Working Capital Management Live Project Report by Pranay Jindal in Jindal Steel and Power

Live Project ReportOn

Working Capital ManagementOf

Jindal Steel & Power Limited

Summer Internship Project Report Submitted In Partial Fulfillment of the Requirements for the Post Graduate Diploma in Management

Submitted by

Parnay Deep

Supervisors: Company Guide: Ankit (Sr.manager Finance)

KURUKSHETRA UNIVERSITYKURUKSHETRA

Acknowledgement

I have to thank KURUKSHETRA UNIVERSITY KURUKSHETRA for giving me an opportunity to

undertake my project work and for giving me knowledge in the field of finance during my

two years course.

I would like to thanks Mr. ANKIT, Sr.Manager - Finance for their valuable guidance and

support in completion of live project at the Jindal Steel & Power Ltd. I would express my

sincere thanks to all the staff members of Jindal Steel & Power Ltd, without their support,

this project would not have been a success.

Last but not the least I would like to thank those person whose encouragement and ideas

enriched my project.

Parnay Deep

Table of Content

Executive Summary - - - - - - - 5

Introduction - - - - - - - - 6

Objective of Study - - - - - - - 9

Theoretical Framework of Working Capital Management - 10

The House of Jindal’s - - - - - - 13

JSPL & its Products - - - - - - - 16

Research Methodology- - - - - - - 22

Analysis of Working Capital Management of JSPL - - 23

Working Capital policy of JSPL - - - - 24 Working Capital Borrowings from Bank - - - 27 Financial Ratio Analysis for Working Capital- - - 28 Alternative Investment Policies - - - - 52 Managing the Components of Working Capital- - - 54 Determination of Operating Cycle - - - - - 62 Analysis of Asset Percentage - - - - 67 Statement of Change of Working Capital- - - - 71 Estimating Working Capital- - - - - - 72 Regression Analysis - - - - - - 75 Trend Analysis for Working Capital - - - - 78 Current Asset Financing - - - - 84

Findings and Suggestions - - - - - - - 85

Limitations - - - - - - - - - 87

Bibliography - - - - - - - - 88

References - - - - - - - - - 90

Glossary - - - - - - - - 91

List of Tables

No Tables Name Page No1 ESTIMATED CASH FLOW FOR APR 10 TO JUNE 10 242 Working Capital Borrowing from Banks 273 Return on Working Capital 284 Liquidity ratios 295 Current Ratio 306 Acid Test Ratio for JSPL 317 Comparison between current ratio and acid test ratio 328 Cash ratio for JSPL 339 Working capital management ratios 34

10 Current asset turnover for JSPL 3511 Working capital turnover for JSPL 3612 Working capital to gross sale for JSPL 3713 Working capital to cost of sale for JSPL 3914 Debtor’s turnover ratio for JSPL 4015 Average collection period for JSPL 4116 Creditor’s turnover ratio for JSPL 4317 Inventory turnover ratio for JSPL 4418 Inventory holding period for JSPL 4519 Current asset to total asset ratio for JSPL 4620 Cash to current asset ratio for JSPL 4721 Inventory to current asset ratio for JSPL 4822 Current liabilities to total liabilities ratio for JSPL 4923 Loan & Advances to Current assets ratio for JSPL 5024 Table showing alternative current assets investment policies 5325 Table showing different cash ratios 5626 Table showing payables management 5727 Table showing Inventory turnover ratio 5928 Table showing analysis of asset percentage 6729 Table showing analysis of working capital 6830 Table showing analysis of current assets 6931 Table showing analysis of current liabilities 7032 Table showing statement of change in working capital 7133 Table showing Production capacity and Sales 7635 Table showing Sales and working capital 77

List of Figures

No Figures Name Page No1 Cash Cycle 72 Working capital flows 123 House of Jindal’s 134 JSPL & its Products 165 Working capital borrowing from Banks 276 Return on working capital 287 Current Ratio 308 Acid Test Ratio For JSPL 319 Cash Ratio for JSPL 33

10 Current Asset Turnover 3511 Working Capital Turnover For JSPL 3612 Working Capital to Gross Sale for the JSPL 3813 Working Capital to Cost of Sale for the JSPL 3914 Debtor’s Turnover Ratio for the JSPL 4015 Average Collection Period for the JSPL 4216 Creditor’s Turnover Ratio for the JSPL 4317 Inventory Turnover Ratio for the JSPL 4418 Inventory Holding Period for the JSPL 4519 Current Asset to Total Asset Ratio for the JSPL 4620 Cash to Current Asset Ratio for the JSPL 4721 Inventory to Current Asset Ratio for the JSPL 4822 Current liabilities to Total liabilities 5023 Loan & Advances to Current Asset 5124 Alternate current assets investment policies 5325 Percentage of Current Asset to Fixed Asset 6726 Net working Capital 6827 Current Ratio Trend 7928 Cash Ratio Trend 7929 Current Asset Turnover Trend 8030 Working Capital Turnover Trend 8031 Debtor Turnover Trend 8132 Creditor Turnover Trend 8133 Inventory Turnover Trend 82

Executive summary

The management had to depend upon certain relevant information for taking various strategic

decisions. The information is made useful by its analysis and interpretation. My project was

related to “Analysis of Working Capital Management of Jindal Steel Power Ltd.”.

This project report is the outcome of my eight-week live project in Jindal Steel & Power Ltd.

My attempt is aimed to analyze the various aspects of working capital management of Jindal

Steel & Power Ltd.

It was found that the operating cycle of the company is bit disturbed. By adopting various

calculation and analysis and then making interpretation with the solution of specific problem

I put my efforts on giving appropriate suggestion to the company. To this context I adopted

various methods and techniques like Trend analysis by using statistical tool, Regression

analysis, a work towards the optimal level of working capital, estimation of working capital,

analyzing of operating cycle and use of various ratio to put an exact picture of company.

The report also consists of qualitative and quantitative analysis of Working Capital

Management of Jindal Steel & Power Ltd. In the course of my study, I found that the

organization faces the problem of liquidity.

Introduction

Working Capital:

“Working Capital includes the current assets and current

liabilities areas of the balance sheet. Working Capital can be

called by its alternative name - "Net Current Assets”.

Working Capital Management is the process of planning and controlling the level and mix of

current assets of the firm as well as financing these assets. It may be regarded as a life blood

of a business; its effective provision can do much to ensure the success of a business, while

its efficient management may lead not only to loss of profits but loss to ultimate downfall in a

going concern. Analysis of working capital is of major importance to internal and external

analysis because it is closely related to the current day-to-day operations.

Working Capital is the name given to the "short-term" area of the balance sheet. Working

Capital includes four balance sheet items:

Stock - stocks of raw materials, partly completed production and finished goods

awaiting sale.

Debtors - amounts owed TO the company, mainly from customers in respect of

sales made on credit.

Creditors - amounts owed BY the company, mainly to suppliers of raw materials,

services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax

demands, unpaid dividends and other items.

Cash - bank balances, cash holdings and short-term investments.

Some of the decisions taken in working capital management are:

An adequate supply of raw materials.

Cash to meet the operational payments.

The ability to grant credit to customers.

Investment in various current assets.

Appropriate sources of fund to finance current assets.

Proportion of long term and short term funds to finance current assets.

Cash Cycle:

As working capital moves from one process to another, it changes from one asset to another

i.e., from cash to inventories and then to receivables and then back to cash. This movement is

represented by cash cycle as below:

Figure 1: Cash Cycle

Objective of Working Capital Management:

Two fold objective of working capital management

a) Maintenance of working capital, and

b) Availability of ample funds at the times of need.

Uses of Working Capital:

The typical uses of working capital are as follows:

Adjusted net loss from operations

Purchase of non-current assets:

Repayment of long-term debt (debentures or bonds) and short-term debt (bank

borrowing)

Redemption of redeemable preference shares 5- Payment of cash dividend.

Payment of cash dividend.

Advantages of adequate working capital:

Increase in debt capacity and goodwill.

Increase in production efficiency

Exploitation of favorable opportunities.

Meeting contingencies and adverse changes

Available cash discount:

Solvency and efficiency of fixed assets

Attractive Dividend to Shareholders

Disadvantage of inadequate working capital:

Loss of goodwill and creditworthiness

Firm can’t make use of favorable opportunities

Adverse effects of credit opportunities

Operational inefficiencies

Effects on financial capacity

Non-achievement of Profit Target

Dangers of Redundant working capital:

Low rate of return on capital

Decline in Capital and Efficiency

Loss of Goodwill and Confidence

Evils of Over-Capitalization

Destruction of Turnover Ratio

Company must have adequate working capital pursuant to its requirements. It should neither

be excessive nor inadequate. Both situations are dangerous. While inadequate working

capital adversely affects the business operations and profitability, excessive working capital

remains idle and earns no profits for the company. So company must assure its working

capital is adequate for its operations.

Objective of Study

This project was undertaken to analyze the working capital policies, working capital

management of the company and to reduce down their problems and finding the solutions

with respect to the working capital management of the company.

The objective of the study is to provide the solutions for reducing down the duration of the

operating cycle, to analyze the working capital position of the company and the liquidity

position, finding out the problems that the company is facing in managing the working capital

and showing trend of particular ratios in future and at same suggesting them to solve their

problems.

To study the working capital concept.

To see how the day-to-day operations of the company takes place.

To study the working capital management process in Jindal Steel & Power Ltd.

To see whether the company is prepared with enough working capital to face any

kind of contingencies.

To compare the performance of W/C for a particular year with previous years.

To assess Liquidity position, Long term solvency, operational efficiency, and

overall profitability of JSPL.

Providing suggestions to solve the problems of the company.

Theoretical Framework of Working Capital Management

Many profitable companies fail each year because their management teams fail to manage the

area of working capital. The term working capital is closely related to the term funds and has

two meaning. It is used to mean current assets minus current liabilities. In simple words it is

the investment needed for carrying out day-to-day operations of the business smoothly.

Working capital is just like the heart of the business. If it becomes weak, the business can

hardly prosper and survive. It is an index of the solvency of a concern. Working capital

management thus throws a challenge and should be a welcome opportunity for a financial

manger that is ready to play an important role in organization.

Sources of Working Capital:

The company can choose to finance its current assets by long-term or short-term sources, or a

combination of them.

A) Long term Permanent Working Sources of Capital: Long-term sources of permanent

working capital include equity and preference shares, retained earnings, debentures and other

long-term debts from public deposits and financial institutions. Financing through long-term

means provides stability, reduces risk of payment, and increases liquidity of the business

concern.

Various types of long-term sources of working capital are as follows:

Issue of shares

Retained Earnings

Issue of Debentures

Long term debts

Other sources

B) Short-term Temporary Working Source of Capital: Temporary working capital is

required to meet the day-to-day business expenditures. The variable working capital would

finance from short-term sources of funds, and only for the period needed. It has the benefit of

low cost and establishes closer relationships with bankers.

Some of the sources of temporary working capital are given below:

Commercial Banks: In the form of short-term loans, cash credit, and overdraft and

through discounting the bills of exchanges.

Public Deposits

Various Credits: Trade credit, Business credit papers and customer credit are other

sources of short-term working capital. Credit from suppliers, advances from

customers, bills of exchanges, promissory notes, etc helps to raise temporary

working capital.

Reserves and other funds

Sources of Additional Working Capital:

Existing cash reserves

Profits (when you secure it as cash)

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long-term loans

Various tools to measure & analyses working capital of a firm:

Fund Flow Analysis: This technique helps to analysis the variation in working

capital contents between two balance sheet dates. Fund flow analysis shows how

much funds have been obtained from different sources to finance working capital

and how they have been utilized. Due to need as well as importance of fund flow

analysis finance managers of almost all the organization use it to make sound

financial decisions.

Working Capital Flows: Information regarding the financing and investment

activities of an enterprise and the changes in the financial position for the period

of time is essential for financial statement, used by owners as well as creditors for

making business decisions.

Changes in Working Capital

Closing Balance of Working

Capital

Opening Balance of Working capital

USES OF WORKING CAPITAL

Redemption of long term debtInvestmentsAcquisition of fixed assetsPayment of dividend

SOURCES OF WORKING CAPITAL

Operations of the businessIssue of long-term debtSale of fixed investmentsSale of long-term investments

Further, this technique can be used only by the internal administration in its

control of working capital. Moreover, some important and significant question

remains unanswered, such as whether the capital is being used most efficiently

and whether the current financial position of the firm has improved.

Working Capital Flows

Figure 2: Working capital flows

THE HOUSE OF JINDAL’S

Figure 3: House of Jindal’s

Shri. Naveen Jindal

ORGANISATIONS PROFILE

The House of JINDAL’s

Group profile:

In the world of business, the Jindal Organization is a celebrity. Ranked 4th amongst the top

Indian Business Houses in terms of assets, the group today is a US $ 12 billion

conglomerate

Jindal Organization aims to be a global player. For that, it is committed to maintain

international quality standards, efficient delivery schedule, competitive price and excellent

after sales service.

Jindal Organization set up in 1970 by the steel visionary late. Mr. O.P. Jindal has grown from

an indigenous single unit steel plant in Hisar, Haryana to present multi-billion, multi-location

and multi-product steel conglomerate and the organization is still expanding, integrating,

amalgamating and growing. New directions, new objectives, but the Jindal motto remains the

same – “We are the Future of Steel”.

The group has been technology driven and has a broad product portfolio. Yet, the focus at

Jindal has always been steel. From mining of iron-ore to the manufacturing of value added

steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its

way to be a major global player, with its overseas manufacturing facilities and strategic

manufacturing and marketing alliances with other world leaders.

The Technological Edge:

The hallmark of the organizations achievement and growth has been its ability to develop and

adopt the latest technology, the match the demands of a dynamic and burgeoning Indian

Industry.

Seeing doors where others see walls

At Jindal, research is a self-imposed discipline; a challenge it has pursued with a pioneer’s

zeal. Exploring new ideas, attempting break through products and processes. For instance,

tracking and adopting the latest in world technology, anticipating customer needs with const-

efficient, reliable solutions and promoting engineering skill and manpower caliber. Jindal’s

R&D investment, together with its R&D capability has given it a head start over others.

Jindal Family:

Jindal organization has expanded and diversified into core business areas. Ensuring synergy

amongst its various business ventures spread over 13 plants at 11 pivotal locations in India.

The Jindal team embodies one of the most coveted talent pools of technological acumen

available in the country today with expertise that have enabled the organization to put up

large-scale projects in record time.

Jindal Steel and Power Limited

Jindal Strips Limited

Saw Pipes Limited

Jindal Iron & steel co.

Jindal Power Limited

Nalwa Sponge Iron Limited

Jindal Stainless Limited

Jindal United Steel Corporation

Jindal Thermal Power Company Limited

Jindal Praxair Oxygen Company Limited

Vijayanagar Minerals Private Limited

JINDAL STEEL & POWER LTD

Company Profile:

Mr. O.P. Jindal promoted JSPL as Orbit Steel Private Limited (OSPL) in 1979. OSPL

became a public limited company in 1998 and its name was changed to the current JSPL

(Jindal Steel & Power Limited)

Jindal Steel & Power Limited (JSPL), a O.P. Jindal Group Company, was formed by hiving

off the Raigarh and Raipur facilities of Jindal Stainless Limited into a separate Company as

part of a scheme of arrangement, w.e.f. April 2, 1998.

The Company has plant at Raigarh (Chhattisgarh) for manufacture of sponge iron with an

installed capacity of 13,70,000 tons per annum, & it is the only sponge iron producer in the

country with its own raw material source and power generation making it one of the most

cost effective producers of sponge iron in the country. Power Generation plants with a

capacity of 290 MW, Steel Melting plant with a capacity of 24,00,000 TPA with Blast

Furnace of 250,000 TPA capacity.

International Collaboration:

JSPL produces rails, H-beams, columns and sheet piles with JFE's technical services

assistance.

JSPL has entered into technical services assistance agreement with JFE (earlier known as

NKK Corporation), Japan for technology transfer to produce superior quality, world’s longest

rails of 120m finished length, along with Parallel Flange Beams, Columns and Sheet Piles for

the first time in the country. This technical collaboration shall enable production of long rails

requiring far less joints in tracks, ushering a new era in safer rail-travel and making

introduction of fast trains in India a reality.

Company Products:

Rail:

Giving impetus to the significant rail sector, JSPL has

pioneered the manufacturing of 121 metre long track

rails in the Indian sub-continent. The world’s longest

track rails are a testimony of JSPL’s manufacturing

capabilities where continuous innovation is a practice

rather than an exception.

What differentiates JSPL’s 121 m long rails from others

is that there is a drastic reduction in the welded joints, providing enhanced safety, cost

reduction and travel comfort. Our products are subjected to stringent quality norms and can

therefore match all international standards

Parallel Flange Sections

JSPL pioneered the production of medium and large size

Hot Rolled Parallel Flange Beams and Column Sections

(H-Beams) in India. The beams are cost effective and

provide design-flexibility.

Plates & Coils

JSPL is equipped with India's first 'one of a kind' state-

of- the -art plate mill that produces plates and coils of

3.5 and 3 metres width, respectively, for the first time in

the private sector.

JSPL epitomizes its performance-oriented service by

producing plates ranging from 7-120mm in thickness &

widths of 1500 -3500 mm and coils varying in thickness

of 7 -25 mm and widths of 1500 - 3000 mm. The products are of premium quality, owing to

its sound steel refining properties. The total production capacity of the plant is 1 MTPA.

JSPL adheres to stringent international standards and the steel grades are manufactured under

various specifications like EN, DNV, BS, ASTM, JIS, LRS, ABS, etc.

Power:

In order to contribute significantly to India's growing

need for power we started power generation over a

decade back. In the beginning it was a captive power

facility using waste heat from the rotary kiln boilers

and the coal rejects of the washery. Over the years

however, Jindal Steel and Power Ltd (JSPL) and its

subsidiary Jindal Power Ltd. (JPL) have come up in a

big way and are producing about 1400 MW power through both captive and commercial

facilities.

Sponge Iron:

JSPL has world's largest coal-based sponge iron

manufacturing facility and stands out as the market

leader in coal-based sponge iron industry within India.

Efficient backward integration has rendered JSPL as

the only sponge iron manufacturer in the country, with

its own captive raw material resources and power

generation capacity helping the company to monitor

both price and quality of its products.

Semi-Finished Products

JSPL has a capacity to produce about three million tonne per annum of semis which are

primarily used for captive use in JSPLs’ 0.75 million tonne per annum capacity Rail &

Universal Beam Mill and 1.0 million tonne per annum capacity Plate & Stackle Mill.

Wire rods:

In line with our corporate philosophy of continuing

efforts to expand our product range to offer a complete

product basket to the customer, JSPL now offers Wire

Rods from its first unit of 6 Million Tonne Steel Plant

at Patratu, Jharkhand.

Awards & Recognition:

The Forbes Asia's 'Fabulous 50' international award 2009

Most promising entrant into the big league, 2009

Golden peacock Environment Management Award 2008.

National Award for Excellence in Cost Management 2005, third prize in the

private sector-manufacturing segment, by the Institute of Cost & Works

Accountant of India (ICWAI)

National Energy Conservation Awards for 2001, 2002, 2003, 2004, 2005 and 2009

by the Ministry of Power, Government of India

National Safety Awards 2003-2004, by the Minter of Labour

IIM Quality Award for 2002-03 by the Indian Institute of Metals

First Prize in the IIM Awards 2001 for Quality by the Indian Institute of Metals

Future plans:

10.0 Lac MTPA capacity Plate Mill

7.0 Lac TPA Rebar, TMT and Wire Rod Mill

4.0 Lac MTPA Coke Oven Plant

12.5 Lac MTPA Blast furnace

A 12.5 million tonne integrated steel plant and 2600 MW captive power plant in

phases in Orissa with an investment of US $ 8.00 billion (Rs. 40,000 crore). The

first phase of 3 million tonne is expected to be commissioned by 2011.

An 11 million tonne integrated steel plant and 2600 MW captive power plant in

phases in Jharkhand , with an investment of US $ 6.00 billion (Rs. 30,000 crore).

An MOU has been signed between JSPL and the Government of Chhattisgarh for

setting up an additional 7.0 MTPA steel plant in phases and a 1600 MW power

plant with an investment of over US $ 5.20 billion (Rs. 26,000 crore).

50 MW capacity Power Plant based on fuel gases of coke oven

JSPL plans to invest US $ 2.1 billion (Rs. 10,500 crore) in Bolivia, South

America, in the coming years for mining and setting up of an integrated 1.7 MT

steel plant, 450 MW power plant, 6 MT sponge iron and 10 MT iron ore pellet

plant.

Research Methodology

Information Requirement:

Since my objective was to analyze the working capital policies, working capital management

of the company and to reduce down their problems and finding the solutions with respect to

the working capital management of the company. So, I required the annual report of the

company, CMA of last few years and its working capital data to analyze the position of the

company and correlate the theoretical and practical aspects of working capital management,

to analyze the efficiency of the management in managing the working capital and to find out

what are the problems that the company is facing. So, the company provided me the required

information. Then relevant calculations and analysis were done.

Research Methodology:

The methodology adopted for the project was divided into two types of analysis: Qualitative

and Quantitative

Qualitative analysis required studying the business profile of the company, its

nature, its functioning, the hierarchy and the functioning of the management of the

company, the performance of the company in last few years and what policy they

adopt and studying what role the working capital plays in a manufacturing

concern.

Quantitative analysis required analyzing the current assets and the current

liabilities of the company, the statement of working capital changes, performing

the analysis for estimating the working capital requirement, analysing the

operating cycle, analyzing the Working Capital Ratios to reveal the financial

position and soundness of the business and give a good basis for quantitative

analysis of financial problems and use of modern working tools to show the trend

of working capital for upcoming year with adopting trend analysis.

Analysis of Working Capital Management

Methods adopted for Working Capital analysis:

The broad range of project management and financial advisory services include:

Working Capital policy

Financial Ratio analysis for Working Capital Management

Managing the components of Working Capital of JSPL

Determination of Operating cycle of JSPL

Statement of change in Working Capital

Estimating Working Capital needs, Permanent & Variable Capital

Regression Analysis

Trend Analysis of Working Capital Management

Working Capital policy of JSPL

Table 1: ESTIMATED CASH FLOW FOR APR 11 TO JUNE 11

ESTIMATED CASH FLOW FOR APRIL 10 TO JUNE 10

RS IN Crores.

PARTICULARS Apr-11 May-11 Jun-11

COLLECTION FOR THE MONTH

PROJECTED

PROJECTED

PROJECTED

STEEL

-DOMESTIC 750.00 750.00 750.00

-EXPORT 58.00 58.00 58.00

POWER 32.00 32.00 32.00

SUB TOTAL 840 840 840 - - -FUNDS REQUIREMENT FOR THE MONTHOPEX PAYMENTS NOT UNDER L/CRAIGARH EXCISE/ STAT TAXES PAYMENT

39.30 39.30 39.30

RAIGARH OTHERS 243.85 243.85 243.85

TAMNAR 20.00 20.00 20.00

RAIPUR 10.89 11.72 11.88

BABIL 41.35 34.43 26.41

TENSA 27.46 27.46 27.46

PATRATU 5.50 6.00 6.00

DELHI 15.00 15.00 15.00

SUB TOTAL 403.35 397.76 389.90

RAIGARH-COKING COAL PAYMENT UNDER LC

167.13 46.78 115.80

SUB TOTAL 570.48 444.54 505.70

SURPLUS/(DEFICIT) FROM OPERATIONS

269.52 395.46 309.30

PROJECT PAYMENTS UNDER L/C

RAIGARH 61.60 49.57 12.79

RAIPUR 0.00 11.36 12.41

ANGUL 84.06 60.00 60.00

PATRATU 14.76 6.50 19.12

BARBIL 0.00 0.00 0.00

SUB TOTAL 160.42 127.43 104.32PROJECT PAYMENTS NOT UNDER L/C

RAIGARH 86.08 107.32 124.65

ANGUL 123.50 162.33 204.99

PATRATU 40.60 45.55 34.30

BARBIL 43.60 45.00 46.50

RAIPUR 0.00 0.00 0.00

FOREIGN PROJECTS 15.00 15.00 15.00

REAL ESTATE 20.00 20.00 20.00

GLOBAL LAW SCHOOL/WINDMILLS

8.70 4.92 0.00

SUB TOTAL 251.40 292.80 320.79

TOTAL PROJECT OUTFLOW 411.82 420.23 425.11

SURPLUS/(DEFICIT) FROM OPERATIONS & PROJECT FLOW

(142.29) (24.77) (115.81)

FINACING OUTFLOWPRINCIPAL PAYMENTS LONG TERM LOAN/ECB/FCTL 52.15 389.09 70.74

BUYER'S CREDIT / SHORT TERM LOAN/JPL

429.45 215.57 632.52

SUB TOTAL 481.60 604.66 703.27INTEREST PAYMENTS 40.66 18.86 35.67

CORPORATE TAX - - 100.00SUB TOTAL 40.66 18.86 135.67

GROSS OUTFLOW (664.55) (648.29) (954.74)CAPITAL INFLOW

LIC NCD 230.00 150.00 150.00

TERM LOANS FOR PROJECTS - - -

STL/BUYERS CREDIT FOR OPERATIONS

- - -

SUB TOTAL 230.00 150.00 150.00

NET SURPLUS/(DEFICIT) AFTER COMMITTED CAPITAL FLOWS

(434.55) (498.29) (804.74)

NET CUMMALATIVE SURPLUS/(DEFICIT)

(434.55) (932.84) (1,737.58)

DEFICIT TO BE FINANCED BY Probable Buyers Credit Coking Coal

167.13 46.78 115.80

Probable Buyers Capital Goods 85.00 77.00 40.00Probable Rollover of Buyers Credit

169.69 93.00 269.92

STL - - -CP 100.00 250.00 -

SUB TOTAL 521.82 466.78 425.72 Net Deficit 87.27 (31.50) (379.03)Net Cummulative Deficit 87.27 55.77 (323.26)

JPL -20WC Limit -50

Net Cummalative Deficit (449.03)

First they collect details of projected cash inflow and outflow from their different branches and make Project for the Cash Flow for three months. Then the process of procurement of fund takes place. If the fund is internally available no process takes place and if not available then they analysis all the option like short term loan, inter corporate loan and commercial paper etc. Now you see the above table there is deficit in last months. To overcome this deficit they will borrow from bank.

Working capital borrowing from Banks

Table 2: Working Capital Borrowing from Banks

WORKING CAPITAL BORROWINGS FROM BANKS(Rs. in Crores)

31st march 2004 56.102131st march 2005 92.064031st march 2006 43.9131st march 2007 118.8131st March, 2008 213.5931st March, 2009 44.2531st March, 2010 114.2631st March, 2011 251.34

Figure 5: Working capital borrowing from Banks

20042005

20062007

20082009

20102011

31st march 2003

31st march 2004

31st march 2005

31st march 2006

31st March, 2007

31 st March, 2008

31 st March,2

009

31 st March,2

010

0.00

50.00

100.00

150.00

200.00

250.00

300.00

Working capital borrowing from Banks

Working Capital Borrowing

Analysis:

In the year 2004 higher percentage of working capital was financed by bank borrowing. In 2005 it was highest but in later stage the bank borrowing had come down as low as 43 crores. This shows that after 2006 onwards higher percentage of working capital is financed by their own cash inflow which reduce the liquidity problem as well cost of borrowing.

Secured by hypothecation by way of first charge on stocks of finished goods, raw materials, work in progress, stores and spares and book debts, and guaranteed by Directors and Second charge in respect of other moveable and immoveable assets.

Financial Ratio Analysis for Working Capital Management

Return on Working Capital:

Return on Working Capital (ROWC) = PBIT / Working Capital * 100

Table 3: Return on Working Capital

Return on Working Capital For JSPL

31 March 2005

405.55 / 103.15 * 100 = 393.16 %

31 March 2006

743.52 / 142.25 * 100 = 522.68 %

31 March 2007

815.16 / 396.19 * 100 = 205.74 %

31 March 2008

1095.11/ 320.68 * 100 = 341.49 %

31 March 2009

1711.11 / 553.78 * 100 = 308.98 %

31 March 2010

2170.79 / 699.93 * 100 = 310.14 %

31 March 2011

2099.47/ 155.65* 100 = 1348.84 %

Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities +

Proposed Dividend + Provision for Tax.

Current Assets = Inventories + Debtors + Cash & Bank balance + Current

Investments + Advance Income Tax + Advance recoverable in Cash.

Figure 6: Return on working capital

2005 2006 2007 2008 2009 2010 20110

200

400

600

800

1000

1200

1400

1600

393.16

522.68

205.74

341.49

308.98310.14

1348.84

Return on Working Capital

Return

Years

Rrtu

rn(in

%)

Analysis:

There has been a initial increase in the Return on Working Capital during 2006,which was

followed by a decline in ROWC between the two years – it reduces more than half during

2007. This respectable situation arises because of increase in current liabilities in past years

as company is having proposal of lots of investment due to which company is financing its

project and there is less tendency of free cash flow. During 2008 there was increase in the

ROWC, which later decreased and was maintained steady.

Liquidity ratios:

Snapshot of Liquidity Ratios:

Table 4: Liquidity ratios

JSPL For the year ended

Basic Ratios 31 Mar

05

31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Current ratio 1.20:1 1.24:1 1.39:1 1.23:1 1.87:1 1.19:1 1.03:1

Acid test ratio 0.81:1 0.80:1 0.82:1 0.76:1 1.27:1 0.85:1 0.73:1

Cash ratio 0.044:1 0.056:1 0.031:1 0.038:1 0.35:1 0.087:1 0.013:1

Current Ratio:

The current ratio is also known as the working capital ratio and is normally presented as a

real ratio.

Table 5: Current Ratio

Current Ratio For JSPL

31 March

2005

Current Assets: Current Liabilities 599.82:496.66 1.20:1

31 March

2006


31 March

2007


31 March

2008


31 March

2009

Current Assets: Current Liabilities 3060:1636.17 1.87:1

31 March

2010


31 March

2011


Figure 7: Current Ratio

2005 2006 2007 2008 2009 2010 20110

0.20.40.60.8

11.21.41.61.8

2

1.2 1.241.39

1.23

1.87

1.191.03

Current Ratio

Years

Curr

ent

Rati

o

Analysis:

The current ratio is the measure of whether a company has enough short-term assets to cover

its short-term debt and is index of strength of working capital. Anything below 1 indicates

negative W/C (working capital). While anything over 2 means that the company is not

investing excess assets. A ratio of greater than one means that the firm has more current

assets then current claims.

Current ratio of the company has increased from 1.20 in Year 2004-05 to 1.39 in Year 2006-

07. Current Ratio of the company depicts that for every Re.1 worth of current liability there

are assets worth Re.1.39. The company has sufficient liquidity as the ratio is increasing. This

year there is an increase in ratio due to almost double inventory level in current year in

comparison with previous year.

But during the year 2009 there was steep increase in the current ratio of the company, not

due to increase in the inventory level, but due to huge holding of the cash which was

recovered from the debtors & not invested during that year.

During last year i.e. 2011, the current ratio was found to be decreased because of the increase

in sundry debtors and decrease in current investments..

Suggestions:

In order to increase current ratio current assets should be increased. If we look into

the detailed schedule of current assets then we can find out that major portion of

current assets is due to debtors and inventories.

Company should make market survey and should decide first that what should be

the optimum amount of finished goods so that major portion of it can be sold off

in the market. This will help in reducing the locking of funds or working capital in

the finished goods.

Acid Test Ratio:

Table 6: Acid Test Ratio for JSPL

Acid Test Ratio For JSPL

31 March 2005 Current Assets - Stocks: Current Liabilities 403.32:496.66 0.81:

1


1


1


1

31 March 2009 Current Assets - Stocks: Current Liabilities 2079.02: 1636.17 1.27:

1


1


1

Figure 8: Acid Test Ratio For JSPL

2005 2006 2007 2008 2009 2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

0.81 0.8 0.82 0.76

1.27

0.850.73

Acid Test Ratio

Years

Aci

d T

est

Rati

o

Analysis:

Acid test ratio is a more rigorous test of liquidity than the current ratio and when used in

conjunction with it, gives a better picture of the firm s ability to meet its short-term debts out

of short-term assets. This ratio is used to determine risk that is not detected by the Working

Capital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm can easily

or readily meets all of its current liabilities. Here JSPL had its acid test ratio around 0.8:1

during the year 2005-2008 which is constant from last three years, which indicates company

was not having satisfactory financial position. But during the year 2009, the acid test ratio of

the company was highly excellent and was able to pay its current liabilities which was

followed by a decrease in the ratio. So it should be looked at with extreme care and also

implies that current assets are highly dependent on inventory.

.

Comparison between Current Ratio & Acid Test Ratio:

Table 7: Comparison between current ratio and acid test ratio

Comparison

Current Acid Test

2005 1.20 0.81

2006 1.24 0.80

2007 1.39 0.82

2008 1.23 0.76

2009 1.87 1.27

2010 1.19 0.85

2011 1.03 0.73

JSPL's liquidity position had worsened when looked at its current ratio. The acid test ratio has

fallen from 2004 to 2005. Current assets might not be that liquid since almost 80% of them

are debtors. The fact that the differences between the current and acid test ratio is around .4,

which is large, tells us that the JSPL stocks are large. The stocks are worth around 40.5% of

current assets in 2008; that's a huge level of stock holdings. Additionally, the acid test ratio

has decreased over the three-year period, meaning that the JSPL has a weak liquidity position

than it had before. Normally that is not a good thing.

Cash Ratio:

Table 8: Cash ratio for JSPL

Cash Ratio For JSPL

31 March 2005 Cash: Current

Liabilities

21.89:496.66 0.044:1


Liabilities

33.29:594.15 0.056:1


Liabilities

31.30:1007.37 0.031:1


Liabilities

52.97:1377.83 0.038:1


Liabilities

577.91: 1636.17 0.35:1


Liabilities

308.96: 3516.15 0.087:1


Liabilities

60.10: 4447.45 0.013:1

Figure 9: Cash Ratio for JSPL

2005 2006 2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.044 0.0560.031 0.038

0.35

0.087

0.013

Cash ratio

Years

Cas

h R

atio

Analysis:

As cash is being the most liquid asset, quoted investment has been taken as marketable

securities. In our case the company carried small amount of cash during the year 2005-2008

so it was not having a favorable cash ratio. But during year 2009 the company carried large

amount of cash in hand which was some what good as compared to the previous year but

during the last year 2010, the cash ratio was found to be decreased due to increase in current

liabilities to large extent. From the above calculation it is clear that company’s cash ratio had

remained very low in comparison to the standard of .5. It is the notable point for the company

as its current liabilities are much higher than the cash in hand. It can create problems in the

future payments of current liabilities. Major portion of company’s current assets goes to

inventory and debtors, which only increase the carrying cost. Company need to reduce these

assets to their optimum level.

Other Snapshot of Working Capital Management ratios

Table 9: Working capital management ratios


Asset Usage 31

Mar05

31

Mar06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Current Asset Turnover 3.77

times

3.51

times

1.84

times

2.04

Times

1.76

times

1.81

times

1.62

times

Working Capital Turnover 12.23

times

15.92

times

6.53

times

10.97

Times

9.77

times

10.93

times

47.33

times

Efficiency

Working capital to Gross

Sale

0.06

times

0.05

times

0.12

times

0.07

Times

0.08

times

0.07

times

0.01

times

Working Capital to Cost of

Sale

0.13time

s

0.10time

s

0.25

times

0.15

times

0.16

times

0.13

times

0.03

times

Stock/Debtors/Creditors

Debtors’ Turnover 5.97

times

13.09

times

8.64

times

10.98

Times

18.99

times

19.55

times

11.83

times

Average Collection Period 60.20da

ys

27.50da

ys

41.66

days

32.78da

ys

18.95da

ys

18.41da

ys

30.43da

ys

Credits’ Turnover ---- 2.14

times

1.28

times

1.30

times

2.30

times

1.47

times

1.16

times

Inventory Turnover 6.42

times

8.75

times

4.55

times

5.47

Times

5.51

times

6.32

times

5.54

times

Inventory Holding period 56.07

days

41.14

days

79.12

days

65.81

Days

65.33

days

56.96

days

64.98

days

Ratio to analyze WC

Structure

Current Asset to Total

Assets Ratio

0.25times

0.22times

0.26times

0.25Times

0.36times

0.34times

0.25times

Cash to Current Asset Ratio 0.036times

0.045times

0.022times

0.031Times

0.188times

0.073Times

0.013Times

Inventory to Current Asset

Ratio

0.32times

0.34times

0.4times

0.37times

0.32times

0.28times

0.28times

Current Liabilities to Total

Liabilities

0.2times

0.16times

0.17times

0.18times

0.16times

0.24times

0.28times

Loan & Advances to CA

ratio

0.36times

0.77times

0.42times

0.46Times

0.47times

0.75Times

0.83Times

Working Capital Management I: Asset Usage

Current Asset Turnover:

Current Asset Turnover = Turnover

Current Assets

Table 10: Current asset turnover for JSPLCurrent Asset Turnover For JSPL

31 March

2005

2264.72/599.82 = 3.77times

31 March

2006

2590.25/736.4 = 3.51 times

31 March

2007

2589.29/1403.56 = 1.84 times

31 March

2008

3519.81/1698.51 = 2.07 times

31 March

2009

5410.75/3060 =1.76 times

31 March

2010

7653.19/4216.08 =1.81 times

31 March

2011

7484.90/4603.1 =1.62 times

Figure 10: Current Asset Turnover

2005 2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

3

3.5

43.77

3.51

1.842.07

1.76 1.81 1.62

Current Asset

Years

Cu

rre

nt

Ass

ets

Tu

rno

ver

(tim

es)

Analysis:

High current assets turnover ratio is more judicious and shows efficiency of management and

proper utilization of the assets. The graph shows the company has managed to higher the ratio

during the previous years however this year due to non-proportionate change in current assets

and turnover the ratio declines to 1.84. Due to more inventory this ratio falls.

Working Capital Turnover:

This ratio signifies how effectively working capital is being used in terms of the turnover.

Working Capital Turnover = Sales

Working Capital

Table 11: Working capital turnover for JSPLWorking Capital Turnover For JSPL

31 March

2005

1261.61/ 103.15 = 12.23 times

31 March 2264.72/ 142.25 = 15.92 times

2006

31 March

2007

2590.25 / 396.19 = 6.53times

31 March

2008

3519.81 / 320.67 = 10.97times

31 March

2009

5410.75/553.78 = 9.77 times

31 March

2010

7653.19/699.93 = 10.93 times

31 March

2011

7367.59/155.65 = 47.33 times

Figure 11: Working Capital Turnover For JSPL

2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

40

45

50

12.23

15.92

6.53

10.97

9.7710.93

47.33

Working Capital Turnover

Working Capital Turnover

Years

Wo

rkin

g ca

pit

al T

urn

ove

r(T

ime

s)

Analysis:

What this ratio tries to highlight is how effectively working capital is being used in terms of

the turnover it can help to generate: no ideal values here but the higher the better, surely. The

declining working capital turnover ratio in JSPL indicates that working capital is not being

utilized properly over the period of time. Management may think of increasing the sales in

the market or it is going for certain expansion plans. But since 2009 the company managed to

increase there working capital turnover as compared to 2008. During 2011, the working

capital turnover ratio was found to be sharply increased, this shows that the working capital

has been utilized efficiently by the management.

Working Capital Management II: Efficiency

Working Capital to Gross Sale:

Working Capital to Gross Sale =Working Capital

Gross Sale

Table 12: Working capital to gross sale for JSPL

Working Capital to Gross Sale for the JSPL

31 March

2005

103.15 / 1547.06 = 0.06 times

31 March

2006

142.25 / 2775.32 = 0.05 times

31 March

2007

396.19 / 3274.05 = 0.12 times

31 March

2008

320.68 / 4336.54 = 0.07 times

31 March

2009

553.78 /6743.22 = 0.08 times

31 March

2010

699.93/8953.77 = 0.07 times

31 March

2011

155.65/8595.67 = 0.01 times

Figure 12: Working Capital to Gross Sale for the JSPL

2005 2006 2007 2008 2009 2010 20110

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.06

0.05

0.12

0.07

0.08

0.07

0.01

Working Capital to Gross Sale

Working capital to Gross Sale

Years

wo

rkin

g ca

pit

al t

o g

ross

sal

e(i

n ti

me

s)

Analysis:

The Company was showing a favourable trend as it was showing decline in the financial

periods till 2006 but now as the ratio increased to .12 from .05 there is a matter of concern

but here also JSPL is far better than the industry’s average. Since 2008, the ratio was found to

be decreasing and it decreased to 0.01 in 2011. Thus the company has managed to utilize

their working capital more efficiently as compared previous years.

Working Capital to Cost of Sale:

Working Capital to Cost of Sale =Working Capital

Cost of Sale

Table 13: Working capital to cost of sale for JSPL

Working Capital to Cost of Sale for the JSPL

31 March 2005 103.15 / 760.75 = 0.13 times

31 March 2006 142.25 / 1363.05 = 0.10 times

31 March 2007 396.19 / 1583.16 =0.25times

31 March 2008 320.68 / 2116.93 =0.15 times

31 March 2009 553.78 / 3296.99 =0.16 times

31 March 2010 699.93 / 5195.41 =0.13 times

31 March 2011 155.65 / 4872.77 =0.03 times

Figure 13: Working Capital to Cost of Sale for the JSPL

2005 2006 2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

0.13

0.1

0.25

0.15 0.16

0.13

0.03

Working Capital to Cost of Sale

Working Capital to Cost of Sale

Years

Wo

rkin

g C

pit

ak t

o C

ost

of

Sale

s(i

n ti

me

s)

Analysis:

The Company is showing a favorable trend as it is showing decline in the ratio during the

financial periods 2007-2011. This shows that the working capital used by them is less as

compared to the cost of sale.

Working Capital Management III: Stock/Debtors/Creditors

Debtor’s Turnover:

Debtor’s Turnover = Sales

Debtors

Table 14: Debtor’s turnover ratio for JSPL

Debtor’s Turnover Ratio for the JSPL

31 March

2005

1261.61 / 211.16 = 5.97 times

31 March

2006

2264.72 / 172.91 = 13.09 times

31 March

2007

2590.25 / 299.54 = 8.64 times

31 March

2008

3519.81 / 320.31 = 10.98 times

31 March

2009

5459.87 / 287.38 = 18.99 times

31 March

2010

7653.19 / 391.46 = 19.55 times

31 March

2011

7367.59/622.36 = 11.83 times

Figure 14: Debtor’s Turnover Ratio for the JSPL

2005 2006 2007 2008 2009 2010 20110

2

4

6

8

10

12

14

16

18

20

5.97

13.09

8.64

10.98

18.99 19.55

11.83

Debtors’ TurnoverYears

Deb

tors

tur

nove

r(in

tim

es)

Analysis:

Firstly, the ratio seems to have change by going from 5 to 19 times over the 6 years;

and it means that, on average, the JSPL’s debtors are taking less days to pay their

accounts. Soundness of this ratio is more depend on the business policy and the terms

with the clients. On the other side during 2007-2010 turnover is increasing, which

implies higher the turnover, shorter the time between sales and collecting cash. It

shows the company’s debt-collecting machinery has improved through years. But

during last year 2011, the debtors turnover ratio has decreased sharply due to increase

in sundry debtors, this shows the debt collecting machinery of the company is not

working efficiently.

Average Collection Period:

Avg. Collection Period = 360

Debtor Turnover

Table 15: Average collection period for JSPL

Average Collection Period for the JSPL

31 March 2005

360 / 5.98 = 60.20 days

31 March 2006

360 / 13.09 = 27.50 days

31 March 2007

360 / 8.64 = 41.66 days

31 March 2008

360 / 10.98 = 32.78 days

31 March 2009

360 / 18.99 = 18.95 days

31 March 2010

360 / 19.55 = 18.41 days

31 March 2011

360 / 11.83 = 30.43 days

Figure 15: Average Collection Period for the JSPL

2004 2005 2006 2007 2008 2009 20100

10

20

30

40

50

60

7060.2

27.5

41.66

32.78

18.95 18.41

30.43

Average Collection Period

Years

Ave

rage

Col

lecti

on P

erio

d(in

day

s)

Analysis:

The average collection period measures the quality of debtors since it indicates the speed of

their collection. The shorter the average collection period, the better the quality of debtors, as

a short collection period implies the prompt payment by debtors. The trend of JSPL was

showing that the company was a success in decreasing the average collection period, which

represent sound collection policy of the company. But during last year 2011, the average

collection period of the company has increased from 18.41 to 30.43 days which is not a good

sign for the company.

Creditor’s Turnover:

Creditor’s Turnover = Purchases

Creditors

Table 16: Creditor’s turnover ratio for JSPL

Figure 16: Creditor’s Turnover Ratio for the JSPL

2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.52.14

1.28 1.3

2.03

1.47

1.16

Creditor's Turnover Ratio

Years

Cred

itor

's t

urno

ver

Rati

o(in

tim

es)

Analysis:

Creditor’s Turnover Ratio for the JSPL

31 March 2006 411.23/191.77 = 2.14 times

31 March 2007 462.04/359.36 = 1.28 times

31 March 2008 601.91/461.77 = 1.30 times

31 March 2009 1156.1/567.46 = 2.03 times

31 March 2010 1800.16/1222.51 = 1.47 times

31 March 2011 1814.93/1560.48 = 1.16 times

It is observed that the creditors turnover ratio has been decreasing since 2008 which implies

terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This

shows company keep its obligation for long time.

Inventory Turnover Ratio:

Inventory Turnover = Net Sales

Inventory

Table 17: Inventory turnover ratio for JSPL

Inventory Turnover Ratio for the JSPL

31 March

2005

1261.61 / 196.47 = 6.42 times

31 March

2006

2253.60 / 257.55 = 8.75 times

31 March

2007

2590.25 / 568.65 = 4.55 times

31 March

2008

3519.81 / 642.44 = 5.47 times

31 March

2009

5410.75 / 980.56 = 5.51 times

31 March

2010

7653.19 / 1209.96 = 6.32 times

31 March

2011

7367.59 / 1328.50 = 5.54 times

Figure 17: Inventory Turnover Ratio for the JSPL

2005 2006 2007 2008 2009 2010 20110

1

2

3

4

5

6

7

8

9

6.42

8.75

4.55

5.47 5.516.32

5.54

Inventory Turnover Ratio

Years

Inve

ntor

y Tu

rnov

er R

atio

(in ti

mes

)

Analysis:

It measures approximately the number of times an entity is able to acquire the inventories and convert them into sales. The higher turnover ratio is good for the firm while A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse, but several aspects of inventory holding policy have to be balanced like lead time, seasonal fluctuations in orders, alternative use of warehouse space. Inventory turnover has decreased in 2011, than the previous years due to increase in inventory and decrease in sales

Inventory Holding Period:

Inventory Holding Period = 360

Inventory turnover

Table 18: Inventory holding period for

JSPL

Inventory Holding Period for the JSPL

31 March 2005 360 / 6.42 = 56.07 days

31 March 2006 360 / 8.75 = 41.14days

31 March 2007 360 / 4.55 = 79.12days

31 March 2008 360 / 5.47 = 65.81 days

31 March 2009 360 / 5.51 = 65.33 days

31 March 2010 360 / 6.32 = 56.96 days

31 March 2011 360 / 5.54 = 64.98 days

Figure 18: Inventory Holding Period for the JSPL

Analysis:

The company’s inventory holding period was found to be fluctuating up and down during

the year 2005 – 2007 , which is not good for the company as it was unnecessary locking up of

working capital in the inventory and it shows inefficiency of the management. After hree year

constant inventory holding period, during last year i.e.2011,the inventory holding period has

increased from 56.96 to 64.98, this shows unnecessary locking up of working capital in the

inventory and it shows inefficiency of the management.

Working Capital Management IV: Ratio to analyze WC Str.

Current Asset to Total Assets Ratio:

Table 19: Current asset to total asset ratio for JSPL

Current Asset to Total Asset Ratio for the JSPL

31 March 2005 599.82 / 2319.78 = 0.25 times

31 March 2006 736.40 / 3250.62 = 0.22 times

31 March 2007 1403.56 / 5250.55 = 0.26 times

31 March 2008 1698.51 / 6783.63 = 0.25 times

31 March 2009 3060 / 8456.31 = 0.36 times

31 March 2010 4216.08 / 12279.99 = 0.34 times

31 March 2011 4603.1 / 17742.44 = 0.25 times

Figure 19: Current Asset to Total Asset Ratio for the JSPL

2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

70

80

56.07

41.14

79.12

65.81 65.33

56.96

64.98

Inventory Hold-ing Period

Years

Inve

ntor

y H

oldi

ng P

erio

d(in

day

s)

2005 2006 2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.250.22

0.26 0.25

0.360.34

0.25

Current Asset to Total Assets Ratio

Years

Cu

rre

nt

Ass

ets

to

To

tal A

sse

t R

atio

(in

tim

es)

Analysis:

If we analyse the structural health of working capital for JSPL, the proportion of current

assets to total assets has been showing decreasing trend as compared to financial year 2009 &

2010 , which shows that the company was having certain problems with its current asset

management. This was due to increase in the application of funds in the fixed assets.

Cash to Current Ratio:

Cash to current ratio = Cash

Current asset

Table 20: Cash to current asset ratio for JSPL

Cash to Current Asset Ratio for the JSPL

31 March 2005 21.90 / 599.82 = 0.036 times

31 March 2006 33.29 / 736.40 = 0.045 times

31 March 2007 31.30 / 1403.56 = 0.022 times

31 March 2008 52.97 / 1698.51 = 0.031 times

31 March 2009 577.91/3060 = 0.l88 times

31 March 2010 308.96/4216.08 = 0.073 times

31 March 2011 60.10/4603.1 = 0.013 times

Figure20: Cash to Current Asset Ratio for the JSPL

2005 2006 2007 2008 2009 2010 20110

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

0.0360.045

0.0220.031

0.188

0.073

0.013

Cash to Current Asset Ratio

Years

Cas

h t

o C

urr

en

t A

sse

t R

atio

(in

tim

es)

Analysis:

The company shows an increasing trend in 2006 & again it decrease in 2007. However in the

year 2009, the cash to current ratio was found to be increased hugely to 0.188 from 0.031 of

2008, which is almost more than six times from year 2008. But in 2011 the ratio again

decreased sharply to 0.013. We can say that it will effect liquidity position of the firm but on

the other hand it is observed that they do not keep any ideal cash with them, which is a

positive sign for the company.

Inventory to Current Asset Ratio:

Inventory to Current Asset = Inventory

Current asset

Table 21: Inventory to current asset ratio for JSPL

Inventory to Current Asset Ratio for the JSPL

31 March

2005

196.5 / 599.82 = 0.32 times

31 March

2006

257.55 / 736.40 = 0.34 times

31 March

2007

568.65 / 1403.56 = 0.40 times

31 March

2008

642.44 / 1698.51 = 0.37 times

31 March 980.56 / 3060 = 0.32 times

2009

31 March

2010

1209.96 /4216.08 = 0.28 times

31 March

2011

1328.50/4603.1 = 0.28 times

Figure 21: Inventory to Current Asset Ratio for the JSPL

2004 2005 2006 2007 2008 2009 20100

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.40.320000000000004

0.34

0.40.37

0.320000000000004

0.28 0.28

Years

Inve

ntor

y to

Cur

rent

Ass

ets

Rati

o(in

tim

es)

Analysis:

Here, the company shows an unfavorable trend of increase in the proportion of the inventory

to current assets during the year 2005 – 2007, which represents that the company was locking

up the working capital unnecessarily in the inventory. But since 2007, the ratio is showing

decreasing trend which is a good sign for the company as they are decreasing the locking up

of working capital in the inventory.

Current Liabilities to Total Liabilities:

Current Liabilities to Total Liabilities =Current Liabilities

Total Liabilities

Table 22: Current liabilities to total liabilities ratio for JSPL

Current Liabilities to Total Liabilities Ratio for the JSPL

31 March

2005

496.66 / 2418.60 = 0.20 times

31 March

2006

594.15 / 3584.92 = 0.16 times

31 March

2007

1007.37 / 5768.53 = 0.17 times

31 March

2008

1377.83 / 7599.84 = 0.18 times

31 March

2009

1636.17 / 9735.21 = 0.16 times

31 March

2010

3516.15 / 14409.75 = 0.24 times

31 March

2011

4447.45 / 15844.26 = 0.28 times

Figure 22: Current liabilities to Total liabilities

2005 2006 2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

0.2

0.16 0.17 0.180.16

0.24

0.28Current Liabilities to Total Liabilities

Years

Cu

rre

nt

Liab

iliti

es

to T

ota

l lia

bili

tie

s(i

n ti

me

s)

Analysis:

The company shows a increasing trend in the proportion of the current liabilities in the total

liabilities as this shows company is taking more loans to meet its liability and project

investments are there, hence this shows a burden on the management of JSPL. This ratio is

not the only means of reviewing a company's debt structure.

Loan & Advances to Current Asset Ratio:

Loan & Advances to Current Asset =Loan & Advances

Current Asset

Table 23: Loan & Advances to Current assets ratio for JSPL

Loan & Advances to Current Asset Ratio for the JSPL

31 March

2005

218.07 / 599.82 = 0.36 times

31 March

2006

572.54 / 736.40 = 0.77 times

31 March

2007

591.01 / 1403.56 = 0.42 times

31 March

2008

785.94/1698.51 = 0.46 times

31 March

2009

1453.72/3060 = 0.47times

31 March

2010

3199.04/4216.08 = 0.75 times

31 March

2011

3865.94/4603.1 = 0.83 times

Figure 23: Loan & Advances to Current Assets

Analysis:

The increase in this ratio in the year 2011 shows the efficiency of the management. However

this much increases in the ratio is not suggestible and due to the efforts of the company in the

current year it is 0.83 times means 83% of current assets are Loans and Advances.

Interpretation (Ratio Analysis)

2005 2006 2007 2008 2009 2010 20110

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

0.36

0.77

0.420.46 0.47

0.750.83

Loan & Advances to CA ratio

Years

Loan

& A

dva

nce

s to

Cu

rre

nt A

sse

st(i

n ti

mes

)

As shown by current assets turnover ratio, the utilisation of current assets in terms

of sales has shown a decreasing trend as compared previous years which shows

that current assets has not been effectively used during the last year 2011 to

achieve sales.

Again if we look at the efficiency with which individual elements of working

capital have been utilised, the picture of inventory turnover is bright.

As we look at the extent of liquidity of working capital, we notice that the ratio

shows a decreasing trend. This indicates, problem on the liquidity front.

As we look at debtors turnover ratio , we notice that the ratio had shown a

increasing trend and a decreasing trend of average collection period during the

period 2005-2010.But during last year the debtors turnover was found to be

decreased and average collection period to be increased.

Management of Current Assets

Alternative Current Asset Investment policies

Three alternative policies are there regarding the total amount of current assets. Essentially,

these policies differ with regard to the amount of current assets carried to support any given

level of sales, hence in the turnover of those assets. The line with the steepest slope represents

a relaxed current asset investment (also known as “fat cat”) Policy, where relatively large

amounts of cash, marketable securities, and inventories are carried, and where sales are

stimulated by the use of a credit policy that provides liberal financing to customers and a

corresponding high level of receivables. Conversely, with the restricted current asset

investment (also known as “lean and mean”) policy, the holdings of cash, securities,

inventories and receivables are minimized. Under the restricted, current assets are turned over

more frequently, so each dollar of current assets is forced to “work harder”. The moderate

current asset investment policy is between the two extremes.

Under the conditions of certainty, all firms would hold only minimal levels of current assets.

Any larger amounts would increase the need for external funding without a corresponding

increase in profits, while any smaller holdings would involve late payments to suppliers along

with lost sales due to inventory shortages and an overly restrictive credit policy.

When uncertainty is introduced the firm requires some minimum amount of cash and

inventories. A restricted lean and mean current asset investment policy often provides the

highest expected return on this investment, but it entails the greatest risk, while the reverse is

true under a relaxed policy.

Alternative Current Assets Investment Policies:

Figure 24: Alternate current assets investment policies JSPL

60 50 Relaxed

40 Moderate

30

20 Restricted

10

0 50 100 150 Sales

Table showing Alternative Current Assets Investment Policies:

Table 24: Table showing alternative current assets investment policiesPolicy Current asset to support

Sales of INR 100/-

Turnover of Current

Assets

Relaxed 30 3.3X

Modified 23 4.3X

Restricted 16 6.3X

JSPL 61.72 1.62X

Note: - The Sales/current assets relationship is shown here as being linear, but the relationship is often curvilinear.

Managing the Components of Working Capital of JSPL

Four main components:

Cash

Marketable securities/Account Payables

Inventory

Accounts Receivables

Cash Management in JSPL:

Cash management system adopted by Finance Department in JSPL is very reliable and

transparent. As cash is a very important activity for a good operation of company here in

JSPL cash is monitored every day and intimated to Finance Department. The daily cash

report includes the all details of cash inflows and outflows. Monthly cash budgets are

maintained for the estimated of monthly cash inflows and outflows. Finally the annual cash

budget is made by the Finance Department in the corporate head office.

The corporate office allocates different amount of each to different manufacturing units as

per their requirement. Corporate office acts as a linkage between the manufacturing unit and

creditors. Corporate office has determined the credit facility for every units of the company

and this keeps on changing from year to year depending up on company’s position

transactions, profitability and inventory position.

The corporate office provides cash to manufacturing units but there most function is

controlled in unit itself. All the need related to inventory are met through corporate office as

well as individual efforts of unit.

Fund Allocation:

Here the initial allocation for manufacturing units is done by corporate office and all

supplementary requirements are to look upon by Commercial department.

Fund Utilization:

Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn up every month.

Although specific forecasting technique is used, funds are deployed to different departments

as per their requirements. Daily reports on cash transaction are prepared by Procurement

department to keep a track of all payments made in the days work. Every month cash

transaction report is sent to Finance department in the corporate office showing all the

transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is

compared. If the utilization of cash is more than the allocation of fund, then the plant has to

justify its more utilization.

To meet the requirement of cash company approach to bank and present the required detailed

by the bank. JSPL kept less cash in hand to meet the entire cash requirement it depends on

financing process.

Evaluation of cash management performances:

To assess the cash management performance this phase is divided as follows:

a) Size of Cash

b) Liquidity and Adequacy of cash:

This is depicted by the current ratio and acid test ratio, as calculated in part ratio analysis for

working capital management and respective position is shown in graph.

c) Control of cash

One of the major objectives of cash management from the stand point of increasing return on

investment is to economize on the cash holding without impairing the overall liquidity

requirements of the firms. This is possible by effecting tighter controls over cash flows. The

following ratios have been applied to assess the efficiency of cash control:

Cash to Current Assets ratio

Cash turnover ratio

Cash to current liabilities ratio

Table 25: Table showing different cash ratios


Efficiency of cash

control

31 Mar

05

31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Cash to Current Asset

Ratio

0.036

times

0.045

times

0.022

times

0.031

times

0.188

times

0.073

times

0.013

times

Cash to Current

liabilities Ratio

0.044

times

0.056

times

0.031

times

0.038

times

0.353

times

0.087

times

0.013

Times

Average: 0.071 (Cash to Current Asset Ratio)

Average: 0.11 (Cash to Current liabilities Ratio)

Summary:

It can be inferred from the above table that cash to current assets ratio during 2010, is lowest

as compared to previous years. This shows decrease in liquidity position of the company,

which ultimately affect the operational efficiency of the firm. Cash to current liability ratio

shows the cash balance maintained by company at a certain point of time for meeting its

current liabilities. The cash to current liabilities ratio is nearly on decreasing trend shows the

efficiency of operations.

Payable Management in JSPL:

Mostly the creditor comprises of the bank who is financing the working capital needs and the

suppliers to whom payments are to be given. This is basically done as per terms and

condition with the respective parties. The company is not able to make proper payment to its

creditors as year on year company’s creditors are increasing (creditors increased from 191.77

Cr on 2005 to 1560.48 in 2011.

Evaluation of Payables Management:

The evaluation for payable management is done with the help of ratios:

Creditor’s turnover ratio

Table 26: Table showing payables management


Payable Management 31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Creditor’s ratio 2.14time

s

1.28time

s

1.30

times

2.03

times

1.47

times

1.16

times

Summary:

It is observed that the creditors turnover ratio has been decreasing since 2009 which implies

terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This

shows company keep its obligation for long time.

Inventory Management:

Here the inventory is categorized in to:

(1) A B C analysis

(2) X Y Z analysis

1) ABC Analysis: - Items which constitutes to 70% of total consumption (of stores and

spares) value when arranged in descending order of consumption value will be termed as ‘A’

class items. Next 20% of total consumption value will be termed as ‘B’ class items and the

rest 10% as the ‘C’ class items.

2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and spares

holding value when arranged in descending order of stock holding will be termed a ‘X’ class

items next 20% of total stock holding value is ‘Y’ class items and the rest 10% as the ‘Z’

class.

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation

costs and interest charges.

Four basic levels will need to be established for each line/category of stock. There are the:

a) Maximum level – achieved at the point a new order of stock is physically

received;

b) Minimum level – the level at point just prior to delivery of a new order

(sometimes called buffer stocks – those held for short term emergencies);

c) Reorder level – point at which a new order should be placed so that stocks will

not fall below the minimum level before delivery is received; and the

d) Reorder quantity or economic order quantity – the quantity of stock, which

must be reordered to replenish the amount held at the point delivery, arrives up

to the maximum level.

Once these controls are implemented an efficient system of recording receipts and issues is

vital to exercise full control of inventories.

Inventory Management at JSPL:

Inventory is stock of a company, which is manufacturing for sale and component that make

up the product. In managing inventories the objective of the company is to determine and

maintain optimum level of inventory investment. The optimum level of inventory lies

between two danger points of excess and inadequate inventories.

Inventory is monitored differently for raw material, work in progress, finished goods and

spares. Monthly inventory report is sent to the finance department in the corporate office.

Obviously the inventory report is prepared at plant level. Procurement Department gives the

data of closing stock of raw materials, finished goods as well as the work in progress.

Inventory Turnover Ratio:

Table 27: Table showing Inventory turnover ratio


31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11

Inventory Turnover 6.42 times 8.75 times 4.55 times 5.47 times 5.51 times 6.32 times 5.54times

Average: 6.08

Summary:

Inventory turnover ratio establishes a relationship between the total sales during a period and

average inventory hold to meet that quantum at 5.54 times in 2011 and on average it is 6.08

times, that signifies the quick moving of inventory. In other words, the stock held during

2005 is for 56.07 days as comparison of average at 61.34 days for the view of 7 years which

increases to 64.98 days in 2011.

Receivable Management:

At a plant level mostly the finished goods are sold on credit to increase upon the market share

and retain the customers but the major portion of debtors are dealt by Marketing Unit of the

Commercial Department and the Finance Department. It is consideration as an essential

marketing tool.

Control of the debtors’ element (the amount owed the business in the short term) involves a

fundamental trade-off between the cost of providing credit to customers (which includes

financing bad debts and administration), and the additional net revenue that can be earned by

doing so. The former can be kept to a minimum with effective credit control policies, which

will require:

Setting and enforcing credit terms;

Vetting customers prior to allowing them credit;

Setting and reviewing individual credit limits;

Efficient invoicing and statement generation;

Prompt query resolution;

Continuous review of debtors position (generating ‘aged debtors’ report);

Effective chasing and collection procedures; and

Limits beyond which legal action will be pursued.

Before allowing credit to a new customer trade and bank references should be sought.

Accounts can be asked for and analyzed and a report including any county court judgments

against the business and a credit score asked for from a credit rating business. Salesmen’s

views can also be canvassed and the premises of the potential customer visited.

The extent to which all means are called upon will depend on the amount of the credit sought,

the period, past experiences with this customer or trade sector, and the importance of the

business that is involved. But this is not a one-off requirement. One classic fraud is to start

off with small amounts of credit, with invoices being settled promptly, eventually building up

to a huge order and a disappearing customer.

Credit checking, even for established customers, should therefore feature in regular

procedures.

When the creditworthiness of a new customer is established, positive credit control calls for

the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if

any).

The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge

large interest on late payment of business debts by companies and public sector organisations.

Nevertheless, it is wise to inform customers this right will be exercised.

Collection is a vital element of credit control and must include standard, polite and well-

constructed reminder letters, and effective telephone or e-mail follow up. Use of collection

agencies should be considered, as could factoring – in its most comprehensive form a loan

facility based on outstanding invoices plus a sales ledger and debtors control service.

Efficient control of debtors will assist cash flow, and help keep overdraft or other loan

requirements down, and hence reduce interest costs.

Debtors represent future cash – or they should do if proper credit control policies are pursued.

Likewise stock will eventually become cash, but in the meantime represents working capital

tied up in the business. Keeping levels to the minimum required for efficient operations will

keep costs down. This means controlling buying, handling, and storing, issuing, and

recording stock.

Inherent in any system of inventory control is the concept of appropriate stock levels –

normally expressed in physical units sometimes in monetary terms.

The objective of establishing control levels is to ensure that excessive stocks are never carried

(and working capital thereby sacrificed) but that they never fall below the level at which they

can be replenished before they run out.

Receivables Management in JSPL:

Corporate office and the commercial department in coordination do the management of

receivables. The management of receivable is dealt on major part by corporate office and

minor part by commercial department of the company.

JSPL in matter of granting a credit period to customers tighten their policy and reduce credit

period to 30.43 days in 2010 to its debtors. Total Debtors amounted to Rs.211.16 Cr. by the

end of 2004, which further increased to 622.36 Cr in 2010.

Determination of Operating Cycle of JSPL

The determination of length of the operating cycle of a manufacturing firm is the sum of :

The broad range of project management and financial advisory services include:

inventory conversion period (ICP), &

debtors conversion period (DCP)

A) Inventory conversion period:

It is the total time needed for producing and selling the product. Typically, it includes:

a) raw material conversion period (RMCP)

b) work-in-process conversion period (WIPCP), and

c) finished goods conversion period (FGCP).

Inventory Conversion period = RMPC + WIPCP + FGCP

The raw material conversion period is depends on:

1) raw material consumption per day, &

2) raw material inventory

Raw Material Consumption per day = Total Raw Material Consumption/Number

of days in the year

Raw Material Conversion period = Raw Material Inventory/Raw Material

Consumption per day

Similar calculations can be made for other inventories, debtors and creditors.

B) Debtors’ conversion period:

It is the time required to collect the outstanding amount from the customers. The total of

inventory conversion period and debtors’ conversion period is referred to as gross operating

cycle (GOC).

Gross Operating Cycle = ICP + DCP

C) Payable Deferral period:

This is very common to get gross operating cycle but in practice, a firm may acquire

resources (such as raw materials) on credit and temporarily postpone payment of certain

expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance

investment in current assets. The payables deferral period (PDP) is the length of time the firm

is able to defer payments on various resource purchases.

Net Operating Cycle = Gross Operating Cycle – Payable Deferral period

If depreciation is excluded from expenses in the computation of operating cycle, the net

operating cycle also represents the cash conversion cycle. It is net time interval between cash

collections 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 firm’s operations.

A) Inventory conversion period:

a) Raw Material Conversion Period:

Raw material consumed = Rs. 2225.71 Cr

Avg. Raw material inventory = Rs. 1145.75 Cr

2225.71-------------- = 11.37 times 195.60

330--------- = 29 days

11.37b) Work-In-Progress Conversion Period:

Cost of Production = Rs. 4278.12 Cr

Avg. work-in-progress = Rs. 119.72

4278.12------------ = 47.24 times 90.545

330------- = 6.98 days47.24

c) Finished Goods Conversion Period:

Sales = Rs. 7367.59 Cr.

Closing stock = Rs. 551.56 Cr.

7367.59--------------= 13.35 times551.56

330------- = 24.70 days13.35

B) Debtors Conversion:

Sales = Rs. 7367.59 CrClosing Debtors = Rs. 622.36 Cr

7367.59------------ = 11.83 times622.36

330------- = 27.87 days11.83

C) Payables Conversion:

Average accounts payables = Rs.727.22 Cr.

Cost of sales = Rs.4872.77 Cr.

Average accounts PayablesPayables Conversion Period = ----------------------------------- *330 Cost of Sales

727.225 = ------------- *330

4827.77 = 49.25 days

Operating Cycle:

Gross Operating Cycle (GOC) = 29+6.98+24.7+27.87 = 87.85 days

Net Operating Cycle (NOC) = 87.85-49.25= 39 days

Analysis:

The Net operating cycle of the firm is of about 39 days which shows that the company

realizes its profits quickly and company can quickly acquire cash that can be used for

reinvestment. In general, the shorter the cycle, the better a company is since less time capital

is tied up in the business process.

The company policy had a significant change for the year with regard to inventory as it

had increased continuously But this policy has a cost to the company in the presence of a

significant decrease in payables deferral period, will have to negotiate higher working

capital funds.

Company has tighten its steps towards the credit policy which signifies that in the current

year company is proving itself more efficient, it as well as shows a increase in the market

share of the company.

The company had reduced down its payables deferral period significantly which

strengthens its creditworthiness in the market and helps the company in getting the loans

on liberal terms. This represents the efficiency of the management.

One can have a vastly different working capital outlay while performing the same activity.

Having a large amount invested in stocks and debtors does not necessarily mean large profits,

but it can mean a drop in the prime calculation that every businessman is interested in the

return on investment. The object of working capital management is to trim down on stocks

and debtors and get the cash coming faster within the comfort zone of the business. In the

normal periods of business activity, cash that had completed the working capital cycle would

be reinvested in stock and the whole process would begin again.

Analysis of Asset Percentage:

Table 28: Table showing analysis of asset percentage

JSPL For the year ended Rs/Crs

Particulars 31 Mar

05

31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Current asset 599.82 736.4 1403.56 1698.51 3060 4216.08 4603.1

Total asset 2319.78 3250.62 5250.55 6783.63 8456.31 12279.9

9

17742.4

4

Percentage of current assets

over fixed assets

25.85% 22.65% 26.73% 25.03% 36.18% 34.33% 25.94%

Current ratios 1.29 1.24 1.39 1.23 1.87 1.19 1.03

Figure 25: Percentage of Current Asset to Fixed Asset

2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

40

25.8522.65

26.7325.03

36.1834.33

25.94

Percentage of current assets over fixed assets

Years

Curr

ent

asse

ts t

o Fi

xed

asse

ts(in

%)

Analysis:

From the above calculation it can be analyzed that JSPL is following a liberal policy of

working capital from last 4 years. When we give a thought to the current ratio of last three

years we can very easily depict that its current ratio is very low than the standard one i.e. of

2:1. This type of moderate approach gives the negative impact on the liquidity of the

company. As we know that profitability is measured by rate of return on total assets i.e. PBIT

/ Total sales. And if small part of total assets consists of current assets then it gives adverse

impact on the rate of return.

Analysis of Net Working Capital:

Table 29: Table showing analysis of working capital


Particulars 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11

Current asset 599.82 736.4 1403.56 1698.51 3060 4216.08 4603.1

Current Liabilities 496.66 594.15 1007.37 1377.83 1636.17 3516.15 4447.45

Net Working Capital 103.15 142.25 396.19 320.68 553.78 699.93 155.65

Figure 26: Net working Capital

2005 2006 2007 2008 2009 2010 20110

100

200

300

400

500

600

700

800

103.15142.25

396.19

320.68

553.78

699.93

155.65

Net Working Capital

Net Working CapitalYears

Ne

t W

ork

ing

Cap

ital

(in

Cr.

)

Analysis:

As we can see from the above table and graph that company’s Net Working Capital has

been showing variation in its trend as last year’s working capital is showing negative

trend in increasing order.

The above situation shows that company management is inefficient in management of

working capital.

Making the comparison of current assets and current liabilities in 2010 & 2011 current

liabilities are increasing which leads the working capital in negative range so company

management is required to put a vigil look to manage working capital.

Analysis of Current Assets:

Table 30: Table showing analysis of current assets


Particulars 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11

Debtors 211.16 172.91 299.54 320.31 287.38 391.46 622.36

Inventory 196.47 257.55 568.65 642.44 980.56 1209.96 1328.50

Cash & Bank balance 21.90 33.29 31.30 52.97 577.91 308.96 60.10

Loans & Advances 218.07 572.54 591.01 785.94 1453.72 3199.04 3865.94

Total 647.6 1036.29 1490.5 1801.66 3299.57 5109.42 5876.90

Analysis:

Composition of all parts seems to be distribute but almost each component is showing

increasing trend which has both kind of influence for the financial performance of the

company so company need to mange this components very carefully.

Inventory is showing an increasing trend that is the signal of danger for company’s

profitability and these are not giving any return by locking up working capital.

Cash & bank balance has decreased to large extent during last year, due to excess of

investments in the projects. This shows that the company holds less liquidity in hand.

Suggestions:

First and foremost suggestion for the company is that, it should look into the idle funds,

which are engaged in inventory. Company should withdraw money from this locked up

working capital and invest it in some other assets.

Analysis of Current Liabilities:

Table 31: Table showing analysis of current liabilities


Particulars 31 Mar

05

31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Sundry Creditors 292.85 298.33 505.47 573.60 619.78 1471.57 2211.71

Banks borrowings 92.06 43.91 118.81 213.59 44.25 114.26 251.34

Advances from

customers

10.57 24.50 20.02 31.36 125.09 506.98 165.63

provisions 88.55 179.99 272.14 385.48 581.94 985.81 1343.71

Other Current liabilities 15.94 52.59 100.53 189.91 294 467.65 521.06

Total 499.97 599.32 1016.97 1393.94 1665.06 3546.27 4493.45

Analysis:

As we can see from the graph and table that major portion of current liabilities are with

sundry creditors and every year it keeps on increasing.

As the company obligations are increased so company need to put certain measure to

control current liabilities.

By looking the seven years position of company in current assets and current liabilities it

can be seen that current liabilities are increasing over current assets so within the time

company need to manage its liability portion and need to make safer decision

Suggestions:

Due to the huge amount of current liabilities company has to lock up its funds in current

assets. Therefore, it should reduce its current liabilities by paying them off so that regular

cash outflow of cash get restricted and outflow gets converted into inflow to increase in

profitability of the firm.

One suggestion that could be made to the company is that, it should pay off its creditors

by withdrawing some cash from its debtors, which is idle at this point of time and some

amount from its inventory.

Statement of Change in Working Capital

Table 32: Table showing statement of change in working capital


Particulars 31 Mar

05

31 Mar

06

31 Mar

07

31 Mar

08

31 Mar

09

31 Mar

10

31 Mar

11

Current Assets

Inventory (94.56) (61.04) (311.10) (73.78) (338.11) (229.42) (118.54)

Receivables (46.05) 38.25 (126.63) (22.76) 32.93 (104.08) (230.12)

Other Current assets (59.98) (73.01) (127.41) (116.79) (343.56) (646.81

)

82.67

Total Current assets (A) (200.59) (95.8) (565.14) (213.33) (648.74) (980.31)

(265.99)

Current Liabilities

Short term borrowings 35.96

(48.16)

74.91 94.78 (169.34) 303.61 658.64

Other Current Liabilities 149.10 58.02 245.62 163.68 248.72 1412.29 447.32

Total

CurrentLiabilities(B)

185.06 9.86 320.53 258.46 79.38 1715.9 1105.96

Working Capital

Shortfall (A-B)

(385.65) (105.66) (885.67) (471.79) (569.36) (2696.21) (1371.95)

Analysis:

A statement of changes in working capital helps us in locating where these changes took

place. Since working capital it measured by subtracting current liabilities from current assets.

Any increase in current asset and any decrease in current liabilities show an increase in

working capital similarly, a decrease in current assets and an increase in current liabilities

represent a decrease in working capital. Negative Working capital shows that customers pay

upfront and so rapidly, the business has no problems raising cash. In these companies,

products are delivered and sold to the customer before the company ever pays for them.

This table shows the changes in net working capital of JSPL. A wise financial policy of a

firm requires that long-term funds be used to finance Fixed Assets and short term funds are

used to finance Current Assets. The statement of changes in working capital shows that there

was a tremendous increase in current liabilities during 2009.There is a decrease in working

capital mainly because of the locking of working capital funds in inventories and receivables

and due to the increase in the liabilities.

Estimating Working Capital Needs

The most appropriate method of calculating the working capital needs of a firm is the concept

of operating cycle. However, a number of other methods may be used to determine working

capital needs in practice. We shall illustrate here three approaches, which have been

successfully applied in practice:

Current assets holding period: To estimate working capital requirements on the basis of

average holding period of current assets and relating them to costs based on the

company’s experience in the previous years. This method is essentially based on the

operating cycle concept.

Ratio of sales: To estimate working capital requirements as a ratio of sales on the

assumption that current assets change with sales.

Ratio of fixed investment: To estimate working capital requirements as a percentage of

fixed investment.

Estimating Optimal Need of Working Capital

Method: 1

a) Raw material consumed per month:

2225.71 = ------------ = Rs. 185.47Crs 12

b) Work in progress:

Raw material per month + (Cost of Production /2) = ---------------------------------------------------------

12 185.47 + (4278.12 / 2)

= ----------------------------- = (185.47 +2139.06)/12 =193.71Crs 12

c) Finished Goods:

551.56 Total cost per month = --------------- = 45.96 Crs

12

d) Total Inventory Needs:

= 185.47+193.71+45.96= Rs. 425.14Crs

e) Debtors:

7367.59 Sales per month = ----------------- = 613.96 Crs

12

f) Operating Cash:

4872.77 Total cost per month = ------------------ = 406.06 Rs/Crs

12 Therefore, Total Working Capital Required

= 425.14+613.96+406.06

= 1445.16 Rs/Crs

The first method gives details of the working capital items. This approach is subject to error

if markets are seasonal.

PBITRate of return = ---------------------------------------------

Net fixed investment + Working Capital

A number of factors will govern the choice of methods of estimating working capital. Factors

such as seasonal variations in operations, accuracy of sales forecasts, investment cost and

variability in sales price would generally be considered. The production cycle and credit and

collection policy of the firm would have an impact on working capital requirements.

Therefore, they should be given due weightage in projecting working capital requirements.

Regression Analysis

The regression analysis is a statistical technique of forecasting working capital requirement.

Under this method a mathematical relationship (y = a + bx) is established between two

variables, one dependent on another. In this case, the dependence of amount of working

capital on sale value is established which helps in making working capital requirement

projections.

The method of least square is used in this regard. The relationship between sales (x) and

working capital (y) is given by the equation:

y = a + bx

Simultaneous linear equation to obtain the value of a and b is as understated:

∑ y = na + b ∑ x

∑ xy = a ∑ x + b ∑ x²

Where a = fixed component

b = variable component

x = sales

y = working capital

n = no. of observations/past years

First we will regress between the sales (x) and the production capacity (y) as the company

had thought of increasing its production capacity to 95 % in the year 2007.

Linear equation between sales and production capacity:

30117.04= 7a + 568b ------- eq. 1

2565207.34 = 568a + 46562b ----------eq. 2

Solving for a and b

a = -16534 , b = 256.78

y = -16534 + 256.78x

Therefore for the year 2011 the sales will be

y = -16534 + 256.78* 95

y = 7860.77

Table 33: Table showing Production capacity and Sales

Year Production Capacity (in

percentage)(x)

Sales(y)

2004 69 1261.61

2005 72 2264.72

2006 82 2590.25

2007 80 3519.81

2008 82 5459.87

2009 88 7653.19

2010 95 7367.59

2011 95 7860.77

Now we will regress between the sales (x) and working capital (y) by taking the forecasted

sales of 2011 as x to forecast the working capital requirement for the year 2011.

Linear equation between sales and working capital:

2371.63 = 7a + 30117.04b ------- eq. 1

12134284.78= 30117.04a + 168481954b ----------eq. 2

Solving for a and b

a = 125.31 , b = 0.04962

y = 125.31+ 0.04962 x

Therefore for the year 2011 the working capital will be

y = 125.31+ 0.04962 * 7860.77

y = 515.36

Table 34: Table showing Sales and working capital

Year Sales (x) Working Capital (y)

2004 1261.61 103.15

2005 2264.72 142.25

2006 2590.25 396.19

2007 3519.81 320.68

2008 5459.87 553.78

2009 7653.19 699.93

2010 7367.59 155.65

2011 7860.77 515.36

Therefore the working capital requirement for the next year will be 515.36 Rs/Crs.

The regression analysis for the working capital requirement for the next year shows that the

company will have to find additional sources of working capital as the company will require

515.36 Rs/Crs calculated on the basis of the sales estimates for the next year and presently

the company has the positive working capital because the current liabilities does not exceed

the current assets. So by the next year the company will have to maintain its current assets or

decrease its current liabilities to meet its working capital requirement.

Trend Analysis for Working Capital Management

Trend analysis is comparative analysis of company’s ratios over time. It tries to predict the

future movement based on past data. Trend analysis is based on idea what is happened in past

and given the idea what would happen in past. In trend analysis, industry ratios are compared

over time, typically years. Year-to-year comparisons can highlight trends and point up the

need for action. Trend analysis works best with five years of ratios.

"With the past, we can see trajectories into the future - both catastrophic and creative

projections."

The Trend Analysis module allows to plot aggregated response data over time. This is

especially valuable on the basis of five-year data and a result of long survey.

The following data points can be measured (Y-Axis)

1. Mean and Mean Percentile

2. Standard Deviation and Variance

3. Ratio

The "Time Factor" (X-Axis) can have the following granularity

1. Daily

2. Weekly

3. Monthly

4. Quarterly (Jan-Mar, Apr-Jun, Jul-Sept, Oct-Dec)

5. Yearly

Projection of Ratios through Trend Analysis

Figure 27: Current Ratio Trend

2005 2006 2007 2008 2009 2010 20110

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1.2 1.241.39

1.23

1.87

1.191.03

Current Ratio Trend

current ratio

Years

Cu

rre

nt

Rati

o

Slope Constant: -0.004

Figure 28: Cash Ratio Trend

2005 2006 2007 2008 2009 2010 20110

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.044 0.0560.031 0.038

0.35

0.087

0.013

Cash Ratio Trend

Cash Ratio

Years

Cas

h R

atio

Slope Constant: 0.010

Figure 29: Current Asset Turnover Trend

2005 2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

3

3.5

43.51

1.842.07

1.761.81

0.79

1.62

Current Assets Turnover Trend

Current Assets

Years

curr

en

t a

sse

ts


Figure 30: Working Capital Turnover Trend

2005 2006 2007 2008 2009 2010 201105

101520253035404550

12.2315.92

6.53

10.97

9.7710.93

47.33

Working Capital Turnover Trend

Working Capital

Years

Wo

rkin

g C

apit

al T

urn

ove

r


Figure 31: Debtor Turnover Trend

2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

5.97

13.09

8.6410.98

18.9919.55

11.83

Debtor Turnover Trend

Debtor Turnover

Years

De

bto

rs T

urn

ove

r


Figure 32: Creditor Turnover Trend

2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

2.14

1.281.3

2.03

1.47

1.16

0

Creditors Turnover Ratio Trend

Creditors Turnover

Years

cre

dit

ors

tu

rno

ver


Figure 33: Inventory Turnover Trend

2005 2006 2007 2008 2009 2010 20110

1

2

3

4

5

6

7

8

9

10

6.42

8.75

4.55

5.47

5.51

6.32

5.54

Inventory Turnover Ratio Trend

Inventory Turnover Ratio

Years

Inve

nto

ry t

urn

ove

r


Analysis on the basis of Trend:

Trend of current ratio put a picture of company that company is not having short term

fund in hand to meet short term debt hence it put a threat in meeting current obligations.

Cash Ratio trend shows that company is having low amount of cash for paying current

liability which can influence the financial position of company in upcoming period.

Current asset turnover trend of company is fluctuating over the period.

Working capital turnover is in positive range over the period that shows that the liquidity

position of the company is favourable & this shows efficiency in use of working capital

Debtor’s turnover trend is showing an increase in future that signifies that there is shorter

time period in sales and collecting cash.

As the Creditor’s turnover ratio trend is decreasing which shows that payments of

company are not prompt and keep it obligation for long time where as it also shows that

credit allowed by the suppliers are liberal.

Inventory is showing good position in hand of company but still company need to keep a

check over it as inventory is influenced by seasonal fluctuations and market conditions.

Current Asset Financing

Process of working capital financing:

1) Predictions are made based on sales.

2) Company has Credit Monitoring Arrangement (CMA) with banks. Accordingly

Forms are prepared and sent to consortium of banks for approval.

a. Form I contains information about Current Assets, this Form I should be sent

one week before beginning of Quarter.

b. Form II contains details about operations; this Form II should be sent six

weeks from entering the Quarter.

3) Accordingly margins are decided. The company itself should meet margin amount.

E.g. Inventory – 25%, Receivables – 35%. Normally margins are 25-35%.

4) Advances are received.

Finding & Suggestions

Findings:

The study conducted on working capital management of Jindal Steel & Power Limited shows

the evaluation of management performance in this context. Major findings and suggestions

thereon are narrated as under:

1. Current asset of the year 2009-10 is comprised of 25% of total investment in assets of

the company. As current ratio is showing a decreasing trend year on year, which

implies that current asset, are less compared to current liabilities.

2. High current assets turnover ratio is more judicious and shows efficiency of

management and proper utilization of the assets.

3. Current ratio (1.03:1) and quick ratio (0.73:1) of the year 2009-10 are lesser than that

of the ideal figures i.e. ideal current ratio is 2:1 while quick ratio is 1:1.

4. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation

of inventory in turn which cause loss to the company by way of deterioration of stock,

interest loss on blockage of stock etc.

5. Debtors Turnover ratio reveals an increasing trend during the period of study and

average collection period came down from 60 to 30 days which shows that company is

having specific policy for debtors’ management.

6. From regression analysis the working capital requirement for the next year is estimated

to be 515.36 Rs/Crs.

7. The operating cycle of the firm is disturbed, as it is continuously increasing which is

not good for the company.

8. The optimum need for working capital on an average basis company roughly will

require more than 455.26 Rs/Crs as its working capital.

Suggestions:

Keeping in view of detailed analysis for the 4 years of study and findings mentioned in above

paragraphs, the following suggestions shall be helpful in increasing the efficiency in working

capital management.

1. In case of inventory management ABC analysis, FSN technique, VED technique

should be adopted to increase the efficiency of inventory management. Further a

inventory monitoring system should be introduced to avoid holding of excess

inventory.

2. It is suggested to maintain a favorable current and quick ratios which shows a lesser

than ideal figures. It can be done either through increasing current assets or decreasing

liabilities.

3. With the help of proper inventory management systems, like demand-based

management, etc. the company can reduce the need for working capital and

inventories can be financed through accounts payable.

4. The company should try and maintain an optimum level of working capital in order to

improve upon the workings of the company.

Limitations:

1. Availability of the financial data was very limited which is not disclosed due to

sensitive nature for the company.

2. The main component of working capital is cost of capital, which is not described in

the project because of confidential nature.

3. External environment influence was not considered while doing the theoretical

standard rather than the industrial standard because of unavailability of any such

specific standard.

4. The scope of the study was limited to Jindal Steel & Power Limited.

Bibliography

Agarwal J.D.A Goal Programming Model for Working Capital Management,Finance

India,Vol.II, No. 2, June 1988

Arunachalam, S., Working Capital Management in Road Transport Corporations In Tamil

Nadu.Finance India, Vol.VIII, No.1,March 1994

Asthana ,Rojul , Simulation for working capital management, Dissertation submitted in

Centre for Systems and Management Studies.IIT,Delhi, 1982

Bannerjee,B.,Financing of working capital, The Indian Practice. The Management

Accountant, Vol. 17, No. 8, August 1982

Bhadra , Biswajit The Role Of Working Capital In Public And Private Enterprises ,

Working Capital Management

Bhattacharya S.K.,Raghavachari, M and Singh A.K.,Determinants of working capital

management, IIM,Ahmedabad

Block, Stanley and Geoffrey Hirt ,Foundations of Financial Management, Homewood,

ILL: Richard D. Irwin, 1987

Brealey, R.A., S.C. Myers and A.J. Marcus. Fundamentals of Corporate Finance (1999),

2nd Edition, The McGraw-Hill Companies, Inc.

Chowdhary ,A.B.Roy ,Working Capital Management, Eastern Law House,1978

Das, P.K., Working capital Management in the Public Sector Undertakings in India – A

Case Study. The Management Accountant, Vol. 28, No. 12, December 1993

ICWAI Exposure Draft Guidelines on Inventory Management. The Management

Accountant Vol-28, No-2, Feb 1993

Gitman, L.J. Principles of Managerial Finance (2000), 9th Edition, Addison Wesley

Longman, Inc.

Michael ,F., - Management of Working Capital, London ,The MacMillan Press Ltd.,1976

N.Chinta Rao & K.V.Rao , Management of Working Capital –Perceptions of Chief

Executives- Working Capital Management

Pandey, I M, Financial Management, Vikas Publishing House Pvt. Ltd.

Ross, S.A., R.W. Westerfield and B.D. Jordan. Essentials of Corporate Finance (1999),

2nd Edition, Irwin/McGraw-Hill.

Scott, D.F., J.D. Martin, J.W. Petty and A. Keown. Basic Financial Management (1999),

8th Edition, Prentice-Hall, Inc.

Richard I Levin, David S. Rubin. Statistics for Management 2007, 7th Edition, Pearson

References:

Khan M.Y, Financial Management.

Principles of Corporate Finance, Brealy and Myers, 7th edition

Pandey I.M., Financial Management

Annual Report of Jindal Steel & Power Ltd.

Working Capital data of Jindal Steel & Power Ltd.

www.indiansteel.com

www.nseindia.com

www.indianinfoline.com

www.steelex.com

www.jindalsteelpower.com

www.moneycontrol.com

Glossary:

ABC Analysis: An approach of inventory management, which classifies inventories

according to their monetary values. Inventory items are thus categorized as (i) A- items: high

value items for which careful management is needed; (ii) B-items: moderate value items for

which rules of thumb such as past inventory turnover are adequate management techniques,

and (iii) C-items: low value items which can be maintained at a flat minimum amount.

Accrued Liability: Also known as outstanding liabilities or expenses. For example, accrued

wages, accrued rent, accrued taxes and accrued interest and so on. They typically represent

obligations for certain services for which payments are yet to be made and are indirect

sources of financing.

Ageing Schedule: It is a tabular classification of receivables which showing the length of

time which the account has been outstanding.

An Aggressive Policy: It resorts to short-term liabilities to finance temporary and also part or

the entire permanent current assets requirement.

Average Collection Period: Accounts receivables / (annual credit sales/360).A ratio that

express how rapidly the firm is collecting its credit accounts.

Balanced Policy: This policy is that balances the trade-off between risk and profitability in a

manner consistent with its attitude towards bearing risk.

Bills Payable: Bills Payable is a current liability and arises when the bills written by

creditors are accepted by the firm.

Capital Cost: The cost of the use of additional capital to support credit sales, which

alternatively could be profitably employed elsewhere is, therefore a part of the cost of

extending credit or receivables and are called capital costs.

Carrying Costs: These costs arise due to the storing of inventory and expenses made in

raising funds to finance the acquisition of inventory.

Cash Budget: It is statement of the expected cash flows for a firm over a specified period of

time.

Cash Cycle: This is length of the time between the purchase of raw materials and collection

of receivables in the sale of the final product.

Cash Discount: A percent reduction in sales or purchase price allowed for early payment of

invoices. It is an incentive for credit customers to pay invoices in a timely fashion.

Collection Cost: These costs are administrative costs or legal costs incurred in collecting the

receivables from the customers to whom credit sales have been made.

Conservative Policy: A conservative policy ignores the distinction between temporary and

permanent current assets, by financing almost all assets investments with long term capital.

Consumer Credit: Credit granted to an individual is referred to as consumer credit.

Credit Period: It is total length of time period over which credit is extended to a customer to

pay bill.

Current Assets: Those assets which can be converted into cash within an accounting year or

within the operating cycle, whichever is greater.

Current Ratio: The ratio of current assets divided by current liabilities. It is used as a

measure of liquidity.

Factor: Specialized buyer, at a discount of company receivables.

Factoring: It is selling of receivables to a financial institution, the factor, usually” without

recourse.

Float: It refers to the amount of money tied up in Cheque that have been written but yet have

to be collected and encashed. Alternatively it represents the difference between the bank

balance and book balance of cash of a firm.

Gross Working Capital: The firm’s investment in current assets.

Inventory Turnover Ratio: Cost of goods sold / Inventory. A ratio that measures the

number of times a firm’s inventories are sold and replaced during the year. This ratio reflects

the relative liquidity of inventories.

Just-in-time Inventory Control: A production and management system in which inventory

is cut down to a minimum through adjustments to the time and physical distance between the

various production operations. Under this system the firm keeps a minimum level of

inventory an hand relying upon suppliers of furnish parts “just-in-time” for them to be

assembled.

Liquidity Ratio: It indicates to the relationship between current assets and current liabilities.

Operating Cycle: The period involved from the time cash is invested in inventory until the

time cash is recovered from the sale of the goods.

Optimal Cash Balance: Equal to the larger of (1) the sum of transaction balances and

precautionary reserves and (2) compensating balance requirements.

Permanent Working Capital: These assets are required on a continuing basis over the entire

year. They represent the amount of cash; receivables and inventory maintained as a minimum

to carry on operations at any time.

Quick Ratio: Current assets minus inventory and prepaid expenses items divided by current

liabilities. It is a measure of liquidity. It is also called acid test ratio.

Source of Funds: Decrease in an asset account or an increase in a liability or an equity

account.

Temporary Working Capital: Trade credit, and other payables and accruals, that arises

spontaneously in the firm’s day to day operations.

Trade Credit: Credit extended to another firm is known as trade credit.

Working Capital Management: It is concerned with the problems that arise in attempting to

manage the current assets, the current liabilities and the interrelationships that exist between

them.

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