CONTENTS

Acknowledgment Certificate CHAPTER 1 Introduction (Pg.-3) An Introduction of Working Capital Management Objectives of the project Scope of the project

CHAPTER 2 Research Methodology (Pg.-27) Collection of data Research Design Limitations of the research

CHAPTER 3 Company Profile (Pg.-34) Steel industry in India Competitors in the market SWOT analysis of the company

CHAPTER 4 Analysis and Discussion (Pg.-40) Working Capital Analysis various departments of TATA Steel Operating Cycle of TATA Steel Inventory Management Manufacturing Process Receivables Management Management of Accounts Payable Comparative analysis of Working Capital through Ratios EOQ Analysis

CHAPTER 5 Conclusion & Summary (Pg.-76) Bibliography(Pg.-81)

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ACKNOWLEDGEMENT
An understanding of the study like this is never the outcome of the efforts of a single person; rather it bears the imprint of a number of persons who directly or indirectly helped me in completing the present study. I would be failing in my duty if I dont say a word of thanks to all those whose sincere advice made my training period a real educative and pleasurable one. I wish to acknowledge my whole hearted gratitude to Mr.Uttam Kumar Roy(Senior Finance Manager),who is my Training Faculty in TATA STEEL for providing help and guidance in the course. I am really very thankful to him for his encouragement given to me time to time and also for his help and guidance while programming. I also express my immense gratitude to Mr.Vivek Kamra, Executive-In-Charge [Tubes], and Mr.Ashish Anupam (Chief Mktg & Sales, Tubes) for giving me opportunity for doing my project in TATA STEEL. My sincere regards also continue for Mr. Vineet Saraf (Regional Sales Manager, Tubes) and Mr. Rajan Babu (Regional Finance Manager), for their valuable guidance and support all through my intern-ship. I am also thankful to Mr. Shiva Kant Vishwakarma (Executive assistant to EIC, Tubes) who spent his valuable in coordinating to obtain approval from TATA STEEL management which allowed me to work upon my intern-ship project in TATA STEEL. My sincere thanks to my Faculty Guide, Mrs. Puja Agrawal (Senior Lecturer, Finance, Amity School of Business) who guided me through whole of my project and answered all of my queries without which it would have been difficult to complete the project in the correct manner.

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An Introduction of WORKING CAPITAL MANAGEMENT

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Nature of Working Capital

Management:

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationship that exists between them.

Current assets
It refers to those assets, which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of the firm. Example: Cash, marketable securities, accounts receivable and inventory are the major current assets.

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 Current liabilities
These are those liabilities that are intended, at their inception, to be paid in the ordinary course of business, within a year, out of current assets or earnings of the concern.

Example: accounts payable, bills payable, bank overdraft and outstanding expenses are the major current liabilities.

GOAL OF WORKING CAPITAL MANAGEMENT:

The goal of WCM is to manage the firms current assets and liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cant maintain the satisfactory level of working capital, it is likely to become insolvent & may even be forced into bankruptcy. The current assets should be large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each
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of the current assets must be managed efficiently in order to maintain the liquidity of the firm while not keeping too high a level of anyone of them. Each of the short sources of financing must be continuously managed to ensure that they are obtained and used in the best possible way. The interaction between current assets & current liabilities is, therefore the main theme of the theory of working capital management.

TASK OF FINANCIAL MANAGER:

The task of financial manager in managing working capital efficiently is to ensure sufficient liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its ability to satisfy short-term obligations as they become due. The three basic measures of a firms overall liquidity are 1) The current ratio 2) The acid-test ratio and 3) the net working capital.
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 INGREDIENTS OF WORKING CAPITAL MANAGEMENT:

There are three ingredients of working capital working capital management, which are as follows:

1) TRADE-OFF BETWEEN PROFITABILITY AND RISK 2) DETERMINING FINANCING MIX

There are 3 basic approaches to determine an appropriate financing mix: (a) Hedging approach, also called the Matching approach; (b) Conservative approach, and (c) Trade-off between these two.

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 NEED FOR WORKING CAPITAL:

The need for working capital (gross) or current assets cant be overemphasized. Given the objective of financial decision making to maximize the shareholders wealth, it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend upon the magnitude of the sales. A successful sales program is necessary for earning profits by any business enterprise. However, sales dont convert into cash instantly; there is invariably a time lag between the sale of goods and the receipt of cash. There is, therefore, a need for working capital in the form of current assets to deal with the problem arising out of the lack of immediate realization of cash against goods sold. Therefore, sufficient working capital is necessary to sustain sales activity. Technically, this is referred to as the operating or cash cycle.

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 OPERATING CYCLE:
The operating cycle can be said to be at the heart of the need for working capital. The continuing flow from cash to suppliers, to inventory, to accounts receivables and back into cash is what is called operating cycle. In other words the term cash cycle refers to the length of time necessary to complete the following cycle of events: Conversion of cash into inventory; Conversion of inventory into receivables; Conversion of receivables into cash;

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Operating cycle

Phase III

Receivables

Cash

Phase II

Phase I

Inventory

Operating Cycle is calculated as R + W + F + D C

Where, R W F D = = = = Raw material storage period WIP Holding Period Finished Goods Storage Period Debtors Collection period
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Credit period availed

Changes in Working Capital

The changes in the level of working capital occur for the following three basic reasons: 1. Changes in the level of sales and operating expenses. 2. Policy changes. 3. Changes in technology.

Changes in sales and operating expenses

The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor may be due to 3 reasons: There may be a long run trend of change. For instance, the price of a raw material may constantly rise, necessitating the holding of a large

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inventory. The Secular trends would mainly affect the need for permanent current assets. In the second place, Cyclical changes in the economy leading to ups and downs in business activity influence the level of working capital, both permanent and temporary. The third source of change is seasonality in sales activity. Seasonalitypeaks and troughs- can be said to be the main source of variation in the level of working capital.

Policy changes
The second major cause of changes in the level of working capital is because of policy changes initiated by the management. A firm following a conservative policy in this respect having a very high level of current assets in relation to sales may deliberately opt for a less conservative policy and vice versa. These conscious managerial decisions certainly have an impact on the level of working capital.

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 Technological changes:
Finally, technological changes can cause significant changes in the level of working capital. If a new process emerges as a result of technological development, which shortens the operating cycles, it reduces the need for working capital and vice versa.

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 Determination of working capital

(I)Estimation of Current Asset:

Minimum desired cash & bank balances Inventories Raw material Work-in-process Finished Goods Debtors Total current assets

(II) Estimation of Current Liabilities:

Creditors Wages Overheads Total Current Liabilities
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 (III) Net Working Capital (I-II)

Add margin for contingency

(IV) Net Working Capital Required

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OBJECTIVES OF THE PROJECT

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 UNDERSTANDING THE CONCEPT AND IMPORTANCE OF WORKING CAPITAL MANAGEMENT:

One of the major objectives of our project is to understand the concept of WORKING CAPITAL MANAGEMENT. Understanding the meaning of two terms i.e. gross working capital and net working capital. To know the two types of working capital i.e., permanent working capital and temporary working capital. Working Capital Management policies have a great effect on a firms profitability, liquidity and its structural health. A finance manager should therefore, chalk out appropriate working capital management policies in respect of each of the components of working capital so as to ensure higher profitability, proper liquidity and sound structural health of the organization.

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 UNDERSTANDING VARIOUS STEPS OF OPERATING CYCLE SO WHICH ARE INVOLVED IN WORKING CAPITAL MANAGEMENT.

Steps of operating cycle which are necessary for proper working capital management. These steps include:

Management of cash-

It is the duty of the Finance Manager to provide adequate cash to all segments of the organization. He has to ensure that no funds blocked in idle cash since this will involve cost in terms of interest to the business. A sound cash management scheme, therefore, maintains the balance between the twin objectives of liquidity and cost.
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Management of Accounts Receivable and PayableAccounts receivables constitute a significant portion of the total current assets of the business next after inventories. They are a direct consequence of trade credit which has become an essential marketing tool in modern business. Accounts payable constitute a significant portion of the total current assets of the business. The objective in accounts payable is to slow down the payments process as much as possible. Whereas the underlying objective in accounts receivables is to maximize acceleration of the collection process.

Management of inventoriesInventories often constitute a major element of the total working capital and hence it has been correctly observed, Good inventory management is good financial management.

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 UNDERSTANDING THE WORKING CAPITAL MANAGEMENT OF TATA STEEL [tubes division] Ltd.

Analyzing the data available with the help of various diagrams and graphical tools of presentation like bar graphs, line graphs etc. This would strengthen the theoretical knowledge that we have about working capital management.

GETTING TO A CONCLUSION:

Getting to a conclusion regarding the appropriate and inappropriateness of the working capital management strategies of Tata Steel ltd.

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 GIVING SUGGETIONS AND RECOMMENDATIONS

Giving suggestions and recommendations based on my theoretical knowledge and practical analysis of data to make the working capital management of TATA Steel ltd. better.

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SCOPE OF THE PROJECT

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This project report focuses on the working capital management of TATA STEEL and its comparison with the industry and its competitors.

Chapter wise scope of the project is as follows-

Starting with the Company Profile which contains brief information

about the history, competitors, product range and the diverse fields in which the company is operating. It creates an image of the company in the readers mind which will further help the reader to understand the project properly. The next chapter is Research Methodology which indicates the various sources of data used to make the project report and the type of research design which is used to make it more meaningful. The research methodology is followed by an overview of working capital management which gives the theoretical knowledge of working capital management which in turn would help building a strong base for the research ahead. Theory is accompanied by graphs and diagrams which

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would help the reader to understand the project and the subject thoroughly. Next is Presentation and Analysis of data. Analyzing the data available with the help of various diagrams and graphical tools of presentation like bar graphs, line graphs etc. This would strengthen the theoretical knowledge that we have about working capital management. The last chapter is Conclusion & Recommendations. This chapter contains the critical evaluation of the presentation and analysis of data. Recommendations include what should be done to make the situation better.

The

aim

of the project is to learn the importance of working capital

management for the efficient utilization of funds and proper financial management of the company. The non-ideal production technology and imperfect market and distribution systems are responsible for the generation of current assets, which block the funds of an enterprise. Working Capital is needed to release such blockage of funds. However the consideration of the level of investment in current assets should
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avoid two danger points- excessive and inadequate investments in current assets.

The concerned unit is a manufacturing unit so a good management of working capital is indispensable for the company. The content of the report has a clear sequence which defines the present background of the company and TATAs contribution to the market.

It discusses the method of comparison of financial statement of companies like ratio analysis, working capital analysis and trend analysis etc. Various ratios, which are required to be calculated, have been stated in the report. The project deals with the study of working capital of the company and to find method and solutions for achieving the most efficient level. It will also look into the approach of risk return trade off in terms of the cost of maintaining a particular level of current assets, which are: 1) 2) The cost of liquidity and The cost of profitability.
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The project deals with analyzing the operating cycle of the company and discusses the technique used by the company for its management.

RESEARCH METHODOLOGY

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COLLECTION OF DATA

DATA SOURCES:

Having defined and formulated a research problem and having determined the objectives of research, a researcher has to face the problem of data collection. The information collected should be both accurate and relevant, as per the requirements of the researcher, who has to work out a suitable data collection method.
Data collection methods can be broadly classified into

Primary methods

Secondary methods

Data collected from Primary methods is known as Primary data and data collected from Secondary methods is known as Secondary data.

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In this project I have used Secondary data most of which was obtained from internal records of the company. Usage of Secondary data enjoys some advantages but it suffers from some limitations too.

ADVANTAGES OF SECONDARY DATA:

- The major advantage of secondary data is economy. As the data are already available, they can be obtained at a relatively low cost. - The secondary data can be obtained quickly. The secondary data enable the researchers to identify the deficiencies in the data. They are useful in the case of exploratory researches as they provide increased understanding of the problem.
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- The secondary data can be easily compared.

LIMITATIONS OF SECONDARY DATA:

- The available data may not suit the current purpose of research, due to incompleteness, generalities and so on. - Information may be outdated or obsolete. - The methodology used in collecting the data such as the sample size, date of the research, etc., may be unknown. - All the findings of a research study may not be made public. - Conflicting data may exist. - It may be difficult to determine the accuracy of secondary data.

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RESEARCH DESIGN

Research design or model indicates a plan of action to be carried out in connection with a proposed research work. It provides a guideline for the researcher to enable him to keep track of his actions and to know that he is moving in the right direction in order to achieve his goal. The purpose of research is to provide information that will aid in management decision making.

TYPES OF RESEARCH DESIGN:

On the basis of the objectives of the marketing research can be classified into:-

Exploratory Research Conclusive Research

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The research design for exploratory research is best characterized by its lack of structure and flexibility. It is generally used for the development of hypothesis regarding potential opportunities and problems.

Exploratory research is further subdivided into - Search of secondary data - Case study - Survey of experts

Conclusive research which is use to provide information for the evaluation of the alternative courses of action can be sub-divided into - Descriptive research. - Causal or experimental research.

In this project Exploratory research design has been used. Flexibility and creativity characterize exploratory research study.
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Limitations of the research

As only the secondary data is used in this project, it was difficult to determine the accuracy of the data.

Some amount of data was not updated and was not of much use.

A considerable amount of conflicting data was there which was difficult to match with.

Because of the companys policy of maintaining secrecy some amount of data was not made available to me which could have helped me in making my project report better.

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Company Profile:
Established in 1907, Tata
is the world's 6th largest steel company with an existing annual crude steel capacity of 28 million tonnes. Asia's first integrated steel plant and India's largest integrated private sector steel company is now the world's second most geographically diversified steel producer, with operations in 24 countries and commercial presence in over 50 countries. Tata Steel completed 100 glorious years of existence on August 26, 2007 following the ideals and philosophy laid down by its Founder, Jamsetji Nusserwanji Tata. The first private sector steel plant which started with a production capacity of 1,00,000 tonnes has transformed into a global giant . Tata Steel plans to grow and globalise through organic and inorganic routes. Its 5 million tonnes per annum (MTPA) Jamshedpur Works plans to double its capacity by 2010. The Company also has three greenfield steel projects in the states of Jharkhand, Orissa and Chhattisgarh and proposed steel making facilities in Vietnam and Bangladesh. Through investments in Corus, Millennium Steel (renamed Tata Steel Thailand) and NatSteel Asia, Singapore, the Tata Steel has created a manufacturing and marketing network in Europe, South East Asia and the Pacific-rim countries. Corus, which manufactured 18.3 MT of steel in 2006, has operations in the UK, the Netherlands, Germany, France, Norway and Belgium. Tata Steel (Thailand) is the largest producer of long steel products in Thailand, with a manufacturing capacity of 1.7 MT. NatSteel Asia produces about 2 MT of steel products annually across its regional operations in seven countries. Tata Steel, through its joint venture with Tata BlueScope Steel Limited, has also entered the steel building and construction applications market. The iron ore mines and collieries in India give the Company a distinct advantage in raw material sourcing. Tata Steel is also striving towards
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Steel

raw materials security through joint ventures in Thailand, Australia, Mozambique, Ivory Coast (West Africa) and Oman. Exploration of opportunities in titanium dioxide business in Tamil Nadu, high carbon ferro-chrome plant in South Africa and setting up of a deepsea port in coastal Orissa are integral to the Growth and Globalisation objective of Tata Steel. Tata Steel's vision is to be the global steel industry benchmark for Value Creation and Corporate Citizenship. Tata Steel is one of the few steel companies in the world that is Economic Value Added (EVA) positive. It was ranked the "World's Best Steel Maker", for the third time by World Steel Dynamics in its annual listing in February, 2006. Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times.

Products Tata Steel is a global player with a balanced presence in developed European and fast growing Asian markets and with a strong position in the construction, automotive and packaging markets. Its Jamshedpur steel works produces hot and cold rolled coils and sheets, galvanised sheets, tubes, wire rods, construction rebars, rings and bearings. In an attempt to 'decommoditise' steel, the Company has introduced several branded steel products, including Tata Steelium (the world's first branded Cold Rolled Steel), Tata Shaktee (Galvanised Corrugated Sheets), Tata Tiscon (rebars), Tata Pipes, Tata Bearings, Tata Structura, Tata Agrico (hand tools and implements) and Tata Wiron (galvanised wire products). In the financial year 2006-07 revenue from the sale of these branded steel products was 26% of the company's sales revenues.

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Corus' main operating divisions comprise Strip Products, Long Products and Distribution & Building Systems Division. Combining international expertise with local customer service, the company supplies a range of long and strip products to demanding customers worldwide in markets including the construction, automotive, packaging and engineering sectors. The NatSteel group produces construction grade steel such as rebars, cut-and-bend, mesh, precage bore pile, PC wires and PC strand. Tata Steel Thailand produces round bars and deformed bars for the construction industry. Corporate Sustainability Regarded globally as a benchmark in corporate social responsibility, Tata Steel's commitment to the community remains the bedrock of its hundred years of sustainability. Its mammoth social outreach programme covers the company-managed city of Jamshedpur and over 800 villages in and around its manufacturing and raw materials operations through uplift initiatives in the areas of income generation, health and medical care, education, sports, and relief. The Company, fully conscious of its responsibilities to the future generations, has always taken pro-active measures to ensure optimum utilization of natural resources. This is reflected in the ISO-14001 certification that all its operations have achieved for environment management. The SA 8000 certification for work conditions and improvements in the workplace at the steel works in Jamshedpur, along with its Ferro Alloys and Minerals Division, is a reiteration of its commitment towards the Company's employees. Tata Steel has pioneered numerous employee welfare measures such as the 8 hours working day and the three tier joint consultation system of management which have been the platform for nearly 80 years of industrial harmony in its Steel Works in Jamshedpur. Global Compact, United Nations

Founder member.
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Jamshedpur city has been chosen to participate in the UN Global Compact Cities Pilot Programme.

Awards and Recognition

World Steel Dynamics has ranked Tata Steel as the world's best steel maker (for two consecutive years) in its annual listing in February 2006. Tata Steel has been conferred the Prime Minister of India's Trophy for the Best Integrated Steel Plant five times. It has been awarded Asia's Most Admired Knowledge Enterprise award in 2003, 2004 and 2006. Conferred the prestigious Global Business Coalition Award for Business Excellence in the Community in recognition of its pioneering work in the field of HIV/ AIDS awareness. Tata Steel works has been conferred the prestigious social accountability (SA) 8000 certification by social. Accountability international (SAI), USA. It is the first steel company in the world to receive this certificate. Corporate Sustainability Report of Tata Steel hailed by United Nation's Environment Programme (UNEP) and Standard and poor as strongest, submitted by any corporate house from emerging economies. Best governed company Award 2006 for setting high standards in governance practices. Tata Steel conferred Mother Teresa Award for Corporate Citizen. Tata Steel won "Award for Corporate Social Responsibility in Public health" by US- Indian Business Council (USIBC), Population Services International (PSI) and the center for Strategic and International Studies (CSIS) in 2007.

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SWOT Analysis of the Company:

Strength:
- 6th Largest Steel Manufacturer in world - Brown field expansion in Jamshedpur and Greenfield project at Kalingangar to meet increasing demand in future. - TSL has formed a Global Minerals Group, in-order to explore various opportunities to secure access to iron ore and coal in various geographies.

Weakness:
- TSLs bottom line will be affected to increase in Interest cost, due to long term debt raised by the company for Corus acquisition.

Opportunities:
- The International Iron and Steel Institute forecast global steel consumption to grow at 6.1% in FY 08 driven by strong demand from Asia, Africa and South America. - The amount allocated for development of infrastructure for 11th Five year plans amounts to USD 320 bn. As a result, the domestic steel consumption is expected to increase to 65 mn. Tones by FY 10 and over 125 mn tones by FY 15.

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 Threats:
- Increase in imported raw material prices may affect the operating margins of the companies. - Change in economic environment - Threat of increased production in China and its ability to export. - Assuming interest rate goes up by 50 bps (Corus funding), such increase will impact the PAT margins by 23 bps.

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ANALYSIS AND DISCUSSION

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PRESENTATION AND ANALYSIS OF DATA:

Working Capital Analysis of TATA STEEL Ltd.

Working capital is a financial metric which represents the amount of dayby-day operating liquidity available to a business. Also known as operating capital, it is calculated as current assets minus current liabilities. A company can be endowed with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. It is a two edged sword where excess of working capital implies blockage of fund and low working capital gives a fear of falling into liquidity crunch therefore it is rightly said that :

Never cross the border, wisdom says, there is fire beyond the border

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The working capital of the company is given below:

PARTICULARS

Amount in Rupees Lakhs 2002-03 2003-04 2004-05 2005-06 2006-07 12 months 12 months 12 months 12 months 12 months 3,186.93 1,544.50 3,804.84 2,257.50 3,632.73 1,708.00 3,742.32 1,502.89 4,408.73 555.45

Gross Working Capital Net Working Capital

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Working capital of the company showing by graph:

Working Capital

5,000.00 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00

500.00
0.00 2002-03 2003-04 2004-05 2005-06 2006-07

Gross Working Capital

Net Working Capital

The figures above shows that the company has managed to bring down the working capital which is a positive sign. A detailed analysis of the various constituents of the working capital has been done to learn the intricacies which have been managed to get the result.
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The figure above shows that Gross Working Capital has an increasing trend whereas net working capital is going down and in the year 2006-07 it has decreased too much. But prima facie it suggests that investment in current assets has increased much and the liabilities have also not been fixed to a great extent. There may be several reasons which will be discussed later in detail.

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OPERATING CYCLE OF TATA STEEL:

Operating cycle of TATA STEEL showing below:

OPERATING CYCLE OF TATA STEEL

70 60 50 40 30 20

10
0
2002-03 2003-04 2004-05 2005-06 2006-07

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Working capital statement of TATA STEEL till 2007 showing below:

PARTICULARS Raw Material Storage Period WIP Storage Period Finished Goods Storage Period Debtors Collection Period Creditors Payment Period Operating Cycle Period

2002-03 2003-04 2004-05 2005-06 2006-07 12 months 12 months 15 months 15 months 12 months 22.38 16.96 21.95 21.49 26.94 5.02 9.64 97.26 119.04 15.26 7.02 9.68 69.16 76.41 26.41 10.71 17.24 89.54 79.76 59.68 10.22 23.14 83.17 72.82 65.20 11.19 20.57 72.73 99.91 31.52

The operating cycle shows an irregular trend. It was increasing all the way but all of a sudden it went down in 2006-07. The main reason behind this is that debtors collection period has decreased and creditors payment period has increased a lot. The credit period granted by customers is generally 90 days but since the company is running on loss sometimes it cannot pay the amount in stipulated time, this has led to the increase in credit period availed from customer and thus decreased the operating cycle to such an extent.

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INVENTORY MANAGEMENT
In clarity and confusion, imagination and emotion Creation

Proceeds towards Perfection

For a long time inventory management remained everybodys concern but nobodys responsibility. Every organizational unit along the productive distributive channel of an enterprise wants to have full control over the inventory it deals in: the purchasing department for materials inventory; production department for work in process, and marketing department for finished goods inventory. Although the distribution appears to be logical, inherent in it is the tendency to maximize individual goals at the cost of organizational goals. Thus the process of sub-optimization begins which leads to disastrous results for the enterprise and put inventory management in disarray.

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Worldwide the corporate failures during and after the Second World War and lately during 70s, led the corporate thinkers to redefine the goals of inventory management as a part of overall materials management of the enterprise. Materials requirement planning (MRP) which emerged as a new discipline, attempted to define inventory management as an integral part of MRP whose broad goals are: (1) to minimize investment in inventory: (2) to ensure smooth and efficient operation of the plant and, (3) to maximize customer service and satisfaction.

The TATA STEEL Limited has varied product line.[which includes Long tubes, Semis, Hot Rods, Cold rods, Galvanized Tubes]. A number of materials small and big are used in the production process. Their efficient management is very much required to use the resources profitably.

A manufacturer is required to hold almost all the three types of inventories namely raw materials, work in process and finished goods. Inventory problems are most complex here because of the complexity of
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products (e.g. a project or finished goods), processes (e.g. continuous or intermittent) and distribution (e.g. geographical locations).

Inventory Strategy:
Inventory strategies vary with the kind of focus strategy and the product market. For a cost focus strategy, make to stock could be ideal. For focused premium market segment the strategies could partly be make to stock and partly assemble to order. Focused differentiation in custom based products may follow inventory strategy of make to order or engineer to order. In both the cases production would not start until an order is received. The consultancy Element is greater in the latter than in the former strategy, which requires designing and/or developing a prototype according to customer requirement and then producing it. Customer wait time is therefore, longer in engineer to order strategy than in make to order strategy.

The TATA STEEL [tubes division] uses Just In - Time Purchases system for its inventory and TOC (theory of constraints). The company runs on
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the system make to order. Production is made on the basis of order received or expected orders to be received. The marketing department makes an estimation of the order to be received and accordingly issues directions to the shop floor for the production requirement. The shop floor on the basis of above requisitions check out its materials in stock and accordingly issues requisition for purchase of raw materials to purchase department.

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A close look on the figures and graphs showing in figure 1,2,3.

PARTICULARS Closing Inventory of Raw Materials (A) Average Inventory (B)

Consumption of raw materials(C)

2002-03 251.47

2003-04 369.10

(Amount in Rupees Lakhs) 2004-05 2005-06 2006-07 257.53 357.77 616.38

278.68 4,449.99 12.19

310.29 6,489.27 17.78

313.32 6,382.07 17.49

307.65 6,303.88 17.27

487.08 6,400.21 17.53

Consumption of raw materials/day (D) Inventory in days (B/D) Sales

22.86 7,414.62

17.45 10,623.50

17.92 10,213.99

17.81 10,176.03

27.78 9,671.34

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Table 1:

Consumption of Raw Materials per Day

Raw Materials Inventory In Days

30 20 18 16 14 12 10 8 6 4 2 0 2002-03 2003-04 2004-05 2005-06 2006-07 0 2002-03 2003-04 2004-05 2005-06 2006-07 5 10 15 25 20

Graph 11

Graph 12

A close look on the figures and graphs above indicates that in the last four years though the sales remained same or has decreased but the stock of raw materials has increased. Besides this the consumption has also increased from 66% in 2002-03 to 66.18% in 2006-07. This was due to the fact the company has so far been unable to recover the rise in
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price of raw materials from its sales. The price of raw material has increased a lot from 2002 to 2007 but due to stiff competition in the market it cannot be recovered by increasing the sale price so that the company should not lose its market share. The increase in inventory may pertain to wrong estimation of executable orders based on which purchases were made which added on to the stock.

Manufacturing Process (Production Phase)

It is the process by which raw material or semi finished goods are converted into finished goods by doing some processing on them or adding something to them. Given below is the five-year data. To calculate its effect on working capital requirement work in progress in operating days is calculated for the following five years.

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PRODUCTION PHASE of the TATA STEEL showing in table 2.

PARTICULARS Closing WIP Average WIP Cost of Goods Produced Cost of Goods Produced/day WIP (Operating Days)

2002-03 93.25 75.00 5,449.34 14.93 5.02

2003-04 210.33 151.79 7,893.80 21.63 7.02

(Amount in Rupees Lakhs) 2004-05 2005-06 2006-07 174.75 189.43 300.45 192.54 8,195.28 22.45 8.58 182.09 8,125.51 22.26 8.18 244.94 7,988.93 21.89 11.19

Table 2 (above) Work in Progress (Holding Period 2002 to 2007) showing in graph 3:

Work In Progress Holding Period 12 10 8 6 4 2 0

2002-03 2003-04 2004-05 2005-06 2006-07

Graph 3
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The data above shows that both cost of goods produced and work in progress have increased during the period. Work in progress holding period has also increased which should be taken care of. Since cost of goods produced per day and average work in progress has increased WIP holding period has increased.

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RECEIVABLES MANAGEMENT:

Collection of Receivables from Debtors:

Accounts receivables of a firm are created on both sides of the productive system. On one side of this system, the firm may make advance payments to the suppliers of inventories (raw materials) to ensure timely supply, particularly when the suppliers hold monopolistic position in the market place, or when materials are in short supply, or simply to develop a captive supply base. A firm may also be motivated to make advance payments for pure short term financial and profitability considerations. Any one or a combination of them will create accounts receivable on the left side of the productive system which may replace the box for supply creditors or hinge parallel to it.

On the other side of the productive system, a firm creates accounts receivables when it sells its outputs on credit. These are popularly
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termed as sundry debtors by the English to distinguish it from other forms of accounts receivables. Sundry Debtors constitute nearly 60 percent of accounts receivables of an enterprise. Many of the considerations that weigh in the minds of a seller are similar to that of making advance payment for supply of materials, though often on the opposite direction. But there are more to it than this, which will be discussed later.

Size of accounts receivable Although accounts receivable does not find much place in economics literature because of its non-existence in national accounting framework and the assumption of perfect financial market, its enormity as a financial variable cannot be ignored at the firm level when we find that even in an advanced economy, like the United States, it constitutes more than 20 % of the total assets of manufacturing firms. In India, it is about 26%.

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Trade Credit Marketing Finance Trade Off

Whatever way we look at it, accounts receivables imply trade credit, and the decision to grant trade credit may either be part of marketing strategy or pure finance strategy, but mostly it is a trade-off between marketing and finance strategies of a business.

An important goal of marketing is matching of the demand of a market segment with adequate and timely supplies. Choice of a correct distribution system or channel is chosen is therefore, key to achieving such a goal. The decision to pick up a particular channel has a long term effect on the business. Once a channel is chose it is difficult to alter it in short term because of commitments made to a large number of people and to independent firms whose principal business is distribution. It often takes years to develop a distribution channel which may remain external to the enterprise, but gets integrated so much with it that it takes up the character of a total business system. Any attempt to snap even a small part of this chain may have the effect of ultimately blocking the inventory flow through the system.
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 Distribution Channels:
Choice of a particular distribution channel has a direct impact on inventory holding and level of receivables. Even when an enterprise does not desire to own the entire channel, working capital requirement does not change except marginally. Such is the importance of correct choice of a distribution channel. Direct marketing or owning a marketing channel (which is also called zero level channel) is best from the point of view of receivables management. As the manufacturer has direct control over the distribution system, receivables are closely monitored resulting into lower level of receivables holding. There is also less distortion in marketing and credit information flow to the business. While marketing research information enables the firm to understand quickly the changing consumer needs and product behavior, the credit information helps it understand credit behavior of customer, which forms the basic input to decide whom to grant trade credit and the degree of monitoring required for a particular customer or a group of customers owing to any change in their creditworthiness.
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As more and more cash is received from the debtors the liquid funds available for the working of the company increases. In TATA STEEL debtors are given a credit period of 90 days. However to encourage an early payment customers are being given a discount of 3 % on payment within 15 days and 1 % on payment within 30 days, with the condition that they should not have any old outstanding account which is due for more than 60 days. Given below is the data for receivables of the company.

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Average Debtors
2050 2000 1950 1900 1850 1800 1750 2002-03 2003-04 2004-05 2005-06 2006-07 40 20 0 120 100 80 60

Average Collection Period

2002-03 2003-04 2004-05 2005-06 2006-07

Chart 14(Avg.Debtors/year)

Chart 15(Avg.Collection Period/yr)

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Table 16 showing debtor from 2002 to 2007.

PARTICULARS Closing Balance of Debtors Average Debtors Annual Sales Average Daily Sales Average Collection Period 2002-03 1,975.68 1,975.68 7,414.62 20.31 97 2003-04 2,050.25 2,012.97 10,623.50 29.11 69 2004-05 1,961.14 2,005.70 10,213.99 22.40 90 (Amount in Rupees Lakhs) 2005-06 2006-07 1,750.71 2,103.61 1,855.93 10,176.03 22.32 83 1,927.16 9,671.34 26.50 73

Conclusion: The debtor figures show a mix of ups and downs. Debtors balance has increased and decreased although the sales have remained almost at the same level. This shows that the company is trying to hold the customers by giving relaxations in credit terms and sometimes stringent credit terms were used to avoid liquidity crunch. A significant decrease in average collection period can be seen from 97 days to 73 days which is a good sign and depicts efficient receivables management by the company. A decrease in debtors means more funds release for the company from working capital and hence no need to borrow funds as working capital.

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Management of Accounts Payable:

Accounts payable includes trade credit and accrued expenses which together provide finance to the operations of a business on an ongoing basis. Accounts payable is the opposite face of accounts receivable. The former exists because of the latter. The dominant part of accounts payable is trade credit which is first offered by the seller of goods which, when accepted by the buyer, creates accounts payable in the books of accounts of the latter. TATA STEEL used to get a credit period of 0 to 90 days. However their average payment period stands at 100 days. Table 17 showing creditors of the TATA STEEL from 2002-2007.
PARTICULARS Closing Balance of Creditors Average Creditors Annual Purchases Average Daily Purchases Average Payment Period 2002-03 1,574.25 1,574.25 7,414.62 20.31 119 2003-04 1,476.89 1,525.57 10,623.50 29.11 76 2004-05 1,706.75 1,591.82 10,213.99 22.40 80 (Amount in Rupees Lakhs) 2005-06 2006-07 1,567.90 2,863.34 1,637.33 10,176.03 22.32 73 2,215.62 9,671.34 26.50 100

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Average Payment from creditors from 2002 to 2007 showing by Graph 8.

Average Payment Period
140 120 100 80 60 40 20 0
2002-03 2003-04 2004-05 2005-06 2006-07

Graph 8 Conclusion: The creditor figures have increased in the long during the period. From 2004-05 to 2005-06 there have been an increase of almost 82%. This is due to fact that average payment period has increased from 73 days to 100 days. It means the company is utmost utilizing the credit period given to it. However a careful look into the profit and loss account of the company suggests that the company is running under loss and is suffering from the liquidity crunch so that may have been the reason for increase in average payment period.

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 Comparative Analysis of Working Capital through Ratios:

Various ratios of working capital has been discussed here and compared with the competitors to analyze the working capital position of the company.

CURRENT RATIO:

The liquidity of working capital is an important aspect to be analyzed by the management for maintaining proper liquid resources to meet operational needs. Current Ratio indicates firms commitment to meet its short term liabilities & is calculated by the formula: Current Assets / Current Liabilities Rationale: Higher the ratio, larger is the amount available per Rupee of current liability, the more the firms ability to meet current obligations & greater the safety of funds of short term creditors. Thus current ratio
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measures margin of safety to creditors. Graph below compares current ratio past five years with its competitors. CURRENT RATIO Chart 9 Showing current ratio of TATA STEEL.
2.5 2

1.5
1 0.5 200 2-03 TATA 1.94 Jindal 1.62 Other 1.63 0 200 3-04 2.46 1.39 1.41 200 4-05 1.89 1.47 1.45 200 5-06 1.67 1.17 1.55 200 6-07 1.14 1.04 1.58

Chart 9 (above) Interpretation: Conventionally ideal current ratio is 2:1, but in practice ideal ratio varies significantly from industry to industry & from company to company. The current ratio of TATA STEEL Ltd varied from 2.46 to 1.14. It has been fluctuating between the two. However the trend seems to be decreasing. Thus it can be said that the margin of safety for creditors is decreasing and companys liquidity position is deteriorating. But when it is
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compared to its competitors JINDAL and OTHERS Ltd., it has still maintained a good position. Hence the decline may be an implication of market forces because its competitors are also facing the same situation. Only OTHERS Ltd. has managed to improve its current ratio. It means as compared to the other two, Other Ltd. has a strong liquidity position whereas the liquidity position of TATA STEEL and JINDAL are declining.

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QUICK RATIO:
This is most rigorous and absolute test of liquidity position of business unit. It shows to what extent cash is available with the firm to meet its current liabilities. Quick ratio of the TATA STEEL showing in chart 10.
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0
1.79

1.5 1.3 1.32 1.17 1.1 1.31 1.23 1.09 1.12 1.05 0.96

1.16

0.81 0.72

2002-03 2003-04 2004-05 2005-06 2006-07

TATA STEEL Jindal Others

Interpretation:

The quick ratio of TATA STEEL is showing a declining trend. From 1.5 in 2002 to 0.72 in 2007, it has dipped almost 50%. If we compare its quick ratio to Jindal and OTHERS they are in a better position. OTHERS Ltd. has the strongest quick ratio among the three of 1.16.

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This means that the liquidity position of TATA STEEL is not that good. It is showing insufficiency of funds. Since the company is running into losses it must have been affected the liquidity position. It is very important for the company to have a good liquidity position because it may suffer various bottlenecks. From the ratios available for TATA STEEL Ltd., it is apparent that it is too less than the std norm but seeking the kind of industry and its aggressive policy for utilization of its current assets the ratio seems sufficient but if we compare current ratio and acid test ratio, then it can be implied that funds are blocked in slow moving inventory. Both the current and quick ratios should be considered in relation to industry average to infer whether the firms short term financial position is satisfactory or not.

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INVENTORY TURNOVER RATIO:

Chart 11 showing inventory turnover ratio of the TATA STEEL.

20 15 10 5 0 2002-03 2003-04
TATA STEEL
13.98 10.18 10.76 12.08 10.1 9.53 10.38 8.16 9.19 6.44 9.78 19.49 16.61 16.8 16.71

2004-05
Jindal

2005-06
Others

2006-07

Chart 11 (above) The inventory turnover ratio shows how rapidly the inventory is turning into receivable through sales. Generally a high inventory turnover is indicative of good inventory management. A low inventory turnover implies excessive inventory levels than warranted by production and sales activities, or a slow moving or obsolete inventory. We have seen that the Sales of TATA STEEL is declining and the company is under losses. Hence a decreasing inventory turnover ratio implies there is unnecessary tie up of funds, reduced profit and increased costs. Among the competitors Jindal has the highest inventory turnover ratio which
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means that it is efficiently managing its inventory to convert them into sales.

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FIXED ASSETS TURNOVER RATIO:

Showing fixed assets turnover ratio of TATA STEEL in graph 12.

8 6

6.87

7.42 6.43 6.19 5.55 4.18 3.65 2.42 2.68 4.23 3.16 2.68 3.69

4 2 0

3.34 2.03

2002-03

2003-04

2004-05
Jindal

2005-06
Others

2006-07

TATA STEEL

Chart 12 (above) Fixed Asset Turnover ratio shows the firms ability in generating sales by utilizing fixed assets. A look on the graph tells the whole story of fixed assets turnover of TATA STEEL. It was doing well in 2002 but thereafter it declined and though its position is somewhat manageable but comparing to its competitors it is not good.

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 EOQ[Economic Order Quantity] Analysis

The TATA STEEL Ltd. maintains its stock on Just In Time Purchases and TOC. The company produces on make to order rather than make to stock. In this preview the company should have low inventory but the inventory level of the company is quite high and it has shown an increasing trend over past few years. Moreover the inventory turnover ratio has also gone down from 10.18 in 2001 to 6.44 in 2006, a fall of almost 40%.

If we consider the storage period the raw material storage period has increased from 22.38 days from 2001-02 to 26.94 in 2005-06, work in progress storage period has increased from 5.02 days to 11.19 days for the same period. It has almost doubled. And the finished goods storage period has also doubled. It rose from 9.64 days to 20.57 days. Thus the storage period of the entire inventory has increased. Storage of unnecessary or idle stock costs a lot in terms of opportunity cost, and the
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cost of handling those items. An EOQ analysis can reduce these extra costs associated with the stock. But the company does not follow EOQ system. EOQ system will decrease the ordering and holding cost to minimum without having any stock out cost which will thus benefit the company both in terms of total purchasing cost and providing liquidity and efficient management of inventory. I analyzed some of the companys raw materials on EOQ basis to check whether the current inventory technique is suitable for the company or whether EOQ is more beneficial to it.

Since the company does not having any details regarding ordering cost and holding cost per unit per annum the analysis is made to minimize inventory level without increasing the purchasing workload.

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CONCLUSION AND SUMMARY

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CONCLUSION:
The success or failure of an organization primarily depends on its ability to sustain its comparative advantage irrespective of the kind of strategy it adopts cost leadership, differentiation or focus.

After analyzing the financial statements and having a deep study of working capital cycle of the company I came to the conclusion that though the company is suffering huge losses and various ratios do not speak in its favors, the reason could not be found as its inefficiency or incapacity to succeed rather the reason being unavailability of market in the present working scenario.

The companies have to have some new avenues which will explore new markets and paths of success. Quality could be the key word for companys future prospects. We can conclude from the above Working Capital Ratios that net working capital is going down and in the year 2006-07 it has decreased
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too much. But prima facie it suggests that investment in current assets has increased much and the liabilities have also not been fixed to a great extent. The operating cycle shows an irregular trend. It was increasing all the way but all of a sudden it went down in 2006-07. The main reason behind this is that debtors collection period has decreased and creditors payment period has increased a lot.

The credit period granted by customers is generally 90 days but since the company is running on loss and sometimes it cannot pay the amount in stipulated time, this has led to the increase in credit period availed from customer and thus decreased the operating cycle to such an extent.

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SUMMARY
Working capital management is the most complex thing to manage in a company. Working capital is just not related to finance department. Various departments affect its working and finance department has to keep an eye of control over all of them. Its function starts right from estimating demand by marketing department and before coming to final destination of operating cycle in finance department it knocks the door of purchasing, quality control, shop floor, stores and finally to customers. All cost centers have their own style of working and it becomes very difficult to control the time taken by other department. Though control is being made but its not easy to maintain ideal norms and sometimes it severs the relations of finance people with other department people.

Irregular trend of operating cycle shows a very dangerous situation because the delay in payment of accounts payable may result in saving
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of some interest costs but it can prove very costly to the firm in the form of loss of credit in the market. This calls for a change in

companies policies to ensure that the payments to the creditors are made at possible stipulated time periods after obtaining the best credit terms possible.

With the economy in boom and various industries coming up, TATA STEEL have to look over the quality aspect of its product and strive to offer unmatchable quality at unbeatable price[over which they have already worked upon] to regain its market share both in domestic market as well as in foreign market.

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Bibliography
As my complete analysis was based on the secondary data basis, I have mostly gone through various web-sites on the internet and the annual reports of TATA STEEL Ltd. The names of the web-sites are:

www.tatasteel.com www.investmentz.co.in www.zeebuz.com Followed by many other searches from

www.google.com.

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