Working capital ak

A SUMMER INTERNSHIP
INDIAN OIL CORPORATION LIMITED
PUNJAB TECHNICAL UNIVERSITY
K.C COLLEGE OF ENGINEERING $ IT ,
IN PARTIAL FULFILMENT OF TWO YEAR FULL TIME
MASTER OF
UNDER THE GUIDANCE OF
MR.PANKAJ KUMAR MEEN
(CHARTERED ACCOUNTAN
SUBMITTED TO:-(H.O.D)
MR.SACHIN VERMA
1
PROJECT REPORT
ON
CAPITAL BUDGTING
AT
NAWANSHAHR,PUNJAB.
AL COURSE
BUSINESS ADMINISTRATION
(FINANCE)
SUBMITTED BY
MEENA AKHILESH KUMAR
ACCOUNTANT) ROLL NO 1315536
(BY:-

ACKNOWLEDGEMENT
It is a matter of great satisfaction and pleasure to present this report on
Working Capital Management of Indian Oil Corporation Ltd. (IOCL), Barauni
Refinery Unit, Begusarai. I take this opportunity to owe my thanks to all those
involved in my training.
First of all I would like to thanks my Institute, my Director Sir and
Placement Cell for giving me this privilege to have a feel of the professional world.
This project report could not have been completed without the guidance of
our Prof. Mr. SK Sinha & project guide Mr. R Ballabh. Their timely help &
encouragement helped me to complete this project successfully.
I would like to thank Mr. W.Kullu (STRM), Mr. J.N.Bhilware (TRO), and
entire training department for giving me an opportunity to do my training and to
gain experience in a known and recognized organization like IOCL. It was a
wonderful experience to working with this Organization. People here were very
helpful and rendered the best help they could, at every point of time.
I would like to take the opportunity to thank my respected project guide Mr.
Pankaj kumar meena(CA) for his valuable enlightened guidance, suggestion,
direction and information in the completion of this Project Report.
Finally I would like to thank my loving parents and my Guardians, who
encouraged and supported me to complete this Project Report. Their blessing and
love helped me to reach the present position.
I express my gratitude towards staff of IOCL, those who have helped me
directly or indirectly in completing the training.
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THANKING YOU
Akhilesh kumar
.

PREFACE
It give me great pleasure to present this project report on “Working Capital
Management” of Indian Oil Corporation Limited, Barauni Refinery Unit,
Begusarai. This project report is intended to fulfil the partial requirement for the
completion of Post Graduation Program.
The real objective behind the partial training and presentation of the report is
to gain experience to the actual work environment and the required knock to guide
knowledge towards facilitating its application for any professional practical
training and close contact with the prevailing system in an organization is of great
importance.
Efforts have been made to prepare this Project Report in most simple
language. While preparing this Project Report, a care has been taken to make it
comprehensive, reliable and analytical to make it easy to understand. Charts and
Diagram have been used to avoid difficulties.
I am grateful to my project guide Mr.Pankaj kumar meena (CA) who has
rendered his best possible help and guidance in the presentation of this project
report. I am grateful to my Institute who gave me an opportunity to do this project.
And I am also grateful to my parents and guardians who encouraged and supported
me to complete this Project Report.
Akhilesh kumar
3

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INDEX:-
Chapter
No.
Particulars: Page No:
Chapter 1. INTRODUCTION TO YHE STUDAY 5 - 7
Chapter 2. OVERVIEW OF INDIAN OIL
CORPORATION LTD 8-16
Chapter 3. PRODUCT PROFILE 16-20
Chapter 4. WORKING CAPITAL MANAGEMENT 20-30
Chapter 5. WORKING CAPITAL MANAGEMENT IN
CONTEXT TO BARAUNI REFINARY 30-56
Chapter 6. INVENTORY MANAGEMENT 56-70
Chapter 7. CASH MANAGEMENT 70-80
Chapter 8. RECEIVABLES MANAGEMENT 80-82
Chapter 9. PAYABLE MANAGEMENT 83-85
Chapter 10. RATIO ANALYSIS 85-89
Chapter 11. BIBLOGRAPHY 90

CHAPTER: 1
INTRODUCTION TO THE STUDY
The study of “Working Capital Management (Including Ratio Analysis)” is
an attempt to resolve the problems that which arise in attempting to manage the
Current Assets and Current Liabilities And is an attempt to overlook the
performance of the company.
The basic objective of Working Capital Management is to manage the firms
Current Assets and Current Liabilities in such a way that the satisfactory level of
Working Capital is maintained i.e. it neither inadequate nor excessive. The basic
objective of Ratio Analysis is to find out the performance of the company of
current year as compared to its previous year.
Control on Working Capital is very important for any organization because
by controlling Working Capital, company can able to have control on its cash flow
in order to meet its Operating Expenses. With the help of Working Capital
company can control its current Assets, Current Liabilities, its Inventories, its
Debtors, Creditors, etc. working Capital ensures that there is sufficient cash flow in
an organization. Working Capital also identifies the profitability of the company.
Therefore control on Working Capital is an important task.
Objective:
The primary objective of working capital management is to ensure that
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sufficient cash is available to:
 Meet day-to-day cash flow needs;
 Pay wages and salaries when they fall due;
 Pay creditors to ensure continued supplies of goods and services;
 Pay government taxation and providers of capital, dividends; and ensure the
long-term survival of the business entity.

Calculation of working capital gives clear idea about the requirement of the
needed inventories in the production and Ratio Analysis gives idea about
performance of the company. Besides that it also takes account of required
current assets. So, the calculation of working capital is an essential part of
financial planning.
My Objective Behind this Project is:
 To find out all the component that should considered while
calculating, working capital in Barauni Refinery Unit (IOCL).
 To find out all the component that should considered while
calculating, ratio analysis of Barauni Refinery Unit (IOCL)
 To find out the problem area which affects the credibility of
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calculating working capital.
 To overtook the performance of Barauni Refinery Unit (IOCL)
 The working capital management is elaborately done at head office
(New Delhi) but still the Barauni Refinery Unit needs to assists the
head office in taking such decisions. How this work is done is the
topic of my concern.
 With the help of ratio analysis I would like to reveal the financial
performance of the company.
 To have a feel of an organization and it’s working.
 To identify the financial strengths & weakness of the company.
 Through the net profit ratio & other profitability ratio, understand the
profitability of the company.
 Evaluating company s performance relating to financial statement
analysis.
 To know the liquidity position of the company with the help of current
ratio.
 To find out the utility of financial ratio in credit analysis &
determining the financial capacity of the firm.
IMPORTANCE OF THE STUDY
In the area of financial management, “Working Capital Management” plays
an important role. Working capital management is concerned with two fold
important factors Viz., the level of current assets to be held and the level of current
liabilities to be paid.

The most important thing is that working capital is the one way through,
which a company’s profitability can be determined. Therefore, this study is
confined to how Barauni Refinery Unit (IOCL determines the amount of working
capital.
METHODOLOGY USED
The methods adopted for the collection of data and information for this work
was gathered mostly through various books, annual report and discussion with
various executives and office staff of Barauni Refinery Unit (IOCL). Moreover,
selective literature, previous research works and internet have also been referred
for the purpose.
LIMITATIONS OF THE STUDY
I found the following difficulties during my training session.
 Scarcity of Printed materials on the topic.
 Since the Finance Department of Barauni Refinery Unit keeps the
reports confidential, so exact date analysis is not possible.
 Studying the balance sheet of the company was not easy.
 Impact of individual thinking and perception.
 All the employees and executives were found busy during their
working hour so they co-operated partially.
CHAPTER: 2
OVERVIEW OF INDIAN OIL CORPORATION LTD
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8
INTRODUCTION:
Indian Oil Corporation Ltd. is India's flagship national oil company with
business interests straddling the entire hydrocarbon value chain – from refining,
pipeline transportation and marketing of petroleum products to exploration &
production of crude oil & gas, marketing of natural gas and petrochemicals. It is
the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the 88th
position in the year 2010. It began operation in 1959 as Indian Oil Company Ltd.
The Indian Oil Corporation was formed in 1964, with the merger of Indian
Refineries Ltd. Indian Oil and its subsidiaries account for a 47% share in the
petroleum products market, 40% share in refining capacity and 67% downstream
sector pipelines capacity in India. The Indian Oil Group of Companies owns and
operates 10 of India's 19 refineries with a combined refining capacity of 60.2

million metric tons per year.On 30th June 2014 IndianOil will complete 50 years
of its existence and a series of events are being planned to celebrate its Golden
Jubilee Year.
Indian Oil was formed as joint ventures between one company and Government of
India but later become fully owned government undertaking. Indian Oil established
as an oil marketing entity on 30th June 1959, Indian Oil company ltd was renamed
Indian Oil Corporation Ltd. on 1st September 1964 following merger with the
refining entity. Indian Refineries Ltd. that was established in August 1958.
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10
VISION:
“A major diversified, trans-national, integrated energy company, with national
leadership and a strong environment conscience, playing a national role in oil
security & public distribution”.
MISSION:
 To achieve international standards of excellence in all aspects of energy and
diversified business with focus on customer delight through value of
products and services, and cost reduction.
 To maximize creation of wealth, value and satisfaction for the stakeholders.
 To attain leadership in developing, adopting and assimilating state-of-the-art
technology for competitive advantage.
 To provide technology and services through sustained Research and
Development.
 To foster a culture of participation and innovation for employee growth and
contribution.
 To cultivate high standards of business ethics and Total Quality
Management for a strong corporate identity and brand equity.

 To help enrich the quality of life of the community and preserve ecological
balance and heritage through a strong environment conscience.
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OBJECTIVE
 To serve the national interests in oil and related sectors in accordance and
consistent with Government policies.
 To ensure maintenance of continuous and smooth supplies of petroleum
products by way of crude oil refining, transportation and marketing activities
and to provide appropriate assistance to consumers to conserve and use
petroleum products efficiently.
 To enhance the country's self-sufficiency in crude oil refining and build
expertise in lying of crude oil and petroleum product pipelines.
 To further enhance marketing infrastructure and reseller network for
providing assured service to customers throughout the country.
 To create a strong research & development base in refinery processes,
product formulations, pipeline transportation and alternative fuels with a
view to minimizing/eliminating imports and to have next generation
products.
 To optimize utilization of refining capacity and maximize distillate yield and
gross refining margin.
 To maximize utilization of the existing facilities for improving efficiency
and increasing productivity.
 To minimize fuel consumption and hydrocarbon loss in refineries and stock
loss in marketing operations to effect energy conservation.

 To earn a reasonable rate of return on investment.
 To avail of all viable opportunities, both national and global, arising out of
the Government of India’s policy of liberalization and reforms.
 To achieve higher growth through mergers, acquisitions, integration and
diversification by harnessing new business opportunities in oil exploration &
production, petrochemicals, natural gas and downstream opportunities
overseas.
 To inculcate strong ‘core values’ among the employees and continuously
update skill sets for full exploitation of the new business opportunities.
 To develop operational synergies with subsidiaries and joint ventures and
continuously engage across the hydrocarbon value chain for the benefit of
society at large.
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FINANCIAL OBJECTIVES:
 To ensure adequate return on the capital employed and maintain a
reasonable annual dividend on equity capital.
 To ensure maximum economy in expenditure.
 To manage and operate all facilities in an efficient manner so as to generate
adequate internal resources to meet revenue cost and requirements for
project investment, without budgetary support.
 To develop long-term corporate plans to provide for adequate growth of the
Corporation’s business.
 To reduce the cost of production of petroleum products by means of
systematic cost control measures and thereby sustain market leadership
through cost competitiveness.
 To complete all planned projects within the scheduled time and approved
cost.
PRESENT POSITION:
State-owned Indian Oil Corporation Ltd. (IOCL) has surpassed Reliance
Industries to regain its position as India’s biggest refiner. This was achieved after
completion of expansion of its Barauni Refinery & Panipat Refinery.

Indian Oil Corporation Ltd. is India’s largest company by sales with a turnover of
Rs. 271,074 crore and profit of Rs. 10,221 crore for the year 2009-10.
IndianOil is the highest ranked Indian company in the latest Fortune ‘Global 500’
listings, ranked at the 125th position. IndianOil’s vision is driven by a group of
dynamic leaders who have made it a name to reckon with.
IOCL DISTINCTIONS:
 IndianOil tops the Fortune India 500 Rankings
 IndianOil in top five in Business India’s Super 100
 IndianOil is India’s Biggest Company: ET 500
 IndianOil in Platts ‘Top 250 Global Energy Company’ Rankings
 IndianOil in top ten of BT 500 PSU rankings
 IndianOil: India’s largest PSU and Highest Revenue Earner in BW Real 500
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rankings
 IndianOil: One of ‘India’s Most Valuable Brands 2010’
 IndianOil tops ‘BS 1000’ rankings
 IndianOil in Top Ten of the Most Recognised & Respected Indian MNCs
 IndianOil in ‘Top 50’ Best Companies To Work For
HISTORY:
2001:
Public sector oil major Indian Oil Corporation has tied up with Standard Chartered
Bank to mobilize Rs 400 crore from the overseas market. Stan Chart is the book-runner,
lead arranger and the facility agent, and Union Bank of India is the joint
arranger for this loan syndication of IOC.
2002:
IOCL has bought out IBPs 25 per cent stake in Indian Oil Tanking (IOT), a
company engaged in the storage and handling of petroleum products, for Rs 44
crore.
2003:
IOCL has appointed McKinsey for conducting a 'structure, process, people' study.
2004:

IOCL the petroleum refining and marketing major, plans to merge with itself its
subsidiary, IBP Ltd, and also set up a new exploration company with an investment
of $2 billion
2005:
Tata Motors has initiated an informal project with Indian Oil Corporation for the
use of bio-diesel blended fuels in its buses. There is no written agreement between
the two companies for the project.
2006:
IOCL has signed an agreement with the West Bengal government for setting up a
petrochemical hub in the state. The company would be the primary investor in the
proposed hub housing petrol, chemical and petrochemical units.
2007:
Dabur India Ltd has entered into an agreement with IOCL to service rural market
demand for consumer goods through the latter's chain of Kisan Seva Kendra
(KSK).
2008:
Haldia refinery alone is expected to save an average Rs450 crore a year once crude
is sourced from Paradip IOCL's refineries had a capacity utilization of 104 per cent
in 2008, processing 48.9 million tonne of crude oil.
2009:
Essar Oil is reported to have expanded the number of its fuel retail outlets to over
1,000, with plans to have around 1,400 outlets operational by April 2009.
Unconfirmed reports said that Essar claimed a market share of around four per
cent, and was aiming to increase it further to over six per cent
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OVERVIEW OF BARAUNI REFINERY:
Barauni Refinery, the second public sector oil refinery of the country, was
built in collaboration with the erstwhile USSR and limited Rumanian participation.
Situated 125 kilometeres from Patna, Barauni Refinery was commissioned in 1964
with a refining capacity of 1 Million Metric Tonnes Per Annum (MMTPA). The
refining capacity was increased to 3.0 MMTPA by 1969. It was built with an initial
cost of Rs. 49.40 Crore. It was dedicated to the Nation by the then Union Minister
for Petroleum, Prof. Humayun Kabir in January 1965. After de-bottlenecking,
revamping and expansion projects, its current capacity 6 MMTPA. With various
revamps and expansion projects at Barauni Refinery, capability for processing
high-sulphur crude has been added, thereby increasing not only the capacity but
also the profitability of the refinery.
Barauni Refinery was initially designed to process low sulphur crude oil
(sweet crude) of Assam. After establishment of other refineries in the Northeast,
Assam crude is unavailable for this refinery. Hence, sweet crude is being sourced
from African, South East Asian and Middle East countries. The refinery receives
crude oil by pipeline from Paradip on the east coast via Haldia.
Matching secondary processing facilities such Resid Fluidised Catalytic
Cracker (RFCC), Diesel Hydrotreater (DHDT), Sulphur Recovery Unit (SRU)
have been added. These state-of-the-art eco-friendly technologies have enabled the
refinery to produce green fuels complying with international standards. The third
reactor has been installed in the DHDT unit of Barauni Refinery to produce Diesel
that complies with the Bharat Stage-III auto fuel emission norms. The MS Quality
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Upgradation project of Barauni Refinery is in full swing to supply Bharat Stage-III
compliant petrol to the market.
The year 2008-09 saw Barauni Refinery achieve the highest ever-crude
throughput of 5.94 MMT, beating the previous best of 5.63 MMT, which was
achieved in 2007-08, along with sustaining the distillate yield of more than 85%
(i.e. 85.7%) year after year
Barauni refinery achieved lowest ever 65.5 MBN of energy in the year 2008-
09. It reduced energy consumption by almost 10% over the previous fiscal year of
2007-08. It excellence safety record during the year 2008-09 is another feather.
Barauni Refinery Coker unit was declared as a zero steam leak unit it has avoided
any accidents in the unit during the year 2008-09
Barauni petrochemicals plant is in the country the second oil refinery in the
public sector and forms an important part of the Indian petrochemical industry
Indian Oil Corporation Ltd is speeding up work on the high sulphur crude
maximization project at its Barauni refinery in Bihar. The project is estimated to
cost Rs 790 crore.
Barauni Refinery supplies distillate products to eastern India, Nepal and
northern India through Road & Rail. Product is also sent to Northern India through
product pipeline.
CHAPTER: 3
PRODUCT PROFILE
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PRODUCTS:
Indian Oil is not only the largest commercial enterprise in the country it is
the flagship corporate of the Indian Nation. Besides having a dominant market
share, Indian Oil is widely recognized as India’s dominant energy brand and
customers perceive Indian Oil as a reliable symbol for high quality products and
services. Indian Oil is a heritage and iconic brand at one level and a contemporary,
global brand at another level. While quality, reliability and service remains the
core benefits to our customers, our stringent checks are built into operating

systems, at every level ensuring the trust of over a billion Indians over the last four
decades. Indian oil has many products but few products are as follows.
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1) Auto Gas:
Auto Gas (LPG) is a clean, high octane, abundant and eco-friendly fuel. It is
obtained from natural gas through fractionation and from crude oil through
refining. It is a mixture of petroleum gases like propane and butane. The
higher energy content in this fuel results in a 10% reduction of CO2
emission as compared to MS. Auto Gas is a gas at atmospheric pressure and
normal temperatures, but it can be liquefied when moderate pressure is
applied or when the temperature is sufficiently reduced.
2) Indian Oil Aviation Service:
IndianOil Aviation Service is a leading aviation fuel solution provider in India and
the most-preferred supplier of jet fuel to major international and domestic airlines.
Between one sunrise and the next, IndianOil Aviation Service refuels over 1500
flights – from the bustling metros to the remote airports linking the vast Indian
landscape, from the icy heights of Leh (the highest airport in the world at 10,682
ft) to the distant islands of Andaman & Nicobar. IndianOil is India's first ISO-9002
certified oil company conforming to stringent global quality requirements of
aviation fuel storage & handling. IndianOil Aviation also caters to the fuel

requirements of the Indian Defense Services, besides refueling VVIP flights at all
the airports and remote heli-pads/heli-bases across the Indian subcontinent.
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3) Bitumen:
The common binders used in bituminous road constructions are road tars and
Bitumen. Bitumen has gradually replaced road tar for road construction
purposes mainly because of its greater availability as compared to road tars.
It is principally obtained as a residual product in petroleum refineries after
higher tractions like gas, petrol, kerosene and diesel, etc., are removed
generally by distillation from suitable crude oil. Indian standard institutions
define Bitumen as a black or dark brown non-crystalline soil or viscous
material having adhesive properties derived from petroleum crude either by
natural or by refinery processes.
4) High Speed Diesel
Indian Oil’s XTRAMILE Super Diesel, the leader in the branded diesel
segment is blended with world-class ‘Multi Functional Fuel Additives
(MFA). XTRAMILE has brought in a huge savings in the high mileage
commercial vehicle segment. Transport fleets that operate a large number of
trucks crisscrossing the country are using XTRAMILE to not only obtain a
higher mileage but also for low maintenance costs.
5) Indane Gas:

Indane is today one of the largest packed-LPG brands in the world. IndianOil
pioneered the launch of LPG in India in the 1970s and transformed the lives
of millions of people with the introduction of the clean, efficient and safe
cooking fuel. LPG also led to a substantial improvement in the health of
women in rural areas by replacing smoky and unhealthy chullahs with
Indane. It is today a fuel synonymous with safety, reliability and
convenience.
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6) SERVO LUBRICATING AND GREASES
Indian Oil’s SERVO range of lubricants reigns as the undisputed market
leader in the Indian lubricants market. Known for its cutting-edge
technology and high-quality products, SERVO backed by Indian Oil’s
pioneering R&D, extensive blending and distribution network, sustained
brand enhancement and new generation packaging is a one-stop shop for
complete lubrication solutions in the automotive, industrial and marine
segments.
7) MS/Gasoline:

Automotive gasoline and gasoline-oxygenate blends are used in internal
combustion spark-ignition engines. These spark ignition engine fuels are primarily
used for passenger cars. XTRAPREMIUM Petrol is India’s leading branded petrol
boosted with new generation multifunctional additives known as friction busters
that prevent combustion chamber deposits. XTRAPREMIUM is custom designed
to deliver higher mileage, more power, better pick up, faster acceleration, enhanced
engine cleanliness and lower emissions.
CHAPTER: 4
WORKING CAPITAL MANAGEMENT
(A theoretical framework)
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INTRODUCTION:
Management is an art of anticipating and preparing for risks, uncertainties
and overcoming obstacles. An essential precondition for sound and consistent
assets management is establishing the sound and consistent assets management
policies covering fixed as well as current assets. In modern financial management,
efficient allocation of funds has a great scope, in finance and profit planning, for
the most effective utilization of enterprise resources, the fixed and current assets
have to be combined in optimum proportions.
Working capital in simple terms means the amount of funds that a company
requires for financing its day-to-day operations. Finance manager should develop
sound techniques of managing current assets.
WHAT IS WORKING CAPITAL?
Working capital refers to the investment by the company in short terms
assets such as cash, marketable securities. Net current assets or net working capital
refers to the current assets less current liabilities.

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Symbolically, it means,
Net Current Assets = Current Assets - Current Liabilities.
DEFINITIONS OF WORKING CAPITAL:
The following are the most important definitions of Working capital:
1) “Working capital is the difference between the inflow and outflow of funds.
In other words it is the net cash inflow”.
2) Working capital represents the total of all current assets. In other words it is
the “Gross working capital”, it is also known as “Circulating capital” or
“Current capital” for current assets are rotating in their nature.
3) Working capital is defined as “The excess of current assets over current
liabilities and provisions”. In other words it is the “Net Current Assets or
Net Working Capital”.
IMPORTANCE OF WORKING CAPITAL
Working capital may be regarded as the lifeblood of the business. Without
insufficient working capital, any business organization cannot run smoothly or
successfully.
In the business the Working capital is comparable to the blood of the human
body. Therefore the study of working capital is of major importance to the internal
and external analysis because of its close relationship with the current day to day
operations of a business. The inadequacy or mismanagement of working capital is
the leading cause of business failures.
To meet the current requirements of a business enterprise such as the
purchases of services, raw materials etc. working capital is essential. It is also
pointed out that working capital is nothing but one segment of the capital structure
of a business.
In short, the cash and credit in the business, is comparable to the blood in the
human body like finance s life and strength i.e. profit of solvency to the business

enterprise. Financial management is called upon to maintain always the right cash
balance so that flow of fund is maintained at a desirable speed not allowing slow
down. Thus enterprise can have a balance between liquidity and profitability.
Therefore the management of working capital is essential in each and every
activity.
The working capital is the amount resolving capital to meet the day today
requirements of the firm. The other facets of the working capital is circulating
capital, floating capital and moving capital which are required to meet the
immediate requirements of the firm.
WORKING CAPITAL MANAGEMENT INTRODUCTION:
Working Capital is the key difference between the long term financial management
and short term financial management in terms of the timing of cash.
Long term finance involves the cash flow over the extended period of time i.e 5 to
15 years, while short term financial decisions involve cash flow within a year or
within operating cycle.
Working capital management is a short term financial management.
Working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities & the inter
relationship that exists between them. The current assets refer to those assets which
can be easily converted into cash in ordinary course of business, without disrupting
the operations of the firm.
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 Composition of working capital
 Major Current Assets
 Cash
 Accounts Receivables
 Inventory
 Marketable Securities
 Major Current Liabilities
 Bank Overdraft
 Outstanding Expenses
 Accounts Payable
 Bills Payable

The Goal of Capital Management is to manage the firm s current assets &
liabilities, so that the satisfactory level of working capital is maintained. If the firm
can not maintain the satisfactory level of working capital, it is likely to become
insolvent & may be forced into bankruptcy. To maintain the margin of safety
current asset should be large enough to cover its current assets.
Main theme of the theory of working capital management is interaction
between the current assets & current liabilities.
CONCEPT OF WORKING CAPITAL:
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There are 2 concepts:
 Gross working capital(GWC): - It is referred as total current assets.
Focuses on,
 Optimum investment in current assets: An excessive investment impairs
firm s profitability, as idle investment earns nothing. Inadequate working
capital can threaten solvency of the firm because of its inability to meet
its current obligations. Therefore there should be adequate investment in
current assets.
 Financing of current assets: Whenever the need for working capital funds
arises, agreement should be made quickly. If surplus funds are available
they should be invested in short term securities.
 Net working capital (NWC):- It defined by 2 ways.
 Difference between current assets and current liabilities
 Net working capital is that portion of current assets which is financed
with long term funds.
If the working capital is efficiently managed then liquidity and profitability
both will improve. They are not components of working capital but outcome of
working capital. Working capital is basically related with the question of
profitability versus liquidity & related aspects of risk.
Implications of Net Working Capital:

Net working capital is necessary because the cash outflows and inflows do
not coincide. In general the cash outflows resulting from payments of current
liability are relatively predictable. The cash inflows are however difficult to
predict. More predictable the cash inflows are, the less NWC will be required. But
where the cash inflows are uncertain, it will be necessary to maintain current assets
at level adequate to cover current liabilities that are there must be NWC.
For evaluating NWC position, an important consideration is trade off
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between probability and risk.
The term profitability is measured by profits after expenses. The term risk is
defined as the profitability that a firm will become technically insolvent so that it
will not be able to meet its obligations when they become due for payment. The
risk of becoming technically insolvent is measured by NWC.
If the firm wants to increase profitability, the risk will definitely increase. If
firm wants to reduce the risk, the profitability will decrease.
PLANNING OF WORKING CAPITAL:
Working capital is required to run day to day business operations. Firms differ in
their requirement of working capital (WC). Firm s aim is to maximize the wealth
of share holders and to earn sufficient return from its operations.
WCM is a significant facet of financial management. Its importance stems from
two reasons:
 Investment in current asset represents a substantial portion of total
investment.
 Investment in current assets and level of current liability has to be geared
quickly to change in sales.
Business undertaking required funds for two purposes:
 To create productive capacity through purchase of fixed assets.
 To finance current assets required for running of the business.

The importance of WCM is reflected in the fact that financial managers spend a
great deal of time in managing current assets and current liabilities.

The extent to which profit can be earned is dependent upon the magnitude of sales.
Sales are necessary for earning profits. However, sales do not convert into cash
instantly; there is invariably a time lag between sale of goods and the receipt of
cash. WC management affect the profitability and liquidity of the firm which are
inversely proportional to each other, hence proper balance should be maintained
between two.
To convert the sale of goods into cash, there is need for WC in the form of current
asset to deal with the problem arising out of immediate realization of cash against
good sold. Sufficient WC is necessary to sustain sales activity. This is referred to
as the operating or cash cycle.
FACTORS AFFECTING WORKING CAPITAL
The working capital needs of a firm are affected by numerous factors. The
25
important factors are as follows:
(i) Nature of business: In some business organizations, the sales are mostly
on cash basis and the operating cycle (explained later) is also very short. In these
concerns, the working capital requirement is comparatively less. Mostly service
giving companies come in this category. In manufacturing concerns, usually the
operating cycle is very long and a firm has to give credit to customers for
improving sales. In such cases, the working capital requirement is more.
(ii) Production Policy: Working capital requirements also fluctuate
according to the production policy. Some products have a seasonal demand but in
order to eliminate the fluctuations in working capital, the manufacturer plans the
production in a steady flow throughout the year. This policy will even out the
fluctuations in working capital.
(iii) Market Conditions: Due to competition in the market, the demands for
working capital fluctuate. In a competitive environment, a business firm has to
give liberal credit to customers. Similarly, it will have to maintain a large inventory
of finished goods to service the customers promptly. In this situation, larger
amount of working capital will be required.
On the other hand, when a firm is in seller’s market, it can manage with a
smaller amount of working capital because sales can be made on cash basis and

there will be no need to maintain large inventory of finished goods because
customers can be serviced with delay.
(iv)Seasonal Fluctuation: A firm, which is producing products with
seasonal demands, requires more working capital during peak seasons while the
demand for working capital will go down during slack seasons.
(v) Growth and expansion activities: The working capital needs of the firm
increase as it grows in terms of sales or fixed assets. A growing firm may need to
invest funds in fixed assets in order to sustain its growth of production and sales.
This will in turn increase investments in current assets, which will result in
increase in working capital needs.
(vi)Operating efficiency: The operating efficiency of the firm relates to the
optimum utilization of resources at minimum cost. The firm will be effectively
contributing to its working capital if it is efficient in controlling operating cost. The
working capital is better utilized and cash cycle is reduced which decreases
working capital needs.
(vii) Credit Policy: Credit term granted by the concern to its customers as
well as to its suppliers will also effect the working capital requirements. If the
concern has allowed very liberal credit terms to its customer and has adopted a
slack collection procedure, more funds will be tied in book debts and working
capital needs will also be high. Where suppliers have granted liberal credit terms to
the concern, there will be less need for working capital. Not only will the Ratio of
cash and credit sales or purchase also effect the level of working capital.
(viii) Sales Growth: As the sales grow, the working capital needs also go
up. Actually it is very difficult to establish an exact proportion of increase in
current assets, as a result of increase in sales. Advance planning of working capital
becomes essential because current assets will have to be employed even before
growth in sales takes place. Once sales start increasing, they must be sustained. For
this a firm will have to expand its production facilities, which will require more
investments in fixed assets. This will in turn result in more requirements of current
assets, which will increase working capital needs.
(iX) Dividend Policy: A company has to pay dividends in cash as per
company Act. 1956. If a liberal policy is followed for payment of dividends, more
26

working capital will be required. The needs for working capital will be
substantially reduced if dividend policy is conservative.
(X) Working Capital Operating Cycle: in a manufacturing concern the
working capital cycle starts with the purchase of raw materials and ends with the
realization of cash from the sale of finished products. This involves purchase of
raw materials and spares, its conversion into stock of finished goods through work-in-
process with progressive increment of labour and service costs, conversion of
finished stock into sales, debtors and receivables and ultimately realization of cash
and this cycle continues again from cash to purchase of raw material and so on.
Thus, there are several factors affecting the working capital requirements.
NEED FOR WORKING CAPITAL MANAGEMENT
1. There is a positive correlation between the sale of the product of the firm
and the current assets. An increase in the sale of the product requires a
corresponding increase in current assets. It is therefore indispensable to
manage the current assets properly and efficiently.
2. More than half of the total capital of the firm is generally invested in
current assets. It means less than half of the capital is blocked in fixed
assets. We pay due attention to the management fixed assets through the
capital budgeting process. Management of working capital too, therefore,
attracts the attention of the management.
3. In emergency (non-availability of funds etc.) fixed assets can be acquired
on lease but there is no alternative for current assets. Investment in
current assets, i.e. inventory or receivables can in no way avoided
without sustaining loss.
27

4. Working capital needs are more often financed through outside sources
so it is necessary to utilize them in the best way possible.
5. The management of working capital is more important for small units
because they scarcely rely on long term capital market and have an easy
access to short term financial sources i.e. trade credit, short term bank
loan etc.
6. In the modern system approach to management, the operations of the
firm are viewed as a total that is an integrated system. In this sense it is
not possible to study one segment of the firm individually or leave it out
completely. Hence an overall look on the management of working capital
is necessary.
MERITS OF ADEQUATE WORKING CAPITAL
 Regular payment of salaries wages and other day-to-day commitments.
28
 Sense of security and confidence.
 Solvency of continuous production.
 Sound goodwill (Prompt Payment)
 Easy loams form banks
 Distribution of dividends.
 Exploitation of good opportunity.
 Meeting unseen contingences.
 Increase in efficiency of fixed assets.
 High moral.
 Increase production efficiency.

29
 Cash discounts.
 Quick and regular return on investment
EVILS OF INADQUATE WORKING CPITAL
 Loss of credit worthiness and goodwill
 Operating inefficiency.
 Low rate of return on fixed assets.
 Increase in business risk.
 Cannot achieve profit target.
 Low moral of business executives
 Weakening of financial capacity
 Cannot pay day-to-day expenses of its operations.
 Delaying payments of wages, salaries, etc.
All this indicates that proper estimation of working capital requirements is a
must of running the business efficiently and profitably. Therefore, the basic
objective of working capital management is manage the firm’s current assets and
current liabilities in such a way that the satisfactory level of working capital is
maintained, i.e. it is neither inadequate not excessive.
In the management of working capital it is mandatory to know that what should be
the level of current assets. There are two policies, which determines the level of
current assets
 Flexible Policy:- Under his policy the investment in current assets is
high maintains a huge balance of cash and marketable securities,
carries a large amount of inventories and grants feverous terms of
credit to customers, which leads to a high level of debtors.

 Restrictive Policy:- Under this policy the investment in the current
assets is low. This means that the firm keeps a small balance of cash
and marketable securities, managers with small amount of inventories
and offers terms of credit, which leads to a low level of debtors.
TYPES OF WORKING CAPITAL
There are two types of working capital: -
Permanent or Regular Working Capital:- It represents the
minimum amount of investment in current assets that is seemed necessary to
carry the operation at time .It is a continuous process of working capital
management in any organization . In this process there is a certain level of
current assets, which is maintained every time or every operating cycle.
Variable Working Capital: - It represents additional assets required
at different time during the operating year to cover any change or variations
form the normal operations. As for example-during the winter season the
sales of the winter garments company increase. To fulfill the demand of
woolen clothes the company requires additional account of current assets or
working capital such as-cash, raw material, etc.
However, as a general rule, it can be concluded that in most cases the period
which elapses between purchase of material and the receipt of sale proceeds of the
finished goods will determine the working capital requirements of any business.
CHAPTER: 5
WORKING CAPITAL MANAGEMENT IN CONTEXT TO
BARAUNI REFINERY UNIT (IOCL)
Barauni Refinery Unit (IOCL) follows a restrictive policy. It maintains
minimum level of current assets. But this unit does not maintain the working
capital fund separately; it shows this account in their annual budget. Barauni
Refinery Unit does not deal directly. All the dealings are handled or controlled by
30

the Head Office. Barauni Refinery Unit does not purchase raw materials directly.
Head Office provides raw materials to this unit as and when required. Through this
unit does not purchase raw materials directly so it has no creditors. The major raw
materials of the Refinery Division are the CRUDE OIL. Since there are not
creditors, it acts as a limitation as it does not present the true picture of the working
capital requirement for the corporation. But in spite of this, there are all the
transaction done by the Head Office only. The Naraimo Refinery Unit maintains
the working capital at some extent to meet out the following requirements:
To maintain inventories (Raw materials, work-in-process, finished goods,
31
chemical, stores and spares)
To pay wages and salary
To incur day-to-day expenses and overheads cost such as fuel, power and
office expenses.
Note: To provide credit facilities to the customers is not applicable to
Barauni Refinery. It is because the finished products are directly sent to the
Marketing Division. Yet creditors may arise due to the lengthy process of book
payment system.
INDIAN OIL CORPORATION LIMITED
Barauni Refinery
Balance Sheet as at 31 March 2013
Particulars note march-13 march-12
 EQUTY AND LIABILITIES
As it is shown in the graph the Net Working Capital of Barauni Refinery
Unit (IOCL) has been decreased during the year 2008-09 as compared to the
previous years. The reason behind this decrease is that the current asset which has
been brought in, in the year 2008-09 is less than the current assets in the previous
years and total liabilities which have been brought in, in the year 2008-09 is greater
than the current assets in the previous years.
Determinants of working capital: -

The following factors, which determined the working capital requirement of
the firms. The descriptions of these factors have already been discussed in the
previous chapter.
32
 Nature of Business
 Production Policy
 Market condition
 Seasonal Fluctuations
 Growth and expansion activities
 Operating Efficiency
 Credit Policy
But in the context of Barauni Refinery Unit (IOCL), the working capital
requirement is mainly determined by factors like nature of the business,
manufacturing process, sales volume and turnover, production policy and
operating efficiency. Credit policy, seasonal fluctuation and are not
applicable in Barauni Refinery. This is a manufacturing concern and its
working depends on the manufacturing cycle and the time tag between
production and sale. The sales volume and turnover also has an impact on
the holding period of raw materials, work-in-progress and finished goods
and ultimately affects the working capital requirement for the concerned
department. The cyclical and seasonal fluctuations as do not affect the
business as the final product are utilized throughout the year.
OPERATING CYCLE
An operating cycle is the technique to forecast the working capital
requirement. The operating cycle can be said to be at the heart of the need for the
working capital. The continuous flow from cash to suppliers, to inventory, to
account receivable and back into cash is called the operating cycle. In other words,
operating cycle is a time gap required to convert the sales and their actual
realization in cash.

Marketing division
Finished goods
(LPG, Kerosene,
Petrol, Diesel, etc)
Operating cycle of Barauni Refinery
Cash
Raw Material
(Crude Oil)
If we analyze the above chart of operating cycle of Barauni Refinery we find
that there is a Marketing Division in place of Debtors. It is due to the only reason
that the Barauni Refinery unit (IOCL) does not sell its product directly,
consequently debtors do not arise. Barauni Refinery Unit sent its product to the
Marketing Division for sell.
The operating cycle of manufacturing company involves three phases: -
 Acquisition of resources such as Raw material, Labour and Fuel, etc.
 Manufacturing of the product which includes conversion of raw material
into work-in-progress into finished goods
 Sale of the product either for cash or on credit sales create account
receivable for collection.
The term cash cycle refers to the length of time necessary to complete the
following cycle of events: -
33
Raw material conversion period: -
Raw material turnover
Raw material holding period
Work-in-process
(Gasoline, Diesel,
Nephtha)

34
Raw material inventory
Work-in-progress conversion period: -
Work-in-progress turnover
Work-in-progress holding period
Work-in-progress inventory
Finished goods conversion period: -
Finished goods turnover
Finished goods holding period
Finished goods inventory
Indian Oil Corporation Ltd.
(Refinery Division) Barauni Refinery
Cost Sheet
Particular Amount (Rs)
2008-09
Amount (Rs)
2009-10
Opening stock of Raw material
+ Purchases
+ Pipe line freight
Less: Closing stock of Raw material
Raw material consumed
Add: Manufacturing Expenses:
7,264,607,814
184,882,113,070
3,549,326,897
1,052,398,617
156,580,858,532
5,642,945,764
195,696,047,781
1,088,830,365
163,276,202,913
3,244,599,731
194,607,217,416 160,031,603,182

35
Chemicals, Stores and spares
Power and Fuels
Repairs and Maintenance
Freight and Transportation charge
Other manufacturing expenses:
(Salary and wages to employees,
overtime, etc)
Add: Opening stock of work-in-process
Less: Closing stock of work-in-process
Works Cost:
Add: Office and Administrative expenses
Cost of Production:
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of Goods Sold:
Add: profit
Transfer to Marketing Division:
643,947,098
50,467,626
671,090,249
816,995,132
1,886,908,800
198,676,626,321
1,971,777,039
200,648,403,360
2,115,521,609
198,532,881,751
3,775,958,673
202,308,840,424
4,094,970,406
206,403,810,830
4,363,813,291
202,039,997,539
88,350,568
202,128,348,107
1,147,217,840
49,902,519
912,475,932
540,696,053
1,486,366,329
164,168,261,855
2,115,521,609
166,283,783,464
3,081,839,768
163,201,943,696
345,294,023
163,547,237,719
4,363,813,291
167,911,051,010
4,252,292,110
163,658,758,900
189,512,622
163,848,271,522
Cost Sheet
2007-08
Amount (Rs)
2006-07
+ Purchases
+ Pipe line freight
7,866,033,711
143,272,803,666
1,031,874,186
7,421,419,792
132,976,533,414
1,012,811,000
152,170,711,563
7,264,607,814
141,410,764,206
7,866,033,711
144,906,103,749 133,544,730,495

36
Chemicals
Stores and spares
Power and Fuels
overtime, etc)
Works Cost:
Add Office and Administrative expenses:
Cost of Production:
Add opening .stock of finished goods:
Less closing stock of finished goods
Cost of Goods Sold:
Add: profit
759,020,855
46,480,030
49,576,516
955,066,394
634,409,180
1,115,911,307
148,466,568,031
1,766,187,119
150,232,755,150
1,971,777,039
148,260,978,111
789,691,553
149,050,669,664
4,167,577,708
153,218,247,372
4,094,970,406
149,123,276,966
7,448,693,896
156,571,970,862
639,199,259
45,149,240
38,008,324
882,564,438
856,638,760
1,028,129,248
137,034,419,764
2,126,733,280
139,161,153,044
1,766,187,119
137,394,965,925
795,284,058
138,190,249,983
3,140,400,210
141,330,650,193
4,167,577,708
137,163,072,485
773,326,289
137,936,398,774
Cost Sheet
2005-06
Amount (Rs)
2004-05
+ Purchases
+ Pipe line freight
15,901,070,579
105,924,004,243
290,460,000
8,709,063,242
86,877,980,982
217,508,000
122,115,534,822
7,421,419,792
95,804,552,224
15,901,070,579
114,694,115,030 79,903,481,645

37
Chemicals
Stores and spares
Power and Fuels
overtime, etc)
Works Cost:
Add: Office and Administrative expenses
Cost of Production:
Add: opening stock of finished goods
Less: closing stock of finished goods
Cost of Goods Sold:
Add: profit
613,844,086
48,446,036
52,510,171
498,949,542
400,362,721
783,052,036
117,091,279,622
2,120,551,481
119,211,831,103
2,126,733,280
117,085,097,823
971,428,338
118,056,526,161
3,504,702,083
121,561,228,244
3,140,400,210
118,420,828,034
4,018,075,333
122,438,903,367
467,601,342
22,096,267
32,465,854
430,421,808
500,309,128
880,634,729
82,237,010,773
1,709,783,215
83,946,793,988
2,120,551,481
81,826,242,507
634,067,792
82,460,310,299
2,344,285,920
84,804,596,219
3,504,702,083
81,299,894,136
6,340,434,077
87,640,328,213
For the year 2009-10
Raw Materials Conversion period: -
Average stock of R.M = Opening stock of R.M + Closing stock of R.M
2
= 1,052,398,617 + 3,244,599,731
2
= Rs 2,148,499,174
Raw Material Turnover = Raw Material consumed

Average Stock of R.M
= 160,031,603,182
2,148,499,174
= 74 times
R.M Holding Period = Average stock of R.M x 365
R.M Consumed
= 2,148,499,174 x 365
160,031,603,182
= 5 days
R.M Inventories = R.M Consumed x R.M Holding Period
38
365
= 160,031,603,182 x 5
365
= Rs 2,192,213,742
Work-in-process Conversion period: -
Average stock of W.I.P = Op. stock of W.I.P + Cl. stock of W.I.P
2
= 2,115,521,609 + 3,081,839,768
2
= Rs 2,598,680,689
W.I.P Turnover = Cost of Production
Average stock of W.I.P

= 163,547,237,719
2,598,680,689
= 63 times
W.I.P Holding Period = Average stock of W.I.P x 365
Cost of Production
= 2,598,680,689 x 365
163,547,237,719
= 6 days
W.I.P Inventories = Cost of Production x W.I.P Holding Period
39
365
= 163,547,237,719 x 5
365
= Rs 2,240,373,119
Finished Good Conversion period: -
Average stock of F.G = Op. stock of F.G + Cl. Stock of F.G
2
= 4,363,813,291 + 4,252,292,110
2
= Rs 4,308,052,701
F.G Turnover = Cost of good sold
Average stock of F.G

= 163,658,758,900
4,308,052,701
= 38 times
F.G Holding Period = Average stock of F.G x 365
Cost of good sold
= 4,308,052,701 x 365
163,658,758,900
= 10 days
F.G Inventories = Cost of good sold x F.G Holding Period
40
365
= 163,658,758,900 x 8
365
= Rs 3,587,041,291

Operating Cycle Diagram for the year 2009-10
Cash
Holding Period and Working Capital Required for 2009-10
Stock Holding Period W.C. Requirement
Raw Material 5 days Rs 2,192,213,742
Work-In-Process 6 days Rs 2,240,373,119
Finished Goods 10 days Rs 3,587,041,291
Total W.C. Requirement Rs 8,019,628,152
41
Raw Material
(Crude Oil)
Rs 2,192,213,742
For 5 days
Rs 2,240,373,119
For 6 days
Work-in-process
(Naphtha, etc)
Finished Goods
(Petrol, Diesel, etc)
Rs 3,587,041,291
For 10 days
Transferred to
Mktg. Division

Average stock of R.M = Opening stock of R.M + Closing stock of R.M
42
2
= 7,264,607,814 + 1,088,830,365
2
= Rs 4,176,719,090
= 194,607,217,416
4,176,719,090
= 47 times
R.M Consumed
= 4,176,719,090 x 365
194,607,217,416
= 8 days
365
= 194,607,217,416 x 8
365
= Rs 4,265,363,669

43
2
= 1,971,777,039 +2,115,521,609
2
= Rs 2,043,649,324
= 202,308,840,424
2,043,649,324
= 99 times
Cost of Production
= 2,043,649,324 x 365
202,308,840,424
= 4 days
365
= 202,308,840,424 x 5
365
= Rs 2,771,353,978

44
2
= 4,094,970,406 + 4,363,813,291
2
= Rs 4,229,391,849
= 202,039,997,539
4,229,391,849
= 48 times
Cost of good sold
= 4,229,391,849 x 365
202,039,997,539
= 8 days
365
= 202,039,997,539 x 8
365
= Rs 4,428,273,919

Cash
Total W.C. Requirement R 11,464,991,566
45
Raw Material
(Crude Oil)
Rs 4,265,363,669
For 8 days
Rs 2,771,353,978
For 4 days
Work-in-process
(Naphtha, etc)
Finished Goods
Rs 4,428,273,919
For 8 days
Transferred to
Mktg. Division

Average stock of R.M= Opening stock of R.M + Closing of R.M
46
2
= 7,866,033,711 + 7,264,607,814
2
= Rs 7,565,320,763
= 144,906,103,749
7,565,320,763
= 19 times
R.M Consumed
= 7,565,320,763 x 365
144,906,103,749
= 19 days
365
= 144,906,103,749 x 19
365
= Rs 7,543,057,455
2

= 1,766,187,119 + 1,971,777,039
47
2
= Rs 1,868,982,079
= 149,050,669,664
1,868,982,079
= 80 times
Cost of Production
= 1,868,982,079 x 365
149,050,669,664
= 5 days
365
= 149,050,669,664 x 5
365
= Rs 2,041,789,995
2
= 4,167,577,708 + 4,094,970,406
2

= Rs 4,131,274,057
= 149,123,276,966
4,131,274,057
= 36 times
Cost of good sold
= 4,131,274,057 x 365
149,123,276,966
= 10 days
48
365
= 149,123,276,966 x 10
365
= Rs 4,085,569,232
Cash
Raw Material
(Crude Oil)
Rs 7,543,057,455
For 19 days

49
Average stock of R.M= Opening stock of R.M + Closing of R.M
2
= 7,421,419,792 + 7,866,033,711
2
= Rs 7,643,726,752
Rs 2,041,789,995
For 5 days
Work-in-process
(Naphtha, etc)
Finished Goods
Rs 4,085,569,232
For 10 days
Transferred to
Mktg. Division

= 133,544,730,495
7,643,726,752
= 17 times
R.M Consumed
= 7,643,726,752 x 365
133,544,730,495
= 21 days
50
365
= 133,544,730,495 x 19
365
= Rs 7,683,395,453
2
= 2,126,733,280 + 1,766,187,119
2
= Rs 1,946,460,100

= 138,190,249,983
1,946,460,100
= 71 times
Cost of Production
= 1,946,460,100 x 365
138,190,249,983
= 5 days
51
365
= 138,190,249,983 x 5
365
= Rs 1,893,017,123
2
= 3,140,400,210 + 4,167,577,708
2
= Rs 3,653,988,959
= 137,163,072,485
3,653,988,959
= 37 times

Cost of good sold
= 3,653,988,959 x 365
137,163,072,485
= 10 days
52
365
= 137,163,072,485 x 10
365
= Rs 3,757,892,397
Cash
Raw Material
(Crude Oil)
Rs 7,683,395,453
For 21 days
Rs 1,893,017,123
For 5 days
Work-in-process
(Naphtha, etc)
Finished Goods
Rs 3,757,892,397
For 10 days
Transferred to
Mktg. Division

RAW MATERIAL TURNOVER
53
Graphically Presentation
RAW MATERIAL TURNOVER: -
17 19
47
80
70
60
50
40
30
20
10
RAW MATERIAL HOLDING PERIOD: -
74
0
2006-07 2007-08 2008-09 2009-10
TIMES
YEAR
TIMES

25
20
15
10
5
RAW MATERIAL HOLDING PERIOD
WORK-IN-PROCESS TURNOVER: -
120
100
80
60
40
20
W.I.P TURNOVER
WORK-IN-PROCESS HOLDING PERIOD: -
54
21
19
8
5
0
2006-07 2007-08 2008-09 2009-10
DAYS
YEAR
DAYS
71
80
99
63
0
2006-07 2007-08 2008-09 2009-10
TIMES
YEAR
TIMES

7
6
5
4
3
2
1
W.I.P HOLDING PERIOD
FINISHED GOOD TURNOVER: -
60
50
40
30
20
10
FINISHED GOOD TURNOVER
FINISHED GOOD HOLDING PERIOD: -
55
5 5
4
6
0
2006-07 2007-08 2008-09 2009-10
DAYS
YEAR
DAYS
37 36
48
38
0
2006-07 2007-08 2008-09 2009-10
TIMES
YEAR
TIMES

FINISHED GOOD HOLDING PERIOD
10 10
8
2006-07 2007-08 2008-09 2009-10
YEAR
CHAPTER: 6
10
INVENTORY MANAGEMENT
56
12
10
8
6
4
2
0
DAYS
INTRODUCTION:
DAYS
Every enterprise needs inventories for smooth running of its activities. It
serves as a link between production and distribution process. There is generally a
time lag between the recognition of needs and its fulfillment. The greater the time-lag,
the higher the requirement for inventory. It also provides a cushion for future
price fluctuations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings; thus, it is very essential to have
proper control and management of inventories. 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.
The Inventory Management system and the Inventory Control Process
provides information to efficiently manage the flow of materials, effectively utilize
people and equipment, coordinate internal activities, and communicate with

customers. Inventory Management and the activities of Inventory Control do not
make decisions or manage operations; they provide the information to Managers
who make more accurate and timely decisions to manage their operations.
Effective Inventory Management helps organizations to meet or exceed customers'
expectations of product availability while maximizing the organization's net profits
and/or minimizing its inventory and its related costs.
Inventory
Raw material Work in progress Finished goods
57
NATURE OF INVENTORY:
The various forms in which inventories exit in a manufacturing companies
are:
Row Material: Raw materials are materials and components that are inputs
in making the final product through the manufacturing process. Purchasing and
production executives shape raw material policies.
Work-in-Process: Work-in-process inventories are semi-manufactured
products. They represent products that need more work before they become
finished products for sale. Work-in-process inventories are influenced by the
decision of production executives.
Finished Goods: Finished goods are those completely manufactured
products, which are ready for sale. Stock of raw materials and work-in-process
facilitate production, while stock of finished goods is required for smooth
marketing operations.
NEED TO HOLD INVENTORIES:

Maintaining inventories involves tying up of the company’s funds and
incurrence of storage and handling costs. There are three general motives for
holding inventories:-
Transaction Motive: - This emphasizes the need to maintain inventories to
facilitate smooth production and sales operations. To increase the production to
fulfill the demand whether seasonal or regular the organization needs to hold
inventories and there should not be any opportunity loss.
Precautionary Motive: - It is necessary to hold inventories to guard against
the risk of unpredictable changes in demand and supply forces and other factors.
For example a manufacturing company.
Speculative Motive: - It influences the decision to increase or reduce
inventory levels to take advantage of price fluctuation. There are some concerns
which maintain the level of inventories either it is raw material or finished goods
and waits for the increase in the price.
The Various methods of requisitioning of Materials
58
Reordering Level
This is the level at which the firm should go for fresh purchase requisition of
material through the storekeeper to meet the requirements. The reordering level
which takes into consideration of minimum level of consumption of raw material
during the course of production process as well as the amount material required by
the firm during period of purchase and goods in transit immediately after the order.
Reordering Level
Minimum Level
Amount of materials
required during the period
of consumption

Reordering Level = Minimum level of stock for uninterrupted flow of production
process
59
+
Amount of materials required during the period of consumption
Or
Lead-time stock level
Alternate method is available by using the maximum consumption and maximum
reorder period.
Reordering level = Maximum consumption x Maximum Re-order period
This method registers the maximum consumption of the firm during the production
as well as the maximum time period required for the supply of required materials.
Under this alternate approach, the firm at any moment will not face any difficulties
due to short supply or insufficient amount of materials.
Minimum Level/Safety level:
The firm should at always maintain minimum amount of material in its
hands to facilitate the low of production process as unaffected due to short fall in
the quantum of materials.
The following points are most important in designing the minimum level of
stock:
 Lead-time should be predominantly considered to determine the time
lag in between the materials ordered and received. The firm should
find out the practical difficulty of the vendor in supplying the material
for the determination for minimum level of stock.
 Amount of consumption of the material during the lead-time.
Minimum stock level=Reordering level-(Normal level consumption x Normal Reorder
period)

Average and normal level of consumption is synonymous with each other. If
normal or average consumption is not given, the formula is as follows.
Average consumption +Minimum level consumption + Maximum level consumption
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2
Maximum Level
This is the level at which the firm holds maximum quantity of materials as
stock during the process. The ultimate aim of fixing the level of maximum level is
that to avoid the overstocking. If the stock level of the firm exceeds the maximum
level already fixed is known as overstocking level of the firm, more than the
requirement.
Why over stocking is considered not advisable?
 It leads to excessive investment on inventory more than the
requirement.
 It leads to unnecessary wastage of the materials due to excessive
stock.
 The excessive storage of materials may certainly affect the price of
the product.
Maximum stock level = Reordering level + Reordering quantity – (Minimum
consumption X Minimum reordering period).
Danger level
At this level, the firms should not further issue any materials to the various
functional departments. At the danger level, the purchase department is vested with
greater responsibility to immediately arrange the supply of raw materials in order
to maintain the flow of production as uninterrupted.
The consumption level of the materials is getting varied from one time period to
another. During the specified period, there may be maximum consumption and
minimum consumption which should be averaged to find the mid point in between

the two, in order either fulfilled the maximum consumption or maximum
consumption to the content possible.
Why the maximum reorder period is taken into consideration?
The purpose of considering is that the greater period taken by the supplier to
supply the required materials.
Danger level = Average consumption X Maximum reorder period.
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Average Stock Level
Average level = Minimum stock level + ½ of the reorder quantity.
Economic Ordering Quantity
The ordering of materials using tagged with three different components of cost viz.
 Acquisition cost of materials
 Ordering cost of material
 Carrying cost of material
The ordering quantity of materials may larger either or meager in volume, which
carries its own advantages and disadvantages.
If the quantity ordered is larger in volume, the following are the some of important
advantages: -
 The bulk purchase order reduces the ordering cost of the materials. The
greater the size of the order, which leads to reduce the numbers of the orders
in procuring the materials.
 Quantity discount – The discount can be classified into two categories viz.
trade discount and cash discount.
 What is trade discount?
Trade discount is the discount granted by the supplier to the buyer of the materials
at the movement of bulk purchase. This percent of discount is greatly possible only

during the periods of greater of volume of purchase; which reduces the overall cost
of the acquisition.
If the quantity is procured in meager volume, the following are constructed as
advantages;
 The carrying cost will come down in the case of lesser inventories.
 The cost of storage is lesser as far as the meager quantities of materials.
 Lost due deterioration of obsolescence, wastage will be minimum.
 Insurance cost is less due to meager volume of materials.
2AO
Economic Ordering Quantity = ------------
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I
A = Annual requirements in units.
O = Ordering cost
I = Cost of storing per year or cost of carrying the inventory.
Objective of inventory management
 To maintain a large size of inventory for efficient and smooth production
and sales operations.
 To maintain a minimum investment in inventories to maximize profitability.
IN CONTEXT TO BARAUNI REFINERY (IOCL)
The Indian Oil Corporation (Barauni Refinery unit) needs to hold
inventories for the purpose of transactions motive and precautionary motive. In this
unit production is a continuous process. For the smooth production, the company
needs to maintain or keep an adequate level of ram material inventory to avoid any
shut down position. For every production unit the inventory of raw material plays a
lead role.
The Indian Oil Corporation (Barauni Refinery unit) maintains all these
sort of inventories. This unit maintains adequate stock of inventories of raw
material for the smooth functioning of the process of production. The company
also maintains an adequate level of inventories for work-in-process as per the

requirement. Till the completion of the production cycle, the work-in-process
inventories are maintained and some part of it is also used as fuel in the unit. Stock
of finished goods also has to be maintained by the Barauni Refinery unit. This unit
does not have authority to sell the finished product in the market directly. It has to
be sent to the Marketing division for further sale. As per the instruction of the
Head Office they have to keep an adequate level of finished goods for
compensating any loss of production during the period of election (governmental
hazards), production break down and other contingencies. It also sells finished
goods like LPG, Petrol, Diesel, etc. on behalf of the Marketing division. That’s
why a stock of finished goods also needs to be maintained.
63
System of identification of needs
There are mainly three types of inventories maintained by Barauni Refinery
Unit (IOCL) such as:
 Crude Oil Inventories
 Inventories for chemicals
 Inventories for stores and spares
Identify the need for Crude Oil Inventories and system of placing the order
The Barauni Refinery Unit (IOCL) identifies the need for inventories for
crude oil through Revenue Budget that is prepared on yearly basis. in the Revenue
Budget, the estimate for the consumption of Crude Oil inventories for the next year
is estimated on the part experience basis. Here a brief introduction about Revenue
Budget of Barauni Refinery Unit (IOCL) is given.
The Revenue Budget is basically a budget of income and expenditure. The
objective of preparing the Revenue Budget is to fix a target in respect of physical
parameters such as, throughput, product pattern, fuel and loss and also that of
operating expenses which become the basis for monitoring and control and to
estimate, based on targeted physical parameters of operating expenses, the likely
profit or internal sources for income, which helps in the fund management.
The Barauni Refinery Unit (IOCL) prepares Revenue Budget every year
in mid September. In the month of September, the Budgeted Estimates (BE) for the

next year and Revised Estimates (RE) for the current year are prepared for which
the Budgeted Estimates (BE) is prepared in the previous year.
For example:- In the financial year 2007-08 in the month of September, the
Budgeted Estimates (BE) for the financial year 2008-09 the Revised Estimates
(RE) for the next six months 2007-08 were prepared.
Budgeted Estimates (BE): Budgeted Estimates is that which is prepared
for the next month in which all the items (inflow and outflow) are included on full
estimation.
Revised Estimates (RE): Revised Estimates is prepared after six months of
applications of budget estimates. The purpose of preparing Revised Estimates is to
know that during the present six months what are the actual expenses or income
exits and on what basis they have been prepared. They collect this information,
about expenses or incomes from the concerned officers or employees. They also
provider information regarding what will be the expenses and incomes for the basis
they next six months. On this basis they estimate for the next six months.
There is no system for placing order for crude oil in the Barauni Refinery
Unit (IOCL). Because they do not deal or purchase crude oil directly. The hear
office handles determination of crude oil and its supply to the Refinery unit. Head
office provides crude oil to the Refinery as and when required as per the
estimation. There is continuous supply of crude oil through pipelines and tankers to
the Refinery.
Identify the need for chemicals and spares:
Identification for need for chemicals basically depends on the quantity and
types of crude oil processed. The quantity for chem8icals is decided in the ratio of
quantity and types of crude oil processed. Orders regarding the purchase of
chemicals and spares are made on past experiences. Inventory is maintained on
approximation. The user department sends the need for the item_ to the Material
department along with the consumption pattern. The reorder point is fixed in
certain cases and then the order goes to the Purchase department. Two kinds of
indent is raised:
64

 Inventory control items, which are fixed where the reorder point or
indent, is raised and the consumption pattern is studied.
 Where consumption pattern is not known, preventive maintenance
processes are undertaken on cash basis.
When an indent is raised and if it is universally available quotations or order
is placed and the best is selected amongst all. Ain case of wholesale items
order is placed to the authorized dealer who manufactures the items as per
the requirement.
Issue system of inventory for Barauni Refinery Unit
Firstly it is needed to explain how many types of issue system for
Inventories are there, and then which system is opted by the Barauni Refinery Unit,
will be explained.
First in First Out Method (FIFO) : In this method or issue system
inventories, are issued for the production process or for sales which are purchased
first or which enter in the stores first. And in the determination of cost of product,
cost of that issued material is considered. In this case most recent purchase is as
closing stock in the stores.
Last In First Out Method (LIFO): This method is absolutely different
from FIFO method. N this method or issue system inventories are issued for the
production process or for the sale, which are purchased or enter in the stores
recently. The purpose for doing so is that issued price is valued at the recent
market price. This method is mostly used when price of inventories are
continuously in the position of rising.
Highest In First Out Method (HIFO):- In this method or issue system
inventories are issued for the production process or for the sale whose cost is high
The purpose for doing so is that the company wants to sell or utilize that material
at its fullest and that there should be no opportunity loss. This method is not mostly
in use because; stock is valued at lowest price.
Barauni Refinery Unit (IOCL): issues inventories for the production
process and for the sale to the Marketing Division on First in First Out (FIFO)
65

basis. Here there is a continuous flow of crude oil. Every day crude oil is supplied
to Refinery and also there is a continuous supply of finished product to the
Marketing Division. Every day crude oil is processed or converted in to finished
product and everyday it is sent to the stores and thereafter it is sent to the
Marketing Division. Crude oil enters in the tank and it is sent for the process and
after processing it is sent to the stores. All this happens automatically. This means
that the crude oil, which enters the tank, first, is sent for the processing first and
after processing it is sent to the sores. From the stores it is sent to the Marketing
Division and then the crude oil is sent for the process and so on. This is a
continuous process and it works on FIFO basis.
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Stores Management: -
There is a separate department in Barauni Refinery Unit (IOCL) Oil Storage
and Movement Department, which manages and maintains the movement of crude
oil, intermediate products and finished goods. Actual job of this department is to
receive the raw material, intermediate products and finished goods and dispatch all
this, such as raw material for processing, intermediate products for further
processing and some of the intermediate products to the Marketing Division for
sale and finished products to the marketing department for the same purpose. This
department receives raw material as crude oil and issues for the further processing
at First in First Out basis. After processing finished products are issued and
dispatched to the Marketing Division for Sale. They receive more than one type of
finished products for which there is different maintenance cost. The maintenance
cost for LPG is more than the other products. There should be certain temperature,
which has to be maintained. And for other products like Petrol, Diesel, Etc., which
is stored in tanks, should not be filled up to the brim. A certain portion of the tank
is kept empty.
Valuation of Inventory: -
Generally the valuation of closing stock is done on the basis of market price
or cost price which ever is less. But here we will see how Indian Oil Corporation
(Barauni Refinery Unit) evaluates its stock, what rules and regulations are
followed by them etc. At first we will see how many types of closing stock they
maintain: -
Types of Closing Stock in Indian Oil Corporation Ltd.:

67
 Crude Oil
Crude Oil Stock in Transit.
Crude Oil Stock in Pipeline
Crude Oil Stock in Refinery Tanks.
 Intermediate Stock or Work-in-Process
 Finished Goods
There are many types of crude oil such as, indigenous crude oil and
imported crude oil. There are two types of indigenous Crude Oil (1) off-shore
crude oil and (2) on shore crude oil and imported Crude Oil separately for (1) High
Sulphur and (2) Low Sulphur.
Valuation of Crude Oil Stock
Crude Oil Stock to be valued at “Cost” or Replacement Cost”
For valuation at replacement cost following conditions should be satisfied:
There should be fall in the price of Crude Oil after the date of closing (31st
March). The expected realization from products to be produced out of crude oil
inventory results in realization lower than cost of crude oil.
For the purpose of valuation of crude oil following three elements are
required: -
1) Cost of Crude Oil.
2) Expected realization from products produced from crude oil.
3) Replacement of cost of crude oil.
Cost of Imported Crude Oil (High Sulpher & Low Sulpher)
1. All elements which are a part of imported crude oil are to be
considered in the cost of stock at Refinery such as FOB, marine

freight, marine insurance, and other landing charges, custom duty,
pipeline cost, entry tax (if applicable).
2. All the above elements to be considered are booked in the
purchase cost of crude oil
3. For crude oil in transit FOB and other elements are booked in
68
purchase cost.
4. The above elements are to be considered for the purpose of
valuation of crude oil stock at cost.
5. All elements as considered for Refinery stock to be taken on
notional basis for crude oil stock in transit and in pipeline e.g.
Custom duty, entry tax etc.
6. Operating cost as per budget estimated of the next year should be
included for comparison with realization.
Valuation of Crude Oil Stock: -
Expected realization value: -
1. If the crude oil quantity is processed during April, the realization of the
products is at the price applicable for the month of April.
2. For balance crude oil quantity (if any), the expected product realization
for the month of May will be considered based on Inventory Logistic
Plan (ILP)
3. Specific customer price and excise duty benefit to be considered for above
Replacement cost of crude oil stock: -
The elements for replacement cost will be same as considered for cost of
crude oil, however, following are to be taken additionally: -
1. FOB as intimated by HO based on actual price during April
2. Other element to be considered by the unit based on the estimated actual
cost.

3. Customs duty as based on percentage; the same should be revised taking
69
revised FOB value.
Valuation of Intermediate Stock
The valuation will be lower than the cost of intermediate products or
realization of the products, to be produced out of the intermediate stock, whichever
is lower.
Cost (Including conversion cost)
The cost of intermediate stock will be based on cost of crude oil as for
Refinery stock and 50% of operating cost as considered for product valuation and
50% of fuel and loss for the month.
Expected realizable value
The realizable value will be similar to crude oil stock valuation, however,
the balance operating cost & fuel & loss (50%) adjustment has to be done while
comparing with the cost of intermediate products.
Valuation of crude Oil
Pipeline Cost, crude oil valuation
 For pipeline cost, the operating cost to be considered as fixed &
variable
 Fixed cost to be allocated based in installed capacity if the capacity
utilization is below installed capacity.
 Variable cost will be allocated based on the pumped quantity by
pipeline during the year.
Valuation of finished products
Finished stock to be valued at cost or realization value whichever is lower.

Finished products to be divided into two categories.
70
 Straight run products
 Especially products for which there is a separate production plant such
as benzene, toluene, FGH, propylene, lubes etc.
CHAPTER: 7
CASH MANAGEMENT
The starting point for avoiding a cash crisis is to develop a cash flow
projection. Smart business owners know how to develop both short-term (weekly,
monthly) cash flow projections to help them manage daily cash, and long-term
(annual, 3-5 year) cash flow projections to help them develop the necessary capital
strategy to meet their business needs. They also prepare and use historical cash
flow statements to gain an understanding about where all the money went.
Efficient cash management processes are pre-requisites to execute payments,
collect receivables and manage liquidity. Managing the channels of collections,
payments and accounting information efficiently becomes imperative with growth
in business transaction volumes. This includes enabling greater connectivity to
internal corporate systems, expanding the scope of cash management services to
include “full-cycle” processes (i.e., from purchase order to reconciliation) via
ecommerce, or cash management services targeted at the needs of specific
customer segments. Cost optimization and value-add services are customer
demands that necessitate the creation of a mechanism to service the various
customer groups.
Cash is the most liquid asset in any business. It is a very crucial asset in the
day-to-day operations of a business firm. Cash is the basis input required to run
thebusiness continuously. A firm has to stike a balance between maintaining a very
high cash balance and very small amount of cash balance. It excessive cash
balance is maintained, the excess cash will remain idle affecting the profitability of
the business adversely. On the other hand, if too small amount of cash balance is
maintained, it will lead to shortage of cash resulting into disruption of

manufacturing operations of a business firm. Therefore, the major aspect of cash
management is to keep a peoper cash balance.
Cash management thus is concerned with, the managing of,
i) Cash flows into and out of the firm.
ii) Cash flows within the firm.
iii) Cash balances held by the firm at a point of time by
financing deficit or investing surpuls cash
It can be represented by cash management cycle: -
Cash collection
Cash management cycle
Sales generate cash, which has to be disbursed out. The surplus cash has to
be invested while deficit has to be borrowed. Cash management seeks to
accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve
liquidity and control. Cash management assumes more importance than other
current assets because cash is the most significant and the least productive asset
that a firm holds. The aim of cash management is to maintain adequate control
over cash position to keep the firm sufficiently and to use excess cash in some
profitable way.
71
Business operation
Information $
control
Cash payment
Deficit
Surplus
Borrow
Invest

IN CONTEXT TO BARAUNI REFINERY (IOCL)
The first and the foremost step in managing cash are identifying its
72
requirement.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit) identifies the need
for cash for meeting its working capital requirement and for day-to-day operations
of business is through the preparation of the cash budget. Budgeting is the
technique by which financial and/or quantitative expressions are given to a set
policy in the form of a plan prior to a defined of time.
It involves the coordination of the activities dictated by plans and sets up a
control mechanism to bring to the notice of management how far the entire
activities are geared upon to get the desired results and corrective action wherever
and whenever necessary so as to comply with the goals set up.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit) prepares the cash
budget on the value dating system. As per this system the Barauni Refinery
(IOCL) maintains a special current account with the SBI. Barauni Refinery Unit
maintains this account with the campus branch as well as the Kolkata branch.
Cheques make every payment by this branch. Cash payment is made in rare cases.
Only for the payment to the employees, up to Rs. 20,000 is mae by cash above the
payment made by cheques. The arrangement of this cash payment is made through
the State Bank of India on behalf of the Head Office. Barauni Refinery Unit issues
cheques for the payment to the party every day as and when required. Out of those
cheques how many cheques are present for payment does not matter. Every day
payment is made for the Barauni payment Refinery Unit and every day they are
sent to the bank for payment for which the Head officer makes payment ultimately
to the Bank. It is a continuous or a cyclical process. It prepares the Estimated
Budget and the Revised Budget every month and every year. The estimated
budget is prepared every 10th of a month and the revised budget is prepared every
25th of the same month and the revised budget is prepared as per the approval of
the Head Office every cash budget is prepared as per the approval of the Head
Office. This cash budget is sent to the Refinery Head quarters New Delhi.
The SBI Branch at Kolkata maintains an account for the Barauni division in
order to make payment to the parties who are interested in getting the payments

conveniently form the Kolkata Branch. For example payments have to be made to
auditors, suppliers for chemicals and stores and spares, entry tax, excise duty, etc.
An amount of Rs. 10 crores is kept and maintained for payments to the concerned
parties and is authorized to spend Rs. 9 cores at a stretch.
The branch has to keep Rs 1 crore as a reserve. The amount of Rs. 9 crores
can be spent at any may be, within an hour or a day or a week. As and when it is
spent the amount is again reimbursed by the Indian Oil Head Office. The Kolkata
Head Office provides all details regarding the payment made to various parties,
after adjusting the amount received and paid, to the Head Office as a proof of its
payment
73
Estimated Cash Budget:
This Estimated cash budget is prepared in every month till the date of 10th
for the next month. In this it is estimated how much cash is required for the next
month. In this all the expected expenses are included and forecasted.
Revised Cash Budget:
Revised cash budget is also prepared in the same month of the estimated
cash budget till the 25th of the month. It is also prepared for the next year for which
estimated cash budget is required. It is nothing but the system of finalizing the cash
budget. The only difference is that during the period of 15 days from 10th to 25th
there may be some expenses, which are included, further.
Items included in the Cash Budget: -
These are some items, which are included in the Cash Budget: -
Projected Expenditure:

This expenditure is capital in nature. As it is not finalized, it is considered to
be revenue in nature. When the project gets over then all the expenses relating to
this are capitalized. At present a project related the installation of 3rd sector of
Diesel Hydrogenating Treating Unit in under consideration.
Custom & Excise Duty and Entry Tax:
These expenses are paid on the basis of occurrence. When these transactions
occur then it is shown in the cash budget. These expenses are on payment basis.
For example: - Expenses for the month of My will be paid in the month of June.
The Refinery pays custom duty, Excise Duty and Entry Tax on Crude Oil
Consumption.
74
Additional Facilities:
These expenses are also of Capital Nature. These expenses are related to
Plant, Furniture, Constructions, etc. Need for furniture for the coming period is
estimate basically in places where construction work is done. The repairs and
maintenance department of each section do this estimation.
Employee Payments:
This expense mainly depends on the existing number of employees INS the
Refinery and their pay scale. The estimation is done on the basis of how many new
employees are appointed, how may of them get retired, how many of them get
promoted, how many of them require advanced payment of salary, etc.
Other Expenses:
Other expenses are related to payment to suppliers, contractors, etc.
Budgeting is not only a financial function performed by the Financial Department
alone. The Planning and Budgeting have to be grassroots operation in which all
levels of management participate. The business of Finance Department is to
receive the operating plans of the line managers and other Department Heads and
transplant those plans into comprehensive projection of financial condition and
operating results. After the budgets are approved, the actual results are also
forwarded to various Departments by Finance for analysis and corrective action as
required.

75
System of managing cash:
The Barauni Refinery basically does not deal with raw cash, at this division,
As the cash management is thoroughly dealt at Delhi and Mumbai Head Office.
The daily requirement of cash is met by direct transitions with the SBI where a
special current account is maintained. The income earned by the Barauni Division
is maintained and kept only on books.
It mainly deals with payments to various parties, which are:
 The internal customers who are the employees
 The external customers who are the contractors.
 For statutory deposits i.e. payment as the Bihar Entry Tax.
The requirements of cash are met as per time and fulfilled by the Finance
department, which deals with the State Bank of India. Cash for petty uses are paid
to the concerned departments and maintained for further uses. Salary to the staff is
directly debited to the concerned accounts. This is how cash is managed in the
Barauni Division.
Cash Budgeting
Budgeting Principles and Practices in Barauni Division
Types of plans/budget
The corporate objective, as approved by the Board of Directors, forms of
basis for long term/short term budgets so as to attain the desired objectives. The
long terms plans comprises of:
1. Perspective plan covering a duration of 10 – 15 years
2. Long range plans covering duration of 5 years.
Perspective Plan

The perspective plan sets the long-term goals to be attained by the
corporation in line with the corporate objectives. The corporate goals are further
divided into Divisional goals and Units’ goals. The purpose of perspective plan is
to achieve efficiency and supremacy in the existing operation and also to diversify
into other areas of operation as may be possible taking into account the
opportunities thrown up by the environment. The perspective plan is updated once
in 2 years is available. This plan is prepared by the corporate planning dept based
on the inputs received by the divisions
76
Long range Planning:
Long range planning is aimed to achieve the broad objectives envisaged in
the perspective plan by fixing specific targets and action plas for various functions.
The long range planning dept coordinates the long-range plan are reviewed
periodically at units/ HO with reference to actual performance. An in addition to
perspective and Long-range plan, the corporation is closely associate in the five
year Plans of the government insofar as it related to petroleum sector. The
corporate plans have to take into consideration the objectives as laid down by the
government in the Five Year Plans. The new projects, which are to be, included in
the long-range plan takes into consideration the stated objective of the Government
in the Five Year Plans.
Short Term Plans:
In the short term the corporation prepares Revenue and Capital budgets
indicating the Revised Estimates for the current yea5r and the budget estimates fort
the next year. These budgets are more detailed and indicate the expected
physical/finance performance of operations and projects for close monitoring and
control.
In addition to these budgets Purchase Budget. Working capital budget or
capital budget or capital budgets are also prepared to now the availability of
internal resources for financing projects and for further Fund management in case
of surplus/deficit. The Foreign Exchange budget is also prepared for submission to
the Government our requirements of the Public section in perspective form
Balance of Payment (BOP) angle.

The Barauni Division deals with the planning and the preparation of the
short-term budget and the long range planning and the HO Delhi Prepares the
perspective plans.
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Revenue Budget:
The revenue budget is basically a budget of income and expenditure. The
objective of revenue budget is two fold:
1. To fix a target in respect of physical parameters viz., throughput
production pattern, fuel and loss and also that of operating expenses
which then become the basis for monitoring and control.
2. To estimate based on the targeted physical parameters/operating
expenses, the likely profit/internal source generation which will then
form the basis of funds management.
Components of Revenue Budget:
The components of Revenue Budget are:
 Throughput, Product Pattern, Fuel and loss
 Operating income
 Raw material
 Operating expenses
Based on the above, the summarized position of Revenue Budget is prepared
indicating the estimate profit or loss during the budget period.
Throughput, Product Pattern and Fuel and Loss:
For the preparation of Revenue Budget, Basic requirement is the estimation
of likely throughput/product pattern for Refineries and estimated throughput of
Pipelines.
This estimation is done by interactive process between refinery units and HO
taking into consideration the shut down schedules, Crude oil availability and other

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