REPORTONWORKING CAPITAL MANAGEMENT & RATIO ANALYSISOFNATIONAL FERTILIZAERS LIMITEDPRESENTED BY:-Aakriti RohatgiDATE OF SUBMISSION : AUGUST 01, 2012
NFLS Core CompetenceNFL, a Schedule A and Mini Ratna Company, is the second largestproducers of Nitrogenous Fertilizers in the country with 16.6%share in Urea production during 2005-2006.
THE COMPANYNational Fertilizers Limited was established in August, 1974 to set up two Fuel Oilbased plants at Bhatinda (Punjab) and Panipat (Haryana). Both of them werecommissioned in 1979. The Nangal Fertilizer plant of Fertilizer Corporation of India(FCI) had been merged with National Fertilizers Limited (NFL) in 1978 on thereorganization of FCI and NFL group of companies. Later NFL executed the country’s1stinland gas based plant at Vijaipur (in Madhya Pradesh) on HBJ (Hazira-Jagdishpur)gas pipeline. The Vijaipur Project received First Prize for “Excellence in ProjectManagement” from the ministry of Program implementation, Govt. of India. Vijaipur planthad gone in commercial production in July, 1988. Subsequently, expansion undertakenin 1997 for doubling the capacity of Vijaipur unit.NFL is a multi unit, multi Product Company and is one of the India’s largest producers ofNitrogenous fertilizer with a market share of 16.6%. NFL is a Mini Ratna Category-1Company and has the distinction of being a profitable public sector undertaking. Thecompany is now operating three fuel oil based Plants located at Nangal, Bhatinda andPanipat and gas based plants at Vijaipur. The company has an installed capacity of32.31 lakh MT of Nitrogenous fertilizer “UREA” It is an ISO-9001; 2000 and ISO-14001:1996 company.NFL produces two popular brands of chemical fertilizers, i.e. Kisan Khad (CalciumAmmonium Nitrate-CAN) and Kisan Urea. Besides the fertilizers, it manufactures andmarkets the industrial products (Liquid Oxygen, Liquid Nitrogen, Liquid Carbon Di-Oxide, Nitric Acid, Methanol, and Argon) and by-products (Sulphar).Now NFL entered “silver jubilee year” on 23rdAugust, 1999. NFL operates three oilbased plant Three of the Units are strategically located in the high consumption areas ofPunjab and Haryana. The Company has an installed capacity of 32.31 lakh MTs ofUrea and has recorded an annual sales turnover of Rs.3, 591 crores during 2005-06.The Company’s strength lies in its sizeable presence, professional marketing andstrong distribution network nationwide and a gas based plant. CompanyNFL has been signing a Memorandum of Understanding (MOU) with the government ofIndia since 1991-92every year under which the Government undertakes to assist NFLwith regard to availability of inputs, obtaining ECA allocations commensurate with theavailability of fertilizers from NFL plants etc. NFL on its part undertakes to adhere to itsproduction and movement plans, achieve its ECA allocation and provide regular feedback to the Administrative department. All the years, after signing the MOU,
Government has rated the performance off the company as “excellent” Company hasbeen performing at high level of capacity utilization over the years.The company also produces bio-fertilizer at its Indore plant since October 1996.NFLcommissioned its 120 Nm3/hr.Argon based plant at Panipat unit in October, 1997.During September 1998 NFL has commissioned the Methanol Augmentation Scheme atNangal unit. In order to sustain and enhance the company’s growth NFL successfullycompleted the revamping of UREA plant at Nangal. Commercial production of this plantwas declared w.e.f 1st Feb. 2001. The annual installed capacity of Nangal plant hasthus increased from 3.30lakh tones of UREA to 4.78 lakh tones. With the re rating ofinstalled capacities of Vijaipur plant and revamping of urea plant at Nangal, the totalannual installed capacity of UREA at NFL has reached to 32.31 lakh tones. Thecompany during the year 2005-06 produced 33.44 lakh tones of UREA, therebyachieving a capacity utilization of 103.5%. NFL is the 2ndlargest producer ofNitrogenous Fertilizer in the country.Three Zonal offices at Bhopal, Lucknow and Chandigarh with central control at Delhi co-ordinate the company-marketing network.Kisan Urea NFL’s popular brand is sold over alarge marketing territory spanning the length and breadth of the country. The Companyalso manufactures and markets Biofertilizers and a wide range of industrial products likeMethanol, Nitric Acid, Sulphur, Liquid Oxygen, Liquid Nitrogen etc. The Company hasdeveloped Neem coated Urea which on demonstration has improved the crop yield by4-5%. The Company is focusing its thrust to widen the marketing operations of Neemcoated Urea.NFL has been brought in Information Technology for its day to day office use. Thecompany has Satellite Based Communication System installed with the assistance ofNIC and its office Complex in NOIDA, Units and Zonal Marketing offices through LocalArea Networking (LAN). The company has also launched its Websitewww.nationalfertilizers.com to make feel its presence at the global level.Today NFL stands for hope, prosperity & growth. It has succeeded in enthusingits people with sense of dynamism and pride by developing a work culture, whereteam spirit takes precedence over personal factors.NFL is already geared up to meet the challenge of the 21stcentury. NFL over the yearshas developed a team of dedicated professionals in the areas of production,maintenance, project management, safety and environment control. Theseprofessionals are sought after in the Industry both in India & abroad for their SpecializedServices .NFL is known in the industry for its work culture; value added human resources, safety,environment, concern for ecology and its commitment to social upliftment. All NFLplants have been certified for ISO-9001(2000) for conforming to international qualitystandards and International Environmental Standard i.e. ISO-14001. Apart from aboveNFL has also obtained OHSAS -18001 safety standards for its two parts. With thecertification of Corporate Office/Marketing operations under ISO-9001:2000, NFL hasbecome the first Fertilizer Company in the country to have its total business coveredunder ISO-9001 Certification.
MARKETING REVIEWDespite of the fact there is tremendous untappedpotential and great need for fertilizer use in the sectors like waste land, rain fedagriculture, horticulture etc., present fertilizer use is quite low. Country’s future need offood security and balance diet can be met only by expanding the base and quantum offertilizer use in addition to use of organic, bio-fertilizers, etc. Demand for fertilizer in non-traditional sector is bound to increase.The company achieved sales turnover of Rs. 3590.53crores as compared to Rs. 3474.06 crores for the previous year. In terms of quantity,33.63 lakh MT of Urea was sold against 34.73 lakh MT sold during the previous year.Company has been making continuous efforts to contain the marketing expenses,especially warehouse handling, rake handling, and inventory carrying cost. Productsmovements are continuously monitored to achieve the highest level of efficiency.Outlook and Initiatives for the current yearAgriculture sector will continue to remainimportant for Indian economy since over 50% of population is actively engaged inagriculture. A second green revolution is needed to transform subsistence farmers tosurplus growers. Domestic gas based Urea industry is comparable to the best in theworld. The single major factor for wide differences in manufacturing costs of variousunits is the feed-stock.Keeping in view the Government of India futurepolicy, Company has been planning switchover of feed-stock from Fuel Oil/LSHS togas.Feasibility study has been carried out by licensors for revamp ofPanipat Unit for change over of feed-stock from Fuel Oil to RLNG. Based on the reportsof the licensors, M/S.PDIL has been lined up for the selection of technology andpreparation of the detailed feasibility report. The study made at Panipat would beapplicable for Bhatinda and Nangal with modifications. Gas suppliers are beingcontacted for committing supply of RLNG for Panipat Unit and possibilities are alsobeing explored for committing availability of gas for Nangal and Bhatinda units.
Feasibility report is under preparation for capacityenhancement at Vijaipur-II unit, Vijaipur I unit is implementing energy selling project inAmmonia plant for reducing the energy consumption, project is scheduled to becompleted by April 2008. In addition to this Company is also implementing variousproposals involving technology absorption to make the pant more efficientPossibilities are being explored to set up joint venture fertilizerplant in the countries where raw material is available in sufficient quantities ateconomical rates. A core group has been established for the purpose. Company ahsdeveloped value added products i.e. Zincated and Sulphar coated Urea and trial runsare being carried out to ascertain crop yield and their advantages. Once the benefits areestablished, these value added products would be produced and marketedcommercially.
National Fertilizers Limited,Gohana Road,Panipat,Haryana-132106.Email: firstname.lastname@example.orgFax : 0180- 2652515Tel. : 0180- 2652481 to 485, &0180- 2655570PANIPAT UNITThe Panipat Unit of National Fertilizer Ltd. is situated onNational Highway No.1 and Delhi- Amritsar railway trunk route. Panipat city is about 90km. away from Delhi and is covered in the National capital region. Panipat is a historicalcity, which was the scene of three historical battles. Panipat is also famous for itshandloom industry.The Panipat project was approved by Govt. of India on 10thFeb. 1975 for implementation. Prime consultants for design, engineering, erection andcommissioning of the plant were m/s Toyo Engineering Corporation of Japan and M/sEngineers India Ltd. Starting from the Zero-date 30.0475, the Feed-in was achieved on01.09.79 i.e. within 40 months of the Zero-date. The unit went in commercial productionfrom 01.09.79. The total cost of the project was Rs. 221.33 crore (Rs. 2213.3 Million)Performance of the unit in all the areas has also been widelyacknowledged. It has won number of Awards and recognition in the Fields ofproduction, productivity, safety, welfare, innovation, environment protection, skill etc.The unit is also well known for its commitment towards environment protection andsocial welfare in the Region.Panipat Unit is considered the show window of thecompany. The unit being near to the National Capital, it hosts a number of distinguishedguests and visitors from within and outside the country.Environmental Control & Ecological Balance
Panipat Unit is acknowledged for its environmentalfriendliness. The Unit is fully conscious of its responsibility towards pollution control &environmental protection. Utmost care is taken to ensure that no harmful gasses aredischarged to the atmosphere. The dust evolved during prilling of UREA in the prillingtower is scrubbed in the dust chamber by water spray. Unit has a flare stack of 80-Mheight to release the gasses from production streams and to burn them. A computerbased windMonitoring system has been installed in one of the monitoringstations located at the center of the laboratory. In order to maintain ecological balance,in and around the factory and township a dense green belt has been provided andabout 6.0 lakhs trees have been planted within the factory and township premises.Employee WelfareThe Company is very conscious of the welfare of its employees atall units. At Panipat unit there is a modern township, which is spread over an area of100 Acre. There are 900 dwellings in township, which accommodate officers, workmen,and CISF and railway staff. Company gives liberal House Building advance at nominalinterest to the employees to construct their own houses. Company has provided a 30bed hospital in the heart of township. Management provides canteen facilities to itsemployees in the factory. Management organizes Inter-unit and Inter-DepartmentalTournaments for various games, for which a yearly sports calendar is drawn.Industrial RelationsIndustrial Relation at Panipat Unit has always remainedpeaceful and cordial. At Panipat unit there is only one registered and recognizedworkers union i.e. NFEU. The union is only affiliated to FWFI (Fertilizers WorkersFederation of India) No outsider is the member of the union .The scheme of employeeparticipation in management is operated at unit level. Under this scheme employees areencouraged to suggest improvements in productivity, production, cost of production,import substitution, working conditions etc.Human Resource DevelopmentThe company considers its employees as its greatest assets. It takescare of its training needs of employees. A separate HRD department is established forthis purpose.NFL Panipat unit has always remained conscious towards socialupliftment of weaker sections and development of surrounding villages. NFL laysemphasis on total system approach towards maintenance management. Various area ofweakness is analyzed and subsequently improved. Increasing use of computers ismade to meet the information needs of Maintenance Personnel. Maintenance
Departments have been continuously making efforts to improve the reliability,availability and maintainability of the equipment/systems and also to optimize the cost ofmaintenance. A systematic approach has been developed and implemented at the Unit.The Panipat Unit encourages setting up of ancillary units.Presently there are two ancillary units manufacturing Jute bags and other two unitsmanufacturing HDPE bags. Four ancillary units are bottling Carbon dioxide (CO2) incylinders and are manufacturing dry ice.National Fertilizers Limited is a quality conscious organization.All the raw materials, chemicals, intermediate products, by-products and finishedproducts are checked for their quality with respect to the standards. Central Laboratoryand the laboratories in each plant are equipped with mostSophisticated instruments and are manned by well qualified staff.Quality of the final product UREA is regularly monitored. It is ensured that the productmeets the quality standard laid down in the Fertilizer Control Order.Management is always conscious about the safety of theemployees. Safety Department with well qualified and experienced Safety engineersensures that working conditions are safe, safety procedures are followed and personnelprotective equipment are used. Safety Department increases the awareness aboutsafety amongst the employees by way of seminars, exhibitions, slogans, safetycompetition etcPublic Relations wing of the unit is continuously engaged in“Image Building” by projecting performance highlights through dissemination ofinformation. The company has to maintain vital links with various “Publics” e.g.employees, media, men, specialized institutes who sponsored visitors, DistrictAdministrators, farmers, dealers besides hosts of other agencies for inculcatingappreciation and understanding about the efforts of the organization.
DIFFERENT PLANTS IN PANIPAT UNITAmmonia Plant:The Ammonia plant is based on Fuel oil as feed stock andis designed to produce 900 MT/day ofAmmonia.The Fuel oil is partially oxidized in theGasification Reactorsat 1350 degree C by Shell Gasification process. The raw gasproduced in the reactors mainly consists of H2, CO, CO2 and H2S. The heat generatedin the process is recovered in the Waste Heat Boilers to produce high pressure steam at100 KG/cm2. About 80% of the carbon produced in the Gasification reactors, is recycledalong with the feedstock.Hydrogen Sulphide in the raw gas is removed by absorption in cold Methanol inDesulphurization Section of Rectisol. The carbon monoxide in the desulpharised gas isconverted to Carbon dioxide by double stage H.T. Shift Conversion. The CO2 is, laterremoved from the process gas in the Decarbonation Section of Rectisol Section andboth the gasses are recovered by regeneration of Methanol at low pressure. H2S in theform of clause gas is sent to Sulphar Recovery Plant for recovery of Sulphar. The CO2gas is sent to Urea Plant for synthesizing with Ammonia to manufacture Urea. Theprocess gas from Rectisol Section is sent to Nitrogen Wash Unit to remove the traces ofimpurities by liquid nitrogen wash. Nitrogen is further added to the process gas (i.e.hydrogen) to obtain a ratio of 3:1 of N2 and H2. This synthesis gas mixture iscompressed to 230 kg/cm2 pressure and synthesis of n2 &h2 is carried out in theHaldor Topsoe loop in a radial flow Ammonia converter and Ammonia is produced.Argon Recovery PlantAtmospheric air contains 0.93% of Argon gas by volume. Till recently thisgas had been passing back to the atmosphere without any use, along with purge gasesfrom northern loop of the Ammonia plant. An idea of installing Argon Recovery Plantwas mooted to recover the Argon gas for sale to augment NFL’s profit margin.The plant has the capacity of producing 0.95 million cubic meters/ annum ofargon based on 330 stream days. The purity of gas produced is more than 99.999%Urea PlantUrea plant is designed to produce1550 TPD based on MitsuiToatsu Total Recycle ‘C’ improved process. The Ammonia and Carbon dioxide,produced in Ammonia plant, are pressurized to about 250 Kg/cm2 pressure. Synthesistakes place in the Urea reactor, where Ammonia and CO2 react at 250 Kg/cm2
pressure and 200 degree C temperature to produce Urea. The reactor outlets productsare then decomposed. The Urea solution, produced in this process, is crystallized in theVacuum Crystallizer. Crystal slurry is centrifuged to separate crystals, which are, thendried in theDrier and pneumatically conveyed to the top of Prilling tower. Urea crystals are meltedin the Melter and the molten Urea is sprayed through Acoustic Granulators from 68 mhigh prilling tower. Urea in the form of prills is collected at the bottom of the prilling toweron CFD bed, where it is cooled by air. Product Urea then sent to bagging plant andbagged in 50 Kg bags.Sulphur Recovery PlantSulphur is present in the fuel oil/LSHS, used as feedstock for manufacture ofAmmonia. Clause gas rich in Hydrogen Sulphide is obtained in the Rectisol Section ofAmmonia plant and is burnt and partially oxidized to SO2 to form elemental Sulphar bycondensing, the residual H2S reacts with SO2 to form more sulphar in two catalyticreactors in series. The unconverted waste gas is burnt in the incinerator and heat isrecovered in Heat Recovery Exchanger, where low pressure steam is produced. Thesulphar recovery plant serves the double purpose i.e. to recover costly Sulphar and toprevent pollution.Captive Power PlantThe captive power plant has been installed to meet the total power requirement ofthe plants .Two Turbo Generators of 15 MW each, generate power at 11 KV. The powerplant can be run in parallel with the northern grid or in isolation. A boiler of 210 T/hr hasbeen provided to supply steam to the Turbo Generators and meet part of the steamrequirement of the process plants. The boiler is designed to operate on coal withsupport oil or fully on fuel oil.Off Sites and UtilitiesThe off Sites & Utilities consists of following facilities:• Raw Water Reservoirs & Filtration Plant• De mineralized Water• Steam Generation Plant• Cooling Towers• Fuel Oil Handling and Storage• Railway SidingEffluent Treatment PlantOne of the most sophisticated Effluent Treatment plant has beeninstalled in the unit, which meets the latest standards, laid down by the Central Boardfor the Prevention & Control of Water Pollution. Treatment of liquid effluents is carriedout by physical, chemical and biological treatment process.
PLANTS AND CAPACITIESAmmonia Plant 900MT/DayUrea Plant 1550 Mt/DaySulphar Recovery Plant 26.5MT/dayCaptive Power Plant 1Boiler of 210 MT/hr2 Turbo Generators of 15 MWH/Hr.eachSteam Generation Plant 3 boilers of 150 MT/Hr.Bagging Plant 4000 MT/dayEffluent Treatment Plant 200 M3/HrRaw Water Plant 2400 M3/HrDM Water Plant 375 M3/Hr
CORPORATE OBJECTIVES OF NFLNFL is an instrument of society. It has to service the needs of people within the scope of its basicobjectives. To achieve this NFL must:• Select capable people and improve their knowledge and skills on organized basis.• Motivate and enthuse the employees to achieve higher productivity with team spirit.• Lay down integrated objectives, define individual goals and maintain an atmosphereconductive to achievement of these goals.The Corporate Objectives of NFL are:In terms of Memorandum of Association, NFL was set up to manufacture and market chemicalfertilizers, other chemicals and by-products as well as to provide the allied services. In order toachieve and maintain the leading position in the production and marketing of fertilizers, thefollowing micro objectives have been intensified:1. PRODUCTIVITYTo achieve the best possible levels of production and economy in the use ofinputs while ensuring safety and proper maintenance of plant and machinery and pollutioncontrol. More specifically (a) To strive to raise capacity utilization. (b) To improve uponconsumption norms consistently.2. RESEARCH & DEVELOPMENTTo carry out R&D activities for-(a) Increasing plant availability.(b) Saving use of energy in different forms.(c) Better recovery of saleable by-products,(d) Process improvement/development and(e) Increasing efficiency utilization on a sustained basis in the application of chemicalfertilizers in combination with other agricultural inputs.
3. PROFITABILITYTo mange the assets, men and materials in most effective and efficientmanner ensuring (a) reasonable return on investment commensurate with the principles laiddown by the Government from time to time, and (b) generation of increasing internal resources.4. MARKETING & CONSUMER SERVICES(a) To provide to the farmers high quality products in right time and in adequate quantitiesand with a package of modern agricultural practices.(b) To further intensify promotional efforts for increased use of fertilizers and to maximizedistribution of Company’s products within the areas covered by the company consistentwith Government Policy.5. ORGANIZATIONTo develop and maintain an organizational environment for encouraging individual and groupinitiative, innovation and productivity and also sustain fair deal and humane approach.6. GROWTH(a) To achieve reasonable and consistent growth in the business of manufacture andmarketing of fertilizers and chemicals compatible with needs of the market.(b) To work out diversification/expansions schemes to increase profitability of the Companyand meet the changing needs of the customers.7. OBLIGATIONS TO SOCIETY(a) To conduct the business of NFL in accordance with ethical and legal standards and tounder take socio-economic activities, consistent with Government policies, in order togenerate good environment, in which Company operates.(b) To promote development of ancillary industries.
SWOT ANALYSISSTRENGTHS:The company’s strengths lies in its brand loyal customers, its harmonious commitments onhuman resources, its efficient operations, IR, goodwill it has generated over by the work culture,fulfilling its social commitments. The strengths that drive its achievements are: The company with an excellent track record and high profits. An early starter- more than 40 years experience in fertilizer industry. Highly motivated and dedicated workers and staff-no industrial relations problem. All plants are situated amidst high fertilizers consumption areas in the states of Punjab,Haryana and Madhya Pradesh. A well developed and efficient marketing network including private and institutionalmarketing arrangements. Bio Fertilizers plants of 100 tonnes capacity per annum at Indore in Madhya Pradesh. Excellent growth prospects with significant additions, modifications and replacements.WEAKNESSES: Credit Policy Claim policy.OPPORTUNITIES: Marketing of Agricultural inputs/ services under one roof. Setting up of Joint Ventures in India/ Abroad. Deploying existing marketing set-up and marketing channels for allied business productlines including agricultural inputs. Good demand for Neem-coated Urea. Scope for growth in Bio-fertilizers. Locational advantage as the production unit are located in the main consumption areas. Once the gas is available at Panipat, Nangal and Bhatinda, the company would be able toproduce UREA at competitive price at these three units.
THREATS: Energy intensive i.e. Fuel Oil/LSHS based plants could become unviable under newfertilizer policy unless feed stock is switched over from Fuel oil/LSHS to NG/R-LNG. Increasing input costs of feed stock i.e. Fuel Oil/LSHS/Naphtha/NG Single nutrient product base. Uncertainty in the availability & pricing of R-LNG for change over of feed stock atPanipat, Bhatinda. Slow growth in UREA consumption during last 7-8 years. Globalized competitive scenario in industrial products and reducing trend of importduties and threat from dumping of low price products.
ORGANISATIONAL SETUP OFFINANCE & ACCOUNT SECTION AT NFL PANIPATF&A Department is under the overall control of Director (Finance) who isappointed by the Government of India. Director is the full time member of the board of directorsof the company. Organization operates through four production units at Naya Nangal, Bhatinda,Panipat, Vijaipur, Central marketing office at New Delhi and corporate office at New Delhi. AtCorporate office, F&A Department is headed by Deputy General Manager who reports toDirector (Finance). Manager (F&A), Deputy Manager (F&A) & other officers assists him.Deputy General Manager/ Manager Finance heads finance department in the production units atNaya Nangal, Panipat, Vijaipur and Bhatinda, administratively reporting to General Manager ofthe respective unit. Finance and Accounts department at each unit comprises of various sections.They are:• Purchase Accounts Section• Sales Accounts Section• Stores Accounts Section• Works Accounts Section• Cash Accounts Section• Establishment Accounts Section/Provident Fund Accounts Section• Miscellaneous Accounts Section and Estate Accounts Section• Central Account Section• Management Reporting & Costing & Budgeting Section• Internal Audit Section.Each of these sections is headed by Deputy Manager/ Assistant Manger/ AccountsOfficer/Assistant Account Officer who is supported by officers and staff depending upon workload of the section.PURCHASE ACCOUNTS SECTIONPurchase Account Section is mainly responsible for-(a) Timely release of payment to suppliers as per terms and conditions of Purchase order.(b) Clearance of provisional liability created by store Accounts section(c) Accounting for the purchase of –- Raw material- Packing material- Furniture- Spares- Stores/consumables etcJunior Assistant
System summaryThe procurement of all types of plant and machinery, store, spares, consumables andequipments are done through material department. Head of department would estimate theirrequirement for the purchase of goods in respect of each financial year well in advance andcommunicate to the Accounts/Material department for inclusion in the annual revenue/capital budget. Once the budget has been approved, the various officers delegated withpowers would be free to indent within the approved budgetary limits. In case of capital itemsall indents shall be sent to Finance &Accounts department by the indenter to ensureavailability of budget before such indents are forwarded to stores/purchase section forprocurement. The materials are broadly classified in three categories: (a) Specific Items(ST):Items for specific works plant and machinery, equipment etc.(b) Regular stock items(RST):Items of normal requirement of recurring nature for operation , maintenance and otherpurposes.(c) Insurance stock items(IST):Items for use as replacement in the event of apossible breakdown.IndentingThe user department places the indent through stores section for the assessed quantities.Store section will then check the stock position of the indented items and in consultation with theindenter, finalize quantities to be purchased. The indent should specify whether it is for“RST”,”ST”,”IST” or of capital nature. The indent will be prepared in 5 copies and will bedistributed among different departments.TenderingTenders are classified into three classes:Open Tenders: Open tenders should be invited in the most open and public manner and, as suchtender notices should be advertised in the leading news papers or in Indian trade journalLimited tenders: Direct invitation/ enquiry to all or limited number of suppliers/ manufacturerson the approved list.Single tender: invitation/enquiry to a single party on the approved listEarnest Money/ Security DepositEMD/SD must be insisted upon in respect of items which are critical/ important and willhamper production, such as capital equipment etc. It may be waived off only in respect ofsimple and non-critical items with the approval of competent authority i.e. General Manager /Executive Director. Specific rates are applicable for EMD.EMD may not be asked for, in case ofpurchase of proprietary itemsSecurity Deposit: From successful Tenderers, 10%of value of the order, after adjusting EMD ifalready deposited.All the deposits should be made in the favor of concerned unit of NFL in the form of crossDemand Draft payable at (the place of unit)
Earnest money should be refunded to the unsuccessful tenderers on the recommendations ofManager (Materials) immediately after placement of order against the tender. Security deposit ofthe parties on whom Purchase orders have been placed, shall however be refunded as per termsand conditions of the Purchase order after consulting the indenting department.Evaluation of Tenders:All tenders will be received in sealed cover by post or deposited in a locked andsealedBox which would be kept at conspicuous place. In the presence of two officers one fromPurchase wing and the representative of F&A department, the tender will be opened andRead out. Evaluation of tender shall be done on comparative statements by bringing allTenders at par after adding al elements like duties, taxes, frieghtand deductingDiscounts/rebates if any to indicate the delivered cost. All tenders would then be ranked inRoman figures.Tender committeeAll proposals of purchase exceeding 2.0 laks in value would require scrutiny andRecommendation by tender committee .The scrutiny of tenders will include technical andFinancial check of the specifications/samples, rates and other terms & conditions of the tender.Tender committee shall take a note of the Purchase section, F&A and user departments duringthe course of scrutiny of tenders. On the basis of above scrutiny the tender committee willrecommend acceptance of the lowest acceptable tender.NegotiationsNegotiations shall not be resorted to in case of open/limited tenders. If negotiationsare considered necessary to be resorted to, the guidelines of the Central Vigilance Commissionshould be kept view.ContractsThe contracts may be of following types: a) Supply Contracts b) Rate Contracts c)Running contracts. Contract is an agreement enforceable by law .For supply of materials,acceptance of terms and conditions of tender/ purchase order and schedule of accepted rate,attached thereto, shall constitute a contract.Petty PurchasesAll purchases up to the value of Rs. 1500 per item shall be considered aspetty purchase. These purchases can be affected by Purchase section without calling for tendersand without issuing Purchase orders. After purchase the purchase section shall handover thematerials on Local Purchase cum Receipt Voucher in 4 copies...SALES ACCOUNTS SECTION
The Government under Essential Commodity Act shall control distribution of fertilizer. All thedispatches from the unit are made based on instruction of Dispatch & Coordination (D&C) cell,of the Central Marketing office situated at respective unit by road or rail.Dispatch by RoadD&C cell receives the order through telephone and interoffice memos from variouszonal offices, CMO for dispatch of specified quantities to dealer at specified destinations.Dispatch instructions are prepared by D&C cell stating name and code with CST no. and amountdeposited etc. These are forwarded to transport department and sales account section of unit.Supplies are made for the dealer’s godown. The traffic department requisitions trucks fromtransport union. Bagging department supervises loading of fertilizer bags in trucks. TrafficDepartment shall prepare a daily Loading Statement /Delivery Challans. Sale accounts sectionshall file serially all dispatch instructions and delivery challans product wise separately. It shallbe ensured that the quantity dispatched as per delivery challan issued by traffic department is notmore than quantity indicated in the dispatch instruction issued by D&C cell. For cross checkingand future reference sales account section shall record the serial no. of the delivery challan on thedispatch instructions as well as delivery challans. Invoices shall be dispatched to parties, CMO,D&C cell on daily basis.Dispatch by Rail:-D&C cell shall prepare rake programs and dispatch to sale account section and trafficdepartment .Traffic department call for rake with Chief Good Clerk (CGC), Indian Railway. Onarrival of rake for siding; loading shall be made and forwarding note prepared for each wagon.CGC shall prepare railway receipt. Traffic department shallCheck weather freight is as per tariff and shortest route has been taken into consideration. A ratesand amount chargeable and loading statement shall be prepared by Traffic Department which isdispatched to D&C cell and Sales account section. Sales account section shall note details inRake Register and prepare monthly debit advice on the rake disposal statement received frommarketing division.Sale of Industrial Products-Numbers of Industrial/by-products are obtained during the production ofAmmonia/Urea at Panipat .These are Nitrogen, Carbon dioxide, Oxygen, Sulphar, Argon gas andcarbon slurry. These are termed and sold as industrial products .D&C cell route sale of all theseproducts. This cell receive demand draft from the purchaser and according to the sales termsDispatch instruction is issued to Traffic, Production and Sales account section Delivery isauthenticated by Officer-in-charge to the purchaser according to the dispatch instructions. Theconcerned department of the unit deals gate passes and excise duty. Invoices are raised on thebasis of Gat pass/Loading statement received by sales account section. Invoices are entered inSales day book product wise.Payment of freight-The company has an agreement with truck transport union for transportation of Urea tovarious destinations where dealers has been appointed. The recipient authenticates receipt of
material on Goods Received Note/Delivery Challan. Transporter will raise bill for freight on thebasis of authenticated GTRsThe traffic department would request the sales account section for issuance of MICRcheck towards Outward freight charges based on the amount claimed in R.R’s by Local RailwaysGoods clerk after checking that the freight charge is as per tariff and shortest route.WORKS ACCOUNTINGWorks Accounting shall be responsible for payment, receipt and maintenance of accounts inrespect of expenditure and income of capital/revenue nature. This section shall be responsible forrendering guidance on financial matters to all engineering departments, scrutiny of estimates ofworks, checking of comparative statements, evaluation of tenders, passing of contractor’s bills,keeping account of all construction work-in-progress and capitalization of work on completion.Functions1. Ensuring that execution of capital schemes is taken up only for which both theadequate budget provision and approved estimate exists and monitoring withreference to progress of expenditure on continuing schemes.2. Checking of estimates of works for obtaining administrative approval andexpenditure sanction of the competent authority.3. Scrutiny of tenders received, checking of comparative statement, evaluation ofcommercial conditions of the tenders and concurrence of proposals of engineeringdepartment for award of work.4. Checking of contractor’s bills for work done with reference to entries inmeasurement books, accounting of expenditure, recoveries to be made fromcontractor release of payment as per terms of agreement.5. Maintain accounts of earnest money deposits and security deposits of contractors.6. Maintain record of various bank guarantees, insurance guarantees, and FDR’sreceived from contractors, to scrutinize them and keep their validity, release orencash the same as the case may be.7. Examine proposals for extra items and extra items rates.8. Release payments of various advances to contractors.9. Effect from the contractor’s in respect of supplies of material, water and power,hire of equipment, income tax, sales tax etc.10. Maintains accounts of works-in-progress and capitalize them on completion.11. Maintain accounts of deposit works undertaken through outside agencies onbehalf of outside parties.12. To examine contractor’s claim.13. Check final bills of the Contractors along with deviation statement, materialconsumption statement.14. Furnish monthly, quarterly, and annual returns for demands of funds, monitorbudget provisions and sanctioned estimated cost.15. Check and pay bills of service and maintenance contractor.
CASH AND BANK ACCOUNT SECTIONSystem SummaryCash and bank accounting section deals with receipt and disbursement of cash directlyand/or through bank. Cash handling is a high risk area, there being greater need to ensure properauthenticity, validity, authorization and control of all cash and bank transactions.Functions:1. Receive cash, check and demand draft from employees and outside parties against dues tocompanies, tender fees, earnest money and refund of advances against receipt voucherfrom the concerned section.2. Make payment in cash, check and demand draft to employees and other outside parties onthe basis of payments order issued by different sections.3. Handling of bank deposits, withdrawal and custody of cash.4. Maintenance of cash and bank books.5. Intimate bank name to officers authorized to operate bank accounts and send theirspecimen signatures and also cancel specimen signatures of those who cease to holdauthority to operate bank accounts.6. Send report to corporate office, of all remittances made by various area office banks tocorporate office.7. Prepare bank reconciliation statements.8. Keep liaison with bank for the discrepancies found in bank reconciliation and for delay inremittances to units, CMO and delay in collection and credit for cheques / drafts/postalorders sent to bank for collection.9. Physically verify the cash on daily basis and also surprise cash check by an officer otherthan in-charge of cash section on monthly basis10. Security of cash handling.11. Insure cash in safe and cash in transit.12. Safe custody of all bank guarantees and fixed deposit receipts, and other valuabledocuments.13. Maintain Register of valuable documents kept in safe custody.14. Check correctness of amount charged by bank for demand draft, telegraphic transfers,issuing of bank guarantees.15. Check interest charged by bank on cash credit account and credit for interest allowed bybank under value dating of remittances.Time Office Section/ Establishment Account Section/ Provident FundTime Office Section
Time Office Section deals with the preparations of attendance records, overtime andleaves records. Proper documentation, authorization, and authenticity of all time office recordsare under them.Aims of time office• Used for preparation of payroll.• For distribution of labor cost to jobs, process departments or cost centers.• Submissions of various statutory returns to Government agencies.Functions of Time Office:1. Compilation/validation of Attendance statements based on data received from variousdepartments.2. Compilation of overtime statements from overtime data received from differentdepartments.3. Keeping record leaves application, reports and leave ledger.4. Ensuring authorization of following competent authority:I. Attendance sheet.II. Overtime statements.III. Leave application of all types.5. Submitting the data promptly to EDP section.6. Obtaining the checklist from EDP section, for every batch of source documents and informsEDP section regarding errors (if any).7. ensuring all the errors have been corrected.8. Feed the attendance data to computer for calculation of Productions incentives.ESTABLISHMENT ACCOUNT SECTIONThis section is responsible for scrutiny, disbursement and accounting of claims of employees inrespect of salaries, wages, shift and dust allowances, LTC, encashment of LTC, medicalreimbursements, various advances etc. Close cooperation between Time office and establishmentA/C section is essential to ensure timely receipts of basic documents related to employee’sclaims and their processing. Establishment A/C section is also responsible for recovery ofIncome Tax deducted at source, depositing the same with Government and submissions ofreports and returns thereto.Functions of Establishment Section:1. Prepare monthly salary bill of staff and officers and make disbursement.2. Calculate, recover and deposit income tax on salaries, issue IT deductions certificates andfile return to TDS as per Income Tax rules.3. Keep record of unclaimed Salaries.4. Check and pay the overtime wages to staff.5. Submitting the monthly statement of overtime paid information to departmental headsand General Manager.
6. Remit to outside authorities’ amount recovered from employees on account ofinsurance premium, EPF, ESI, house rent.7. Pay bonus, gratuity, and incentives to employees as per rules.8. Check and pay leave encashment, medical claims, local conveyance reimbursement,traveling allowances, LTC encashment and advance to employees.9. Calculate and make recovery for above advances and interest wherever applicable.10. Keep sub ledger of advances to employees and prepare schedule of outstanding advances.11. Compilation of employee’s statistics for management and statutory authorities.PROVIDENT FUND ACCOUNTS SECTIONSystem SummaryProvident Fund Scheme for the Board of Trustees shall manage the employees constituted inaccordance with Provident fund rule of the company .This amount is deposited at NFL trust atNangal Unit. After 6 months from joining of a regular employee deductions started.Functions of Provident Fund Section:1. Maintain member wise details of Provident fund balances, contributions and loans.2. Check eligibility of new members and make Family Provident Fund and PF deductionsand ensure that nomination forms have been obtained in all case by personneldepartment.3. Examine the applications for the loans taken by members as per rule of the trust and todisburse the loans as per PF rules.4. Charge the interest on loans taken by members as per PF rules.5. Credit the interest on PF balances as decided by the trust.6. Ensure the recovery of loan installments, interest on loan and crediting interest onmember balances.7. Process the application for transfer Provident Fund to other units and organizations.8. Process the applications for final withdrawal as per rules of the trust.9. Prepare the monthly returns of the members, investment of PF money, employer depositLink Insurance etc. for submission to RPFC (Regional Provident Fund Commission)10. Maintenance of proper accounts of all receipts, payments, assets and liabilities of theProvident Fund as per the requirement of EPF Act and PF rules and compilation ofBalance Sheet and Interest Income statement etc. for trust and arranging thereof.11. Comply with provisions of Section 418 of Companies Act 1956.12. Arrange timely investment of PF money in the prescribed pattern as per instructionsissued by the Government of India from time to time.Every employee has to deposit 12%of basic salary and DA into PF. From this6500*8.33%=541.45 are deposited under Pension Scheme (RPFC). This scheme wasstarted from 16thNovember 1995.MISCELLANEOUS ACCOUNTS AND ESTATE ACCOUNTSECTION
Miscellaneous and estate accounts section are responsible for processing ofmiscellaneous payments which are neither against specific purchase order or work ordere.g. power bills,CISF payments, entertainment expenses, rent of buildings and recoveryof rent for company’s houses etc.Functions:1. Quarters are allotted by Personnel & Administration Department or Estate departmentas per approved rules of allotment. A copy of occupation / vacation report shall beendorsed to F&A department and entered in occupation/vacation register.Miscellaneous and estate section shall intimate EDP section for deduction of rent etc.from salary.2. Deductions for water shall be made at the flat rate fixed. Monthly deductions towardselectrical charges shall be made on the approved provisional rate basis.3. Imprest shall be given to various departments as per need with the approval ofManager/Head of dept.4. The guest hose staff will maintain record of all guests in the guest’s house, in aregister. The receipts will be deposited with the accounts depts. daily/ weekly basis,depending on the amount collected through Estate/Misc. section, who will verify thecorrectness of the amount from the guest house register and duplicates of receiptsbooks. All expenses for guest house like washer man’s bill etc. will be paid throughEstate/Misc.Section5. Miscellaneous section makes all the payment of CISF bills and entry shall be made inCISF payment control register.6. Miscellaneous Account Section is also responsible for miscellaneous types ofpayments like:I. Record of all the payment of telephone bills are made by Misc. section toensure that duplicate payments are not made.II. The expenditure on entertainment will be authorized within budgetaryallocations/ limits fixed for the unit/office/head of department.III. Contracts for services, such as canteen, horticulture, repairs to typewriters,office furniture, air conditioners etc.IV. Matters relating to sports and welfare activities.V. Advertisement and publicity, conference and seminars, payments forjournals and periodicals, legal expenses etc.MANAGEMENT REPORTING SECTIONSystem SummaryManagement reporting Section is responsible for:-1. Timely send various reports to corporate office (Noida).On the basis of which it allocatesthe funds to all units and control them.2. Send the necessary information to FICC (Fertilizer Industrial coordination Committee)for getting subsidy.3. Send the information to other agencies like Ministry of Law Justice & Company Affairsand BOP (Beauro O Public Enterprises) whenever necessary.4. Reporting for the Auditing purpose. There are two types of Audit
(a) Internal Audit: the auditors, which are authorized by Company itself, or outsiders do itas the case may be.(b) External Audit: It includes:• Statutory Auditors• Government Auditors• Cost Auditors• Ficc AuditorsManagement Information SystemsThere are many reports and presentations prepared for effective administrations and controllingfunctions at NFL panipat, which flow vertically. These report are prepared and sent regularly,monthly, quarterly, half yearly, and annually as per the schedules. Thus it is the sole purpose ofreporting to establish an effective information and controlling system for quick decision making.With an effective MIS, officer can proceed for better decision after reviewing the every aspectof the problem .If there is any delay for decision/ corrective action, then there may be heavy/huge losses to be suffered by the company specially in case of manufacturing unit like NFL,where production per day matters a lot.STORES ACCOUNTING SECTIONStore keeping activities play an important role in Material Management function. It has to bereleased that stores means money and any saving effected in reducing inventory, its carrying costand obsolesce will contribute in improving the profitability of the company.Functions:The main function of store section is of receiving, inspection, storing, issuing and take suitablesteps for evolving methods and procedures for inventory control. It has to keep in coordinationwith purchase department as well as finance department with regard to stores accounting,physical stock verification, disposal of scrap and surplus material, lodging of formal claims onthe carriers and underwriters etc.Receipt and inspection of material:The receipt and inspection wing is responsible for Railway Receipt/ GoodsReceipt/ Advance Dispatch Documents. The RR/GR is entered serially in the Goods InwardRegister meant for the purpose. All documents relating to the consignment shall bear the GIRno .which will serve the purpose of control of subsequent linking. The work of clearance,unloading and shifting of material from railways/ Transport Companies and Railway siding shallbe arranged through material handling contractor. The store wing of material department shallmake arrangement for payment of freight. On receipt of Delivery Challan that shall also bearGIR control number, relevant documents including purchase order shall be taken out forpreparation of Material Inspection Note cum Store Receipt Voucher. The receipt and inspectionsection attach the item identification tag to the item. To avoid errors in processing of SRV on thecomputer, the material code and unit of measurement shall e checked from the issue section ofstore wing.Inspection note shall be prepared in 6 copies. Store wing shall be responsible forcarrying out preliminary checks to determine any shortage or breakage.In case of any discrepancies, section will inform to the insurance section and the package shallbe preserved for survey, if necessary as claims procedure & insurance policy. The discrepancies
shall be intimated to supplier immediately after inspection, not later than two weeks after receiptof material to store. After the material has been checked and accepted , SRV no. will be allottedby Receipt & Inspection Section and the document shall be released to different departments forfurther processes.Maintenance of store:Care is taken by the store to preserve the various types of materials by using properpreservatives. To facilitate Computer processing and proper accounting all items of stores areallocated 7 digit material code. A control register is maintained for allocating code numbers tostores and spares. Considering the importance of the function new codes shall be allotted by acompetent officer in the Material Department. At the beginning of each financial year MaterialDepartment obtain a list from the computer center of all the items having no movement for 2years. Disposal of Scrap shall be carried out by Public Auction or tender system as per procedureafter approval by an officer competent to do so as per delegation of powersIssue of MaterialsThe materials shall be issued from stores on the strength of store issue Note. This storeissue Note contains the name and designation of the officer requisitioning the material. It alsocontain the Material Code Number, quantity to be issued, cost head and unit of measurementInsurance of stores:The items damaged in transit and having scrap value shall be separately stored for beingreturned to Insurance Company and procedures on settlements of claim.]CENTRAL ACCOUNTS SECTIONCentral Accounts Section is responsible for:1. Fixed Assets Accounting2. Inter unit Accounting and Reconciliation3. Coordination with EDP for preparation of daybooks, sub ledger, main ledger, trialbalance, consolidated transaction summaries and party ledgers.4. Preparation of periodical Final Accounts.5. Finalization of Final Accounts and coordination with statutory auditors and GovernmentAuditors for Audit.6. Submission of Company’s Income Tax Return and all other information required forassessment of tax by tax authorities.7. Coordination for tax audit of the company.8. Interaction with local income tax and sales tax authorities.9. Accounting systems and procedures.
INTRODUCTION TO THE PROJECTThe term Working Capital is one of the most misunderstood terms in Finance.The number one reason most people look at a balance sheet is to find out a companysworking capital (or "current") position. It reveals more about the financial condition of abusiness than almost any other calculation. It tells you what would be left if a companyraised all of its short term resources, and used them to pay off its short term liabilities. Themore working capital, the less financial strain a company experiences. By studying acompanys position, you can clearly see if it has the resources necessary to expandinternally or if it will have to turn to a bank and take on debt.Working Capital is the easiest of all the balance sheet calculations. Heres the formula:Current Assets - Current Liabilities = Working CapitalOne of the main advantages of looking at the working capital position is being able toforesee any financial difficulties that may arise. Even a business that has billions of dollarsin fixed assets will quickly find itself in bankruptcy court if it cant pay its monthly bills.Under the best circumstances, poor working capital leads to financial pressure on acompany, increased borrowing, and late payments to creditor - all of which result in a lowercredit rating. A lower credit rating means banks charge a higher interest rate, which cancost a corporation a lot of money over time.Companies that have high inventory turns and do business on a cash basis (such as agrocery store) need very little working capital. These types of businesses raise moneyevery time they open their doors, then turn around and plow that money back intoinventory to increase sales. Since cash is generated so quickly, managements can simplystock pile the proceeds from their daily sales for a short period of time if a financial crisisarises. Since cash can be raised so quickly, there is no need to have a large amount ofworking capital available.A company that makes heavy machinery is a completely different story. Because thesetypes of businesses are selling expensive items on a long-term payment basis, they cantraise cash as quickly. Since the inventory on their balance sheet is normally orderedmonths in advance, it can rarely be sold fast enough to raise money for short-term financialcrises (by the time it is sold, it may be too late). Its easy to see why companies such asthis must keep enough working capital on hand to get through any unforeseen difficulties.Working Capital Management is usually being described as involving theadministration of assets namely- cash and marketable securities andinventories and administration of Current Liabilities. Management of Working
Capital i.e. Current assets is somewhat similar to that of fixed assets in thesense that in both the cases the firm has to analyze their effects in theprofitability and risk. The management of fixed and current assets are differentin certain aspects:Time: In managing fixed assets, time is very important factor. But it plays minor role inmanaging current assets.Liquidity: Holding large current assets, strengthens the firms liquidity position butreduces riskiness and over all profitability.Expected Sale: The level of current assets and fixed assets depends upon expectedsale. There is greater degree of flexibility in managing current assets.Working Capital must be in proportion to fixed assets, so that business may operatesmoothly. Working at the inception of the business can result in early financialfailure. The capital requirement for plant and equipment can be measured withaccuracy but promoters underestimate working capital requirements. So aserious unbalance might develop between production capacity of fixed assetsand amount of working capital available to business.Defining Working CapitalThe term working capital refers to the amount of capital which is readily available to anorganization. That is, working capital is the difference between resources in cash orreadily convertible into cash (Current Assets) and organizational commitments for whichcash will soon be required (Current Liabilities).Current Assets are resources which are in cash or will soon be converted into cash in"the ordinary course of business".Current Liabilities are commitments which will soon require cash settlement in "theordinary course of business".Thus:WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIESIn a departments Statement of Financial Position, these components of working capitalare reported under the following headings:Current Assets• Liquid Assets (cash and bank deposits)• Inventory• Debtors and ReceivablesCurrent Liabilities
• Bank Overdraft• Creditors and Payables• Other Short Term LiabilitiesMEANING OF WORKING CAPITALMANAGEMENTDecisions relating to working capital and short term financing are referred to as workingcapital management. These involve managing the short term assets and its short termliabilities. The goal of Working capital management is to ensure that the firm is able tocontinue its operations and that it has sufficient cash flow to satisfy both maturing short termdebt and upcoming operational expenses.NEED FOR WORKING CAPITAL MANAGEMENTWorking capital measures the company’s efficiency and its short term financial health. Thenumber one reason most people look at a balance sheet is to find out a companys workingcapital (or "current") position. It reveals more about the financial condition of a business thanalmost any other calculation. It tells you what would be left if a company raised all of its shortterm resources, and used them to pay off its short term liabilities. The more working capital, theless financial strain a company experiences. By studying a companys position, you can clearlysee if it has the resources necessary to expand internally or if it will have to turn to a bank andtake on debt.Working capital can be either positive or negative. A positive working capital indicatesthat company is healthy enough to pay its short term liabilities whereas a negative workingcapital indicates that company’s inability to meet its short term liabilities. Worst case can be thata company can become bankrupt. Continuous declining in working capital is also alarming andneed a quick look upon the matter. Working capital gives investors an idea of company’sunderlining operational efficiency like slow collection may signal an underlying problem.
Working capital is also need for the purpose of inventory funding. As your company growsthe sales grow also the receivables and marketing expenses also grow so proper working capitalmanagement is required so that at any point of time during the regular operation of the companyenough assets are available to meet the liabilities.There are different business needs and working capital is used for it like-• Critical to meeting short-term cash needs and liquidity for the firm to survive.• A permanent working capital investment to be able to operate a business with a comfortmargin to meeting short-term liabilities.• Seasonal or cyclical working capital to finance the temporary cash shortfalls due to thenature of the firm’s normal business cycle.• Working capital needed for fund growth. As a firm grows, it needs to maker greaterinvestments in inventory, accounts receivable, personnel, etc. to realize increased sales.• "Working capital" to support new market or product development, undertakes R&D toimprove existing products & operations.ADVANTAGES OF WORKING CAPITALMANAGEMENTOne of the main advantages of looking at the working capital position is being able to foreseeany financial difficulties that may arise. Even a business that has billions of dollars in fixedassets will quickly find itself in bankruptcy court if it cant pay its monthly bills. Under the bestcircumstances, poor working capital leads to financial pressure on a company, increasedborrowing, and late payments to creditor - all of which result in a lower credit rating. A lowercredit rating means banks charge a higher interest rate, which can cost a corporation a lot ofmoney over timeESTIMATING WORKING CAPITALREQUIREMENTSFor estimating working capital following three techniques are required-
• ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHODSince working capital is the excess of current assets over current liabilities an assessmentof the working capital requirements can be made by estimating the amounts of differentconstituents of working capital like Inventories, Accounts Receivable, Cash, and AccountsPayable etc.• PERCENT OF SALES METHODAccording to this method, on the basis of past experience between sales and workingcapital requirement in future is estimated.• OPERATING CYCLE APPROACHESAccording to this approach, the requirement of working capital depends upon theoperating cycle of the business. It begins with the acquisition of Raw Materials and ends with thecollection of the receivables.Pros and cons of maintaining excess or inadequate working CapitalThe firm should maintain sound working capital. It should have adequate working Capital toown its business operations. Both inadequate and excessive working Capital positions aredangerous from the firm’s point of view. Excessive Working Capital mean sidle funds, whichearns no profit for the firm. Paucity of Working Capital not only impairs firm’s profitability butalso results in production interruptions and ineffectiveness. A firm’s net Working Capitalposition is not only important as an index of liquidity but it is also used as a measure of thefirm’s risk. Risk means chances of the firm’s being enable to meet its obligation on due date.DISADVANTAGES OF EXCESS WORKINGCAPITALThe company may suffer for having excess working Capital as:
1) Return on investment will be inadequate.2) The management might not be taking advantage of purchasing on credit.3) The business of company is not expanding.4) Money is being blocked in excessive inventories for debtors who have adverseaffects.5) Management is not maintaining relations with the bank.6) It results in unnecessary accumulation of inventory and the chances ofmishandling, wastage, theft and losses increases.Advantages of adequate Working Capital1) To avoid technical insolvency, inability to pay creditors, wages, expenses topurchase material etc.2) To maintain creditworthiness to suppliers, banks and financial institutions.3) To pay dividend regularly to shareholders and to maintain efficiency of the workin the company.Adequate working Capitals prevent decline in efficiency and create goodwill for company.The company has inadequate working capital then:a) The firm will unable to attract positive credit opportunities.b) Fixed Assets can’t be efficiently utilizedc) Operating inefficiency creep in when it becomes difficult to meet day to daycommitment.d) It stagnate growth. It becomes difficult for the firm to undertake profitable projects due tonon availability of working capital.DETERMINANTS OF WORKING CAPITALThere is no set rule or formulae to determine the working capital requirement of the firm. A largenumber of Factors, each having a different importance, influence working capital needs of afirm. . Therefore a thorough analysis of all theseFactors should be made before trying to estimate the amount of Working Capital needed. Someof the factors can be:-• NATURE OF BUSINESS
Nature of Business is one of the most important factors in determining the WorkingCapital requirement of any company. Some companies do need low investment in the fixedassets and high investment in working capital e.g.- Trading and Financial companies whereassome companies like public utilities require high investment in fixed assets and low in workingcapital.• SIZE OF BUSINESSSize of any business is also a very important factor in determining the Working Capital ofany company. Size of any business depends upon the operating cycle and working capital is indirect proportion with the operating cycle of the company. Thus with larger operating cycle largeworking capital is needed whereas small working capital will be enough for small operatingcycle.• MANUFACTURING CYCLEManufacturing cycle refers to the cycle which starts with the procurement of rawmaterials and ends with the production of the finished goods. The larger the manufacturingcycle will be the more the working capital will be required and vice versa.• FIRM’S CREDIT POLICYCredit Policy of any company effects the working capital requirement to a great extent.Every company has to decide upon the credit terms which it will provide to its customers. Aliberal credit policy will need more working capital whereas a stern policy can reduce theworking capital to a great extent. But liberal policy can cause large bad debts whereas sternpolicy can reduce sales. So a company has to form credit policy with at most care.• AVAILABILITY OF CREDITThe terms on which the company is having the availability of credit by its creditorsalso affect the working capital requirement of the company. If the company is able to get crediton liberal terms then the working capital requirement will be low whereas it will be high if thecredit available is on stern basis.• PRICE LEVEL CHANGESIf the price of raw materials increases then more working capital will be required in order topurchase them. But all the companies will not react with the change in prices in the same way asthe price change will affect different companies differently.• BUSINESS FLUCTIONS
All business experience cyclical and seasonal fluctuations regarding demand and supplyof their goods and services and these fluctuations do have an impact on the Working capital ofthe company. During boom period due to increase in the activities there is more requirement ofthe working capital whereas during recession low working capital will be required as activities ofthe business also slows down.• PRODUCTION POLICYA firm can select a strategy of constant production, in order to resolve theworking capital problem arising due to seasonal changes in the demand for the firm’sproduct. A steady production policy will cause inventories to accumulate during the offseason periods. Thus every company has to cope with different fluctuations as stated aboveso a production policy for every company is required. As fluctuations are different withdifferent companies so a unique production policy is required by each company. For exampleAt NFL, the production is continuous. But the demand is very limited in a year i.e. duringRabi season and Khariff season. So company has to maintain a sufficient amount of finishedgoods so as to meet the demand of customer during the peak period.• OPERATING EFFICIENCYOperating Efficiency, i.e. the optimum utilization of resources atminimum cost will also determine the amount of working capital requirement.
WORKING CAPITAL CYCLECash flows in a cycle into, around and out of a business. It is thebusinesss life blood and every managers primary task is to help keep it flowing and to use thecash flow to generate profits. If a business is operating profitably, then it should, in theory,generate cash surpluses. If it doesnt generate surpluses, the business will eventually run out ofcash and expire..The faster a business expands the more cash it will need for working capital and investment. Thecheapest and best sources of cash exist as working capital right within business. Goodmanagement of working capital will generate cash will help improve profits and reduce risks.Bear in mind that the cost of providing credit to customers and holding stocks can represent asubstantial proportion of a firms total profits.There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables(your creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has twodimensions ........TIME ......... and MONEY. When it comes to managing working capital -TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect moniesdue from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventorylevels relative to sales), the business will generate more cash or it will need to borrow lessmoney to fund working capital. As a consequence, you could reduce the cost of bank interest oryoull have additional free money available to support additional sales growth or investment.Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or anincreased credit limit; you effectively create free finance to help fund future sales.If you ....... Then ......• Collect receivables (debtors) faster You release cash from thecycle• Collect receivables (debtors) slower Your receivables soak upcash• Get better credit (in terms of duration or amount)from suppliersYou increase your cashresources• Shift inventory (stocks) faster You free up cash• Move inventory (stocks) slower You consume more cashIt can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc.If you do pay cash, remember that this is now longer available for working capital. Therefore,if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc.Similarly, if you pay dividends or increase drawings, these are cash outflows and, like waterflowing downs a plug hole, they remove liquidity from the business.More businesses fail for lack of cash than for want of profit.
The way working capital moves around the business is modeled by the working capital cycle.This shows the cash coming into the business, what happens to it while the business has it andthen where it goes. A simple working capital cycle may look something like:-A more versatile Working Capital Cycle is shown below:-
The upper portion of the diagram above shows in a simplified form thechain of events in a firm. Each of the boxes in the upper part of the diagram can be seen as a tankthrough which funds flow. These tanks, which are concerned with day-to-day activities, havefunds constantly flowing into and out of them.• The chain starts with the firm buying raw materials on credit.• In due course this stock will be used in production, work will be carried out on the stock, and itwill become part of the firm’s work in progress (WIP)• Work will continue on the WIP until it eventually emerges as the finished product• As production progresses, labor costs and overheads will need to be met• Of course at some stage trade creditors will need to be paid• When the finished goods are sold on credit, debtors are increased• They will eventually pay, so that cash will be injected into the firmEach of the areas – stocks (raw materials, work in progress and finished goods), trade debtors,cash (positive or negative) and trade creditors – can be viewed as tanks into and from whichfunds flow.Working capital is clearly not the only aspect of a business that affects the amount of cash:• The business will have to make payments to government for taxation• Fixed assets will be purchased and sold• Leaser of fixed assets will be paid their rent• Shareholders (existing or new) may provide new funds in the form of cash• Some shares may be redeemed for cash• Dividends may be paid• Long-term loan creditors (existing or new) may provide loan finance, loans will need to berepaid from time to time, and• Interest obligations will have to be met by the business.Unlike movements in the working capital items, most of these ‘non-working capital’ cashtransactions are not everyday events. Some of them are annual events (e.g. tax payments, leasepayments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. newequity and loan finance and redemption of old equity and loan finance) would typically be rarerevents.
APPROACHES TO WORKING CAPITAL MANAGEMENTThe objective of working capital management is to maintain theoptimum balance of each of the working capital components. This includes making surethat funds are held as cash in bank deposits for as long as and in the largest amountspossible, thereby maximizing the interest earned. However, such cash may moreappropriately be "invested" in other assets or in reducing other liabilities.Working capital management takes place on two levels:• Ratio analysis can be used to monitor overall trends in working capital and toidentify areas requiring closer management• The individual components of working capital can be effectively managed byusing various techniques and strategies.When considering these techniques and strategies, departmentsneed to recognize that each department has a unique mix of working capitalcomponents. The emphasis that needs to be placed on each component variesaccording to department. For example, some departments have significant inventorylevels; others have little if any inventory.Furthermore, working capital management is not an end in itself. It is an integral part ofthe departments overall management. The needs of efficient working capitalmanagement must be considered in relation to other aspects of the departmentsfinancial and non-financial performance.FINANCIAL RATIO ANALYSISINTRODUCTIONFinancial ratio analysis calculates and compares various ratios of amountsand balances taken from the financial statements.The main purposes of working capital ratio analysis are:• to indicate working capital management performance; and• To assist in identifying areas requiring closer management.Three key points need to be taken into account when analyzing financial ratios:• The results are based on highly summarized information. Consequently, situations whichrequire control might not be apparent, or situations which do not warrant significanteffort might be unnecessarily highlighted;
• Different departments face very different situations. Comparisons between them, or withglobal "ideal" ratio values, can be misleading;• Ratio analysis is somewhat one-sided; favorable results mean little, whereas unfavorableresults are usually significant.•However, financial ratio analysis is valuable because it raises questions and indicates directionsfor more detailed investigation.The following ratios are of interest to those managing working capital:• working capital ratio;• liquid interval measure;• stock turnover;• debtors ratio;• Creditors’ ratio.WORKING CAPITAL RATIOCurrent Assets divided by Current LiabilitiesThe working capital ratio (or current ratio) attempts to measure the level ofliquidity, that is, the level of safety provided by the excess of current assets over currentliabilities.The "quick ratio" a derivative, excludes inventories from the current assets,considering only those assets most swiftly realizable. There are also other possible refinements.There is no particular benchmark value or range that can be recommended assuitable for all government departments. However, if a department tracks its own working capitalratio over a period of time, the trends-the way in which the liquidity is changing-will becomeapparent.LIQUID INTERVAL MEASURELiquid Assets divided by Average Operating ExpensesThis is another measure of liquidity. It looks at the number of days that liquid assets(for example, inventory) could service daily operating expenses (including salaries).STOCK TURNOVER
Cost of Sales divided by Average Stock LevelThis ratio applies only to finished goods. It indicates the speed with whichinventory is sold-or, to look at it from the other angle, how long inventory items remain on theshelves. It can be used for the inventory balance as a whole, for classes of inventory, or forindividual inventory items.The figure produced by the stock turnover ratio is not important in itself, but thetrend over time is a good indicator of the validity of changes in inventory policies.In general, a higher turnover ratio indicates that a lower level of investment isrequired to serve the department.Most departments do not hold significant inventories of finished goods, so thisratio will have only limited relevance.DEBTOR RATIOThere is a close relationship between debtors and credit sales tothird parties (that is, sales other than to the Crown). If sales increase, debtors will increase, andconversely, if sales decrease debtors will decrease.The best way to explain this relationship is to express it as the number ofdays that credit sales are carried on the books:Credit Sales per Period x Days per periodAverage DebtorsWhere trading terms are 30 days net cash, and customers buy from day-to-day during the 30 day period and pay 30 days after a statement is rendered, a collection period of45 days (the average between 30 and 60 days) would be satisfactory.If the average collection period extends beyond 60 days, debtors are holdingcash that should have flowed into the department. This means that the department is unable tosatisfy pressing liabilities or to invest that cash.The debtor ratio does not solve the collection problem, but it acts as an indicator that an adversetrend is developing. Remedial action can then be instigated.CREDITOR RATIOThis ratio is much the same as the debtor ratio. It expresses the relationshipbetween credit purchases and the liability to creditors. It can be stated as the number of days thatcredit purchases are carried on the books.Credit Purchases per Period x Days per periodAverage CreditorsNote that non-credit purchases (such as salaries) and non-cash expenses(such as depreciation) need to be excluded from "credit purchases" and any provisions need to beexcluded from "creditors".
There is no need to pay creditors before payment is due. The departmentsobjective should be to make effective use of this source of free credit, while maintaining a goodrelationship with creditors.As with debtors, if a department has been granted credit terms of 30 days netcash, credit purchases should not be carried on the books for more than an average of 45 days. Ifpayment is withheld for 60 days or more it is likely that creditors will become impatient andimpose stricter and less convenient trading terms-for example, "cash on delivery".SPECIFIC STRATEGIESINVENTORYInventory refers to the holding of raw materials. Work-in-progress and finished good heldby a firm at any time. Inventory turns over at frequent intervals and thus can be expected toconvert in cash rather quickly. The speed with which inventory is turned into cash depends onfirm’s business line. As lot of cash is blocked in the inventories so it is essential that inventorycycle should be less so that the flow of working capital is properly maintained.NEED FOR INVENTORYInventory is maintained to widen the latitude in planning and scheduling successiveoperations.Inventory of raw materials provide flexibility in purchasing and production. Thus firm canwait for an opportune buying movement without affecting its production schedule and like wiseproduction schedule need not be influenced by immediate purchasing activity.Inventory of work-in-progress provides flexibility in production scheduling sothat an efficient schedule and high utilization of capacity may be attained thus reducing delayand idle facilities.Inventory of finished goods provides flexibility in production program andmarketing activities. With proper finished goods inventory marketing department can meet theneeds of the customer promptly irrespective on quantity flowing out of the production line.Inventory management is an important aspect of working capital managementbecause inventories themselves do not earn any revenue. Holding either too little or too muchinventory incurs costs.Costs of carrying too much inventory are:• opportunity cost of foregone interest;• warehousing costs;• damage and pilferage;• obsolescence;• Insurance.•
Costs of carrying too little inventory are:• stockout costs:- Lost sales;- delayed service.• ordering costs:- Freight;- order administration;- loss of quantity discounts.Carrying costs can be minimized by making frequent small orders but thisincreases ordering costs and the risk of stock-outs. Risk of stock-outs can be reduced by carrying"safety stocks" (at a cost) and re-ordering ahead of time.The best ordering strategy requires balancing the various cost factors to ensure thedepartment incurs minimum inventory costs. The optimum inventory position is known as theEconomic Reorder Quantity (ERQ). There are a number of mathematical models (of varyingcomplexity) for calculating ERQ.Managing inventory is a juggling act. Excessive stocks can place a heavyburden on the cash resources of a business. Insufficient stocks can result in lost sales, delays forcustomers etc.The key is to know how quickly your overall stock is moving or, put anotherway, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetableshop might turn over its entire stock every few days while a motor factor would be much sloweras it may carry a wide range of rarely-used spare parts in case somebody needs them.Nowadays, many large manufacturers operate on a just-in-time (JIT) basiswhereby all the components to be assembled on a particular today, arrive at the factory early thatmorning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take uplittle space, minimize stock-holding and virtually eliminate the risks of obsolete or damagedstock. Because JIT manufacturers hold stock for a very short time, they are able to conservesubstantial cash. JIT is a good model to strive for as it embraces all the principles of prudentstock management.The key issue for a business is to identify the fast and slow stock movers with the objectives ofestablishing optimum stock levels for each category and, thereby, minimize the cash tied up instocks. Factors to be considered when determining optimum stock levels include:• What are the projected sales of each product?• How widely available are raw materials, components etc.?• How long does it take for delivery by suppliers?• Can you remove slow movers from your product range without compromising bestsellers?MONITORING AND CONTROL OF INVENTORY
• ABC Analysis- In this method the inventory is divided into three categories A, B and C.A items are those which constitute the highest percentage of value of all the inventoryheld but with the least number of items where as C items are just reverse of it constitutingthe lowest value and highest number of items. B items are average in both the terms.Greater control is needed on A level items because of their value and so highermanagement takes it care whereas low control is done for the C level items.• FSM Analysis- Here the inventory is dividing into the Fast moving, Slow moving andNon-moving inventory. This is the kind of analysis done at the aggregate level.• Just-in-time Inventory level- It was originally developed by Taichi Okno of Japan. Itsimply implies that the firm should maintain a minimum level of inventory and rely onsuppliers to provide the parts and components just in time to meet its assemblyrequirements. It is difficult to implement because it involves a significant change in thetotal production and management system by having a strong and reliable relationshipwith suppiers which are not remotely located and a reliable transport system.DEBTORSDebtors (Accounts Receivable) are customers who have not yet made payment for goods orservices which the department has provided.The objective of debtor management is to minimize the time-lapse between completion of salesand receipt of payment. The costs of having debtors are:• opportunity costs (cash is not available for other purposes);• Bad debts.Debtor management includes both pre-sale and debt collection strategies.Pre-sale strategies include:• offering cash discounts for early payment and/or imposing penalties for late payment;• agreeing payment terms in advance;• requiring cash before delivery;• setting credit limits;• setting criteria for obtaining credit;• billing as early as possible;• Requiring deposits and/or progress payments.• Post-sale strategies include:• Placing the responsibility for collecting the debt upon the center that made the sale;• Identifying long overdue balances and doubtful debts by regular analytical reviews;• Having an established procedure for late collections, such as- a reminder;- a letter;- cancellation of further credit;- telephone calls;- use of a collection agency;- legal action.Cash flow can be significantly enhanced if the amounts owing to a business are collected faster.Every business needs to know.... who owes them money.... how much is owed.... how long it isowing.... for what it is owed.
Late payments erode profits and can lead to bad debts.Slow payment has a crippling effect on business; in particular on small businesses who can leastafford it. If you dont manage debtors, they will begin to manage your business as you willgradually lose control due to reduced cash flow and, of course, you could experience anincreased incidence of bad debt. The following measures will help manage your debtors:1. Have the right mental attitude to the control of credit and make sure that it gets thepriority it deserves.2. Establish clear credit practices as a matter of company policy.3. Make sure that these practices are clearly understood by staff, suppliers and customers.4. Be professional when accepting new accounts, and especially larger ones.5. Check out each customer thoroughly before you offer credit. Use credit agencies, bankreferences, industry sources etc.6. Establish credit limits for each customer... and stick to them.7. Continuously review these limits when you suspect tough times are coming or ifoperating in a volatile sector.8. Keep very close to your larger customers.9. Invoice promptly and clearly.10. Consider charging penalties on overdue accounts.11. Consider accepting credit /debit cards as a payment option.12. Monitor your debtor balances and ageing schedules, and dont let any debts get too largeor too old.Recognize that the longer someone owes you, the greater the chance you will never get paidThus it is necessary for any firm to have proper credit variables.CREDIT POLICY VARIABLES• Credit Standards- Here company decides –What standard should be applied in accepyingor rejecting an account for credit graning. Like liberal credit terms do tend to push upsales but incidencs of bad dabts also goes up as well as the collection cost is increased.• Credit Period- It reffers to the length of time customers are allowed to pay for theirpurchases. Like higher credit period will push sales but more money wil be blockedduring the credit period also the bad debts can also go up.• Cash Discount- These are generally offered to the customers so that they make promptpayment. The percentage dicount and the period which it is avialable is reflected in thecredit terms. Eg- 2/10 net 30 mean that a discount of 2% is offered if the payment ismade by the tenth day otherwise full payment is due by the thirtieth day. This is to reducethe average collection period.• Collection Effort- it aims at timely colletion of the receivables and the procedurefollowed by the firm in this respect so that money locked in the receivables is quicklyreleased.CREDIT EVALUATION
Before giving credit to any customer it is important it is important that risk involved ingiving credit should be considered. There can be two types of errors –Type I error- A good customer is misclassified as a poor credit risk.Type II error- A bad customer is misclassified as a good credit risk.Both the errors are costly. Type I error leads to loss of profit on sales to good customerswho are denied credit. Type II error results in bad debt losses on credit sales made to riskycustomers.APPROACHES FOR CREDIT EVALUATIONThere are same main factors considered while evaluating and classifying the customers.This can be done by adopting various techniques.• Traditional Credit Analysis- The credit should be given toa customer or not is assessed interms of five C’s- Character, Capacity, Capital, Collateral and Condition. These can bedone by studying the financial statements, bank references, experience etc.• Numerical Credit Scoring- This technique is somewhat adhoc in nature as it is based onthe weights assigned by the firm which are subjective in nature. Firstly some factorsrelevents for credit evaluation are identified and weights are assigned to them on theirrelative importance. Then rating is done on these factors using a suitable rating scale.Then multiply the factor rating with the factor weight to get factor score and add add allscores to get overall customer rating index.• Discriminates Analysis- This technique may be employed to create a better risk index. Itconsiders some financial ratios of its customers as the basic determinants ofcreditworthiness. Accordingly it is plotted on a graph with X axis as the customers whopaid their dues while on Y axis are customers who default the payments. The higher thevalue higher the creditworthiness.ACCOUNTS PAYABLE / CREDITORSCreditors (Accounts Payable) are suppliers whose invoices for goods or services have beenprocessed but who have not yet been paid.There is an old adage in business that if you can buy well then you can sell well. Management ofyour creditors and suppliers is just as important as the management of your debtors. It isimportant to look after your creditors - slow payment by you may create ill-feeling and cansignal that your company is inefficient (or in trouble!).Remember, a good supplier is someone who will work with you to enhance the futureviability and profitability of your company.Organizations often regard the amount owing to creditors as a source of free credit. However,creditor administration systems are expensive and time-consuming to run. The over-ridingconcern in this area should be to minimize costs with simple procedures.
While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to delayall payments until the latest possible date., Regular weekly or fortnightly payment of all dueaccounts is the simplest technique for creditor management.Creditors are a vital part of effective cash management and should be managed carefully toenhance the cash position.Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidityproblems. So these points can be considered to make any policy for creditors.• Who authorizes purchasing in the firm - is it tightly managed or spread among a numberof (junior) people?• Are purchase quantities geared to demand forecasts?• Do the firm use order quantities which take account of stock-holding and purchasingcosts?• Does the firm know the cost to the company of carrying stock?• Does the firm have alternative sources of supply? If not, get quotes from major suppliersand shop around for the best discounts, credit terms, and reduce dependence on a singlesupplier.• How many of the firm’s suppliers have a returns policy?• Is the firm in a position to pass on cost increases quickly through price increases to yourcustomers?• If a supplier of goods or services lets you down can you charge back the cost of thedelay?• Can you arrange to have delivery of supplies staggered or on a just-in-time basis?CASH AND BANK BALANCESIntroductionCash is the most important Current assets for the operation of the business. Cash is the basicinput needed to keep the business running on a continuous basis; it is also ultimate outputexpected to be released by selling of service or product manufactured by the firm. Cash is themedium of exchange to purchase the goods and services and to discharge the liabilities. Inbusiness enterprises, it includes cash in hand and readily market securities. Now a day’s liquidityband solvency maintenance has become the main task of financial executives. The firm shouldkeep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturingoperations while excessive cash will simply remains idle without contributing any thing towardsthe firm profitabilityNEED FOR CASHThe first important thing for any business is to understand that why cash is needed inbusiness. The main reasons are-• Transaction Motive- so some cash is always required as buffer for this purpose.• Precautionary Motives- to protect uncertainties related to inflow and outflow of cash• Speculative Motives- to tap profit making opportunities arising from the fluctuations inthe market.
So cash can be maintained by-• Establish reliable forecasting system.• Improve cash collection and cash disbursement.• Achieve optimal conservation and utilization of funds.Facets of Cash managementCash management is concerned with the managing of: (a) Cash flows into and out of the firm. (b)Cash flows within the firm. (c) Cash balances held by the firm at a point of time by financingdeficit or investing surplus cash. It can be represented by cash management cycle. Cashmanagement seeks to accomplish this cycle at a minimum cost. At the same it also seeks toachieve liquidity and control. The aim of cash management is to maintain adequate cash controlover cash position to keep the firm sufficiently liquid and o use excess cash in some profitableway. The management of cash is important because it is difficult to predict cash flowsaccurately, particularly the inflows, there is no perfect coincidence between the inflows andoutflows of cash. Cash management is also important because management devote theirconsiderable time in managing it. In recent past number of innovations have been done in cashmanagement techniques In order to resolve the uncertainty about the cash flow predictions andlack of synchronization between receipts and payments, the firm should develop appropriatestrategies for cash management. The firm should evolve strategies regarding the following facetsof cash management:• Cash planning: cash inflows and outflows should be planned to project cash surplus ordeficit for each period of the planning period. Cash budget is prepared for this purpose.• Managing the cash flows the flow of cash should be properly managed. The cash inflowsshould be accelerated while cash outflows should be decelerated.• Optimum Cash level the firm should decide the appropriate level of cash balances. Thecost of excess cash and danger of cash deficiency should be matched to determine theoptimum level of cash balances.• Investing Surplus Cash the surplus cash balance should be properly invested to earnprofits. The firm should decide about the division of such cash balance betweenalternative short term investment opportunities such as bank deposits, marketablesecurities or incorporate lending.FORECASTING OF CASH REQUIREMENTCash should be within the business in proper amount so that it can be neither excessnor scarcity of the cash. For this proper forecasting for the need of the cash is required. It canbe done by—• Receipt and Payment Method- It can be done by monitoring collections and payments bythe firm and also by looking at the timing and magnitude of expected cash receipts andpayments. The collection can be done by prompt billing and expeditious collection ofcheque while payments to be made only when due, done on a centralized basis andshould match with the receipts during that period.