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It is a detailed project report on food corporation of india.
95
1 Working Capital Management. SUMMER TRAINING REPORT ON “WORKING CAPITAL MANAGEMENT OF FCI” SUBMITTED IN PARTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION (Banking and Insurance) UNDER THE GUIDANCE OF SUBMITTED BY Mr.Inderpal Singh Vishal Singh (Assistant Professor) 00914701813 BBA(B&I)5 rd Semester MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES
Transcript
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1 Working Capital Management.

SUMMER TRAINING REPORT

ON

“WORKING CAPITAL MANAGEMENT OF FCI”

SUBMITTED IN PARTIAL FULFILLMENT FOR

THE AWARD OF THE DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION(Banking and Insurance)

UNDER THE GUIDANCE OF SUBMITTED BY

Mr.Inderpal Singh Vishal Singh

(Assistant Professor) 00914701813

BBA(B&I)5rdSemester

MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES

Affiliated to Guru Gobind Singh Indraprastha University, Delhi

PSP Area, Plot No. 1, Sector 22, Rohini Delhi 110086

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2 Working Capital Management.

ACKNOWLEDGEMENT

There is always a sense of gratitude which one express to other for the helpful so needy services they

render during all phases of life. I would like to express my gratitude towards all those who have been

helpful to me in getting this mighty task of training to a successful end.

With the deepest sense of esteem and gratitude I express my sincere thanks to Mr.INDERPAL

SINGH (Assistant Professor), under whose able guidance I was able to learn much and successfully

completed my project.

I would take this opportunity to thank all my family members for their help& suggestions during the

course of project work.

I am also thankful to all my friends who gave me constant & continuous inspiration to complete this

project.

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3 Working Capital Management.

CERTIFICATE

This is to certify that MR. DHRUV TAMPA has successfully completed the Research project titled

“Working Capital Management of Food Corporation Of India” at Delhi as the partial

fulfillment of the requirement for the award of degree of Bachelor of Business Administration

(Banking and Insurance) by Guru Gobind Singh Indraprastha University, batch 2013-2016.

To best of my knowledge the report is original and has not been copied or submitted anywhere else.

It is an independent work done by him.

Mr.Inderpal Singh

(Assistant Professor)

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4 Working Capital Management.

Contents

PREFACE

ACKNOWLEDGEMENT

DECLARATION

CERTIFICATE

1. CHAPTER 1 ……………………………………………………………….06

Introduction

Significance of Study

Conceptualization

Industry profile

2. CORPORATE PROFILE……………………………………………….….15

3. LITERATURE REVIEW…………………………………………………..34

4. RESEARCH METHODOLOGY ………………………………………...36

Objectives of the Study

Scope of study

Problem Identification

Data Collection

5. DATA ANALYSIS & INTERPRATATION ...........................................39

6. CHAPTER ……………………………………………………………….….59

FINDINGS

SUGGESTIONS

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CONCLUSION

LIMITATION

7. BIBLIOGRAPHY……………………………………………………………..64

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CHAPTER-I

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INTRODUCTION

As we all know working capital Management is one of the important decision in financing.

So it is very necessary to know the working capital & its cycle. Working Capital refers to the cash a

business requires for the day-to-day operations or more specifically for financing the conversions of

raw materials into finished goods, which the corporation sells for payment. In other words ‘Working

Capital’ is the money the business process consumes. The longer the process takes, the more money is

consumed. Working Capital is calculated by deducting current assets from current liabilities. Current

Assets are resources, which are in cash or soon be converted into cash. Whereas Current liabilities are

commitments, which will soon require cash settlement in the ordinary course of business.

Working Capital can also be defined with an approach that encompasses all the processes

surrounding accounts payable, accounts receivables and inventory and one begins to understand the

potential knock-on impacts of a change in working capital practice or policy. When looking in detail at

any of these three core areas, it soon becomes clear that Working Capital Management touch all the

firm buys, makes and sells.

The diagram below demonstrates how a ‘total’ approach to working capital covers all the

corporation’s activities relating to the vendor, the customer and the products.

Payments & Investments

Purchase

Sales

Collection Planning & Budgeting

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SIGNIFICANCE OF THE STUDY

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is

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

running of business. No business can run successfully without an adequate amount of working capital.

On one hand, inadequacy of working capital pose a danger to the short term liquidity and solvency

position of the business and on the other hand excess working capital leads to blockage of firm’s funds

in current assets, which reduced the profitability of the organization. Thus there is a need to maintain a

trade-off between the above aspects (i.e. liquidity, solvency and profitability aspects) so that the short

term funds of the corporation can be utilized in most effective manner.

Keeping the above in mind, the present study analyzed the various aspects of working capital

management of Food Corporation of India and pin-points on weak areas and suggests corrective action

to manage the working capital effectively. The study is useful for the different stakeholders in

understanding the working capital position of the corporation. The study would also help the future

researcher for their research in the organization.

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9 Working Capital Management.

CONCEPTUALISATIONThe need of working capital is to run the day-to-day business activities. There is hardly any

firm, which does not require any amount of working capital. Firms may differ in their requirement of

working capital but it is necessary for all firms to maintain the working capital. The working capital is

the lifeblood for any corporation, as a person cannot live without blood, as it is any firm cannot

survive without working capital. Working capital is necessary for all type of companies’ whether it is a

small corporation or large corporation. Every corporation maintains the working capital to pay the

short-term expenses as creditors, short-term loans, daily wage other expenses. It is very important to

run a business effectively. It is a part of total investing capital. It does not give any return opposite of

long-term investment (fixed capital). But it is helpful in earning profit from the long-term capital.

Meaning of working capital: -

Working capital is also known as the short-term investment of capital. Working capital is that

capital which is capture in the business as in the form of cash or cash equivalents to run the rut ion

activities of business. Mainly it is known as the difference between the current assets and current

liabilities but in other sense it is known as the sum of all current assets. It is also known as the capital,

which is used to operate the business’s routine work. It is the short-term capital investment in the

business. The working capital includes those assets, which are converted into cash within an

accounting year and the current liabilities are include in working capital which are payable within an

accounting year. There are two concept of working capital as follows.

Working capital

Gross WorkingCapital

Net Working

Capital

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Gross Working Capital:-

Gross Working Capital refers to the firm’s investment in the current assets. Current assets are those

assets which can be converted into cash within an accounting period (or operating cycle).current assets

include the debtors(account receivables ), cash , short term investment, bills receivables,

stock(inventories) ,prepaid expenses and accrued interest.

Net Working Capital: -

Net Working Capital refers to the difference between the current assets and current liabilities.

Current assets are those assets, which can be converted into cash within an accounting year (or

operating cycle). Current assets include the debtors (account receivables), cash, short term investment,

bills receivables, stock (inventories), prepaid expenses and accrued interest. And current liabilities are

those claims of outsiders which are expected to mature for payment within an accounting year and

include creditors (accounts payable), bills payables, out expenses (as standing salaries, outstanding

rent, outstanding wages), short term loans and bank overdraft. Net working capital can be positive or

negative. A positive net working capital will arise when the current assets exceed current liabilities. A

negative net working capital occurs when current liabilities are in excess of current assets.

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11 Working Capital Management.

There is two other type of working capital on the Time basis are

as follows

Permanent working capital: -

It is also called fixed working capital. Permanent working capital is a certain level of

working capital on a continuous and uninterrupted basis.

Amount Permanent working capital

Time

Variable working capital: -

It is also known as Temporary or Fluctuating working capital. Variable working capital is the

working capital needed to meet seasonal as well as unforeseen requirements. It is fluctuating with in

accounting year and cannot live fixed as shown in the figure.

Variable working capital

Amount

Time

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INDUSTRY PROFILEAgriculture Industry at a Glance:-

Industry Overview

The Indian Agriculture Industry is on the brink of a revolution that will modernize the entire food

chain, as the total food production in India is likely to double in the next ten years.

As per recent studies the turnover of the total food market is approximately Rs.250000 crores (US $

69.4 billion) out of which value-added food products comprise Rs.80000 crores (US $ 22.2 billion).

The Government of India has also approved proposals for joint ventures, foreign collaborations,

industrial licenses and 100% export oriented units envisaging an investment of Rs.19100 crores (US

$ 4.80 billion) out of which foreign investment is over Rs. 9100 crores (US $ 18.2 Billion). The

agricultural food industry also assumes significance owing to India's sizable agrarian economy,

which accounts for over 35% of GDP and employs around 65 per cent of the population. Both in

terms of foreign investment and number of joint- ventures / foreign collaborations, the consumer

food segment has the top priority. The other attractive features of the Indian agro industry that have

the capacity to lure foreigners with promising benefits are the deep sea fishing, aqua culture, milk

and milk products.

Excellent export prospects, competitive pricing of agricultural products and standards that are

internationally comparable has created trade opportunities in the agro industry. This further has

enabled the Indian Agriculture Industry Portal to serve as a means by which every exporter and

importer of India and abroad, can fulfill their requirements and avail the benefits of agro related buy

sell trade leads and other business opportunities.

This Indian agro industry revolution brings along the opportunities of profitable investment and

agriculture-industry-india.com provides you the B2B platform with agro related trade leads,

exporters & importers directory etc. that help you make your way to profit easy.

To lead yourself to the destination of profit through the Indian Agriculture Industry, know maximum

about the EXIM policy, programs & schemes, price policy, seed policy and statistics at the Indian

agro portal and harvest benefits from India, world's second largest producer of food and a country

with a billion people. From canned, dairy, processed, frozen food to fisheries, meat, poultry, food

grains, alcoholic beverages & soft drinks, the Indian agro industry has dainty areas to choose for

business.

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MAJOR AGRICULTURE PRODUCTS IN WHICH FCI DEALS :-

Wheat

With a production reaching ten times in past five years, India is today the

second largest wheat producer in the whole world. Various studies and

researches show that wheat and wheat flour play an increasingly important

role in the management of India’s food economy.

Wheat production is about 70 million tonnes per year in India and counts for approximately 12 per

cent of world production. Being the second largest in population, it is also the second largest in

wheat consumption after China, with a huge and growing wheat demand.

Production Area

Major wheat growing states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Madhya

Pradesh, Gujarat and Bihar. All of north is replenished with wheat cultivation. Wheat has a narrow

geographic land base of production as compared to rice or pulses. Wheat is a temperate crop

requiring low temperatures and most of the country is tropical.

Rice

Introduction

Throughout history rice has been one of man's most important foods. Today,

this unique grain helps sustain two- thirds of the world's population.

Archeological evidence suggests that rice has been feeding mankind for more

than 5,000 years. Today, agriculture is the backbone of India’s economy, providing direct

employment to about 70% of working people in the country. It forms the basis of many premier

industries of India, including the textile, jute, and sugar industries. Agriculture contributes about

31% to GDP; about 25% of India's exports are agricultural products.

Rice Production Area

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The major rice growing area in India are West Bengal, Uttar Pradesh, Madhya Pradesh, Orissa,

Bihar, Andhra Pradesh, Assam, Tamil Nadu, Punjab, Maharashtra, Karnataka, Haryana, Gujarat,

Kerala, Jammu- Kashmir, Tripura, Meghalaya, Manipur, Rajasthan, Nagaland, Arunanchal Pradesh,

Himachal Pradesh, Mizoram, Goa, Pondicherry, Sikkim, A & N Island and D & N Haveli.

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CHAPTER-II

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CORPORATION PROFILE

FOOD CORPORATION OF INDIA

About FCI: -

Food Corporation of India (Hindi: भारतीय खाग निगम) was setup on 14th January 1965 under

Food Corporation Act 1964 with authorised capital of almost $600 million to implement the national

policy for price support operations, procurement, storage, preservation, inter-state movement and

distribution operations.

It operates through 5 zonal offices and a regional office in Delhi. Each year, the Food Corporation

purchases roughly 15-20 per cent of India's wheat output and 12-15 per cent of its rice output. The

losses suffered by FCI are reimbursed by the Union government, to avoid capital erosion, and thus

declared as a subsidy in the annual budget. In 2007, such food subsidies were met by government

bonds worth almost $8 billion.

The Food Corporation of India was setup under the Food Corporation Act 1964, in order to

fulfill following objectives of the Food Policy:

Effective price support operations for safeguarding the interests of the farmers.

Distribution of food grains throughout the country for public distribution system ; and

Maintaining satisfactory level of operational and buffer stocks of food grains to ensure

National Food Security.

In its 45 years of service to the nation, FCI has played a significant role in India's success in

transforming the crisis management oriented food security into a stable security system. Since its

inception in 1965, having handled various situations of plenty and scarcity, FCI has successfully met

the challenge of managing the complex task of providing food security for the nation. A strong food

security system which has helped to sustain the high growth rate and maintain regular supply of

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17 Working Capital Management.

wheat and rice right through the year. The efficiency with which FCI tackled one of the worst

droughts of the century not only cemented its role as the premier organization in charge of food

security in India, but also brought it accolades from international organizations.

Today it can take credit for having contributed a great deal in transforming India from a

chronically food deficit country to one that is self-sufficient.

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CORPORATE VISION

Vision 2020

To aggressively promote Decentralized Procurement by State Governments with special

emphasis in non-traditional areas and commodities.

To ensure adequate buffer for meeting requirements under TPDS & Other Welfare Schemes.

To dispose of surplus and un-storage worthy godowns and introduce concepts of mechanized

handling in the conventional godowns.

To undertake R&D for conversion of some of the existing capacity to bulk and cost effective

utilization of existing bulk capacity.

To optimize monthly movement programme with existing state of art of computerization

within the country at various locations as per corporate policies and priorities.

Modernization of Quality Control equipments and systems for food preservation in order to

increase the shelf life of food grain.

To venture in the fields of Forward Trading and Exports of both surplus stocks of food grains

in Central Pool and no-traditional commodities.

To introduce state of art of financial management in order to reduce the dependency on the

present banking system in the country.

To initiate systems for settlement of storage loss and transit loss through insurance coverage

and revised inventory mechanism.

To develop efficiency in human resource management both in staff/officers and workers with

changed circumstances in the work approach of P.S.U. s.

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19 Working Capital Management.

To achieve state of art in computerized communication between different offices/ depots

throughout the country.

NEW INITIATIVES

Having been acknowledged a major player in food grain management within the Country and

abroad, FCI is now endeavoring for

Resource mobilisation to reduce burden on food subsidy.

Better financial & Treasury Management.

Improved stock inventory management real time on-line system through a recently launched

IISFM (Integrated Information System for Food grains Management) in collaboration with

NIC.

Creation of Profit Centers.

Up gradation of technology through interface with Agriculture Universities/Management

Institutes.

Use of ’A’ Twill texture gunny bags as against 'B' Twill bags as a project to reduce losses in

storage and transit.

Multimodal transportation system through riverine / container.

Micro level Inventory Management through focused weekly movement plans.

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Sustained corporate communication for improving image perceptions

CORPORATE MISSION

While homemakers are busy making chapati, roti, and pooris, Food Corporation of India (FCI)

stays busy managing India's grain supplies. FCI buys and markets wheat and rice for the Indian

government, purchasing both domestically grown and imported grains, keeping the stockpiles in its

own warehouses. Through periodic sales, FCI controls and manages the domestic grain supply,

regulating the market prices for those commodities. It also provides some of its stores of grain to

government-subsidized food programs, and it builds up buffer stocks to meet any food crisis. One

of Asia's largest companies, FCI operates under the direction of the Indian government's Food

Ministry. It was founded in 1965. 

QUALITY POLICYQUALITY POLICY

FCI, as the country’s nodal organization for implementing the National Food Policy, is committed to

provide credible, customer focused services, for efficient and effective food security management in

the country. focus shall be:  

Professional excellence in Management of food grain and other commodities

Service quality and stake holder orientation

Transparency and accountability in transactions

Optimum utilization of resources

Continual improvement of systems, processes and resources

Competitive Landscape for Food Corporation of India

Demand is driven by federal agricultural policy programs, food consumption trends, and the grain

and oilseed export market. The profitability of individual companies depends on maximizing crop

yield and minimizing disease risk. Large companies have advantages in highly automated

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technologies and access to the latest in seed and crop technologies. Small operations can compete

effectively by harvesting heirloom, non-genetically modified (GM), or specialty products. The

industry is labor-intensive: average annual revenue per employee (operator and hired laborers) is

$100,000.

Top Food Corporation of India Competitors

Companies Location

Cargill, Incorporated Wayzata, MN

ITC Limited Kolkata, India

Louis Dreyfus SAS Paris, France

Adani Group Ahmedabad, India

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Food Subsidy Released to FCI and Incurred by FCI (Rs. in Crores.)

Food subsidy released to FCI Food Subsidy Incurred by FCI

Year Total Against

Earlier years

For the

Year

Subsidy

Incurred 

during the

year

Status of

Accounts

%of

Subsidy

released in

the year

incurred

2001-

02

16274.00 . 16274.00 18005.00 Audited 90.39%

2002-

03

22673.72 . 22673.72 25321.90 Audited 80.54%

2003-

04

23474.04 4945.86 18928.18 21587.28 Audited 87.68%

2004- 23280.00 4090.39 19189.61 20773.60 Audited 92.37%

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Food Subsidy Released to FCI and Incurred by FCI (Rs. in Crores.)

Food subsidy released to FCI Food Subsidy Incurred by FCI

05

2005-

06

19871.00 473.32 19397.68 21343.99 Audited 90.88%

2006-

07

20786.21 1411.08 19375.13 28027.84 Audited 69.13%

2007-

08

27759.68 5218.75 22540.93 30051.50 Audited 75.01%

2008-

09

36717.00 7627.90 29089.10 34787.47 Audited 83.62%

2009-

10

46456.52 7600.43 38856.19 45717.00 Prov.Estimate 84.99%

2010-

11(#)

45954.56 5379.15 40575.41 57925.00 Revised Estimates 70.05%

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CORPORATE   SETUP

The General Superintendence, Directions and Management of the affairs and business of the

Corporation vests with the Board of Directors

Board of Directors as per section 7(1) of the Food Corporation Act shall be:

Chairman

Managing Director

Managing Director, Central Warehousing Corporation (Ex-Officio)

Government Representatives : -

Three Directors to represent respectively the Ministries of the Central Government

dealing with : -

I. Food

II. Finance

III. Co-operation; and

Six other Directors (out of which four(4) are non-official Directors)

OBJECTIVES OF FCI

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To provide farmers remunerative prices

To make food grains available at reasonable prices,   particularly to vulnerable section of the

society

To maintain buffer stocks as measure of Food Security

To intervene in market for price stabilization

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SIGNIFICANT ACCOUNTING POLICIES

OF

FOOD CORPORATION OF INDIA

1. PURCHASES AND IMPORTS

(A) Purchases of indigenous food grains represent the payment made at the Procurement/

Purchase prices reduced by the amount of income from quality cuts wherever applicable

and include the procurement charges incurred on direct purchases and paid to the State

Governments and other agencies for the purchases made from them.

In respect of imported food grains, purchases are accounted for on the basis of the payment

made for the quantities shown in the bills of lading together with the expenses incurred on

ocean freight, port clearance charges and marine insurance. Stocks on high seas, in ship

awaiting berthing and in ship holds are also valued in the same manner except that the port

clearance charges and cost of gunnies (both not accrued) are not added the in . Such

purchases are taken in the account for vessels sailed up to 31st March. If there is more than

one bill of lading of different financial years for the same vessels, the bills of lading bearing

dates on or before 31st March are to be accounted for as purchases of the relevant financial

year.

(B) In case of import of food grains, the dispatch money earned at the unloading port

Accounted for on the basis of provisional time-sheets where the final time-sheets are not

available and for the loading pot, it is accounted for only on receipt of final time-sheets.

However, in the case of export of food grains the dispatch money earned at the loading port

is accounted for on the basis of provisional time-sheets.

2. SALES

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a. Sales affected on behalf of the Government of India are reflected at the issue prices

fixed by the Government. The difference between the economic cost and the sales

realization is claimed as subsidy.

b. Sales of sugar are reflected at the net value after deducting sub-wholesalers/retailers

margin and transportation charges.

c. Sales are accounted for on actual delivery of stocks.

3. BANK TRANSACTIONS

The accounting of cash and bank transactions including Inter-office remittances is made as

per the books maintained by the Corporation. The differences in the banking transaction

between the figures of the Corporation and those appearing in the bank accounts are

reflected in the bank reconciliation statement.

4. INCOME/EXPENSES RELATING TO PREVISOUS YEARS

Items of income/expenses for each claim/bill pertaining to the previous years above

Rs.25000/- which arise in the current period as a result of errors or omissions are accounted

for under the head “Adjustment relating to previous years. “ The charges/ credits arising on

the outcome of a contingency which at the time o f occurrence could not be estimated

accurately do not constitute an error but a change in estimate. Such an item is not treated as

prior item.

5. PROVISION OF LIABILTIES

(A) Provision for accrued expenses UP to 31st March, irrespective of amount of each bill/claim

is made in the accounts.

(B) All undisputed taxes, levies i.e. Central Sales tax, purchase tax, Market fee, Octroi, Entry

tax, Nirashrit tax, Excise / Custom duty etc. which are legally payable and paid within the

stipulated period are accounted for on accrual basis.

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(C) Property taxes and other levies/ service charges etc. On the godowns belonging to the

Corporation charged by the local authority/ administration and which are legally payable

shall be accounted for on accrual basis.

(D) Interest due on loans or borrowings or advances from public Financial Institutions/

Scheduled Banks up to 31st March and paid on or before finalization of Accounts or by the

specified date for filing of Return of Income whichever is earlier, is accounted for on

accrual basis.

(E) Where the arbitration award is against the Corporation and the Corporation has not

challenged the award within the period of 3 months from the date of pronouncement of

award or the appeal to set aside the award has been rejected/dismissed by the court,

liabilities are provided for on accrual basis.

(F) Prepaid expenses Up to Rs.10,000/- in each case are charged to revenue.

(G) Contingent liabilities (claims against the Corporation not acknowledged as debts) are

disclosed in each case, above Rs.25,000/-

(H) Liabilities other than those relating to Central/State Governments which have not been

claimed within a period of three years are generally written back. However, this limitation

is not applicable to Central/State Government liabilities which are valid for 30 years and

also to the claims/ counter-claims of state /Government / Agencies, where there are

continuing transactions and where

Accounts are pending reconciliation/claims are pending acceptance.

(I) The accounting of expenditure towards reimbursement of Hill Transport subsidy and Road

Transport charges is made upon receipt of claims as per prescribed procedure, from

concerned state Governments.

(J) Payment under Voluntary Retirement Scheme excepting one-fifth of the amount so paid,

are treated as Deferred Revenue Expenditure and equally claimed as expenditure in

succeeding four years.

(K) Liability for un-responded debit/excess credit given by the Bank as well as claim on the

Bank for excess debit/un-responded credit alongwith interest accrued thereon is retained for

12 years. Thereafter the net amount alongwith interest is written back/charged off as current

year’s income/expenditure, however, in case of nit liability the same alongwith interest

thereon, or reflected under contingent liability.

6 DERIVATIVE TRANSACTIONS

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34 Working Capital Management.

The realized gain or loss in respect of commodity hedging contracts and interest rate swap

transactions, entered into by the Corporation to manage the commodity price risk and

interest rate risk respectively, the settlement period of which has expired during the year,

are recognized in the Profit and Loss Account. However in respect of contracts the

settlement period of which extend beyond the Balance sheet date, are treated as off

Balances Sheet transactions. Gain or losses arising there from are recognized, as and when

settlement takes place, in accordance with the terms of the contracts.

7 FIXED ASSETS

a. Fixed assets are accounted for on historical costs less depreciation (except freehold land

at cost) on written down value basis. The rates and methods of depreciation are being

adopted as prescribed in the Income Tax Act, 1961 and Rules framed there under as

amended from time to time

b. Depreciation claimed less/more in earlier year(s) is not charged off/reversed in the

current year.

c. Land(s) allotted to the Corporation free of cost by the State/Central Government are

valued at Notional Cost of Re.1/-(for each plot of land).

8 REVENUE RECOGNITION

The following items of income and expenses are accounted for on cash basis-

(A) Income

(1) Claims against Central/State Governments and their agencies/Banks which are prima

facie under dispute.

(2) Refunds including rebate/interest thereon, due on account of taxes and levies.

(3) Claims on duty drawback on exports.

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35 Working Capital Management.

(4) Claims on Railways for freight on missing wagons, disputed demurrages and

compensation for shortages/ damages.

(5) Interest on advances to the State Governments/Agencies/Staff and on delayed

realization of sales.

(6) Claims on shipping agents for short Landing in weight in bulk cargo as well as in

bagged cargo where number of bags are found correct having no slack and torn bags noticed

at the time of discharge of vessel and for disputed demurrages.

(7) Penalties and compensation for breach of contracts.

(B) Expenses

1. All disputed taxes/levies i.e. CENTRAL/State Sales tax, Purchase tax, Value Added

Tax, Market fee, Octroi, Entry tax, Nirashrit tax, Excise/Custom duty etc. However, the same

should be shown as contingent liability provided the amount/claim in each case exceeds

Rs.25,000/- Sales tax paid over and above the actual collection and disputed is shown as

deposit recoverable and is charged in the year of settlement after the assessment is over.

2. Penal interest other than that accepted by the Corporation.

3. Claims against the Corporation including salaries and wages which are prima facie

under dispute.

4. Prorata pension payments to the Government of India, Gratuity and Encashment of

leave.

5. Payment to the families of deceased employees under the FCI Group Insurance

Scheme, 1980.

6. Provident Fund Contribution in respect of Contractor’s labour.

9 PHYSICAL VERIFICATION

(A) The physical verification of stocks (including non-issueable, below I.S.S and damaged) of

foodgrains, sugar and other commodities is required to be made at the end of year on the

basis of peripheral count and weighment is conducted in all depots including CWC/SWC

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36 Working Capital Management.

godowns. Provision for shortages assessed on peripheral count, if any, is considered at

Headquarters.

(B) The physical verification of stocks is conducted by 100% weighment is conducted in

respect of baby stacks (baby stacks are defined where the number of bags is less than 20%

of the total number of bags received right from the creation of the stack) excepting for

those baby stacks where the stocks are covered by tender sales or subject to litigation.

(C) Where the stocks are held in silos/bins and in transit at port/Railway-siding, the book

balances are adopted. The variations, if any, are adjusted when the silos/bins are emptied

and / or the stocks received at godowns. Stocks under fumigation at the year end are also

taken at the book balances.

(D) Where the stocks are loaned to/held by other parties, these are adopted as per book

balances.

10 VALUATION OF CLOSING STOCK.

(A) The closing stock of issueable foodgrains, by products and sugar are valued at weighted

average acquisition cost. In cases where the stocks comprise of both indigenous and

imported varieties of a particular commodity, the stocks are valued at common weighted

average acquisition rate/cost.

(B) The stocks of foodgrains, by-products/sugar declared as non-issueable, below I.S.S after

due segregation and analysis by Quality Control Division and as approved by Competent

Authority, are valued at estimated realizable value.

(C) The stocks of other commodities i.e. gunnies and stores & spares etc. are valued at average

acquisition cost.

11 INVESTMENT

The investments in Govt. of India Bonds are valued at cost.

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37 Working Capital Management.

FINANCIAL FEATURES AT A GLANCE

Average Bank Borrowing during  2008-09

(Consortium of 65 Banks as on 31.3.08)Rs. 22333 Crores

Commercial Borrowing (Bonds) Rs. 8605 Crores

Rate of Interest on Bank Borrowing w.e.f.

01.03.200810.15 % p.a. (Monthly Compounding)    

Rate of Interest on Bonds 7.31%p.a.(Annually Payable)

Equity Released for Plan Schemes and Working Capital (as on 31.03.08)

Rs. Cr.

YearWorking

Capital

Construction of

GodownsIISFM Project Other Schemes Total

Upto 2002-03 1484.00 855.11 Nil 13.89 2353.00

2003-04 Nil 23.96 15.50 Nil 39.46

2004-05 Nil 5.87 39.14 Nil 45.01

2005-06 Nil 20.78 15.00 Nil 35.78

2006-07 Nil 7.50 Nil Nil 7.50

2007-08 . . . . .

First Quarter Nil Nil Nil Nil Nil

Second Quarter Nil Nil Nil Nil Nil

Third Quarter Nil 3.18 14.49 Nil 17.67

Fourth Quarter Nil 0.82 10.51 Nil 11.33

Total Nil 4.00 25.00 Nil 29.00

Total paid-up Capital 1484.00 917.22 64.64 13.89 2509.75

Authorised Capital . . . . 3500.00

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38 Working Capital Management.

Accounting Year-Wise opening Stock adjusted weighted Economic Cost

Year Status Wheat Rice 

2001-02 Audited 852.94 1097.96

2002-03 Audited 884.00 1165.03

2003-04 Audited 918.69 1236.09

2004-05 Audited 1019.01 1303.59

2005-06 Audited 1041.85 1339.69

2006-07 Audited 1214.39 1411.60

2007-08 Audited 1348.69 1571.36

2008-09 Audited 1458.83 1698.90

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39 Working Capital Management.

CHAPTER-III

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40 Working Capital Management.

Literature Review REVIEW OF EXISTING LITERATURE

Review of existing literature means review or readout the present available information that

is collecting before the study by any other person. The existing literature is very important in the study

of any topic because the existing literature give the basic idea about the study. It does the work as the

secondary data in the preparation of the study report. Without existing data it is difficult to start the

study because we don’t have any clue about our study so the review of existing data is necessary for

every researcher. In the study of working capital management it is very necessary to study the

information available of the past studies.

J. Fred. Weston finds the some main important function of the financial manager in the

aspects of working capital management. “Time, working capital management requires much of

financial manager’s time. Investment, working capital represents a large portion of the total investment

in assets. Criticality, working capital management has great significance for all the firms but it is very

critical for the small firms. Growth, the need for working capital is directly related to the firm’s

growth.” From the above study it is clear that the working capital management must have the long

time and it is related to the firm’s growth directly and it is a large part of the total investment in the

assets.

According to the RBI’s report on the study of working capital management, investment in the

current assets represents a very significant portion of the total investment in the assets. In large

companies like BHEL, the current assets as a percentage of total assets may be high as, say, 70

percent.

E. W. Walker gives the suggestion after his study on working capital management that the

financial manager should determine the optimum level of the current assets so that the wealth of

shareholders is maximized.

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41 Working Capital Management.

CHAPTER IVRESEARCH

METHODOLOGY

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42 Working Capital Management.

NATURE OF RESEARCH: -

The research is of analytical as well as descriptive in nature, where the problem has been

analyzed with help of financial information available with the corporation.

FOCUS OF THE PROBLEM

The study is based on the premise that an efficient and effective management of working

capital enhances the profitability of the corporation and utilizes the corporation’s fund in most

optimum manner. Thus the present study entitled “Working Capital Management at Food Corporation

of India.” is focused on evaluating the various components of working capital so that the suitable

strategies may be suggested to the corporation for its effective management.

RATIONALE & OBJECTIVES OF THE STUDY

To find out the liquidity position of the corporation.

To analyze the credit policy of the corporation.

To know the how a firm made the payments.

To know the inventory position of the corporation.

To find out the effectiveness of working capital management.

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43 Working Capital Management.

DATA COLLECTION & DATA SOURCE: -

Due to the nature of study, study is primarily based on the secondary data. The secondary

data is collected through annexure, schedules, other pertinent details from various sources in the

corporation and references books. Annual reports and records of the corporation have been used for

the purpose of study.

TOOLS & TECHNIQUES OF ANALYSIS: -

In order to analyze the problem and to arrive on a fair view ‘Ratio Analysis’, Interview

Methods & different techniques related to inventory management, cash management, receivable

management & payable management have been incorporated. Some of them are as follows: -

• Estimation of components of working capital method

• Percentage of sales approach

• Operating cycle approach

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44 Working Capital Management.

CHAPTER V

DATA ANALYSIS &

INTERPRETATION

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45 Working Capital Management.

THEORETICAL FRAMEWORK OF WORKING CAPITAL

MANAGEMENT

Working Capital Cycle

Working capital is vital to a business. They have to have funds available to pay their day-to-

day bills, wages and so on. The working capital is made up of the current assets net of the current

liabilities. It is very important to a corporation to manage its working capital carefully. This is

particularly true where there is a substantial time lag between making the product and receiving the

money for it. In this situation the corporation has paid out all the costs associated with making the

product (labor, raw materials and so on) but not yet got any money for it. They must therefore ensure

they have enough cash to do this.

The way working capital moves around the business is modeled by the working capital cycle. This

shows the cash coming into the business, what happens to it while the business has it and then where it

goes. A simple working capital cycle may look something like: -

Between each stage of this working capital cycle there is a time delay. For some businesses this

will be very long where it takes them a long time to make and sell the product. They will need a

substantial amount of working capital to survive. Others though may receive their cash very quickly

after paying out for raw materials etc. (Perhaps even before they've paid their bills) - They will need

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46 Working Capital Management.

less working capital. For all businesses though they need to plan how much cash they are going to

have.

Process flow of “Cash planning & Budgeting”

No

Yes

Explanation of above:

Cash is the lifeblood of every business organization. Every organization needs to have

adequate flow of cash to meet its all requirement whether short term or long term. In any organizations

before starting any business activity proper planning of cash inflow & outflow is required to be made.

Input information received from all units- firm for the first week & tentative for the 2nd, 3rd, 4th week for raw material, sales, manufacturing exp. Etc. on the basis

of debtors & inventory aging reports etc.

Plan firmed up after discussion and modified with reference to inflows & outflows on unit basis.

Plan met

Monitored & reviewed on daily basis including follow-up collection /funds-in-transit.

Carried to next month

Month closed

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47 Working Capital Management.

So, on the basis of receivable period cash inflow is planned for the beginning of each month and

accordingly outflow that is to be made is also planned as to when payment is to be made.

Purpose of preparing cash flow

Cash flow is concerned with the movement of money in and out of a business. More

importantly, it is concerned with the time at which the movement of the money takes place. You might

even say the concept of cash flow is more in line with reality.

It is being identified in which unit the outflow is greater than the inflow, & where there is

discrepancy between the Budgeted & Actual inflow & outflow.

In this format on daily basis cash inflow & outflow is entered under respective heads. This is

done in all the units of Food Corporation of India then at the end of the day cash balance remaining

with all banks are also added & it is found whether the cash balance reduced between two consecutive

days are equivalent to the net of cash flow or not? If not, then any discrepancy is there & that is tried

to found out. It also helps in finding out the item wise expenditure of the firm & help in knowing the

surplus/deficit generated in each unit & also helps in finding out the reason for difference between the

inflow & outflow of various units.

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48 Working Capital Management.

Working Capital Management

Components of Working Capital:-

Receivable Management

Inventory Management

Payable Management

Cash Management

Receivables Management

The term receivable is defined as “debt owed to the firm by customers arising from sale of

goods in the ordinary course of business”. The credit sales are generally made on open account in the

sense that there are no formal obligations through a financial instrument. However extension of credit

involves risk and cost. Management should weigh the benefits as well as the cost to determine the goal

of receivable management.

The benefits from receivables are the increased sales and profits anticipated because of a

more liberal policy. When firms extend their trade credit, i.e. invest in receivables; they intend to

increase the sales level. The motive of liberal credit policy can be either growth oriented or sales

retention. The extension of credit has a major impact on sales, costs and profitability. Other things

being equal, a relatively liberal policy and therefore higher investment in receivables will produce

larger sales. However cost will be higher with the liberal policies than with more stringent measures.

Therefore accounts receivables management should aim at a trade-off between profit (benefits) and

risk (cost).

The cost associated with the extension of credit and accounts receivables are:

1. Collection cost

2. Interest cost

3. Delinquency cost and

4. Default cost.

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49 Working Capital Management.

Receivable Management in Food Corporation of India

These sales are made against invoice. Receivable management is beyond credit control.

In Food Corporation of India Sales ledger debtors’ day collection is prepared to calculate on

a consistent basis throughout the corporation and for each unit, the number of day’s sales represented

by customer debts.

Department involved in receivable management

1. Accounts & Finance department

2. Sales & marketing department

Credit terms followed

All sales made are credit sales.

1. It has different payment terms with different customers and it is mutually agreed which is

shown on the PO (purchase order) made with each customer.

2. In general credit offer to most of the customers is for 30-45 days, and to few customers it is

60 days.

3. Advance payment is received in case of foreign customer & the customer who are one time

purchaser or whose credit worthiness is not checked.

Credit policy: -

In credit policy as credit standards & credit analysis is done. But in Food Corporation of

India there is no written credit policy as such. No credit analysis is done before selling goods to them.

No documents are being filled by the customer & their financial performance is also not judged.

Sometime they just refer to their balance sheet. No information is collected either internally or

externally.

Collection policy: -

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50 Working Capital Management.

There is distinct credit collection policy in Food Corporation of India because no credit sales are

allowed in FCI and that is FCI not having any uniform collection policy.

Inventory management

Inventories are stock of the product, a corporation is manufacturing for sale. Inventories can exist in

the form of raw material, work-in-progress, finished goods, components and supplies, whereas motive

for holding inventories can be transaction motive, precautionary motive and speculative motive.

But many companies can’t operate under this model. Those that sell time-sensitive items have to have

materials, if not finished products, on hand to satisfy the expectations of the customer who needs an

order right away. Now-a-days many large manufacturers operate on a just-in-time (JIT) basis whereby

all the components to be assembled on a particular day, arrive at the factory early that morning, no

earlier no later. This helps to minimize manufacturing costs as JIT stocks take up little space,

minimize stock holding and virtually eliminate the risk of obsolete or damaged stock, because JIT

manufacturers hold stock for a very short time, they are able to conserve substantial cash.

Inventory Management – Objective

The basic objective of inventory management is twofold. First is the avoidance of over or under

investment in inventories and second is to provide the right quantity of material to the production

department at right time. The key issue for a business is to identify the fast and slow stock movers

with the objective of establishing optimum stock levels for each category and, thereby, minimize the

cash tied up in stocks. Factors to be considered when determining optimum stock levels are:

The projected sales of each product.

Availability of raw materials, components etc.

Delivery time by the suppliers

Can one remove slow movers from one’s product range without compromising best sellers?

Inventory Management Techniques

An inventory management technique includes the following: -

• Effective and efficient purchasing, storage and issuing procedures.

• Settings of various levels like maximum, minimum, recorder level etc.

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• Fixation of economic order quantity.

• Establishment of inventory budgets.

• Use of perpetual inventory system.

• Min-max plan.

• Order cycling system.

• ABC analysis.

• VED analysis.

• XYZ analysis.

• Use of inventory ratios.

• Aging schedule of inventories.

INVENTORY MANAGEMENT OF FCI In Food Corporation of India inventory management is done as various types of inventory are required

to be kept & valuation of inventory is done.

Types of Inventory

1. RAW MATERIAL

BOP (Brought out part): - It is the inventory of main raw material. It is kept for continued

production.

Development material : - It is the inventory that is being developed for new order until the

sample is being finalized.

Key material : - It is the raw material of keys

Plastic material : - It is the inventory of plastic material that is used for covering the keys.

Job Work (3 rd party RM ): - It is the inventory that is being used by third party for producing

our goods. This stock is in a way the stock of Food Corporation of India only.

2. Work-in-progress : - It is the inventory of semi-finished goods.

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52 Working Capital Management.

Key section : - It includes following:-

Key blank : - It is the inventory of plain key material.

Key bitted : - It is the inventory of key that is being cut as per the requirement of locks of

different vehicles.

Key molded : - It is the inventory of key that is being molded to suit the requirement of vehicle.

3. Rejection: - It is the inventory of item that has been out of use.

The material that can be used from rejected inventory is taken out & rest is the scrap

Technique of Inventory Management used

Effective and efficient purchasing, storage and issuing procedures are being followed. On the basis of

schedules received from the customer forecasting of material requirement for the full lead period is

done.

Procedure of purchase, stock & issue are as follows:

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53 Working Capital Management.

Process flow of purchase, stock & issue

When supply is received then check is done at the gate of the wherehouse & it is checked whether the

material is supplied as per the invoice. If satisfied then MRR (material received receipt) is issued at the

gate. Material is then sent to the receiving department, there the quantity of material is checked to

know whether it is as per the order or not? After checking it is then passed on to the quality store for

Schedule is received from customers i.e. Central Govt. or State Govt.

MRP (material requirement planning) is done

Material received is stored (one day inventory is maintained)

Bill of material is prepared

Availability of stock is checked

Production schedule is checked

Accordingly Order is placed with suppliers/vendors

Material is issued for production using FIFO method

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54 Working Capital Management.

the quality check i.e. whether the quality is as per the order requirement or not? Then the material is

finally stored in the store from where it is issued to the production department through the issue slip.

Material is issued using FIFO (first in first out) method, where the material that comes first is issued

first for the production. They use the practice in which material is kept in racks in such a way that

material coming first will be used first.

JIT method: -

In Food Corporation of India JIT system of inventory management is used. It is the method

in which inventory is ordered only when demand comes. As in Food Corporation of India the

production schedule is followed. When & how much quantity of purchase & sale is to be made is

know beforehand. That’s why no excess inventory is maintained.

Aging schedule of inventories: -

Inventory aging is done where on the basis of period of stock holding inventory is divided

into four categories: -

• 30-60days :- Fast Moving

• 60-90 days Slow Moving

• 90-120 days

• 120 above :- Non-Moving

Continued Inventory aging is done to know the status of inventory. Analysis is done so as to control &

reduce the slow moving inventory.

Non-moving inventory are removed either by selling it as scrap or by making some modification in it

through job work and then using it again, if possible.

Which type of inventory is higher in different months? Remedial action can be taken against the

inventory. With the help of chart comparison becomes easy.

Payable Management

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55 Working Capital Management.

Creditors are a vital part of effective cash a management and should be managed carefully to enhance

the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can

create liquidity problems. Ironically, some companies looking to take working capital off the balance

sheet nurture slow, inefficient or even obstructive A/P processes. It’s one case where negligence can

improve financial performance. But squeezing the vendors is a shortsighted policy. A better strategy is

to shrink the vendor base radically, then use one’s clout to negotiate longer terms with the vendors.

Vendor rationalization is a process that can pay off in a big way. Apart from the question that who

should authorize purchasing in the corporation- should it be tightly managed or spread among a

number of (junior) people? The following comes under good payable management.

1. Purchase quantities should be geared to demand forecasts

2. Order quantities should be used which takes account of stock holding and purchasing costs.

3. The cost to the corporation of carrying stock should be clearly defined.

4. A corporation should have alternative sources of supply. It should get quotes from major

suppliers and shop around for the best discounts, credit terms, and reduce dependence on a

single supplier.

Payable Management in Food Corporation of India

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56 Working Capital Management.

In Food Corporation of India it is being ensured that timely payment is made to the supplier/vendors.

The payment schedule is so designed that it will be made when the payment is received from the

debtors/customers & they have tried to delay the payment as much as they can so that the excess cash

balance is not required from the bank& their WCDL (working capital draw down limit) is not used.

Payment terms: -

1. Payment terms with the various vendors is decided on the basis of their PO i.e. purchase

order. The unit to be purchased cost of each unit, period of credit, when & how payment is to

be made. Everything is stated in the PO.

2. Payment is made to the vendors twice in a month in all the units of Food Corporation of

India. First installment is made in between 8th-10th & second installment is made in between

25th–29th.

3. Payment is made to the vendors through RTGS, NEFT only if all the required bank detail

(like IFSC code, Bank name, its branch, a/c no.) of the respective vendor is available, if not

then the payment is made through a/c payee cheque.

Methodology of payment

In Food Corporation of India the complete data base of the vendors is made in which each & every

information & bank detail of the suppliers is available.

1. For making the payment every time it become due, the suppliers’ liability is checked on the basis

of their credit period and amount that is due for the respective period is found out and it is being

tallied with the ledger of that supplier.

2. If the amount in ledger doesn’t tally with the ledger of supplier then balance confirmation is asked

from the respective supplier to know the due amount.

3. Then the amount due is recorded in the database & it is checked that through which medium

payment is to be made. If amount is more than “one lack” then payment is made through RTGS

otherwise through NEFT, and if bank detail is not available or the supplier whose bank is not

registered with RBI then in that case payment is made through account payee cheque.

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4. Food Corporation of India has recently started the service of outsourcing cheque payment from

HSBC bank, whereby, now only the details of supplier & the amount to be paid will be sent to the

bank & bank will make the cheque & payment on its behalf this will save the time & efforts of the

employees & the process will also get fastened.

CASH MANAGEMENT

Cash is an important part of any business organization; therefore it should be manage properly so as to

ensure smooth functioning of the organization. It is the

maintaining of liquidity of a firm to minimize the risk of insolvency? (An insolvent corporation is one

where it is unable to meet its maturing liabilities on time because it has inadequate liquidity to meet its

debt obligation). Cash Management is also about the proper balancing of keeping cash without letting

it idling around. Profit is not equating to cash flow. A highly profitable corporation might collapse if

without adequate cash flow due to the tying up of corporation’s funds with the accounts receivable and

worsen by the needs to make regular payments like wages, rent & utilities, taxes

Motives/Reasons of Holding Cash

Three (3) motives advocated by British economist, John Maynard Keynes namely for:

1. Transaction motive

2. Precautionary motive and

3. Speculative motive

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Cash Management in Food Corporation of India:Cash is the lifeblood of every business organization. Every organization needs to have

adequate flow of cash to meet its entire requirement, whether short term or long term. In any

manufacturing organizations before starting any business activity proper planning of cash inflow &

outflow is required to be made. So, on the basis of receivable period cash inflow is planned for the

beginning of each month and accordingly outflow that is to be made is also planned, as to when

payment is to be made.

On daily basis unit wise cash flow is prepared as discussed above & the position is

monitored. It is being identified in which unit the outflow is greater than the inflow, & where there is

discrepancy between the Budgeted & Actual inflow & outflow.

Payment is received on 2nd, 8th, 18th- 22nd of each month, accordingly payment is made on 2nd, 8th, &

22nd of each month.

Receivable & payable of the organization are so managed that the cash limit available with

the Banks are minimally used.

Food Corporation of India has maintained the accounts with many banks but major ones are

SBI BANK, IDBI BANK and AXIS BANK.

Bank provides the facility of WCDL (working capital draw down limit).it is the limit

available with the bank for meeting the short term cash requirement of the firm.

Different bank charges differed rate of interest for the service. As WCDL is the zero balance schemes

where firm can use the credit limit of the bank up to certain extent as agreed upon by them.

WCDL (working capital draw down limit) is of two types: -

Short-term loan: - It is the short-term loan facility that the firm can avail with the bank it is having 15

days roll over period i.e. after using for 15 days this facility gets rolled for next 15 days.

CC (Cash Credit) limit: -It is the facility similar to credit card facility available with the bank. The

organization can avail up to certain extent the credit facility of bank. In case of standard chartered

bank it is 500 Crores.

To know the position of WCDL used with the banks daily bank statements are checked of all the three

banks, this is done because there is always difference between the our bank book & books maintain by

bank, so to get an accurate picture of cash bank statements are checked. It is identified on daily basis

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that whether the firm is having fund with bank or it is using bank’s fund i.e. Bank’s CC limit. This is

done to know the cash position of firm at the end of each day so that decision could be taken on time

regarding Sweep to other unit or regarding investing the surplus fund.

Chart is prepared to show the WCDL utilization position. In the next page WCDL Average chart is

shown in which average utilization of the WCDL is shown.

0.00

500.00

1000.00

1500.00

2000.00

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Series1

As per this chart WCDL utilization increases on 12th –18th of every month as payment is

being made to supplier’s between these days in maximum number of units of Food Corporation of

India. The utilization is minimum on 8th & 22nd of every month as payment is received on these days

from customer.

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STATEMENT OF WORKING CAPITAL

Statement of Working Capital as on 31 March 2009

Particulars Amount Rs. (in Cr.)

Current Assets:

(1) Cash 16.74

(2) Debtors and receivables 20843.27

(3) Stock 15135.81

(4) Advances to suppliers & employees 75.97

(5) Short term investment 631.90

Total of current assets (A) 36703.69

Current Liability:

(1) Creditors 3741.09

(2) Provisions for FBT 3.87

(3) Advances from customers 142.15

(4) Short term loan 1224.29

Total of current liability (B) 5111.4

Net working capital (A-B) 31592.29

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Operating Cycle Framework

Operating Cycle

Working capital is also known as revolving capital and a circular

path of conversion/reconversion takes place. This revolution of cycle is

called as the operating cycle. Let us consider an example to better understand operating cycle. A

person starts a business with an initial investment. With credit extended by expense creditors, he

starts production process. Goods of varying levels of finish results, and thus called as work-in-

progress. Once complete processing is done, it is called as finished goods. Until these goods are sold,

they remain in stock. Sales may be for cash and/or credit basis. The business person needs to wait a

little to realize cash from credit customers. The realized cash is used to pay creditors. But he needs to

maintain cash balance for day-to-day operations as well as for meeting sudden spurt in payment

obligations accompanied by sluggish cash collections from debtors. Thus a revolution or cycle from

cash to raw materials to Work-in-Progress, to finished goods, to debtors, and back to cash takes

place. This revolution is called as operating cycle.

Thus, we can say that the term operating cycle, otherwise called as cash cycle refers to the

length of time necessary to complete the following cycle of events:

1. Conversion of cash into inventory

2. Conversion of inventory into debtors

3. Conversion of debtors into cash

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Stage 1: Cash to Inventory – In this stage, cash first gets converted into raw materials, then work-in-

progress and then finished goods in a typical manufacturing concern. As regards non-manufacturing

concerns, when the goods are purchased, cash gets converted into Inventory.

Stage 2: Inventory to Debtors – The inventory thus produced or purchased, gets converted into

debtors or receivables upon credit sales.

Stage 3: The debtors or accounts receivables get in turn converted back into cash when they make

payment.

Length of operating cycle: When raw materials remain in store pending issue for production for a

less duration, when raw materials gets converted into WIP in a short duration, when finished goods

remain in warehouse pending for sales for a short duration only, and when cash realizations out of

sales are made quickly and finally when payment to creditors is made slowly, the operating cycle

would be smaller and consequently the working capital will also be reasonable. Thus shorter

duration of operating cycle indicates an efficient working capital management.

For Example:

Computation of length of operating cycle:

Period covered 1 year of 365 days

Average credit period allowed by creditors 16 days

Average total of debtors outstanding $480,000

Total consumption of raw materials per

annum $4,400,000

Total production cost per annum $10,000,000

Total cost of sales $10,500,000

Sales during the year $16,000,000

Value of stock maintained:

Raw materials

Work in progress

 

$320,000

$350,000

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63 Working Capital Management.

Finished goods stock $260,000

Calculate the operating cycle.

Solution:

Age of Raw materials =    $320,000 x 365  =

     $4,400,000

27 days

Age of WIP =   $350,000 x 365  =

   $10,000,000

13 days

Age of finished goods =   $260,000 x 365  =

   $10,500,000

9 days

Age of debtors =   $480,000 x 365  =

    $16,000,000

11 days

60 days

Less: Age of creditors (given) 16 days

Length of Operating cycle 44 days

Computation of Working capital need through Operating cycle

The length of operating cycle can be used to estimate total working capital required. First, we

have to calculate the number of operating cycles in the period under study, normally a year.

Therefore, number of operating cycles =       Number of days in a year

                                                                   Length of operating cycle in days

In the above example, the number of cycles per annum would be 365 / 44 = 8.3 times.

Amount of working capital =   Total Operating cost

                                              No. of Operating cycles

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64 Working Capital Management.

If the operating cost per annum is $10,500,000, the amount of working capital would thus come to

$10,500,000 ÷ 8.3 = $1,265,060 per operating cycle. Hence the significance of operating cycle

concept in the efficient management of working capital.

Relevancy of Operating Cycle Approach in Food Corporation of India

Food Corporation of India still not adopted these methodologies but in forthcoming years they will

have to adopt these terminologies not in theoretical sense but in they have to put themselves in

practical manner also. This is the main reason that I have put myself to explain these methodologies

with the help of an example.

In Food Corporation of India everything is controlled by Central Government, buffer stock, targets

of the forthcoming years for purchase of food grains, minimum support price for food grains,

shortage ratios, purchase price and sales prices of food grains that are the main reason for not

adopting these methodologies in practical manner mainly not practicable for FCI, where everything

is controlled by Ministry of Agriculture, Central Government.

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65 Working Capital Management.

CHAPTER-VI

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66 Working Capital Management.

FINDINGS

The study of working capital primarily aimed at pinpointing the strengths and weaknesses of

a business undertaking by regrouping and analyzing the systems and procedures involved in preparing

financial statements and procedures involved in. It is useful for management for its internal affairs and

to outside parties who are directly or indirectly related with the affairs of the corporation. These are

crucial reports, which reflect the financial soundness of a business enterprise through well- arranged

data.

On the basis of the study of financial accounting system of Food Corporation of India

following are the main findings:

1. The working capital management of corporation is good. Corporation pays its creditors on

time and well manages the current assets.

2. There is a time gap between debtors and creditors. And it’s a good health sign for a

corporation. Because a corporation can invest for short term & earn return.

3. Firm made its payment through NEFT (national electronic fund transfer) & RTGS (real time

gross settlement). And by this a firm can made payment quickly and there is no need of paper

work.

4. As corporation uses JIT policy for inventory. That’s why there is very less chances for

obsolescence of inventory.

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67 Working Capital Management.

SUGGESTIONS

On the basis of the study of procedures of Food Corporation of India following are the

suggestions: -

1. They should list their Corporation in stock Exchange to generate funds so that they can

expand their business and earn more revenue.

2. Corporation is working on Offline. That’s why corporation should adopt other software like

Oracle etc.

3. There should have uniform policy in every unit like in making provisions, valuation of

inventory etc.

4. If firm has JIT policy then why there is non-moving stock exists in the firm. A firm should

keep check on it.

CONCLUSIONS

Food Corporation of India is a growing enterprise. Its sales are increasingly gradually.

Depending upon which its working capital requirement s also increased.

The management of working capital in Food Corporation of India is quite satisfactory. This

is shown by different calculations. calculations like net working capital, Current Assets, current

Liability and operating cycle shows that liquidity position of the corporation is good which means

corporation can easily pay to its short term liabilities as and when it become due.

And if one can get money to move faster around the cycle (e.g. collect money due from

debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to

sales), the business will generate more cash or it will need to borrow less money to fund working

capital. As a consequence, one can reduce the cost of bank interest or generate additional free money

available to support additional sales growth or investment. Similarly, if one can negotiate improved

terms with supplier e.g. get longer credit or an increased credit limit; one can effectively create free

finance to help fund future sales.

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68 Working Capital Management.

LIMITATIONS OF THE STUDY

The study is based on secondary data which may incorporate the limitations of the same.

The study is restricted to the period of three years (2006-07), (2007-08), (2008-09).

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CHAPTER VII

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70 Working Capital Management.

BIBLIOGRAPHY

BOOKS: -

1. Khan M.Y. and Jain P.K (2001), Financial Management, Tata McGraw Hill.

2. Kothari C.R. (2005), “Research Methodology-Methods & Techniques”, New Age

International Pvt. Ltd. Publishers, New Delhi.

3. Pandey I.M. (2003), Financial Management, Tata McGraw Hill.

4. Shapiro Alan C. (2003) “Multinational Financial Management” John Wiley & Sons (ASIA)

Pvt. Ltd.

REPORT: -

Bulletin and Annual Report: - Food Corporation of India. (From 2004-2005 to 2008-09).

Annual Report of FCI for the financial year 2009-10 is under submission to Food Ministry, so

unavailable.

WEBSITES: -

1. www.economictimes.com

2. www.financialexpress.org

3. www.fciweb.nic.in

4. http://www.agriculture-industry-india.com


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