Report On Working Capital_309306935.docx

ACKNOWLEGMENT This project has been a wonderful learning. I am very thankful to have got this opportunity to work on a satisfying project on “STUDY OF WORKING CAPITAL MANAGEMENT OF GNFC.” I am very thankful to the management of GNFC for providing me the golden opportunity to do this project. I would like to thank Mr.N.K.Patadia (AGM-TC) to grant me. I also express out thank to Mr.I.P.Bhatt (SM-TC). I am immensely grateful to Mr.A.K.Trivedi (GM-Finance) who has guided me during the project and special thanks to Mr.D.R.Panchal (PS-Finance) who has guided me and helped me a lot. I am also thankful to manager Mr. R.B.Kayastha (Banking Section) who has guided me for studying working capital management. I am also thankful to chief managers Mrs.J.M.Kavina, Mr.V.C.Bhatt, senior managers Mr.U.N.Gohil, Mr.P.H.Gadhi, Mr.U.V.Parmar, Mr.R.M.Patel, and managers Mr.A.B.shah, Mr.R.B.Shah, Mr.A.R.Shah, Mr.R.S.Patel, Mr.M.H.Dave, Mr.N.N.Modi, Mr. M.S. Talukdar, in charge of different section for making me aware about their particular section.

Niyati Patel

INDEX Sr No.

Content

1.

Company Profile

2.

Study Of Finance Department

3.

Working Capital Management

4.

Calculation of operating cycle of GNFC

5.

Calculation of Working Capital

6.

Cash management

7.

Inventory management

8.

Receivables management

9.

Findings

10.

Conclusion

Page No.

COMPANY PROFILE GUJARAT NARMADA VALLEY FERTILIZER COMPANY LIMITED (GNFC) is the joint sector enterprise promoted by the Government of Gujarat and the Gujarat State Fertilizer Company Ltd (GSFFC). It was set up and located in Bharuch, Gujarat in 1976. GNFC started its manufacturing and marketing operation by setting up in 1982, one of the world’s largest single-stream ammonia-urea fertilizer company. Over the next few years, GNFC successfully commissioned different projects in fields as diverse as chemicals, fertilizer and electronics. GNFC today has extended its profile much beyond fertilizers through a process of horizontal integration. Chemicals/Petrochemicals, Energy Sector, Electronics/Telecommunication

and

Information Technology from ambition and challenging additions to its corporate portfolio. GNFC has enterprising, strategic view towards expansion and diversification. Gujarat Narmada Valley Fertilizers and Chemicals Limited (‘the Company’ or ‘GNFC’) operates businesses mainly in the Industrial Chemicals, Fertilizers and Information Technology (‘IT’) Products space. Serving a diverse set of customers, the Company is now an established leader in most of its chosen lines of business. GNFC today is one of the leaders in fertilizer industry. The Company is engaged in manufacturing and selling fertilizers such as Urea and Ammonium Nitrophosphate under the brand name of “NARMADA”. The Company has set up core chemical and petrochemical plants such as Methanol, Formic Acid, Nitric Acid, Acetic Acid, Toluene Di - Isocyanate, Aniline, Ammonium Nitrate, Ethyl Acetate, Methyl Formate etc. The Company is one of the largest producers of Formic Acid and Acetic Acid in the country. The Company has India’s largest single stream plant of Aniline. The company is the only manufacturer of Toluene Di-Isocynate in South East Asia and Indian Sub Continent. The Company’s chemicals enjoy high brand value in niche market. The Company provides several cutting-edge IT services and solutions covering Digital Signatures Certificate (DSC), E-procurement, E-Governance projects, Data centres and CCTV surveillance systems etc. under Brand name of (n)code solutions. It remains the market leader in Digital Certificate business maintaining about 40% market share.

Board of Directors Shri G. R. Aloria

IAS

Chairman

Dr. J. N. Singh

IAS

Director

Smt. Mamta Verma

IAS

Director

Prof. Arvind Sahay

Director

Shri Chandrasekhar Mani

Director

Shri Sunil Parekh

Director

Shri Piruz Khambatta

Director

Shri H. V. Patel

IAS

Director

Dr. Rajiv Kumar Gupta

IAS

Managing Director

Executive Directors Shri R. T. Bhargava

Executive Director

Shri P. A. Mankad

Executive Director

Shri K. B. Garvalia

Executive Director

Shri Y. B. Gandhi

Executive Director

Shri R. B. Panchal

Company Secretary & Executive Director

Chief Financial Officer Shri Vikram Mathur

Registered Office: P. O. Narmadanagar- 392015 District: Bharuch Gujarat, INDIA

General Manager & CFO

Products:  Methanol  Acetic Acid  Toluene Di-isocyanate  Aniline  Formic Acid  Concentrated-Nitric Acid  Weak Nitric Acid  Ammonium Nitric (Melt)  Methyl Formate  Nitrobenzene (NB)  Calcium Carbonate  Hydrochloric Acid  Ortho Toluene Diamine

Services: 1. Fertilizer plant  GNFC started fertilizer manufacturing and marketing operation by setting up in 1982, one of the world’s largest single-stream ammonia-urea fertilizer complexes.  GNFC today is one of the leaders in fertilizer industry. The company is engaged in manufacturing and selling fertilizer such as Urea, Ammonium Nitro phosphate and calcium Ammonia Nitrate under the umbrella Narmada. GNFC has to phosphate and calcium Ammonia plant, a reference plant in the world of fuel oil based technology along with the world’s largest single stream urea plant.

2. Chemical plant  GNFC has kept pace with changing times and its vision is always focused on growth. Even as the company was implementing its fertilizer complex, plans were underway for expansion and diversification in related areas. This resulted in the up of core chemical and petrochemical plants such as Methanol, Formic Acid, Nitric Acid and Acetic Acid.  These industrial chemicals are used by a wide range of manufacturers, processors and chemical operators in India and even abroad. While methanol finds application in chemicals, resign etc. Formic acid is used mainly in rubber, textiles, tanneries and pharmaceuticals

industries. Both methanol and formic acid are regularly being exported to international markets.

3. IT Tower  An it division of GNFC it offers digital certificates that can integrate with application such as emails, workflow, enterprise wide application, or secure VPNs. The digital certificates can use by individuals, corporate and governments to secure online B2B/B2C applications and other online transactions.  It has promoted a portal called www.nprocure.com offering end-to-end electronic procurement services provider. It also designs and builds world class data center infrastructures and also offers a wide range of security services which include managed IT services & secure infrastructure design & building services.

ORGANISATIONAL STRUCTURE

Board of Directors

Chairperson & Managing Director

Executive Director

General Manager

Additional General Manger

Chief Manager

Senior Manager

Manager

Senior Officer

Officer

Staff

FINANCE DEPARTMENT GNFC have a finance department for transacting all types of financial dealings. The finance department is the integral part of any organization which plays pivotal role in all organization. Because money is the medium without which we can even think to do anything. And finance department can only solve the problems which are arises for the money .finance department dealing with the sources of fund and application of the fund. To take any operation any operation in the consideration we must have to budget it according to the financial condition of the organization. And foremost is that to handle this financial department GNFC has its own latest technology through which it can run financial activity smoothly.

Finance department mainly divided in the following section:  Bills Payment Section  Marketing Account Section  Bank Section  Establishment Section  Insurance Section  Indirect Tex Section  Central Account Section  Concurrence Section  Stores Account Section

WORKING CAPITAL MANAGEMENT  Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.  A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.

Concepts of working capital:  There are two concepts of working capital-gross and net.  Gross working capital refers to the firm’s investment in total current assets.  Net working capital refers to the difference between current assets and current liabilities. Net working capital is positive when CA exceed CL and negative when CL exceeds CA.  A finance manager should ensure there is sufficient liquidity in the firm’s operations. This is possible only when the CA and CL are managed efficiently. Liquidity of the firm is defined as the firm’s ability to meet its short-term obligations as and when payable.

Objective: Liquidity V. Profitability The basis objective of working capital management is to maintain the smooth functioning of the normal business operations of a firm. The company has to decide on the sufficient quantity of working capital to be maintained. A company following a conservative approach will have more current assets at its disposal. Holding large amount of CA is not very advisable as the firms lose on the profitability aspect. They can earn more by putting these resources to alternative uses or by investing CA into short term investment avenues. This approach is dynamic wherein only small amounts of cash are held by companies and the rest put to alternative uses.

Need for Working Capital: Different firms have different requirements of working capital. One of the objectives, the firm should earn good returns from its operations which mean that earning a steady amount of profit requires good amount of sales. The firm should invest adequately in current assets to enable it to generate sales continuously without any break. Sales do not convert into cash instantaneously and there is always on operating cycle involved in the conversion of sales into cash.

Operating cycle: It is the length of time required to convert sales into cash. This involves three phases:  Acquisition of resources-procuring raw materials, labour, fuel, etc.  Manufacture of the product-conversion of raw material into inventory.  Sale of the product-conversion of sales into cash or credit in which case the firm has accounts receivable. The length of the operating cycle is the sum total of:  Raw Material storage period  Conversion period  Average collection period This total is referred to as Gross Operating Cycle (GOC). Form this; the firm has to make payables which are the Average Payment Period. Subtracting payables deferrals from GOC, we get Net Operating Cycle or the Cash Conversion Cycle.

Calculation of Operating Cycle of GNFC: 1) Inventory Conversion Period The inventory conversion is the sum of raw material conversion period, work in process and finished goods conversion period: ICP=RMCP + WIPCP + FGCP i)

Raw Material Conversion Period ( RMCP ) RMCP = Average raw material inventory Raw material consumption per day

Raw material consumption per day = Raw material consumption / 360 Average raw material inventory = (Opening stock of RM + Closing stock of RM)/2 2007-08

2008-09

2009-10

Average raw material inventory

4041.71

5274.76

5522.39

Raw Material consumption per

214.71

292.01

341.99

19

18

16

day Raw Material Conversion Period (RMCP) (in days)

i)

Work in Process Conversion Period (WIPCP) WIPCP = Average work in process inventory Cost of production per day

Average work in process inventory = (Opening WIP + Closing WIP) / 2 Cost of production per day = (Raw material consumed + power, fuel and other Utilities + stores chemicals + Opening WIP – Closing WIP) / 360

2007-08

2008-09

2009-10

2422.75

1793.73

2013.60

Cost of Production per day

367.30

377.15

433.86

Work in Process Conversion

7

5

5

Average Work in Process Inventory

Period (WIPCP) (in days)

i)

Finished Goods Conversion Period (FGCP) FGCP = Average Finished goods Inventory Cost of goods sold per day 2007-08

2008-09

2009-10

Average finished goods Inventory

4351.26

8795.65

11532.51

Cost of goods sold per day

455.18

592.60

765.97

15

15

Finished goods conversion 10 Period (FGCP) (in days)

Raw Material Conversion Period (RMCP)

2007-08

2008-09

2009-10

19

18

16

7

5

5

10

15

15

36

38

36

(in days) Work in Process Conversion Period (WIPCP) (in days) Finished Goods Conversion Period (FGCP) (in days) Inventory Conversion Period (ICP) (in days)

1) Inventory Conversion Period (ICP): 40 35 30 25 20 15 10 5 0

38

36

19

18 7

15

36

16

15

10 5

2005-06

5

2006-07

2007-08

Raw Material Conversion Period (RMCP) (in days) Work in Process Conversion Period (WIPCP) (in days) Finished Goods Conversion Period (FGCP) (in days) Inventory Conversion Period (ICP) (in days)

From the above calculation we can see that since last 3 years the ICP is nearer to 37days. For maintaining operating cycle successfully this conversion period of inventory is fair for GNFC.

2) Debtors conversion Period (DCP) : Debtors conversion period =

Debtors * 360 Credit Sales

2007-08

2008-09

2009-10

Debtors

36117.55

51742.25

50126

Credit Sales per day

596.55

649.82

953.86

80

53

Debtors Conversion 60 Period (DCP) (in days)

Debtors Conversion Period 80

80 70

60

60

53

50 40 30 20 10 0

2005-06

2006-07

2007-08

Debitor conversion period (DCP) (in days) The debtors’ conversion period represents the length of time required to collect the sales receipts. It can be called process of cash inflow. From the above calculation the conversion periods are fluctuating. It was highest in 2006-07 i.e. 80days which affects adversely to the firm. In 2007-08 it decreases from 80days to 53 days which is fair for GNFC.

3) Gross Operating Cycle (GOC): Gross operating cycle = Inventory conversion period + Debtors Conversion Period 2005-06

2006-07

2007-08

Inventory Conversion Period (In 36 days)

38

36

Debtors Conversion Period (In 60 days)

80

53

Gross Operating cycle (In days)

118

96

96

Gross Operating Cycle 118

120

96

100

96

80

60

40

20

0 2005-06

2006-07

2007-08

Gross Operating Cycle (in days)

From the above calculation we can say that gross operating cycle is highest in 2006-07 i.e. 118 days because of high collection period. In 2007-08 it is decreased to 89 days because of low collection period. The time taken in completing one round from cash outflow to cash inflow takes nearly 90 days.

4) Payable Deferred Payment (PDP): PDP =

Average Creditors * 360 Credit Purchase

Credit purchase = raw material consumed + power fuel and other utilities + stores and chemicals + packing material + purchase of good for sale + closing stock of raw material + closing stork of stores and spares – (opening stock of raw material + opening stock of stores and spares) 2005-06

2006-07

2007-08

Average Creditors

21275.35

21045.27

34782.22

Credit Purchase Per Day

410.39

551.51

678.89

Payable Deferred Payment (PDP) (In Days)

52

38

51

60

52

51 38

40 20 0 2005-06

2006-07

2007-08

Payabel Deferred Payment (PDP) (In days)

Payable deferred payment is the time that lapse between the dates of various resources received on credit and the date when payment is made. In the last 3 days it is highest in 2005-06 i.e. 52days. An increase in the length of the operating cycle, without a corresponding increase in payable deferred period, creates the further working capital financing needs. The days are lowest in 2006-07 i.e. 38days.

5) Net operating cycle (NOC): Net operating cycle = gross operating cycle + payable deferred period

Gross operating cycle (GOC) (in days) Payable deferred payment (PDP) (in days) Net operating cycle (NOC) (in days)

2006-07

2007-08

96

118

89

52

38

51

44

80

38

80

80 70 60 50 40 30 20 10 0

2005-06

44

2005-06

38

2006-07

2007-08

Net Operating Cycle (NOC) (In days)

The difference between gross operating cycle and payable deferred period is known as net operating cycle. The operating cycle is 44 days in 2005-06 which goes up in 2006-07 i.e. 80days. An increase in the length of operating cycle creates further working capital financing needs. In 2007-08 the cycle days are reduced to a noticeable level. The change in 2006-07 is because of higher collection period and lower payable deferred period.

6) Current Asset to Fixed Asset Ratio: Higher of current asset to fixed asset is useful to measure a level of current asset. The three policies are follows:  Higher CA / FA ratio indicates conservative current asset policy. It implies greater liquidity and lower risk.  Lower CA/FA ratio indicates aggressive current asset policy. It implies higher risk and poor liquidity.  Between these two extreme levels, there is an average current asset policy. 2005-06

2006-07

2007-08

Current Asset

88426.02

141029.06

120397.18

Fixed Asset

85109.61

110632.68

107022.88

CA / FA (Times)

1.04

1.27

1.12

1.4 1.2

1.27 1.12 1.04

1 0.8 0.6 0.4 0.2 0

2005-06

2006-07

CA / FA (Times)

2007-08

From the above data we can say that GNFC is following average policy. In 2005-06 current asset was slightly greater than fixed asset and 2007-08 it follows greater difference. The ratio is highest in 200607 i.e. 1.27 which indicates conservative current asset policy. It shows greater liquidity and lower risk of the company.

Determinants of working capital: A firm should plan its operations in such a way that there is neither too much nor too little working capital. The following factors are identified as significant factors affecting the composition of working capital or current assets:  Nature of business: working capital requirements are basically influenced by the nature of business. Trading organizations invest little on fixed asset and are have a large stock of finished goods, accounts receivable (arising out of credit sales) and accounts payables (due to credit purchases). In contrast, public utilizes do not have large stocks of current asset and they invest heavily on fixed assets.  Nature of Raw Material Used: the nature of raw material also influences the quantum of inventory. For example, if the raw material is based on the agricultural produce, the seasonality of production affects the raw material requirements. Consequently, the percentage of raw material inventory to total current asset will be very high.  Sales and Demand Conditions/ Business Cycle: companies which are growing will have large quantities of finished goods inventory. Sales depend on the demand conditions which vary depending on the seasonality and cyclicality of product demand.  Processing Technology: the manufacturing cycle comprises the purchase and use of raw material and production of finished goods. Longer the manufacturing cycle, larger is the firm’s requirement of working capital. This will also lead to an extended manufacturing time span and larger tie-up of funds in inventory.  Credit Policy: the credit policy of the firm affects the working capital. The credit terms to be granted to customers depend on the industry norms. If the industry standard is 45 days and the firm restricts its credit terms to 20 days, it works heavily on the company’s sales. On the other hand, if the company follows the industry standard and grants credit of 45 days, extra efforts are to be put in towards collection. Incidence of bad debts is higher in such cases.  Operation Efficiency: use of working capital is improved and the velocity of cash conversion cycle is stepped up. Better utilization of resources improves profitability and helps in reducing the pressure on working capital.

Decision Criteria:  Working capital management entails short term decisions – generally, relating to the next one year period which is “reversible”. These decisions are therefore not taken on the same basis as capital investment decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.  One measure of cash flow is provided by the cash conversion cycle the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter- relatedness of decisions relating to inventories, account receivable and payable, and cash. Because this number effectively corresponds to the time that firm’s cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.  In this context, the most useful measure of profitability is return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; return on equity (ROE) shows this result for the firm’s shareholders. Firm value is enhanced when, and if the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link short-term policy with long-term decision making. See economic value added (EVA).

Management of working capital: Management uses a combination of policies and techniques for the management of working capital. These policies aim at managing the current asset (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.  Cash management: identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.  Inventory management: indentify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and minimizes reordering costs and hence increases cash flow; i.e. credit terms which will attract customers, such that any revenue and hence return on capital (or vice versa) discounts and allowances.  Short term financing: identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be

necessary to utilize a bank loan (or overdraft), or to “convert debtors to cash” through “factoring”.

Calculation of gross working capital: Gross working capital refers to the current assets of the firm. Current assets are the assets which can be converted into cash within a year and it includes cash, short term securities, debtors, bills receivables etc.

Sources of funds Current assets Inventories

2005-06

2006-07

2007-08

26957.87

38848.52

38599.79

Sundry debtors

42957.30

60527.55

38968.35

Cash and bank balance

5501.95

13047.91

15141.34

Interest accrued

141.48

141.48

447.65

Loan and advances

12867.42

28465.60

27240.05

Gross working capital

88426.02

141029.06 120397.18

160000 141029.06 140000 120397.18

120000 100000

88426.02

80000 60000 40000 20000 0

2005-06

2006-07 Gross Working Cpital

2007-08

From the above last 3 days data we can see that gross working capital is highest in 2006-07. Inadequate amount of working capital can threaten. The solvency of the firm because of its inability to meets its current obligation. Here we can see the major proportion of current asset investment is done into account receivable and investment in current asset should be judge adequately account to the need of business firm. Excessive investment in current assets should be avoided because it affects the firm’s profitability, as idle firm investment earns nothing.

Calculation of Net Working Capital of GNFC Ltd.: Net working capital is a difference between current assets and current liabilities. Net working capital= current asset – current liabilities

Sources of funds

2005-06

2006-07

2007-08

Current asset Inventories

26957.87

38848.52

38599.79

Sundry debtors

42957.30

60527.55

38968.35

5501.95

13047.91

15141.34

141.48

141.48

447.65

Loan and advances

12867.42

28465.60

27240.05

(A) Total Current Assets

88426.02

141029.06

120397.18

Liabilities

26444.51

44245.09

35272.92

Provisions

10902.56

9723.65

13594.99

(B) Total Current Liabilities

37347.07

53968.74

48867.19

Net Working Capital (A-B)

51078.95

87060.32

71529.99

Cash and bank balance Interest accrued

Current liabilities

87060.32

90000 80000

71529.99

70000 60000

51078.95

50000 40000 30000 20000 10000 0

2005-06

2006-07

2007-08

Net Working Capital (A-B) Net working capital can be positive or negative. For GNFC it is highest in 2006-07 i.e. 87060.32 which decrease in 2007-08 by 71529.99. so it is positive. Excessive investment in current assets should be avoided because it affects the firm’s profitability.

Cash Management Cash is the most important current asset for a business operation. It is the force that drives business activities and also the ultimate output expected by the owners. The firm should keep sufficient cash at all time. Excessive cash will not contribute to the firm’s profits and shortage of cash will disrupt its manufacturing operation. The term ‘cash’ can be used in tow senses in a narrow sense it means the current and other cash equivalents such as cheques, drafts and demand deposits in banks. In a broader sense, it includes near cash asset like marketable securities and time deposits in banks.

The

distinguishing nature of this kind of asset is that they can be converted into cash very quickly. Cash in its own form is an idle asset. Unless employed in some form or another, it does not earn any revenue. Cash management is concerned with  Management of cash flows into and out of the firm,  Cash management within the firm and  Management of cash balances held by the firm deficit financing or investing surplus cash.

Motives of holding cash: There are four motives of holding cash. They are:  Transaction motive: This refers to a firm holding cash to meet its routine expenses which are incurred in the ordinary course of business. A firm will need finances to meet a plethora of payment like wages, salaries, rent, selling expenses, taxes, interests, etc. The necessity to hold cash will not arise if there were a perfect coordination between the inflows and outflows. These two never coincide.  Precautionary motive: This refers to the need to hold cash to meet some exigencies which cannot be foreseen. Such unexpected need may arise due sudden slow-down in collection of accounts receivable, cancellation of etc. the moneys held to meet such unforeseen fluctuations in cash flows are called precautionary balances.  Speculative motive: This relates to holding cash to take advantage of unexpected changes in business scenario which are not normal in the usual course of firm’s dealings. It may also result in investing in profit- backed opportunities as the firm comes across.  Compensating motive: this is yet another motive to hold cash to compensate bank for providing certain services and loans. Banks provide variety of services like cheque collection, transfer of funds through DD, MT, etc. To avail these purposes, the customers need to maintain minimum balance in their account at all times. The balance so maintained cannot be utilized for other purpose. Such balances are called compensating balances.

Objectives:  Meeting payments schedule and  Minimize funds committed to cash balance.  Meeting payments schedule: In the normal course of functioning, a firm will have to make many payments by cash to its employees, suppliers, infrastructure bills, etc. it will also receive cash through sales of its products and collection of receivables. Both these do not happen simultaneously. A basic objective of cash management is therefore to meet the payment schedule in time. Trade credit refers to the credit extended by the supplier of goods and services in the normal course of business transactions.

 Minimize funds committed to cash balances: Trying to achieve the second objective is very difficult. A high level of cash balances will help the firm to meet its first objective discussed above, but keeping excess reserves is also not desirable as funds in its original form is idle cash and a non earning asset. The aim of cash management is therefore to have an optimal level of cash by bringing about a proper synchronization inflows and check the spells of cash deficits and cash surpluses.

Factors for efficient cash management: The efficiency of cash management can be augmented by controlling a important factors described below:  Prompt billing and mailing: There is a time lag between the dispatch of goods and preparation of invoice. Reduction of this gap will bring in early remittances.  Collection of cheques and remittances of cash: It is generally found that there is a delay in the receipt of cheques and their deposits into banks. The delay can be reduced by speeding up the process of collection and depositing cash or other instrument from customers. The concept of ‘float’ helps firms to a certain extent in cash management. Float arises because o the practice of banks not crediting firm’s account in its books when a cheque is deposited by it and not debit firm’s account in its books when cheque is issued by it until the cheques is cleared and cash is realized or paid respectively. Whenever cheques are deposited with the bank, credit balance increases in the firm’s books but not in bank’s books until the cheque is cleared and money realized. This refers to ‘collection float’. Likewise the firm may take benefit of ‘payment float’. The difference between payment float and collection float is called as ‘net float’. When net float is positive, the balance in the firm’s books is less than the bank’s book’s when net float is negative; the firm’s book balance is higher than in the bank’s books.

Cash forecasting and budgeting: Cash budget is a device to plan for and control cash receipts and payments. It gives a summary of cash flows over a period of time. Cash budgets are prepared under three methods: 1. Receipts and payments method 2. Income and expenditure method 3. Balance sheet method

Cash management at GNFC GNFC uses short period cash budget method. It prepare cash budget on quarterly basis. They make budget every month for the next three months. Cash budget is prepared by inflow and outflow as well as receipt and disbursement.

Cash budget format: Details of cash flow: Actual for Dec-2007 v/s projection for the period Jan 2008 to March 2008 (Rs. In lacks) Actual Dec 2007

Year to date

Projections Jan 2008

Feb

March

2008

2008

A. Opening Balance B. Receipts Sub Total C. Payment Sub Total D. Net Cash Inflow (B-C) E. Closing Balance (A+D) F. Total Cash Credit Limit

Cash collections: GNFC is selling its all product on cash as well as credit basis. It is own cash management system with BANK OF BRODA and ICICI. GNFC has non operative sales collection amount at each of its sales office for cash collection where only cheques are deposited by the customer, cash not be withdrawn. The fund is transferred at BOB (Bharuch) to the GNFC cash credit account.

Cash disbursement: Company has deal with certain fixed expenses every month i.e. salaries, telephone payments, electricity charges, dealer payments etc. supplier payments are done by cheque, inter bank credit

or imported account.Almost all transactions at GNFC are done by cheques on cash transaction. Minor expenses are done on cash basis. So at GNFC there is nothing like optimum cash balance.

Surplus cash investment: Company receives cash from selling its products. If there is surplus cash after all cash disbursement GNFC invest that surplus fund as fixed deposit for very short time period. On the contrary if company is in deficit then bank gives cash credit facility. The interest rate is now 9.25%. it is a consortium rate of all banks. The rate is counted as PLR 3.5% second source is short term t inter corporate loan from GSFC for 90 days and HDFC for 120 days.

Inventory Management  The team ‘inventory’ refers to the stockpile of products. Inventory comprises of those assets which will be sold off in the near future and moneys recovered. Inventory consists of three types of assets – raw materials, semi – finished goods (work in progress) and finished goods. Raw material inventory consists of those items which are purchased by the firm to be converted into finished goods. Work in progress inventory consists of partially complete goods, that is, items currently being used in the production process. Finished goods stock represent completed products ready to be sold.  The chief responsibility of a finance Manager of a firm is to see to it that the actions of the firm ultimately lead to wealth maximization of shareholders. Also he should ensure availability of sufficient raw materials for smooth production and sufficient finished goods stock to satisfy sales demands. These two conflicting is a basis of trade-off between costs and benefits associated with the inventory levels.

Role of Inventory in Working Capital: Inventories form an important part of a firm’s working capital. Some characteristic features about inventory are as follows: 1. Current asset: Inventories will be converted to cash within a year. 2. Level of liquidity: Inventories are looked at as next to cash. A firm having fast-moving goods in its stock can convert the products quickly to cash. Such stocks are called as highly liquid stocks.

3. Liquidity lags: Inventories have three types of legs: a. Creation lag: Raw materials are purchased on credit (creation of accounts payable) and used to produce finished goods. There is always a lag in payment whether goods are purchased or manufactured. This liquidity lag offers a benefit to the firm. b. Storage lag: The goods held for sale cannot be converted into cash immediately. Whether the goods are fast-moving, the firm realize its cash after a certain period. c. Sale lag: Instant cash realized when goods are sold on cash basis but in competitive situations, firms should give some credit period to their customers to enhance their sales volumes. This results in accounts in accounts receivable and this lag is a cost to the firm.

Purpose: The goal of inventory holding is to efficiency through cost reduction and to increase sales volume. The following are the other benefits accruing from holding inventories:  Sales: Customers purchase goods only when need arises. On the other hand. Firms the goods they want are not available most of them look at other substitutes.  Avail quantity discounts: suppliers give discounts for purchases. Such discounts increase the firm’s profits. Firms may go in for large orders to benefit from discounts offered by dealers.  Reducing ordering costs and time: every time a firm places an order, it incurs certain administrative expenses and some time is lost in processing these forms to get necessary approvals. Each of these varies with the number of order placed. To save on and costs, the firms may think about placing big orders  Reduce risk of production shortages: manufacturing firms require a whole lot of raw materials and spares. Even if one item is missing or is not available immediately, the entire production process goes for a toss and the firm incurs heavy losses. To avoid such situation firms maintain the required stores and inventories in sufficient quantities.

Cost associated with inventories:  Successful inventory management is a trade of between high and low levels of inventory. The inventory cost can classify as under.  Material costs: these are the costs of purchasing the goods and the related cost such as transportation and handling costs associated with it.

 Ordering costs: the expenses incurred to place orders with suppliers and replenish inventory of raw materials are known as ‘ordering cost’. Ordering costs include requisitioning. Purchase ordering, transporting, receiving, inspecting and handling at the warehouse.  Carrying costs: carrying cost include storage, insurance, taxes, deterioration, spoilage, obsolescence, salaries o in storage. The greater the inventory, the greater is the carrying cost.  Cost of funds tied up in inventory: whenever a firm commits its resources to inventory, it is using funds that otherwise might have been available for other activities. The firm is losing on the opportunity cost. If the finds were not locked up in inventory, they would have earned a return.  Cost o running out of goods: these are the costs associated with the inability to provide materials to the production department when they ask for or not providing finished goods to the marketing department when demand is there warehouse keeper, maintenance of building etc. carrying cost generally are to the tune of 25% of the value of inventory.

Inventory management at GNFC At GNFC there are total 140000 items in inventory whose total value is Rs.1001000000.

Bifurcation of inventories: Mechanical spares

57%

Catalyst and chemical spares

12%

Electrical items

11%

Instrumentation items

10%

Other miscellaneous item

10%

10% 10%

11% 12%

Mechanical spares Electrical items Other miscellaneous item

57%

Catalyst and chemical spares Instrumentation items

In 57% mechanical spares, there are some item which are not come into daily use. These item are very costly and carrying cost is also high. Material planning control system is available for the management of inventory at GNFC. This system is useful to control the minimum maximum level of inventory. Some inventories costs are very less and required time to time in the production. GNFC use SAP system for maintaining the inventory as well as the dead stock. SAP system is very useful and effective. The important benefit is the is helps in reducing the work load. Sales to inventory turnover ratio (2007-08) = sales/ inventory =343391.21/ 38599.79 =8.89 times The sales to inventory turnover ratio is 8.89 tines, which shows good management of inventory.

Inventory management techniques: Many mathematical models are available to handle inventory management problems. Some of the techniques are as follows: 1. 2. 3. 4. 5.

1.

Codification System ABC System Economic Oder Quantity ( EOQ) FSN Analysis HML Analysis

Codification system

Codification refers to assigning a unique code or name to each item based on its use, characteristics, importance and other features. It is the process of allocating a code after logical grouping and sub groping considering material types and application. Advantages:  It helps in avoiding duplication of items.  It is the starting point for standardization.  It identifies all the items logically.  It helps to group the similar items together.

 It lays the foundation for an efficient purchase organization by helping to form specialized commodity base purchase sections. Since items are identified by sources of supply, it is possible to bulk together to take advantage of bulk discount. 2. ABC system Monitoring a large number and types of inventory becomes very difficult in a big company given the amount involved. In such cases, ABC analysis enable the management to monitor the stocks in a proper manner. The firm therefore classifies inventories into three different categories – A group – items with high attention. Rigorous, sophisticated and intensive control measures are used for such item monitoring. Items under the C group represent least value items needing simple control large. The B group stands midway. They are neither too expensive nor very cheap. These items require reasonable attention. The ABC analysis concentrates on important items and is therefore known as “Control by Importance and Exception”. It is also known as Proportion Value Analysis as items are classified according to the importance of their value. Advantages of ABC analysis: It ensures closer control on costly items in which lies the greater part of company’s resources. Clerical costs are greatly reduced as stocks are maintained at optimum level. It helps in achieving the main objective of inventory control at minimum cost. 3. Economic Order Quantity (EOQ) EOQ refers to the optimal order size that will result in the lowest ordering and carrying costs for an item of inventory based on its expected usage. The optimum level of inventory is referred to as the Economic Order Quantity. It is the economic lot size. EOQ is defined as level of inventory order that total cost associated with the inventory management. It is the level one unit beyond which is additional cost to the firm and one unit below may hamper production process. The model in inventory control.  Constant or uniform demand: The firm knows with certainty the annual consumption of a particular item of inventory.  Constant unit price: The EOQ model is based on the assumption that the per unit piece of material does not change and is constant irrespective of the order size.  Constant carrying costs: Unit carrying costs are known to vary substantially as the size of inventory increases or decreases. Firms derive economies of scale by increasing order size. However, the EOQ model assumes the carrying costs to be constant.

 Constant ordering costs: Ordering costs are assumed to be constant whatever the numbers of orders are and whatever the size is. Economic Order Quantity: Optimum Production Quantity, 2AS/C The formula for EOQ model is Where A refers to the annual usage, S refers to ordering cost, C refers to cost of carrying inventory per unit per annum. Re-order Point: In the EOQ model, it was assumed that there is no time lag between ordering and procuring of materials. Therefore the re-order point for replenishing the stocks occurs at that level when the inventory level drops to zero and because of instant delivery by suppliers, the stock levels bounce back. But rarely do we come across such situations in real life. There is always a lead time between ordinary data and receipt of materials. Due to this, the recorder level is always higher zero. Re-order point = Normal Consumption during lead time + Safety stock Recorder level = Average usage *Lead time Safety stock In order to avoid a stock-out situation, the firms should maintain a safety stock which will act as a buffer or a cushion against a possible shortage of inventory. Safety stock may be defined as the minimum additional inventory to meet an unanticipated increase in usage resulting from an unusual high demand 4. FSN Analysis At GNFC FSN analysis is carried out for consumable items, which are used by multiuser. FSN means fast moving, slow moving and non moving items analysis.

Norms established by GNFC for different items Fast moving items  It should have more than 5 issue transaction in a year.  There should be multi users. For fast moving items close watch is required and annual rate contracts are made to avoid stock outs. Here frequency of review is more. Slow moving items,  Items should have transactions between 1 to 5 items in a year.  There should be multi users. For slow moving items consumption pattern is studied. Normally these

items are for specific

users and levels can be kept low but users should given their requirement or shutdown. Here frequency of review is less. Nonmoving items  Items have no issue transactions for last 3 years.  Items should have some quantity available in all the past 3 years. For non moving items reports are made at the closing of the financially year. The report is circulated to all concerned department. The departments study the use of equivalent materials against other similar material. After that the excess material is declared for disposal and that items are removed from the list. 5. HML Analysis HML analysis refers to high value, Medium value and low value items. In this analysis the unit value of the items is considered. Here the analysis is mainly focus to control the unit prices of high value items and negotiate the prices. This analysis is done for electrical, instrumentation and other items. At GNFC 

Items having value more than or equal to 100000Rs. Is called high value items.



Items having value more than or equal to 25000Rs. and below 100000Rs. is called medium value items.



Items having value less than25000Rs. is called low value items.

Zero inventories: GNFC is maintaining the zero inventories for raw material like oil, gas etc. Zero inventories takes place when the company has made contract with suppliers to provide row material on demand. GNFC has contract with GAIL for providing gas as and when required. The supply of gas on demand help to save inventory and cost reduction also. For lubricants GNFC has done negotiation with IOC (Indian Oil Corporation). It has provided accommodation in the plant which is called IOC depot. IOC keeps the stock at the depot and GNFC use it when it is required. Till that GNFC does not need to pay anything for it. GNFC has to look after the material of depot. IOC pays charges for that to the company. This helps to reduce the transaction cost. Import substitution Import substitution refers to find out the domestic suppliers for the item which are imported. GNFC has done the same for the item which are imported. It has developed supplier connection in domestic market and market contracts with them. GNFC has positive experience by contracting with local vendors. It has obtained lots of saving and benefits by adopting import substitution technique. Pricing of inventories There are different ways of valuing inventories. Firms should choose that system which gives them the maximum benefit. Fist In Fist Out (FIFO): a firm adopting this method prices the raw material at that rate at which the material were received. The goods received first are issued first and once the first set of consignment is completely exhausted, the second set is not utilized. This is logical method of issues which is used by almost all companies. Last in first out (FIFO): in the LIFO method, the consignment last received is first issued and if this is not sufficient, only then the previous set in the warehouse is utilized. This system is useful when the companies want to price their product on the basis of total cost incurred plus a percentage of profit.

Weighted average method: the pricing of materials is done on weighted average method where in weights are assigned to the quantities held and accordingly priced. This is one of the most widely used methods as it gives importance to the balances in stores in their proportion of availability. Standard price method: under this method, the material is priced at a standard cost which is predetermined. When the material is purchased, the stock account will be debited with the standard price. The difference between the purchase price and the standard price will be carried to a variance account. Replacement or current price method: this method prices the issues at the value that is realizable at the time of issue.

Receivable Management Businesses sell goods on credit to increase the volume of sale. In the present era of intense competition, one way to improve sale deals is to offer relaxed payment conditions to customers. Finished goods get converted to receivables when sold on credit terms. Trade credit is a marketing tool that tries to bridge the gap between production and distribution of company’s products. Trade credit creates receivables or book debts which the firm hopes to realize in the near future. The receivables are a very important component assets.

Objectives: The term ‘receivables’ is defined as ‘debt owed to the firm by customers arising from the sale of goods or services in the ordinary course of business’. The main objective of having receivables in the current assets is to promote and encourage sales which will lead to increased profits. In competitive situations, the firms will be forced to offer goods on credit keeping in line with competitor’s strategies. All firms therefore grant credit to increase sales, profits and to meet competition.

Costs Associated with Maintaining Receivables: The following are the different costs incurred with the extension of credit and accounts receivable:  Capital cost: A firm offering goods on credit can surely expect higher sales but some of the firm’s resources remain blocked in them as there is a time lag between a credit sale and cash receipt from customers. The cost of use of additional capital to maintain its obligations will definitely have an effect on the firm’s profits.

 Collection cost: These are the costs incurred in collecting receivables. They are administrative in nature and these costs include(a)additional expenses on the creation and maintenance of staff, stationery, postage, registers etc.  Delinquency cost: This cost arises out of the failure of customers to meet their obligations when payment on credit sales becomes due after the expiry of credit period. Additional costs in the form of reminders, legal charges etc. will be incurred.

 Default cost: The firm may not be able to recover its dues because of its customers’ inability to pay off their debts. Such dues are bad debts and go on to reduce the profits of the company. The size of the receivables is determined by the firm’s credit policy and the level of its sales.

Receivables management at GNFC: At GNFC the receivables are approx. 35% of current assets. The company credit policy varies from 15 days to 90 days. On every 30 days company prepares the receivables list which shows the total receivables and due date for each bill. The list is prepared by accounting department. Account department co ordinates with marketing department for collection of receivables. Credit policy: The credit policy of a company can be regarded as a tradeoff between increased credit sales leading to higher profits and the cost of having large cash locked up in receivables. The credit policy to be adopted in businesses largely depends upon competitors’ strategies. If the competitors are grating a 15 day credit period and if the firm decides to extend the credit period to30days, the firm will be flooded with customers’ demand for company’s products. Firms average investment in account receivable 90days credit per month. The credit policy is a framework to determine (a) Credit standards, (b) Period of credit, (c) Cash discount to be offered and (d) Collection program.

All these variables listed influence the amount of sales, the amount of sales, and the amounts locked up in receivables and the bad debts incidence. Credit Standards : The term ‘credit standard’ represents the criteria for extending credit to customers. The quantitative basis for setting credit standards are credit rating, references, average payment period and ratio

analysis. Professional credit rating agencies’ help may be sought to rate a customer’s creditworthiness. After rating, the customers are rated as ‘excellent’, ‘very good’, ‘good’,’ average’, ‘poor’ , etc. The overall credit standards can be divided into (a) tight or restrictive and (b) liberal or easy-going. Credit period: This refers to the time given to customers to pay for their purchase. It is generally expressed in days like 15 days or 30 days. Generally, firms give a discount if payments are made within a said period beyond which they will not lose on the benefit that can be availed. Increasing the credit period will bring in new sales and new customers decrease, which is not desirable.

Cash Discounts: Firms offer cash discount to induce prompt payment s. Cash discounts has implications on sales volume, average collection period, investment in receivables, incidence of bad debt losses and profits. Change in discount rate will bring in additional sales-granting a discount implies reduced pieces and this factor brings in new sales. GNFC is providing 14% discount on the total amount to the clients’ if they pay before due date. Collection Program: The success of a collection program will be depended on the collection policy. The objective of a collection policy is to achieve timely collection of receivables, thereby releasing funds locked up in receivables and minimize bad debts occurrence. The collection program consists of the following:  Monitoring receivables  Informing customers about the due date for payment  Initiating legal action to overdue customers after sending repeated notices Collection policy should be so formulated that it is not too rigorous as it acts as an irritant to customers, leading to bad relationship with them.

Credit policy at GNFC  The company sales its product on both cash and credit basis.

 Daily reporting of sales is done for organizations.  The Company follows a rigorous system of credit evaluation for both corporate client and dealers. The customers are required to make payments through cheques.

 ICRA rating is the standard for selecting and granting credit to customer  Clients are required to give pre signed cheques to the GNFC for purchasing the product.  Company has non operative sales collection account at each sales office for cash collection.  If clients pay before due date then interest is charged @ 16% per year on total amount. If clients pay before due date then 14% discount is given on the total amount.

 If the cheque bounces from the account then 0.75% of total amount or 5000 Rs. whichever is higher is charged to customer.

 Prorate of quantity: if GNFC doesn’t have quantity if product then it is entitled to follow all the conditions.

Credit evaluation of client is done for the purpose of extending credit to them. GNFC has presently implemented credit rating model developed by ICRA rating agency for assessing the clients’ credit worthiness. They want to change the credit rating agency from ICRA to CARE.

In GNFC different monitoring technique of account receivable are used. It is to collection period and monitoring the top 10 customers of GNFC.

FINDINGS  The value of gross working capital is highest in 2006-07 i.e. 141029.06 Major proportion of investment is done into account receivables and inventories.  The value of net working capital is increasing and highest in 2006-07 i.e. 87060.32 which indicates good liquidity position of GNFC.  The inventory conversion period is on an average 37days during last 3 years. It means average 37days time is required for producing and selling the product.  Debtors’ conversion period is highest in 2006-07 i.e.80days which goes down in 2007-08 i.e. 53days. Lower collection period is good for the company.  Gross operating cycle is highest in 2006-07 i.e. 118 days due to high inventory conversation period and debtor’s conversation period.  Payable deferred payment is 2006-07 i.e. 38 days. It is 51 days in 2007-08.  The net operating cycle is higher in 2006-07 due to higher collection period and lower payable deferred period.  Current assets to fixed assets ratio is higher in 2006-07 i.e. 1.27 GNFC is following average policy in which there is an equal level of risk and liquidity.

CONCLUSION From the above calculation and information we can say that GNFC is managing its working capital very effectively. All three components of working capital i.e. cash management are operating very successfully at the company. Major transactions are done through cheque. Company has sound liquidity position. Its investing the major portion of surplus fund in FD only. The company has good inventory management. It is maintaining zero inventories. GNFC uses different techniques for monitoring receivables management. In short the all over working capital management of GNFC is proper.