WORKING CAPITAL MANAGEMENT AT NALCO

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WORKING CAPITAL MANAGEMENT AT NALCO

  1. 1. PREFACE To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-to-day finance. Management of this short-term capital or finance of the business is called; Working capital Management Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. I have tried to put my best effort to complete this task on the strength learning that I have that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader. [Working Capital Management/SIMMC1999/1210002] Page 1
  2. 2. ACKNOWLEDGEMENT A work is never a work of an individual. I owe a sense of gratitude to the Intelligence and cooperation of those people who had been so easy to let me understand what I needed from time to time for completion of this exclusive project. I am greatly indebted to my internal guides and Mr. G.B.PRADHAN , Assistance Manager , Finance Department ,corporate office , NALCO , DAMOJUDI for their constant guidance ,advice and help which enabled me to finish this project report properly in time . Last but not the least, I would like to express my gratitude to my friends & other faculty members who always endured me and stood with me and without whom I could not have completed the project. AMIT KUMAR NAMADAS [Working Capital Management/SIMMC1999/1210002] Page 2
  3. 3. DECLARATION I do hereby declare that this piece of project report entitled “A Study on Working capital Management practices in NALCO” for partial fulfilment of the requirements for the award of the degree of “POST GRADUATE DIPLOMA IN MANAGEMENT” is a record of original work done by me under the supervision and guidance of Prof Dr. PRALAY KUMAR GHOSH, SIMMC .This project work is my own and has neither been submitted nor published elsewhere. PLACE: SIGNATURE OF THE STUDENT DATE: [Working Capital Management/SIMMC1999/1210002] Page 3
  4. 4. EXECUTIVE SUMMARY The major objective of the study is to proper understanding the working capital of NALCO & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firm‟s short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period. The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management. Inventories management at NALCO: NALCO is a large scale manufacturing company involved in mining of Bauxite and production of Aluminum. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning. Cash management at NALCO: NALCO has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate required amount of cash. Receivables management at NALCO: NALCO has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office obtains sales order from Aluminum users in India as well as globally. On the basis of order received for different products it marks production planning of different i.e. Ingot sow ingot, Billets, Wire etc. [Working Capital Management/SIMMC1999/1210002] Page 4
  5. 5. Chapter. 1. CONTENTS Introduction Page No. 6 1.1 Objective Of The Study 1.2 Research Methodology and Scope Of Study 1.3 Limitation Of The Study 2. 3. INDUSTRY SCENARIO AND COMPANY PROFILE 2.1 Aluminium Structure, Inputs and Products Introduction – NALCO 7-11 12-24 3.1 Brief History 3.2 Achievements 3.3 Nalco- products 4. Introduction-Working Capital 25-30 5. Working Capital Management 31-46 5.1 Consequences of under and over assessment of W.C 5.2 Types of W.C 5.3 Financing W.C 5.4 Inventory Management 5.5 Cash Management 5.6 Receivables Management 6. Data Collection And Representations 47-59 6.1 Important Terms and Ratios (graphical presentation) 7. Conclusion, Major Findings, Recommendation 8. Bibliography [Working Capital Management/SIMMC1999/1210002] 59-61 62 Page 5
  6. 6. CHAPTER – 1 INTRODUCTION The life blood of business, as is evident, signified funds required for day-to-day operations of the firm. The management of working capital assumes great importance because shortage of working capital funds is perhaps the biggest possible cause of failure of many business units in recent times. There it is of great importance on the part of management to pay particular attention to the planning and control for working capital. An attempt has been made to make critical study of the various dimensions of the working capital management of NALCO, a Star Trading House with NAVRATNA Status. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing short-term debt and upcoming operational expenses. OBJECTIVE OF THE STUDY:The following are the main objectives of the present study: 1. To determine the amount of working capital requirement by NALCO 2. To calculate various ratios relating to working capital and compare with standard. 3. To make an item wise study of the components of the working capital. 4. To suggest the steps to be taken to increase the efficiency in management of working capital. PLACE OF STUDY:The project study is carried out at the Finance Department of NALCO MINES & REFINERY COMPLEX, Damonjodi, Odisha. The study is undertaken as a part of the PGDM curriculum from13 MAY 2013 to 06 JULY 2013 in the form of summer placement. STUDY DESIGN AND METHODOLOGY:Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, NALCO. The secondary data were collected from the Annual Report of NALCO, NALCO website, etc. LIMITATIONS:There may be limitations to this study because the study duration (summer placement) is very short and it‟s not possible to observe every aspect of working capital management practices. [Working Capital Management/SIMMC1999/1210002] Page 6
  7. 7. CHAPTER – 2 INDUSTRY SCENARIO AND COMPANY PROFILE INDIAN ALUMINIUM INDUSTRY Aluminium Industries in India is one of the leading industries in the Indian economy. The growth of the aluminum Metal industry in India would be sustained by the diversification and exploration of new horizons for the industry. India has huge deposits of natural resources in form of minerals like copper, chromite, iron ore, manganese, bauxite, gold, etc. The India aluminum industry falls under the category of non iron based which include the production of copper, tin, brass, lead,Zinc , aluminum, and manganese. The main operations of the of the India aluminum industry is mining of ores, refining of the ore, casting, alloying, sheet, and rolling into foils. At present, Hindalco and Nalco are one of the most economical in the production of aluminium in the world. For the sustenance of the growth the aluminum industry in India has to develop research and development units to assist the production and improve on the quality measures to keep a stringent quality control. The India aluminum Metal Industries sector in the previous decade experienced substantial success among the other industries. The India aluminum industry is developing fast and the advancement in its technologies is boosting the growth even faster. The utilization of both international and domestic resources was significant in the rapid development of the India aluminum industry. This rapid development has made the India aluminum industry prominent among the investors. The India aluminum industry has a bright future as it can become one of the largest players in the global aluminum market as in India the consumption is fairly low, the industry may use the surplus production to cater the international need for aluminum which is used all over the world for several applications such as aircraft manufacturing, automobile manufacturing, utensils, etc. The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg. In USA, 19 kg. In Japan and 10 kg. In Europe , Even the World‟s average per capita consumption is about 10times of that in India. One reason of low consumption in the country could be that consumption pattern of aluminium in India is vastly different from that of developed countries. The demand of aluminium is expected to grow by about 9 percent per annum from [Working Capital Management/SIMMC1999/1210002] Page 7
  8. 8. present consumption levels. This sector is going through a consolidation phase and existing producers are in the process of enhancing their production capacity so that a demand supply gap expected in future is bridged. However, India is a net exporter of alumina and aluminium metal at present. ALUMINIUM-STRUCTURE The aluminium industry in India can be classified as: (a) The primary producers who produce ingots and billets (primary form of aluminium) using bauxite. (b) The secondary producers who add value to the ingots and billets to produce semifabricated products. At present there are only five companies in the primary aluminium market viz. Hindalco, Indian Aluminum (Indal), Madras Aluminum (Malco), National Aluminum (Nalco) and Bharat Aluminum (Balco). The former three are private sector companies while the latter two are government owned. All the primary producers have integrated forward into the manufacture of high value semifabricated products like rods, rolled products, extrusions and foils. Regulated till 1989 Until 1989, the Aluminum Control Order (ACO) required all domestic manufacturers to ensure that atleast 50% of their ingot production was electrical grade, for use by the transmission power industry. The government fixed ingot prices on the basis of a Retention Pricing Mechanism, taking into consideration the average retention prices of all producers and a minimum return on equity. The above control resulted in a skewed product mix and shortages of aluminum for other sectors. The problem was further compounded by the vulnerable financial position of State Electricity Boards (the main users of electrical grade aluminum) and high import and excise duties. The producers resorted to inflated prices for other types of aluminium to compensate for the disadvantages they suffered because of this regulation. The ACO was scrapped in 1989 and in 1991 the government lifted restrictions on capacity additions resulting in a free market environment. [Working Capital Management/SIMMC1999/1210002] Page 8
  9. 9. Aluminium – Inputs The aluminium industry in India can be classified as: Captive power, amplebauxite reserves, coupled with cheap labour costs makes Indian companiesamongst the most competitive aluminium producers globally. The main raw material for the manufacture of aluminium includes bauxite,caustic soda, calcined petroleum coke, coal tar pitch, and LS/FS furnace oil. The production process for manufacture of aluminium is briefly outlined below. The mined bauxite ore is mixed with caustic liquor and is refined to produce alumina. This is then smelted (through electrolysis in a smelter) to obtain aluminium. Depending on the quality of bauxite, 2.5 – 3 tonnes are required for manufacture of 1 tonne of alumina. In turn, 2 tonnes of alumina are required for manufacture of 1 tonne of aluminium. Bauxite Indian bauxite reserves at 3 bn tonnes, are the 5th largest in the world, and account for 6% of total world reserves. Most alumina refineries are designed around the bauxite reserves to reduce transportation costs. Cost per tonne of bauxite varies for players depending on the location of the refinery and bauxite mines. [Working Capital Management/SIMMC1999/1210002] Page 9
  10. 10. For example, Nalco has an estimated 1,600 m tonnes of bauxite reserves only 20 kms from its alumina refinery, enabling it to become one of the most economical bauxite producers in the world. Power Power constitutes the single largest cost component for aluminium manufacturers (35–40% of operating costs). Almost all the major Indian companies have captive power plants thus giving them access to cheap power. This makes India one of the most competitive low cost aluminium producers in the world. Hindalco and Nalco‟s production costs are amongst the lowest in the world. Both companies have the advantage of 100% captive power, vital in a power intensive industry and in a power deficit country like India. Aluminium – Products Aluminium products can be segregated into rolled products, extrusions, and foils. Rolled products find applications in automobiles (paneling, floors and windows, but are yet to find use in structural parts and bodies), construction (roofing and walls), consumer durables, engineering applications, web stock for laminated packaging (for toothpastes). A major portion of rolled products capacity is accounted for by the five integrated producers (around 82%). Extrusions include products as bars, pipes and tubes. Major users of extruded aluminium products are buildings, transportation and electrical sector Production in this segment is widely spread and the top three players control around 31% of the market (the largest company - Hindalco commands around 14% market shares in this segment). Foils are sheets having thickness of less than 0.2 mm up to 0.006 mm finding application mainly in the packaging sector. Major users of aluminium foils include the pharmaceutical, consumer products, cigarette and cable manufacturing industries. KEY POINTS Supply - Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements. [Working Capital Management/SIMMC1999/1210002] Page 10
  11. 11. Demand- Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation. Barriers to entry- Large economies of scale. Consequently, high capital costs. Bargaining power of suppliers- Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalise power costs to a certain extent in the long-term. Bargaining power of customers- Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply. Competition- competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry. [Working Capital Management/SIMMC1999/1210002] Page 11
  12. 12. CHAPTER – 3 NATIONAL ALUMINIUM COMPANY LTD. National Aluminium Company Ltd. (Nalco) is considered to be a turning point in the history of Indian Aluminium Industry. In a major leap forward, Nalco has not only addressed the need for self-sufficiency in aluminium, but also given the country a technological edge in producing this strategic metal to the best of world standards. Nalco was incorporated in 1981 in the Public Sector, to exploit a part of the large deposits of bauxite discovered in the East Coast. The Captive Power Plant (CPP) & Smelter Plant are situated near Angul. Nalco is one of the biggest and Asia‟s largest integrated complex, encompassing Bauxite mining, Alumina refining, Aluminium smelting and casting power generation, rail and port operations. NALCO was established in 1981 as a public sector enterprise of the Govt.of India. It is considered a truing point in the 50-yearold history of the Indian aluminum industry. In Orissa, for setting up Asia's largest integrated alumina-aluminium complex in 1981, National Aluminium Company Limited (Nalco) acquired 7263 acres of land at Damanjodi in Koraput district and 4057 acres at Angul. During the inception of the company, 635 families in 51 villages were displaced - 600 families in Damanjodi sector and 35 families in Angul sector. From these 635 displaced families, employment has been provided to 625 nominees. Confusion regarding educational background and nomination status of balance 10 families has beent0aken up at appropriate level. Besides, 1495 families were substantially affected i.e. parting with one third or more land) in Angul sector. Even from these, jobs have been provided to 1060 persons. Nalco has also been sponsoring ITI training to such persons and 543 have been technically trained so far. Apart from financial compensation, employment and rehabilitation packages, Nalco has also spent more than Rs. 100 crore towards various social sector development activities. Creation of infrastructure in the surrounding villages for communication, education, health care and drinking water gets priority in the periphery development plans of the company. Community participation in innovative farming, pisciculture, social forestry and sanitation programmes apart, encouragement to sports, art, culture and literature are all a part of Nalco's deep involvement with the life of the community. Successful operations of the company have led to employment and income generation for the local people in many significant ways. [Working Capital Management/SIMMC1999/1210002] Page 12
  13. 13. ALUMINIUM SMELTER PLANT The 2, 30,000 tpa capacity Aluminium Smelter is located at Angul in Orissa. Based on energy efficient state-of-the-art technology of smelting and pollution control, the Smelter Plant is in operation since early 1987. Presently, the capacity is being expanded to 3, 45,000 tpa. MISSION OF NALCO The broad mission of the company is: “To achieve growth in business with global competitive edge providing satisfaction to the customers, employees, share holders and community at large”. This has been clearly spelt out in the Company‟s Memorandum & Articles 0f Association. Thus, employee satisfaction is a part of the Company‟s broad mission and is a thrust area. OBJECTIVES To maximize capacity utilization. To optimize operational efficiency and productivity. To maintain highest international standards of excellence in product quality, cost efficiency and customer service. To provide a steady growth in business by technology up gradation, expansion and diversification. To have global presence and earn foreign exchange. To maintain leadership in domestic market. To maximize return on investment. To develop a strong R&D base and increase business development activities. To maximize internal customer satisfaction. To foster high standards of health, safety and environment friendly products. To instill financial discipline at all level for achieving cost and budgetary controls, optimize utilization of working capital and effective cash flow management. To promote a result oriented organizational ethos and work culture that empowers employees and helps realization of individual and organizational goals. [Working Capital Management/SIMMC1999/1210002] Page 13
  14. 14. The salient features: Advanced 180 KA cell technology Micro-processor based pot regulation system Fume treatment plant with dry-scrubbing system for pollution control and fluoride salt recovery Integrated facility for manufacturing carbon anodes, bus bars, anode tems etc. 4 x 35 tone and 4 x 45 tone furnaces and 2 x 15 tph and 2 x 20 tph ingot casting machines 4 x 45 tonne furnaces and 2 x 9.5 tph wire rod mills 2 x 45 tonne furnaces and 60/42 per drop billet casting machine 2 x 1.5 tonne induction furnace with a 4 tph alloy ingot casting machine 26,000 tpa strip casting machines With the acquisition and subsequent merger of International Aluminium Products Limited (IAPL) with Nalco, the 50,000 tpa export-oriented Rolled Products Unit is all set to produce foil stock, fin stock, can stock, circles, coil stock, cable wraps, standard sheets and coils CAPTIVE POWER PLANT Close to the Aluminium Smelter at Angul, a Captive Power Plant of 720 MW capacity, comprising 6 x 120 MW clusters, has been established for firm supply of power to the Smelter. Presently, the capacity is being expanded to 960 MW. The salient features: Micro-processor based burner management system for optimum thermal efficiency Computer controlled data acquisition system for on-line monitoring Automatic turbine run-up system Specially designed barrel type high pressure turbine Electrostatic precipitators with advanced intelligent controllers Wet disposal of ash The water for the Plant is drawn from River Brahmani through a 7 km long double circuit pipeline. The coal demand is met from a mine of 3.5 million tpacapacity opened up for Nalco at Bharatpur in Talcher by Mahanadi Coalfields Limited. The Power Plant is inter-connected with the State Grid. [Working Capital Management/SIMMC1999/1210002] Page 14
  15. 15. Brief History: After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats, the govt. of India on the 28th March, 1978, authorized Aluminum Pechiney of France to prepare a feasibility report on the industrial exploration of bauxite for the establishment of an integrated Aluminium complex. The result of this study led to sifting of focus of attention to Panchpattermali, 30km.East of Koraput District of Orissa. Nalco was incorporated in 1981as a public sector Unit. The newly founded NALCO signed an agreement of collaboration with aluminium Pechiney, the world leader in this field for incorporation of technical know-how to set up Asia‟s largest integrated aluminium complex. DIVIDENT AND APPROPRIATIONS You will be happy to know that your Company paid an Interim Dividend for the year 20112012@ Rs. 0.90 per share (18%) in March, 2012. The Board of Directors of our Company have recommended payment of final dividend @ Rs. 0 1.0 per share (2%) making aggregate of Rs. 1.00 per share (20%) for the year 2011-2012 as against Rs. 2.50 per share Rs. 2 per share –split and bonus share of Rs.10 each (20%) as interim dividend and Rs. 0.50 per post split and bonus share of Rs. 5 each (10%) as final dividend paid for the previous year 20102011. Your Directors propose to transfer Rs. 550 corer to General Reserve Account from the year 2011-2012 as against Rs. 770 corer transferred in the previous year. PRESIDENTIAL DIRECTIVES As per Presidential Directives, steps were taken for recruitment of SC/ST candidates. Your Company also complied with the provisions of the Person with Disabilities Act, 1995. As on 31.03.2012, out of the total 7,705 employees (including trainees) on the rolls of your company, there were 1,240 (16.09) SCs, 1378 (18.88%) STs, 776 (10.07%) OBC and 77 (1.00%) person with Disabilities. Every third employees in your Company either belongs to SC or ST category. The total number of lady employees in the organizations as on the date was 355. [Working Capital Management/SIMMC1999/1210002] Page 15
  16. 16. ON GOING EXPANSION PROJECTS 1. ALUMINA REFINERY-UPGRADITION PROJECT Capacity upgardition of 4th Stream of Alumina Refinery from 5.25 lakh TPY to 7.0 and that of Bauxite Mines from 6.3 Millen TPY to 6.825 Millen TOY at an estimated project cost of Rs. 409 corer in progress .Overall physical progress up to 81% has been achieved. The project is scheduled to be commissioned during the course of current year. 2. UTKAL-E COAL BLOCK Utkal-E Coal Block project at an estimated cost Rs.337.61 corer(at May ,2011 price level ) is in progress .It has a mineable reserve of around 67.49 mln tons. 3. 3RD PHASE EXPANSION ROJECT The company has initiated activates for 3rd phase brown field expansion at existing facilities at Angul and Damanjodi, in Odisha at an estimated investment of Rs. 7,500 crore. A. AMPERGE INCREASE AT SMELTER Smelter pot lines operating at 180 KA for the last two and half decade, have been taken to enhanced current to 220KA, at an outlay of Rs. 900 crore and the capacity of plant will be enhanced by 1.07 Lakh MTPA . Preparation of Detailed project Report and Environment Impact Assessment (EIA) study is in progress. B. 500 MW POWER PLANT AT CCP The proposed 500MW power plant at CCP will meet the power requirement for the technology up- gradation of Smelter pot line besides export of surplus power to state grid. Project cost is estimated at Rs. 2,522 corer (August 2009 price level). C. 5TH STREM AT ALUMINA REFINERY NALCO Company has plans to add one more stream to existing four streams in Alumina Refinery. The stream will be 1 Millen tones per annum and investment will be Rs. 4,000 crore approximately, Activates for preparation of DPR are in hand. [Working Capital Management/SIMMC1999/1210002] Page 16
  17. 17. 4. 50 WIND POWR PLANT In line with the vision of the Company and in pursuit of endeavor to harness the in renewable energy source, your Board has approved the investment of Rs. 274 crore for setting up 50MW Wind power plant in Andhra Pradesh. Manufacturing of all equipments has been completed. 5. NUCLER POWER PLANT IN JOINT VENTUR NALCO Company has been entered into joint venture with Nuclear Power Corporation of India Ltd. For setting up of 1400MW nuclear power plant in Gujarat at an estimated cost of Rs.11,459 corer. Your Company present equity share is 26% and the same would be increased to 49% after approval of the Govt. of India. REPORT ON CORPORATE GOVERNANCE PHILOSOPHY Corporate Governance is the best management practice, compliance of low in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. it deals with laws, procedures, practice and implicit rules that determine a Company s abilities to take informed managerial decision vis-à-vis its claimants , in particular its shareholder ,customers, the state and employees. BOAED OF DIRECTORS The Board of Directors formulate strategic, police and review performance periodically to manage the Company .The Functional that is Executives Directors manage the business of the Company under the overall supervision , control and guidance of the Board . DIRECTORS FROFIT A brief resume of all the Directors is given at the begging of the Annual Report. The nature of their expertise in specific functional areas and names of Companies in which [Working Capital Management/SIMMC1999/1210002] Page 17
  18. 18. they hold Directorship, chairmanship/membership of Board Committees and their shareholding in the Company are given there in. COMPOSITION As per the Article of Association of the Company, the number of directors on the Board shall not be less than four and shall not be more then eighteen. NALCO being a Government Company, the power to appoint directors vests with the president of India. As on 31st March ,2012 , the Board had 12 directors comprising of 6 executive directors , one non- executive official director and six non executive non official(independent) directors. One of the executive directors being under suspension, the composition of Board was in compliance with the requirement s under clause 49 of the listing Agreement and DPE guidelines on Corporate Governance. AGE LIMIT AND TUNERE OF DIRECTORS Age limit for the Functional that is Executive Director including Chairman –cumManaging Director is 60 years. The upper age limit for consideration of appointment director is 65. Tenure of office of CMD and /or other Functional that is Executive Directors is for a period of five years from the date of appointment or until the age of superannuation or till further order of the Govt. of India whichever is earlier. BOARD OF METTINGS The Board met 11 times during the year 2011-2012. The minimum and maximum time gap between any two Board matting was 8days and 73 days respectively. LOCATION OF THE ORGANISATIONS Nalco projects mostly located in backward districts of Orissa were expeditiously completed on schedule on the very difficult logistics of project management. The Mines and Alumina Refinery Complex has located at Damanjodi in Koraput District. This is a picture sque valley of this beautiful district at the foot of Panchpatmali Hills. A 16 km long uphill road connects [Working Capital Management/SIMMC1999/1210002] Page 18
  19. 19. the plateau of Panchapatmali, where the bauxite Mines of Nalco is located. Damanjodi is 12 Km. from Semiliguda, a small town located on the NH-43 that connects Vizianagarm of Andhra Pradesh with Jagdalpur of Chatisgarh. The Vizianagaram is a distance of 135 Km.. There is of course a passenger rail service from Koraput to Visakhapatnam through the most enchanting hilly terrains of Aruku Valley and Anantagiri. Damanjodi is also connected by Rail Transport from Bhubaneswar, Rayagada, Visakhapatnam, Sambalpur & Kolkata. It is also connected by bus service from Berhampur, Cuttack, Bhubaneswar, Angul & Samabalpur. Its Smelter Plant and CPP are located at Angul, while the corporate head quarter is located at Bhubaneswar, the capital city of Orissa. Registered office………………………………...Bhubaneswar Bauxite mine…………………………………….Panchpatmali Aluminium refinery…………..............................Damanjodi Captive power plant….…………………………Angul Aluminium smelter…………………………..…Angul Port facilities….………………………………….Visakhapatnam Rolled product unit……………………………….Angul ACHIEVEMENTS OF NALCO: 1980: A Memorandum of Understanding was signed in January, by the Government of India for technical collaboration and financing of an integrated alumina-aluminium complex with Aluminium Pechiney of France. 1981: The Company was incorporated on 7th January, as a wholly owned enterprise of Government of India. The Company Manufacture aluminium hydrate, claimed alumina, aluminium ingots and aluminium wire rods. 1993: [Working Capital Management/SIMMC1999/1210002] Page 19
  20. 20. NALCO signed a project co-operation agreement with Hydro Aluminium AG, Norway to carry out a joint study for feasibility of setting up a100% export oriented aluminium plant of 0.9 million tonnes per annum capacity. 1,28,86,19,200 No. of shares allotted 1994: The Company proposed to undertake expansion of bauxite mine from2.4million TPA. to 4.8 million tpa. and alumina refinery from 8,00,000 tpa. to 13,50,000 tpa. This was subject to necessary clearances. 1995: A Smelter plant at Angul was undertaken with a capacity of 26000 TPY of strip casting facility. A special Alumina plant at Damanjodi was undertaken with a Capacity of 20,000 TPY. A 10,000 TPY detergent grade Zeolite (Zeolite-A) plant at Damanjodi, was undertaken. 1996: The proposal to expand the capacities of bauxite mine at Panchpatmali from 24 lakh tonnes to 48 lakh tonnes and alumina refinery at Damanjodi from 8 lakh tonnes to 15.75 lakh tonnes was approved by the Government on 18.12.1996. 1997: Subject to necessary approvals being obtained the company proposed to convert 50% of its existing equity capital into debt. The public sector aluminium giant, National Aluminium Company (NALCO) set up in technical collaboration with Pechiney, France is the largest integrated aluminium company in Asia. National Aluminium Company Ltd (Nalco), country's largest Aluminium Company, has opened a stockyard at Bhiwandi in Thane district. National Aluminium Company (Nalco), India's largest producer and ex porter, got the ISO 14001 certification for environmental excellence. The National Aluminium Company, Bhubaneswar, signed an agreement of national importance with the NRDC for licensing from the NRDC the knowhow to manufacture gallium from the sodium alumina plant. 1998: The company has been forced to curtail its power generation capacity due to a drastic reduction in intake by Gridco. - the nodal power transmission and distribution agency in Orissa. 1999: The National Aluminium Company Ltd (NALCO) a Government of India [Working Capital Management/SIMMC1999/1210002] Page 20
  21. 21. undertaking is setting up a plant for extraction of gallium at its aluminium refinery complex at Damanjodi. The National Aluminium Company (Nalco) will take over International 2000: Icra has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture issue of the company, while it has assigned an A1 rating to the Rs 5-crore CP issue of Narmada Chematur Petrochemicals. 2001: A public sector Aluminium Company making a foray into detergent business sounds out of place. But if senior officials of National Aluminium Company (Nalco) are to be believed, the country‟s second largest aluminium company will be doing that at its zeolite plant scheduled to start operations in July end. 2002: S Behuria appointed as part time official Director of Nalco. Nalco's alumina refinery capacity increased to 15.75 lakh tone 2003: Commissions one unit of Captive Power Plant with a capacity of 120 MW and 120 pots of Smelter with a capacity to produce 57,500 MT of Aluminium per year Nalco members okay delisting of securities from stock exchanges of Bhubaneshwar, Delhi, Calcutta & Madras 2004: National Aluminium Company Limited (NALCO) has informed that Madras Stock Exchange Limited vide its letter dated December 22, 2003 have withdrawn the admission granted to dealings on their exchange for the securities of NALCO. Nalco open offer to acquire 20% stake for Ondeo Nalco India. 2005: Nalco inks agreement with NMDC 2010-11. PSY Excellence Award 2011, in the Maharatna and Navratna category, for Corporate Social Responsibility and Responsiveness, instituted by the Department of public Enterprice , Govt. of India and Indian Chamber of commerce.  Top Export Award of CAPEXIL , for outstanding export performance during 201011. [Working Capital Management/SIMMC1999/1210002] Page 21
  22. 22.  Best exporters Award from directorate of export promotion and marketing , Govt. of Odisha for outstanding export of Alumina and Aluminum for the year 2009-2010.  Prestigious National Energy Conservation Award for the year 2011 from Ministry of power for smelter plant at Angul.  Three prestigious award : CEO with HR Orientation .HR leadership Award and Origination with Innovative HR Practice at the Global HR excellence Awards ceremony during World HRD congress-2012. NALCO-PRODUCTS Aluminium Metal Ingots Sows Billets Wire rods Alloy wire rods Cast strips Alumina & Hydrate Calcined Alumina Alumina Hydrate EXPANDED CAPACITIES: 2ND Phase expansion project You will be pleased to know that with the commissioning of 4th Stream of Alumina Refinery during the year ,the2nd phase Expansion Project of your Company stands completed. The details of earlier capacity and present capacity after 2nd phase expansion of your company are as under. [Working Capital Management/SIMMC1999/1210002] Page 22
  23. 23. SI Project Segment Capacity NO before 2nd Capacity after 2nd Phase phase Expansion Expansion 1 Bauxite Mine 48 LakhTPY 63 LakhTPY 2 Alumina Refinery 15.75 LakhTPY 21 LakhTPY 3 Aluminum Smelter 3.45 LakhTPY 4.6 LakhTPY 4 Captive Power Plant 960MW 1,200MW The Sales break-up is as follows: Unit 2011-2012 2010-2011 Alumina MT 792,552 855,639 Aluminum including MT 98,399 98,200 Alumina and Hydrate MT 49,844 42,062 Zeolite-A MT 409 3,854 Aluminum MT 317,517 340,752 Total Metal Sale MT 415,916 438,952 Total Chemical Sale MT 842,396 681,919 Export Rolled Products Domestic ORGANIZATIONAL CHART OF NALCO (M&R COMPLEX) ED (M&R) GM (AR) GM (O&M) GM (MINES) FUNCTIONAL HOD GM (H&A) GM (MATLS) FUNCTIONAL HOD FUNCTIONAL HOD [Working Capital Management/SIMMC1999/1210002] GM (FINANCE ) Page 23
  24. 24. FUNCTIONAL HOD FUNCTIONA L HOD ED(M&R) : GM(AR)/ GM(O&M) Overall incharge of M&R Complex and all Functional level GMs are reporting : In charge of Alumina Plant operation & maintenance GM(Mines) : In charge of Mines operation & maintenance GM(H&A) : In charge of HRD & Admn. of M&R Complex GM (MATLS.) : In charge of Purchase & stores Functions of M&R Complex GM(FINANCE) : In charge of Finance & Accounts of M&R Complex FUNCTIONAL : In charge for respective area of operation and i.e. Production, Mechanical, Electrical, Steam Generation Plant, Electronic & Instrumentation, Civil, Purchase, Stores, Finance, Human Resource Development, Administration, Horticulture, Training, Peripheral Development. HEAD OF DEPARTMENT [Working Capital Management/SIMMC1999/1210002] Page 24
  25. 25. CHAPTER – 4 WORKING CAPITAL Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called „Long term Funds‟ or „Fixed Capital‟. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called „Long-term Funds‟ or „Fixed Capital‟. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, The ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Working capital cycle involves conversions and rotation of various constituents Components of the working capital. Initially „cash‟ is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus „cash‟ assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset. Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and [Working Capital Management/SIMMC1999/1210002] Page 25
  26. 26. degree of synchronization among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business. These characteristics have certain implications: Decision regarding management of the working capital has to be taken frequently and on a repeat basis. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets: Stock of Cash Stock of Raw Material Stock of Finished Goods Value of Debtors Miscellaneous current assets like short term investment loans & Advances A number of definitions have been formulated: perhaps the most widely acceptable would be; “WORKING CAPITAL represents the excess of CURRENT ASSETS over CURRENT LIABILITIES “ The same may be designated in the following equation: WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES: Funds thus invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Thus it is known as revolving or circulating capital or short term capital. These are two concepts of working capital:a. Gross Working Capital. b. Net Working Capital. Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current [Working Capital Management/SIMMC1999/1210002] Page 26
  27. 27. assets and current liabilities. The constituents of current assets and current liabilities are shown in table A. Constituents of Current Assets and Current Liabilities Current Assets Inventories – Raw materials and components, Work in progress, Finished goods, other. Trade Debtors. Loans and Advances. Investments. Cash and Bank balance. Current Liabilities Sundry Creditors. Trade Advances. Borrowings. Provisions. The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below: Nature of Enterprise The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. Manufacturing/Production Policy Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may [Working Capital Management/SIMMC1999/1210002] Page 27
  28. 28. follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. Working Capital Cycle In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment of labour and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. Operations The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. Market Condition If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. Credit Policy The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables. Business Cycle Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. [Working Capital Management/SIMMC1999/1210002] Page 28
  29. 29. On the country at the time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal Availability of Raw Material If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same. Growth and Expansion Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. Earning Capacity and Dividend policy Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. Price Level Changes Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. Manufacturing Cycle The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital [Working Capital Management/SIMMC1999/1210002] Page 29
  30. 30. requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. Other Factors Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labour, banking facilities etc. also influences the requirement of working capital. Component of Working Capital Basis of Valuation Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous. [Working Capital Management/SIMMC1999/1210002] Page 30
  31. 31. CHAPTER – 5 WORKING CAPITAL MANAGEMENT Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets .This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:1. Investment in current assets represents a substantial portion of total investment. 2. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components. The importance of working capital management is affected in the fact that financial manages spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favourable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers. The problem of working capital management is one of the “best” utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations. CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. [Working Capital Management/SIMMC1999/1210002] Page 31
  32. 32. The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, over assessment of working capital also has its own dangers CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency. Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit. The working capital in certain enterprise may be classified into the following kinds. 1. Initial working capital. The capital, which is required at the time of the commencement of business, is called initial working capital. These are the promotion expenses incurred at the earliest stage of formation of the enterprise which include the incorporation fees. Attorney's fees, office expenses and other expenses. 2. Regular working capital. This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses. 3. Fluctuating working capital. This capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by improvement or extension of [Working Capital Management/SIMMC1999/1210002] Page 32
  33. 33. machinery. It may be secured from any financial institution which can, of course, be met with short term capital. It is also called variable working capital. 4. Reserve margin working capital. It represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the running life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business. Financing Working Capital Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds: I. Supplier’s Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc. ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the Required business level. The loans are available for creating the following current Assets: Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the [Working Capital Management/SIMMC1999/1210002] Page 33
  34. 34. right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. iii. Promoter’s Fund It is advisable to finance a portion of current assets from the promoter‟s funds .They are longterm funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business. Management of Inventory Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques Needs to hold inventories:There are three general motives for holding inventories:Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation. Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in reordering costs and quantity discounts etc [Working Capital Management/SIMMC1999/1210002] Page 34
  35. 35. Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The following are the objectives of inventory management:To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To minimize losses through deterioration, pilferage, wastages and damages. To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. To ensure right quality of goods at reasonable prices. To facilitate furnishing of data for short-term and long term planning and control of inventory Management of cash Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firm‟s manufacturing operations while excessive cash will simply remain ideal without [Working Capital Management/SIMMC1999/1210002] Page 35
  36. 36. contributing anything towards the firm‟s profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm. Need to hold cash The firm‟s need to hold cash may be attributed to the following three motives:The Transaction Motive: The transaction motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc. The Precautionary Motive: A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. For example a debtor who pays after 7 days may inform of his inability to pay, on the other hand a supplier who used to give credit for 15 days may not have the stock to supply or he may not be in opposition to give credit at present. Speculative Motive: - The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. The opportunities to make profit changes. The firm will hold cash, when it is expected that interest rates will rise and security price will fall. COMPONENTS OF WORKING CAPITAL ARE CALCULATED AS FOLLOWS: 1) Raw Materials Storage Period= Average stock of raw materials/Average cost of raw material consumption per day. 2.) W-I-P holding period= Average w-i-p in inventory/Average cost of production per day 3.) Stores and spares conversion period= Average stock of Stores and spares/Average consumption per day. [Working Capital Management/SIMMC1999/1210002] Page 36
  37. 37. 4.) Finished goods conversion period= Average stock of finished goods/Average cost of goods sold per day. 5.) Debtors collection period= Average book debts/Average credit sales per day. 6.) Credit period availed= Average trade creditors/Average credit purchase per day. Management of Receivables A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables. Needs to hold cash: Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to take a sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is [Working Capital Management/SIMMC1999/1210002] Page 37
  38. 38. “to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.” IMPORTANT TERMS WORKING CAPITAL CYCLE Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management 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 a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and workin-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 two dimensions ........TIME ......... and MONEY. When it comes to managing working capital TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales. If you…. Then……. [Working Capital Management/SIMMC1999/1210002] Page 38
  39. 39. Collect receivables (debtors) faster You release cash from the cycle Collect receivables (debtors) slower Your receivables soak up cash Get better credit (in terms of duration or amount) from suppliers You increase your cash resources Shift inventory (stocks) faster You free up cash Move inventory (stocks) slower You consume more Cash It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now 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 water flowing downs a plug hole, they remove liquidity from the business. More businesses fail for lack of cash than for want of profit. Sources of Additional Working Capital Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans [Working Capital Management/SIMMC1999/1210002] Page 39
  40. 40. If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash o Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque). Handling Receivables (Debtors) 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 is owing.... 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 least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased 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 the priority 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, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. [Working Capital Management/SIMMC1999/1210002] Page 40
  41. 41. 7. Continuously review these limits when you suspect tough times are coming or if operating 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 don't let any debts get too large or too old. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects: weak credit judgement poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example......... longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors. Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or [Working Capital Management/SIMMC1999/1210002] Page 41
  42. 42. important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Managing Payables (Creditors) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stock-holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis? There is an old adage in business that if you can buy well then you can sell well. Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with you to enhance the future viability and profitability of your company. [Working Capital Management/SIMMC1999/1210002] Page 42
  43. 43. METHODS OF CASH MANAGEMENT : The following methods of cash management will help: A) Methods of accelerating cash inflows: 1) Prompt Payment by customers. 2) Quick conversion of payment into cash. 3) Decentralized collections. 4) Lock box system. B) Methods of slowing the cash outflows: 1) Paying on last Date. 2) Payment through Draft. 3) Adjust Payroll funds. 4) Centralization of payments. 5) 1nter13ank transfer. 6) Making use of Float. Determination of Optimum cash balance : A firm has t9 maintain a minimum -amount of cash for settling of his dues in time cash is needed to purchase raw materials, pay creditors, day to day expenses dividend, etc. an appropriate amount of cash balance to be maintained should be determined on the basis of past experience and future expectations. If a firm maintained less cash balance then its liquidity position will be weak. And if higher cash balance is maintained then an opportunity to earn is lost. Thus a firm should maintain optimum cash balance neither small nor large cash balance. There are basically tw9 approaches to determine an optimal cash balance such as, namely (i) Minimizing cost models, (ii) Preparing cash budgets. (A) Cash management Models: A number of mathematical models have also been developed to determine optimal cash balance such as, operating cycle model, inventory model, probability model and stochastic Model. However the inventory model is developed by William J. Boumal and the [Working Capital Management/SIMMC1999/1210002] Page 43
  44. 44. Stochastic Model of M.H. Miller and Daniel Orr are mainly used to determine the optimum cash balance. (i) William J. Baumal Model : William J. Baumal developed a Model (The transaction Demand for Cash: An Inventory theoretic Approach) which is usually used in determining the optimum cash balance also. Baumal found similarity between cash management and Inventory management. As Economic order Quantity in inventory management involves trade off between carrying cost and ordering cost. The optimal cash balance is the trade off between Opportunity cost or cost of borrowing or holding cash and the transaction cost (Le. The cost of converting marketable securities into cash) the optimum cash balance is reached at a point where the total cost is minimum. The figure explains the optimum cash balance The Bau (Baumal Model: Trade-Off between Holding and Transaction Cost) a) Cash needs of the firm are known with certainty. b) The cash disbursement of the firm occurs uniformly over a period of time and is known with certainty. c) The opportunity cost of holding cash is known and remains constant. d) The transaction cost of converting securities into cash is known and remains constant. [Working Capital Management/SIMMC1999/1210002] Page 44
  45. 45. The Baumal Model can also be represented algebraically. C= 2 A* f / 0 c- -Optimum cash balance A -- Annual carrying Cost F -- Fixed Cost per transaction 0 - - Opportunity cost of holding Cash (ii) Miller and Orr model: Baumal Model is based on the basic assumption that the size and timing of cash flows are known with certainty. This usually doesn't happen in practice. The cash a firm are neither uniform her certain. The Miller and Orr model overcome the shortcomings of Baumal Model and developed stochastic model for firms within certain cast cash outflow. The miller and Ore model provides two- control limits the upper control limit and the lower control limit along with a return point as shown in the figure below: (Miller and Orr Cash Management Model) (B) Cash Budget: Cash budget is an estimate of cash receipt and disbursement of cash during a future period of time. In the word of Solomon Ezra a cash budget is, "an analysis of flow cash in a business over a future, short or long period of time. It is a forecast of expected cash intake [Working Capital Management/SIMMC1999/1210002] Page 45
  46. 46. and outlay. It is a device to plan and control of the use of cash. The cash receipt from various sources is anticipated. The estimated cash collection receivables, interest, dividend and other will be taken into account. The mount to be spent on purchase of Raw materials, payment to creditors, and meeting other revenues and capital expenditure should be considered . [Working Capital Management/SIMMC1999/1210002] Page 46
  47. 47. CHAPTER – 6 DATA COLLECTION AND REPRESENTATIONS Nalco Balance sheet as on . (Rs in Crs.) PARTICULARS 2011-12 2010-11 2009-10 2008-09 2007-08 Sources of funds Shareholders Fund Share Capital Reserve Surplus 1,288.62 10,426.46 1,288.62 9,875.99 644.31 9,751.27 644.31 9,125.50 644.31 8,230.14 Secured loans Defered tax liability 849.11 14.88 693.46 660.59 621.35 607.43 TOTAL APPLICATION OF FUNDS FIXED ASSETS Gross block less cdepreciation net block (NET FIXED ASSETS ) fixed asset awaiting disposal Capital work in progress INVESTMENT 12,564.19 11,872.95 11,056.17 10,391.16 9,481.88 13,658.62 12,076.15 11,017.96 7,046.27 6,582.62 6,181.65 6,612.35 5,493.53 4,836.31 684.44 7,296.79 1,743.53 7,237.06 2,243.40 7,079.71 9,899.84 5,868.30 4,031.54 0.99 2,867.13 6,899.66 754.26 1,331.67 986.75 895.93 1,058.47 112.40 3,795.23 163.84 915.23 6,045.17 944.92 181.78 3,152.35 145.00 785.59 5,209.64 841.90 686.65 26.50 60.65 2,869.04 3,516.46 175.35 236.47 616.02 541.10 4,528.81 5,041.33 2,354.46 386.49 2,740.95 3,304.22 1,849.95 369.98 2,219.93 2,989.71 1,603.40 1,318.31 329.84 222.57 1,933.24 1,540.88 2,595.57 3,500.45 Current assets, loans and advances Inventory 1,212.70 Sundry Debtors 138.12 Cash and bank balance 4,168.35 other current assets 270.07 loan and advances 1,680.49 CURRENT ASSETS 7,469.73 less:current liabilities & provision current liabilities 2,673.32 Provision 283.27 CURRENT LIABILITIES 2,956.59 Net current asstes 4,513.14 TOTAL 9,137.26 5,606.31 3,530.95 0.86 2,334.59 5,866.40 115.03 12,564.19 11,872.95 11,056.17 10,391.16 9,481.88 [Working Capital Management/SIMMC1999/1210002] Page 47
  48. 48. PROFIT & LOSS ACCOUNT Profit and loss account for 2008 to 2012 PARTICULARS 2011-12 2010-11 INCOME Sales 7,038.23 less: excise duty 426.66 Net sales 6,611.57 Finished goods internally consume Other income 542.16 TOTAL 7,153.73 EXPENDITURE Decretion/accretion to stock of finished/ intermediary -2.93 raw materials 1,030.78 fuel & power 2,196.68 repair & maitenance Other manufacturing expenses employees renumeration benefit 1,034.54 administrative exp. other exp. 1,207.59 selling distributiom exp. interest & financing charge 0.87 provision depreciation & impairments 466.55 TOTAL 5,934.08 PBEIT 1,219.65 Exceptional items 21.90 add/less: prior period adjustment (net) profit before tax 1,197.75 Provision for taxation Tax exp. (1) Current tax (2) MAT creditmin entitlement -39.89 Current 237.94 Fringe benefit Deffered 155.65 Earlier years -5.45 Tax Expenses 348.25 Profit after tax (NET PROFIT ) 849.50 [Working Capital Management/SIMMC1999/1210002] 2009-10 2008-09 2007-08 6,369.88 410.90 5,958.98 5.57 452.95 6,417.50 5,311.40 255.74 5,055.66 24.20 468.75 5,548.61 5,517.52 423.00 5,094.52 26.44 495.84 5,616.80 5,474.45 485.65 4,988.80 31.65 554.77 5,575.22 9.91 766.12 1,772.64 414.70 177.61 989.02 121.09 138.07 72.17 0.05 0.34 430.06 4,891.78 1,525.72 21.63 782.30 1,601.14 296.37 210.78 843.60 115.29 127.55 89.04 2.28 -3.91 319.39 4,405.46 1,143.15 -85.35 696.76 1,311.55 250.52 174.98 771.06 103.33 123.10 84.33 3.96 -3.23 272.44 3,703.45 1,913.35 -21.85 574.36 994.69 231.54 163.82 552.97 106.74 113.97 84.74 1.51 -0.35 281.10 3,083.24 2,491.98 -1.02 1,524.70 11.71 1,154.86 13.81 1,927.16 -25.39 2,466.59 422.61 315.31 32.87 -0.08 455.40 1,069.30 39.25 -13.92 340.64 814.22 634.92 10.87 13.91 -4.81 654.89 1,272.27 849.80 10.64 -5.31 -20.06 835.07 1,631.52 Page 48
  49. 49. SCHEDULAE CHANGES IN WORKING CAPITAL AT NALCO CALCULATION WORKING CAPITAL Particular (Rs. In Crores ) 2011-12 2010-11 2009-10 2008-09 2007-08 IVENTORIES 1212.7 1058.47 944.92 841.9 686.65 SUNDRY DEBTORS 138.12 112.4 181.78 26.5 60.65 3795.23 3152.35 2869.04 3516.46 163.84 145 175.35 236.47 LOAN & ADVANCES 1680.49 915.23 785.59 616.02 541.1 Total current assets 7469.73 6045.17 5209.64 4528.81 5041.33 2673.32 2354.46 1841.34 1603.4 1318.31 283.27 386.49 369.98 329.84 222.57 2740.95 2211.32 1933.24 1540.88 3304.22 2998.32 2595.57 3500.45 current assets CASH &BANK 4168.35 BALANCE OTHER CURRENT 270.07 ASSETS CURRENT LIBELITIES & PROVISIONS CURRENT LIBELITIES PROVISIONS Total current 2956.59 liabilities Net working capital 4513.14 [Working Capital Management/SIMMC1999/1210002] Page 49
  50. 50. Net Working Capital 5000 4500 4513.14 4000 3500 3500.45 3000 3304.22 2998.32 2595.57 2500 2000 1500 1000 500 0 Net Working Capital 2008 2009 2010 2011 2012 3500.45 2595.57 2998.32 3304.22 4513.14 It was observed that major source of liquidity problem is not the mismatch between current payments and current receipts from the Comparison of funds flow statements of AIL for five years. This company net working capital is continue increase and to the present level is good. The growth in working capital is a clear indication that the company does not utilizing its short term resources with efficiency. In year 2008-09 the company net working capital was Rs. 2595.57 and after 3 years it increasing and 2011-12 the company net working capital was 4513.14. CURRENT ASSET Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year. [Working Capital Management/SIMMC1999/1210002] Page 50
  51. 51. CURRENT ASSETS 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00 Inventory 2008 686.65 2009 841.90 2010 944.92 2011 1,058.47 2012 1,212.70 Sundry Debtors 60.65 26.50 181.78 112.40 138.12 3,516.46 2,869.04 3,152.35 3,795.23 4,168.35 other current assets 236.47 175.35 145.00 163.84 270.07 loan and advances 541.10 616.02 785.59 915.23 1,680.49 Cash and bank balance TOTAL CURRENT ASSETS 8,000.00 7,469.73 7,000.00 6,045.17 6,000.00 5,209.64 5,041.33 5,000.00 4,528.81 4,000.00 3,000.00 2,000.00 1,000.00 0.00 TOTAL CURRENT ASSETS 2008 2009 2010 2011 2012 5,041.33 4,528.81 5,209.64 6,045.17 7,469.73 It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects on profitability. Current assets include some funds investments for which company pay interest. [Working Capital Management/SIMMC1999/1210002] Page 51
  52. 52. CURRENT LIABILITIES Current liabilities mean the liabilities which have to pay in current year. It includes sundry creditor‟s means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance CURRENT LIABILITIES 2,673.32 3,000.00 2,354.46 2,500.00 2,000.00 1,500.00 1,318.31 1,000.00 500.00 1,849.95 1,603.40 386.49 369.98 329.84 222.57 283.27 0.00 Current liabilities Provision 2008 1,318.31 2009 1,603.40 2010 1,849.95 2011 2,354.46 2012 2,673.32 222.57 329.84 369.98 386.49 283.27 TOTAL CURRENT LIABILITIES 3,500.00 3,000.00 2,740.95 2,500.00 2,956.59 2,219.93 2,000.00 1,933.24 1,540.88 1,500.00 1,000.00 500.00 0.00 TOTAL CURRENT LIABILITIES 2008 2009 2010 2011 2012 1,540.88 1,933.24 2,219.93 2,740.95 2,956.59 [Working Capital Management/SIMMC1999/1210002] Page 52
  53. 53. Observations:Current liabilities show continues growth each year because company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm. As a current liability increase in the year 2011-12 by 2956.59. It increases the working capital size in the same year. And company enjoyed over creditors which may include indirect cost of credit terms. CURRENT RATIO: The current ratio is calculated by dividing the total current assets by total current liabilities. Current Assets Current ratio = Current Liabilities Current ratio may be defined as the relationship between current assets and current liabilities .This ratio also known as working capital ratio is a measure of general liquidity & most widely used to make the analysis of a short-term financial position or liquidity position of the firm. Current assets include cash and those assets, which can be converted into cash within a year such as marketable securities, debtors and inventories, bills receivable and prepaid expenses. All obligations maturing within a year are included in current liabilities. Current liabilities include creditors, Bills payable accrued expenses, short-term bank loans. Income – tax liabilities and long-term debt maturing in the current year. CURRENT ASSETS CURRENT LIABILITIES 1) Cash in hand 1) Outstanding Expenses 2) Cash at Bank 2) Bills payable 3) Marketable Securities 3) Sundry creditors 4) Short term investments 4) Short term advances 5) Bills receivable 5) Income tax payable [Working Capital Management/SIMMC1999/1210002] Page 53
  54. 54. 6) Sundry Debtors 6) Dividends payable 7) Inventories 7) Bank overdraft 8) Accrued expenses and 8) Work in process other obligations maturing in current year 9) Prepaid expenses and others which Can be converted into Cash within a year As a conventional rule a current ratio of 2:1 or more is considered to be satisfactory it represents the margin of safety for creditors. An extremely high ratio of current asset to current liability is an indication of slack management, poor credit management and excessive inventories for the current requirement. The current ratios of NALCO from the year 20112008 to 2012are as follows: CURRENT RATIO 8000 7000 6000 5000 4000 3000 2000 1000 0 7469.73 6045.17 5041.33 1540.88 4528.81 5209.64 2211.32 1933.24 2740.95 2956.59 CURRENT ASSETS 2008 5041.33 2009 4528.81 2010 5209.64 2011 6045.17 2012 7469.73 CURRENT LIABILITIES 1540.88 1933.24 2211.32 2740.95 2956.59 [Working Capital Management/SIMMC1999/1210002] Page 54
  55. 55. CURRENT RATIO 3.50 3.27 3.00 Axis Title 2.50 2.53 2.36 2.34 2.21 2.00 1.50 1.00 0.50 0.00 CURRENT RATIO 2008 2009 2010 2011 2012 3.27 2.34 2.36 2.21 2.53 Observations: The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value. It is very high 3.27 in 2007-08, but regularly decreases. In 2010-11 it comes at 2.21 Acid Test or Quick Ratios: This ratio is calculated by dividing Total liquid assets by Total current liabilities. Quick Assets Quick Ratio = ------------------------Current Liabilities Acid test or quick ratio is a more rigorous test of liquidity than the current ratio. The term „‟Liquidity” refers to the ability of a firm to pay its short-term obligations as and when they become due. Quick ratio may be defined as the relationship between quick liquid assets and current or liquid liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash in hand and cash at bank are the most liquid assets. The other assets, which can be included in the liquid assets, are bills receivable, sundry debtors, marketable securities and short-term or temporary investments. Quick Assets are those assets which are converted into cash immediately for example cash, debtors, bills receivables, and marketable securities. [Working Capital Management/SIMMC1999/1210002] Page 55
  56. 56. Generally a quick ratio of 1:1 is considered satisfactory. Usually a high acid test ratio is an indication that the company is liquid and has the ability to meet its current liabilities in time and on the other hand, a low quick ratio represents that the company‟s liquidity position is not good. A company with a high value of quick ratio can suffer from the shortage of funds if it has slow paying, doubtful and long duration outstanding book debts (receivable) and it can really prospering with a low value of quick ratio if it is realizing cash efficiently from inventories and paying its current obligations in time. Quick ratio of Nalco from the year 2008 to 2012are are as follows:- QUICK RATIO 6257.03 7000 6000 5000 2000 4264.72 3686.91 4000 3000 4986.7 4354.68 1540.88 2211.32 1933.24 2740.95 2956.54 1000 0 QUICK ASSETS 2008 4354.68 2009 3686.91 2010 4264.72 2011 4986.7 2012 6257.03 TOTAL CURRENT LIABILITIES 1540.88 1933.24 2211.32 2740.95 2956.54 QUICK RATIO 3.00 2.83 2.50 2.00 2.12 1.93 1.91 1.82 1.50 1.00 0.50 0.00 QUICK RATIO 2008 2009 2010 2011 2012 2.83 1.91 1.93 1.82 2.12 [Working Capital Management/SIMMC1999/1210002] Page 56
  57. 57. Observations:Quick ratio indicates that the company has sufficient liquid balance for the payment of current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time, it indicates that the firm maintains the over liquid assets than actual requirement of such assets. TOTAL ASSETS TURNOVER RATIO: The total assets turnover ratio is calculated by dividing Net sales by total assets. Net Sales Total assets turnover ratio = Total Assets The total assets turnover ratio is a significant ratio since it shows the firm‟s ability of generating sales from all the financial resources committed to the company. As this ratio increases there is more revenue generated per rupee of total investment in assets. The total assets turnover ratios of NALCO from the year 2008 to 2012 are as follows: Rs in corers TOTAL ASSETS TURNOVER RATIO 16000 14000 12000 10000 8000 6000 4000 2000 0 NET SALES TOTAL ASSETS 10907.73 4988.8 11428.47 5094.52 12289.35 5055.66 13282.23 5958.98 14766.52 6611.57 2008 4988.8 2009 5094.52 2010 5055.66 2011 5958.98 2012 6611.57 10907.73 11428.47 12289.35 13282.23 14766.52 [Working Capital Management/SIMMC1999/1210002] Page 57
  58. 58. TOTAL ASSETS TURNOVER RATIO Axis Title 0.47 0.46 0.45 0.44 0.43 0.42 0.41 0.4 0.39 0.38 TOTAL ASSETS TURNOVER RATIO 2007-08 2008-09 2009-10 2010-11 2011-12 0.46 0.45 0.41 0.45 0.45 ANALYSIS:- The total asset turnover ratio in 2007-08 was 0.46 which has reduced to 0.45 in 2008-09 ,further reduced to 0.41 in 2009-10,then the 2011 to 2012 increase 0.45 . The reduction in ratio is mainly due to lower realization and increase in asset of the company due to expansion activities. Higher ratios are indicative of efficient management and utilisation of resources. It is good for the company. WORKING CAPITAL TURNOVER RATIO:- NET SALES Working Capital Turnover Ratio = --------------------NET WORKING CAPITAL Net working capital = Current Asset – Current Liability [Working Capital Management/SIMMC1999/1210002] Page 58
  59. 59. WORKING CAPITAL TURNOVER RATIO 7000 6000 5000 4000 3000 2000 1000 0 6611.57 5958.98 4988.8 5094.52 5055.66 3500.45 4513.14 3304.22 2998.32 2595.57 NET SALES 2008 4988.8 2009 5094.52 2010 5055.66 2011 5958.98 2012 6611.57 NET WORKING CAPITAL 3500.45 2595.57 2998.32 3304.22 4513.14 WORKING CAPITAL TURNOVER RATIO 2.50 2.00 1.96 1.80 1.69 1.50 1.46 1.43 1.00 0.50 0.00 WORKING CAPITAL TURNOVER RATIO 2008 2009 2010 2011 2012 1.43 1.96 1.69 1.80 1.46 ANALYSIS:- High working capital ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in working capital.. The working capital turnover ratio in 2008-09 has gone up from 1.45 in 2007-08 to 1.96 in 2008-09 due to very high cash and bank balance as on 31st march, 2009 to 2011-12 it is decrease compare in last year 2010-11 in 1.80 due to they are no loan in bank . [Working Capital Management/SIMMC1999/1210002] Page 59
  60. 60. CHAPTER – 7 CONCLUSION After studying the components of working capital management system of NALCO. It is found that the company has a sound and effective policy and its performance is very good even in this bad recession situation company has managed to post good profit. Company is competing well at the domestic as well as the international level and it is among the low cost producers of aluminium in the world only because of its proper management of finance, specially the short term finance known as the working capital. The company is a matured one and it has contributed well in the countries growth and development and will also continue to perform and contribute to the whole nation. In conclusion, we can say that the companies management is an effective one and knows well the management of finance, its working capital management system is very good because of which only the company has got the status of NAVRATNA company. Working capital management is important aspect of financial management. The study of working capital management of NALCO has revealed that the Net Working Capital was improving regularly from 3500.45 in 2007-08 and 4513.14 in 2011-12 which is as per standard industrial practice. The current Assets of the company showed an increasing Rs. 5041.33 Cr. in year 2007-08 from 2009-10, but in 2011-12 it stable at Rs. 7469.73cr. The study has been conducted on working capital ratio analysis, current ratio, and Change the working capital components which helped the company to manage its working capital efficiency and affectively. 1. Working capital of the company was decreasing from year 904.88cr. From 2007-08 to 2008-09, Rs.305.9 cr. increases form 2009-10 to 2010-11 Rs. 4513.14 cr. in 2011-12 it increase to Rs. 1208.92 cr. All calculation is showing positive working capital per year. It shows good liquidity position. 2. Positive working capital indicates that company has the ability of payments of short terms liabilities. 3. Working capital increased because of increment in the current assets. [Working Capital Management/SIMMC1999/1210002] Page 60
  61. 61. Company‟s current assets were always more than requirement it affect on profitability of the company. MAJOR FINDINGS Statement Showing Difference from Previous year:- Particular 2011-12 2010-11 2009-10 2008-09 Rs.In Crores 2007-08 Investments 754.26 1,331.67 986.75 895.93 115.03 Inventories 1,212.70 1,058.47 944.92 841.90 686.65 Sundry Debtors 138.12 112.40 181.78 26.50 60.65 4,168.35 3,795.23 3,152.35 2,869.04 3,516.46 Current Liabilities 2,673.32 2,354.46 1,849.95 1,603.40 1,318.31 10,426.46 9,875.99 9,751.27 9,125.50 8,230.14 Cash & Bank Balance Reserve RECOMMENDATION:Recommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. 1. Company should increase the inventory holding period. It is the major part of working capital of company. 2. Company has to take control on cash balance because cash is non earning assets and increase cost of funds. 3. Company should raise it fund through short term sources for short term requirement of funds. 4. Nalco must try to maintain a low working capital by lowering the investment in current assets as the working capital is too high. 5. It should not keep its current assets idle which makes the current ratio too high. 6. The inventory turnover ratio is too long which must improve by maintaining low stock. 7. The Company must try to increase its profitability ratios by increasing investment which will improve the capacity of the firm to face adverse economic conditions like low demand, price competition, etc. [Working Capital Management/SIMMC1999/1210002] Page 61
  62. 62. CHAPTER – 7 BIBLIOGRAPHY Published annual reports from 2007-08 to 2011-12. Nalco Website = www.nalcoindia.com Search Engine = www.google.co.in Books = Financial Management ,By I.M.Pandey, Vikas Publication. Financial Management , Sharma & Gupta [Working Capital Management/SIMMC1999/1210002] Page 62

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