Shell Pakistan Limited&

PSO Company Limited

Cash Management Comparative Analysis of

Petroleum Sectors

• Hammad Ahmad L1F08MBAM2017• Umair Yaqoob L1F08MBAM2109• Farhan Shafiq L1F08MBAM2007• Mehmood Akhter L1S09MBAM2017

Group Members(R107)

Presentation Flowchart

• Cash is both a fundamental resource and the means by which the entity acquires other resources. To manage cash is to manage the entity's ability to purchase assets, service debt, pay employees, and control operations.

• Cash management can be defined as managing cash inflow, concentration of cash and disbursement of cash and it’s seems to deal with forecasting future cash needs by analyzing current cash portfolios and possibilities to generate surplus cash.

• Cash is to a business is what blood is to a living body. The availability of cash in time is one of the heartiest desires for successful operation and capitalizes on opportunity.

• Cash management refers to keep an organization execution for the better use of cash resources such as to collect receivable in timely and make timely payments to creditors (McKinsey 2009).

• Kim et al. (1998) underline the perception of tradeoff model between the costs of holding cash that derives a low return and estimated costs of generating funds if new investment opportunities available or the planned expenditure arises to internal cash flows.

Introduction

Objectives of the Study: • To evaluate the performance of cash management of petroleum sector by analyzing cash tools

such as cash cycle and cash flows statements and ratios.• To examine that, the capacity of financial requirement is reliant to the capacity of generating daily

cash requirement of companies.• To evaluate the short term solvency and liquidity of petroleum sector, how the selected

companies utilize his cash resources and aptitude of financial management of petroleum sector• To investigate the long term cash surplus and deficiencies of the companies.

Justification of the Study:• To mange proper collection and disbursements of the firm, cash manger needs to analyze the cash

to cash cycle (Paul D. Hutchison, M. Theodore Farris II, and Susan B. Anders, 2007).• The surplus and deficiencies required for the business also require examining. This will do with the

help of cash flows statements analysis where cash manger get clear pictures how much cash are require for which activities (Wilna Styne Bruwer and Willie Hamman, 2008).

• As Cash is a part of working capital of the firms, therefore optimal selection of working capital compositions and optimal cash in hands has counter effects on each others. The optimal cash in hands therefore is major consideration as it effect working capital requirement and maintain liquidity of the firms (Goodhart, 2009).

• The Cash management includes managing of short-term marketable securities, because in today world money comprises actual cash in hand or bank or other thing that use as mode of cash. (Singhvi, 1970).

Industry Profile:

• This sector is divided into different line of business such as:

– Refinery– Exploration– Marketing

• The major sales of these products are to transportation industry such as air buses, local and public buses transports companies.

45%

22%

7%

6%

20%

Market Shares As on December, 2010PSO Shell Total Pakistan Caltex Others

Shell Profile:•The second largest oil company in the country.•Shell Pakistan is divided into 8 functional areas i.e. Retail, Lubricants, Aviation, Operations, Finance, Corporate, Human Resource and Commercial Fuels.•22% share holding in the petroleum sector.

PSO Profile:•PSO is the market leader in Pakistan’s energy sector. •Major fuel supplier to aviation, railways, power projects, armed forces and agriculture sector. •Provides Jet Fuel to Refueling Facilities at 9 airports in Pakistan and ship fuel at 3 ports.•45% share in the petroleum sector.

Cash to Cash Cycle

Shell PSO

Cash Conversion Cycle by Quarters: Shell PSO

Cash Flows Statements

-5,000,000-4,000,000-3,000,000-2,000,000-1,000,000

01,000,0002,000,0003,000,0004,000,000

2006 2007 2008 2009 2010

CFO

CF-INV

CF-FIN

NET CF

Shell

-10000000

-8000000-6000000

-4000000-2000000

02000000

40000006000000

2006 2007 2008 2009 2010

CFOCF-INVCF-FINNET CF

PSO

Cash Related Ratios

ShellItems 2006 2007 2008 2009 2010

CFO/current debts

5.04% 0.55% 4.26% 15.63% 7.36%

Cash/Sales 0.84% 0.71% 0.62% 0.56% 0.53%

Cash/Total Assets

3.48% 2.79% 2.20% 2.58% 2.71%

Cash/Total debts

5% 4% 3% 3% 3%

CFO/Sales 0.77% 0.09% 0.71% 2.52% 1.13%

CFO/Total Assets

3.20% 0.37% 2.50% 11.69% 5.81%

CFO/Total Debts

5.00% 0.55% 3.81% 15.50% 7.32%

CFO-(i+t)/interest

7.01 0.75 4.69 4.77 3.90

CFO/Dividend

0.70 0.08 1.01 7.23 1.14

CFO/Operating

Income

18.06%

9.55% 11.71% 80.50% 60.29%

PSO

Items 2006 2007 2008 2009 2010CFO/

current debts

6.17% 13.01% 12.02% 10.86% 11.47%

Cash/Sales

0.39% 0.42% 0.55% 0.69% 0.62%

Cash/Total

Assets1.70% 1.84% 2.40% 3.07% 3.02%

Cash/Total debts

3.16% 3.48% 4.57% 5.75% 6.27%

CFO/Sales

0.75% 1.55% 1.42% 1.28% 1.12%

CFO/Total Assets

3.25% 6.77% 6.23% 5.71% 5.44%

CFO/Total Debts

6.04% 12.77% 11.83% 10.71% 11.30%

CFO-(i+t)/interest

9.15 15.62 15.31 8.09 9.67

CFO/Dividend

2.05 4.34 3.82 3.52 2.10

CFO/Operating

Income19.19% 39.42% 35.91% 32.29% 27.83%

Vertical Analysis:Shell

PSO

ISSUES / FINDINGS:

Shell:• Inadequate current assets composition due to

– Inadequate cash balances as it represented only 2.71% in 2010.– Minor level of short term investment as it was null in 2010.

• Inadequate cash flows.• Profitability issue as in 2010 there was very low profit i.e. 0.82%.• Liquidity Problem due to inadequate cash in hands and marketable securities.• Minor level of inventory to meet uncertain demand as it was 30% in hand where as demand growing at the rate of

25%. The inventory should be double of demand as half consider as cushion.• High level of operating cost as it was 5% in 2010 where as industry average was only 3-3.5%. PSO• High cash conversion cycle

– Too much account receivables as represented 58% in 2010.– Lower level of accounts payables as represented only 77% as compared to an industry which was more than

that.• Inadequate current assets composition due to

– Inadequate cash balances as it represented only 0.88% in 2010.– Minor level of short term investment as 0.18% in 2010.– Too much Account receivables as 58% in 2010.

• Inadequate cash flows as negative cash trend at the end .• Profitability issue as very low net profit in 2010 i.e. 1.21%. • Liquidity Problem due to illiquid assets.• High level of direct cost (CGS) as represented by GPM which was only 3.93% in 2010.• Lack of capital Expenditure as it gone down 546802 thousands from 678172 thousands.• Minor level of long term investment as it represented only 1% in 2010.

Projected Solutions for Shell:

Projected Solutions for PSO:

Recommendations:• Monitor the cash position on continuous basis.• Controlling balances on deposit.• Moving funds as necessary.• Managing short-term (working capital) borrowing and investing.• Forecast future shortages and surpluses effectively.• How is surplus cash invested?• How are cash shortages managed?• Short-term financing alternatives.• Managing banking relationships.• Analyzing, designing and implementing cash management systems and

procedures.