Narayana Final Project Working Capital

7/31/2019 Narayana Final Project Working Capital

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FINANCIAL MANAGEMENT

INTRODUCTION:

Entails planning for the future of a person or a business enterprise to ensure a positive

cash flow. It includes the administration and maintenance of financial assets. Besides, financial

management covers the process of identifying and managing risks.

The primary concern of financial management is the assessment rather than the

techniques of financial quantification. A financial manager looks at the available data to judge

the performance of enterprises. Managerial finance is an interdisciplinary approach that

borrows from both managerial accounting and corporate finance.

Financial management is broadly concerned with the acquisition and use of funds by a

business firm. It deals with

How large should the firm be and how fast should it grow?

What should be the composition of firms level?

What should be the mix of the firms financing?

How should the firm analysis, plan and control its financial affairs?

While the first three questions express Ezra Solomons conception of

financial management as discussed in his clerical worlds. The Theory of financial

management. The forth one represents an addition that is very relevant in the light of the

responsibilities shouldered by finance managers in practice.

MEANING:

Some experts refer to financial management as the science of money management. The

primary usage of this term is in the world of financing business activities. However, financial

management is important at all levels of human existence because every entity needs to look

after its finances.

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NATURE OF FINANCIAL MANAGEMENT:

Financial management is that managerial activity which is concerned with the

planning and controlling of the financial resources. Though it was branch of economics till

1890,as a separate activity of discipline it is of recent origin still, it has no unique body of

knowledge of its own and draws heavily on economics for its theoretical concepts even today.

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:

The scope and functions of financial management is divided into two categories

. The traditional approach

The modern approach

THE TRADITIONAL APPROACH:

The traditional approach of the scope of the financial management refersto its subjects matter. The scope of the finance function was treated by the traditional approach

in the narrow sense of procurement of funds by corporate to meet their financing needs.

The institutional agreement in the form of financial institution, which

comprise the organization of the capital market.

The financial instrument through which funds are raised from the capital markets and

the related aspects of practices and the procedural aspects of capital markets.

The legal and accounting relationships between a firm and its sources of funds.

The first argument against the traditional approach was based in its emphasis

on issues relating to procedural of funds by corporate enterprises.

MODERN APPROACH:

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The modern approach views the term financial management is a broad

sense and provides a conceptual and analytical framework for financial decision making

Accounting to it the finance functions covers both acquisitions of funds as well as their

allocation. Thus apart from the issues involving in acquiring external funds, the main concern

of financial management is the efficient and wise allocation funds to various as a defined in a

broad sense, it is viewed as an integral part of overall management. Financial management in

the modern sense of the term can be broken down into three major decisions as functions of

finance.

INTRODUCTION OF WORKING CAPITAL MANAGEMENT

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Working capital management is one of the financial management. An organizations

success wholly depends on the operating efficiency and optimum utilization of the scarce

capital and other resources. In this process financial management plays a crucial role in

channeling the funds in proper direction and in reducing the wastages within the firm. As the

public sector undertakings plays a crucial role in the economy, its financial management

matters a lot for the diverse interests associated with it.

Balance sheet and profit and loss accounts at the end of the year does not give the

strengths and weakness of the company. So an estimation of working capital management is

used to determine the financial statement and data. so that a forecast may be made for the

purpose of future earnings and ability of the company.

MEANING AND DEFINITION OF WORKING CAPITAL:

MEANING:

Every enterprises has to arrange for adequate funds for meeting day to day operations

and expenses to keep it as a going concern so ordinary speaking working capital refers to the

flow of ready funds necessary for working of enterprise.

DEFINITION:

Working capital refers to a firms Investment in short-term assets, cash, short-term

securities, accounts Receivables Inventories According to Hoagland: capital is description of

that capital which is not fixed. But the more common use of working capital to consider it as

the different between the work value of current assets and current liabilities.

.. Weston & Brigham

Every Business needs funds for 2 purposes:

For its establishment and to carryout the day to day operations the funds needed.

For short term purchase of Raw materials, payment of wages & other day-to-day expense etc,

these funds are known as working capital.

CONCEPTS OF WORKING CAPITAL:

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There are two concepts in working capital:

1 .GROSS WORKING CAPITAL:

Gross working capital simply called as working capital .Refers to the firms Investments in

current assets. Current assets are the assets, which can convert into cash with in an

accounting year (or operating cycle includes cash, short term securities, debtors, bill

receivables and Inventories. Gross working capital concepts focus Attention on 2 aspects of

current assets management.

1. Optimum investment in current assets

2. Financing of current assets management.

2. NET WORKING CAPITAL:

Net concepts is also called as net working capital it refers to the difference between

current Assets and Current Liabilities are those clines of outsiders that are expected to

nature for the payment within an accounting year. Net working capital being the difference

between current assets. And current liabilities are a quantitative concept.

It indicates the liquidity position of the firm and suggests extents to which working capital

is needed.

NEED FOR THE STUDY

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The study is conducted for the following needs.

1. Management of funds, particularly working capital decides not only liquidity and

solvency but also operating efficiency of the organization.

2. RASHTRIYA ISPAT NIGAM LIMITED needs more working capital and its

management to keep the pace of its financial growth.

3. To study the working capital needs and strengths of the organization in meeting and

managing working capital of the organization.

4. To review the element of working capital and importance in operating the activities in

the organization.

OBJECTIVES OF THE STUDY

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To know procurement and inspection procedure in Visakhapatnam steel plant.

To know the frequency of procuring inventory in Visakhapatnam steel plant.

To study how working capital management is maintained at Visakhapatnam steel plant.

To study working capital management techniques that is applied in Visakhapatnam

steel plant.

To offer suggestion for better management of working capital management in

Visakhapatnam steel plant.

METHODOLOGY OF THE STUDY

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The analysis of the project was based on the available information. Any information about the

topic is called the data. The data was gathered from various sources i.e., Primary and secondary

sources

Types of data:

1. Data Primary Data

2. Secondary

1. PRIMARY DATA:

Any information which is collected afresh and for the first time is called

primary data .The primary data happen to be original in character. The information isgathered from concerned employees .The employees and manager of the financial

department have provided the information needed for the study.

2. SECONDARY DATA:

Information which has already been collected by somebody else or some other agency

with definite purpose and which has already been proposed is called secondary data .The

secondary data for the study have been gathered from the balance sheets, profit and loss

accounts, annual reports and other books and manuals of the RASHTRIYA ISPAT NIGAM

LTD.

LIMITATIONS OF THE STUDY

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Though the project is completed successfully a few limitations may be Limitation.

Although every effort has been made to study the working capital management in

detail, in an organization of VSP size, it is not possible to make an exhaustive study

in a limited duration of 6weeks.

Apart from the above constraint, one serious limitation of the study is that it is not

possible to reveal some of the financial data owing to the policies and procedures

laid down by VSP. However the available data is analyzed with great effort to get

an insight into Working Capital Management in VSP.

INDUSTRY PROFILE

INTRODUCTION:

Steel is a versatile, constantly developing material that underpins all manufacturing

activity. If a product is not made from steel, then it is certainly made using steel at some point

in the manufacturing process.

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OVERVIEW OF IRON AND STEEL INDUSTRY:

HISTORICAL PERSPECTIVE:

The finished steel production in India has grown from a mere 1.1 million tonnes in

1951 to 29.27 million tonnes in 2000-2001. During the first two decades of planned economic

development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel production

exceeded 8%. However, this growth rate could not be maintained in the following decades.

During 1970-80, the growth rate in steel production came down to 5.7% per annum and picked

up marginally to 6.4% per annum during 1980-90, which increased to 6.65% per annum during

1990-2000. Though India started steel production in 1911, steel exports from India began only

in 1964. Exports in the first five years were mainly due to recession in the domestic iron and

steel market. Once domestic demand revived, exports declined. India once again started

exporting steel only in 1975 touching a figure of 1 million tonnes of pig iron export and 1.4

million tonnes of steel export in 1976-77. Thereafter, exports again declined to pick up only in

1991-92, when the main producers exported 3.87 lakhs tonnes, which rose to 2.79 million

tonnes in 1995-96. The steel exports in 1999-2000 were 2.36 million tonnes and in 2000-01 it

was 2.57 million tonnes. The growth in the steel sector in the earlier decades since

Independence was mainly in the public sector units set up during this period. The situation haschanged dramatically in the decade 1990-2000 with most of the growth originating in the

private sector. The share of public sector and private sector in the production of steel during

1990-91 was 46% and 54% respectively, while during 2000-01 the same was 32% and 68%

respectively. This change was brought about by deregulation and decontrol of the Indian iron

and steel sector in 1991. A number of policy measures have been taken since 1991 for the

growth and development of the Indian iron & steel sector. Some of the important steps are

THE INDIAN STEEL SECTOR AFTER LIBERALISATION

The Indian steel sector was the first core sector to be completely freed from the

licensing regime and the pricing and distribution controls. This was done primarily because of

the inherent strengths and capabilities demonstrated by the Indian iron and steel industry.

During 1996-97, finished steel production shot up to a record 22.72 million tonnes with a

growth rate of 6.2%, while in 1997-98, the finished steel production increased to 23.37 million

tonnes, which was 2.8% more than the previous year. The growth rate has drastically decreased

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in 1997-98 and 1998-99 being 2.8% and 1.9% respectively as compared to 20% in 1995-96 and

6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy 9.60% with the total

production touching 29.27 million tonnes. The production of finished steel during 2001-02 has

been 30.61 million tonnes, which means a lower growth rate of about 4.5% compared to the

previous year. This fall in the growth rate of steel production has been brought about by several

factors that, inter-alia, include general slow down in the industrial production and construction

activities in the country coupled with lack of growth in major steel consuming sectors.

APPARENT CONSUMPTION OF STEEL:

Apparent consumption of steel is arrived at by subtracting export of steel from the total

of domestic production and import of steel in the country. Change in stock is also adjusted in

arriving at the consumption figures. It is also treated as the actual domestic demand of steel in

the country. The year-wise apparent consumption of finished steel since 1990-91, is given in

the table in the annexure.

PROJECTIONS OF FINISHED STEEL:

In order to have a long-term perspective and planning, a Sub-Group on Steel and Ferro

Alloys was constituted for steel sector under the aegis of Planning Commission. The iron and

steel sector has experienced slow down from the year 1997 to 2001.

The growth of the steel sector is dependent upon the growth of the economy in general

and the growth of industrial production and infrastructure sectors in particular. The major

reasons for the slow growth in the steel sector during the last few years include: -

(a) Sluggish demand in the steel consuming sectors Steel being the basic raw material for

the construction industry, the capital goods and engineering goods industry, as also the

auto sector and white goods sector, its growth is dependent upon the demand for steel

by these segments of the industry. Since no major infrastructure or construction projects

have been implemented in the last few years, demand for steel has remained low. No

major projects in the oil sector, power sector, fertilizer sector, where intensity of steel

consumption is high, have come up in the recent past.

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(b) Overall economic slowdown in the country. All major core sectors of the economy have

been facing an economic slowdown. These include, power, coal, cement, industry,

mining and steel. The slow down phenomenon is not restricted to the steel sector alone.

Only when the overall economy of the country picks up, the steel sector would also

show signs of revival.

(c ) Lack of investment by Government/private sector in major infrastructure projects Due

to budgetary constraints, no major construction activity in mega projects including

fertilizer, power, coal, railways etc. have been planned by the Government. Despite

liberalization of the economy and relaxation in the investment norms, private sector

investment is yet to materialize in the core sectors of the economy. This has also

contributed to slowing down demand for steel.

(d) Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal

prices etc. have been under the administered price regime. These rates have been

frequently enhanced, thereby contributing to the rise in input costs for steel making.

MARKET SCENARIO:

After liberalization, with huge scale addition to steelmaking capacity, there is no

shortage of iron and steel materials in the country. Apparent consumption of steel increased

from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-02. During 2001-2002, due

to economic slowdown, certain sector like power and fertilizer projects, auto sector and white

goods sector have shown a slump in demand for steel. Steel Industry has been facing a

slowdown in the level of demand due to slow down of the domestic economy and that of the

major steel-consuming sector. Efforts are being made to boost demand particularly in rural

areas and also to increase exports. Prices of iron and steel have declined in 2001-02 in tune

with global trends, while input cost have gone up. However, of late, there has been resurgence

in the price level mainly of flats and demand has also witnessed an upward trend. In 2003-2004

steel sector market demand increased mainly because of massive construction activity taken up

in China.

PRODUCTION:

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Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India is

8th largest producer of steel in the world. In 2001-02, finished steel production was 30.61

million tonnes. Pig iron production in 2001-02 was 3.95 million tonnes. Sponge iron

production was 5.66 million tonnes in 1999-2000. In 2001-02, nearly 51% of crude steel

production was by public sector the remaining 49% was by private sector. In 2001-02, the

integrated steel plants produced 42% of finished steel and the remaining 58% was by the

secondary producers. Interface with consumers by way of Steel Consumer Council exists,

which is conducted on regular basis. Interface helps in redressing availability problems,

complaints related to quality.

PRICING & DISTRIBUTION :

Price regulation of iron & steel was abolished on 16.1.1992. Distribution controls on

iron & steel removed except 5 priority sectors, viz. Defense, Railways, Small Scale Industries

Corporations, Exporters of Engineering Goods and North Eastern Region. Development

Commissioner for Iron & Steel makes allocation to priority sectors. Government has no control

over prices of iron & steel. Open Market Prices have been generally stable, though fluctuations

have been noticed. Price increases of late have taken place mostly in long products than flat

products. In the current financial year the long product prices have increased by about 20%because of raise in demand internationally.

IMPORT AND EXPORT OF IRON AND STEEL:

India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a rise in

domestic demand, the import of saleable steel in 1996-97 reached a level of 1.80 million

tonnes. The incidence of import was mainly in hot rolled coils, cold rolled coils and semis.

Import of carbon steel during 2000-01 was about 1.41 million tonnes, which was about 12%

less than the import in 1999-2000. The total imports of carbon steel during six years up to

2001-02 are given in enclosed chart.

MEASURES ON IMPORTS OF IRON & STEEL:

Iron & Steel are freely importable as per the Exim Policy. India has been annually

importing around 1.5 Million Tonnes of steel. Imports have largely dropped, partly an

indication of greater self-sufficiency and partly the ability to control inflow of seconds and

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defectives. To check unbridled imports of cheap/seconds & defective steel, several measures

have been put in place, like; The Government has fixed floor prices for seven items of finished

steel viz. HR coils, HR sheets, CR coils, Tinplates.

The other notable measure in this regard is that imports of certain types of steel have

been subject to mandatory compliance of quality standards as specified by the Bureau of Indian

Standards (BIS). Adherence to BIS norms imply supplying information like name and address

of the importer, generic or common name of the commodity, net quantity in terms of standard

units of weights and measures, month and year of packaging and maximum retail sale price.

Moreover all manufacturers/exporters of the listed products shall be required to register

themselves with the BIS.

MEASURES FOR EXPORT OF IRON & STEEL:

Iron & Steel are freely exportable and India is a net exporter of steel. Advance

Licensing Scheme allows duty free import of raw materials for exports. Duty Exemption Pass

Book Scheme also facilitates exports. Indian steel exports have been subject to anti-

dumping/anti-subsidy duties actions by the stronger economies over the last few years. These

include:

Canada has covered pipes, hot rolled, cold rolled and galvanized products in the

AD/CVD actions. China has recently imposed a safeguard duty on the import of steel, which

ranges from 7-26%. The country-wise details are yet to be worked out. The rising trend in

Indian steel exports that was being witnessed in the last couple of years was halted due to these

anti dumping actions initiated by the advanced, developed nations of the world, which led to

the loss of major markets for the Indian steel exporters.

GLOBAL SCENARIO:

The global production of crude steel increased from 777 million tonnes in 1998 to 785

in 1999. The world steel consumption has also increased by 1%. The international steel trade

constituted around 279.6 million tonnes or 39.8% of the production. World steel industry

witnessed major ups and downs in the last two decades and especially over the past five years.

The pattern of trade has been upset by two important developments. These are the collapse of

the Soviet Union and the severe financial crisis in most South East Asian countries as well as in

Korea and Japan. After the Asian crisis, the region got transformed into a net exporter of steel.

The world steel industry is today characterized by excess capacity and poor demand. It is in this

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global context that the Indian steel industry will have to cast its future role. World production

of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest monthly total in

over a decade. The total of the 3 months to date was 226.8 million tonnes, 8.8% higher than the

January to March period in 2002.

Crude steel production in the USA is still rising, up by 5.4% in March 2003, bringing

the first quarter total up by 6.5% to 23.1 million tonnes. Mexican production is also improving

with March production up 21.4% and the 3 months total up 29.6% to 3.8 million tonnes, almost

equal to the Spanish first quarter total. Canadian steel production, on the other hand, fell by

3.6% in March and by 3.5% in the year to date to 4.0 million tonnes.

In the first two months and there was a very large tonnage exported to both China and

Singapore in February 2003. Net shipments of steel reported by the AISI were 7.5% up in the

two months at almost 16.5 million tonnes, with most of the increase going to the home market.

In March 2002 the US President announced imposition of temporary safeguard measures on

import of key steel products into USA. In retaliation to the US action EU has also imposed

provisional safeguard measures against import certain steel products. China, Canada and

Thailand are some of the other countries that have initiated safeguard investigations against

import of steel products into their countries. On the pricing front the steel prices have been

spiraling up especially since mid 2002 mainly due to the shortfall in supply. This can be

attributed to the facts.

Cessation of gas supply in Venezuela stopped about 6 million tonnes of

annualized production of steel.

Ukraine has imposed export duty on scrap steel, which is a raw material.

THE GROWTH PROFILE AFTER LIBERALISATION:

The liberalization of industrial policy and other initiatives taken by the Government

have given a definite impetus for entry, participation and growth of the private sector in the

steel industry. While the existing units are being modernized/expanded, a large number of

new/Greenfield steel plants have also come up in different parts of the country based on

modern, cost effective, state of-the-art technologies.

In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit

in the secondary sector. Post liberalization, the AIFIs have sanctioned 21 new projects with a

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total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned.

The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 3.94

million tonnes in 2001-02. The share of Private/secondary sector has increased over time and is

currently around 74% of total production.

COMPANY PROFILE

INTRODUCTION:

Steel occupies the foremost place among the materials in use today and pervades all

walks of life. All the key discoveries of the human genesis, for instance, steam engine, railway,

means of communication, automobile, aero plane and computers are in one way or other,

fastened together with steel and with its sagacious and multifarious application steel is a

versatile material with multitude of useful properties, making its indispensable for furthering

and achieving continual growth of the economy be it construction, manufacturing,

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infrastructure or consumables. The level of steel consumption has long been regarded as an

index on industrialization and economic maturity attained by a country. At the time of

independence India had only three integrated Steel Plants-Iron $ Steel Company at Burnout,

Tata Iron And Steel Company at Jamshedpur, Iron $ Steel Company in the erstwhile princely

state of Mysore. Keeping in view the importance of steel, the following integrated steel plants

with foreign collaborations were set up in the public sector in the post-independence era.

BACKGROUND

To meet the growing domestic needs of steel Government of India decided to set up an

integrated steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in

1979 for cooperation in setting up 3.4 MT integrated steel plant at Visakhapatnam. The

foundation stone for the plant was laid by the then Prime Minister on 20th January 1971.

The project was estimated to cost Rs. 3897.22 Crores based on prices as on 4 th quarter

of 1981. However on completion of construction and commissioning of the whole plant in

1992, the cost escalated to around 8500 Cores. Visakhapatnam Steel Plant is one of the most

modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992

by the then Prime Minister Sri P.V. Narasimha Rao.

The consultant, m/s M.N. Dastur and company ltd., submitted a techno-economic

feasibility report for the plant, with an annual capacity of about 3.4 million tones of liquid steel,

in October 1977.

The erstwhile Ussr government examined the detailed project report prepared by

Dastur & company and offered technical and economic co-operation for the same. The govt. of

India and erstwhile Ussr signed an agreement on June 12th 1979, for co-operation in setting up a

3.4 million tones integrated steel plant at Visakhapatnam. The u.s.s.r agreed to provide

financial assistance of 3.4 million ruble credit to GOI specifically for setting up the steel plant.

In terms of this agreement, soviets and Indian design organization revised the earlier detailedproject report of Dastur co., jointly and a comprehensive revised detailed project report for vsp

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1 Durgapur Steel Plant British

2 Bhili Steel Plant Erstwhile USSR

3 Bokhara Steel Plant Erstwhile USSR

4 Rourkela Steel Plant German


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was submitted in November 1980. A new company i.e. Rashtriya spat enigma ltd. (RINL) was

incorporated for faster implementation of the project.

MAJOR SOURCE OF RAW MATERIALS:

Iron ore lumps and fines Bailadilla, MP

BF lime stone Jagayyapeta, AP

SMS lime stone Jaisalmer, Rajasthan

BF Dolomite Dubai

SMS Dolomite Madharam, AP

Manganese Ore Chipurupalli, AP

Boiler coal Talc her, Orissa

Coking coal Australia

POWER SUPPLY:

operational power requirement of 180 to 200 MW is being met through

Captive Power Plant. The capacity of the Power plant is 286.5 MW. VSP is exporting 60 MW

power to APTRANSCO.

MAJOR UNITS:

Department Annual cap 000 T Units (3.0 MT stage)

Coke ovens 22613 Batteries each of 67 ovens and 7 Meterheight

Sinter Plant 5256 2 Sinter machines of 213 m2 grate area each

Blast furnace 3400 2 Furnaces of 3200 m3 volume each

Steel melt shop 30003 LD converters each of 150 m3 volume andstrand bloom casters

LMMM 710 3 Stand finishing mill

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WRM 850 2 x 10 stand finishing mill

MMSM 860 6 stand finishing mill

MAIN PRODUCTS OF RINL:

By products

Angles Granulate slag

Billets Lime fines

Channels Coal tar

Beams Anthracite acid

Squares HP Naphthalene

Flats Benzene

Round Toluene

Rebars Byline

Wire rods Wash oil

RINL TECHNOLOGY:

o 7Metre tall Coke oven batteries with coke dry quenching

o Biggest Blast furnaces in the country

o Bell less top charging system in Blast furnace

o 100% slag granulation at the BF cast house.

o Suppressed combustion LD gas recovery system.

o 100% continuous casting of liquid steel.

o Tempcore and Stelmor cooling process in LMMM & WRM.

o Extensive waste heat recovery systems.

o Comprehensive pollution control measures.

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CORPORATE PLAN OF RINL:

VISION:

To establish as an excellent corporate citizen and ensure optimal return on investment.

Harness our growth potential and sustain profitable growth

Deliver high quality and cost competitive products and be the first choice of customers

Create an inspiring work environment to unleash the creative energy of people.

Achieve excellence in enterprise management.

Be respected corporate citizen, ensure clean and green environment and develop vibrant

communities around us.

MISSION:

To attain 16 (MT) million tones liquid steel capacity through technological up gradation,

operational efficiency and expansion; augmentation of assured supply of raw materials to

produce steel at international standards of cost and quality; and to meet the aspirations of the

stakeholders.

OBJECTIVES:

Towards growth Expand the plant capacity to 6 MT by 2009-10, 8 MT by 2014-15

and 10 MT by 2018-19.

Towards Profitability Achieve net profits continuously from 2002-03.

Towards Stakeholders Make VSP the company of choice.

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Towards Technology Continuously upgrade technology to operate at international

efficiency levels.

Towards Safety, Environment and Society Continue efforts towards safety of

employees, conservation of environment and be socially responsive.

Expand plant capacity to 6.3 Mt by 2011-12 with the mission to expand further in

subsequent phases as per Corporate Plan.

Revamping existing Blast Furnaces to make them energy efficient to contemporary

levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity to

7.5 Mt.

Achieve higher levels of customer satisfaction.

Vibrant work culture in the organization.

Be proactive in conserving environment, maintaining high levels of safety & addressing

social concerns.

CORE VALUES:

Value foresight is crucial in todays competitive businesses climate VSP values

Commitment

Customer satisfaction

Continuous improvement

Concern for environment

VSP POLICES:

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HR POLICY:

In Visakhapatnam Steel Plant, believe that employees are the most important

resources. To realize the full potential of employees, the company is committed to:

Provide work environment that makes the employees committed and motivated for

maximizing productivity

Establish systems for maintaining transparency, fairness and equality in dealing the

employees

Empower employees for enhancing commitment, responsibility and accountability

Encourage teamwork, creativity, innovativeness and high achievement orientation

Provide growth and opportunities for developing skill and knowledge

Ensure functioning of effective communication channels with employees.

HRD POLICY:

In Visakhapatnam Steel Plant, are committed to create an organizational culture

which nurtures employees potential for the prosperity of the organization. To accomplish this:

Identify development needs of the employees on a regular basis, provide the necessary

training and continually evaluate and monitor the effectiveness of the training so that

the quality of the training also gets upgraded

Provide inputs to the employees for developing their attitude towards work and for

matching their competencies with the organizational requirements

Create an environment of learning and knowledge sharing by providing the means and

facilities and also access to the relevant information and literature

Facilitate the employees for continuous development of their knowledge base, skills,

efficiency, innovativeness, self-expression and behavior so that they contribute

positively with commitment for the growth and prosperity of the organization while

maintaining a high level of motivation and satisfaction

Prepare employees through appropriate development programs for taking up higher

responsibilities in the organization

Fulfill social obligations by providing training to the students of educational institutions

and to the trainees of other organizations

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CUSTOMER POLICY:

VSP will endeavor to adopt a Customer-focused approach at all times with

transparency

VSP will strive to meet more than the Customer needs and expectations pertaining to

Products, Quality, Value for Money and Satisfaction

VSP greatly values its relationships with Customers and would make efforts at

strengthening these relations for mutual benefit

ENERGY POLICY:

In Visakhapatnam Steel Plant, are committed to optimally utilize various forms of energy in a

cost-effective manner to effect conservation of energy resources. To accomplish this:

Monitor closely and control consumption of various forms of energy through an

effective Energy Management System

Adopt appropriate energy conservation technologies

Maximize the use of cheaper and easily available forms of energy

I.T POLICY:

RINL/VSP is committed to leverage Information Technology as the vital enabler in improving

the customer-satisfaction, organizational efficiency, productivity, decision-making,

transparency and cost effectiveness, and thus adding value to the business of steel making.

Towards this, RINL shall

Follow best practices in Process Automation & Business Processes through IT by in-

house efforts / outsourcing and collaborative efforts with other organizations / expert

groups / institutions ofhigher learning, etc, thus ensuring the quality ofproduct and

services at least cost

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Follow scientific and structured methodology in the software development processes

with total user-involvement, and thus delivering integrated and quality products to the

satisfaction ofinternal and external customers

Install, maintain and upgrade suitable cost-effective IT hardware, software and other

IT infrastructure and ensure high levels ofdata and information security

Enrich the skill-set and knowledge base ofall related personnel at regular intervals to

make employees knowledge-employees

Periodically monitor the IT investments made and achievements accrued to review their

cost effectiveness

CARE FOR SOCIETY:

The Company has committed Rs.12.75 Crores for the year 2009-10, as against Rs.

38.83 Crores in the previous year, towards Corporate Social Responsibility activities.

The reduction is largely due to the reduced PAT for the year.

CORPORATE GOVERNANCE:

Company is committed to conforming to the highest standards of corporate governance

by ensuring transparency, disclosures, and reporting as required under the Corporate

Governance Guidelines issued by the Department of Public Enterprises.

HUMAN RESOURCE MANAGEMENT:

Human resource initiatives at VSP are clearly linked to the corporate strategy of theorganization. VSP has exemplary industrial relations where the entire workforce works as a

well knit team for the progress of the Company. The productive environment prevailing in the

Company fosters an atmosphere of growth, both for the employees and for the Company. VSP

has introduced multi skilling concept since inception and the employees are trained as per this

concept. VSP has adopted a system of overlapping shifts, the first of its kind, in the industry.

TRAINING AND HUMAN RESOURCE DEVELOPMENT:

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Training and HRD are given due emphasis at VSP. Each year, a minimum of 1/3rd of the

employees undergo various training sessions either at Training and Development Centre or at

Centre for HRD for sharpening their skills on the technical and management related issues.

Training is also given in the area of safety, fire prevention, and occupational health besides on

the job at the shop floor.

SWOT ANALYSIS:

SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be avoided,

opportunities that should be banked, and threats that should be faced & yet survive in the

business.

STRENGTHS:

State of the art technology:

VSP was built with the co-operation of USSR and claims to be one of the most modern

steel plants in the country. VSP employs highly sophisticated technology, large-scale

computerization & automation in the production.

Location advantages:

VSP was rendered with additional advantages due to its location. The location

aspect has helped the VSP in easy procurement of raw materials as most of the raw

materials are imported from Andhra itself, apart from Orissa & M.P which are

located nearby.

More over the existence of Visakhapatnam port makes it easy in procurement of

raw materials like cooking coal from Australia. Also exports to various countries

can be made directly from Visakhapatnam port.

Self-Sufficiency in power: VSP has its own power generation unit with a total

capacity of 286.5 MW. VSP requires power of 180 MW to 200 MW. VSP, after

meeting its requirement exports power to APSEB.

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High commitment on part of employees:

The productive environment prevailing in the company fosters an atmosphere of

growth both for employees & for the company. The labour productivity is

currently262 tonnes/man/year unparallel in the public sector steel industry.

Strong commitment to conserve environment:

VSP is forefront of Indian industry in area of pollution control, equipment &

measures. The total cost of these measures works out at Rs.4600 million which

forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified

company (certificate for environment protection & pollution control measures).

ISO 9002 Certification:

VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO

certification gives an edge for VSP over other companies & depicts the

competency of Vizag steel to compete with the global steel producers.

Land and layout for expansion up to 16mt with proximity to port.

Quality producer image.

High standing for customer service.

Committed workforce.

Ability to raise fund.

WEAKNESS:

High intake of employees: VSP employs 17,500 employees including both

administrative and plant. When compared to international standard companies like

POSCO and other major steel producers, VSP employs 50% more for the same

capacity. Hence the salaries of these employees, medical & other facilities will raise

cost further which may disturb the cost effectiveness achieved in the production front.

Low return product mix: The product mix of VSP is small. VSPs long products like

billets, wire rods, structural are facing less demand due to the crisis in South East Asian

nations.

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Inadequate port facilities: The berthing facilities at VSP are not adequate relative to the

requirements of VSP.

No in-house key raw materials-iron ore/coal.

Lack of level playing field.

Single location company-Only long products, exposed to cyclic market.

Major capital repairs and modernization- New overdue.

High cost of servicing huge equity.

Consumption of coking coal contracted at higher cost in 2008-09.

OPPORTUNITIES:

Sizeable export markets: China is the biggest importer of Indian steel. China is

going to have huge requirements of steel in next 5 years due to Olympics (in 2008), shanghai

expo (in 2010).Reconstruction work in Iraq requires huge amounts of steel where RINL can

play a significant role.

Other promising factors are-

Proximity to southern market.

Strong economy.

Possibility of new markets.

A slow but steady increase in domestic steel demand.

Potential for growth in domestic steel demand- Low per capita consumption in India.

Huge investment planned in infrastructure in 11th plan.

THREATS:

Global steel majors like POSCO & Mittal steel are venturing into steel production very soon (in

Orissa). This may pose a problem to VSP in the procurement of raw materials as it is dependent

on Orissa for these materials. Input costs are increasing due to the increasing cost of raw

material. Also the demand for coal & coke is escalating.

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High raw material prices & shift of value chain towards raw materials.

Oligopolistic coal supply side.

Single Iron ore supplier Located in disturbance prone areas.

Predominant secondary sector in long products.

VSP High earning island.

MARKETING NETWORK:

The Company markets its products through headquarters marketing office and anetwork of regional offices, branch offices and stockyards located all over the country. It also

takes the help of consignment agents and consignment sales agents for the marketing of its

products. The exports are carried out by the export wing of marketing division with the help of

different agencies. The Company is recognized as Star Trading House by the Director

General of Foreign Trade, Ministry of commerce, Government of India.

The end users of the steel products manufactured at the plant include amongst other

construction industry, automobile industry, engineering industry, re-rolling industry, forging

industry, cable industry, wire drawing industry, fastener industry, electrode manufacturers and

railways. The Company is ideally located to serve the southern Indian market. Regional

SMangers/Branch managers meet at Head quarters regularly to assess the market situation and

decide market strategies.

RECENT TRENDS:

RINL BECOMES NAVARATNA COMPANY:

Considering the turn around and the excellent physical and financial performance in the

last 4 years vsp has been awarded NavaRatna status by the GOI in the year 2010. This confers

more autonomy to vsp management in financial and policy matters. The B.O.D also will be

strengthened with more independent non-executive directors.

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VSP EXPANDING ITS CAPACITY:

Vsp has undertaken expansion of capacity from 3-million tone liquid steel to 6.3

million tone liquid steel at a cost of rs.8692cr. Their entire expansion is scheduled to be

completed within a period of 4 years from October 2006. The honorable prime minister of india

has inaugurated the expansion project by laying foundation stone on 20th may 2006. Vsp will be

producing special grade long products required for automobile, railways and other special

applications in the new mills which are going to be installed. Due to some un avoidable reasons

this project is getting delayed by around 2 years resulting cost escalation to more than Rs14000

Crores.

JOINT VENTURES:

Vsp does not own any mines for extracting much required iron ore and low ash

metallurgical coal for its production. Vsp depends on m/s. National mineral development

corporation for meeting its iron ore requirements and import sources (Australia) for low ash

metallurgical coal. These sources have been increasing their prices disproportionately in recent

times due to very high demand because of capacity additions taking place in large scale. In

order to have raw material security and control over prices vsp has embarked upon acquiring

interest in coal mines and iron ore mines through joint ventures in India and abroad.

IMPLEMENTATION OF ADDITION MODIFICATION ANDREPLACEMENT:

In order to improve productivity, constantly upgrade the technology and reduce the cost

of production to become one of the worlds lowest cost producers vsp is implementing number

of arm schemes on a continuous basis since last 5 years. Vsp is spending substantial amount of

funds in the arm schemes which are yielding incremental benefits year after year.

CONSERVATION OF WATER:

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Vsp has taken up a number of projects for conservation of precious water. This is

carried out in three methods.

Reduce the consumption of water in the process.

Treat the drainage and sewerage water and reuse where ever possible.

To construct check dams for diverting rainwater to underground.

FINANCIAL PERFORMANCE OF VSP:

HISTORY:

In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP), VisakhapatnamSteel Plant (VSP) stands as a monument of advanced technology. VSP is the first shore based

integrated Steel Plant in the country.

The decision of Government of India to set up an integrated steel plant at

Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in Parliament on 17th

April, 1970 followed by foundation stone laying by her. The initial project cost was sanctioned

at Rs. 2256 Crores with an Internal Rate of Return (IRR) 4.20%. The Indian government and

USSR signed an agreement on 12th June 1979 for cooperation in setting up the 3.4 million

tonne integrated steel plant at Visakhapatnam.

Thereafter the project has undergone three revisions as detailed below.

First revision Second revision Third revision

Date of sanction by GOI 30.07.1982 24.06.1988 12.07.1995

Capital asset. Rs.3897.28 Cr. Rs. 6849.70 Cr. Rs.8593.29 Cr.

Financial IRR 5.40% 6.56% 5.30%

Liquid steel capacity (in MTper annum)

3.40 3.00 3.00

The broad reasons for revisions were:(1) Non-availability of funds on time

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(2) Price escalation

(3) Enhanced currency exchange rates

(4) Revision in taxes and duties

(5) Change in ocean freight.

REASONS FOR TIME OVER RUN:

(1) Inadequate fund flow & its delay

(2) Midway revision of project concept

(3) Dislocation of Soviet equipment suppliers

(4) Delay in supplies made by major PSUs.

(5) Delay in providing water by AP Government

RATIONALISED CONCEPT:

The construction of the plant started in 1981 and scheduled to be completed in 4 to 6

years in two stages. However, due to inadequate funds availability, there was a threat to project

continuance. In order to contain project cost, a Rationalised Project Concept was evolved

where while retaining the Hot Metal capacity, the liquid steel capacity was brought down to 3.0

MT from 3.4 MT by dropping one SMS converter and uprating the capacity of other converter.

Further on the finishing line, Universal Beam Mill was dropped. The Rationalised Concept

helped in reducing the project cost by Rs. 1497 Crores. Details of major production facilities

under original concept and revised concept are given at annexure.

The plant was commissioned in two stages. The 1st BF viz., Godavari was commissioned

in March 1990. The 2nd BF viz Krishna was commissioned in March 1992 and finally the

plant was dedicated to the Nation by the then Honourable Prime Minister Sri PV Narasimha

Rao in August 1992.

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CAPITAL RESTRUCTURING:

FIRST CAPITAL RESTRUCTURE:

Long gestation period in commissioning the plant and escalation of the project cost to

Rs. 8593.29 crores (3.8 times over the original estimate) necessitated capital restructuring, in

order to ensure viability and to prevent from becoming potentially sick under Sick Industrial

Company (Special Provisions) Act 1985. Action was taken for restructuring the capital base

even before the Company became totally commercially operational. The first capital

restructuring took place in July 1993.

BENEFITS FROM CAPITAL RESTRUCTURING:

Reduction of loss by Rs. 432.47 crores annually on account of interest saving

due to conversion of loans to equity capital, Preference Capital and Interest free

loan.

Reduction of loss by Rs. 149.40 crores on account of interest saving due to

waiver of penal interest.

SECOND CAPITAL RESTRUCTURE:

The second capital restructuring was approved in May 1998, whereby Rs. 542.47 crores

of Government loan was converted into 7% non-cumulative preference share capital

redeemable after ten years from the date of release of these loans. Further, conversion of Rs.

791 crores interest free loan to 7% non-cumulative preference capital was also agreed to.

Benefits from this capital restructuring was a reduction of loss by Rs. 235.85 crores on account

of interest saving and an annual interest saving of Rs. 88.47 crores. While approving second

capital restructure, government of India-Inter-alia desired to appoint a financial consultant of

repute to suggest a turnaround strategy for the organisation.

FINANCIAL AND PHYSICAL PERFORMANCE :

FINANCIAL PERFORMANCE:

The financial performance of the organisation against the set targets right from 1990-91

to 2002-03 is placed at Annexure. From this table it can be seen that the Company was gaining

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considerable gross margin which reflects the satisfactory performance of the plant for all the

years except during the year 1998-99 and 1999-2000 when there was a major set back to Coke

ovens. Further it had also secured reasonable cash profits barring those two years and initial

period up to 1992-94.

The Company had again gained its momentum during 2000-01 when it made a cash

profit of Rs. 153 crores and turned around during the year 2002-03 making a Net Profit of

around Rs. 520crores for the first time. During the last few years, the Company had taken a

number of steps like major capital repairs to Coke ovens, BF capital repairs, austerity measures

to cut down the cost, restrictions on capital expenditure etc. It may need a special mention that

a special drive took place to cut down the interest cost on term loans and working capital

arrangements.

PHYSICAL PERFORMANCE:

The details of physical performance as against the targets set right from 1990-91 to

2002-03 are placed at annexure. From the table it can be seen that the targets set were

reasonably met by the organization, up to 1999-2000 and far exceeded the targets from the year

2000-01 onwards.

PRESENT PERFORMANCE:

The Company turned around during the year 2002-03, making for first time Net Profit

of Rs. 520 crores, achieving Gross sales/turnover of Rs. 5059 Crores. The financial year 2002-

03 is a happy note in VSPs diary because of its remarkable performance in all fronts. On the

production front, the Company far exceeded the targets set. The performance of the Company

for the year 2002-03 is placed at Annexure.

At the beginning of the financial year 2002-03, the Company was having total term

loans to the tune of Rs. 1373.98 crores. UTI (Rs. 590.29 Crores, LIC Rs. 580.80 crores and

Bonds Rs. 175 crores) are the major outstanding. Apart from this the utilization of working

capital limits from the banks were Rs. 600 crores (CC Rs. 96 crores, WODL Rs. 395 Crores in

the form of FCNR (B) DL Rs. 267 cores, DCDL Rs. 128 crores and EPC Rs. 109 corers).

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STEPS TAKEN TO REDUCE DEBT BURDEN:

The significant steps taken by the Company to reduce debt burden include restructuring

of dept through prepayment of high interest loans out of internal resources, swapping of high

cost loans with borrowings from banks at lower interest rates, swapping off high cost working

capital demand loans with FCNR borrowings and commercial paper at cheaper rates of interest.

The Company due to the above initiatives could prepay the entire term loan of Rs. 590

crores from UTI during the year 2002-03 from out of internal resources and by swapping with

bank loans. 15% working capital demand loan of Rs. 400 crores was also substituted with

commercial paper with an average interest rate of 7% and FCNR demand loan at an average

interest rate of 3.4% to 10.09T.

The above steps resulted in brining down outstanding term loans to Rs. 773.37 crores as

at the end of the year 2002-03 (debt free on date) and utilization of working capital to the extent

of only Rs. 368 crores. The above steps resulted in containing the interest expenditure to Rs.

135 crores for the year 2002-03 as against the previous year level of Rs. 290 crores as shown in

Annexure.

PRODUCTION PERFORMANCE (000 TONNES):

YEAR HOT

METAL

LIQUID

STEEL

SALEABLE

STEEL

2006-2007 4,046 3,606 3,290

2007-2008 3,913 3,322 3,074

2008-2009 3,546 3,145 2,701

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2009-2010 3,900 3,399 3,167

COMMERCIALPERFORMANCE (RS. CORS):

YEAR SALES

TURNOVER

DOMESTIC SALES EXPORTS

2006-2007 9131 8487 4242007-2008 10433 9878 5552008-2009 10411 10333 78

2009-2010 10662 10444 68

FINANCIAL PERFORMANCE (Rs. In Crores)

Year Gross margin Cash profit Net profit

2006-07 2632 2584 2222

2007-08 3001 2977 26862008-2009 2355 2267 1336

2009-2010 1603 1525 797

WORKING CAPITAL MANAGEMENT

INTRODUCTION:Working capital management is concerned with the problems that

arise in attempting to manage the current assets, the current liabilities and the inter relationship

that exists between them .The term current assets refer to those assets which in the ordinary

course of business can be, or will be, converted into cash within one year without undergoing a

diminution in value and without disrupting the operations of firm.

The major current assets are cash, marketable securities, accounts

receivable and inventory. Current liabilities are those liabilities which are intended, at theirinception, to be paid in the ordinary course of business, within a year, out of the current assets

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or earning of the concern. The basic current liabilities are account payable, bills payable; bank

over draft, and outstanding expenses, the goal of working capital management is to manage the

firms current assets and liabilities in such way that a satisfactory level of working capital is

maintained.Working Capital is the Life-Blood and Controlling Nerve Center of a business

Definition:

Working capital is the amount of funds necessary to cover the operating the

enterprise.

SHUBIN

Working 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 receivable, into cash.

GENE STENBERG

OPERATING / WORKING CAPITAL CYCLE OF

MANUFACTURING FORM:

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CLASSIFICATION OF WORKING CAPITAL:

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Working capital can be classified into two ways.

On the basis of concept

On the basis of time.

1.ON THE BASIS OF CONCEPT:

Net operating cycle (NOC) is the difference between gross operating cycle and payables

deferral period.

Net operating cycle = Gross operating cycle - Creditors deferral period

NOC = GOC - CDP

2 .ON THE BASIS OF TIME:

On the basis of time, it may be classified as

a) Permanent working capital

b) Temporary working capital

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PARMANENT WORKING CAPITAL:

Permanent working capital is the amount invested in all current assets which

is required at all times to carry out minimum level of business activities. It grows with the size

of the size of the business. It is permanently needed for the business and therefore be financed

out of long term funds.

VARIABLE WORKING CAPITAL:

Variable working capital is the excessive amount over permanent working capital.

This keeps on fluctuating from time on the business activities. It is further divided into

Seasonal working capital

Special working capital

Seasonal working capital is required to meet the seasonal demands of busy periods

occurring at stated intervals. Whereas special working capital is 5required to meet

extraordinary needs for contingencies.

FOCUSING ON MANAGEMENT OF CURRENT ASSETS:

The gross working capital concept focuses attention on two aspects of current assets

management: (1) how to optimize investment in current assets? (2)How should current assets

be financed?

The consideration of the level of investment in current assets should avoid two danger

points- excessive or inadequate investment in current assets. Investment in current asset should

be just adequate to the needs of the business firm. Excessive investment in current asset should

be avoided because it impairs the firms profitability, as idle investment earns nothing. On the

other hand inadequate amount of working capital can threaten solvency of the firm because of

its inability to meet its current obligations. It should be realized that the working capital needs

of the firm may be fluctuating with changing business activity. This may cause excess or

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shortage of working capital frequently. The management should be prompt to initiate an action

and correct imbalances.

OPERATING AND CASH CONVERSION CYCLE:

Operating cycle is the time duration required to convert into sales, after the conversion of

resources into inventories and cash. The operating cycle of a manufacturing company involves

three phases:

Acquisition of resources such as raw material, labour power and fuel etc.,

Manufacture 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, Credit sales create account receivable

for collect The length of operating cycle of a manufacturing firm is the sum of

inventory conversion period (ICP), and debtors (receivable) conversion period (DCP).

The inventory conversion period is the total time needed for producing

and selling the product. It includes raw material conversion period (RMCP), work-in-

progress conversion period (WIPCP) and finished goods conversion period (FGCP).

The debtor conversion period is the time required to collect the

outstanding amount from the customers.

The net operating cycle also represents the cash conversion cycle (CCL).

It is the net time interval between cash collection from sale of the product and cash

payments for resources acquired by the firm. It also represents the time interval over

which additional funds, called working capital, should be obtained in order to carry out

the firms operations.

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GROSS OPERATING CYCLE (GOC):

The firms gross operating cycle can be determined as inventory

conversion period (ICP) plus debtor conversion period (DCP). Thus GOC is given as follows:

Gross operating cycle = Inventory conversion period + debtor conversion period

GOC = ICP + DCP

Inventory conversion period (ICP) is the sum of raw material conversion period(RMCP), work-in-progress conversion period (WICP), and finished good conversion period

(FGCP).

ICP = RMCP + WICP + FGCP

1. RAWMATERIAL CONVERSION PERIOD (RMCP):

It is the average time period taken to convert raw material in to work-in-progress.

RMCP depends on raw material consumption per day and raw material inventory. Raw

material consumption per day is given by the total raw material consumption divided by the

number of days in the year (say 360). The raw material conversion period is obtained when raw

material inventory is divided by raw material consumption per day.

Rawmaterial conversion period (RMCP) = (Raw material consumption)/360

RMCP = RMI360

RMC

2. WORK IN PROGRESS CONVERSION PERIOD (WIPCP):

It is the average time taken to complete the semi-finished or work-in-progress.

Work-in-progress conversion period = Work-in-progress inventory

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(Cost of production)/360

3. FINISHED GOODS CONVERSION PERIOD (FGCP):

It is the average time taken sell the finished goods.

Finished goods conversion period = Finished goods inventory

(Cost of goods sold)/360

FGCP = FGI360

CGS

3. DEBTOR CONVERTION PERIOD (DCP):

It is the average time taken to convert debtors in to cash. DCP represents the

average collection period.

DCP = debtors 360

Credit sales

CASH CONVERSION OR NET OPERATING CYCLE (NOC):

Net operating cycle (NOC) is the difference between gross operating

cycle and payables deferral period.

Net operating cycle = Gross operating cycle - Creditors deferral period

NOC = GOC - CDP5.

CREDITORS DEFERRAL PERIOD (CDP):

it is the average time taken by the firm in paying its suppliers

(creditors).

CDP = Creditors360

Credit purchases

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DETERMINANTS OF WORKING CAPITAL IN RINL:

It is understood that working capital is the vital component for future growth of the firm.

Financial manager has to maintain adequate level of working capital. There are several factors

influence the determinants of working capital. It is necessary to know those factors which

identifying the optimum size of working capital. In RINL working capital is generally deter

mind by these factors.

They are:

1. Market Coverage

2. Manufacturing Cycle

3. Advances

4. Growth of the firm

5. Seasonal fluctuations

6. Global Market boom

7. Expansion Chances

8. Credit Policy

The Management of working capital in RINL encompasses the following problems:-

1. To decide upon the optimal level of investment in various current assets.

2. To decide upon the optimal mix of short-term funds high relation to long term capital.

3. To locate the appropriate means of short-term financing.

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THE DANGERS OF EXCESSIVE WORKING CAPITAL:

It results in unnecessary accumulation of inventories. Thus chances of inventorymishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely affect

profit.

Excessive working capital makes management complacent which degenerates in

to managerial efficiency.

Tendencies of accumulating inventories tend to make speculative profits grow.This may tend to make dividend policy liberal and difficult to cope with in

future when the firm is unable to make speculative profits.

THE DANGERS OF INADEQUATE WORKING CAPITAL:

It becomes difficult for the firm to undertake profitable projects for non

availability of working capital funds.- It becomes difficult to implement operating plans and achieve the firms

profit target.

Operating in inefficiencies creep in when it becomes difficult even to meet

day to day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds.

Thus the firms profitability would deteriorate.

Paucity of working capital funds render the firm unable to avail attractivecredit opportunities etc.

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DIFFERENT WORKING CAPITAL RATIOS:

Although working capital management particularly its receivable component, apparently

takes on a short term approach, commitment to a particular receivables policy and the customer

relation ship that emanates from it are long term in nature. Hence, the credit manager must take

a long term as well as short term view of the business to which he is going to commit him self.

It is not important to have a strong accounting background to make intelligent use of financial

statements. A credit manager is required to calculate and interpret certain key ratios which will

tell him where his account receivables are in danger or not.

Classification of ratio:

Liquidity ratio

Solvency ratio

Profitability ratio

LIQUIDITY RATIO:

This ratio measures the ability of a business organization to pay short term

obligations in time. The liquidity ratio can be sub classified into two groups.

Liquidity study

Efficiency study

LIQUIDITY STUDY:

The liquidity study can be further classified in to three categories.

Current ratio

Quick ratio(acid test ratio)

Absolute liquid ratio

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EFFICIENCY STUDY:

The efficiency study can be further classified in to three categories.

Inventory turn over ratio(ITR)

Debtor turn over ratio(DTR)

Creditors turn over ratio(CTR)

CURRENT RATIO:

It establishes the relationship between the current assets and current liabilities.

Mathematically,

Current ratio=current assets/ current liabilities

Rule of thumb: The standard fixed for current ratio is 2:1

The current ratio is a crude measure of liquidity.

QUICK RATIO:

It establishes the relationship between liquid asset and current liability.

Mathematically,

Quick ratio=liquid assets /current liabilities

It is the absolute measure of liquidity.

Rule of thumb: The normal standard fixed for the quick ratio is 1:1

It is a rigorous measure of examining the liquidity of a business concern. Its other name is

also acid test ratio.

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ABSOLUTE LIQUID RATIO:

It establishes the relationship between absolute liquid assets and current liabilities.

Mathematically,

Absolute liquid ratio=absolute liquid assets/current liability

Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2

A rare measure of liquidity used under certain special circumstances.

INVENTORY TURN OVER RATIO:

ITR measures the relationship between cost of goods sold and the average inventory

during the period.

Mathematically,

ITR=cost of goods sold/average inventoryOr

Sales / average inventory

Its main objective is to measure the movement of stock. It is an absolute measure of

movement of stock or inventory.

DEBTOR TURNOVER RATIO (DTR):

It measures or establishes a relationship between the net sales and the average debtor.

Mathematically,

DTR=net sales/average debtors

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It measures the conversion of debtors in to the cash.

It is an absolute measure of measuring the turn over or conversion of debtors.

There is a relative measure also namely average collection period.

Average collection period=365/DTR (days)

CREDITORS TURNOVER RATIO (CTR):

While receivables turn over ratio of the customer organization measures the vulnerability of

the sources from which payables of the vendor-organizations are satisfied, the creditors turn

over ratio indicates the actual payment behavior of the customer organization.

CTR=purchases/trade creditors (payables)

Conversion of this ratio in number of days = 365/CTR

CONSTITUENTS OF CURRENT ASSETS:

1) Cash in hand and bank balances

2) Bills receivable

3) Sundry debtors(less provision for bad debts)

4) Short term loans and advances

5) Inventories of stock as:

a. Raw materials

b. Work-in-progress

c. Stores and spares

d. Finished goods

6) Temporary investments of surplus funds

7) Prepaid expenses

8) Accrued income

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In narrow sense the term working capital refers to the net working capital. Net

working capital is the excess of currents assets over current liabilities

Gross working capital= Current assets total

Net working capital=Current assets-Current liabilities

Current Liabilities are those, which are expected to fall due or nature of payment in

short period of one year, and they represent short-term sources of funds they include

1. Short-term borrowings: include bank borrowings other than those against own

debentures and other mortgages.

2. Trade creditors and other liabilities Sundry creditors, outstanding expenses and

advances received.

Provisions for taxation, dividends and other current provisions

CONSTITUENTS OF CURRENT LIABLITIES:

1. Bills payable

2. Sundry creditors (or) Accounts payable

3. Accrued or outstanding expenses

4. Short-term loans, advances and deposits

5. Dividends payable

6. Bank overdrafts

7. Provision for taxation.

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THE NEED FOR WORKING CAPITAL:

A firm has to make profit to maintain its image in the capital market the investors will also

be looking forward to the continuous growth of profitability gradual increase in profit will

result in capital growth of the firm. To earn substantial profit, sales volume has to be increased.

It is observed that sale of goods will not immediately be converted in to cash. When the

sale transactions are more credit in nature to have uninterrupted business operations the amount

will be looked up in the current assets like accounts receivables, stock, etc., This actually

happens due to the cash cycle by the time the cash is converted back to the cash.

The firm needs extra funds and hence the need for working capital. If this is not provided

the business operations will be effected to a greater extent and hence this past of finance has to

be managed well.

THE WORKING CAPITAL NEED FOR THE FOLLOWING

PURPOSES:

1. The purchase of raw materials, components and spares

2. To pay wages and salaries.

3. To incur day-to-day expenses and overhead cost such as fuel, power and office

expenses, etc.,

4. To meet the selling costs as packing, advertising etc,.

5. To provide credit to the customers.

6. To maintain the inventories of raw material, work-in-progress, stores and spares and

finished stock.

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IMPORTANCE OF WORKING CAPITAL:

Working capital is the life blood and nerve center of a business, just as circulation of blood

is essential in the human body for maintaining life, working capital is very essential to maintain

the smooth running of a business. No business can run successfully without an adequate

amount of working capital.

The main advantages of maintaining adequate amount of working capital are as follows:

Solvency of the business.

Goodwill.

Easy loans.

Cash discounts.

Regular supply of raw material.

APPROACHES FOR FINANCING WORKING CAPITAL:

There are two sources of financing working capital requirements:

LONG TERM SOUECES:

Long term sources such as share capital, debentures, public deposits, Pouching back of

profits, loans from financial institutions.

SHORT TERM SOUECES:

Short term sources such as commercial banks, indigenous bankers, traders creditors,and installment credit, advances, and accounts receivables and so on.

There are three basic approaches for determining an appropriate Working capital financing

mix.

Hedging approached

Conservative approach

Aggressive approach

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1. HEDGING APPROACH:

The firm can adopt a financial plan which matches the expected life of assets with the

expected life of the source of funds raised to finance assets. The firm follows matching

approach. It suggests that the permanent working capital requirements should be financed

with funds from long term sources while temporary working capital requirements should be

financed with funds from short term funds

2. CONSERVATIVE APPROACH:

This approach suggests that the entire estimated investments in current assets should

be financed from long term sources and the short term sources should be used only for

emergency requirements. The distinct features of this approach are:

Liquidity is severally greater

Risk is minimized

The cost of financing is relatively more as interest has to be paid even on seasonal

requirements for the entire period.

3. AGGRESSIVE APPROACH:

The aggressive approach suggests that the entire estimated requirements of current asset

should be financed from short term sources and even a part of fixed asset investments be

financed from short term sources. This approach makes the finance mix more risky, less costly

and more profitable.

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ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is the life blood and center of a business. Working capital is very

essential to maintain the smooth running of a business. No business can run successfully

without an adequate amount of working capital .Some of the advantages of working capital

management is as follows.

SOLVENCY OF THE BUSINESS:

Adequate working capital enables helps in maintaining solvency of the business by

providing the uninterrupted flow of production.

GOODWILL:

Sufficient working capital enables a business concern to make prompt payments and

hence help in creating and maintaining goodwill.

EASY LOANS:

A concern having adequate working capital, high solvency and good credit standing can

arrange loans from banks and others on easy and favorable terms.

CASH DISCOUNTS:

Adequate working capital also enables a concern to avail cash discounts on the

purchases and hence it reduces costs.

REGULAR SUPPLY OF RAW MATERIALS:

Sufficient working capital ensures regular supply of raw materials and continuous

production.

REGULAR PAYMENTS:

Regular payment of salaries, wages and other day to day commitments. A company

which has sample working can make regular payment of salaries, wages and other day to day

commitments which raises the moral of its employees, efficiency and enhances production and

profits.

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DETERMINANTS OF WORKING CAPITAL:

The need for working capital is not always the same; it varies from year to year or even

month to month depending upon a number of factors. There is no set of rules or formulate to

determine the working capital needs of the firm. Each factor has its own importance and the

importance of the factors changes for a firm over a time.

In order to determine the proper amount of working capital of a concern, the following

factors should be considered carefully.

NATURE OF THE BUSINESS:

The amount of working capital is basically related to the nature and volume of the

business concern where the cost of the raw materials to be used in the manufacturing of a

product is very large in proportion to its total cost of manufacturing the requirements of

working capital will be very large.

SIZE OF THE BUSINESS UNIT:

The size of the business unit has an important impact on its working capital needs. Size

may be measured in terms of operations. A firm with large scale of operation will need more

working capital then a small firm.

SEASONAL VARIATION:

Seasonal industries require more working capital to stock the raw materials during theseason. In peak season

TIME CONSUMED IN MANUFACTURING:

The average time taken in the process of manufacturing is also an important factor in

The process of manufacturing is also an important factor in determining the amount of working

capital .The longer the period of manufacturing the larger the inventory required.

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TURN OVER OF CIRCULATING CAPITAL:

Rapidly of turnover determines the amount of working capital .The faster the sales the

larger the turnover hence less working capital.

MANUFACTURING/PRODUCTION POLICY:

Each enterprise in the manufacturing sector has its own production policy, some follow

the policy of uniform production even if the demand varies from time to time, and others may

follow the principle of demand based production in which production is based on the demand

during that particular phase of time. Accordingly, the working capital requirements vary for

both of them.

OPERATIONS:

The requirement of working capital fluctuates for seasonal business.

The working capital needs of such business may increase considerably during the busy season

and decrease during the slack season. Ice creams and cold drinks have a great demand during

summers, while in winter the sales are negligible.

MARKET CONDITION:

If there ids high competition in the chosen product category, then one shall need to

offer sops like credit, immediate delivery of goods etc. For which the working capital

requirement will be high. Otherwise, if there is no competition or less competition in the

market then the working capital requirements will be low.

AVAILABILITY OF RAW MATERIAL:If raw material is readily available then one need not maintain a large stock of the same,

thereby reducing the working capital investment in raw material stock. On the other hand, if

raw material is not readily available then a large amount of working capital is required.

TERMS OF PURCHASE AND SALE:

Terms of purchase and sales affect the amount of working capital .The practice of

cash purchases with credit sales requires more working capital.

INVENTORY TURNOVER:

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With a better inventory control, a form is able to reduce its working capital

requirements. If the inventory turnover is high the working capital requirements will be low.

GROWTH AND EXPANSION:

Growing concerns requires more working capital than the forms that are static. It is

logical to expect larger amount of working capital in a growing concern to mean its growing

needs of funds.

LEVELS OF WORKING CAPITAL INVESTEMENT:

The overall policy considers both the level of working capital investment and its financing. In

practice, the firm has to determine the joint impact of these two decisions upon its probability

and risk. The size and nature of a firms investment in current assets is a function of a number

of different factors, including the following:

The type of products manufactured.

The length of the operating cycle.

The sales levels.

Inventory polices.

Credit policies.

How efficiently thefirm manages current assets.

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INVENTORY MANAGEMENT:

Every enterprise needs inventory 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 a need and its fulfillment. Greater the time lag the higher the requirements for

inventory. The unforeseen fluctuations in the demand and supply of goods also necessitate the

need 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. Inventories include all types of stocks. For effective working capital

management, inventory needs to manage effectively. The level of inventory should be such that

the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs

should also be minimized. Business, therefore, should fix the minimum safety stock level, re-

order level and ordering quantity so that the inventory cost is reduced and its management

becomes efficient.

The meaning of inventory is Stock of goods or a list of goods. In accounting language it

may mean Stock of finished goods only. In a manufacturing concern it may include raw

materials, work in process and stores etc.

PURPOSE OF INVENTORY MANGEMENT:

Every firm needs to maintain inventories

To facilitate continuous production and timely execution of sales orders

To meet the unpredictable changes in demand and supplies of material

To reduce ordering costs and avail quantity discounts etc. For taking advantages of

price fluctuations, saving in reordering costs.

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NEED TO HOLD INVENTORIES:

There are three general motives for holding inventories.

1. The Transaction Motive:

Which emphasis the need to maintain inventories to facilitate smooth production and

sales operation.

2. The Precaution Motive:

This necessitates holding of inventories to guard against the risk of unpredictable

changes in demand and supply forces and other factors.

3. The Speculative Motive:

This influences the decision to increase or reduce inventory level to take advantage of

price fluctuation.

OBJECTIVIES OF INVENTORY MANAGEMENT:

The main objectives of inventory management are operational and financial. The

operational objectives mean that the materials and spears should be available in sufficient

quantity so that work is not disrupted for want of inventory. The financial objective means that

investments in inventories should not remain ideal and minimum working capital should be

locked in it. The objectives of inventory manageme

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Narayana Final Project Working Capital

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