.Anywhere banking (ANB) FacilityANB facility offers IFFCO the flexibility of making at par payments acrossmultiple locations by using a single current account maintained at Delhi.All the payments are made through IDBI and HDFC banks. IDBI is used in 17states 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 overdraftamount is being paid, interest is debited by the bank to Head Office throughMarketing Central Office.For all transactions within the local region (within the New Delhi offices), IOBis used. It also transacts all the local expenses of the Marketing CentralOffice.All payments are made through cheques only. But, all employee paymentsand 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. Working Capital Management
  • 78 SAAB MARFIN MBAObservations 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 As at 31.03.2009 31.03.20087.95% Fertilizer Companies GOI SpecialBonds, 2026 646.167.00% Fertilizer Companies GOI SpecialBonds, 2022 2900.976.20% Fertilizer Companies GOI SpecialBonds, 2022 2106.336.65% Fertilizer Companies GOI SpecialBonds, 2023 1631.65 TOTAL 6638.95 646.16Since the GOI was short of funds, they have issued the above bonds whichhave 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. Working Capital Management
  • 79 SAAB MARFIN MBA 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 thefarmers, the government is allowing subsidy to the manufacturers. Thisamount is notified by the government for every month on the basis of theraw material prices of fertilizer. Working Capital Management
  • 80 SAAB MARFIN MBA Central Subsidy on Fertilizers Year Urea Decontrolled Total Subsidy P&K on all Imported Indigenous Total Fertilizers Fertilizers2004-05 494 10243 10737 5142 158792005-06 1211 10653 11864 6596 184602006-07 3274 12650 15924 10298 262222007-08 6606 16450 23056 16934 399902008-09 10981 19517 30498 65351 958492009-10 5948 9780 15728 34252 49980* *budgetedIn the year 2008-09, there was a large increase in the subsidy. This was dueto the increase in the prices of the imported raw materials and finishedgoods (for resale). The price for these goods is usually US$370 per metrictonne 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 Working Capital Management
  • 81 SAAB MARFIN MBA 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. Working Capital Management
  • 82 SAAB MARFIN MBA 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 Working Capital Management
  • 83 SAAB MARFIN MBA 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 EditionReports Annual reports of IFFCO Agreement files of IFFCOWebsites and Internet www.iffco.nic.in www.wikipedia.com www.investopedia.com www.fert.nic.in www.faidelhi.org www.moneycontrol.com Working Capital Management
  • 84 SAAB MARFIN MBAAppendix A: Working Capital ManagementWorking Capital Management is the interaction between current assets andcurrent liabilities. The current assets refer to those assets, which in ordinarycourse of business can be, or will be turned into cash within one yearwithout undergoing a diminution in value and without disrupting theoperation of the firm.Decisions relating to working capital and short term financing are referred toas Working Capital Management. This involves managing the relationshipbetween a firms short-term assets and its short-term liabilities. The majorthrust is on managing the current assets because a current liability arises incontext of current assets.The goal of working capital management is to ensure that a firm is able tocontinue its operations and that it has sufficient ability to satisfy bothmaturing short-term debt and upcoming operational expenses. Themanagement 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 thesense 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. Working Capital Management
  • 85 SAAB MARFIN MBAIn examining the management of current assets, answers will be sought tothe 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 ofliquidity if its assets cannot readily be converted into cash. Positive workingcapital is required to ensure that a firm is able to continue its operations andthat it has sufficient funds to satisfy both maturing short-term debt andupcoming 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 andcomposition of working capital and whether such an investment hasincreased or declined over a period of time.Financial manager now a day is responsible for shaping the fortunes of theenterprise, and is involved in the most vital decision of the allocation ofcapital. There is a need to have a broader and farsighted outlook and mustensure that the funds of the enterprise are utilized in the most efficientmanner .One of the most important task of financial manager is to select anassortment of appropriate sources of finance for the current assets. Normallythe excess of current assets over current liabilities should be financed by Working Capital Management
  • 86 SAAB MARFIN MBAlong-term sources. Precisely it is not possible to find out which long termsources has been used to finance current assets, but it can be examined asto what proportion of current assets has been financed by long term funds.Therefore, an attempt has been made in this regard.In working capital analysis the direction of change over a period of time is ofcrucial importance. Not only that, analysis of working capital trends providesa base to judge whether the practice and prevailing policy of themanagement with regards to the working capital is good enough or animprovement is to be made in managing the working capital funds. Working Capital Management
  • 87 SAAB MARFIN MBAHence in this study, an attempt is made about the trends of the workingcapital management of selected enterprise. In addition, to have higherprofitability the firms may sacrifice solvency and maintained a relatively lowof current assets. When the firms do so their profitability will improve andless are tied up in the idle current assets, but their solvency will bethreatened. Hence, an attempt is made to study the association ofprofitability with the working capital ratios. With this view, an effort has beenmade in this project report to make an in-depth study of IFFCO in respect ofits performance and its working capital management.Types of CapitalEvery business needs funds for two purposes for its establishment to carryout its day-to-day operations. Capital required for business can be classifiedunder two main categories: 1) Fixed Capital 2) Working CapitalFixed CapitalLong term funds are required to create production facilities throughpurchase of fixed assets such as plant & machinery, land, buildings,furniture, etc. investments in these assets represents that part of firm’scapital, which is blocked on a permanent or fixed basis and is called fixedcapital.Working CapitalFunds are also needed for short-term purpose for the purchase of rawmaterials, payment of wages and other day-to-day expenses, etc. Thesefunds are known as Working Capital. There are two concepts of workingcapital: 1. Gross working Capital 2. Net working CapitalGross Working Capital Working Capital Management
  • 88 SAAB MARFIN MBAGross working capital refers to the firm’s investment in current assets.Current assets are the assets which can be converted into cash within anaccounting year or within an operating cycle. The items comprising ofcurrent assets are: Cash Marketable securities Accounts receivable Notes or bills receivable Prepaid expenses Merchandise inventory Manufacturing inventoryNet Working CapitalNet Working Capital refers to the difference between the current assets andcurrent liabilities. Current liabilities are those claims of outsiders which areexpected to mature for payment within an accounting year or the operatingcycle of the business. The items comprising of current liabilities are: Accounts Payable Acceptance Promissory Notes Payable Accrued Liabilities Estimated Liabilities or Provisions Bank Overdraft Contingent LiabilitiesNet working capital can be positive or negative. A positive net workingcapital will arise when current assets exceed current liabilities. A negativenet working capital occurs when current liabilities are in excess of currentassets. If current assets are less than current liabilities, an entity has aworking capital deficiency, also called a working capital deficit. WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES Working Capital Management
  • 89 SAAB MARFIN MBAAn increase in working capital indicates that the business has eitherincreased current assets (that is received cash, or other current assets) orhas decreased current liabilities.Types of Working CapitalWorking Capital can be further divided into two types namely: 1) Permanent or fixed working capital 2) Variable or temporary working capitalPermanent or Fixed working capitalThere is always a minimum level of current assets which is continuouslyrequired by a firm to carry on its business operations. Permanent or Fixedworking capital is the minimum level of current asset. It is permanent in thesame way as the firms fixed assets are. Depending upon the changes inproduction and sales, the need for working capital, over and abovepermanent working capital will fluctuate. For example: every firm has tomaintain a minimum level of raw material, work-in-progress, finished goodsand cash balance. As the business grows, the requirements of permanentworking capital also increase due to the increases in current assets.Temporary or Variable Working CapitalVariable working capital is the extra working capital needed to support thechanging production and sales activities of the firm. Both kinds of workingcapital – permanent and temporary – are necessary to facilitate productionand sale through the operating cycle. But the firm to meet liquidityrequirements that will last only temporarily creates a temporary workingcapital. Variable working capital can be further classified as seasonalworking capital and special working capital. Most of the enterprises have toprovide additional working capital to meet the seasonal and special needs.The capital required to meet the seasonal needs of the enterprise is calledseasonal working capital. Special working capital is that part which isrequired to meet the special exigencies such as launching of extensivemarketing campaigns for conducting research etc. Working Capital Management
  • 90 SAAB MARFIN MBATemporary working capital differs from Permanent working capital in thesense that it is required for short periods and cannot be permanentlyemployed gainfully in the business. Temporary Working Capital Working Capital (in Rs.) Permanent Working Capital TimeGood Management of Working Capital Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies are available for managing specific working capital items. The areas of working capital management are as follows: Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment Working Capital Management
  • 91 SAAB MARFIN MBA in raw materials - and minimizes reordering costs - and hence increases cash flow Debtor management: Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".Objectives of Working Capital Management Liquidity vs. Profitability The basic objective of working capital is to provide adequate support for the smooth functioning of the normal business operations of the company. The quantum of investment in current assets has to be made in such a manner that it not only meets the needs of the forecasted sales but also provides a built in cushion in form of safety stocks to meet unforeseen contingencies. Based on this the companies can follow any of the two approaches or even a combination of both. A company opting for high investment in current assets follows the Conservative Approach i.e. subjected to lower degree of risk. This approach imparts greater LIQUIDITY to the company. The other approach is the Aggressive Approach in which the firm goes for fewer investments in current assets, thus leaving more amounts of funds for investment in more profitable ventures. This approach imparts greater PROFITABILITY to the company. An ideal policy would be the moderate policy, which strikes a balance between the two approaches. Choosing the pattern of financing Working Capital Management
  • 92 SAAB MARFIN MBA The management of financing the chosen level of current assets once again takes into consideration the attitude of management towards risk.Determinants of Working CapitalThe working capital requirements of a concern depend upon a large numberof factors. It is not possible to rank them because all such factors are ofdifferent importance and the influence of individual factors changes for afirm over time. However the following are the factors generally influencingthe working capital requirements: Nature or character of business The working capital requirements of a firm basically depend upon the nature of the business. Public undertakings like electricity, water supply, and railways need very limited working capital because they offer cash sales only and supply services. Trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets, as they need large amount of working capital. The manufacturing undertakings also require sizable working capital along with fixed investments. Size of business The working capital requirements of a concern are directly influenced by the size of the business. Greater the size of a business unit, generally larger will be the requirements of working capital. Manufacturing process In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Larger the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw material and other supplies have to be carried far a longer period in the process with progressive increment of labor and service costs the finished product is finally obtained. Working Capital Management
  • 93 SAAB MARFIN MBA Seasonal variations In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure the uninterrupted flow and process them during the entire year. A huge amount is thus blocked in the form of material inventories during such seasons, which gives rise to more working capital requirements. Rate of stock turnover There is a high degree of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having low rate of turnover. Firm’s credit policy A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand the concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital.Advantages of Adequate Working CapitalThe main advantages of maintaining adequate amount of working capitalare as follows: Solvency of the business Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Goodwill Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Quick and regular return on investments Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure Working Capital Management
  • 94 SAAB MARFIN MBAto plough back profits. This gains the confidence of its investors andcreates a favorable market to raise additional funds in the future. Working Capital Management
  • 95 SAAB MARFIN MBA Ability to face crises Adequate working capital enables a concern to face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital. Regular payments of salaries, wages and other day-to-day commitments A company which has ample working capital can make regular payments of salaries, wages and other day-to-day commitments which raise the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. Easy loans A concern having adequate working capital, high solvency and good credit standing can arrange loans from the banks and others on easy and favorable terms. Regular supply of raw materials Sufficient working capital ensures regular supply of raw materials and continuous production.Balanced Working CapitalEvery business concern should have adequate working capital to run itsbusiness operations. It should have neither redundant for excess workingcapital nor inadequate or shortage of working capital. Both Excess, as wellas short Working capital positions is bad for any business.Disadvantages of Redundant or Excessive Working Capital Excessive working capital means idle funds, which earn no profit for the business, and hence the business cannot earn proper rate of return on investments. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more changes of theft, losses and waste. Excessive working capital implies excessive debtors and defective credit policy, which may cause higher incidents of bad debts. Working Capital Management
  • 96 SAAB MARFIN MBA When there is excessive working capital, relations with the bank and other financial institutions may not be maintained. It may result into overall inefficiency in the organization and also due to low rate of return on investments the value of shares may also falls.Dangers of Inadequate Working Capital A concern, which has inadequate working capital, can pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credits facilities. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. The firm cannot pay day-to-day expenses of its operations and creates inefficiencies, increase costs and reduces the profits if the business. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. It cannot buy its requirements in bulk and cannot avail of discounts, etc. and also the rate of return on investments also falls with the falls with the shortage of working capital.Issues in Working CapitalThe financial manager must determine levels and composition of currentassets. He must see that right sources are tapped to finance current assets,and that current liabilities are paid in time.There are many aspects of working capital management which make it animportant function of the financial manager: Time Working capital management requires much of the financial manager’s time. Investment Working Capital represents a large portion of the total investment in assets. Critically working Capital management has great significance for all firms but it is very critical for small firms. Working Capital Management
  • 97 SAAB MARFIN MBA Growth The need for working capital is directly related to the firm’s growth.It is necessary for a financial manager to manage working capital in the bestpossible way to get the maximum benefit.Financial manager should pay special attention to the management ofcurrent assets on a continuing basis. Actions should be taken to curtailunnecessary investment in current assets.There is a direct relationship between a firm’s growth and its working capitalneeds. As sales grow, the firm needs to invest more in inventories anddebtors. These needs become very frequent and fast when sales growcontinuously. The financial manager should be aware of such needs andfinance them quickly. Continuous growth in sales may also require additionalinvestment in fixed assets.The finance manager should pay particular attention to levels of currentassets and the financing of current assets.Policies for Financing Current AssetsA firm can adopt different financing policies vis-à-vis current assets. Threetypes of financing may be distinguished: Long-term financing The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserve and surplus (retained earnings). Short-term financing The short-term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short-term finance in the money market. Short-term finances include working capital funds from banks, public deposits, commercial paper, factoring of receivable etc. Spontaneous financing Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of business. Trade (suppliers) credit and outstanding expenses are examples of spontaneous financing. There is no explicit cost of spontaneous financing. A firm is expected to utilize these sources of finances to the Working Capital Management
  • 98 SAAB MARFIN MBA fullest extent. The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long-term and short-term sources of finances. Depending on the mix of short-term and long-term financing, the approach followed by a company may be referred to as: Matching approach Conservative approach Aggressive approachApproaches to Working Capital ManagementThe objective of working capital management is to maintain the optimumbalance of each of the working capital components. This includes makingsure that funds are held as cash in bank deposits for as long as and in thelargest amounts possible, thereby maximizing the interest earned. However,such cash may more appropriately be "invested" in other assets or inreducing other liabilities.Working Capital Management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management The individual components of working capital can be effectively managed by using various techniques and strategiesWhen considering these techniques and strategies, departments need torecognize that each department has a unique mix of working capitalcomponents. The emphasis that needs to be placed on each componentvaries according to department. For example, some departments havesignificant inventory levels; others have little if any inventory.Furthermore, working capital management is not an end in itself. It is anintegral part of the departments overall management. The needs of efficientworking capital management must be considered in relation to other aspectsof the departments financial and non-financial performance.The main purposes of Working Capital Ratio Analysis are: Working Capital Management
  • 99 SAAB MARFIN MBA To indicate working capital management performance; and To assist in identifying areas requiring closer managementThree key points need to be taken into account when analyzing financialratios. These key points are as follows: The results are based on highly summarized information. Consequently, situations, which require control, might not be apparent, or situations, which do not warrant significant effort, might be unnecessarily highlighted. Different departments face very different situations. Comparisons between them, or with global “ideal” ratio values, can be misleading. Ratio analysis is somewhat one-sided; favourable results mean little, whereas unfavourable results are usually significant.However, financial ratio analysis is valuable because it raises questionsand indicates directions for more detailed investigation.Sources of CashThe various sources of cash that provide the money to fund the workingcapital include the following: Existing cash reserves Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long term loans Profit or net incomeInventory ManagementInventories constitute the most significant part of current assets. Inventoriesare stock of the product, a company is manufacturing for sale andcomponents to make that product. The various forms of inventory in afertilizer manufacturing company are: Working Capital Management
  • 100 SAAB MARFIN MBA Raw Materials are those basic inputs that are converted into the finished products through the process of manufacturing. Work-In-Progress inventories are semi-manufactured products. Finished Goods inventories are completely manufactured products. Stores & Spares, loose tools, chemical catalysts, packing & Construction materialsObjectives of Inventory ManagementThe problems faced by an organization in the context of inventorymanagement are: To maintain a large size of inventory for efficient and smooth production & sales operation To maintain minimum investment in inventories to maximize profitability To ensure continuous supply of materials, spares & finished goods. To avoid both overstocking & under stocking of inventory To eliminate duplicate stock orders. This is possible with the help of a centralized purchasing system. To design proper organization for inventory management Working Capital Management
  • 101 SAAB MARFIN MBABoth Excessive & Inadequate Inventories are not desirable. The objective ofInventory Management is to determine & maintain the optimum level ofinventory investment. The optimum level of inventory will lie between twodanger points of excessive & inadequate inventories.Excessive stocks can place a heavy burden on the cash resources of abusiness.Insufficient stocks can result in lost sales, delays for customers etc.The key is to know how quickly the stocks are moving or how long each itemof stock sits on shelves before being sold. Average stock holding periods areinfluenced by the nature of the business.The key issue for a business is to identify the fast and slow stock moverswith the objective of establishing optimum stock levels for each category andthereby minimize the cash tied up in the stocks.Factors to be considered when determining the optimum stock levels include: What are the projected sales of each product? How widely available are each component, raw materials, etc.? How long does it take for delivery by the suppliers? Can one remove the slow movers from one’s product range without compromising on the best- sellers?For better stock control, following measures can be adopted: Review the effectiveness of existing purchasing & inventory systems. Know the stock turnover for all major items of inventory. Apply tight controls to the significant few items & supply control for the remaining. Sell off outdated or slow moving merchandise. Consider the idea of outsourcing the manufacturing of the product to another manufacturer. Review security procedures to minimize losses through deterioration, pilferage, wastage & damages. Working Capital Management
  • 102 SAAB MARFIN MBA To facilitate furnishing of data for short-term & long-term planning & control of inventoryReceivable ManagementAccounts Receivable refers to the amount owed by the debtors to thebusiness. They are usually created because of trade credit that is given to thecustomers of the business.These receivables have three characteristics: It involves an element of risk, which should be carefully analyzed. It is based on economic value It implies futurity.To maintain a proper flow of funds in the business in order to make timelypayments to the creditors, to buy raw materials & to run the day-to-dayactivities of the business, it is essential that the debtors make theirpayments on time. The interval between the date of sale & the date ofpayment has to be financed out of the working capital. Thus, trade debtorsrepresent investment.Objectives of Receivable ManagementThe objective of Receivable Management is to promote sales & profits untilthat point is reached where the returns that the company gets from fundingreceivables is less than the cost that the company has to incur in order tofund these receivables. However, to maintain these receivables thecompany has to incur certain costs such as: Additional fund requirements for the company – When a firm maintains receivables, some of its resources remain blocked in them so to finance the activities during that time gap the firm requires funds. Administrative Costs Collecting Costs Defaulting Costs Working Capital Management
  • 103 SAAB MARFIN MBAThe size of receivables or investment in Receivable Management isdetermined by the firm’s credit policy & level of sales. Receivablemanagement is the process of making the decision of selection of tradedebtors in which the funds could be invested or to whom money can begiven.Receivable management involves the careful consideration of thefollowing aspects: - Forming the credit policy Executing the credit policy Formulating & executing the collection policyThe Credit Policy is the policy followed by the company with respect to thecredit standards adopted, any incentive in the form of cash discount offered,and also the period over which the discount can be utilized by the customers& the collection effort made by the company. All these variables underlying acompany’s credit policy influence the volume of sales and hence the profitsof the company.Cash ManagementCash, the most liquid asset and also referred to as the life blood of abusiness enterprise and is of vital importance to the daily operations of thebusiness firms. Its efficient management is crucial to the solvency of thebusiness because cash is the focal point of the fund flows in a business. If abusiness has no cash and no way of getting any cash, it will have to closedown.Cash Management is concerned with the managing of: Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash. Working Capital Management
  • 104 SAAB MARFIN MBACash Management refers to management of cash balance and the bankbalance and also short term deposits. The term cash may be used in twodifferent ways: 1) It may include currency, cheques, drafts, demand deposits held by the firm i.e. pure cash or generally accepted cash equivalents. 2) In a broader sense, it also includes near cash assets such as marketable securities and short term deposits with banks. For cash management purposes, the term cash is used in this broader sense i.e. it covers cash, cash equivalents and those assets which are immediately convertible to cash.Objectives of Cash ManagementThe cash management strategies are generally built around two goals: To provide cash needed to meet the obligations, and To minimize the idle cash held by the firmThe risk return trade-off of any firm can be reduced to two prime objectivesfor the firm’s Cash Management System: 1) Meeting the Cash Outflows: This will help the firm in avoiding the chance to default in meeting financial obligations otherwise the goodwill of the firm is adversely affected. Also this will further help in availing the opportunities of getting cash discounts by making early or prompt payments and meeting unexpected cash outflows without much problem. 2) Minimizing the Cash BalanceLoans and AdvancesLoans and Advances are one of the important factors of working capital. Incurrent assets loans and advances play a significant role. When we talk aboutthe working capital management it is necessary to consider Loans & Working Capital Management
  • 105 SAAB MARFIN MBAAdvances, as they are a major component of Current assets and along withthe equity of the company for a source of generating cash in theorganization.While analyzing the loans & advances position of IFFCO the following ratioshave to be calculated for better understanding i.e. Loans and advances to Current Assets ratio Loans and advances to Working capital ratioOperating CycleOperating Cycle is the times duration required to convert sales, after theconversion of resources into inventories, into cash. The operating cycle of amanufacturing company involves three phases: Acquisition of resources such as raw material, labour, power and fuel etc. Manufacture of the product which includes conversion of raw material into work-in-progress into finished goods. Sale of the product either for cash or on credit. Credit sales create account receivable for collection. Credit Sales Collection Purchases Inventory Period Accounts Receivable Period Accounts Working Capital Management
  • 106 SAAB MARFIN MBA Payable Period Cash Conversion Cycle Payments Operating CycleThe operating cycles are of two types: 1. Gross Operating Cycle 2. Net Operating Cycle or Cash Conversion CycleGross Operating CycleGross operating cycle is a tool which measures the total number of daysfrom the day the purchases are made or the stock arrives to the day all thecollections are made. Cash is said to be blocked till the collections have beencollected. So the sooner the cash is received from the consumers the betteris for the company as they get cash for further production. Gross OperatingCycle is given as follows: Days Inventory Operating cycle = Outstanding(DIO) + Days (OC) Sales Outstanding(DSO)Cash Conversion CycleThe cash conversion cycle (also referred to as CCC or the net operating cycle)is the analytical tool of choice for determining the investment quality of twocritical assets - inventory and accounts receivable. The CCC tells us the time(number of days) it takes to convert these two important assets into cash. Afast turnover rate of these assets is what creates real liquidity and is apositive indication of the quality and the efficient management of inventoryand receivables.The cash conversion cycle is comprised of three standard, so-called activityratios relating to the turnover of inventory, trade receivables and tradepayables. These components of the CCC can be expressed as a number oftimes per year or as a number of days. CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO) Working Capital Management
  • 107 SAAB MARFIN MBAThe cash conversion cycle (CCC) measures how fast a company can convertcash on hand into even more cash on hand. The CCC does this by followingthe cash as it is first converted into inventory and accounts payable (AP),through sales and accounts receivable (AR), and then back into cash.Generally, the lower this number is the better for the company.The components of CCC are calculated as follows: Days Inventory Outstanding (DIO) This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is the better. Days Inventory Average Inventory Outstanding = Cost of Goods sold (COGS) / (DIO) 365 Broadly, the smaller number of days, the more efficient a company - 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. If the number of days is high, that could mean that sales are poor and inventories are piling up in warehouses. If inventory days are increasing, that’s not necessarily a bad thing. Companies normally let inventories build up when they are introducing a new product in the market or ahead of a busy sales period. However, if you don’t foresee an obvious pickup in demand coming, the increase could mean that unsold goods will simply collecting dust in the stockroom. Days Sales Outstanding (DSO) This 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. Again, smaller is better. Days Sales Average Accounts = Outstanding Receivable Working Capital Management
  • 108 SAAB MARFIN MBA (DSO) Net Sales / 365 If a companys collection period is growing longer, it could mean problems ahead. The company may be letting customers stretch their credit in order to recognize greater top-line sales and that can spell trouble later on especially if customers face a cash crunch. Getting money right away is preferable to waiting for it - especially since some of what is owed may never get paid. The quicker a company gets its customers to make payments, the sooner it has cash to pay for salaries, merchandise and equipment, loans and, best of all, dividends and growth opportunities. Days Payables Outstanding (DPO) This involves the companys payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a longer DPO is better. Days Payable Average Accounts Payable Outstanding = Cost of Goods sold (DPO) (COGS) / 365Key RatiosThe ratios can be divided into following categories according to financialactivity or functions to be evaluated: Ratios related to Inventory Management Ratios related to Receivables Management Ratios related to Cash Management Profitability RatiosRatios related to Inventory Management 1. Inventory Turnover Ratio 2. Inventory to Working Capital Ratio 3. Inventory to Current Assets Ratio 4. Inventory to Sales Ratio Working Capital Management
  • 109 SAAB MARFIN MBA1. Inventory Turnover Ratio The inventory turnover measures that how well the company can manage to sell its inventory. Another way of saying is how efficiently the company turns inventory into sales. The purpose is to ensure the blocking of only required minimum funds in inventory. Importance of Inventory Turnover If the company can quickly sell its inventory, the inventory turnover will be higher. Conversely, if the company cannot sell its inventory well, then the inventory turnover will be low. One has to watch this figure closely – if the inventory ratio climbs too high, then the company may be keeping too little inventory. This could cause lost profits due to customer orders that had to wait until inventory arrived. Inventory Cost of Goods sold (COGS) Turnover = Average Inventory Ratio2. Inventory to Working Capital ratio The inventory to working capital ratio measures how well the company is able to generate cash using working capital at its current inventory level. This ratio shows the relationship between investments made in inventory & the total net investment in working capital. Inventory is an important part of working because of its direct impact on the profits of the organization. The value of inventory is susceptible to changing price levels, fluctuation in business activities, variation in consumer demand, obsolescence & other unpredictable factors that determine the market conditions. Therefore, working capital should be sufficient to provide a cover for the possible losses in inventory value. Importance of Inventory to Working Capital 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 Working Capital Management
  • 110 SAAB MARFIN MBA on Short-Term Liabilities and Accounts Payable. This is a great ratio to be used with several others to really pick apart the inner workings of a company. Inventory to Inventory = X 100 Working Capital Working Capital Ratio3. Inventory to Current Assets Ratio Inventory is one of the largest components of the current assets. The position of inventory indicates operational efficiency of organization. The inventory to current assets ratio measures how much percentage of current assets is formed by the inventories. This ratio is essential as inventories are the most illiquid of all current assets as sometimes it becomes difficult to convert inventory ( raw materials, work-in-progress and finished products ) into cash on a short notice. Importance of inventory to current assets 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 & it may be difficult to convert them into cash immediately. On the other hand, if the position of inventory is lower in current assets, it indicates higher operational efficiency of the organization. Normally, less than 50 % of current assets are treated as average position of inventory. Inventory to Inventory = X 100 Current Assets Current Assets Ratio Working Capital Management
  • 111 SAAB MARFIN MBA 4. Inventory to Sales Ratio The Inventory to Sales ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. Importance of Inventory to 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. Viewing this ratio over several periods reveals the important aspect of the companys ability to manage inventory while attempting to increase sales. It is also important to compare this ratio among several companies to gauge how well each one performs, and to compare their ratios to industry averages. Inventory Inventory to = X 100 Sales Ratio SalesRatios related to Receivable Management 1. Debtors turnover ratio 2. Average collection period 3. Debtors to current assets ratio 4. Debtors to working capital ratio 5. Debt to Equity Ratio Working Capital Management
  • 112 SAAB MARFIN MBA1. Debtors Turnover Ratio This ratio is also known as Accounts Receivable Turnover Ratio. Accounts Receivable is the amount that customers owe the company. The Accounts Receivable Turnover 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, just as Average Collection Period measures this in days. Importance of Accounts Receivable Turnover A high or increasing Accounts Receivable Turnover is usually a positive sign – showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A possible negative aspect to an increasing Accounts Receivable Turnover is that the company may be too strict in its credit policies and missing out on potential sales. Debtor Net Sales Turnover = Ratio Average Accounts Receivable2. Average Collection Period The Average Collection Period measures the average number of days it takes for the company to collect revenue from its credit sales. The Average Daily Sales is the Net Sales divided by 365 days in the year. The company will usually state its credit policies in its financial statement, so the Average Collection Period can be easily gauged as to whether or not it is indicating positive or negative information. Importance of Average Collection Period This ratio reflects how easily the company can collect on its customers. It also can be used as a gauge of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. This could be an indicator that the companys customers are in trouble, which could spell trouble ahead. This could also indicate the company has loosened its credit policies with customers, meaning that they may have been extending credit to companies where they normally would Working Capital Management
  • 113 SAAB MARFIN MBA not have. This could temporarily boost sales, but could also result in an increase in sales revenue that cannot be recovered, as shown in the Allowance for Doubtful Accounts. Average 360 Collection = Debtor Turnover Period Ratio3. Debtors to Current Assets Ratio Debtor to current assets ratio indicates the position of debtors in total current assets. This ratio is calculated by debtors with current assets. Debtors are one of the largest components of 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 on respect of other current assets, it indicates poor recovery of the company. Debtors to Debtors = X 100 Current Current Assets Assets Ratio4. Debtors to Working Capital Ratio Debtor to working capital ratio is one of the important ratios for analysis of working capital management. Working capital is directly related with the position of debtors. If debtors are lower as compared to working capital, 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. Debtors to Debtors = X 100 Working Working Capital Capital Ratio5. Debt to Equity Ratio Debt to Equity ratio describes the lenders contribution for each rupee of the owners’ contribution. The ratio is directly computed by dividing total debt by equity or net worth. Debt to Equity Debt = Ratio Equity Working Capital Management
  • 114 SAAB MARFIN MBA Importance of Debt to Equity Ratio 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.Ratios Related to Cash Management 1. Working capital ratio or current ratio 2. Liquid ratio or Acid-test ratio 3. Cash to current assets ratio 4. Sales to current assets ratio 5. Working capital turnover ratio 6. Sales to working capital ratio 1. Working Capital Ratio or Current Ratio The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is, the level of safety provided by the excess of current assets over current liabilities. The current ratio compares all the Current Assets of a company to all the Current Liabilities. What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt? Importance of Working capital ratio or current ratio At a minimum, you would hope the company whose financial performance you are analyzing could meet to pay its Current Liabilities if it were to liquidate all its Current Assets. This would translate to a Current Ratio of 1:1 - the point where the Current Assets equal the Current Liabilities. As with all the other performance ratios, the Current Ratio value depends on the industry in which the company is operating. It is also important to know what assets make up most of the Current Assets. Inventory and Accounts Receivable, which are part of the Current Assets, cannot always be counted on as easily transferred to cash. Cash and Marketable Securities comprising the Working Capital Management
  • 115 SAAB MARFIN MBA majority of the Current Assets would definitely be favorable. Knowing this, would the company you are analyzing truly be able to meet its financial obligations is it in fact had to sell its Current Assets? The Current Ratio rising over time will be favorable. Current Assets Current Ratio Current = Liabilities2. Liquid Ratio or Acid-Test Ratio or Quick Ratio Liquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio is a more vigorous test of liquidity than current ratio. The term “liquidity” refers to the ability of the firm to pay its short term obligations as & when they become due. Current assets include inventories and prepaid expenses, which are not easily converted into cash within a short span of time. So, quick ratio may be referred to as the relationship between quick assets i.e. (current assets – inventories) & current liabilities. An asset is said to be liquid if it can be converted into cash within a short span of period without loss of value. Importance of Liquid Ratio If a company one is analyzing looks good while testing it against the Current Ratio, then the Quick Ratio should be your next test to apply. Companies with steadily rising Inventories may look good with the Current Ratio, but will have a deteriorating effect on the Quick Ratio, since we subtract the Inventory out. The Quick Ratio rising over time is favorable. Quick Ratio Current Assets – Inventories = Current Liabilities Working Capital Management
  • 116 SAAB MARFIN MBA3. Cash to Current Assets Ratio This ratio basically measures what percentage of the current assets is formed by the cash component. This is a more stringent measure of liquidity as it considers the most liquid current asset. Importance of Cash to Current Assets Ratio High or increasing Cash to Current Assets ratio is generally a positive sign, showing the companys liquid assets represent a larger portion of its Total Current Assets. It also indicates the company may be better able to convert its non-liquid assets, such as inventory, into cash. Cash to Cash Current Asset = X 100 Ratio Current Assets4. Sales to Current Assets Ratio The Sales to Current Assets ratio measures how well a company is making use of its assets in generating sales. This ratio is most valid in industries where companies hold the majority of their own inventories in-house, as opposed to having their customers hold their inventory for them. Importance of Sales to Current Assets The Sales to Current Assets ratio is best measured over several periods compared to industry averages, as the amount of Current Assets varies widely among companies and industries. Decreasing Sales to Current Assets ratio is generally a negative sign, indicating the company may have slowed production, decreasing the amount of inventory and resultantly the Current Assets. Sales to Sales Current Asset = Ratio Current Assets5. Working Capital Turnover Ratio The Working Capital Turnover ratio measures the companys Net Sales from the Working Capital generated. Note that another ratio exists, the Sales to Working Capital Ratio also measures Net Sales to Working Capital. We chose to interchange the usual components of Working Capital (Total Current Assets - Total Current Liabilities) with an alternate method (shown above). With two similar ratios using slightly Working Capital Management
  • 117 SAAB MARFIN MBAdifferent methods to compute Working Capital, plotting both of theseratios together to see their differences would be wise.Importance of Working Capital TurnoverA high or increasing Working Capital Turnover is usually a positivesign, showing the company is better able to generate sales from itsWorking Capital. Either the company has been able to gain more NetSales with the same or smaller amount of Working Capital, or it hasbeen able to reduce its Working Capital while being able to maintainits sales. Efforts to streamline the operations of the company willoften show favorably in this ratio. Working Sales Capital = Turnover Ratio Average Working Capital Working Capital Management
  • 118 SAAB MARFIN MBA 6. Sales to Working Capital Ratio The Sales to Working Capital ratio measures how well the companys cash 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. Importance of Sales to Working Capital An increasing Sale to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods. This ratio can help uncover questionable management decisions such as relaxing credit requirements to potential customers to increase sales, increasing inventory levels to reduce order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold on to its cash. Working Sales Capital = Turnover Average Working Capital RatioProfitability Ratios 1. Return on Assets (ROA) 2. Return on Equity (ROE) 3. Return on Capital Employed (ROCE) 4. Net Profit Margin 1. Return on Assets (ROA) ROA is an indicator of how profitable a company is relative to its total assets. ROA tells how efficient management is at using its assets to generate earnings. 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. Working Capital Management
  • 119 SAAB MARFIN MBA Return on Profit After Tax = Average Total Assets (ROA) Assets2. Return on Equity (ROE) The return on equity is net profit after taxes divided by average equity. It measures the rate of return on the ownership interest of the common stock owners. It measures a firms efficiency at generating profits from every unit of shareholders equity. ROE shows how well a company uses investment funds to generate earnings growth. Return on Profit After Tax = Equity (ROE) Average Equity3. Return on Capital Employed (ROCE) ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit. 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. Return on Profit Before Tax Capital = Employed Average Capital Employed (ROCE)4. Net Profit Margin Net Profit Margin ratio is measured by dividing profit after tax by sales: Net Profit Profit After Tax = Margin Sales Importance of Net Profit Margin 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. Working Capital Management
  • 120 SAAB MARFIN MBAAppendix B: Cash ManagementCash, the most liquid asset and also referred to as the life blood of abusiness enterprise and is of vital importance to the daily operations of thebusiness firms. Its efficient management is crucial to the solvency of thebusiness because cash is the focal point of the fund flows in a business. If abusiness has no cash and no way of getting any cash, it will have to closedown.Cash Management refers to management of cash balance and the bankbalance and also short term deposits. A Cash Management System isessential for a company for the following two reasons: Uncertainty of cash flows Lack of synchronization of inflows and outflowsCash Management is concerned with the managing of: Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash.Goals of Cash ManagementThe Cash Management Strategies are generally built around Two Goals: To provide cash needed to meet the obligations, and To minimize the idle cash held by the firmIn order to resolve the uncertainty about cash flow prediction and the lack ofsynchronization between cash receipts and payments, the firm should Working Capital Management
  • 121 SAAB MARFIN MBAdevelop appropriate strategies for cash management. The firm should evolvestrategies regarding the following four facets of Cash Management: Cash Budgeting/ forecasting: Cash inflows and Cash Outflows should be planned to protect cash surplus or deficit for each period of planning. Cash Budget should be prepared for this purpose. Manage the Cash Flows: The flow of cash should be managed properly. The cash inflows should be accelerated, while, as far as possible, decelerating the cash outflows. Managing of cash is done through: Organized collection management Proper disbursement management Optimum Cash Level: The firm should decide about the optimum level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances. Investment of Surplus Cash: The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities and inter-corporate lending.Motives for Holding CashThere are four primary motives for holding cash. 1. Transaction Motive Business firms as well as individuals keep cash because they require it for meeting demand for cash flow arising out of day-to-day transactions. The firm needs cash primarily to make payments for purchases, wages & salaries, other operating expenses, taxes, dividends, etc. The need to hold cash would not arise if there were perfect synchronization between cash payments and cash receipts, i.e. enough cash is received when the payment has to be made. For those periods, when cash payments exceeds the cash receipts, the firm Working Capital Management
  • 122 SAAB MARFIN MBA should maintain some cash balance to be able to make required payments. For transaction purpose, a firm may invest its funds in marketable securities. The Transaction Motive mainly refers to holding cash to meet anticipated payments whose timing is not perfectly matched with cash receipts. In other words, the necessity of keeping minimum cash balance to meet payment obligations arising out of expected transactions is known as Transaction Motive for holding cash.2. Precautionary Motive A firm should maintain larger cash balance that required for day-to-day transactions in order to avoid any unforeseen situation arising because of insufficient cash. The necessity of keeping cash balance to meet any unforeseen situation or unpredictable obligation is known as Precautionary motive for holding cash. The Precautionary motive for holding cash depends on the predictability of cash flows. The amount of precautionary cash is also influenced by the firm’s ability to borrow at short notice when the need arises. Stronger the ability of the firm to borrow at short notice less is the need for precautionary balance. The precautionary balance may be kept in the form of cash or marketable securities. Marketable securities play an important role here. The amount of cash set aside for precautionary reasons may not earn anything, but if these funds are invested in high liquid marketable securities, then they can give a lot of profits. Hence, the amount of cash, a firm holds for transaction and precautionary depends upon: The expected cash inflows and cash outflows based on the cash budget and forecasts, encompassing long and short range cash needs of the firm i.e. Degree of Predictability of its cash flows The degree of deviation between the expected and actual cash flows Efficient planning and control of cash Working Capital Management
  • 123 SAAB MARFIN MBA The firm’s ability to borrow at short notice in the event of any emergency The willingness and the capacity of the firm to take risk of running short of cash 3. Speculative Motive The firm’s desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is known as Speculative Motive for holding cash. The Speculative Motive provides affirm with sufficient liquidity to take advantage of unexpected profitable opportunities that may suddenly appear (And just as suddenly disappear if not capitalize immediately). However, not many firms engage their funds in speculative motives to a great extent. Thus, the primary motives to hold cash and marketable securities are: Transaction Motive and Precautionary Motive.Cash Management, thus, deals with optimization of cash as an asset and forthis purpose the financial manager has to take various decisions from timeto time. He has to deal as the cash flows in the direction of the firm. Even if afirm is highly profitable, its cash inflows may not exactly match the cashoutflows.He has to manipulate and synchronize the two for the advantage of the firmby investing excess cash if any as well as arranging funds to cover thedeficiency.Factors affecting the Cash NeedsIntrinsic factors influencing the cash management Cash Cycle: The term cash cycle refers to the length of the time between the payment for the purchase of raw materials and the receipts of the sales revenue. Cash Inflows and Cash Outflows Cost of Cash Balance Working Capital Management
  • 124 SAAB MARFIN MBA Other Consideration: There may be several subjective considerations such as uncertainties of a particular trade, staff required for cash management etc., which will have a bearing on determining the cash balance required by a firm.Extrinsic factors influencing the cash management Management Information System (MIS) of the banks: They provide full details of the payments received. The details provided by them contain information of the payment of the Field Representative (FR), Area Office (AO) and State Office (SO). The report is made such that it can be used by the Marketing Central office (Mkco), State Office, Area Office and Field Representative for verification of payments received and to find out any discrepancies, if there any. Innovative Schemes: Banks generates various new schemes time to time which changes the cash flow of the organization. Interest Lost: If any payment gets delayed even by one day, there is a loss of investment over that income. So banks are bound by the agreement by which they pay interest for any delay on their part. Bank Charges: Banks arrange their representatives for pick up of demand drafts from the Field Representatives, Area Offices and State Offices and deposit them in the banks. For this service they charges transportation cost and transaction cost, which vary depending on the banks.Appendix C: Financial Statements BALANCE SHEET Working Capital Management
  • 125 SAAB MARFIN MBA (Rs. in Crores) Schedule As At 31.03.2009 As At 31.03.2008SOURCES OF FUNDS Shareholders funds: Share capital 1 426.28 423.93 Share Application Money Reserve and Surplus 2 3532.59 3958.87 3264.73 3688.66 Loan Funds: Secured Loans 3 7373.18 2404.67 Unsecured Loans 4 5429.6 12802.78 4370.97 6775.64 Deferred Tax Liability ( Net ) 542.12 534.19 TOTAL 17303.77 10998.49APPLICATION OF FUNDS Fixed Assets: 5 Gross block 8808 8138.98 Less: Accumulated Depreciation 3842.16 3400.04 Net Block 4965.84 4738.94 Capital Work-In-Progress 6 290.98 5256.82 430.85 5169.79 Investments 7 7552.95 1416.73 Current Assets, Loans and Advances Inventories 8 1731.36 1577.1 Sundry Debtors 9 407.23 413.76 Cash and Bank Balances 10 69.63 243.32 Loans and Advances 11 5464.77 3541.56 7672.99 5775.74 Less: Current Liabilities and Provisions Current Liabilities 12 2860.18 1048.49 Provisions 13 322.71 323.08 3182.89 1371.57 Net Current Assets 4490.10 4404.17 Miscellaneous Expenditure (to the extent not written off) Voluntary Retirement Scheme Expenses 3.9 7.8 TOTAL 17303.77 10998.49 PROFIT AND LOSS ACCOUNT (Rs. in Crores) Schedule For yr 31.03.2009 For yr 31.03.2008 Working Capital Management
  • 126 SAAB MARFIN MBAINCOME FROM OPERATIONS Turnover Sales 7387.70 5968.47 Less: Excise Duty - - 7387.70 5968.47 Subsidy on Fertilizers 25545.60 32933.30 6194.35 12162.82 Other Revenue 14 499.00 345.77 Increase/ (Decrease) in Stocks 15 280.51 (1136.21) 33712.81 11381.38LESS: COST OF OPERATIONS Consumption of Raw Materials, Stores etc. Raw Materials 13997.22 6646.44 Stores and Spares 108.34 96.26 Chemicals and Catalysts 41.38 38.22 Packing Materials 200.39 170.43 Power, Fuel and Water 981.80 756.48 15329.13 7707.83Less: Stock Transfer for SelfConsumption 159.41 15169.72 118.81 7589.02Purchase of products for resale 14539.23 1245.44Employees Remuneration & Benefits 16 595.96 405.75Manufacturing, Administration,Distribution and Other Expenses 17 1481.91 959.49Interest 18 1023.20 389.37Depreciation/ Amortisation 470.40 410.93Prior Period Adjustments (Net) 19 (13.46) (3.00)Deferred Revenue Exp. Written-off 3.90 3.86(Voluntary Retirement SchemeExpenses) 33270.86 11000.86Profit Before Tax 441.95 380.52Provision forTaxation Current Tax 92.80 61.80 Fringe Benefit Tax 8.02 6.50 Deferred Tax 7.93 56.14 Earlier Years (26.81) 81.94 (1.51) 122.93Profit After Tax 360.01 257.59Profit transferredto: Capital Repatriation Fund 0.47 0.46 Dividend Equalisation Fund Contribution towards Approved Donations 1.00 1.47 - 0.46 (Under Income Tax Act, 1961) Working Capital Management
  • 127 SAAB MARFIN MBANet Profit as per Multi stateCooperative Societies Act, 2002 358.54 257.13 CASH FLOW STATEMENT (Rs. In Crores) Year Ended Year Ended 31.3.2009 31.3.2008 (A) Cash Flow from Operating Activities: Net Profit before Tax 441.95 380.52 Adjustment for: Depreciation 470.40 410.93 Interest (Net) 857.19 362.71 Provision for Doubtful Debts 0.01 0.31 Loss on Damaged Goods 17.60 - Write down of Value of Goods-in-Transit 107.68 - Amount charged off / adjusted 0.04 0.20 Assets Written-off 13.41 2.27 Loss on Sale of Investments (Net) 83.16 15.47 Exchange Rate Variations (Net) 148.84 5.10 Loss on Sale of Fixed Assets (Net) 4.29 2.75 Dividend Income (274.42) (132.54) Profit on sale of Investments - (115.22) Deferred Revenue Exp. Written off - VRS 3.90 3.97 Diminution in value of Long Term Investments 81.16 - Liabilities / Provision written back (3.88) (14.12) Prior Period Depreciation (0.12) 1509.26 2.95 544.78 Operating Profit before Working Capital Changes 1951.21 925.30 Adjustment for: Inventories (279.54) 706.83 Trade and Other Receivables (1717.19) (487.06) Trade Payable and Provisions 1747.04 (249.69) 3.43 223.20 Cash Generated from Operations 1701.52 1148.50 Direct Taxes Paid (Net of Refunds) (135.23) (72.07) Payment towards Cooperative Education Fund (2.57) (1.75) Payment to Cooperative Welfare Fund (1.90) (1.60) Donations Paid (1.87) (141.57) (0.67) (76.09) Net Cash From Operating Activities (A): 1559.95 1072.41 (B) Cash Flow from Investing Activities: Purchase of fixed Assets including C.W.I.P. (590.82) (594.93) Proceeds from Sale of Fixed Assets 11.50 31.89 Purchase of Investments (Net) (6300.54) (691.73) Working Capital Management
  • 128 SAAB MARFIN MBA Dividend Received 246.61 132.74 Profit on Sale of Investments - 115.22 Interest received 55.66 26.26Net Cash used in Investing Activities (B): (6577.59) (970.55)(C) Cash Flow from Financing Activities: Proceeds from issue of Share Capital 2.35 0.01 Repayment of Term Loans (362.67) (153.97) Repayment of Deferred Trade Tax Loan (Net) (9.21) (4.10) Increase in Cash Credit 589.37 160.88 Increase in Short Term Loans 5809.65 286.72 Interest Paid (1008.14) (389.37) Dividend Paid (84.53) (84.45) Exchange Rate Variation (Net) (92.87) (5.10)Net Cash used in Financing Activities (C): 4843.95 (189.38)NET INCREASE/ (DECREASE) IN CASHAND CASH EQUIVALENTS (A+B+C) (173.69) (87.52)CASH AND CASH EQUIVALENTS AT THEBEGINNING OF THE YEAR 243.32 330.84CASH AND CASH EQUIVALENTS AT THECLOSE OF THE YEAR 69.63 243.32NET INCREASE/ (DECREASE) IN CASHAND CASH EQUIVALENTS (173.69) (87.52) Working Capital Management
  • 129 SAAB MARFIN MBAAppendix D: Significant Financial Indicators 2008-0 2007-0 2006-0 2005-0 2004 9 8 7 6 -05FINANCIAL RATIOS :Operating Profit to Sales (%) 6.5 7.8 6.69 6.92 6.52Profit before Tax to Sales (%) 1.34 3.13 2.43 4.85 6.37Return on Capital Employed (%) 3.12 3.5 2.53 7.18 10.58Profit before Tax to Net Worth 11.16 10.31 6.9 13.55 14.27(%)Profit After Tax to Net Worth (%) 9.09 6.99 4.81 9.6 9.68Fixed Assets Turnover (Times) 6.32 2.38 2.2 3.01 3.57Working Capital Turnover 7.41 2.62 2.5 4.07 4.58(Times)Inventory of Finished Goods 0.12 0.76 1.48 0.74 0.9(Months Sales)Inventory of Raw Material &PackingMaterial (Months Consumption) 0.74 1.25 1.01 0.86 0.79Sundry Debtors (Months Sales) 0.67 0.78 0.9 0.89 1.17Current Ratio 2.41:1 4.21:1 5.06:1 3.49:1 2.36:1Quick Ratio 1.87:1 3.06:1 3.15:1 2.37:1 1.51:1Debt Equity Ratio 3.23:1 1.84:1 1.78:1 1.42:1 2.20:1Employees ProductivityNo. of Employees 6757 6743 6826 6506 5752Sales per Employee (Rs. Crore) 4.87 1.8 1.51 1.77 1.29 Working Capital Management
  • 130 SAAB MARFIN MBAAppendix E: Provisional highlights of IFFCO performanceduring 2008-09Highest Production of Fertilisers 71.68 lakh MT(Previous Best 70.12 lakh MT in2006-07)Highest Production of Urea 40.68 lakh MT(Previous Best 39.63 lakh MT in2007-08)Production of NPK/DAP/NP 31.00 lakh MT(Best 32.26 lakh MT in 2006-07)Highest Sales of Fertilisers 112.58 lakh MT(Previous best 93.24 lakh MT in2007-08)Highest Sales of Urea 58.69 lakh MT(Previous best 54.29 lakh MT in2007-08)Highest Sales of NPK/DAP 53.89 lakh MT(Previous best 38.95 lakh MT in2007-08)Profit Before Tax Rs.441.95 crore(Best PBT 807.1 crore in 2002-03)Profit After Tax Rs.360.01 crore(Best PAT 557.2 crore in 2002-03)Highest Turnover Rs 32933 crore(Previous best Rs.12163 crore in2007-08) Working Capital Management
  • 131 SAAB MARFIN MBAPlant Productivity 1376 MT per employee(Best 1669 MT in 2005-06)Highest Marketing Productivity 7397 MT per employee(Previous best 6158 MT in 2007-08)Composite Energy Consumption 5.941 Gcal/ MT(Lowest 5.907Gcal / MT in 2007-08)Appendix F: VALUE ADDED STATEMENT (Rs. In Crore) Year ended Year endedParticulars 31.3.2009 31.3.2008Income from Sales 32933.30 12162.82Dividend and Other Income 499.00 354.77 33432.30 12517.59Less:Cost of Materials 29418.89 9971.54Manufacturing, Admn.,Distribution 1481.91 959.49& Other ExpensesTotal Value Added 2531.50 1586.56Applied to meet:Employee Cost 595.96 405.75Interest Payment 1023.20 389.37Income Tax (Net) 74.00 66.79Dividend 85.10 84.53Donations 1.75 0.75Cooperative Education Fund 3.59 2.57Retained Cash Profit 747.90 636.80 Working Capital Management
  • 132 SAAB MARFIN MBATotal Utilisation of ValueAdded 2531.50 1586.56RatiosValue added to Total Income(%) 7.57 12.67Value added to CapitalEmployed (%) 17.89 14.65Value added to Net Worth (%) 63.95 43.01Value added per Employee(Rs. Lakh) 37.46 23.53Appendix G: Some of the well known fertilisers used in IndiaNitrogenous FertilisersUrea 46%NAmmonium Sulphate (As) 21%NAmmonium Chloride (ACl) 26%NCalcium Ammonium Nitrate (CAN) 25%NPhosphatic & Potassic FertilisersSingle Super Phosphate (SSP) 16% P2O5Muriate of Potash (MOP) 60%K2OSulphate of Potash (SOP) 48%K2ODi-ammonium Phosphate (DAP) 18 – 46Rock Phosphate (RP) 16 - 20% P2O5NPK Grades Working Capital Management
  • 133 SAAB MARFIN MBA 10:26:26 12:32:16 14:35:14 15:15:15 16:20:00 17:17:17 19:19:19 20:20:00 23:23:00 28:28:00Appendix H: Some Calculations Calculation of Cost of Goods Sold (COGS) (in Rs. Crores) Year Opening Stock Closing Stock Purchases COGS 2004-05 495.27 353.65 6667.86 6809.48 2005-06 353.65 593.33 9406.16 9166.48 2006-07 593.33 1347.34 10332.1 9578.09 2007-08 1347.34 211.13 10200.56 11336.77 2008-09 211.13 491.64 31777.26 31496.75 Calculation of Average Inventory (in Rs. Crores) Working Capital Management
  • 134 SAAB MARFIN MBA Opening Closing Average Year Inventory Inventory Inventory2004-05 1020.56 931.50 976.032005-06 931.50 1519.64 1225.572006-07 1519.64 2283.94 1901.792007-08 2283.94 1577.10 1930.522008-09 1577.10 1731.36 1654.23 Working Capital Management