Management of working capital and expense analysis of nalco

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  • 1. 1 A PROJECT REPORT ON MANAGEMENT OF WORKING CAPITAL &Its Expense Analysis AT (A NAVARATNA COMPANY) (Submitted in Partial Fulfillment of the Requirements of Post Graduate Diploma in Management under VJIM) Name: Rabi Narayan Sahoo Roll no. : 121331 Name of the Faculty Guide: Name of the Corporate Guide: Mrs. Ch.Jyothi Mr. N. Nanda Faculty,VJIM. Sr.Manager (Finance)
  • 2. 2 CERTIFICATE FROM THE ORGANIZATION This is to certify that RABINARAYAN SAHOO, student of VIGNANA JYOTHI INSTITUTE OF MANAGEMENT, Hyderabad has completed his field work report at NALCO on the topic of ―Working Capital management & its expense analysis‖ and has submitted the field work report in partial fulfillment of PGDM. He has worked under my guidance and direction. Date: Mr.N Nanda Sr.Manager (Finance)
  • 3. 3 CERTIFICATE FROM THE FACULTY GUIDE This is to certify that RABINARAYAN SAHOO, student of VIGNANA JYOTHI INSTITUTE OF MANAGEMENT, Hyderabad has completed his field work report at NALCO on the topic of ―Working Capital management& its expenses analysis‖ and has submitted the field work report in partial fulfillment of PGDM. He has worked under my guidance and direction. Date: MrsCh.Jyothi Faculty,VJIM.
  • 4. 4 DECLARATION I, RABINARAYAN SAHOO,a student of VIGNANA JYOTHI INSTITUTE OF MANAGEMENTdo here by declare that the project report entitled ―Working Capital management& its expense analysis―is a bonafied work done by me at NALCO, Bhubaneswarin partial fulfillment for the award of degree in Post Graduate Program in Management 2012-2014. No part of this report has been submitted to anyone at time before and any other University for award of any degree or diploma. Date: - RabinarayanSahoo (VJIM)PGDM Place: - Roll NO -121331
  • 5. 5 ACKNOWLEDGEMENT This project is an authenticated work on Summer Training Project at National Aluminium Company Limited, Bhubaneswar. I would like to take this opportunity to thank all the people, who extended their immense help to complete my project. I would like to express my gratitude to Mr.N.Nanda,Sr.Manager (Finance), Nalco, who spent his valuable time to discuss about the project and his continuous co- operation helped to get on with the project on a full swing without much hassles. I would like to thank MrsCh.JyothiFaculty ,VignanaJyothi Institute Management, Hyderabad for her valuable advice and guidance during my project completion. I also thank to all staff members of account department for helping me to complete the summer internship program. Finally, an honorable mention goes to my family and friends for their understandings and supports on me in completing this project. Without helps of the particular that mentioned above, I would face many difficulties while doing this project.
  • 6. 6 PREFACE It is a great privilege for me to place this report before the readers. The report is concerned with “Working Capital Management & its expense analysis‖. This report is proposed in a very simple and understandable language. I would also like to state that although every possible care has been taken to make this report error free but still the possibility of some errors creeping in inadvertently cannot be ruled out. I shall feel highly obliged to all the readers if the same are brought to my notice. Critical evaluation and suggestions for improvement are most welcome and shall be greatly acknowledged. I sincerely express my gratefulness to all those who have directly or indirectly helped us in preparing this report. I firmly believe that this direction from all readers which will be thankfully acknowledged.
  • 7. 7 EXECUTIVE SUMMARY The major objective of the study is to have proper understanding on the working capital of NALCO & to suggest measures to overcome the shortfalls, if any. Every business needs adequate liquid resources in order to maintain day to day cash flows. It needs enough liquidityfor wages and salaries as they fall due and to pay the creditors in order to keep its workforce on and to ensure uninterrupted supplies. Maintaining adequate working capital is not only important in the short term to run the business but also to set the enterprise on going concern. Sufficient liquidity must be maintained in order to ensure the survival of business in the long term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities. Therefore when business make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building etc, but must also take account of the additional current assets in proper ratio that are usually involved with any expansion activity . Increase production tends to engender a need to hold additional stocks of raw material & work in progress. Increased sales usually mean that the level of debtor will increase. A general increase in the firm’s scales of operation tends to imply a need for greater level of cash. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management.
  • 8. 8 TABLE OF CONTENTS Chapter No Particulars Page No Completion Certificate Certificate from Organization Certificate from faculty guide Declaration Acknowledgement Preface Executive Summary Introduction 1. 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Introduction Review of the Literature Meaning of the Study Objectives of the Study Significance of the Study Methodology Sources of Data Collection Limitations of the Study 2. 2.1 2.2 2.3 Company Profile Brief History of the Company Vision, Mission, and Objectives of the Company Organization Structure and Style of work of the Company 3. 3.1 3.2 3.3 3.4 3.5 To perceive the intended meaning of Working capital. Introduction Concept of working capital Planning of working capital Working capital cycle  Operating cycle  Cash conversion cycle 4. 4.1 4.2 4.3 4.4 To understand the liquidity position & working capital utilization of company & to know the level of current assets with relation to current liabilities  Financial comparative analysis  Ratio Analysis  Expense Analysis 5. 5.1 5.2 To know the various resources followed by Nalco & suggests the best industry standard Conclusion Findings, Suggestions
  • 10. 10 REVIEW OF LITERATURE WORKING CAPITAL MANAGEMENT Introduction: Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity. There are two concepts of working capital- gross and net. . Gross Working Capital focuses on Optimization of investment in current asset. Financing of current asset Net Working Capital focuses on Liquidity position of the firm Judicious mix of short-term & long-term financing.
  • 11. 11 MEANING OF THE STUDY Working capital is the life blood and nerve center of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. Working capital refers to that part of firm’s capital which is required for financing short term or current assets such as cash, marketable securities, debtors, and inventories. In other words working capital is the amount of funds necessary to cover the cost of operating the enterprise. Working capital means the funds (i.e.; capital) available and used for day to day operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a business which are used in or related to its current operations. It refers to funds which are used during an accounting period to generate a current income of a type which is consistent with major purpose of a firm existence. Advantages of working capital management: It helps the business concern in maintaining the goodwill. It can arrange loans from banks and others on easy and favorable terms. It enables a concern to face business crisis in emergencies such as depression. It creates an environment of security, confidence, and overall efficiency in a business. It helps in maintaining solvency of the business. Disadvantages of working capital management: Rate of return on investments also fall with the shortage of working capital. Excess working capital may result into overall inefficiency in organization. Excess working capital means idle funds which earn no profits. Inadequate working capital cannot pay its short term liabilities in time.
  • 12. 12 OBJECTIVES OF THE RESEARCH  To Perceive the Intended Meaning ofworking capital management  To Understand the Liquidity position & working capital utilization of Company.  To Estimate the relationship between working capital and profitability.  To perceive the significance of various sources of working capital.  To know the level of current assets with relation to current liabilities at Nalco.  Study the working capital management of Nalco – Inventory management; Cash management; Debtor’s management etc.  To know the various resources followed by Nalco and suggests the best Industry Standard.
  • 13. 13 SIGNIFICANCE OF THE STUDY Working capital is the floating capital and contributes to turnover of a company. as against this, the fixed capital is the amount that an organization spends on plant, machinery etc, which are retained for production of goods or services. These costs are recovered over a period of time. Working capital is the amounts blocked in stores and spares of plant, inventory of raw materials, cost of finished goods lying unsold and the amounts due from buyers, to whom normally credit is extended and of course, also the cost of goods in transit between dispatch and receipt by customer. Working capital is planned based on cash flows expected- that is the recovery from customers from the date of dispatch, the inventories of finished goods held etc and also on inventories, raw materials etc. Unless all elements that go in to working capital are under control, the business is seriously affected by cash shortages. Borrowings for working capital also carry higher interest costs and to that extent increase in working capital directly affects the profitability. Unless the requirements for production are met, goods cannot be produced in required quantity. This is possible provided sales are made and more than sales, the dues from clients are recovered.
  • 14. 14 METHODOLOGY OF THE STUDY The data for the present study is drawn from secondary sources. The secondary data is collected from the company’s Annual Reports, Internal Magazines, Newspapers and some web sources. The basic understanding of the subject is referred from different publications from professional institutes like ICAI, ICWAI, ACSI and valuable guidance from the guide. Interpretation of various statistics is done through discussion and analysis with guide wherever necessary.
  • 15. 15 SOURCES OF DATA COLLECTION The data used here consists of secondary dataonly. The secondary data was collected using the Annual Reports, Internal magazines,journals, newspapers etc. The methodology to be adopted for the project is explained as under: The initial step of the project was studying about the company and then evaluating the financial position of the company on the basis of ratio &financial comparative analysis. The project will focus on the study of overall working capital management at the organizations, for which the following study and analysis will be undertaken: (i)This project is aimed to estimate the operating plan for the year 2011- 2012. (ii) This will include the calculations and analysis of the operating cycle and cash conversion cycle for the company. (iii)This project will study the cash management, payables management, receivables management and inventory management. (iv) This project will calculate the net working capital of Nalco. (v) Lastly, suggestion about steps to be undertaken in order to increase the efficiency in the managing the working capital of the company.
  • 16. 16 LIMITATIONS OF THE STUDY During the course of study of summer training project entitled ―Working capital management‖ of Nalco the report has been prepared subject to the following limitations. The study is limited to five financial years from 2009to2012 Performance. The data used in the study have been taken from balance sheet and their related schedule of Nalco. The study has been conducted during the boundaries of Nalco. The analysis ignores the time value of money
  • 17. 17 NATIONAL ALUMINIUM COMPANY LIMITED NALCO is considered to be a turning point in the history of Indian aluminum industry. Nalco has not only has addressed the need for self-sufficiency in aluminum but also given the country a technological edge in producing this strategic metal to the best of world standard. NALCO was incorporated in 1981 as a public sector. This has emerged as the largest integrated bauxite alumina aluminum complex in Asia. By considering its capacity utilization, technology absorption, quality assurance, export performance, & earning profit, Nalco is a bright example of India’s industrial development. Today, as an ISO9001, ISO 14001, OHSAS 18001 co. with its products registered in London Metal Exchange, Nalco has emerged as the largest in integrated bauxite alumina aluminum complex in Asia. INDUSTRY OF ALUMINUM The aluminum market is like a box of chocolates: you never know what you're goanna get." With due credit to Forrest Gump, David Hamill of American Metal Market aptly described the volatility of this sector in the mid-1990s. In the 1993-96 period alone, the market bottomed out, peaked, and drew back once more. While the gyrations made life interesting for speculators, they were anathema to users who sought stable, predictable pricing. By the late 1990s, the industry had begun to consolidate considerably—most notably with the merger of giants Alcoa and Reynolds. Industry shipments totaled $11.5 billion in 2001, down from $12.8 billion in 2000. The industry remained relatively flat in 2002 with little growth anticipated during 2003. Over the past several decades, aluminum makers have been successful in developing new products and taking market share from competitors like steel. Much of the industry's gains could be traced to the intrinsic qualities of the metal—aluminum is strong, lightweight, and eminently recyclable, all qualities that were still highly prized in the 1990s. Skilled management and smart marketing, however, had also been significant factors in the industry's advance. Thus it had come to dominate the beverage can market and had established an increasing presence in automobile manufacturing. While the industry had done an excellent job in spurring demand, the volatility in aluminum markets was causing more than a few users to have second thoughts about the metal. In the
  • 18. 18 important automotive market—and even in cans—some executives were taking another look at steel. Nevertheless, producers remained optimistic that aluminum's physical traits would make it the metal of choice in a growing variety of applications. The economic conditions of the early 2000s were putting pressure on aluminum as oversupply and lack of demand combined to slow the industry's growth. Aluminum sheet, plate, and foil represent the aluminum industry's major product group and account for the majority of shipments from aluminum producers. Aluminum is first produced in the form of sheet ingot. This ingot, which may weigh as much as 20 tons, are flat rolled and re rolled until the desired thickness, or gauge, is achieved. The gauge determines what product has been produced: plate is a quarter-inch thick or more; sheet is.006 inch to .249 inch; and foil is less than .006 inch. Sheet is by far the most widely used form of aluminum and is found in the industry’s entire major markets, including containers and packaging (most notably beverage cans) and transportation (i.e. panels for automobile bodies). Plate is used for the skins of jetliners and to make storage tanks, among other heavy-duty application wrap the Thanks giving turkey, but is also utilized in building insulation and electrical capacitors, as well as a wide variety of packaging applications
  • 19. 19 VISION To be a reputed global company in the metal and energy sector. MISSION To create a learning and knowledge based organization through continuous innovation, evaluation, and realignment HR practices with the business strategies, and to attract, nurture and retain talent. To inculcate a spirit of creativity, quest for learning, to create a responsive and competent work force and inspiring &motivationalorganizational climate. OBJECTIVE OF THE COMPANY The philosophy of Nalco in the field of human resources and management has been: To attract competent personnel with growth potential and develop their skills and capabilities in a congenial work and social environment through opportunities for training, recognition career advancement and other incentives. To develop and nurture favorable attitude among employees and to obtain their best contribution to the organization by providing stable employment, safe working conditions, job satisfaction, quick redress of grievances and through good pay and welfare amenities, commensurate with the company's capacity to spend and the governments guidelines. To foster fellowship and sense of belongingness among all sections of employees through closer association of employees with the management and by encouraging healthy trade union practices. CORPORATE STRENGTH Captive resources Advanced technology Integrated operation World-class products Well-trained manpower Sound financial mgt Care for Ecology & Environment Self-funded expansion Expertise in project mgt International linkage Technology & Market
  • 20. 20 A fully mechanized open-cast mine of 4800000tpa, on Panchpatmali hills of Koraput district in Orissa, serves feed-stock to the Alumina Refinery at Damanjodi, located 16km downhill. The transportation is done trough a 14.6km long single flight, multi-curve, cable belt conveyor of 1800 tph capacity. The mining capacity has been expanded to 6300000tpa. Area of deposit : Resource : 310mt Ore quality : Alumina 45%, silica2% Mineralogy : over 90% gibbsite Over burden : 3mtr (avg) Ore thickness : 14mtr (avg) Alumina Refinery The 1575000tpa energy-efficient Alumina Refinery, having 3 parallel streams of equal capacity is located in the picturesque valley of Damanjodi. The Refinery provides alumina to the co.’s
  • 21. 21 smelter at Angul& exports the balance alumina to overseas markets through Vishakhapatnam Port. Presently, has been expanded to 2100000 tpa capacity. The salient features:- Atmospheric pressure digestion process Inter-stage cooling for higher productively Co-generation of 3818.5 MW power by use of back pressure turbine in steam generation plant. Smelter plant The 345000 tpa capacity Aluminum smelter, located at Angul in Orissa, is based on advanced technology of smelting & pollution control. Its capacity has been expanded to 460000tpa. The salient feature of the plant:- 180 KA cell technology Fume treatment with dry-scrubbing system Manufacturing of carbon anodes, bus bars, anode stems etc. Integrated facility for manufacturing ingots, sows, billets. wire rods,
  • 22. 22 Captive Power Plant Close to the Aluminum at Angul, a captive power plant of 960MW capacity, comprising 8*120MW clusters, has been established for firm supply of power to the smelter presently, the capacity has been expanded to 1200MW. The salient features:- Micro-processor based burner Mgt system for optimum thermal efficiency. Computer controlled data acquisition system for on-line monitoring. Automatic turbine run-up system Specially designed barrel type high pressure turbine. Port facility On the Northern Arm of inner Harbor of Vishakhapatnam port on the Bay of Bengal, Nalco has established mechanized storage & ship handling facilities for exporting Alumina in bulk & importing Caustic Soda. The salient features:- Maximum ship size-35000DWT Alumina reception-48*53 tone pay-load wagons Alumina storage-3*25000ton RCC silos Ship loading rate-2200tph
  • 23. 23
  • 24. 24 INDUSTRY PROFILE A) MARKET UNIVERSE & RELATED MARKET SHARE: DOMESTIC MARKET SIZE: The Aluminium requirement in the country is basically catered by Primary Producers namely:  Balco&Malco (Sterlite Group Companies)  Hindalco  Indal (Aditya Birla Group Companies)  Nalco (Public Sector Undertaking) PRODUCERS/ PRODUCTS BALCO MALCO NALCO HINDALCO JINDAL INGOT 5% 0.5% 42% 52.5% WIRE ROD 27.3% 17% 23% 32.7% ROLLED PRODUCT 22.75% 4.15% 37.6% 35.5% TOTAL 16% 5% 26% 44% 9%
  • 25. 25 To Perceive the Intended Meaning of working capital management
  • 26. 26 INTRODUCTION: Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash. Long term finance involves the cash flow over the extended period of time i.e 5 to 15 years, while short term financial decisions involve cash flow within a year or within operating cycle. Working capital management is a short term financial management. Working capital management is concerned with the problems thatarise in attempting to manage the current assets, the current liabilities & the inter relationship that exists between them. The current assets refer to those assets which can be easily converted into cash in ordinary course of business, without disrupting the operations of the firm. Composition of working capital. Major Current Assets 1) Cash 2) Accounts Receivables 3) Inventory 4) Marketable Securities Major Current Liabilities 1) Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills Payable The Goal of Capital Management is to manage the firm s current assets &liabilities, so that the satisfactory level of working capital is maintained. If the firm cannot maintain the satisfactory level of working capital, it is likely to become insolvent & may be forced into bankruptcy. To maintain the margin of safety current asset should be large enough to cover its current assets. Main theme of the theory of working capital management is interaction between the current assets & current liabilities.
  • 27. 27 CONCEPT OF WORKING CAPITAL: There are 2 concepts: Gross Working Capital Net Working Capital Gross working capital: - It is referred as total current assets. Focuses on,Optimum investment in current assets: Excessive investments impair firm s profitability, as idle investment earns nothing. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Therefore there should be adequate investment in current assets. Financing of current assets: Whenever the need for working capital funds arises, agreement should be made quickly. If surplus funds are available they should be invested in short term securities. Net working capital - Net working capital (NWC) defined by 2 ways, Difference between current assets and current liabilities. Net working capital is that portion of current assets which is financed with long term funds. NET WORKING CAPITAL = CURRENT ASSETS- CURRENTLIABILITIES If the working capital is efficiently managed then liquidity and profitability both will improve. They are not components of working capital but outcome of working capital. Working capital is basically related with the question of profitability versus liquidity & related aspects of risk. PLANNING OF WORKING CAPITAL: Working capital is required to run day to day business operations. Firms differ in their requirement of working capital (WC). Firm s aim is to maximize the wealth of shareholders and to earn sufficient return from its operations. WCM is a significant facet of financial management. Its importance stems from two reasons: Investment in current asset represents a substantial portion of total investment. Investment in current assets and level of current liability has to be geared quickly to change in sales. Business undertaking required funds for two purposes:
  • 28. 28 To create productive capacity through purchase of fixed assets. To finance current assets required for running of the business. The importance of WCM is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities. The extent to which profit can be earned is dependent upon the magnitude of sales. Sales are necessary for earning profits. However, sales do not convert into cash instantly; there is invariably a time lag between sale of goods and the receipt of cash. WC management affect the profitability and liquidity of the firm which are inversely proportional to each other, hence proper balance should be maintained between two. To convert the sale of goods into cash, there is need for WC in the form of current asset to deal with the problem arising out of immediate realization of cash against good sold. Sufficient WC is necessary to sustain sales activity. This is referred to as the operating or cash cycle.
  • 29. 29 WORKING CAPITAL CYCLE: (Source-: A firm requires many years to recover initial investment in fixed assets. On contrary the investment in current asset is turned over many times a year. Investment in such current assets is realized during the operating cycle of the firm. Each component of working capital (namely inventory, receivables and payables) has two dimensions ... TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect dues from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales. It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longeravailable for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc.
  • 30. 30 Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plughole, they remove liquidity from the business.
  • 31. 31 Important Terms in Working Capital Management.  Operating cycle: The working capital cycle refers to the length of time between the firms paying the cash for materials, etc., entering into production process/stock & the inflow of cash from debtors (sales), suppose a company has certain amount of cash it will need raw materials. Some raw materials will be available on credit but, cash will be paid out for the other part immediately. Then it has to pay labor costs & incurs factory overheads. These three combined together will constitute work in progress. After the production cycle is complete, work in progress will get converted into sundry debtors. Sundry debtors will be realized in cash after the expiry of the credit period.This cash can be again used for financing raw material, work in progress etc. thus there is complete cycle from cash to cash wherein cash gets converted into raw material, work in progress, finished goods and finally into cash again. Short term funds are required to meet the requirements of funds during this time period. This time period is dependent upon the lengthof time within which the original cash gets converted into cash again. The cycle is also known as operating cycle or cash cycle.
  • 32. 32 The working capital cycle helps in the forecast, control,&management of working capital. It indicates the total time lag & the relative significance of its constituent parts. The duration may vary depending upon the business policies. In light of the facts discusses above we can broadly classify the operating cycle of a firm into three phases viz. 1. Acquisition of resources. 2 .Manufacture of the product and 3 .Sales of the product (cash / credit). First and second phase of the operating cycle result in cash outflows, and be predicted with reliability once the production targets and cost of inputs are known. However, the third phase results in cash inflows which are not certain because sales and collection which give rise to cash inflows are difficult to forecast accurately. Operating cycle consists of the following: Conversion of cash into raw-materials; Conversion of raw-material into work-in-progress; Conversion of work-in-progress into finished stock; Conversion of finished stock into accounts receivable through sales; and Conversion of accounts receivable into cash. In the form of an equation, the operating cycle process can be expressed as follows: Operating cycle = R + W + F + D C R = Raw material storage period W = Work in progress holding period F = Finished goods storage period D = Debtors collection period C = Credit period availed
  • 33. 33 Operating cycle for manufacturing firm:
  • 34. 34 CASH CONVERSION CYCLE The cash conversion cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. However, shortening the CCC creates its own risks: while a firm could even achieve a negative CCC by collecting from customers before paying suppliers, a policy of strict collections and lax payments is not always sustainable. Definition-: CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations. = Inventory conversion period + Receivables conversion period – Payables conversion period = Avg. Inventory COGS / 365 + Avg. Accounts receivable Sales / 365 – Avg. Accounts payable [inventory increase +COGS] / 365 = Avg. Inventory COGS / 365 + Avg. Accounts receivable Sales / 365 – Avg. Accounts payable [inventory increase +COGS] / 365 Derivation of CCC-: Cash flows insufficient-: The term "Cash Conversion Cycle" refers to the timespan between a firm's disbursing and collecting cash. However, the CCC cannot be directly observed in cash flows, because these are also influenced by investment and financing activities; it must be derived from Statement of Financial Position data associated with the firm's operations. Equation describes retailer-: Although the term "cash conversion cycle" technically applies to a firm in any industry, the equation is generically formulated to apply specifically to a retailer. Since a retailer's operations consist in buying and selling inventory, the equation models the time between (1) Disbursing cash to satisfy the accounts payable created by purchase of inventory, and (2) Collecting cash to satisfy the accounts receivable generated by that sale.
  • 35. 35 Calculations-: On the basis of financial statement of an organization we can calculate the average daily sales and average daily cost of goods sold and based on such calculation we can find out the length of operating cycle both gross as well as net cash conversion cycle. As mentioned above, on the basis of information presented in Balance sheet & P/l Account of NALCO, the length of gross as well as net operating cycle is as follows. Inventory conversion period Receivables conversion period Payables conversion period
  • 36. 36 PARTICULARS 2009-10 2010-11 2011-12 Material cost 739.30 774.21 898.45 Labour cost 614.23 916.31 997.85 Direct expenses 1922.89 2042.42 1981.07 Prime cost 3276.42 3732.94 3877.37 +Mfg cost 193.10 194.19 119.69 Cost of production 3469.52 3927.13 3997.06 +Open WIP 98.11 130.53 120.62 -Closing WIP 130.53 143.91 141.94 COG produced 3464.10 3913.75 3975.74 +opening finished goods 116.97 136.98 178.38 -closing of finished goods 136.98 178.28 192.32 COG sold 3444.09 3872.45 3961.80
  • 37. 37 Cash conversion cycle for the Year 2009-10. Average Daily Sales-:Sales/365 Days=5414.46/365=14.83 Average Daily COGS -: COGS/365 Days=3444.09/365=9.43 Inventory days=909.21/9.43=96.4 Accounts receivable=104.14/14.83=7.02 Accounts payable=1726.67/9.43=183.10 CCC=96+7-183=-79 Cash conversion cycle for the year 2010-11-: Average daily sales-5840.46/365=16 Average daily COG sold=3872.365=10.6 Inventory days=1001/10.6=94 Accounts receivable=147.09/16=9.19 Accounts payable=2097.46/10.6=197 CCC=94+9-197=-93 Cash conversion cycle for the year 2011-12-: Average daily sales=6817/365=18.67
  • 38. 38 Average COG sold=3961/365=10.8 Inventory days=1141.85/10.8=105.6 Accounts receivable=124.89/18.67=6.68 Accounts payable=2493.18/10.8=230.85 CCC=105.6+6.68-230.85=-118.3  Analysis-: NALCO actually has a negative cash conversion cycle, meaning that it generally receives cash for its products before it pays its suppliers for the parts.
  • 39. 39  To Understand Meaning of Liquidity position & working capital utilization of Company &To know the level of current assets with relation to current liabilities.
  • 40. 40 Financial Comparative Analysis Working capital and Sales-: The working capital requirement as a percentage of sales is increasing every year. Previously it was 51% of sales but in current year the working capital required has increased to 61% of there is sharp 10% increase in the requirement of working capital in comparison to sales so it resembles that company is not able to generate more sales in lesser amount of working capital. 0 1000 2000 3000 4000 5000 6000 7000 8000 2009-10 2010-11 2011-12 Sales Debtors 2009- 10 2010- 11 2011- 12 Working capital(in crs) 2808.44 3151.27 4164 Sales 5414.46 5840.64 6781.85 % of Sales 51% 53% 61%
  • 41. 41 Debtors and Working Capital As on 31st March 2009-10 2010-11 2011-12 Debtors 104.14 147.09 124.89 Working capital 2808.44 3151.27 4164 As a % of WC 3.70% 4.66 2.99 The debtors are 3.70% of working capital in the year 2009-10 but it has increased to 4.66 in the next not a good sign to the company but in the year of 2011- 12 it again reduced to 2.99% which is better than previous. 2009-10 2010-11 2011-12 5414.46 5840.46 6781.85 104.14 147.09 124.89 Debtors & Working Capital Sales Debtors
  • 42. 42 Creditors and Working Capital As on 31st March 2009-10 2010-11 2011-12 Creditors 1726.67 2097.91 2493.18 Working capital 2808.44 3151.27 4164 As a % of WC 61% 66.57% 59.87% The creditor’s contribution in the working capital is increasing showing that we are operating more on credit rather than cash purchases and our other overhead expenditures are also on credit. It is good but till our credit expenses like interest on these credits does not cross the cost of investing in working capital in cash purchases and expenses. The creditors also include advances paid by the customers, but it reduced to 59.87% in the year of 2011-12 but still it good for our company. 2009-10 2010-11 2011-12 5414.46 5840.46 6781.85 104.14 147.09 124.89 Creditors and Working Capital Sales Debtors
  • 43. 43 Inventories and Working capital As on 31st March 2009-10 2010-11 2011-12 Inventory 909.21 1001 1141.85 Working capital 2808.44 3151.27 4164 As a % of WC 32.37% 63.57% 27.42 The inventory is the main component of the working capital and its contribution in the working capital is increasing. This must be controlled. 5414.46 5840.46 6781.85 104.14 147.09 124.89 2009-10 2010-11 2011-12 Inventories and Working capital Sales Debtors
  • 44. 44 Debtors and sales As on 31st March 2009-10 2010-11 2011-12 Debtors 104.14 147.09 124.89 Sales 5414.46 5840.46 6781.85 As a % of Sales 1.92 2.51 1.84 If we analyze the debtors as compared to the net sales of the last 3 years the debtors of our company are continuously at a very low level as a percentage of sales, which is a good sign that we are not blocking our capital. 2009-10 2010-11 2011-12 5414.46 5840.46 6781.85 104.14 147.09 124.89 Debtors and sales Sales Debtors
  • 45. 45 Creditors and Sales The creditors as a percentage of sales show the sales we are generating are from credit Purchases up to what extent. If more sales are there from credit then the working capital required will be less. In the above table the % is increasing from year to year so we should try to increase this percentage so that more sales will not require more working capital, as the raw material can be availed on credit. NOTE: - In the figures of creditors only the creditors relating to purchases are taken. Other payments relating to tax, outstanding expenses or any other liability are not taken under it. 2009-10 2010-11 2011-12 5414.46 5840.46 6781.85 104.14 147.09 124.89 Creditors and Sales Sales Debtors 2009-10 2010-11 2011-12 Creditors 1726.67 2097.91 2493.18 Sales 5414.46 5840.46 6781.85 As a % of Sales 31.88% 35.92% 36.76%
  • 46. 46 To Estimate the relationship between working capital and Profitability of Nalco.
  • 47. 47 RATIO ANALYSIS QUICK ASSETS Acid Test Ratio = ------------------------------- QUICK LIABILITIES Particulars 2010 2011 2012 Q.A. 4424.05 5129.94 6506.99 Q.L 2219.93 2740.95 2676.89 A.T.R 1.99 1.87 2.43 Interpretation-: A quick ratio of 1:1 or more is considered as satisfactory or of sound liquidity position. In the year 2012, compared to previous year, quick assets increased but current liabilities decreased, but the ratio between previous year and current year increases from 1.87 to 2.43 that means firm’s ability to pay its short term obligation as and when they become due. 0 0.5 1 1.5 2 2.5 2009-2010 2010-2011 2011-2012 A.R A.R
  • 48. 48 Inventory holding period-: 12 MONTHS Inventory Holding Period = ---------------------------------------------- INVENTORY TURNOVER RATIO Particulars 2010 2011 2012 Inventory turnover ratio 10.42 10.26 5.8 Period(in months) 12 12 12 Inventory holding period 0.86 0.85 0.48 Interpretation-:As per the data derives from the above table we can see that the ratio of inventory decreases 2010-11 to 2011-12 so it’s a better sign for the company that company is able to sell the finished good within that particular year. 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 2009-10 2010-11 2011-12 I.H.P I.H.P
  • 49. 49 Debtors Collection Period: - 12 MONTHS Debtors collection period = ------------------------------------------- DEBTORS TURNOVER RATIO Particulars 2010 2011 2012 Debtors turnover ratio 49.79 41.19 52.83 Period 12 12 12 Debtors collection period 0.24 0.29 0.22 Interpretation-: The debtor collection period is also decreasing from 2010-11 to 2011-12 and it is lowest ratio from last two years, so it shows that company is able to pay its debtors with in the particular period. 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 2009-10 2010-11 2011-12 D.C.P D.C.P
  • 50. 50 Investment Turnover Ratio: - 12 MONTHS Investment period ratio = ------------------------------------------- INVESTMENT TURNOVER RATIO particulars 2010 2011 2012 Periods 12 12 12 Investment turnover ratio 10.42 10.26 5.8 Investment period ratio 1.15 1.16 2.06 Interpretation-: Investment turnover ratio is increasing from last two years becauseThe government had in November last year deferred disinvestment of Nalco citing poor second-quarter performance which raised valuation concerns and said the stake sale would happen only after the third quarter results of 2012. 2009-10 2010-11 2011-12 1.15 1.16 2.06 I.T.R I.T.R
  • 51. 51 Gross Profit Margin: - GROSS PROFITS Gross Profit Margin = --------------------------- x 100 SALES Particulars 2009-10 2010-11 2011-2012 G/P 1155 1524 1198 SALES 5310 6370 6927 G/P Margin 21.75 23.92 17.29 Interpretation-: Gross-profit Margin is also decreasing from previous year because the company is not able to do well due to global economy fluctuation,Euro zone crisis and constant fluctuation in LME prices. 2009-10 2010-11 2011-12 21.75 23.92 17.29 G/P M G/P M
  • 52. 52 Net Profit Ratio: - NET PROFIT (AFTER TAX & INTEREST) Net Profit Ratio = --------------------------------------------------------X 100 SALES Particulars 2009-10 2010-11 2011-12 PAT 814 1069 850 Sales 5310 6370 6927 N.Profit(loss) Margin 15.32 16.78 12.27 Interpretation-:As same as Gross profit Ratio 2009-10 2010-11 2011-12 15.32 16.78 12.27 N/P R N/P R
  • 53. 53 Total Assets Turnover Ratio: - NET SALES Total Assets Turnover ratio: ---------------------------------------- AVERAGE TOTAL ASSETS Particulars 2009-10 2010-11 2011-12 Total fixed assets 13947.77 14316.77 15957.83 Average fixed assets 6973.88 7158.38 7978.91 Total current assets 11254.5 11254.81 13825.99 Average current assets 5622.75 5627.40 6912.99 Average of total assets 12596.63 12785.79 14891.91 Sales 5414.46 5840.64 6781.85 T.A.T.R 0.42 0.45 0.45 2009-10 2010-11 2011-12 0.42 0.45 0.45 A.T.R A.T.R
  • 54. 54 Interpretation -: Assets turnover ratio is not fluctuating as much as other ratio’s because company is able to manage its assets in an efficient manner. Fixed Assets turnover ratio: - NET SALES Fixed Assets turnover ratio: - --------------------------------- AVG. FIXED ASSETS Particulars 2009-10 2010-11 2011-12 Total fixed assets 13947.77 14316.77 15957.83 Average of fixed assets 6973.88 7158.38 7978.91 Sales 5414.46 5840.64 6781.85 F.A.T.R 0.77 0.81 0.84 2009-10 2010-11 2011-12 0.77 0.81 0.84 FA.T.R FA.T.R
  • 55. 55 Interpretation-: Here we have seen there has been a continuous increase in sales. In theYear 2010-11, there was an increase in average fixed assets as well as in sales so ratio increased from to 0.81 to 0.84. Current Assets turnover ratio: - SALES Current assets turnover ratio: - ------------------------------------- AVG. CURRENT ASSETS Particulars 2009-10 2010-11 2011-12 Sales 5414.46 5840.64 6781.85 Total current assets 11254.5 11254.81 13825.99 Average current assets 5622.75 5627.40 6912.99 C.A.T.R 0.96 1.03 0.98 2009-10 2010-11 2011-12 0.96 1.03 0.98 CA.T.R CA.T.R
  • 56. 56 Interpretation-: A better current assets turnover ratio is always good for a firm and in caseof our organization. Current assets had increased in 2010-11 but after that it again decreased to 0.98 which affects company’s financial balance. Working Capital turnover ratio-: NET SALES Working Capital turnover ratio = ----------------------------------- NET WORKING CAPITAL Particulars 2009-10 2010-11 2011-12 Sales 5414.46 5840.64 6781.85 Working capital 2808.44 3151.27 4164 W.C.T.R 1.92 1.85 1.62 2009-10 2010-11 2011-12 1.92 1.85 1.62 WC.T.R WC.T.R
  • 57. 57 Interpretation-: A high working capital turnover ratio indicates efficiency in utilization of resources but in case of NALCO it reduced from 1.85 to 1.62 which is a negative sign to the company.
  • 58. 58 EXPENSE ANALYSIS OBJECTIVE The objective of the Expense Analysis is as follows: - To perceive the different expenses of the company SCOPE The expense analysis helps us to identify the deviations of different expenses incurred during the year from those incurred in the last year. These expenses are analyzed in comparison to sales because as the sales increases there will be definitely an increase in expenses but the ratio of increase in expenses to sales must not increase. We have to search out the gaps and weak points due to which the expenses are increasing. These gaps are filled by proper managerial actions, to maintain the contribution and profits of the company. The efficiency of the company are not only judged by the increasing sales. If we want to know a company better, we must analyze the expenses as compared to sales. If the expenses are reducing irrespective of increasing sales, it resembles the increasing operational efficiency of the company. Thus expense analysis is very important for a company at different levels in the lifetime of the company to control its expenses.
  • 59. 59 INTRODUCTION The expenses of a company can be classified into three categories: -  Material Expenses  Labour Expenses  Overhead Expenses Material expenses are those expenses, which contribute to the material cost of the company. These include the cost of raw material, freight and octroi charges, Labour charges, power and fuel and any other cost which is directly related to the material consumption for the purpose of production of finished goods. Labour Expenses include the expenses related to the manpower of the company. These include salaries and wages, recruitment and training expenses, and other staff welfare expenses. Overhead Expenses can be further divide into administration overhead and selling & distribution overheads. The administration overhead includes the expenses related to the office like rent, insurance, taxes, printing and stationary and many more. The selling & distribution expenses include commission on sales, warranty expenses, travelling expenses and many more.
  • 60. 60 To perceive the different expenses of the company The expenses as a percentage to net sales of the company have following components distributed in the given ratio-: Components of cost 2009-10 2010-11 2011-12 Material cost 47.68 51.81 42.45 Labour cost 14.46 15.68 14.71 Overhead cost 11.06 18.67 16.52 Profit 18.92 16.27 14.14
  • 61. 61 material cost labour cost overhead cost profit 2009-10 2010-11 material cost labour cost overhead cost profit material cost labour cost overhead cost profit 2011-12
  • 62. 62 From the above graph we can observe that in year of 2011-12 all the cost& profit percentage to sales is decreasing, due to global commodity fluctuation, Euro zone crisis and constant fluctuation of LME (London metal exchange) prices. Contribution Particulars 2009-10 2010-11 2011-12 Sales 5414.46 5840.46 6781.85 Variable cost 3010.69 3473.79 3981.79 As a % 0f Sales(variable cost) 55.60% 59.47% 58.71% As a % of Sales(contribution) 44.40% 40.53% 41.29% The contribution has increasing from 40.53% to 41.29% .The main reason is in the year of 2011-12 the variable cost is not that much as a percentage to sales.
  • 63. 63
  • 64. 64 BALANCE SHEET ------------------- in Rs. Cr. ------------------- Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths Sources Of Funds Total Share Capital 1,288.62 1,288.62 644.31 644.31 Equity Share Capital 1,288.62 1,288.62 644.31 644.31 Share Application Money 0.00 0.00 0.00 0.00 Preference Share Capital 0.00 0.00 0.00 0.00 Reserves 10,426.46 9,875.99 9,751.27 9,125.50 Revaluation Reserves 0.00 0.00 0.00 0.00 Networth 11,715.08 11,164.61 10,395.58 9,769.81 Secured Loans 0.00 14.88 0.00 0.00 Unsecured Loans 0.00 0.00 0.00 0.00 Total Debt 0.00 14.88 0.00 0.00 Total Liabilities 11,715.08 11,179.49 10,395.58 9,769.81 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths Application Of Funds Gross Block 13,658.62 12,076.15 11,017.96 9,899.84 Less: Accum. Depreciation 7,046.27 6,582.62 6,181.65 5,868.30 Net Block 6,612.35 5,493.53 4,836.31 4,031.54 Capital Work in Progress 684.44 1,743.53 2,243.40 2,867.13 Investments 754.26 1,331.67 986.75 895.93 Inventories 1,212.70 1,058.47 944.92 841.90 Sundry Debtors 138.12 112.40 181.78 26.50 Cash and Bank Balance 4,168.35 3.60 7.75 14.63 Total Current Assets 5,519.17 1,174.47 1,134.45 883.03
  • 65. 65 Loans and Advances 1,950.56 1,247.23 1,054.37 868.13 Fixed Deposits 0.00 3,791.63 3,144.60 2,854.41 Total CA, Loans & Advances 7,469.73 6,213.33 5,333.42 4,605.57 Deffered Credit 0.00 0.00 0.00 0.00 Current Liabilities 3,522.43 3,216.08 2,634.32 2,300.52 Provisions 283.27 386.49 369.98 329.84 Total CL & Provisions 3,805.70 3,602.57 3,004.30 2,630.36 Net Current Assets 3,664.03 2,610.76 2,329.12 1,975.21 Miscellaneous Expenses 0.00 0.00 0.00 0.00 Total Assets 11,715.08 11,179.49 10,395.58 9,769.81 Contingent Liabilities 1,807.26 2,188.93 2,416.28 1,995.77 Book Value (Rs) 45.46 43.32 161.34 151.63
  • 66. 66 PROFIT AND LOSS ACCOUNT ------------------- in Rs. Cr. ------------------- Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths Income Sales Turnover 7,038.23 6,481.35 5,440.43 5,647.27 Excise Duty 421.32 422.37 255.70 425.92 Net Sales 6,616.91 6,058.98 5,184.73 5,221.35 Other Income 520.26 338.43 333.82 384.19 Stock Adjustments -2.41 1.56 -21.67 88.27 Total Income 7,134.76 6,398.97 5,496.88 5,693.81 Expenditure Raw Materials 1,435.27 871.34 935.42 813.00 Power & Fuel Cost 2,196.68 1,785.83 1,603.70 1,313.71 Employee Cost 1,034.54 989.02 843.60 771.06 Other Manufacturing Expenses 242.86 411.06 306.21 257.75 Selling and Admin Expenses 0.00 165.82 146.91 166.07 Miscellaneous Expenses 560.24 101.71 87.10 89.96 Preoperative ExpCapitalised 0.00 0.00 -0.22 -0.19 Total Expenses 5,469.59 4,324.78 3,922.72 3,411.36 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths Operating Profit 1,144.91 1,735.76 1,240.34 1,898.26 PBDIT 1,665.17 2,074.19 1,574.16 2,282.45 Interest 0.87 109.84 92.08 88.57 PBDT 1,664.30 1,964.35 1,482.08 2,193.88 Depreciation 466.55 430.06 319.39 272.44 Other Written Off 0.00 0.00 0.00 0.00 Profit Before Tax 1,197.75 1,534.29 1,162.69 1,921.44
  • 67. 67 Extra-ordinary items 5.45 -0.94 25.63 18.62 PBT (Post Extra-ord Items) 1,203.20 1,533.35 1,188.32 1,940.06 Tax 353.70 455.48 354.56 659.70 Reported Net Profit 849.50 1,069.30 814.22 1,272.27 Total Value Addition 4,034.32 3,453.44 2,987.30 2,598.36 Preference Dividend 0.00 0.00 0.00 0.00 Equity Dividend 257.72 257.72 161.08 322.16 Corporate Dividend Tax 41.31 42.56 27.38 54.75 Per share data (annualised) Shares in issue (lakhs) 25,772.39 25,772.39 6,443.10 6,443.10 Earning Per Share (Rs) 3.30 4.15 12.64 19.75 Equity Dividend (%) 20.00 30.00 25.00 60.00 Book Value (Rs) 45.46 43.32 161.34 151.63 CASH FLOW ACTIVITES ------------------- in Rs. Cr. -------------------
  • 68. 68 Mar '12 Mar '11 Mar '10 Mar '09 12 mths 12 mths 12 mths 12 mths Net Profit Before Tax 1197.75 1524.70 1154.86 1927.16 Net Cash From Operating Activities 886.00 1630.53 1171.65 1938.22 Net Cash (used in)/from Investing Activities -82.28 -768.48 -593.14 -2197.98 Net Cash (used in)/from Financing Activities -430.60 -219.17 -303.81 -387.66 Net (decrease)/increase In Cash and Cash Equivalents 373.12 642.88 274.70 -647.42 Opening Cash & Cash Equivalents 3795.23 3152.35 2877.65 3516.46 Closing Cash & Cash Equivalents 4168.35 3795.23 3152.35 2869.04
  • 69. 69
  • 70. 70 To know the various resources followed by Nalco and suggests the best Industry Standard. CONCLUSION AND RECOMMENDATIONS
  • 71. 71 Findings (1) The liquidity position is very sound .So NALCO is liquid enough to fulfill its short term obligations. (2) There is a huge improvement in the efficiency of operation as the stock turnover ratio has been reduced from 0.85% to 0.45%. (3) As the debt equity ratio is around 22 % which means NALCO is maintaining a high safety margin than previous year because previous year it was 29%. (4) NALCO depends on both the shareholder’s fund as well as the outsider’s fund to finance its huge fixed assets. But as per my analysis it maintains very low debt rate that means it is using its current fund to finance fixed assets, which is not good for any company. (5) Regarding the profitability the net profit ratio has been decreased from 16.78 to 12.27 as compared to previous year. The gross-profit margin and net profit margin of previous year shows that the company is not able to achieve the profit what it achieve previous year, due to increasing in operating cost. (6) The long term financial position is also very satisfactory as there is an increase of 3 % in fixed assets.
  • 72. 72 Suggestions  An understanding among the staff should be instilled that proper WCM produces profit  NALCO is a zero debt company so it should try to reduce its equity and increase its debt portion in order to leverage the return on equity.  The company should try to invest surplus cash in some other profitable manner without keeping it idle.  Inventory management is a great concern for NALCO especially stores and spares. Proper steps must be taken for purchase and procurement of inventory.  A proper stock level should be maintained in order to avoid interruption in production and sales while at the same time the stock level should be economic to avoid unnecessary carrying cost.  Proper planning of production should be made and communicated to the entire concerned department so as to determine the exact need of materials and prevent unnecessary blockage of useless materials.
  • 73. 73 CONCLUSION  NALCO hasn’t only addressed itself to the country’s need for self-sufficiency in Aluminium but has also given the country the technology edge in producing good quality material. Besides being the leader in domestic primary Al market, NALCO has also earned a good name in global market in export of Alumina and Aluminium metal earning valuable foreign exchange for country with its consistent track record in capacity utilization, technology absorption, quality assurance, export performance, internal power generation and posting of profits . NALCO shows how a well-managed company achieves the mission and gives much more profit.  Working capital is an important area in financial management. No business can run without adequate amount of working capital.  Since NALCO is a manufacturing company its working capital need is very high. From the study, it’s clear that NALCO have to maintain a high level of working capital decently to get a good return on investment.  This NavratnaCompany has managed to post profit even at the period of economic recession.
  • 74. 74 REFERENCES 1. Annual report of Nalco. 2. Auditors Report, Directors Report, and Investors Report. 3. Nalco’s official website: 4. MRPM Report.