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36547675 34797594-working-capital-management (1) 36547675 34797594-working-capital-management (1) Document Transcript

  • DECLARATION I hereby declare that this project report entitled “WORKINGCAPITAL MANAGEMENT : A study with reference to BAJRANBALIALLOYS PRIVATE LIMITED in ORISSA” has been prepared by meduring the period of 45 days of my summer holidays in partial fulfillment ofrequirement for the award of Degree of Bachelor Of Business Managementby ANDHRA UNIVERSITY. I also hereby declare that this project is the result of my owneffort and that it has not been submitted to any other University for theaward of any Degree.PLACE: Vishakhapatnam NAME: Ch. PadmaDATE: Roll No. : 2
  • CERTIFICATEThis is to certify that this project report entitled “A STUDY ON STRATEGY REDOF HINDUSTAN COCO COLA BEVERAGES PVT LTD” WithRespective to Ameenpur Depot is a bonafide work done under my guidanceand direction in partial fulfillment for the award of the post graduation PGDM, duringsummer internship for 45 days.PLACE: Hyderabad Dr. Lakshmi Kumari (economics)DATE: Assistant Professor, Institute of Public Enterprise 3
  • ACKNOWLEDGEMENTSI wish to express my deep sence of gratitude to Prof. K. SHIVARAMAKRISHNA, director, Gitam institute of management, Gandhi institute ofmanagement and technology, visakhaptnam for permiting me to do theproject.I would like to express my heartful thanks to Prof. Ram Mohan Rao, Headof the department, Gitam institute of management, Gandhi institute ofmanagement and technology, visakhapatnam for the necessary cooperationextended to me in doing my project work.I first and foremost acknowledge my sincere heartiest thanks to I.Madhavi(M.A.eng), Gitam institute of management, Gandhi institute of managementand technology, Visakhapatnam, who has been my guide for providing meconstant encouragement and consistent interest towards the effectivepresentation of this project report.With immense pleasure, I would like to express my sincere thanks andgratitude to Bajrangbali Alloys private limited, Orissa, and my co-guide Mr.Rajendra Prasad Agarwal for providing necessary information during myproject period.I would take opportunity to express my deep and profound gratitude to myfamily members and friends who have helped me directly and indirectly inthe successful completion of project. Ch.Padma 4
  • CHAPTER – ITHEORITICAL FRAMEWORK: Working Capital Management is concerned with the problems thatarise in the attempt to manage the current assets, the current liabilities andthe inter-relationship that exists between them. The aim of the workingcapital management is to manage the concerns current assets and currentliabilities in such a way that an adequate level of the working capital ismaintained. An adequate level of the working capital provides a businesswith operational flexibility. A business with an adequate level of workingcapital has more options available to it, and can make its own choices as towhen working capital will be used and how it will be used; on the otherhand, if a firm is short of working capital, it may be forced to limit businessoperations, extension of credit to customers and the amount that it investsinventory. This will adversely affect production as well as sales, which inturn will affect profitability of the concern. Working Capital Management is an integral part of overall financialmanagement. It has been looked upon as the driving seat of the financialmanager. Moves and actions in the operating fields of production,procurement, marketing and services are ultimately interpreted and viewedin financial terms. Hence, the preoccupation can be marked with thefinancial implications of the management of working capital and itssegments. In the words of Louis Brandt : We need to know when to look forworking capital funds, how to use them, and how to measure, plan andcontrol them. Thus, it is concerned with obtaining economic funds, using 8
  • them in a profitable manner and controlling them to maintain economy andprofitability. Working Capital Management helps to establish a properbalance among risk, liquidity and profitability.Session Objectives: • Objective of Working Capital Management • Static view of working capital • Dynamic view of working capital • Determination of Operating Cycle • Evaluating working capital managementTOPIC RELATED CONCEPTS:Working Capital Management:Working capital management is concerned with the problems that arisewhile managing current assets, current liabilities, and inter-relationshipthat exists between them.Current assets are those assets that, in ordinary course of business, can beconverted into cash within one year without undergoing any diminution invalue. The major current assets are cash, marketable securities, accountsreceivable, and inventory.In contrast to this, fixed assets are those assets that are permanent in natureand are held for use in business activities. For example, land, building,machinery etc.Current liabilities are those liabilities that are obligations that have to bepaid in a single accounting period. Examples of current liabilities are:accounts payable, bills receivable, bank over-draft and outstanding 9
  • expenses. Long-term liabilities, on the other hand, are obligations that canbe repaid over a period greater than a single accounting period. Examplesof long-term liabilities are: share capital, debentures, long-term loans etc.CONCEPTS OF WORKING CAPITAL:There are two concepts of working capital: a. Gross working capital: It is equal to the total investment in current assets. b. Net working capital: It is the difference between current assets and current liabilities. It can be described as that part of a firm’s current assets which is financed with the help of long-term funds. Both the concepts have equal significance in working capital management. Gross working capital helps in analyzing: a. Ways to optimize investment in current assets and b. Methods for financing current assets. Net working capital indicates the liquidity position of the firm. It also reflects the extent to which the working capital needs should be financed by long-term sources of funds.OBJECTIVE OF WORKING CAPITAL MANAGEMENT:The goal of working capital management is to manage the current assetsand liabilities in such a way that an acceptable level of net working capitalis maintained. There are two issues that are dealt under working capital.They are: 10
  • 1. Determining the level of working capital to be maintained: The exact amount of working capital that should be maintained varies from firm to firm and depends on various factors like nature of business, degree of competition etc. Keeping in view the uncertainty associated with the dynamic environment in which a firm operates, the amount of investments in current assets should 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 the form of safety stocks to meet unforeseen contingencies arising out of factors such as delays in the arrival of raw materials, sudden spurts in sales demand etc. If a firm follows a conservative approach, then it will make a higher level of investment in current assets. But this would also mean that the company will not have sufficient amount to invest in profitable avenues. On the other hand, if the finance manager opts for an aggressive approach, the firm will have lesser investment in current assets thus leaving more amounts for investing in profitable alternatives. Thus, conservative approach provides more liquidity but less profitability and aggressive approach provides more profitability and less liquidity. 2. Decision regarding financing of current assets: Once the appropriate level of working capital is chosen, the next decision pertains to determining the finance-mix for current assets. Some of the sources that are used to finance current assets are: 11
  • a. Spontaneous liabilities: Short-term liabilities such as sundry creditors, accrued expenses, etc. and provisions that arise during the normal course of business serve as non-interest bearing source of financing current assets. b. Bank borrowings, Public deposits and long-term sources of financeThe difference between the amounts of current assets and liabilities isusually financed through a combination of bank borrowings by way ofcash credit/overdraft arrangement and long-term sources of finance suchas debentures and equity capital. Companies can also opt for fixeddeposits (obtained for a period of one to three years) for financingcurrent assets.The decision regarding the financing of current assets using the abovesources of finance depends on the attitude of the company towards risk.The financing policy opted by the firm can be classified into twocategories based on its risk attitude: a. Conservative financing policy: A firm following a conservative financing policy will use long-term sources like equity and debentures, for financing current assets. Consequently, these firms will have a lower risk as there is a reduced probability of “technical insolvency” that arises when a company is not in a position to honor its current liabilities. 12
  • But following a conservative policy would imply a higher cost of financing since: i. Equity has the highest cost of capital and it does not have the advantage of tax-deductibility that exists in the case of debt capital. ii. The interest on debentures has to be paid irrespective of the fluctuating needs for financing current assets. b. Aggressive financing policy: A firm following an aggressive financing policy will use more of bank borrowings and public deposits and less of long-term sources of finance for financing its current assets. Such a policy will be useful for companies that have a fluctuating need for current assets because usually the bank borrowings are geared to move in tandem with the fluctuating level of current assets so that the total interest charge for the company is likely to be low. But an aggressive financing policy involves higher risk of “technical insolvency.” Hence, depending upon the attitude of management towards risk and keeping in view the constraints imposed by banking sector with respect to short-term credit, the firm should choose the appropriate financing policy.STATIC VIEW OF WORKING CAPITALAs per the static view, working capital can be defined in two ways:Gross working capital: It is equal to the total current assets (includingloans and advances). 13
  • Net working capital: It is the difference between current assets and current liabilities (including provisions). It can be also described as that part of a firm’s current assets which is financed with the help of long- term funds. The net working capital of a firm helps in comparing the liquidity of the same firm over a period of time. The liquidity of a firm can be defined as the ability of the firm to satisfy short-term obligations as they become due. The static view of working capital lays more emphasis on the level of current assets compared to the level of current liabilities.Drawbacks of static view of working capital: The static view of working capital has the following drawbacks: 1. The working capital under this view is computed using the data given in the balance sheet that is static in nature and fails to reflect the dynamic nature of working capital that is crucial in decision making. 2. The net working capital which is computed as the difference between current assets and current liabilities does not reflect the correct amount of working capital due to the following reasons: -Short-term bank borrowings that are used for financing current assets are shown separately under the heading of secured loans and not as a part of current liabilities. -Short-term Public deposits utilized for financing current assets are shown under the category of unsecured loans and are not included in current liabilities. -Short-term marketable securities that are held for the purpose of providing liquidity to the firm are shown under the heading of investments and are not included in the current assets. 14
  • The reasons mentioned above lead to a miscalculation of the amount of working capital. II. DYNAMIC VIEW OF WORKING CAPITAL The dynamic view defines working capital as the amount of capital required for the smooth and uninterrupted functioning of the normal business operations of the firm encompassing various activities commencing with the procurement of raw materials, conversion of raw materials into finished product for sale, creation of accounts receivable on account of goods sold on credit and finally realization of profits from sales and cash from accounts receivable. As per this definition of working capital, the following activities would come under the purview of working capital management. 1. Determination of the appropriate level of raw material inventory: A firm needs to decide the appropriate level of working capital by keeping in view the following factors: - Existence of raw materials in the domestic market. - Need for importing the raw materials if not available indigenously. - Existence of restrictions imposed by government. - The time lag between ordering and receiving of raw materials - Discounts offered by suppliers. - Price movements of raw materials in a period of high inflation.2. Determination of appropriate level of work-in-processinventory: 15
  • Depending on the nature of process technology used, the firm should decide the required level of work-in-process inventory. The level of work-in-process inventory will be higher in case of firms where the raw material has to pass through several stages during the process of production.3. Determination of appropriate level of finished goods inventory: Following are some factors that help in determination of the required amount of finished goods inventory: -Degree of accuracy in forecasting sales demand. -Ability to meet sudden spurt in demand. -Seasonality of demand. -Nature of finished goods: For example, if it is a perishable good then lower inventory should be maintained.4. Determination of credit policies and credit period to beextended to customers: The degree of competition in the industry and the general attitude of the competitors towards credit sales are two major factors that determine the credit policies of the firm. Apart from these factors, the credibility of the customer is also crucial in deciding the credit policy.5. Determination of the level of cash to be maintained by the firm: The required level of cash should be decided keeping in view the following factors: - Ability to meet cash payments. - Ability to avail sudden cash discounts offered by the suppliers. 16
  • - Credit period extended to customers. - Credit period extended by suppliers. - Degree of synchronization between cash inflows and cash outflows. - Minimum amount of cash to be maintained.IMPORTANCE OF WORKING CAPITAL MANAGEMENT Proper management of working capital is very important for thesuccess of an enterprise. “It aims at protecting the purchasing power ofassets and maximizing the return on Investment. The manager ofadministration of current assets to a very large extent determines thesuccess of the operations of a firm. Constant management is required tomaintain appropriate levels in the various working capital accounts. Theobservation of Kennedy and MC Mullen does not carry weight when theyway that, A study of working capital is of major importance to internal andexternal analysis because of its close relationship to current day-to-dayoperations of business, Inadequacy or mismanagement of working capital isthe leading cause of business failures. Shortage of working capital, so oftenadvanced as the main cause of failure of Industrial concerns, is nothing butthe clearest evidence of mismanagement, which is so common. The current assets and current liabilities flow round in a business likean electric current. The working capital plays the same role in the businessas the role of the heart in the human body. Just as the heart gets blood andcirculated the same in the body, in the same enterprise, adequate amount ofworking capital is pre-requisite. The adequacy of cash and current assetstogether with their efficient handing virtually determine the survival ordemise of a concern. Inadequate working capital is a business ailment as 17
  • compared to the availability of excess working capital may leadcarelessness. About costs and therefore, to inefficiency of operations. Many atimes business failure takes place due to lack of working capital. If aconcern maintains an adequate amount of working capital, it enjoys a goodcredit rating and gets discount on payment. It will ensure proper functioningof the business operations and help in the maximization of threat of return.A business house can maximize its rate of return on the capital investedprovide in keeps pace with the scientific and technological developmentstaking place in the field to which it pertains. As soon as some technologicaland scientific development takes place, a business enterprise in order toaccelerate its profitability should immediately introduce the same to itsproductive process. In reality, however the sufficiency of working capitalwill determine the course of decision in this regard.PRINCIPLES OF WORKING CAPITAL MANAGEMENTThe following are the general principles of a sound working capitalmanagement policy:(1) Principle of Risk Variation:- Risk here refers to the inability of a firm to meet its obligations asand when they become due for payment. Larger investment in current assetwith less dependence on short term borrowing increases liquidity reducesrisk and thereby decreases that opportunity for gain or loss. On the otherhand less investment in current asset with greater dependence on short-termborrowings increases risk, reduces liquidity and increases profitability. 18
  • (2) Principle of Cost of Capital: The various sources of raising working capital finance have differentcost of capital and the degree of risk involved. Generally, higher the risk,lower is the cost and lower the risk, higher is the cost. A sound workingcapital management should always try to achieve a proper balance betweenthese two.(3) Principle of Equity Position: The principle is concerned with planning the total investment incurrent assets. According to this principle, the amount of working capitalinvested in each component should be adequately justified by a firm’sequity position. Every rupee invested in the current assets should contributeto the net worth of the firm. The level of current assets may be measuredwith the help of two rations:(i) Current assets as a percentage of total assets, and(ii) Current assets as a percentage of total sales. While deciding about thecomposition of current assets, the financial manager may consider therelevant industrial averages.(4) Principle of Maturity of Payment : This principle is concerned with planning the sources of finance forworking capital. According to this principle, a firm should make everyeffort to related maturities of payment to its flow of internally generatedfunds. Maturity pattern of various current obligations is an important factorin risk assumptions and risk assessments. Generally, shorter the maturityschedule of current liabilities in relation to expected cash inflows, thegreater the inability to meet its obligations in time. 19
  • To sum up, working capital management should be considered as anintegral part of corporate management. In the words of Louse Brand, “Weneed to know when to look for working capital funds, how to use them andhow to measure, plan and control them”. To achieve the above mentionedobjectives of working capital management, the financial manager has toperform the following basic function. (i) Estimating the working capital requirements. (ii) Financing of working capital needs. (iii) Analysis and control of working capital . Working capital management involves the management of the threemost important components of the working capital, i.e Cash, Receivablesand Inventory.CASH MANAGEMENTObjectives of Cash management1. To make short-term forecasts about cash inflows and outflows of thefirm.2. To find profitable avenues for investing surplus cash.Arranging finance in case of cash deficit.Cash Forecasting and BudgettingCash budget is a vital tool used for planning and controlling cash receiptsand payments. A cash budget is a summary statement about the firm’sexpected cash inflows and outflows over a short period of time. With thehelp of the information given in the cash budget, the finance manager canestimate the timing and magnitude of the expected cash flows and can use 20
  • it to determine the future needs of the firm; for planning the sources offinance for these needs and for exercising control over the cash andliquidity of the firm. The time horizon for which the cash budget isprepared varies from firm to firm.Firms that are affected by seasonal variations would usually preparemonthly budgets. Firms whose cash flows are relatively unstable in natureand are affected by extreme fluctuations prepare daily or weekly cashbudgets.Short-term forecasts will help in determining the cash requirements for apre-determined period by making projections about the expected cashflows. These forecasted figures are used in the preparation of cash budget.The other utilities of short-term forecasts are:1. The short-term forecasts will enable the finance manager to adjustthe differences in the cash receipts and cash payments.2. They help in planning the investment of surplus cash in marketablesecurities.3. They help in choosing securities with appropriate maturities andacceptable levels of risk.4. They help in planning short-term financing arrangements withbanks and are useful in determining the minimum and maximum balancesto be maintained with the bank.One of the commonly used methods of forecasting short-term cash flowsis the receipts and disbursements method.Cash Reports:Cash reports are prepared in situations where cash inflows and outflows donot fluctuate much and the collection and payment patterns are stable. 21
  • They help in comparing the actual figures with forecasted figures and incontrolling the deviations that exist. If the fluctuations in the cash positionare high, then the reports are prepared on a weekly and sometimes even ona daily basis. The important categories of cash reports are:1. Daily Cash Report: It provides information about the daily cashposition. It indicates opening and closing cash balances, payments made tocreditors, repayments of loans and other cash flows.2. Daily Treasury Report: A daily cash report does not indicate theposition of accounts receivables, accounts payables and marketablesecurities. The daily treasury report fulfils the requirement of presenting acomprehensive statement about the opening, the closing and the netbalances of cash, marketable securities, accounts receivable and accountspayable.3. Monthly Cash Report: It shows the cash receipts and payments overan entire month.Internal Control systemNeed for Internal Control System: Internal control system is needed foraccounting and controlling the deviations of actual cash flows from theexpected cash flows. With an increase in the size of the organization, it isnot possible to scrutinize all aspects of the business. There are variousrisks that a large company faces like entry of counterfeit documents intothe accounting system, careless attitude on behalf of the management,inaccuracy in recording or reporting transactions, loss of vital documents,etc. In order to prevent the occurrence of such events, it is necessary toimplement an efficient internal control system. The existence of internalcontrol systems will help in controlling the actions of fraudulent people, asthey will be aware of the fact that their actions are being monitored. 22
  • Formulation of Internal Control System: The formulation of an internalcontrol system depends on the size of the firm. The treasury department,audit staff or an outside consultancy can be helpful in framing the designof an internal control system. The following points should be taken care ofwhile formulating the internal control system: Responsibilities should be categorized based on the functionsperformed. Activities related to the maintenance of records should beassigned to the controller and activities related to custody of cash andother liquid assets should be allocated to the treasurer. It should ensure proper documentation and recording procedures. The policies and procedures should be formulated in consensus withthe organization’s long-term goals. The system should ensure that jobs are assigned to suitable personnelon the basis of their qualifications, interest and experience. The treasurerand controller should list some basic skills that are required for a particulartype of job. Companies should also try to conduct training programs tofamiliarize its employees with latest business practices and latesttechnology.Internal audit:Internal audit is an appraisal activity performed within an organization. Itaims at reviewing the financial aspects and other policies and proceduresof the company. Internal audit becomes more important in case of largeorganizations in order to prevent non-compliance of the company’s rulesand regulations. The job of performing internal audit is assigned to theaudit staff or to the internal audit committee.Objectives of Internal Audit: 23
  • 1. Internal audit assesses the effectiveness and adequacy of the controlmeasures implemented in the areas of accounting, treasury and operationsof the firm. The audit staff should also perform a cost-benefit analysis ofthe internal control system.2. Internal auditors should verify the documents related to the branchesand should check the accuracy of the accounting books and records. Theyshould also see the extent to which the company’s assets are accounted forand should review the methods employed to prevent losses.3. Internal auditors should ensure that the rules and regulations of theorganization are being adhered to. The internal auditors should also try toidentify the flaws existing in the rules and regulations of the firm.4. Internal audit should also ensure that liabilities have been incurred forlegitimate purpose of the business.5. Internal audit should help in the preparation of reports that wouldprovide assistance to the various levels of management and would alsohelp the external auditor.Elements of Internal Audit:For ensuring the effectiveness of internal audit, the following aspects should be taken care of:1. Totality: Totality implies that the internal audit should consider all theaspects of the organization for the purpose of review and control.2. Expertise: The members appointed as internal auditors should have therequired qualifications, experience and should be thorough with theprinciples and practices of internal audit.3. Independence: The internal auditors should have the freedom to reportdirectly to the top management. 24
  • 4. Objectivity: Besides ensuring the accuracy and reliability of therecords, the internal audit system should also be able to safeguard theassets.5. Utility: The system should not be redundant in nature.Limitations of Internal Audit:1. If the internal audit staff is inefficient then the whole purpose ofinternal audit will fail.2. Inefficiency creeps into the records if they are not reviewed in time bythe internal audit staff.3. Proper internal audit will not be performed if the internal audit staff isassigned other functions of the company. 25
  • Working capital is one of the most difficult financial concepts tounderstand for the small business owner. In fact, the terms means a lot ofdifferent things to a lot of different people. By definitions, working capital is the amount by which current assetsexceed the current liabilities. However, if you simply run this calculationeach period to try to analyze working capital, you won’t accomplish muchin figuring out what your working capital needs are and how to meet them.DETERMINANTS OF WORKING CAPITAL ANALYSIS: The main determinants that affect the working capital of a firm are:CURRENT ASSETS Current assets are those which can be converted into cash as andwhen needed, i.e., those assets which can turn to cash as per therequirement of the business within the accounting period.SUNDRY DEBTORS Debtors are those to who products are supplied on credit basis. Theseamounts are collected within the accounting period. Therefore, they areconverted into cash as per requirement, hence they are considered undercurrent assets.INVENTORIES 27
  • Closing stocks or inventory includes raw materials, work in progressand finished goods, which are needed for the smooth running of theorganization. Generally inventory is maintained by every organization,which is bound to meet its demand in the market. The amount of inventorymaintained by the firm represents its profitability position. The quality mustnot be in excess or inadequate, it must be according to the requirement. Thequality stores must be able to meet the market demand.CASH AND BANK Every organization or firm maintains cash reserves in their accounts.This is the major key on which working of the entire organization isdependent upon. This is required in every aspect of production, marketing,financing etc. In other words, it can be said that it plays a vital role in thefunctioning of any organization.LOANS AND ADVANCES Advances to staff are those advances, which are given to theemployees as festival advances. These advances are treated as current assetsas they are given advance to the employees and are collected with in theaccounting year. It doesn’t result in any default payment as the amount isdeducted from their salaries directly during their payment. Their advancesare prepared and are collected in the accounting year. These are the loansand advances amount that are given by the organization in procuring of rawmaterials. Amount is given in advance to its supplier in supplying the rawmaterials required and this is adjusted after receiving the raw material. Thefinal settlements take place only after deducting the advances amount fromtotal amount.CURRENT LIABILITIES 28
  • Current liabilities are those which are payable during an accountingyear. These are paid out of current assets like cash. When current assetsavailability is present there exist the current liabilities but current assetsmust always be in excess to current liabilities. This provides theorganization to be in a good position.SUNDRY CREDITORS Creditors are those from whom products are purchased on creditbasis. These amounts are paid within the accounting period. If the creditorsnumber increase the amount payable also increases which further increasesthe liquidity.PROVISION Provisions are those liabilities, which are provided by theorganization to meet its taxes on its income in the future. They includeprovision for taxes or provision for dividend. But as this organization neednot provide any dividend to its shareholders but also there is no payment oftaxes, because there is no income or profit to this organization from the pastten years. A useful tool for the small business owner is the operating cycleanalyses the accounts receivables, inventory and accounts payable cycles interms of days. In other words, accounts receivables are analyzed by theaverage number of days it takes to collect an amount. Inventory is analyzedby the average number of days it takes to turn over the sale of a product(from the point it comes in your door to the point it is converted to cash oran account receivable). Account is payable are analyzed by the averagenumber of days it takes to pay a supplier invoice. Most businesses cannot finance the operating cycle (accountsreceivables inventory days) with accounts payable financing alone. 29
  • Consequently, working capital financing is needed. This shortfall istypically covered by the net profits generated internally or by externallyborrowed funds or by a combination of the two. Most businesses needshort-term working capital at some point in their operations. For instance,retailers must find working capital to fund seasonal inventory buildupbetween September and November for Christmas sales. But even a businessthat is not seasonal occasionally experiences peak months when orders areunusually high. This creates a need for working capital to fund the resultinginventory and accounts receivable buildup. Here are the five most commonsources of short term working capital financing:EQUITY: If your business is in its first year of operation and has not yet becomeprofitable, then you might have to rely on equity funds for short-termworking capital needs. These funds might be injected from your personalresources or from a family member, friend or third party investor.TRADE CREDITORS: If you have a particularly good relationship established with your tradecreditors, you might be able to solicit their help in providing short-termworking capital. If you have paid on time in the past, a trade creditor maybe willing to extend terms to enable you to meet a big order. For instance, ifyou receive a big order that you can fulfill, ship out and collect in 60 days,you could obtain 60-day terms from your supplier if 30-day terms arenormally given. The trade creditor will want proof of the order and maywant to file a lien on it as security, but if it enables you to proceed, thatshouldn’t be a problem.FACTORING: 30
  • Factoring is another resource for short term working capitalfinancing. Once you have filled an order, a factoring company buys youraccount receivable and then handles the collection. This type of financing ismore expensive than conventional bank financing but it is often used bynew businesses.LINE OF CREDIT: Banks to new business do not often give lines of credit. However, ifyour new business is well capitalized by equity and you have goodcollateral, your business might qualify for one. A line of credit allows youto borrow funds for short terms needs when they arise. The funds are repaidonce you collect the accounts receivables that resulted from the short-termsales peak. Lines of credit typically are made for one year at a time and areexpected to be paid off for 30 to 60 consecutive days sometime during theyear to ensure that the funds are used for short-term needs only.SHORT TERM LOAN: While your new business may not qualify for a line of credit from abank, you might have success in obtaining a one-time short-term loan (lessthan a year) to finance your temporary working capital needs. If you haveestablished a good banking relationship with a banker, he or she might bewilling to provide a short-terms note for one order or for a seasonalinventory and/or accounts receivable buildup. In addition to analyzing theaverage number of days it takes to make a product (inventory days) andcollect on an account (account receivable days) Vs. the number of daysfinanced by accounts payable, the operating cycle analysis provides oneother important analysis. From the operating cycle, a computation can bemade of the dollars required to support one day of accounts receivables and 31
  • inventory and the dollars provided by a day of accounts payable. Workingcapital has a different impact on cash flow in a business.CHAPTER – IIMETHODOLOGY 32
  • NEED FOR THE STUDY:- Manufacturing Industry is one of the major public sectors in India.This industry plays a major role in the economic development of a nation.From the first five year itself the Government of India has emphasized onthe Manufacturing Industry. This industry is considered as the core industryin every economy of the world. Working capital gives an idea to the investor as well as themanagement of any firm about the functioning of the organization.Preparation of a separate statement of working capital gives us an ideaabout the gross as well as the net working capital of the statement. One canknow or plan about the day-to-day expenses. Working capital is the difference between the current assets and thecurrent liabilities. This working capital must also be adequate (i.e.,) not toohigh, neither too low. An optimum level of working capital is a goodsignificance for the progress of the organization. This study of workingcapital management would give me the insight about the level of workingcapital required in this organization. A study of working capital management in BAJRANGBALIALLOYS PRIVATE LIMITED gives out the exact idea of working capitalbecause it is an organization with huge requirement of working capital. Thisis life blood without which the organization may not be able to perform itsresponsibilities.SCOPE OF THE STUDY:- 33
  • The study was conducted in the BAJRANGBALI ALLOYSPRIVATE LIMITED in ORISSA. The aim of the study is to analyze theworking capital management of the firm. Working Capital is the difference between the current assets andcurrent liabilities of a firm. The current assets and the current liabilities ofthe firm were taken into account and the computation of the working capitalwas made. The study comprises of the working capital of five consecutivefinancial years of the firm. The importance of the study is very significant. This is becausewithout the working capital no company can continue its day-to-daybusiness activity. The use of the study is that by following the methodology of thisstudy one can get a hint of the working capital of any firm in theengineering industry as well as in the plastic industry. Moreover, thismethod of study can be used to find out the management of working capitalin other organizations.OBJECTIVES OF THE STUDY:-The present study “Working Capital Management of BAJRANGBALIALLOYS PRIVATE LIMITED” is intended to analyze the practice ofWorking Capital Management. The efficiency of the Working Capital 34
  • Management is determined by the efficient administration of its variouscomponents.The study has been carried out with following objectives: -  To know the process of Working Capital Management in BAJRANGBALI ALLOYS PRIVATE LIMITED in ORISSA.  To study the Cash Management, Receivables Management and Inventory Management in detailed manner.  To understand the ability of BAJRANBALI ALLOYS PRIVATE LIMITED in ORISSA to meet its obligations.  To know the extent to which the BAJRANBALI ALLOYS PRIVATE LIMITED in ORISSA is efficiently using its resources.DATABASE AND METHODOLOGY :- 35
  • Any financial survey collects data systematically and analyses it tomeet the objectives. The data can be broadly classified into two types, i.e.,Primary data and Secondary data. The primary data was collected through personal discussion andcontacts with the concerned executives of the unit BAJRANBALIALLOYS PRIVATE LIMITED in ORISSA. The secondary data was collected through journals and annual reportsof the unit and published and unpublished records of Unit BAJRANBALIALLOYS PRIVATE LIMITED in ORISSA.LIMITATIONS OF THE STUDY:-  Time factor is the most crucial one. The study was conducted within a short period of one month.  The investigator has to wait for a long time to make contact with the executives, they being busy with their work.  To collect information from persons involved in their working hours all against their threat of being exposed in case of employees and reserved and resisting attitude of managers was a very critical job.  It is also found that some of the executives lack interest, enthusiasm, initiative and involvement, which in turn demotivates the researchers.  The final and foremost thing is that very often the organization secrecy stands on the way to find out the organizational information regarding some aspects of the study. But in spite 36
  • of these limitations, attempts have been taken to make the study a scientific and reliable one.PRESENTATION OF THE STUDY: - The study of working capital management in BAJRANBALIALLOYS PRIVATE LIMITED is made into a report consisting of fivechapters.Chapter 1 : Theoretical Framework of Working Capital managementChapter 2 : Deals with the introduction need for the study, objectives, methodology and limitation of the study.Chapter 3 : Describes the profile of BAJRANGBALI ALLOYS PVT. LTD, organizational set up and the functional areas.Chapter 4 : Analysis of Working capital Management. Explains the Working Capital Management in Unit BAJRANBALI ALLOYS PRIVATE LIMITED, ORISSA.Chapter 5 : Documents the summary of findings, suggestions and conclusions. 37
  • CHAPTER – IIIORGANISATION PROFILE:INDUSTRY PROFILE:INTRODUCTIONSteel is the metal of the new millennium. It is the worlds most useful,economical & suitable building material. Icon Steel, with its continuousimprovement in the production process, modernization and introduction ofstate-of-the-art technology, has evolved as a supplier of choice who profits,cares and promises for a safer, stronger and better tomorrow. It is one ofthose few prestigious steel producing companies of the country to obtain theISO 9002 certification. The combination of superior technology, qualitycontrol and experienced workforce has helped (he company develop value-added steel which caters to residential as well as industrial requirement andat the same time maintains customers i. At Icon Steel, the quest forexcellence is not just a process, but a way of life…. 1. Over the last few years, there has been a great deal of change in the Indian economic scenario which has concomitant impact on industries. From a protected, inward looking economy, with an inefficient and highly protected industrial sector, it has quickly become a market driven and internationally competitive economy. Under the spell of liberalization, the Indian steel industry has witnessed a rapid growth. Fortunes of this industry started to look up from late 1993, with a revival in demand and prices, strong growth in 38
  • end user industries such as constructive, infrastructure, automobiles and white goods have been responsible for this upsurge.2. Bajrangbali Alloys (p) ltd. Incorporated on 03.09.1993,set up an 3.50 Mt induction furnace at India manguli chhak near NH 5 with term loan assistance from union Bank of. The unit commenced operation from January, 1995. In their forward integration programme, the company set up a re rolling mill with a capacity of 10,2000 TPA with term loan assistance of 100 lac from SIDBI from October, 1998. The Company was registered as an SSI unit, the DIC PMT no. being 151600567 dt.06.04.99. The products of the company have been approved by Bureau of Indian Standard. The Quality Management System of the unit has been certified by NQRQSR Ltd. As ISO 9001:2000 Standard.3. The Performance of the company has remained very satisfactory over the years. The term loans of both Union Bank of India & SIDBI have been fully repaid within the scheduled time. The company availed a STWC loan of Rs.50 lace from SIDBI in January 2004 & has, so far, repaid the monthly installment(s) amounting Rs.8.40 lac. Working capital; loan facility to the tune of Rs.125.lac has been extended by Union Bank of India who has security charge over the assets of the induction furnace division. SIDBI has security charge over the Re- Rolling Mill division assets.4. The Company now intends to modernize their re-rolling mill whereby the capacity shall increase by 9000 TPA. Besides the existing activity of manufacturing of CTD Bars, the Company proposes to include the 39
  • TMT Section, Angles, and Channels & Sections in their re-rolling mill. The additional raw material. That may be required for this activity shall be met either from internal production or from open market. 5. Considering the above factors and future prospects of the Sponge Iron Industry, the Promoters, all of whom hell from a successful business family and have themselves in the present line of activity decided to set an additional capacity of 100TPD Sponge Iron Unit at its present factory location.MARKET: The up-ward trend in steel production, increasing importance ofInduction furnaces, recent use of sponge in Blast Furnace as intermediaryraw-materials, scarce availability of scrap, lack of uniform & good qualityscrap, existence of less tramp material is making sponge iron an idealsubstitute for scrap. The change in Govt policy and liberalization processwill go a long way in boosting the demand for sponge iron. The market forsponge iron is very bright in the coming years.The Integrated SetupLocated on the banks of river Birupa besides National Highway -5 & about12 km* away from the Silver city Cuttack, the Icon Steel manufacturingplant facilitates a melting shop, a double drive ten stand steel mill, doubleroller bearing water cooled driving rolls, natural cooled cooling bed withnecessary processing line - all integrates through automated controlsystems. 40
  • Advanced Level-1 and two semi-automated systems, AC main drive & ACauxiliary drive control are provided for fully semi-automatic process withThe objective of achieving strict tolerance for nominal sizes, shapes, lengthand strength The setup function is designed to perform the rolling strategyover a wide range of products using mathematical module and semi-autoadaptive algorithms. Hydraulic conveyor is developed to reach highperformances under all rolling conditions. Data exchange with productionplanning, melt shop and semi-automation completes the system in allrespects.PROFILE OF THE COMPANY“BAJRANG”, the RUDRA God, is the strength behind BAJRANGSTEEL.Conceived in 1992 by two young relatives – a businessman of long standing& one project financier, who traveled the nook & corner of Andhra Pradesh& other parts of the country to gain practical knowledge on industries –M/S. Bajrangbali Alloys (p) Ltd. Started its commercial production on02.01.95 in the ingot division with financial assistance from Union Bank ofIndia, College Square, Cuttack – 3 Branch to the tune of Rs. 65.00 lac asterm loan & Rs. 35.00 lace as working capital loan. Although the unitsuffered from the initial jolts of the operational aspect for quite some time,it has overcome the same over the years & is now marching ahead to meetits social & economic goals. Initially, the unit was manufacturingM.S.ingot/billets of 3”*4”*4’6” size with one 10,800 M.T./P.A. capacityinduction furnace from scrap collected from local market. Through the unitwas not free from the ups & downs that the iron & steel sector witnessedduring the last decade, M/S. Bajrangbali Alloys (p) Ltd. has, to its credit,added the expansion in the re-rollable items i.e M.S. rods & M.S. tort or 41
  • varying from 8mm dais to 20 mm dais having an installed capacity of10,200 M.T./P.A. with effect from 19.10.98. And with the setting up of asponge iron unit in collaboration with another relative entrepreneur, the unitis now producing the re-rollable M.S. items from iron ore; thereby assuringthe best quality to the ultimate consumers.BAPL, thus, takes pride in beingthe 1st unit of this type in the state of orissa to convert iron ore to spongeiron to ingots &then to M.S rod &tor. The present project envisagesinstallation of a Thermo Mechanical Treatment plant in the unit which shallbe the 1st of its kind in the state of Orissa for better mechanical properties ofthe product manufactured. Bajrangbali Alloys (p) ltd. is promoted by twogroups of established & renowned business houses & is now handling thefollowing Promoter directors.1.Mr.Rajendra Prasad Agarwal.2.Mr.Dindayal Agarwal.3.Mr.Deepak Agarwal.4.Mr.Dinesh Agarwal.Situated on the side of N.H5 on the bank of the river “Birupa”, the unit is12k.m.away from the silver city of Cuttack quite away from inhabitant area& thus does not pos any problem to the populace. The regd.office of thecompany is at Malgodown,Cuttack-753003.OUR VISION:Our Vision is to be an ever-growing company of quality, economy andreliance. Out Cote Values include commitment, continuous improvementthrough Research & Development, technical Upgradation, use of cutting-edge technology for strategic advantage, setting and surpassing world-classbenchmarks, concern for environment, innovation and Customer 42
  • satisfaction. We are committed to providing quality products at affordableprices and customer service round the clock.Apart from the above our aim is to expand out supply network so as tomake our products available at each and every corner of urban as well asrural areas.INDUSTRY AT A GLANCE1. NAME OF THE COMPANY : BAJRANGBALI ALLOYSPVT. LTD.2. CONSTITUTION : PRIVATE LIMITEDCOMPANY3. COMPANY REGD. NO : 15 – 03400 OF 1993 – 94. Date : 03.09.19934. REGD. OFFICE FACTORY : MALGODOWN, CUTTACK –753003 : N.H. – 5, MANGULI, P.O. – CHOUDWAR, CUTTACK-7540255. POWER : CESCO / GENERATOR6.Govt.consent : OBTAINED.(EXISTING)7.INSTALLED CAPACITY : EXISTING(ROLLING MILL) 10,200 TPA. PROPOSED ADDL. 9,000 TPA 43
  • 8. PRODUCT : TMT BARS, ANGLES,CHANNELS & SECTIONS9. CAPACITY UTILISATION : 1ST 2ND 3RD 65% 75% 85%10.PRODUCTION : 12,480 14,400 16,236.9911.TURNOVER IN QTY. : 11,967.12 14,300.02 16,236.9912. TURNOVER [IN LACS] : 2405.39 2945.80 3426.0013. SELLING PRICE/MT. : RS19,500.00 RS20,000.00RS20,500.00ANGLES, CHANNELS & SECTION: RS21,500.00 RS22,000.00RS22,500.0014. WORKING CAPITAL [IN LACS]: 1ST 2ND 3RD TOTAL 171.81 211.32 245.53 BANK 126.00 155.00 180.00 MARGIN 45.81 56.32 65.5315. PROJECT COST. 44
  • PARTICULAR AMOUNT[IN LACS] Land & land development Existing Civil & structural works 38.60 Plant & machinery 220.42 Electricals & Fittings. 50.00 Contingency 9.27 Prel. & pre-operative exps. 12.00 Margin Money for working cap 45.81 Total 376.1016. MEAN OF FINANCE. AMOUNT promoter’ contribution 176.10Term loan 200.00 Total 376.1017.FINANCIAL PARAMETER :DEBT EQUATY RATIO. 1.14:1DSCR 2.03BREAK EVEN POINT. 59%18. PROFITABILITY 45
  • RETAINED EARNINGS AFTER TAX 315.49ADD.DEPRECIATION 99.84 415.33TERM LOAN REPAYMENT 200.00AVAILABLE NET SURPLUS 215.33CORE VALUES :Honesty: To be principled, straight-forward and fair in all dealings.Integrity: Maintaining the highest standards of professional adaptability.Flexibility: Adapting to stay a step ahead of change.Respect: Giving each person room to contribute and grow.Knowledge: To acquire and adopt leading edge expertise in all aspects ofconcerned business.Performance: The team comes first; none of us is as good as all of us!Strategic Intent Bajrangbali Alloys (P) Ltd.,{BAPL}, in the recent years has evolvedas a more dynamic, knowledge-driven organization. Aimed at making theorganization more market-oriented and customer-centric, the followinginitiatives are to drive Bajrangbali Alloys (p) Ltd. ,{BAPL}forward in therapidly changing business environment: 46
  • Consolidation: A continuous streamlining of capacity and product in corebusiness area.Brand Building Increasing brand involvement for the products amongst customers, toreduce market fragmentation and to attain ‘generic-brand’ status forBajrangbali Alloys (pvt) Ltd., {BAPL} is planned through strategicbranding.Product-mix rationalizationMaintaining an intelligent product-mix based on value and demand curvesto maximize returns.Exploring global marketsReaching out to international markets with world-class products while bymaintaining leadership in India is the goal of Bajrangbali Alloys (pvt) Ltd.,{BAPL}.Operational Improvements & Cost-competitivenessTo attain higher efficiency levels and world-class quality in productionprocesses.Increasing capacitiesExpansion of manufacturing and processing capabilities across productrange, in line with market dynamics is the aim to increase the capabilities. 47
  • Sound InvestmentsAccelerate growth by way of investments into focused, synergeticacquisitions.Captive Market Share Sustaining and strengthening Bajrangbali Alloys (p) Ltd., leadershipposition in its market segments way ahead of competitors.Extending ‘Touch-Points’ Building a wider and ‘intelligent’ distribution network that enablesBajrangbali Alloys (p) Ltd., to serve its markets in a customized andlocalized manner and attain higher penetration, without losing theeconomies of scale.Corporate Milestones Bajrangbali Alloys (p) Ltd.,{BAPL}have demonstrated a sensation intraditional leadership. Over the year, it has only emerged as a moredynamic, focused corporate.LOCATIONAL ADVANTAGE:Bajrangbali Alloys Pvt.Ltd is an existing unit with its factory location at theside of N.h-5, Manguli Choudwar Cuttack . it has Started Operation Initiallywith a 3.5 Ton capacity Induction furnace in the Year 1995 . Subsequently,Forward integration in the shape of Setting up of a rolling Mill with a 5MT/hour capacity was installed at the site which started production during1998. It has now been Proposed to enhance the capacity of the Rolling Mill& add TMT bar, angles Channels & section. 48
  • The new location of the plant has been considered in the State of Orissa.Orissa is endorsed with rich mineral deposits like Iron Ore, Bauxite, andManganese Ore, Chromites etc. which has enabled the State to have CoreIndustries like steel Plant, Aluminum Smelter, Charge Chrome Plants, andSponge Iron Plants etc.Power Situation in Orissa is aloes Fair. Power being one of the primemovers of the economy, State Government has been endeavoringsubstantial investments in Power Sector to step up generating capacity inthe state.The Plant is situated at an approximate distance of 12km from the silvercity of Cuttack towards Balasore. The Plant site is very close to the coal andiron ore mines, by which the company is able to save a lot towardstransportation cost. Labour is being available cheaply. The Finished Productis being sold to units inside & outside orissa without any transportationproblem. Since the unit is in operation since last 5/6 years it has all locationadvantages.HISTORY AND BACKGROUNDTHE PROJECTThe company is presentely engaged in the production of pencil steel ingothaving production capacity of 10800 tones per annum & CTD bars with aninstalled capacity of 10200 TPA. The project envisages enhancing anddiversifying the production capacity of the existing Re-Rolling Mill plabtfor manufacture of rerolled products like CTD bars, a Thermo MechanicalTreatment Plant with addition of Flats, Channells, Angles & sections. Theproposed production capacity of the plant after expansion anddiversification have been narrated else where. 49
  • History and Background:Bajrangbali Alloys (p) Ltd. ,{BAPL}is an existing unit engaged inmanufacturing of pencil steel Ingots & RE-Rolling items since last 10years.The promoters of the company Mr.Ranjendra Prasad Agarwal,Mr.Dindyal Agarwal, Mr.Dinesh Agarwal & Mr.Deepak Kumar Agarwalare highly experienced & one of the leading group in both steel trading andmanufacturing in Orissa since last many years. After having successfullyestablished their unit, infrastructure, market & all that is required forsuccessful operation of the unit, the promoters have mooted the idea ofenhancing the capacity in the rolling mill unit with additional items havingmore value added for a still better viability of the unit. This strategyemerging from the past experience of the promoters will not only ensurelower cost of inputs via-a-vis cost of production but also will enhance ppofitby value addition and reaching to still a larger clientel.NAME OF THE CONSTITUTION:The company was incorporated as a private limited company dulyregistered with the Registrar of companies, Orissa bearing registrationNo.15-03400 dated 03.09.1993. The company has obtained the permanentregistration certificate from Dic, Cuttack (earlier-Jagatpur) bearingNo.151600567.RESUME ON THE PROMOTERS.The promoters of the project are highly experienced in business and are alsofinancially sound. They are capable enough to bring-in their equity 50
  • & run the project successfully. The brief bio-data of each promoter is givenhere after.FINANCIAL ASSISTANCE.The initial term loan availed from union bank of India has been fullyLiquidated. However; the company enjoys a working capital term loan ofRS.125.00 lac from the said bank. The company had availed a term loan ofRS.65.75 lac from SIDBI during January,1998 to March,1999 which hassince been prepaid by November,2003.All the institutional loan dues werepaid regularly & on before the due dates. Mean while, BAPL has availed ashort term working capital loan of RS.50.00 lac from SIDBI& theinstallments are being paid regularly with the interest dues. The outstandingin this account is RS.41.60 lac as on date.Electrical/ Controls:PowerThe Company draws electricity from the 33 KV feeders at Tangi-Choudwarsub-station. The company is playing a monthly electricity charge of aroundRs. 35.00 lac to Rs. 40.00. lac on an average.The total connected load for operation of Blast Furnace, Pig CastingMachine, pumps, Compressors, E.O.T. Crane ventilation and airconditioning system, plant lighting etc is estimated as 1500kw with themaximum demand of 1700 KVA. Power will be drawn at 33KV fromCESCO and necessary step down facilities have been provided in estimate.Electricity supply system shall comprise switchgear, transformer withsubstation and distribution line and circuit breaker has been provided in theproject cast estimate. 51
  • Power supply and distribution:The power requirement of the proposed plant is estimated at 350 KVA on30 mm maximum demand with an annual energy consumption of 1.95million KWH. Power would be tapped from Orissa State Electricity Board[OSEB] grid at 33 KV and stepped down to 415 V in the substation to beinstalled inside the plant premises. A DG set of 5QO KVA rating would beprovided to cater to the emergency power requirement of critical equipmentof the plant requiring uninterrupted power supply.Shop Electricals:AC motors will normally be used in the plant. Drives requiring variablespeed like to kiln / cooler would be with AC motors with variable controls.Motor control centers have been planned m different areas.SOCIAL ACTIVITIES:The operations in all section inside the factory are taking place in a verycongenial atmosphere. The safety of the workers as also the supervisors hasbeen the prime focal point of the management. Safety shoes, gloves,helmets and the likes are regularly supplied to the field personnel besidescontinuous supply of drinking water, lemon/salt water during summerseason & regular health check-up.The manufacturing operation of the factory is being done on contract basisunder the registered contractors.The workers are covered under ESI & regular health check-ups are beingdone. They are also covered under the EPF & the monthly contributions aredeposited with the appropriate authority regularly.The management is very much serious on the pollution aspect & antipollution equipments have been installed besides plantation of trees inside 52
  • the factory premises and the periphery areas. The unit has obtainednecessary certificate from State Pollution Control BoardREGISTRATION ETC:The unit is registered with the Directorate of Industries, Orissa, under thefactories Act & other Govt. agencies as per the provision. The productsmanufactured confirm to B.I.S.specification under IS 1786:1985 having thelicence no. CM/L – 5136050. BAPL has been certified as on ISO-9001 :Company by M/S.NQA Quality System Registrar Ltd for manufacture &supply of cold twisted deformed bar. The quality policy of the company isto satisfy the customers by supplying qualitative C.T.D bar conforming tothe agreed specification at all the times.The company is having a web sitewith the address as www.info_steel.com.RAW MATERIALS:As has been explained earlier, ingots were manufactured from heavy &commercial scrap at the initial period. After setting up of the sponge ironunit near Byree as a sister concern, the unit now manufactures the re-rollable items mostly from iron ore directly. BAPl had also imported qualityscrap from the United Kingdom during 2001-02 to the tune of RS.121.64lac & is now planning to import further scrap from foreign countries.PLANT ARCHITECTURE:The plant is designed to combine production characteristics of m lineprocess with the high flexibility of rolling mill, which consists of thefollowing. 53
  • ⇒ SF6 Breaker, coupled with 33KV power system fitted with air circuit breaker of L & T make assembled with automatic power factor controllers. ⇒ Medium frequency induction furnace of ABB make having twin crucibles {1500KW] with digital regulators for refinement sponge iron of maximum 85%. ⇒ 3x4 size Ingot caster with capability to produce Ingots up to 60" length. ⇒ Reheating tunnel-type double row pusher furnace of 20ft width and 80 ft length with a heating capacity upto 1200oC temperature and output capacity of 10 MT per hour. ⇒ Ten stand double drive mill coupled with reduction gear, pinion stand, roll-cooling system and online roll grinding. ⇒ Hot flying shear (drum-type rotary) for end cutting and sizing. ⇒ Natural-cooled cooling bed having transfer capacity of 5 MT per hour with maximum bed length of 150 ft..MARKET.In all ventures, market plays a vital roll for continuous sustenance of anenterprise. The steel sector is very much venerable to the ups&down ofmarket end. After witnessing a bleak period, this sector is also not free fromthese ups & down of the market.Besides catering to the requirement of steel trading concerns, the unit hascuctomers in up state Bridge corporation Ltd, Methodist Engineering Co.(p)Ltd., Metro Builders ,Z Engineering Corporation Ltd, MethodistEngineering Co.etc. The product has reached the common man in the 54
  • districts of Mayurbhanj , Keonjhar , all the areas of the undivided districtsof Balasore , Cuttack ,puri , Dhenkanal & Ganjam through numerous retailtrading outlets. From July-August, 2003, BAPL is supplying bulk quantitiesof their product to the four southern states viz:Andhar Pradesh, Tamil Nadu,Karnatak & Kerala where the product have received & high demand.AWARDS :BAPL has received the “NATIONAL AWARD” to small scaleEntrepreneure-2000 for their Performance as small entrepreneur. SriDindayal Agarwal, Director of the company, received the trophy & thecertificate from Honble Sri Jaswant Singh , the then Finance Minister ofGovt. of India on 28th August , 2002.Orissa has recognized the role of BAPL in the small sector by honouringthem in FUSION-2002 on 20.09.2002.The Company has also been awarded with Prestigious “RASHTRIYAUDYOG AWARD , 2002 -2003 “ by International Integration AndGrowth Society , New Delhi for the excellence in the field & for thegrowth of Indian Economy .Other awards best owed the company fpr itsexcellent performance include:-1.Dhatu Nayak Award – 2002 by the Indian Society for Industry &Intellectual Development, New Delhi.2.Rashtriya Udyog Ratan Award – 2002 by the Indian Society forIndustry & Intellectual Development, New Delhi. Bajrang steel has neverfailed in discharging its social responsibility. Over the years, BAPL hasorganized eye camp, health check up camps, blood donation camps etc.During 2002 , Bajrang Steel Organised a talent hunt Competition amongstthe School & College going Students of the twin cities of Cuttack & 55
  • Bhubaneswar at saheed Bhawan & Sri Ramchandra Bhawan. The event ,which was spread over 3 days , attracted a large no. enthusiastic buddingcitizens to come out with their hidden talents.TECHNICAL SPECIFICATIONSHere are some of the grades that Icons Steel Specification in:Cold Twisted Deformed Bars TMT (Terncore processed) BarDesignation : Fe 310, Fe415, Fe 500, Confirms tofe S5Q etc specifications under 15:1786, Fe415Confirms to :IS226, JS1977r IS1786, The high Strength JS7887 & reinforcement bar, producedIS2062 having yield strength of 250 using the Temp coreMPa to 550 process, ensures highMPa according to the designation. ductility & tensile strength.Sizes: 3, 10,12,16, 20, 25, 28 & 32mm Sizes:8, 10,12, 16, 20, 25, 28 &32m 56
  • Organization & Manpower:Manpower requirement of the plant including executives, supervisors, andskilled, semi-skilled, unskilled arid clerical staff would be about 64.Construction Planning:The project is expected to be commissioned in 6 months from the ‘Zero date i.e. from end of May – 2004.Capital costs:The estimated capital cost of the proposed plant is Rs.545.68 lakhs. Thebreak-up of the capital cost with details of civil construction. Main Plant &Machinery, Electrification and Installation & Misc. Fixed assets have beenelaborated hereafter.The capital cost is based on the prices prevailing during the First quarter ofcalendar year 2004 and also takes into account any minor variations. It,however, does not include any provision for future escalation in steel,cement, consumables, labour etc.FINANCIAL AND ECONOMIC ANALYSISPROJECT COSTThe total cost of the project under expansion including margin money forworking capital is estimated to be amount Rs. 376.10 lacs. The details of theproject cost are given in annexure.The promoter has already taken up the project construction work & theimplementation is in cull swing. 57
  • LAND AND SITE DEVELOPMET:The existing land of the company at Manguli Chhak is sufficient and noadditional expenditure will be incurred under this head for the purpose ofthe expansion project.BUILDINGAs the unit is an existing one, it has already got a factory shed and someother miscellaneous construction. However cost of 38.06 lacs.PLANT AND MACHINERIESThe promoters have already finalized the suppliers of the machines. Thetotal cost of the plant and machinery including its accessories, misc. fixedassets, electrical installation and auxiliary equipments is projected at Rs.270.42 lacs. This amount includes the duties, packing and forwarding andalso the installation charges. This value has been finalized with thesuppliers after due deliberations and negotiations. The suppliers of the plantand machinery are most reputed in this line.PROVISION FOR PRICE ESCALATIONConsidering the registration period, a nominal escalation of 5% on buildingand the cost of plant and machinery including electricals & installation areincluded in the project cost.MEANS OF FINANCEThe total requirements for the project, Rs. 200.00 lacs is proposed to befinanced by way of term loan arrived at Rs. 176.10 lac. The loan componentworks out to be 63% of financiable assets or 53% of the total project cost.WORKING CAPITAL FINANCE & MARGINThe total working capital requirement has been estimated at Rs. 171.81 forthe 1st year. For the 3rd year, when maximum capacity utilization isestimated, the total requirement has been arrived at Rs.245.53 lac. Thepromoters’ margin for the 1st year working out is to be Rs. 45.81 lacs. 58
  • The details of the calculation of the working capital are given in Annexureattached to this project report.Presently the unit is enjoying working capital limit of Rs. 125.00 lacs withUnion Bank of India, College Square Branch, Cuttack and the account isregular. The promoters are negotiating with 2 / 3 nationalized banks forsanction of substantial enhanced working capital limit & switch over fromthe existing bank i.e. Union Bank of India. The response has veryencouraging.PROJECT PROFITABILITYThe detailed computation of projected profitability is given in Annexure.PROJECTED DSCRThe DSCR of the project has been estimated at 2.0 and the detailedcomputation is given in Annexure.PROJECT FUND FLOWThe projected fund flow is given in Annexure.PROJECTED BALANCE SHEETThe project Balance-sheet is given in Annexure.PROJECT BREAK EVEN ANALYSISThe projected break even analysis is given in Annexure. The break evenpoint has been arrived at 56% of the installed capacity & 66% of themaximum utilized capacity.NATURE OF ACTIVITIES:Types of Product:All the products made by Bajrangbali Alloys (p) Ltd.,{BAPL} are madeaccording to the needs of the customer or the clients of the company. Themain products are: 59
  • a. Different sizes of Iron Rod b. NailMANUFACTURING PROCESS:The product is basically formed in different parts. Each and every part ofthe final product is made at different places simultaneously. Grooving,Sizing are the main steps in this. Then the different parts are assembledtogether at the end. The manufacturing process undertaken by the companyis given below: The Ingots is shown on 1000 c heat, and then this is placed down tothe Roll stands .which is further divided to different steps: 1. Roughing stage: 3 stands are used in this process 2. Intermediary stage: 8 stands are used in this process 3. Finished goods: 2 stands are used in this process. 750 c is used to produce the rods.BASIC RAW MATERIALS: As the products are made according to the specifications givenby the clients the raw materials are also not too much in number. Four basicraw materials are used by the company in the manufacturing process. Thelists of the basic raw materials are given below: a. Silicon Manganese. b. Ferro Silicon. c. Sponge Iron 60
  • d. Aluminum e. Ramming Mass f. Boric Acid g. MouldMAJOR CLIENTS:Bajrangbali Alloys (P) Ltd.,{BAPL}has a range of clients both in thenational and international market. The company’s electrical product clientsare all placed in the international market while in the plastic division thecompany resorts to domestic wholesalers and distributors which cater to thedomestic market.DESCRIPTION OF VARIOUS DEPARTMENTS:A brief description of all the departments of Bajrangbali Alloys (p) Ltd.,{BAPL} are given below :Purchase Department:The production supervisor prepares the INDANE (requirement list) andgives it to the purchase department who does the necessary purchases of thecompany. The purchase department then receives the TENDERS /QUOTATIONS from other companies who are willing to supply in thisorganization. The company who quotes the least price for supplying thematerial is given the order by the purchase department. Then the storesdepartment of Bajrangbali Alloys (p) Ltd.,{BAPL} receives the materialand sends it to the quality control(QC) department for checking the qualityof the material purchased. After checking the material the QC department 61
  • sends the material back to the stores department for issuing according to theneeds of the organization.Finance Department:Fund is maintained by the cash department of each of the four factories forthe day to day expenses incurred. Loans to the workers, emergencypayment to suppliers, emergency expenditure in case of accident, all theseexpenses are taken from the account of the organization.Marketing Department:The marketing team goes to different international locations to understandthe needs of the various companies. Moreover Bajrangbali Alloys (P) Ltd.,{BAPL} has mediators who help them to get international orders. In thedomestic market Bajrangbali Alloys (P) Ltd.,{BAPL}wholly depends onthe wholesalers for the sale.Inventory Department:Iron rods being the primary raw material for the production is stored inlarge quantities as orders keep on flowing. The stores department plays avital role as many other secondary raw materials are used in the productionprocess viz, nuts, bolts, screws, hammers, gloves and so on. The foreignclients report to those warehouses (office) about their requirements andafter the production they get the delivery from those warehouses.Human Resource Department:This department plays a vital role for the day to day working of BajrangbaliAlloys (p) Ltd.,{BAPL}. Maintaining four manufacturing units at differentplaces without any hassle is not an easy task to accomplish. Bajrangbali 62
  • Alloys (p) Ltd.,{BAPL} has over 800 employees in all. Managing all ofthem towards the positive growth of the company is a very difficult task. ToBajrangbali Alloys (p) Ltd.,{BAPL} human capital is very important.Training and developmental activities are a continuous process in theorganization. Dynamic professionals are recruited viz, engineers, hrexecutives, front office executives, MBAs, CAs and so on. Internationalstudents from Turkey, Switzerland, Malaysia, Mexico and Singapore cometo take internship at Bajrangbali Alloys (p) Ltd.,{BAPL}.SOCIAL RESPONSIBILITY:Company has contributed immensely towards the benefit of the society as awhole and towards the needy in specific. Constructed road dividers, donatedambulances to different municipal corporations, sponsored different eventswhich contribute to the society both culturally and socially.OVERVIEW:The manufacturing industry is the basic industry in any developing ordeveloped economy. It is considered as the backbone of the economy.Manufacturing industry is considered as the core industry. Themanufacturing industry contributes around to 50% to the GDP of anydeveloping nation and 30% in case of a developed nation.Manufacturing is the organized activity devoted to the transformation ofraw materials into marketable goods. In technical parlance, marketablegoods are known as economic goods. They cannot be obtained withoutpaying a price. This is in contrast to free goods, which are available at nocost. The manufacturing system usually employs a series of value-addingprocesses to convert raw materials into more useful forms, and eventuallyinto finished products. 63
  • The outputs from one manufacturing system may be utilized as the inputs toanother. A manufacturing system is, therefore, a typical input-outputsystem, which produces outputs (economic goods) through activities oftransformation from inputs (raw materials).In an industrialized country, the manufacturing industries are the backboneof the national economy, because it is mainly through their activities thatthe real wealth is created. Recently, there has been what may be termed as arevolution in the fundamental ways of thinking about manufacturingmanagement.This has received its impetus and inspiration from the Chinese managementsystem, wherein such manufacturing activities which do not add value tothe product are meticulously eliminated. One of the direct consequences ofthis revolution has been the much greater emphasis on the simplification ofproducts set-ups, and the smooth flow of materials through the factory.Such innovative and productive techniques have given China a clear,competitive edge over others in the global market: and this has created anurge among industries in other countries, including India, to follow theChinese pattern. 64
  • CHAPTER – IVWORKING CAPITAL MANAGEMENT [ANALYSIS]WORKING CAPITAL/OPERATING CYCLE The time period between the purchase of raw materials and the collection of cash for sales is referred to as operating cycle. It consists of the following components: 1. Raw Material Storage Period: The raw material storage period is computed as: where,Average stock ofraw materials =And Average daily consumption of rawmaterials = 2. Conversion Period: The average work-in-process inventory periodcan be computed as: 65
  • where, Average stock of work-in- process = and Annual cost of production = Opening stock of work-in-process + Annual consumption of raw materials + Manufacturing costs such as wages and salaries, power and fuel etc. + Depreciation –Closing work-in- process. Average Daily cost of production = 3. Finished Goods Storage Period:The finished goods storage period is computedas: where, Average stock of finished goods = 66
  • Annual cost of sales = Opening stock of finished goods + Annual cost of production + Excise Duty + Selling and Distribution costs + General administrative costs + Financial costs – Closing stock of finished goods. Average daily cost of sales = 4. Average Collection Period: It is computed as:Averagebalanceofsundrydebtors= Average daily credit sales of the company = 67
  • 5. Average Payment Period: The average payment period is computed as:Averagebalance ofsundrycreditors =Average daily credit purchases madeby the company = Computation of Operating Cycle: Gross Operating Cycle = Raw material storage period + Conversion period + Finished goods storage period + Average collection period Net Operating Cycle = Gross operating cycle – Average payment period Uses of Operating Cycle: It helps in comparing each component of working capital cycle with standards and helps in exercising control if any deviations exist.1. For implementing better control measures, separate working capitalcycles can be prepared for the slack season and the busy season.2. It helps in estimating the future requirements needed to support theforecasted sales of the company.Insurance 68
  • Insuring the assets of the company also comes under the purview of the internal control of the firm. Several companies take the assistance of consultants who specialize in the field of insurance. The company should make a proper analysis about the issues related to insurance of its assets like maintaining a proper list of all the policies that the company has; ensuring that all policy documents are safely kept; ensuring that no two policies cover the same risk; and preparing a statement to declare that the cover provided by the policy is adequate and not excessive. Conducting an analysis of this kind will help the company in making the required changes in the insurance provided for its assets. Types of Insurance Coverage: i. Blanket Policies: These policies insure all those risks that are not covered under any other policy.ii. Business Interruption Policy: This policy protects the company against losses that occur as a result of a sudden break in the operations of the firm. For example, financial losses caused by interruption of production due to machinery breakdown are covered under this policy. iii. Employees Health Insurance Policies: The Employees State Insurance Act has made it compulsory for all organizations to cover their employees under this act. Under the Employees Health Insurance policy, the employer and the employee contribute to the premium.iv. Insurance against Non-Performance: These policies cover material damages arising as a result of non-performance of tasks.v. Fidelity Guarantee Policy: This policy provides cover with respect to direct pecuniary loss suffered by the insured as a result of acts of dishonesty, forgery, fraud and larceny that are committed by the employees in connection with their opportunities and duties. 69
  • vi. Life Insurance of the Key Personnel: This policy covers the loss arising as a result of the death of the key-personnel. Information Systems and Reporting: Information systems provide the managers with vital information that is useful in planning and controlling the operations of the firm. With the help of information systems, reports about the investments, income and expenditure of the organization are prepared. Result orientation, totality, accuracy, promptness, proper forecasting of funds for the future, are some essential features of an effective reporting system. Formal Methodology of reporting involves the following steps: 1. Programming: It involves formulation of various strategies to achieve the long-term policies of the company. 2. Budgeting: Budgets reflect the forecasted income and expenditure over a period of time. 3. Accounting for the deviations: Once the actual expenses and revenue figures are available, they are compared with the forecasted figures to check for any deviations. The actual data is also used for future programming and in evaluating the performance of managers of each responsibility centre. 4. Reporting and analysis: Once all the transactions are analyzed, various reports are prepared for reviewing the performance of various responsibility centres. Daily stock report on raw materials, reports regarding bank deposits and withdrawals, reports related to accounts receivables, cash inflows and outflows etc. are certain classes of reports generated by the treasury department. Measuring the Performance of the Treasury Department: 70
  • In order to measure the performance of treasury we need to analyze theextent to which it has achieved the goals of the firm. A goal is a futuretarget set by an organization. In order to be effective, goals should bechallenging, attainable, specific, quantifiable, time bound and relevant.After setting the goals, the finance managers should develop the plans toachieve the goals. They should also analyze the costs and risks involved inachieving the goals. In order to review the achievement of goals, theprofits generated in the current year should be compared with previousyears. The performance of the treasury can be maximized by constantlyreviewing the progress of the company’s policies.INVENTORY MANAGEMENTPurpose behind maintaining Inventories1. To avoid lost sales: If the firms do not hold adequate amount of goods,then there is a probability that the firm might lose some business.2. To gain quantity discounts: Many suppliers provide goods at reducedprices if the firm orders for a large amount of goods.3. To reduce ordering costs: When the firm places fewer orders of largequantities, the ordering costs will reduce.To achieve efficient production run: In order to have an uninterruptedproduction process, a firm needs to maintain a buffer stock. Also it needsto maintain a stock of certain vital raw materials and many othercomponents so that their shortage does not halt the production.Classification of Inventories: 71
  • Inventories may be classified into three categories.1. Raw Material Inventory: It consists of the basic materials that havenot been committed to the production process. It helps in uncoupling theproduction function from the purchasing function so that any delay inshipment of raw materials does not cause production delay.2. Work-in-Process Inventory: It consists of those materials that havebeen committed to the production process but have not been completelyconverted into finished goods.3. Finished goods Inventory: It consists of completed products that areawaiting sale. This inventory uncouples the production and sales functionsso that it is no longer necessary to produce the goods before a sale canoccur.Cost Associated with Inventories:There are three direct costs and two indirect costs that are associated withinventories:Direct Costs associated with inventories:1. Material Costs: These include purchasing costs, transportation costsand handling costs.2. Ordering costs: Ordering costs include the entire cost of acquiring theraw material, i.e. all the costs associated with activities like:requisitioning, purchase ordering, transporting, inspecting and handlingcosts at the warehouse for storing. Ordering costs would increase with anincrease in number of orders i.e. higher the frequency of acquiring theinventory, greater will be the ordering costs. If the firm maintains a largeinventory, only a few orders will have to be placed and ordering costs will 72
  • be relatively less. Thus ordering costs decrease with an increase in the sizeof the inventory.3. Carrying costs: These are the costs that are incurred for maintaining agiven level of inventory. They include storage costs, insurance, taxes,deterioration and obsolescence. The storage costs include cost of storagespace, handling costs and administrative costs like salaries to staff andworkers etc. Carrying costs increase with an increase in the inventory size.Indirect Costs associated with inventories:1. Cost of funds tied up in inventory: Maintaining inventories involves certain costs as funds that might have been used for other purposes are locked up in the form of inventory.2. Costs of running out of goods: If the firm is not able to provide materials to the production department, or supply finished goods to the marketing department, then the firm will have to incur some costs in the form of loss of production due to stoppage of work, uneconomical prices associated with cash purchases etc. Apart from these quantitative aspects, there are certain qualitative aspects related to these costs in the form of adverse effect on the relationship with the customer, and damage done to the image of the company when the demand is not met. Inventory management aims at minimizing the total costs associated with holding inventories. The firm faces two conflicting needs with respect to management of inventories:a. To maintain a sufficient size of inventory for efficient and smooth production and sales operations. Maximization of profit is done by maintaining minimum investment in inventories. Hence, keeping in view these two conflicting goals, the firm should try to strike a trade-off 73
  • between the ordering and carrying costs so that the costs are minimized and the profitability is maximized.Inventory Management Techniques:Inventory management includes three sub-systems or techniques that helpin the efficient utilization of inventories. They are:1. Economic Order Quantity2. Reorder-point subsystem3. Stock-level subsystem.Economic Order Quantity (EOQ): One of the major problemsassociated with inventory management is with regard to the quantity ofinventory that should be added to replenish it. The Economic OrderQuantity (EOQ) is the optimal order size that minimizes the total costs(ordering costs + carrying costs) associated with maintaining inventory.The total costs associated with inventories are computed as: Total costs = Total inventory costs + Total Ordering costsTotal Costs = where, U is the annual usage Q is the quantity ordered F is the fixed cost per order P is the purchase price per unit C is the carrying costs expressed as a percentage of purchase prices. We know that the ordering costs decrease with an increase in size of the inventory and carrying costs increase with an increase in the size of the inventory. This can be graphically represented as: 74
  • From the above graph, we can infer that the total costs will be minimum when the ordering costs are equal to carrying costs. The point Q* at which the total cost is minimum is known as Economic Order Quantity. It can be derived in the following manner:At Q* (i.e EOQ) Ordering costs will be equal to carrying costs,i.e.Hence EOQ or Q* = where, U is the annual usage of material F is the fixed cost per unit P is the purchase price per unit C is the carrying costs.Reorder Point Subsystem: 75
  • The EOQ model assumes that the reorder point for replenishment of stockis when the inventory level reaches zero and the time taken to procure thestock is zero but such a situation does not exist in reality. There is alwaysa time lag between the date on which the order is placed and the date onwhich the order is received. Consequently the reorder point is set at a levelgreater than zero so that the new goods that are ordered at this time willreach before the firm runs out of the existing stock.The reorder point is computed on the basis of the following factors: a. The inventory required during the lead time (also known as procurement or delivery time stock): If the replenishment system is efficient then less delivery time stock will be required. b. The minimum level of inventory held to prevent shortage (known as safety stock): The level of safety stock will be decided by weighing the probability of a stock-out that will lead to customer dissatisfaction and lost sales, against the increased costs associated with maintaining a high safety stock. Thus, when the usage rate and the lead time for procurement are likely to vary, the Reorder Point = Normal consumption during lead time + Safety stock where, normal consumption = Average daily usage rate x lead time in days If the usage rate and lead time for procurement are known with certainty, the Reorder level = Average daily usage rate x lead time in days. From the above formula it can be inferred that the reorder level will be fixed at a point where the level of inventory is just adequate to meet the production requirements during the lead time. Another formula that can be used for computing the reorder point is: Reorder Point = S x L + F 76
  • where, S is the usage in units L is the lead time in days R is the average number of units per order F is the stock out acceptance factor The stock out acceptance factor is based on the stock-out percentage rate specified and the probability distribution of the usage.Stock-level subsystem: The functions performed by this sub-system are: • Keeping a record of the existing level of inventory • Issuance of goods • Maintaining a record of the arrival of goods It is on the basis of the reports of this sub-system that the firm will place an order for replenishing the stock. The total inventory management system consists of all the three subsystems: EOQ subsystem, Reorder point subsystem and stock-level subsystem. Inventory Planning The level of inventory should match with the firm’s planning and budgeting process. The inventory level should not be too high or too low and should commensurate with the requirements of the production and marketing side. • Inventory planning should commence with planning the mix of the components that are required for making the finished product. Each component is then assigned a value and the materials cost for each 77
  • product is computed as the weighted average of the value of thecomponents.• A forecast of the future unit requirements is then made depending uponthe future sales opportunities, estimated on the basis of a sales forecastand safety level.Inventory planning also involves the development of an inventory data-base. An inventory database is a collection of inventory data items storedin a structured format. It provides information about classification ofinventories, level of inventories, demand for the items, ordering costs,carrying costs etc.ABC SystemAccording to this technique a firm should not exercise the same degreeof control over all inventory items. It should exercise more control overitems which are more expensive while less control should be exercisedon items that are less expensive.On the basis of the cost involved, items are classified into threecategories: 1. Category A: Items included in this class are those that requirethe largest investment. Therefore, these items require more rigorous andintensive control. 2. Category B: Items in this group are comparatively lessexpensive than the items in the group A and require relatively lesscontrol. 3. Category C: Items in this group involve relatively smallinvestments although the number of items will be fairly large. Minimumcontrol is required for items in this category. 78
  • Receivable management:Trade credit arises when a firm sells its products or services on credit anddoes not receive cash immediately. Trade credit is used by the firm toprotect its sales from the competitors and to attract potential customers tobuy its products at favorable terms. Trade credit creates receivables orbook debts that the firm is expected to collect in the near future. Thecustomers from whom book debts have to be collected in the future areknown as trade debtors.Receivables help the firm in increasing the sales level, as clients willprefer credit sales to cash sales. It also helps the firm in maintaining thesales at an appropriate level in situations where there is intensecompetition. As credit sales comprise a high profit margin, they generatemore profit than cash sales.The objective of receivables management is to help the firm to manage thereceivables in an efficient manner such that the benefits arising as a resultof extending credit sales should be more than the costs associated with it.1. Capital cost: Increase in the level of accounts receivables implies aninvestment in current assets. There is a time gap between the sale of goodson credit and payment by the customers. During this time gap, the firm’sfunds are blocked in the form of receivables and so it will have to arrangefor additional finance for meeting its own obligations. The cost involvedin financing the additional capital can be in the form of interest paymentsin case of external finance or opportunity cost of capital in case of internalsources that could have been put to some other use. The cost associatedwith the use of additional capital to support credit sales, which could havebeen profitably employed in other alternatives, is a part of the cost ofextending trade credit. 79
  • 2. Administrative costs: These are the costs related to the maintenance ofrecords related to receivables and also the expenses incurred for obtaininginformation about the creditworthiness of the customer.3. Collection costs: These are the costs that are incurred while collectingthe receivables from the debtors.4. Default costs: If the customer does not pay the dues within thespecified period, then the receivables are treated as bad-debts and have tobe written-off as they cannot be realized.Any business firm operates by selling goods on credit. Thus, finishedgoods sold on credit become receivables, which again form a major part ofthe current assets of a firm. The main objective of receivablesmanagement is to boost sales to a point where the returns that thecompany gets from the receivables is less than the cost that the companyhas to incur in order to fund these receivables.Maintaining receivables is no free job. The cost of maintaining receivablesincludes, the additional funding required by the company, administrativecosts, collection costs and default costs. Every company requires a propercredit policy to make sure that the cost of maintaining receivables isminimum.The credit policy looks at ways for a trade-off between increase creditsales leading to increased profits and the cost of having a larger amount ofcash locked up in receivables as well as the losses due to bad debts. Thevariables associated with credit policy include credit standards, creditperiod, cash discount and collection program. While application of stiffcredit standards might lead to lower receivables, it also reduces sales. Onthe other hand, liberal credit standards increase sales, but also have a highincidence of bad debts. 80
  • Credit period refers to the time period allowed for customers to pay fortheir purchases. Increasing the credit normally increases sales as well asthe incidence of bad debts and vice-versa. Cash discounts are the discountsoffered by companies to induce customers to pay much earlier than thenormal credit period. A liberal cash discount policy involves increasingthe discount percentage or lengthening the period of discount period.Collection program is the efforts made by a company to collect itspayments that are due. This includes monitoring the state of receivables,dispatching letters reminding customers of their due dates, telegraphic andtelephonic advice to customers, threat of legal action against overduepayment.MATERIAL INFLOW:Ingots produced by the electric furnace are charged into the reheatingfurnace and heated up to the required specific products and grade to berolled. Hot ingots are driven through conveyer to the 1st stand, then movedto the other path via repeater system When the rolled bar reaches to therequisite nominal sizes, the head and tail of the bar can be cut at the alligatormachine. The hot materials pass through the pinch roll & allowed to cool oncooling bed. Through the flying shear materials are cut into the desiredlength and carried to the twisting yard for further process and bundle.Moreover, automated feedback and control units ensure adherence tospecified size, shape & strength of the product and thereby total qualitycontrol.ANALYSIS OF NET WORKING CAPITAL 81
  • Working capital is one of the most difficult financial concepts tounderstand for the small business owner. In fact, the term means a lot ofdifferent things to a lot of different people. The need for working capital torun the day-to-day business activities cannot be overemphasized. We willhardly find a business firm which does not require any amount of workingcapital. Indeed; firms differ in their requirements of the working capital.Briefly, this is no precise way to determine the exact amount of gross or networking capital for every enterprise.Working Capital can be viewed as the amount of capital required for thesmooth and uninterrupted functioning of the normal business operation of acompany ranging from the procurement of raw material, converting thesame into finished products for sale and realizing cash along with profitfrom accounts receivable that arise from sale of finished goods on credit.The need for working capital by a typical manufacturing and sellingcompany becomes self-evident. In order to meet the production plans of acompany some quantity of raw materials have to be maintained in the formof inventory as there will usually be a time lag from the moment an order isplaced for raw material with suppliers till the same is received by thecompany. Absence of raw material inventory may result in stoppage ofproduction for want of raw material. The role of working capital plays insupporting the normal business operation of a typical manufacturing andtrading company The date and problem of each company should be analyzed todetermine the amount of working capital. The current assets and currentliabilities flow round in a business like an electric current. The workingcapital plays the same role in the business as the role of the heart in thehuman body. Just as the heart gets blood and circulates the same in the 82
  • body, in the same enterprise, adequate amount of working capital is pre- requisite. The firm’s net working capital refers to the difference of current assets and the current liabilities. The following table shows the net working capital of Unit Bajranbali Alloys Private Limited of Orissa for the past five years, i.e., from 2004-2008.Years 2003 2004 2005 2006 2007TotalCurrent 32,860,599.86 44,098,144.77 102,602,517.86 90,069,854.80 143,477,154.80AssetsTotalCurrent 16,447,724.67 7,821,287.07 20,566,911.08 12,277,951.92 19,962,962.61LiabilitiesNetWorking 16,412,875.19 36,276,857.70Capital 82,035,606.78 77,791,902.88 123,514,192.19 TABLE NO. 4.1: CHANGES IN WORKING CAPITAL DURING THE FINANCIAL YEAR 2003-2004 83
  • PARTICULARS AS ON 31ST AS ON 31ST DEFFERENCE (Rs) MARCH, 2003 MARCH, 2004 in Rs. in Rs.1. CURRENT ASSETS INCREASE DECREASEa. Sundry Debtors 2,199,199.30 7,554,494.32 5,355,295.02b. Inventories 17,010,735.18 16,841,878.30 168856.88c. Cash & Bank 2,325,864.36 7,893,059.68 5567195.32d. Loans & advances 11,324,801.02 11,808,712.47 483911.45Short TermTotal Current Assets 32,860,599.86 44,098,144.772.CURRENTLIABILITIESa. Liabilities & 16,447,724.67 7,821,287.07 8626437.6ProvisionsTotal Current Liabilities 16,447,724.67 7,821,287.07Working Capital 16,412,875.19 36,276,857.70 20,032,839.39 168856.88Increase in Working 19,863,982.51 19,863,982.51NET TOTAL 19,863,982.51 19,863,982.51 The above table shows the changes in the working capital during the financial year 2003 –2004. We can easily figure out that there is a Increase of Rs. 19,863,982.51 which shows the application of funds in the working capital of the firm for this particular period. TABLE NO. 4.2: CHANGES IN WORKING CAPITAL DURING THE FINANCIAL YEAR 2004 – 2005 PARTICULARS AS ON 31ST AS ON 31ST DEFFERENCE (Rs) MARCH, 2004 MARCH, 2005 in Rs. in Rs. 84
  • 1. CURRENT INCREASE DECREASEASSETSa. Sundry Debtors 7,554,494.32 12,757,922.07 5,203,427.75b. Inventories 16,841,878.30 37,267,825.23 20,425,946.93c. Cash & Bank 7,893,059.68 13,664,046.31 5,770,986.63d. Loans & advances 11,808,712.47 38,912,724.25 27,104,011.78Short TermTotal Current Assets 44,098,144.77 102,602,517.862. CURRENT LIABILITIESa. Liabilities & 7,821,287.07 20,566,911.08 12,745,624.01ProvisionsTotal Current 7,821,287.07 20,566,911.08LiabilitiesWorking Capital 36,276,857.70 82,035,606.78 58,504,373.09 12,745,624.01Increase in 45,758,749.08 45,758,749.08Working CapitalNET TOTAL 45,758,749.08 45,758,749.08 From the above table we can analyse change in working capital during the financial year 2004-2005. We can easily notice out that there is an increase of Rs. 45,758,749.08 which shows an application of funds in the working capital of the firm for this particular period. TABLE NO. 4.3: CHANGES IN WORKING CAPITAL DURING THE FINANCIAL YEAR 2005 – 2006 PARTICULARS AS ON 31ST AS ON 31ST DEFFERENCE (Rs) MARCH, 2005 MARCH, 2006 in Rs. in Rs. 1. CURRENT ASSETS INCREASE DECREASE a. Sundry Debtors 12,757,922.07 16,063,569.42 3,305,647.35 b. Inventories 37,267,825.23 33,425,828.28 3,841,996.95 c. Cash & Bank 13,664,046.31 12,961,095.04 702,951.27 d. Loans & advances Short 38,912,724.25 27,619,362.06 11,293,362.19 Term Total Current Assets 102,602,517.86 90,069,854.80 85
  • 2. CURRENT LIABILITIESa. Liabilities & Provisions 20,566,911.08 12,277,951.92 8,288,959.16Total Current Liabilities 20,566,911.08 12,277,951.92Working Capital 82,035,606.78 77,791,902.88 11,594,606.51 15,838,310.41Decrease in Working 4,243,703.90 4,243,703.90NET TOTAL 4,243,703.90 4,243,703.90 The above table helps in analyzing the working capital during the financial year 2002-2003. We can easily find out that there is a decrease of Rs. 4,243,703.90 which shows the sources of funds in the working capital of the firm for this particular period. TABLE NO. 4.4: CHANGES IN WORKING FINANCIAL CAPITAL DURING THE YEAR 2006 – 2007PARTICULARS AS ON 31ST AS ON 31ST DEFERENCE (Rs) MARCH, 2006 MARCH, 2007 in Rs. in Rs.1. CURRENT ASSETS INCREASE DECREASEa. Sundry Debtors 16,063,569.42 21,539,580.61 5,476,011.19b. Inventories 33,425,828.28 73,541,461.76 40,115,633.48c. Cash & Bank 12,961,095.04 17,637,670.12 4,676,575.08d. Loans & advances Short 27,619,362.06 30,758,442.31 3,139,080.25TermTotal Current Assets 90,069,854.80 143,477,154.802. CURRENT LIABILITIES 86
  • a. Liabilities & Provisions 12,277,951.92 19,962,962.61 7,685,010.69Total Current Liabilities 12,277,951.92 19,962,962.61Working Capital 77,791,902.88 123,514,192.19 53,407,300.00 7,685,010.69Increase in Working 45,722,289.31 45,722,289.31NET TOTAL 45,722,289.31 45,722,289.31 From the above table we can analyse working capital during the financial year 2003-2004. We can easily analyse out that there is a decrease of Rs. 45,722,289.31 which shows the application of funds in the working capital of the firm for this particular period. STATEMENT OF CHANGES IN NET WORKING CAPITAL:- The statement of changes of working capital is prepared with the help of the current assets and the current liabilities of two or more periods. The working capital flow arises when the net effect of a transaction is to increase or decrease the amount of working capital. Normally, a firm will have some transactions that will have an effect on the firm or the business as a whole, thus increasing or decreasing the net working capital. The net working capital increases or decreases when a transaction involves a current and a non current asset account. FIGURE NO. 4.4 87
  • Comparison of Net Working Capital 140,000,000.00 123,514,192.19 120,000,000.00 100,000,000.00 82,035,606.78 77,791,902.88 80,000,000.00 Net Working Capital 60,000,000.00 36,276,857.70 40,000,000.00 16,412,875.19 20,000,000.00 0.00 Capi king Wor 2003 2004 2005 2006 2007 Net (in cr) tal YearsFrom the above graph, we can see that the Net Working Capital of the firmwas very low in 2003. The value came to negative in the year 2006, butafter that there was boom in the net working capital in 2006 & 2007. 88
  • TABLE NO. 4.5: CONSOLIDATED STATEMENT OF CURRENT ASSETS :- The table below gives us a clear view of the Current Assets of the firm.Current Assets 2003 2004 2005 2006 2007a. Sundry 2,199,199.30 7,554,494.32 12,757,922.07 16,063,569.42 21,539,580.61Debtorsb. Inventories 17,010,735.18 16,841,878.30 37,267,825.23 33,425,828.28 73,541,461.76c. Cash & Bank 2,325,864.36 7,893,059.68 13,664,046.31 12,961,095.04 17,637,670.12d. Loans & 11,324,801.02 11,808,712.47 38,912,724.25 27,619,362.06 30,758,442.31advances ShortTermTotal Current 32,860,599.86 44,098,144.77 102,602,517.86 90,069,854.80 143,477,154.80Assets Each of them is compared for a period of five consecutive financial years. This consolidated statement of Current Assets helps us to know and determine the changes in the value of the Current Assets over the five financial years of the firm. The various current assets of the firm include sundry debtors, inventories, cash & bank balances and loans & advances. From the above given table, we can also find out that the total current assets of the firm were always increasing in the five financial years. For ex, in 2003 the total current assets were Rs. 32,860,599.86 which increased to Rs. 44,098,144.77 in 2004 and to Rs. 102,602,517.86 in the year 2005. There was a sudden decline in 2006 for Rs. 90,069,854.80 but then the company rose in 2007 with Rs.143, 477,154.80. TABLE NO. 4.6: CONSOLIDATED STATEMENT OF CURRENT LIABILITIES 89
  • Current Liabilities 2003 2004 2005 2006 2007a. Liabilities & 16,447,724.67 7,821,287.07 20,566,911.0 12,277,951.9 19,962,962.61Provisions 8 2Total Current 16,447,724.67 7,821,287.07 20,566,911.0 12,277,951.9 19,962,962.61Liabilities 8 2 FIGURE NO.4.6 Current Liabilities 25,000,000.00 20,566,911.08 19,962,962.61 20,000,000.00 16,447,955 15,000,000.00 12,277,951.92 Current Liabilities 7,821,287.07 10,000,000.00 24.67 T (in cr) 5,000,000.00 M O A U N 0.00 2003 2004 2005 2006 2007 Years 90
  • Each of them is compared for a period of five consecutive financial years.This consolidated statement of Current Liabilities helps us to know anddetermine the changes in the value of the Current Liabilities over the fivefinancial years of the firm. We can also figure out that the value of totalCurrent Liabilities was not stable. The total current liabilities wasRs.16,447,955 in the year 2003, Rs.7,821,287.07 in the year 2004, Rs.20,566,911.08, in the year 2005, 12,277,951.92 in the year 2006 andRs.19,962,962.61 in the year 2007. This shows that the total currentliabilities of the firm decreased in the year 2004 and again in the year 2006. 91
  • COMPARISON OF SUNDRY DEBTORS Comparison of Sundry Debtors 25,000,000.00 21,539,580.61 20,000,000.00 16,063,569.42 15,000,000.00 12,757,922.07(in cr) Sundry Debtors 10,000,000.00MOAUNT 7,554,494.32 5,000,000.00 2,199,199.30 0.00 2003 2004 2005 2006 2007 Years FIGURE NO.4.7 92
  • The above graph shows that there was a constant rise in the value of thesundry debtors from Rs.2.199,199.30 to 21,539,580.61 over the fivefinancial years. There was continuously increase in debtors between 2003-2007.COMPARISON OF INVENTORIES COMPARISON OF INVENTORIES 80,000,000.00 73,541,461.76 cr) 70,000,000.00 (in T 60,000,000.00 N U 50,000,000.00 37,267,825.23 40,000,000.00 Inventories O 33,425,828.28 M A 30,000,000.00 17,010,735.18 20,000,000.00 16,841,878.30 10,000,000.00 0.00 2003 2004 2005 2006 2007 Years 93
  • FIGURE NO. 4.8 This graph reveals that there was always an increase in the value of the inventories of the firm. There was a marginal drop in the level of inventory in 2004 and 2006 to 16,841,878.30 and 33,425,828.28 respectively, but after then the inventory level increased rapidly by 73,541,461.76. COMPARISON OF CASH & BANK BALANCES Comparison of Cash & Bank Balances 20,000,000.00 17,637,670.12 13,664,046.31 15,000,000.00 12,961,095.04 10,000,000.00 Cash & Bank 7,893,059.68 5,000,000.00(in cr) 2,325,864.36MOAUNT 0.00 2003 2004 2005 2006 2007 Years FIGURE NO. 4.9 94
  • The above graph shows the imbalanced behavior of cash and bank balancesof the firm. The balance dropped down in 2003, but recovered in the nextfinancial year. There was a decrease in 2006 to 12,961,095.04, as shown inthe above figure. But there after it increased rapidly in 2007 by17,637,670.12.COMPARISON OF LOANS & ADVANCES Comparison of Loans and Advances 45,000,000.00 38,912,724.25 40,000,000.00 30,758,442.31 35,000,000.00 27,619,362.06 30,000,000.00 25,000,000.00 Loans and AdvancesT (in cr) 20,000,000.00 11,324,801.02 15,000,000.00 11,808,712.47MOAUN 10,000,000.00 5,000,000.00 0.00 2003 2004 2005 2006 2007 Years 95
  • FIGURE NO. 4.10The graph shows that the loans and advances of the firm were very high on2005 by 38,912,724.25. This decreased during 2006 by 27,619,362.06. Theamount of loans and advances was not uniform in the five financial years,with a continuous rise and fall in the value of it.COMPARISON OF LIABILITIES & PROVISIONS:- Comparison of Liabilities and Provision 25,000,000.00 20,566,911.08 19,962,962.61 20,000,000.00 16,447,724.67 15,000,000.00 12,277,951.92T (in cr) Liabilities and Provision 10,000,000.00 7,821,287.07MOAUN 5,000,000.00 0.00 2003 2004 2005 2006 2007 YearsFIGURE NO. 4.11 96
  • We can gather from the above graph that the liabilities of the company werenot uniform and there was sudden drop in the liabilities during the year2004 and 2006 by 7,821,287.07 and 12,277,951.92 respectively.SWOT ANALYSIS ⇒ The company is an existing profit making one having BIS and ISO 9001:2000 and making annual cash generation. ⇒ Promoters are resourceful. The promoters shall bring in sufficient funds out of their contribution before their availing disbursement. The company has alreadySTRENGTS started investing in the project ⇒ Saving in transportation, handling, administrative overheads, marketing and 97
  • collection expenses.⇒ It has already paid the entire Term Loan of Union Bank of India for the Induction Furnace Division and only their working capital loan exists. It has also paid the entire Term Loan of SIBID of Rs. 65 lakhs for the re-rolling mill division. The STWC loan a/c. of SIDBI is very regular as also the W.C loan a/c. of UBI.⇒ Promoters have several years of experience in re-rolling and iron and steel marketing.⇒ Raw materials like Sponge Iron, Ingots etc. are available from associate company and own plant respectively.⇒ Available infrastructure facilities like land, power, telephone, water, road, etc.⇒ National award holder of Small Scale Entrepreneurs, 2000, Dhatu Nayak Award- 2002, Rashtriya Udyog Ratan Award –2002, Rashtriya Udyog Award-2002 and many more.⇒ De Ratio at 1.14 : 1. (Expansion) 98
  • ⇒ Due to modernization, the life of roll can be saved up to a minimum of 2% ⇒ End cuttings to extent of 050% to 1% can be saved & break down can be minimized y 20% ⇒ Higher sizes of CTD / TMT bars can be manufactures & power & F.O can be saved to a minimum of 10% from the present consumption.WEAKNESS ⇒ Fluctuating selling price of sponge iron and metallic scrap.OPPORTUNITIES ⇒ Diversification into structural steel, power plant, DRI plant etc. ⇒ A few rolling mills at Tangi (Cuttack),THEATS Jagatpur and Khurda and nearby states shall provide competition. 99
  • CHAPTER V:FINDINGS- The net working capital of the unit has shown a gradual increase. Only in the year 2006 the level of net working capital fell to Rs.77,791,902.88 from Rs.82,035,606.78 in 2005. which then increased to Rs.19,962,962.61 in 2007. There was a increase of rupees Rs.19,863,982.51 in the net working capital during the financial year 2003-2004 which shows the application of funds There was an increase of rupees Rs.45,758,749.08 in the net working capital during the financial year 2004-2005 which shows the application of funds. There was a decrease of rupees Rs.4,243,703.90 in the net working capital during the financial year 2005-2006 which shows the sources of funds. There was an increase of rupees Rs.45,722,289.31 in the net working capital during the financial year 2006-2007 which shows the 100
  • application of funds. The net working capital of the firm was at a very low level during the year 2003 was Rs.16,412,875.19 gradually it increased every year till it reached Rs.82,035,606.78 in 2005, then on 2006 it decreased up to Rs.77,791,902.88. There was a sudden rise immediately on 2007 where the net working capital is Rs.123,514,192,19 There was a sudden decrease in the inventory in 2004 from Rs.17,010,735.18 to Rs.16,841,878.30. Then gradually it increased to Rs.37,267,825.23 in 2005, and a decline again in 2006 for Rs.33,425,828.28. The company again increased its inventories by Rs.73,541,461.76 in 2006-2007. The amount of current assets increased continuously during the year 2003-2007except for a slight decline in 2006 by Rs.90, 069,854.80. The level of current liabilities of the firm was not uniform. The liabilities showed a decrease in 2004 to Rs.7, 821,287.07 and again decline in 2006 by Rs.12, 277,951.92. There is an imbalance behavior of cash and bank balances of the firm. The balance dropped but increased in 2004 to Rs.7, 893,058.68. Then there was again a decline in 2006 for Rs.12, 961,095.04 from Rs.13, 664,046.31 in 2005. The loans and advances of the firm were very high in the year 2005 by 38,912,724.25. There was a slight decrease in 2004 and 2006 by 101
  • Rs.11,808,712.47 and Rs.27, 619,362.06 respectively. Sundry debtors increased continuously between 2003-2007 from Rs.2,199,199.30 to Rs.21,539,580.61.SUGGESTION- • From the analysis of working capital, the liabilities are very high each and every year. This should be lessened so as to earn profits. • The company sells its products on cash basis mostly whereas the major procurements of raw materials are on 30 days credit basis. The necessary steps have been taken by the company to reduce the inventory holding period over the years. As a multi-national company, the procurement planning should be made in advance. The intend for procurement must be done in such a way so that items should be available in minimum stock at right time. The items available should be accessible to all through computers. All the concerned departments can access the software on inventory of raw material and spares. So all care should be taken to reduce unnecessary inventory holding and resultant consequential loss to the company. • The need for working capital by a typical manufacturing and selling company becomes self-evident. In order to meet the production plans of a company some quantity of raw materials have to be maintained in the form of inventory as there will usually be a time lag from the moment an 102
  • order is placed for raw material with suppliers till the same is received by the company. Absence of raw material inventory may result in stoppage of production for want of raw material. The role of working capital plays in supporting the normal business operation of a typical manufacturing and trading company. • In view of the above facts, it was found that there was decrease in liabilities and provision, loans and advances, inventories in the year 2004 and 2006. So necessary steps should be taken. • There was a continuous increase in number of debtors from 2003 and 2007. This should be taken care.CONCLUSION-To conclude, we can say that Unit Bajrangbali Alloys (p) Ltd ,BAPL hascontinued to take on the competition, in spite of slow down in the overallperformance. However, the outstanding loans and advances recorded agrowth of 10% as against the all region average of 9%, mainly due to thedifficulties experienced by the Manufacturing industry in the past years.The unit has a large amount of man power, which it can aim to utilize in thebest possible manner. As the Unit is not deprived of skilled labour, it shouldalways aim at increasing the profits of the firm.There is an imbalance behavior of current asstes and current liabilities ofthe company by which the total working capital fluctuates every financialyears 103
  • Working capital management involves not only managing the differentcomponents of current assets, but also managing the current liabilities or tobe more precise the financial aspects of current assets. It is thereforeappropriate to provide a brief description of current assets and currentliabilities.The Unit went on increasing the production in the subsequent years. Thisunit produces different quality of Manufacturing goods and Sponge ironaccording to the customer specifications.This chapter also deals with the practical part, i.e., it deals with the analysisof the current assets and the current liabilities of the Unit for a period offive consecutive financial years to determine the net working capital of theUnit. The comparison of the net working capital of the firm is alsomentioned with the help of a few tables and graphs. 104
  • BIBLIOGRAPHYBOOKS 1. I .M Pandey,2005,Financial Management, New Delhi, Vikas Publication. 2. L.S. Porwal ,2001, Accounting Theory and Introduction, New Delhi, TATA Mc. Graw hill. 3. S.C. Shukla , T.S. Gerewal, 1999,Advanced Accounting, New Delhi,S.Chand.WEB-SITES REFERRED  www.google.com  www.altavista.com  Annual reports of last 5 yearsMAGAZINES  Business world.  Business today.  ICON Steel magazine. 105
  •  India today. Bajrangbali Alloys (P) Ltd.,{BAPL} magazine. 106