Complete Working Capital

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Working Capital Management

A Project ReportSubmitted in partial fulfillment of

The requirements for theMaster of Business Administration

By

DEBASIS SUBUDHI

Roll no:-MBA:-0841333254

July - 2009

Under the guidance

Munmun Mohanty

&

Niranjan Nanda


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INSTITUTE OF BUSINESS & COMPUTER STUDIESBHUBANESWAR, ORISSA

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PREFACE

Dissertation report for an M.B.A student is an important part of competition of the

particular topic. Hence every student undergoes this training at various place having

different topics. The main objective of the actual environment that prevails in to

todays organization. In this project on can find that how the theories of book are put

into the practice and how much they are suitable and useful

As per dissertation is concerned I underwent in NATIONAL ALUMINIUM

COMPANY (NALCO) ANGUL. The topic of my dissertation is WORKING

CAPITAL MANAGEMENT

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GUIDE CERTIFICATE

This is to certify that the project entitled Working CapitalManagement is a piece

of term project done by ASWIN, student of 2 year M.B.A, I.B.C.S. (SOA

UNIVERSITY),BHUBANESWAR. To the best of my knowledge and belief the term

project report:-

Embodies the work of the candidate themselves.

Has been duly completed.

Is up to the standard both in respect to contents and language for being

referred to the examiner.

Signature

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DECLARATION BY THE CANDIDATE

I Mr. ASWIN a student of 2 year M.B.A INSTITUTE OF BUSINESS AND

COMPUTER STUDIES, SOA UNIVERSITY, BHUBANESWAR, Regd No: -

0841333285, hereby declare that the project report entitled on WORKING

CAPITAL MANAGEMENT is the outcome of my own performance and the same

has not been submitted to any university/Institute for the award of any degree or any

professional diploma/degree.

Date:-

Place: - Signature

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ACKNOWLEDGEMENT

I take this opportunity to place on record my grateful thanks and sincere gratitude toMr. NIRANJAN NANDA, finance Manager, NALCO Finance Dept, ANGUL. Who

gave me valuable advice and inputs for my study? My project could not have been

completed if I had not been able to get the reference materials from the company.

I am immensely grateful to my esteemed guideMs. MUN MUNMOHANTYwhose

continued and invaluable guidance can never be forgotten by me but for whom, this

study could not have got present shape.

Last but not the least; I would also like to express my thanks to Mr.P.SARATHI,

S&P dept, who inspired me to put in my best efforts for the inspired me to put in my

best efforts for the research/project report.

ASWIN

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TABLE OF CONTENTS

PREFACE ................................................................................................................................I

GUIDE CERTIFICATE ........................................................................................................II

DECLARATION BY THE CANDIDATE .........................................................................III

ACKNOWLEDGEMENT ..................................................................................................IV

TABLE OF CONTENTS .......................................................................................................V

1. INTRODUCTION TO NALCO .........................................................................................7

1.1 CORPORATE STRENGTH ................................................................................8

1.2 BAUXITE MINE .................................................................................................8

1.3 ALUMINA REFINERY ...................................................................................... 91.4 SMELTER PLANT ............................................................................................10

1.5 CAPTIVE POWER PLANT:- ............................................................................11

1.6 PORT FACILITIES:- .........................................................................................12

1.7 ROLLED PRODUCTS UNIT:- ......................................................................... 13

1.8 ENVIRONMENT:- ............................................................................................ 13

1.9 COMMUNITY CARE:- .....................................................................................14

1.10 HRM PHILOSOPHY:- .................................................................................. 15

1.11 HUMAN RESOURCES(Up to September 2008):- ......................................... 15

1.12 EXPANSION PROGRAMME:- ...................................................................... 16

1.13 PRODUCTION & SALES:- ............................................................................ 17

1.14 FINANCIAL PERFORMANCE:- ................................................................... 191.15 QUALITY POLICY:- ...................................................................................... 22

Guiding Principles ...............................................................................................22

Commitment .........................................................................................................23

ENVIRONMENT POLICY:- ..................................................................................23

1.16 ALUMINIUM PROPERTIES & APPLICATIONS ........................................ 25

Aluminum the wonder metal has many remarkable features ............................ 25

PRODUCTS ......................................................................................................... 27

Alumina:- ............................................................................................................. 27

2. INTRODUCTION TO WORKING CAPITAL MANAGEMENT ...............................29

OBJECTIVES OF THE STUDY: - .........................................................................30

3. CASH MANAGEMENT ..................................................................................................31

3.1 OBJECTIVES OF CASH MANAGEMENT .....................................................31

3.2 MOTIVES FOR CASH HOLDING .................................................................. 32

(1). Transaction Motive:- ..................................................................................... 32

(2).precautionary Motive:- ................................................................................... 33

(3).Speculative Motive:- .......................................................................................33

3.3 CASH PLANNING: - ........................................................................................ 33

3.4 CASH FORECASTING & BUDGETING ........................................................ 34

Receipts and Payment Method:- ......................................................................... 34Adjusted Net Income Method:- ............................................................................36

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3. 5 MANAGEMENT OF CASH FLOW: - ............................................................ 36

3.6 DELAYING PAYMENT: - ............................................................................... 38

4. CASH MANAGEMENT AT NALCO .............................................................................39

ANALYSIS .......................................................................................................... 39

SUMMARY ............................................................................................................. 44

5. INVENTORY MANAGEMENT .....................................................................................45

5.1 COMPONENTS OF INVENTORY: - ...............................................................46

5.2 NEED TO HOLD INVENTORIES: - ................................................................ 47

5.3 OBJECTIVES: - ................................................................................................. 47

COSTS:- ............................................................................................................... 48

Ordering cost:- ......................................................................................................48

Carrying Cost:- ..................................................................................................... 48

BENEFITS:- .........................................................................................................49

5.4 TECHNIQUES OF INVENTORY MANAGEMENT ...................................... 49Classification Problem:- ....................................................................................... 49

Quantity Problem:- ............................................................................................... 51

EOQ model:- ........................................................................................................ 51

Approaches:- ........................................................................................................ 52

6. INVENTORY MANAGEMENT AT NALCO ................................................................53

7. MANAGEMENT OF ACCOUNTS RECEIVABLES ..................................................62

ESTABLISHING OPTIMUM CREDIT POLICY .............................................. 62

7.1 ACCOUNTS RECEIVABLES MANAGEMENT AT NALCO ....................... 68

8. FINANCING OF WORKING CAPITAL .......................................................................71

TRADE CREDIT:- ..................................................................................................72

Types of bank finance for working capital ...........................................................75

Security Required In Bank Finance .................................................................... 77

9. WORKING CAPITAL MANAGEMENT ANALYSIS .................................................79

Current Assets Ratio .............................................................................................79

Liquid Ratio ..........................................................................................................80

10. DEHEJA COMMITTEE REPORT ..............................................................................83

11. TONDON COMMITTEE REPORT .............................................................................85

12. CONCLUSION ..............................................................................................................86

11. BIBLIOGRAPHY ...........................................................................................................87

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1. INTRODUCTION TO NALCO

National Aluminium Company Limited (NALCO) is considered to be a turning point

in the history of Indian Aluminium Industry. In a major leap forward, NALCO has not

only addressed the need for self-sufficiency in aluminium but also given the country a

technological edge in producing this strategy mental as per world standards.

Incorporated in 1981 as a public sector enterprise, NALCO was set up to exploit a

part of the large Bauxite deposits discovered in East Cost, in technological

collaboration with aluminium pechiney of France (now Alcan).With consistent track

record in capacity utilization, technology absorption, quality assurance, export

performance and profitability, Nalco is a bright example of Indias industrial

capability. Today, as an ISO 9001, ISO 14001 and OHSAS 18001 company, with its

product registered in London Metal Exchange, Nalco has emerged as the largest

integrated bauxite-alumina-aluminium complex in ASIA. Now, Nalco enjoys the

status of a Navratna company.

(Figure 1 NALCO Site )

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1.1 CORPORATE STRENGTH Captive Resources

Advanced Technology

Integrated Operation

World-class Products

Well-Trained Manpower

Sound Financial Management

Care For Ecology And Environment

Self-Funded Expansions

Expertise In Project Management

International Linkages in Technological & Market

1.2 BAUXITE MINE

(Figure 2 Bauxite Mine )

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A fully mechanized open-cast mine of 4800000 tpa, on panchpatmali hills of Koraput

district in Orissa, serves feed-stock to the Alumina Refinery at Damanjodi, located

16km downhill. The transportation is done through a 14.6km long single flight,

multicurve, cable belt conveyor of 1800 tph capacity. The mining capacity is being

expended to 6300000 tpa.

Area of deposits : 16 sq.km

Resources : 310 million tonnes

Ore quality : Alumina 45%

Silica 2%

Mineralogy : Over 90% gibbsitic

Over burden : 3 mtr(avg.)

Ore thickness : 14 mtr(avg.)

1.3 ALUMINA REFINERY

(Figure 3 ALUMINA REFINERY )

The 1575000 tpa energy-efficient Alumina Refinery, having three parallel streams of

equal capacity, is located in the picturesque valley of Damanjodi. The Refinery provides alumina to the companys Smelter at Anugul and exports the balance

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alumina to overseas markets through Visakhapatnam Port. Presently, it is being

expanded to 2100000 tpa capacity.

1.4 SMELTER PLANT

(Figure 3 SMELTER PLANT)

The 345000 tpa capacity Aluminium Smelter, located at Anugul in Orissa, is based on

advanced technology of Smelter and pollution control. Its capacity is being further

expanded to 460000 tpa.

The Salient features of the plant includes: -

180 KA cell technology

Fume treatment with dry-scrubbing system

Manufacturing of carbon anodes, bus bars, anode stems etc.

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Integrated facilities for manufacturing ingots, sows, billets, wire rods, strips

and rolled products.

1.5 CAPTIVE POWER PLANT:-

(Figure CAPTIVE POWER PLANT)

Close to the Aluminium Smelter Plant at Anugul, a captive Power Plant of 960 mw

capacity has been established for firm supply of power to the Smelter. The coal

demand of the plant is met from a dedicated mine of Mahanadi Coalfields Limited.

The plant is also connected with the state Grid for sale of surplus power. The ongoing

expansion shall raise its capacity to 1200 mw.

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1.6 PORT FACILITIES:-

(Figure - 8 Ant Wall )

( Figure PORT FACILITIES)

On the inner harbour of Visakhapatnam Port on the Bay Of Bengal, Nalco has

established mechanized storage and ship handling facility for exporting alumina in

bulk and importing caustic soda. This facility can handle ships up to 35000 DWT.Ship Loading Rate: 2200 tph

Alumina Storage : 3*25000 tonnes

Besides, Nalco exports from the ports of Paradeep and Kolkata.

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1.7 ROLLED PRODUCTS UNIT:-

After acquisition and merger of International Aluminium Products Ltd., Nalco has

started production from this 50000 tpa plant. This Rolled products unit is presently

producing standard coils and sheets. Besides, it has facilities to produce foil stock, fin

stock, cable wrap stock, coil stock and closure stock for a veriety of end uses.

1.8 ENVIRONMENT:-

Nalco assigns high importance to promotion and maintenance of a pollution-free

environment in all its activities. The Environment Management Systems in all

production/operation units conform to the ISO 14001 norms. Among numerous

recognitions, the two highest national awards viz. Indira Gandhi Priyadarshini

Vrikshamitra puraskar for plantation & afforestation and Indira Gandhi Paryavaran

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Puraskar for environment management, conferred on the company by the ministry of

Environment & Forests, Government of India, bear further testimony to Nalcos

commitment towards the environment.

1.9 COMMUNITY CARE:-

The Company has adopted a policy of playing a catalytic role in improving the quality

of life of the people living in the peripheral villages, in collaboration with local

government authorities.

The activities include: creation of infrastructure for communication, education, health

care, water supply, apart from undertaking social forestry, organizing rural sports and

supporting cultural activities

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1.10 HRM PHILOSOPHY:-

To attract competent personnel with growth potential and develop their skills

and capabilities in a congenial work and social environment through

opportunities for training, recognition, career advancement and other

incentives.

To develop and nurture favourable attitudes among the employees and to

obtain their best contributions to the organisation by providing stable

employment, safe working conditions, job satisfaction, quick redressal of

grievances and through good pay and welfare amenities commensurate with

the companys capacity to spend and the Governments guidelines.

To forest fellowship and sense of belongingness among all sections of

employees through closer association of employees with the management and

by encouraging healthy trade union practices.

1.11 HUMAN RESOURCES(Up to September 2008):-

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Total : 7466

SC/ST Representation : 2517

Land Displaced Persons : 1979

Physically Handicapped : 74

Women Employees : 320

1.12 EXPANSION PROGRAMME:-

In order to strengthen its business and increase market share, the company has been

pursuing expansion programmes on a sustained basis. Soon after the completion of the

1st

phase expansion, the company has launched its 2nd

phase expansion, commencing

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in October 2004, which involves fresh investment of more than Rs. 5000 crore. The

project is nearing completion.

Segment Present capacity Capacity under ExpansionBauxite Mines 4800000 tpa 6300000 tpa

Aluminium Refinery 1575000 tpa 2100000 tpa

Aluminium Smelter 345000 tpa 460000 tpa

Power Point 960 MW 1200 MW

The company is now planning 3rd phase expansion with an investment of Rs. 6000

crore, which will increase, aluminium capacity to 5.80 lakhs tonnes and power

generation to 1400 MW.

1.13 PRODUCTION & SALES:-

ALUMINA

(IN 000 MTs)

0

200

400

600

800

1000

1200

1400

1600

2004-2005 2005-2006 2006-2007 2007-2008

Production

Export

Column1

Values for the above chart

Year Production Export

2004-2005 1575 9092005-2006 1590 863

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2006-2007 1475 774

2007-2008 1576 860

ALUMINIUM

(In 000 MTs)

Value for the above chart

Year Production Export sale Domestic sale

2004-2005 338 133 206

2005-2006 359 96 258

2006-2007 359 93 263

2007-2008 360 101 252

POWER

(In Million Units)

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0

1000

2000

3000

4000

5000

6000

2004-2005 2005-2006 2006-2007 2007-2008

Generation

Sale


Year Generation Sale

2004-2005 5613 406

2005-2006 5679 322

2006-2007 5968 421

2007-2008 5609 129

1.14 FINANCIAL PERFORMANCE:-

TURNOVER & NET PROFIT

(Rs. In crore)

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0

500

1000

1500

2000

2500

3000

3500

4000

4500

2004-2005 2005-2006 2006-2007 2007-2008

Export

Domestic


Year Export Domestic

2004-2005 2200 22002005-2006 2306 3018

2006-2007 2586 3929

2007-2008 2134 3340

DIVIDEND PAYMENT

(Rs. In crore)

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0

100

200

300

400

500

600

2004-2005 2005-2006 2006-2007 2007-2008

Amount Paid

% of Dividend


Year Amount Paid Dividend

2004-2005 258 40

2005-2006 322 50

2006-2007 483 752007-2008 387 60

1.15 QUALITY POLICY:-Quality will form the core of our business philosophy. Meeting the needs and

expectations of the customer and consistently improving our systems and work ethos

will be our chosen path achieving excellence in business and fulfilling our social

obligations.

Guiding Principles

To ensure a healthy return on investment by maximising operational

efficiency, capacity utilisation and productivity.

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To continually improve and redesign systems, processes and practices

in order to ensure error prevention and improve response time.

To adopt Internal Customer focus as a means to external customer

satisfaction.

To treat human resources as the key to quality excellence and ensure

development, involvement and satisfaction of employees.

To ensure high quality of inputs through proactive interaction with

suppliers.

To meet obligations towards the society as a responsible corporate

citizen.

To provide value for money to all stake holders.

To follow ethical business philosophy at all times.

Commitment

We dedicate ourselves to the quality policy and objectives of the company in letter

and spirit and commit to continuously strive for their fulfillment.

ENVIRONMENT POLICY:-

In recognition of the interests of the society in securing sustainable industrial growth,

compatible with a wholesome environment, National Aluminium Company Limited

(NALCO) affirms that it assigns high importance to promotion and maintenance of a

pollution-free environment in all its activities.

To use non-pollution and environment friendly technology.

To monitor regularly air, water land, noise and other

environmental parameters.

To constantly improve upon the standards of pollution control

and provide a leadership in environment management.

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To develop employees awareness on environmental

responsibilities and encourage adherence to sound

environmental practices.

To work closely with Government & local authorities to

prevent or minimise adverse consequences of the industrial

activities on the environment.

To comply with all applicable laws governing environment

protection through appropriate mechanisms.

To actively participate in social, welfare and environmental

development activities of the locality around its units.

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1.16 ALUMINIUM PROPERTIES & APPLICATIONSAluminum the wonder metal has many remarkable features

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PRODUCTS

Alumina:-

Calcined Alumina

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Alumina Hydrate

Speciality Aluminas & Hydrates

Detergent Grade Zeolite

Aluminum Metal:-

(High Purity, CG, EC & LME grades)

Standard Ingots (each approx. 20/22.5 kgs)

Sow Ingots (each max. 750 kgs)

Wire Rods (in coil form, 9.5/11.95 mm dia, weight approx. 2 mt)

Billets (in four sizes : 127+-1.5 mm / 152+-1.5 mm / 178+-1.5 mm / 203+-1.5

mm dia)

Cast strip (max. width 1600 mm, gauge 6 to 10 mm)

Flat Rolled Products (coils & sheets)

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2. INTRODUCTION TO WORKING CAPITALMANAGEMENT

Financial management (the effective one) is the outcome or result among other things

about proper management and investments of funds in business. Funds can be

involved for permanent purposes such as acquisition of fixed assets, diversification of

plants and machinery and research & development.

Simple working capital returns to a firms investments in short term assets working

capital or funds thus refers to the differences between inflow or outflow of funds or

excess of current assets over current liabilities working capital management is

concerned with the problems assets, the current liabilities and the inter-relationship

between them. Working capital is considered as the nerve canter of business.

The analysis of working capital as the firms main objective is to increase the wealth

of shareholder and the wealth depends upon. The efficiency management of funds

then should analyses investment in fixed along with short term assets.

Every business needs funds for two purposes-for its establishment and to carry out itsday-to-day operations. Long-term funds are required to create production facilities

through purchase of fixed assets such as plant and machinery, land, building,

furniture, etc. investments in these assets represents that part of firms capital which is

blocked on a permanent or fixed basis and is called fixed capital. Funds are also

needed for short-term purposes for the purchase of raw material, payments of wages

and other day-to-day expenses, etc. These funds are known as working capital. In

simple words, working capital refers to that part of firms capital which is required for

financing short-term or current assets such as cash, marketable securities, debtors and

inventories. Funds, thus, invested in current assets keep revolving fast and are being

constantly converted into cash and this cash out flows again in exchange for other

current assets. Hence, it is also known as revolving or circulating capital or short-

term capital.

In the words ofShubin, Working capital is the amount of funds necessary to cover

the cost of operating the enterprise.

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According to Genestenberg, Circulating capital means current assets of a company

that are changed in the ordinary course of business from one form to another, as for

example, from cash to inventories, inventories to receivables, receivables into cash.

OBJECTIVES OF THE STUDY: -

The project work is designed to fulfill the following objectives:-

To study the present system of working capital in the organization.

It protects a business from the adverse effects of shrinkage in the values of

current assets.

It is possible to pay all the current obligations promptly and to take advantages

of cash discounts.

To promote employment stabilization and identify the specific deviations of

working capital funds.

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3. CASH MANAGEMENT

As we know that cash is the most important liquid asset of the firm, therefore the

management of cash is a must for every financial manager for its holding in order

to run the daily operations. Apart from this, cash is the common denominator to

which all the current assets can be reduced because the other major liquid assets

i.e. receivables and significance of cash management. Thus a major function of a

finance manager is to maintain a sound finance position.

In the narrow sense the other names termed as cash are currency, Cheques and

drafts. The broader view of cash also includes near cash assets, such as marketable

securities and deposits in bank. The basic characteristics of this near cash assets

are that they can easily converted into cash. As we know that holding of cash has

no earning power but when converted into cash these near cash items gives some

profit to the firm. Thus it serves as a short-term investment.

Basically management is concerned with managing of:-

1: cash flows into and out of firm.2: cash flow within the firm.

3: cash balances held by the firm at a point of time by financing deficit or

investing surplus cash.

3.1 OBJECTIVES OF CASH MANAGEMENT

The basic objectives of cash management are:-

A: To meet cash disbursement needs.

B: To minimize funds committed cash balances.

In the normal operations of business firms are to make payments of cash on a

continuous and regular basis to supply of goods, employees and so on. At the

same instant cash comes constantly through the collection of debtors. A basis

objective of cash management is to meet the payment schedule that is to have

sufficient cash to meet the cash disbursement need of the firm. The advantages of

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adequate cash are it prevents insolvency or bankruptcy arising out of the inability

to pay its obligations, helps in making payments on due date, thus availed cash or

trade discounts.

Excessive cash holdings lead to a strong credit rating which enables the firm to

purchase goods on favorable terms and to maintain its line of credit with banks

and other sources of credit.

The firm can take the advantage of favorable business opportunities that may be

available periodically. Lastly it can help during emergency.

In minimizing the cash balances two conflicting aspects have to be reconciled. A

high level of cash balances will ensure prompt payment together with all the

advantages. But it also makes large amount of funds remain idle, as cash is a non-

earning asset. A low level of cash balances on the other hand may mean failure to

meet the payment schedule. The aim of cash management should be to have an

optimal amount of cash balances.

3.2 MOTIVES FOR CASH HOLDING

From the objective of cash management we know that cash is held by firm for various

profitable purposes. If we assign these objectives we can say cash is held mainly forthree motives:-

(1). Transaction motive.

(2). Precautionary motive.

(3). Speculative motive.

(1). Transaction Motive:-

The principle is that the firm has to maintain certain level of cash to maintain its

operation in the ordinary course of business. The firm needs cash primarily to make

payments for wages, purchase, other operating expenses, taxes, dividends and

contingencies. Similarly there is a regular inflow of cash to the firm from sales

operation, return on outside investments. These receipts and payments constitute a

two way flow of cash. The need of holding cash would not arsis if there is perfect

synchronization between cash receipts and cash payments. But the inflows(receipts) &

outflows(payments) do not perfectly synchronize or coincide. When cash paymentexceeds cash receipts, the firm needs to maintain a certain level of cash balance to be

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able to make timely payments, the firm may invest its cash in marketable securities,

whose maturity confirms to the timing of the anticipated payments, such as payment

of taxes, dividends, etc.

(2).precautionary Motive:-

In addition to the non synchronization of anticipated cash inflows and outflows of a

firm should hold cash for different un-anticipated events. The precautionary amount

of cash depends upon the predicted cash flows. The emergency cash balanced can be

maintained after predicting the cash flow. Thus precautionary cash balance serves to

provide a cushion to meet unexpected demands upon the predicted cash flows. The

resemblance serves to provide a quotient meet unexpected contingencies. The more

unpredicted the cash flows the larger the need for such balances. Another factor which

has a bearing as the level of such cash balances is the availability of the short term

credit if the firm can borrow at a short notice, then there is no need to maintain a huge

balance.

(3).Speculative Motive:-

This motive refers to the decision of the firm to take advantages of available

opportunities which comes out of unexpected times and which is typically outside the

normal course of business. Suppose there is attend of not raising prices of certain

shares in stock market, at that time the firm may invest in that security for this they

need. The speculative represents a positive and aggressive approach. Therefore firms

keep necessary cash balances in order to exploit the opportunities.

3.3 CASH PLANNING: -

As we know that if there can be a perfect synchronization of cash inflows and cash

outflows then there would have no problem in making payments and for investments.

But generally this does not happens sometimes cash payments exceed cash receipts.

This cash poor position and idle cash position can be avoided if there planned in

advance. Thus, cash planning can help to anticipate future cash flows and need of the

firm and reduces the possibility of cash balances.

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Cash planning is teaching to plan and control of the cash. Cash planning helps in

developing a projected (estimated) cash statement by forecasting the expected cash

floes for a given period which helps in protecting the firm from the financial disaster.

The forecast may be based on present operations. Cash planning may be done on

daily, weekly or monthly basis which depends upon the like and nature of business.

3.4 CASH FORECASTING & BUDGETING

Simply cash budget is a forecast or cash flows. This is also referred to as ways and

means to budget. It is a summery statement of the firm expected cash inflow and

outflow over a projected time period. It gives information on the timing and

magnitude of expected cash flows and cash balances over a projected period. Which

helps the finance manager to determine the future cash needs of the firm, plan for

financing the needs and excessive control over the cash and liquidity of the firm?

Cash budget may be done weekly; monthly or semi-annual basis totally depends upon

the nature of the firm and the amount of the fluctuations. The purpose of cash budget

is to co-ordinate the timing of cash needs.

Cash forecasting may be short term or long term forecasting.SHORT TERM FORECAST:-

The function of short term forecasting includes the cash requirements, the future

availability of short term finance and the investment of surplus cash.

The other advantages of short term forecasting includes:-

(a) Planning, Reduction of short term and long term debt.

(b) Selection and amount of inventories to be purchased.

(c) Taking advantages of cash and discount offered by suppliers.

Mostly two types of methods are used in short term forecasting:-

. Receipts and payment method

. The adjusted net income method

Receipts and Payment Method:-

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This method is used to forecast all the receipts and disbursement which are

accepted during this year. The main objective is to summarize these flows during

the pre-determined period. This method is very useful in those case where the item

is expensive and are considered important.

The factors that generate cash flow are generally divided for the purpose of cash

budget into three broad categories:-

(1) Operating

(2) Non-operating

(3) Financing

(1) Operating:- Among the operating factors affecting the cash flows are the

collection of accounts receivable. Cash sales and collection from

customers are important parts of the operating cash inflows. The term of

credit and the speed with which the customers pay would determine the lag

between the circulation of the accounts receivable and the bill collection,

also discounts allowances for early payments returns from the customers

and bad debts affects the cash inflows.

(2) Non-Operating:- Non-operating cash inflows include sale of old assets,

dividend received and interest received on investment. The amount may be

very less but are useful when internal generated source are insufficient.

(3) Financial:- Financial sources are also responsible for cash inflows,

financial sources include borrowing insurance of securities etc.

The cash out flows are of three types:-

Operating outflows

Capital expendituresContractual payment

Operating outflows like cash purchase, payments of payables, advances to supplier,

wages & salaries and others are also important part of cash budget.

Capital expenditure includes purchase of machinery, investment casts, etc.

Contractual payments like repayments of loans and interests, taxes payments,

discretionary payments like common & preference dividends etc. are also considered

while preparing cash budgets.

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Adjusted Net Income Method:-

This method also called as sources and uses approach. It predicts the firms future

requirements of cash, how much it can generate internally and externally. It is intact a

projected cash flows statement. It has three parts or sources and uses of cash and cash

balances. In preparing such forecast items such as net income, depreciation, taxes,

dividends, etc. can easily be determined from the costs annual operating budget. The

estimates of receivable and payable pose problem because they are influenced by

different factors creating difficulty in estimating working capital changes.

The major benefits of net income method are that it helps in keeping a control onworking capital and anticipating financial requirements.

LONG TERM FORECASTING:-

Long term forecasting is made keeping the companies future financial objectives in

mind. They are very much prone to different environmental impacts such as product

development, sudden policy changes of government etc. These forecasts are generally

made for more than three years. The major uses are:-

(a) Companys future working capital needs.

(b) Companies long term projected are evaluated in terms of finance.

(c) Helps in corporate planning.

Long term forecasting can be made with receipts and disbursement method adjusted

net income methods which are used for short term forecasts. Long term forecasts

reflect the impact of growth, expansion or acquisition.

3. 5 MANAGEMENT OF CASH FLOW: -

The strategy aspects of efficient cash management are:-

(a) Speedy Collection Of Accounts Receivable

(b) Delaying Payments On Accounts Payable

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(a) Speedy Collection Of Accounts Receivable:-

Accelerating Cash Collection: - For efficient cash management, the cash inflow

process can be accelerated through systematic, planning and refined techniques. For

this customers should be encouraged to make the payments promptly and the receipts

from customers should be converted into cash immediately.

Prompt Payments: - For this you have avoid order processing float i.e.:- the time

taken to get the invoice to the buyer. This can be removed by prompt billing. At the

same time you have to discourage the buyers float i.e.:- the extra time enjoyed by the

buyer for paying bills.

Early Conversion of Payment into Cash: -Once the customer makes the payments

by writing a cheque in favour of the firm, the collection can be expected by prompt

encasement of the cheque. This can be done by:-

(a) Removing postal float i.e.:- the time taken by the post office to transfer the

cheque from the customer to the firm.

(b) Time taken in processing the cheque within the firm before their deposited

in bank.

(c) Collection time within the bank. This total delayed in time is

Called deposit float. An important aspect at cash management

Decentralized collection.

There are two methods in decentralized collection:-

(1) Concentration Banking

(2) Lock-Box Method

(1) Concentration Banking : - In this case customer of a particular area make

payments to a company headquarter. The local branch office rather than to

a company headquarter. The local branch office then deposits the cheques

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into a local bank account. Surplus funds are periodically transferred to a

concentration account at one of the companys principal banks.

Concentration banking brings small balances together into central

balances, which then can be invested in interest paying assets through a

single transaction. Concentration Banking reduces mailing time and time

taken to clear the cheques. It has some limitations; first it involves

administrative costs to reward the banks for their services and cost of

transferring funds to the concentration banks.

(2) Lock-Box System : - Often concentration bank combined with a lock-box

system. In a lock-box system the company rents a locked post office box ineach principal region are instructed to send their payments to the post

office box. The local bank as agent for the company empties the box at

regular intervals and deposits the cheques in the companys local account.

Surplus funds are transferred periodically to one of the companys

principal banks.

3.6 DELAYING PAYMENT: -The effective control of disbursement can also help the firm in conserving cash and

reducing the financial requirements. Disbursement arises due to the trade credit. The

firm can take maximum advantages of trade credits. As sources of funds by paying

later than agreed. But this may in danger the firms credit position.

The firm also uses the technique of paying the float to minimize, the availability of

funds. But this is a risky game and should be discouraged. Excess cash should

normally be invested in marketable securities.

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4. CASH MANAGEMENT AT NALCO

As we know that Nalco is a profit making company having a profit of Rs. 2491.98

Crores in the year ended 31st March 2008.

The optimum level of cash balance is prepared by means of cash budget. From this

they forecast the future cash flow. As Nalco is a cash rich company, each department

has the full liberty to spend, but they have to inform the daily transactions to the

corporate office. Also cash report is prepared monthly. When there is shortage of cash

i.e. cash balance goes below the minimum level, it fulfils the gap by liquidating the

marketable securities. When there is excess of cash, it invests them first in purchasing

marketable securities, then it lend to associates, then pay to the liabilities.

Mainly CDA/Deposits are purchased when there is excess of cash. For collection of

cash flow centralized collection method is applied. Disbursement is also centralized.

Daily cash transaction is done on computer system of account, thus avoiding the

manual error. Different instruments are used for collection, but preference is given to

drafts & then letter of credit (LOC).

Company also dues the float for its working capital requirements, sometimes. Also

company tries to find out the buffer or safety stock, but dependent on the bank

finance.

ANALYSIS

Cash Trend:-

Year Cash & Bank Balance(Rs. In Crores)

2003-2004 98.36

2004-2005 755.21

2005-2006 2193.71

2006-2007 3686.53

2007-2008 3516.46

.

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The reflections of these variations can be seen from the cash & bank balance increases

very rapidly from 2003-2004 to 2006-2007, but in the year 2007-2008 it decreases as

compared to the previous years.

CASH TURNOVER RATIO

Cash turnover = Sales/Closing Cash Balances

(Rs. In crores)

Year Sales Closing Cash

Balances

Cash Turnover

Ratio

2003-2004 3114.37 98.36 31.66

2004-2005 4123.96 755.21 5.46

2005-2006 4851.90 2193.71 2.21

2006-2007 5940.19 3686.53 1.61

2007-2008 4988.80 3516.46 1.42

Cash turnover ratio shows that per rupee of sales, how much cash is to be employed.

That means to generate one rupee of sales the firm need, what should be the amount

of cash. It indicates the number of times cash is turnover in the course of a year. This

turnover ratio indicates the velocity of utilization of cash.

From the above table it can be seen that sales is increasing very rapidly from 2003-

2004 to 2006-2007. Sales increases up to 5940.19 crores but it decreases in the year

2007-2008 to 4988-80 crores.

But when we come across the trend of ratio, it can be seen that even if sales and cash

balance are increasing, ratio is fluctuating. In the year 2003-2004 the cash turnover

ratio is 31.66 crores but it decreases very drastically in 2004-2005 then after words it

decreases proportionately and by the end in the year 2007-2008 it reaches to around

1.42 crores.

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CASH IN TERMS OF NUMBER OF DAYS OF OBLIGATION

Cash in terms of no. of days = 365 days/Cash turnover

(Rs. In Crores)

Year Cash Turnover Number of days in

a year

Cash Holding

Period

2003-2004 31.66 365 12days

2004-2005 5.46 365 67 days

2005-2006 2.21 365 166 days

2006-2007 1.61 365 227 days2007-2008 1.42 365 258 days

We can see that as the ratio of cash turnover is fluctuating, i.e. there is a sudden drop

from 31.66 crores in 2003-2004 to 5.46 crores in 2004-2005. The cash in terms of

number of days of obligation also jumps from 12 days in 2003-2004 to 67days in

2004-2005. Then again it goes up to 258 days in the year 2007-2008. So, there is a

complete controlled over the cash balance.

CASH TO CURRENT ASSET PERCENTAGE

Cash to current asset percentage = cash/current asset*100

(Rs. In Crores)

Year Cash Current Asset Percentage

2003-2004 98.36 990.51 9.93

2004-2005 755.21 1811.04 41.702005-2006 2193.71 3297.88 66.52

2006-2007 3686.53 4974.08 74.11

2007-2008 3516.46 5041.33 69.75

This ratio indicates that what is the percentage of cash to current assets i.e. whether

cash captures a major portion of current asset or not? As idle cash generates nothing,

and in the same time lack of cash will lead to stoppage of work there is a need for

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optimal cash balance. The firm should try as much to finance the working capital with

other current assets provided the other current assets giving profits.

It can be observed from the above data that cash increases from 98.36 crores to

3686.53 crores in (2003-2004) to (2006-2007) but it decreases to 3516.46 crores in the

year (2007-2008).

Like wise current asset increases from 990.51 crores (2003-2004) to 5041.33

crores(2007-2008). So all the fluctuations in cash as well as current assets comes to a

mixed picture in the ratios. The ratio trend increases from 9.93% (2003-2004) to

41.70% (2004-2005). In 2005-2006 the ratio was 66.52% while in 2006-2007 it was

74.11%. this increase may due to increase in current asset. In 2007-2008 it decreases

to 69.75% due to decrease in cash balance.

ABSOLUTE LIQUID RATIO

Absolute Liquid Asset= Quick asset/ Current liability

(Rs. In crores)

Year Quick Assets Current Liability Absolute Liquid

Ratio

2003-2004 510.03 864.28 0.59

2004-2005 1281.98 806.39 1.59

2005-2006 2706.30 940.15 2.88

2006-2007 4339.12 1218.61 3.56

2007-2008 4354.68 1540.88 2.83

Although there are other current assets like receivables, debtors, etc., yet there may be

doubts regarding their realisation into cash immediately or in time. So, this ratio

should be calculated along with current ratio and acid test ratio to examine the

liquidity of the firm at worst emergency time.

It can be seen that there is an increase in quick assets from Rs. 510.03 crores in 2003-

2004 to Rs. 1281.98 crores in 2004-2005. It also increases the quick assets in every

year. This may arise due to increase in cash balance.

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Current liability drops from Rs. 864.28 crores in 2003-2004 to Rs. 806.39 crores in

2004-2005. In the year 2005-2006 it increases to Rs. 940.15 crores and so on.

Due to the fluctuations in both current assets and current liability, the ratio was 0.59 in

2003-2004 then it becomes 1.59 in 2004-2005. This may be done due to decrease in

current liability from Rs. 64.28 crores to Rs. 806.39 crores and increase in quick asset

from Rs. 510.03 crores to Rs. 1281.98 crores. Then it again rises from 1.59 to 2.88 in

2005-2006 and a sudden increase from 2.88 to 3.56 in 2006-2007. Again the ratio

drops to 2.83 in 2007-2008. This may happen due to increases in current liability.

PERCENTAGE OF SHORT TERM DEPOSITS TO CASH BALANCES

Percentage of short term deposits to cash balances= Short term deposits / Cash

balances *100

(Rs. In crores)

Year Cash Balances Short term/ Fixed

deposits

Percentage

2003-2004 98.36 8.92 9.07

2004-2005 755.21 13.85 1.83

2005-2006 2193.71 8.37 0.38

2006-2007 3686.53 16.22 0.44

2007-2008 3516.46 16.03 0.46

It shows that cash trend although increasing, has a drop in the year 2007-2008.

Short term / fixed deposits is rather fluctuating irrespective of increasing cash

balances. In 2003-2004 it was Rs. 8.92, increases to Rs. 13.85. This may be due to

increase in cash balance. The deposits decreases to Rs. 8.37 in 2005-2006 and again

increases to Rs. 16.22 in the year 2006-2007 and at last year it decreases to Rs. 16.03.

It can be seen that nearly all the cash is deposited in short term / fixed deposits. In

2003-2004 it was 9.07%, while in 2004-2005 it decreases to 1.83% and it again

decreases to 0.38% and further rises to 0.44% in 2006-2007 and 0.46% in 2007-2008.

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SUMMARY

From the cash trend it is seen cash is increasing each year expect in 2007-2008, which

is a good sign for the firm. But the real good sign can be shown / known from the cash

turnover in sales ratio.

From cash turnover sales ratio it is seen that cash turn ratio in 2003-2004 was 31.66.

This indicates that per one rupee of sales of cash. This was a very good performance

of the firm. Next year it decreases to 5.46. Again it decreases to 2.21 in 2005-2006. In

2006-2007 and in 2007-2008 it comes to 1.42. If the ratio decreases in the next future

year it would not be a healthier indication for the firm.

The cash in terms of number of days of obligation in 2003-2004 is only 11.53 days,

which is a good sign. But then it starts increasing to 257.04 days in 2007-2008.

Looking at the cash to current asset ratio and absolute liquid ratio, it seems that Nalco

is a cash rich company and has heavy amount idle cash.

The cash to Current Asset in 2003-2004 is 9.93% increases to 41.70% in 2004-2005

and it rises up to 74.11% in 2006-2007. But in the year 2007-2008 it reduces to69.75%. So, it can be seen that cash has a major portion in filling the working capital

gap.

This position can also be understood from the absolute liquid ratio. The standard ratio

for absolute liquid ratio is 0.5. But in Nalco it was for absolute liquid ratio is 0.5. But

in Nalco it was always above 1.00 expect in 2003-2004.

The table showing percentage of short term / fixed deposits to each cash balance, it

can be well understood that Nalco has not much of idle cash, because it invests a

larger amount of cash balance in short term or fixed deposits.

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5. INVENTORY MANAGEMENT

One of the major portions of working capital constitutes inventory, which is the most

significant part of current assets. The term inventory refers to stockpile of the product

a firm is offering for sale and the components that make up the product. The major

difference between inventory and other current assets is that in case of inventory

person from different fields like marketing, purchasing, research and development,

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finance are involved. So its management should be done both commercially and

scientifically, this predominant position of inventories in total working capital

obviously cost for the maximum efficient management of working capital.

5.1 COMPONENTS OF INVENTORY: -

The word inventory is understood differently by various authors. In accounting

language it may mean a stock of finished goods only. In manufacturing concern it

may include raw materials, work-in-progress, store supplies etc. To understand the

exact meaning of the word inventory we may study it may from the usage side or

from the side of point of entry in the operations.

The inventory consists of:-

1) Raw Material:-

These are the primary products purchased by the firm to convert into useable

products through the manufacturing process. They are required to carry out

production activities uninterruptedly. The quantity of raw materials required will

be determined by the rate of consumption and the time required for replenishing

the supplies.

2) Work-in-Progress:-

These are the basic inputs which have gone through at least one of the

manufacturing operation and are stored for future operations. These products are

then processed for finished goods. The quantum of working process depends upon

the time taken in the manufacturing process.

3) Finished Goods:-

These are the products which have gone through the total operations and are ready

to use. Finished goods are store to effective marketing operations.

4) Supply:-

This kind of inventory maintained by the firm for the necessity of smooth

operation. Mainly lubricants, lights, bulbs, etc. which do not enter productionprocess. This supply contains a small part of inventory.

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5.2 NEED TO HOLD INVENTORIES: -

If the question arises why do we need to hold inventory? The answer is same as

that of holding cash. There are three general motives for holding inventories:-

Precautionary motive

Transitive motive

Speculative motive

PRECAUTIONARY MOTIVE:-

This motive emphasis the need for holding of inventories against the risk associated

with the short-term supply of raw material and semi-finished goods. It is impossible

for the firm to predict all the future irregularities and risks attached with the supply of

raw material. So they keep inventory in order to keep the business going without any

risk.

TRANSITIVE MOTIVE:-

This motive emphasizes the need to hold inventories for the uninterrupted flow of

production operations. It is impossible for the firm to get raw material in time, to

predict the wastages during production. There is a time lag between demand for

materials and supply materials. For this difficulty the firm maintains a certain level of

inventory for this smooth operation.

SPECULATIVE MOTIVE:-This motive emphasizes the need to purchase raw materials by taking the optimum

advantage of time and facilities available. The firm reduces or increases the inventory

according to the price situations. Other factors which may affect the purchase

decisions are discounts, unanticipated inventory.

5.3 OBJECTIVES: -

The primary objectives of inventory management are:-

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To minimize the possibilities of disruption in the production schedule of a firm

for a want of raw materials, stores and spares etc.

To keep down capital investment in inventories.

These two converse objectives call for an optimum level of inventory. Theoptimum level of inventory sought for striking a balance between excessive and

too little inventory. The efficient management and effective control of inventories

help in achieving better operational results and reducing investment in working

capital which have a bearing on the maximization of owners wealth or net worth.

The major objective of the financial manager is to use the funds in maintaining an

optimum level of inventory is determined on the basis of the trade-off between

costs and benefits associated within the level of inventory.

COSTS:-

There are several costs included in maintaining and inventory we categorized

them as follows:-

Ordering cost:-

Also known as the acquisition or set up costs are the entire costs associated with

the acquisition of raw materials. It includes costs of requisitioning, purchase

ordering, transporting, receiving, inspecting and storing.

This cost is directly proportional to the number of orders placed and inversely

related to the size of inventory. Thus such costs can be minimized by placing

fewer orders for a larger amount. But acquisition of a larger quantity would

increase the cost associated with the maintenance of inventory that is carrying

cost.

Carrying Cost:-

a) Those cost arising out of storing materials i.e. tax, depreciation, insurance,

maintenance of the building, utilities and janitorial services, detritions of materials

due to pilferage, fire etc and service costs i.e. labour for handling inventory

clerical and supervision cost.

b) The opportunity cost of funds which are in raising the finance of acquisition of

inventory which may have used in any profitable work.

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Carrying cost is directly proportional to the size of inventory. The sum of ordering

cost and carrying cost contribute total cost.

BENEFITS:-

Benefits are the functions of the firm. In other words inventories performed

certain basic functions which are of crucial importance in the firms production

and marketing strategies.

1) Benefits in Purchasing:-

The purchase of raw materials should not be tied to the production of sales. The

efficient method of purchase sought for taking the advantages available if you

purchase larger quantities, then you should go for it. Again this bulk purchase may

decrease the ordering cost.

2) Benefits in Production:-

During the pick sale season the firm should go for higher production. For this firm

may need for larger inventory. Again this reduces the carrying costs. Otherwise

you should carry on production continuously and make an extra inventory of

finished goods which can be sold during the period of seasonal demand.

3) Benefits in Sales:-

The maintenance of inventory also helps a firm to enhance its sales efforts. If there

is no inventory of finished goods the sales have to be depend upon the

Current production; which hampers firms supply position. So inventories held in

order to bridge the gap between the current productions and actual sales. Inventory

thus ensures the continued patronage of customers.

5.4 TECHNIQUES OF INVENTORY MANAGEMENT

As it been figured out that the financial manager should aim at an optimum level of

inventory on the basis of the trade-off between cost and benefit to maximize the

owners wealth. For this he has to use some mathematical techniques to solve the

problems arise at the time of determination of stock level. Major problem are the

classification problem i.e. how much to order and when to order.

Classification Problem:-

a) ABC Analysis:-

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The first step in the inventory control system is classification of different types of

inventories to determine the type and degree of control require for each material.

Some items account for major portion of total consumption value of all the items,

but they are small in number. Efficient inventory management demands that item

of higher value should attract greater attraction of the management. This objective

is achieved by selective control techniques or ABC analysis. This ABC analysis is

also known as always better control.

ABC analysis is based on the concept that inventory item should be ranked

according to their relative investments in each item in inventory. This ABC

analysis concentrates on important terms and also known as control by importance

and exception. As items are classified in the importance of their value, this

approach is known as proportional value analysis.

The inventories are grouped as follows:-

Group Investment Inventory Control

A LargeMost rigorous, intensive

and Sophisticated method

B ReasonableLess Sophisticated method

then Group A

C LeastMinimum attention on

control

The following steps are involve in implementing the ABC analysis:-

Classifies the items of inventories, determining the expected use in units

and the price for unit of each item.

Determining the total value of each item by multiplying the expected

units by its unit price.

Rank the items in accordance with the total value giving first rank to the

item with highest total value and so on.

Compute the ratios of numbers of units of each item to total units of all

items and the ratios of total value of each item to total value of all items.

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3) The order placed to replenished inventory stocks are received at exactly that point

in time when inventory reaches zero.

Approaches:-

1) Trial and error approach:-

The firm has different options. It can buy all inventories in one lot required for one

accounting year or it can buy in small lots periodically, say weekly, monthly,

quarterly, etc. The lower the inventory the higher the carrying cost. The EOQ uses

different permutation and combination of lots of inventory purchase.

EOQ is the order size with lowest total of carrying costs and using costs. The

EOQ is calculated in the following steps:-

Total inventory requirement

No of order = Order size

Average inventory = Order size / 2

Total carrying cost = average inventory *carrying cost per unit

Total ordering cost= no of orders *cost per unit

Total cost= cost of items purchased +total carrying cost and ordering cost

The quantity which gives the lowest total cost is the EOQ.

Another formula for calculating EOQ:-

EOQ= 2so / c

Where S= total inventory requirement in units

O=ordering cost per order

C=carrying cost per unit

2) Graphic approach:-

The EOQ can be calculated from the following graph also.

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In the above graph costs (both carrying and ordering along with total) are taken in Y-

axis and order size is taken in X-axis.

It is seen that total carrying costs increases with regard to increase in order size and

ordering cost decline as there is less no. of orders. The total cost line seems to decline

at instances but start rising when the decreases in average ordering cost is more than

offset by the increase in carrying cost. The EOQ occurs at the point E where the total

unit is minimum. Thus firms operating profit is optimum at point E.

3) When to order (Order point problem):-

Another problem in inventory management is determination of re-order point. Re-

order point is that inventory level at which an order should be placed to replenish the

inventory. To determine the reorder point with accuracy we have to calculate.

(i)Lead time

(ii)Average usage

(iii)EOQ

Lead time refers to the time taken in receiving the delivery of the inventory after

placing orders to the suppliers. It covers the time span from the point when a decision

to place an order for the procurement of inventory is made to the actual receipt of the

inventory by the firm.

Thus reorder point =lead time*average usage

4) Safety stocks:-

We have already determined the EOQ and reorder point which are calculated under

some conditions of certainty. But real world situations are very much uncertain. Thus

the lead time and average usage cannot be calculated accurately.

6. INVENTORY MANAGEMENT AT NALCO

As Nalco is one of the largest limited companies of India with a huge production in

every year, it has to employ a huge amount in investment in current assets, mainly to

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maintain the size of inventory. So, Nalco has to go through all the methods and

formalities required in inventory management from purchasing and supervision to

disbursements.

The inventory in Nalco contains both raw materials and finished goods of

intermediaries.

Raw Materials:-

Caustic Soda

C.P.Coke

C.T.Pitch

Aluminium Flouride

Lime

Others(Calcined Alumina)

Finished Goods and Intermediary:-

Bauxite

Aluminium Hydrate

Calcined Aluminium

Aluminium Ingots

Aluminium Wire Rods

Other Items

Purchase Procedure:-

Due to large investment in inventories the purchase procedure is equally tough for

Nalco officials. They have mainly few suppliers. For the purchasing work all the

formalities are maintained.

Valuation of Inventory:-

Raw materials, stares of spare parts and loose tools are valued at weighted average

cost. Finished goods are valued at the lower of cost or net realizable value.

Intermediary products are valued at direct material cost. Value of scrap is recognized

in the accounts as and when sold.

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The minimum level of inventory is determined by the EOQ model, i.e. by

consumption during lead period and safety stocks. For this the trial and error method

is applied. Mainly fixed order quantity system is followed.

Inventory report is prepared every month in Nalco, because there is necessity to check

all the purchases, wastages, etc., to keep a balance.

As we know that there is a need for clarification of inventory, Nalco is doing ABC

Analysis for such classification i.e. classifying inventory according to their

investments. For stores and spares the company is following vital, essential, desirable

(VED) analysis.

Size of Inventory and Inventory Trend:-

Inventory in Nalco mainly comprises of:-

(a) Raw Material

(b) Finished Goods

(c) Stores & Spares

RAW MATERIAL TURN OVER RATIO

(Rs. In Crores)

Year Raw MaterialFinished

Goods

Stores &

Spares

Total

Inventories

2003-2004 48.08 148.85 251.42 448.35

2004-2005 56.17 175.41 260.12 491.702005-2006 50.48 235.35 241.03 526.86

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2006-2007 82.45 346.60 247.94 576.99

2007-2008 65.59 266.93 268.66 601.18

From the above table we can see that raw materials always increasing except in 2005-

2006, where it dropped to Rs. 50.48 Crores from Rs. 56.17 Crores in 2004-2005.Again it rises and reaches up to Rs. 82.45 Crores in 2006-2007 and it again decreases

to Rs. 65.59 Crores in 2007-2008.

Finished goods are always in increasing trend. In the year 2003-2004 it was Rs.

148.85 crores and it was gradually increases in every year and at last it reaches up to

Rs. 266.93 crores in the year 2007-2008.

But the inventory of stores and spares is always increasing except in the year 2005-

2006, where it dropped to Rs. 241.03 Crores from Rs. 260.12 Crores. Again it rises

and reaches up to Rs. 268.66 Crores in 2007-2008.

Mixing all the figures we are getting that total inventory was increasing each year

from 2003-2004 to 2007-2008. In 2003-2004 it was Rs. 448.35 Crores and it was

gradually increases and reaches to Rs. 601.18 Crores in the year 2007-2008.

FINISHED GOODS TURNOVER RATIO

Finished Goods Turnover Ratio= Cost of goods sold/ Average Finished goods

inventory

(Rs. In Crores)

YearCost of goods

sold

Average

finished goods

inventory

Finished

goods

turnover ratio

Finished

goods storage

period (days)

2003-2004 1658.03 143.225 11.57 32 days

2004-2005 1905.86 162.130 11.75 32 days

2005-2006 2278.67 205.380 11.09 33 days

2006-2007 2342.41 240.975 9.72 38 days

2007-2008 2738.09 256.765 10.66 35 days

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The finished goods turnover ratio shows how rapidly the finished goods are turning

into receivables through sales. Generally a high level of turnover is indicative of

goods inventory management. A low turnover implies excessive inventory of finished

goods levels than warranted by sales activity, or a slow moving or absolute inventory.

Slow disposal of stocks will mean slow recovery of cash, hence will effect the

liquidity position of the firm.

From the above table it can be observed that cost of goods sold is increasing from

2003-2004 to 2007-2008. In 2003-2004 it was Rs. 1658.03 Crores in 2004-2005 Rs.

1905.86 Crores and rises up to Rs. 2738.09 Crores in 2007-2008.

Average finished goods inventory also inventory is also in increasing trend. In 2003-

2004 it was Rs. 143.225 Crores & in the year 2004-2005 it was Rs. 162.13 Crores and

finally reaches to Rs. 256.765 Crores in 2007-2008.

Looking at the turnover ratio, it can be seen that ratio is increasing from 2003-2004 to

2004-2005. In 2003-2004 it was 11.57 & in 2004-2005 it was 11.75. In 2005-2006 it

decreases to 11.09 and. It also gradually decreases to 10.66 in the year 2007-2008.

The total picture is reflected in the storage period also. The storage period is always

increases except in the year 2004-2005 & 2007-2008 i.e. in the year 2004-2005 it was

32 days & in the year 2007-2008 it was 35days.

SPARE PARTS & STORES TURNOVER RATIO

Stores & Spares Turnover Ratio= Stores & spares consumed /Avg. stores ofspares

(Rs. In Crores)

YearStores & Spares

Consumed

Avg. Stores &

Spares

Stores &

Spares

Turnover

Ratio

Storage

Period In

Days

2003-2004 176.73 250.195 0.71 515days

2004-2005 170.24 255.77 0.66 554 days2005-2006 224.51 250.58 0.89 411 days

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2006-2007 215.34 244.49 0.88 415 days

2007-2008 209.88 258.30 0.81 451 days

From the above table it can be seen that the stores & spares consumed inventory is

increase in the year 2003-2004 & 2005-2006 i.e. Rs. 176.73 Crores and Rs. 224.51Crores but in remaining three years it decreases gradually.

The trend of average stores & spares inventory is in fluctuation phase. In 2003-2004 it

was Rs. 250.195 Crores, in 2004-2005 it increases to Rs. 255.77 Crores and in 2005-

2006 it drops to Rs 250.58 Crores, in 2006-2007 also it drops down to Rs. 244.49

Crores but finally in the year 2007-2008 it increases to Rs. 258.30 Crores.

The reflection is on the stores & spares inventory ratios. You can see that ratio in all 5

years is below 1. In the year 2003-2004 it was 0.71, in 2004-2005 it decreases to 0.66,

it again increases to 0.89 but in further two year i.e. in 2006-2007 & 2007-2008 it

decreases i.e. 0.88 & 0.81 respectively.

As a result of which the stores of spares conversion days shows that in the year 2003-

2004 it was 515days and it was increased in the year 2004-2005 to 554 days. But in

next three years the conversion days decreases as compared to 2004-2005.

Stores & Spares turnover ratio which is the ratio between stores of spares consumed

versus average stores & spares inventory, shows how effectively stores & spares

inventory is used in emergency times and in the course of business.

TOTAL INVENTORY TURNOVER RATIO

Total Inventory Turnover Ratio= Sales / Avg. Inventory

(Rs. In Crores)

Year Avg.

Inventory

Sales Turnover

Ratio

Conversion

Period

2003-2004 480.48 3114.37 6.48 57 days

2004-2005 529.06 4123.96 7.79 47 days

2005-2006 591.58 4851.90 8.20 45 days

2006-2007 634.96 5940.19 9.35 40 days

2007-2008 686.65 4988.80 7.27 51 days

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Inventory turnover ratio measures the velocity of conversion of stock into sales.

Usually a high inventory turnover / stock velocity indicates efficient management of

inventory because more frequently the stocks are sold, the lesser amount of money is

required to finance the inventory. A low inventory turnover ratio implies to an

inefficient inventory management. Or in other words the selling activity of the firm is

whether efficient or not, can be known from this ratio.

From the above table it indicates that the average inventory increases from 2003-2004

to 2007-2008. In 2003-2004 the average inventory Rs. 480.48 Crores and it gradually

increases & reaches to Rs. 686.65 Crores in the year 2007-2008.

In 2003-2004 the sales figures was Rs. 3114.37 Crores and it increases to Rs. 4123.96

Crores in 2004-2005 and it rapidly increases for the next two years & finally reaches

to Rs. 5940.19 Crores in the year 2006-2007 and at last it decreases to Rs. 4988.80

Crores in the year 2007-2008.

The variation can be diagnosed in the ratio column. In 2003-2004 it was 6.48

increased to 7.79 in the year 2004-2005, peak to 8.20 in the year 2005-2006, again

peak to 9.35 in 2006-2007 & at finally it reaches to 7.27 in 2007-2008.

As a result of which the days of inventory holding also shows some variation. In

2003-2004 it was 57 days, down to 47 days in 2004-2005, it further decreased to next

three years and reached to 51 days in 2007-2008.

RAW MATERIAL TURNOVER RATIO

Raw material turnover ratio= Raw material consumed*average of Raw material

(Rs. In Crores)

Year Raw material

consumed

Average raw

material

Raw material

turnover ratio

Raw material

storage period

2003-2004 432.57 59.85 7.23 51 days

2004-2005 436.15 52.13 8.37 44 days2005-2006 526.74 53.33 9.88 37 days

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2006-2007 526.62 66.47 7.91 47 days

2007-2008 591.21 47.02 7.99 46 days

The raw material inventory turnover ratio indicates how quickly the raw material is

turning in to production. A high raw material hence less cost of supervision and thechance of deterioration in quality is decreases. In the other hand a low quality raw

material increases cost.

It can be observed from the above tables that the consumption of material was at its

peak in 2005-06. It was Rs.526.74 crores in that period. Before that period it was

Rs.432.57 crores in2003-04 and Rs.436.15 crores in 2004-05. After 2005-06 it was

slightly decreases to 526.62 crores in 2006-07 and again it peaks to Rs.591.21 crores

in 2007-08.

Having a glimpse and the average raw material inventory trend, it is a increasing two

expects in 2004-05, 2005-06 i.e. Rs.52.13 crores & Rs.53.33 crores as compared to

the year 2003-04.

The reflection of both raw material consumption trend and average inventory trend is

on the raw material turnover ratio trend. The trend shows that raw material turnover

ratio was increasing from 2003-04 to 2005-06. In 2003-04 it was 7.23 and reaches up

to 9.88 in 2005-06. From 2006-07 onwards it starts decreasing & reaches to 7.99 in

2007-08 as compared to 1st 3 years.

As a result of which the raw material storage period starts decreasing from 2003-04

(51 days) to 46 days in 2007-08.

SUMMARY

Looking at the inventory imposition in NALCO, we can see that stores and spares

control a major portion of investment in inventory. Here raw materials constitute a

negligible amount of inventory ranging between 9%-14% where as finished goods

inventory stands in second position.

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Thus from the above analysis it can be concluded that there some important stores &

spare material which are required at any moment & are costly.

Finished goods turnover ratio, shows that the holding period after three consecutive

years of increase and then decrease. This slight decrease is a rather of satisfaction for

the management. But only in this decline continuous in the future years will be a

satisfactory thing for management.

But the trouble comes in utilising the raw material inventory. The raw material

inventory ratio is not constant in case of NALCO. In first three years it performed

well as compared to previous years but after that in the year 2005-06 the turnover

ratio goes on decreasing while the raw material storage period increasing

simultaneously, so it is a bad sign for management. Because the larger the inventory,

larger is the maintenance cost and extra storage space has to be taken.

Stores and spares are also plays a vital role, here stores and spares turnover ratio is not

in a good position. In these five years only in the year 2005-06 there is an

improvement. As we know that NALCO is VED Analysis and has some stores and

spares which has very limited use and the event for using them is unexpected.

Shortage of one of these stores and spares material at the time of need may lead to

production ceasing, the greater responsibility for this is goes to in the hands of

management.

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7. MANAGEMENT OF ACCOUNTSRECEIVABLES

It has been observed that a basis strategy to reduce the operating cash requirements of

firm is to accelerate the collection of receivables so was to reduce the average

collection period. This accounts receivable or trade credit has three features i.e.

(a)It involves an element of risk.

(b)It is based on economic value.

(c)It implies futurity.

Therefore it is important to analyze the important dimensions of the efficient

management of receivables within the frame work of a firms objectives. Therefore

credit manager and academic persons have a common interest in designing models

that monitor the growth rate level of account receivables.

ESTABLISHING OPTIMUM CREDIT POLICY

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A firms investment in account receivables depends on

(a)The volume of credit sales

(b)The collection period

Then the firms average investment in accounts receivables is daily credit sales *

average collection period. The average collection period can be computed as follows:-

Average collection period =360/Debtors turnover

The investments in receivables may be expressed in terms of costs instead of sales

value.

The volume of credit sales is a function of firms total sales and percentage of credit

sales to total sales. Total sales depend on market size, firms market share, product

quality, intensity of competition, economic condition, change in Government policy

etc. The finance manager hardly has any control over these variables. The percentage

of credit sales to total sales is mostly influenced by the nature of business and industry

norms.

There is one way in which the financial manager can affect the volume of credit sales

and collection period &consequently, investment account receivables. The term credit

policy is used to refer to the combination of 3 decision variables.

Goals of credit policy:-

A firm may follow lenient or stringent credit policy tends to sell on credit to

customers on very liberal terms and standards; credits and granted for longer periods

even to those customers who may become doubtful debtors in future.

In contrast a firm following a stringent credit policy sells on credit on highly selective

basis only to those customers who have already proved their creditworthiness in the

past or whose financial resources are very strong. In practice nearly all firms follow

credit policies in between lenient credit policy and stringent credit policy.

The reasons for allowing credit:-

Competition: - Generally the granting of credit is directly proportional to the

degree of competition.

Companys bargaining power: - This is a major reason of companies granting

credit. The bargaining power depends on the buyers personal report with the

marketing manager, the talkative power of the buyer etc.

Buyers requirement: - The no. of business sector there is a need for credit

without which the buyer cannot operate. So the credit is granted.

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The quantity basis of establishing credit standards are factor such as credit ratings,

credit references, average payment period and certain financial ratio. Thus the choice

of optimum credit standards involves a trade off between incremental rate of return

and incremental cost. The trade off with reference to credit standards covers.

i. Collection cost

ii. Average collection period

iii. The level of bad debt losses

iv. Level of sales

Collection cost: - These are the cost relating to the collection of accounts receivables.

The more the liberalized credits, the more will be the collection costs, and in case of

more tightened credit the less is collection cost. This is a semi-variable cost.

Average collection period:-The investments in accounts receivables involves a capital

cost as funds have to be arranged by the firm to finance them till customers make

payments. A relaxation credit standard implies an increase in sales which in term

would lead to higher average accounts receivables. Further, relaxed standards would

mean that credit is extended liberally so that it is available to even less credit worthy

customers, who will take a longer period to pay there overdue.

In case of a strict credit standards would signify a decrease in sales and extension of

credit limit to more credit worthy customers, who can promptly pay there bills, thus a

lower average level of accounts receivables.

Thus change in sales and collection while standards are relaxed produce a higher a

carrying cost and in tightened credit standards produce lower cost.

Bad debt losses: - These happen when customer fails to pay. They will increase with

relaxation of credit standards and decrease in tightened credit standard position. Every

company giving credit on liberal terms makes provisions for doubtful debts.

Sales Volume: - This will increase when t

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