Complete Working Capital | Inventory | Banks

Working Capital Management

A Project Report Submitted in partial fulfillment of The requirements for the Master of Business Administration

By

DEBASIS SUBUDHI
Roll no:-MBA:-0841333254

July - 2009

Under the guidance

Munmun Mohanty
&

Niranjan Nanda

INSTITUTE OF BUSINESS & COMPUTER STUDIES
BHUBANESWAR, ORISSA

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PREFACE

Dissertation report for an M.B.A student is an important part of competition of the particular topic. Hence every student undergoes this training at various place having different topics. The main objective of the actual environment that prevails in to today’s organization. In this project on can find that how the theories of book are put into the practice and how much they are suitable and useful As per dissertation is concerned I underwent in NATIONAL ALUMINIUM COMPANY (NALCO) ANGUL. The topic of my dissertation is “WORKING CAPITAL MANAGEMENT”

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GUIDE CERTIFICATE

This is to certify that the project entitled “Working Capital Management” is a piece of term project done by ASWIN, student of 2 year M.B.A, I.B.C.S. (SOA UNIVERSITY), BHUBANESWAR. To the best of my knowledge and belief the term project report: Embodies the work of the candidate themselves.  Has been duly completed.  Is up to the standard both in respect to contents and language for being referred to the examiner.

Signature

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B. BHUBANESWAR. ASWIN a student of 2 year M. hereby declare that the project report entitled on “WORKING CAPITAL MANAGEMENT” is the outcome of my own performance and the same has not been submitted to any university/Institute for the award of any degree or any professional diploma/degree. Date:Place: Signature iii .A INSTITUTE OF BUSINESS AND COMPUTER STUDIES. Regd No: 0841333285.DECLARATION BY THE CANDIDATE I Mr. SOA UNIVERSITY.

who inspired me to put in my best efforts for the inspired me to put in my best efforts for the research/project report. MUN MUN MOHANTY whose continued and invaluable guidance can never be forgotten by me but for whom. NIRANJAN NANDA. Last but not the least.SARATHI.ACKNOWLEDGEMENT I take this opportunity to place on record my grateful thanks and sincere gratitude to Mr. finance Manager. S&P dept. NALCO Finance Dept. ANGUL. P. Who gave me valuable advice and inputs for my study? My project could not have been completed if I had not been able to get the reference materials from the company. I am immensely grateful to my esteemed guide Ms. this study could not have got present shape. I would also like to express my thanks to Mr. ASWIN iv .

....1 CORPORATE STRENGTH....................................................8 1......................................................................22 Guiding Principles ........................33 3..........15 1..............25 Aluminum – the wonder metal has many remarkable features.....................2 BAUXITE MINE............................................................III ACKNOWLEDGEMENT ............................................30 3....................................................................................25 PRODUCTS........................ CASH MANAGEMENT..............31 3..................................................................................................................................................10 HRM PHILOSOPHY:.........TABLE OF CONTENTS PREFACE..33 3..11 1.....................9 1.............................1 OBJECTIVES OF CASH MANAGEMENT........3 ALUMINA REFINERY.................................. Transaction Motive:-...................................... INTRODUCTION TO NALCO...........32 (1)..........................................................14 1......I GUIDE CERTIFICATE........................36 v .....................11 HUMAN RESOURCES(Up to September 2008):-.....32 (2)...........................................................................12 1............................................................................................................... INTRODUCTION TO WORKING CAPITAL MANAGEMENT.........................................................................................................................................................................................................................................................9 COMMUNITY CARE:-...23 1...........................................................................................precautionary Motive:-..................7 1.............................................3 CASH PLANNING: -......................19 1..................................................................5 CAPTIVE POWER PLANT:-...........................................................................................................34 Adjusted Net Income Method:-....................10 1.....................................................................................................................................................................23 ENVIRONMENT POLICY:-......4 SMELTER PLANT...........................................22 Commitment...........34 Receipts and Payment Method:................................................................................IV TABLE OF CONTENTS................................7 ROLLED PRODUCTS UNIT:-......................8 1.....................27 2...............................................14 FINANCIAL PERFORMANCE:-...................................................................27 Alumina:-....16 ALUMINIUM PROPERTIES & APPLICATIONS...................................................................................................................II DECLARATION BY THE CANDIDATE.......................17 1..............15 QUALITY POLICY:-...................................................8 ENVIRONMENT:-..........................................................................................................................................................................6 PORT FACILITIES:-..........................................2 MOTIVES FOR CASH HOLDING.......29 OBJECTIVES OF THE STUDY: -........................................12 EXPANSION PROGRAMME:-...................................................31 3..................................................................................................16 1...............................................33 (3)...............................................................................15 1..............................................Speculative Motive:-.........................13 1..................................................4 CASH FORECASTING & BUDGETING.....................................................................................................................................................................................V 1............................................................13 PRODUCTION & SALES:-...13 1.......

.............. DEHEJA COMMITTEE REPORT..........1 COMPONENTS OF INVENTORY: -.................................................46 5..................................... WORKING CAPITAL MANAGEMENT ANALYSIS........................................................................................................................................................................................................48 Ordering cost:-........................................77 9.................... CONCLUSION ............................................... TONDON COMMITTEE REPORT........................................................72 Types of bank finance for working capital............................49 Classification Problem:-..................62 ESTABLISHING OPTIMUM CREDIT POLICY...........................................................................................................................79 Current Assets Ratio...................53 7......................................................................................................................................................................39 SUMMARY....................48 Carrying Cost:-..36 3........................52 6.......................................................86 11.............................49 Quantity Problem:-.....................................87 vi ..............................................................47 5...................................................................................................................................51 Approaches:-.......................................................................... BIBLIOGRAPHY................51 EOQ model:-.............................68 8........................................4 TECHNIQUES OF INVENTORY MANAGEMENT..........................................................................................................................................................................39 ANALYSIS....49 5..........................................................................71 TRADE CREDIT:... FINANCING OF WORKING CAPITAL..............75 Security Required In Bank Finance..................38 4............. MANAGEMENT OF ACCOUNTS RECEIVABLES...................80 10.................. CASH MANAGEMENT AT NALCO...........................62 7..............................................................................................................1 ACCOUNTS RECEIVABLES MANAGEMENT AT NALCO.................2 NEED TO HOLD INVENTORIES: -...........................................3.................................79 Liquid Ratio................44 5..............................47 COSTS:-.........45 5.............48 BENEFITS:-............................................................. INVENTORY MANAGEMENT AT NALCO.................85 12.....................................................................................3 OBJECTIVES: -............................................................................................................................................83 11............................................................................................................................................................................ 5 MANAGEMENT OF CASH FLOW: -..............................................6 DELAYING PAYMENT: -................................................................... INVENTORY MANAGEMENT............................................................................................................................................

Nalco enjoys the status of a Navratna company. In a major leap forward. INTRODUCTION TO NALCO National Aluminium Company Limited (NALCO) is considered to be a turning point in the history of Indian Aluminium Industry. Nalco is a bright example of India’s industrial capability. NALCO was set up to exploit a part of the large Bauxite deposits discovered in East Cost. Today. NALCO has not only addressed the need for self-sufficiency in aluminium but also given the country a technological edge in producing this strategy mental as per world standards. as an ISO 9001.With consistent track record in capacity utilization. Incorporated in 1981 as a public sector enterprise. with its product registered in London Metal Exchange.1. quality assurance. Now. Nalco has emerged as the largest integrated bauxite-alumina-aluminium complex in ASIA. in technological collaboration with aluminium pechiney of France (now Alcan). export performance and profitability. (Figure –1 NALCO Site ) 7 . technology absorption. ISO 14001 and OHSAS 18001 company.

2 BAUXITE MINE (Figure –2 Bauxite Mine ) 8 .Working Capital Management 1.1 CORPORATE STRENGTH • • • • • • • • • • Captive Resources Advanced Technology Integrated Operation World-class Products Well-Trained Manpower Sound Financial Management Care For Ecology And Environment Self-Funded Expansions Expertise In Project Management International Linkages in Technological & Market 1.

The mining capacity is being expended to 6300000 tpa. multicurve.) : 14 mtr(avg. Area of deposits Resources Ore quality Mineralogy Over burden Ore thickness : 16 sq. having three parallel streams of equal capacity. serves feed-stock to the Alumina Refinery at Damanjodi.Working Capital Management A fully mechanized open-cast mine of 4800000 tpa.6km long single flight. The transportation is done through a 14.km : 310 million tonnes : Alumina 45% Silica 2% : Over 90% gibbsitic : 3 mtr(avg.3 ALUMINA REFINERY (Figure – 3 ALUMINA REFINERY ) The 1575000 tpa energy-efficient Alumina Refinery. The Refinery provides alumina to the company’s Smelter at Anugul and exports the balance 9 . located 16km downhill.) 1. cable belt conveyor of 1800 tph capacity. on panchpatmali hills of Koraput district in Orissa. is located in the picturesque valley of Damanjodi.

Working Capital Management alumina to overseas markets through Visakhapatnam Port. Presently. 10 . The Salient features of the plant includes: • • • 180 KA cell technology Fume treatment with dry-scrubbing system Manufacturing of carbon anodes. it is being expanded to 2100000 tpa capacity. Its capacity is being further expanded to 460000 tpa. anode stems etc. located at Anugul in Orissa. is based on advanced technology of Smelter and pollution control. 1.4 SMELTER PLANT (Figure – 3 SMELTER PLANT) The 345000 tpa capacity Aluminium Smelter. bus bars.

5 CAPTIVE POWER PLANT:- (Figure – CAPTIVE POWER PLANT) Close to the Aluminium Smelter Plant at Anugul. wire rods. The plant is also connected with the state Grid for sale of surplus power. The coal demand of the plant is met from a dedicated mine of Mahanadi Coalfields Limited. 11 . a captive Power Plant of 960 mw capacity has been established for firm supply of power to the Smelter. sows. billets. strips and rolled products. The ongoing expansion shall raise its capacity to 1200 mw. 1.Working Capital Management • Integrated facilities for manufacturing ingots.

This facility can handle ships up to 35000 DWT. Nalco has established mechanized storage and ship handling facility for exporting alumina in bulk and importing caustic soda. 12 .6 PORT FACILITIES:- (Figure . Ship Loading Rate: 2200 tph Alumina Storage : 3*25000 tonnes Besides.Working Capital Management 1. Nalco exports from the ports of Paradeep and Kolkata.8 Ant Wall ) ( Figure – PORT FACILITIES) On the inner harbour of Visakhapatnam Port on the Bay Of Bengal.

Besides.7 ROLLED PRODUCTS UNIT:- After acquisition and merger of International Aluminium Products Ltd.. 1. coil stock and closure stock for a veriety of end uses. cable wrap stock. Indira Gandhi Priyadarshini Vrikshamitra puraskar for plantation & afforestation and Indira Gandhi Paryavaran 13 . Among numerous recognitions. the two highest national awards viz.Working Capital Management 1.8 ENVIRONMENT:- Nalco assigns high importance to promotion and maintenance of a pollution-free environment in all its activities. it has facilities to produce foil stock. The Environment Management Systems in all production/operation units conform to the ISO 14001 norms. Nalco has started production from this 50000 tpa plant. fin stock. This Rolled products unit is presently producing standard coils and sheets.

water supply. bear further testimony to Nalco’s commitment towards the environment. apart from undertaking social forestry. conferred on the company by the ministry of Environment & Forests. health care. The activities include: creation of infrastructure for communication.9 COMMUNITY CARE:The Company has adopted a policy of playing a catalytic role in improving the quality of life of the people living in the peripheral villages. organizing rural sports and supporting cultural activities 14 .Working Capital Management Puraskar for environment management. in collaboration with local government authorities. 1. Government of India. education.

job satisfaction. • To develop and nurture favourable attitudes among the employees and to obtain their best contributions to the organisation by providing stable employment. quick redressal of grievances and through good pay and welfare amenities commensurate with the company’s capacity to spend and the Government’s guidelines.10 HRM PHILOSOPHY:• To attract competent personnel with growth potential and develop their skills and capabilities in a congenial work and social environment through opportunities for training. career advancement and other incentives. recognition. 1.Working Capital Management 1.11 HUMAN RESOURCES(Up to September 2008):- 15 . • To forest fellowship and sense of belongingness among all sections of employees through closer association of employees with the management and by encouraging healthy trade union practices. safe working conditions.

the company has launched its 2nd phase expansion. commencing 16 .12 EXPANSION PROGRAMME:- In order to strengthen its business and increase market share. Soon after the completion of the 1st phase expansion. the company has been pursuing expansion programmes on a sustained basis.Working Capital Management Total SC/ST Representation Land Displaced Persons Physically Handicapped Women Employees : 7466 : 2517 : 1979 : 74 : 320 1.

aluminium capacity to 5.80 lakhs tonnes and power generation to 1400 MW.13 PRODUCTION & SALES:ALUMINA (IN ‘000 MTs) 1600 1400 1200 1000 800 600 400 200 0 2004-2005 2005-2006 2006-2007 2007-2008 Production Export Column1 Values for the above chart Year 2004-2005 2005-2006 Production 1575 1590 17 Export 909 863 . 5000 crore. Segment Bauxite Mines Aluminium Refinery Aluminium Smelter Power Point Present capacity 4800000 tpa 1575000 tpa 345000 tpa 960 MW Capacity under Expansion 6300000 tpa 2100000 tpa 460000 tpa 1200 MW The company is now planning 3rd phase expansion with an investment of Rs. 1. which will increase. which involves fresh investment of more than Rs. The project is nearing completion. 6000 crore.Working Capital Management in October 2004.

Working Capital Management 2006-2007 2007-2008 1475 1576 ALUMINIUM (In ‘000 MTs) 774 860 Value for the above chart Year 2004-2005 2005-2006 2006-2007 2007-2008 Production 338 359 359 360 Export sale 133 96 93 101 Domestic sale 206 258 263 252 POWER (In Million Units) 18 .

14 FINANCIAL PERFORMANCE:TURNOVER & NET PROFIT (Rs.Working Capital Management 6000 5000 4000 3000 2000 1000 0 Generation Sale 2004-2005 2005-2006 2006-2007 2007-2008 Values for the above chart Year 2004-2005 2005-2006 2006-2007 2007-2008 Generation 5613 5679 5968 5609 Sale 406 322 421 129 1. In crore) 19 .

In crore) 20 .Working Capital Management 7000 6000 5000 4000 3000 2000 1000 0 Sales turnov er Net Profit 2004-2005 2005-2006 2006-2007 2007-2008 Values for the above chart Year 2004-2005 2005-2006 2006-2007 2007-2008 Sales turnover 4420 5324 6515 5474 Net Profit 1235 1562 2381 1632 SALES TURNOVER (Rs.

In crore) 21 .Working Capital Management 4500 4000 3500 3000 2500 2000 1500 1000 500 0 2004-2005 2005-2006 2006-2007 2007-2008 Export Domestic Values for the above chart Year 2004-2005 2005-2006 2006-2007 2007-2008 Export 2200 2306 2586 2134 Domestic 2200 3018 3929 3340 DIVIDEND PAYMENT (Rs.

Working Capital Management

600 500 400 300 200 100 0 2004-2005 2005-2006 2006-2007 2007-2008 Amount P aid % of Div idend

Values for the above chart

Year 2004-2005 2005-2006 2006-2007 2007-2008

Amount Paid 258 322 483 387

Dividend 40 50 75 60

1.15 QUALITY POLICY:Quality will form the core of our business philosophy. Meeting the needs and expectations of the customer and consistently improving our systems and work ethos will be our chosen path achieving excellence in business and fulfilling our social obligations.

Guiding Principles • To ensure a healthy return on investment by maximising operational

efficiency, capacity utilisation and productivity.

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Working Capital Management

To continually improve and redesign systems, processes and practices

in order to ensure error prevention and improve response time. • To adopt Internal Customer focus as a means to external customer

satisfaction. • To treat human resources as the key to quality excellence and ensure

development, involvement and satisfaction of employees. • To ensure high quality of inputs through proactive interaction with

suppliers. • To meet obligations towards the society as a responsible corporate

citizen. • • Commitment We dedicate ourselves to the quality policy and objectives of the company in letter and spirit and commit to continuously strive for their fulfillment. ENVIRONMENT POLICY:In recognition of the interests of the society in securing sustainable industrial growth, compatible with a wholesome environment, National Aluminium Company Limited (NALCO) affirms that it assigns high importance to promotion and maintenance of a pollution-free environment in all its activities. • To use non-pollution and environment – friendly technology. • To monitor regularly air, water land, noise and other environmental parameters. • To constantly improve upon the standards of pollution control and provide a leadership in environment management. To provide value for money to all stake holders. To follow ethical business philosophy at all times.

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Working Capital Management

• To

develop

employees’ and

awareness

on

environmental to sound

responsibilities

encourage

adherence

environmental practices. • To work closely with Government & local authorities to prevent or minimise adverse consequences of the industrial activities on the environment. • To comply with all applicable laws governing environment protection through appropriate mechanisms. • To actively participate in social, welfare and environmental development activities of the locality around its units.

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Working Capital Management

1.16 ALUMINIUM PROPERTIES & APPLICATIONS
Aluminum – the wonder metal has many remarkable features

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Working Capital Management 26 .

Working Capital Management PRODUCTS Alumina:• Calcined Alumina 27 .

weight approx.5 mm dia) • • Cast strip (max. 20/22. 2 mt) Billets (in four sizes : 127+-1.5 mm / 178+-1.5 mm / 203+-1. 750 kgs) Wire Rods (in coil form. CG.5 mm / 152+-1. gauge 6 to 10 mm) Flat Rolled Products (coils & sheets) 28 . 9.5/11.5 kgs) Sow Ingots (each max. EC & LME grades) • • • • Standard Ingots (each approx.Working Capital Management • • • Alumina Hydrate Speciality Aluminas & Hydrates Detergent Grade Zeolite Aluminum Metal:(High Purity. width 1600 mm.95 mm dia.

etc. Hence. thus. “Working capital is the amount of funds necessary to cover the cost of operating the enterprise. land. investments in these assets represents that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. INTRODUCTION TO WORKING CAPITAL MANAGEMENT Financial management (the effective one) is the outcome or result among other things about proper management and investments of funds in business. Funds can be involved for permanent purposes such as acquisition of fixed assets.Working Capital Management 2. These funds are known as working capital. The analysis of working capital as the firm’s main objective is to increase the wealth of shareholder and the wealth depends upon. Funds are also needed for short-term purposes for the purchase of raw material. marketable securities. building. the current liabilities and the inter-relationship between them. working capital refers to that part of firm’s capital which is required for financing short-term or current assets such as cash. Simple working capital returns to a firms investments in short term assets working capital or funds thus refers to the differences between inflow or outflow of funds or excess of current assets over current liabilities working capital management is concerned with the problems assets. The efficiency management of funds then should analyses investment in fixed along with short term assets. Funds. invested in current assets keep revolving fast and are being constantly converted into cash and this cash out flows again in exchange for other current assets. it is also known as revolving or circulating capital or shortterm capital. furniture.” 29 . Every business needs funds for two purposes-for its establishment and to carry out its day-to-day operations. diversification of plants and machinery and research & development. payments of wages and other day-to-day expenses. etc. In the words of Shubin. debtors and inventories. Working capital is considered as the nerve canter of business. Long-term funds are required to create production facilities through purchase of fixed assets such as plant and machinery. In simple words.

 It protects a business from the adverse effects of shrinkage in the values of current assets. from cash to inventories. 30 . receivables into cash. “Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another.  To promote employment stabilization and identify the specific deviations of working capital funds. as for example.Working Capital Management According to Genestenberg.  It is possible to pay all the current obligations promptly and to take advantages of cash discounts.” OBJECTIVES OF THE STUDY: The project work is designed to fulfill the following objectives: To study the present system of working capital in the organization. inventories to receivables.

Thus it serves as a short-term investment.1 OBJECTIVES OF CASH MANAGEMENT The basic objectives of cash management are:A: To meet cash disbursement needs. receivables and significance of cash management. The advantages of 31 . Basically management is concerned with managing of:1: cash flows into and out of firm. employees and so on. In the normal operations of business firms are to make payments of cash on a continuous and regular basis to supply of goods. Thus a major function of a finance manager is to maintain a sound finance position. 2: cash flow within the firm. In the narrow sense the other names termed as cash are currency.Working Capital Management 3. such as marketable securities and deposits in bank. CASH MANAGEMENT As we know that cash is the most important liquid asset of the firm.e. 3. cash is the common denominator to which all the current assets can be reduced because the other major liquid assets i. 3: cash balances held by the firm at a point of time by financing deficit or investing surplus cash. Apart from this. The broader view of cash also includes near cash assets. As we know that holding of cash has no earning power but when converted into cash these near cash items gives some profit to the firm. Cheques and drafts. A basis objective of cash management is to meet the payment schedule that is to have sufficient cash to meet the cash disbursement need of the firm. At the same instant cash comes constantly through the collection of debtors. therefore the management of cash is a must for every financial manager for its holding in order to run the daily operations. B: To minimize funds committed cash balances. The basic characteristics of this near cash assets are that they can easily converted into cash.

A high level of cash balances will ensure prompt payment together with all the advantages. Excessive cash holdings lead to a strong credit rating which enables the firm to purchase goods on favorable terms and to maintain its line of credit with banks and other sources of credit. dividends and contingencies. taxes. Transaction Motive:The principle is that the firm has to maintain certain level of cash to maintain its operation in the ordinary course of business. (2). the firm needs to maintain a certain level of cash balance to be 32 . (1). purchase. In minimizing the cash balances two conflicting aspects have to be reconciled. But the inflows(receipts) & outflows(payments) do not perfectly synchronize or coincide. Lastly it can help during emergency. 3. The firm needs cash primarily to make payments for wages. Precautionary motive. These receipts and payments constitute a two way flow of cash. The need of holding cash would not arsis if there is perfect synchronization between cash receipts and cash payments. helps in making payments on due date. other operating expenses. But it also makes large amount of funds remain idle.Working Capital Management adequate cash are it prevents insolvency or bankruptcy arising out of the inability to pay it’s obligations. return on outside investments.2 MOTIVES FOR CASH HOLDING From the objective of cash management we know that cash is held by firm for various profitable purposes. Transaction motive. as cash is a nonearning asset. When cash payment exceeds cash receipts. If we assign these objectives we can say cash is held mainly for three motives:(1). (3). The aim of cash management should be to have an optimal amount of cash balances. Speculative motive. A low level of cash balances on the other hand may mean failure to meet the payment schedule. thus availed cash or trade discounts. The firm can take the advantage of favorable business opportunities that may be available periodically. Similarly there is a regular inflow of cash to the firm from sales operation.

The resemblance serves to provide a quotient meet unexpected contingencies. But generally this does not happens sometimes cash payments exceed cash receipts.Speculative Motive:This motive refers to the decision of the firm to take advantages of available opportunities which comes out of unexpected times and which is typically outside the normal course of business. cash planning can help to anticipate future cash flows and need of the firm and reduces the possibility of cash balances. whose maturity confirms to the timing of the anticipated payments. (2). Therefore firms keep necessary cash balances in order to exploit the opportunities. The speculative represents a positive and aggressive approach. etc. The more unpredicted the cash flows the larger the need for such balances. This cash poor position and idle cash position can be avoided if there planned in advance.precautionary Motive:In addition to the non synchronization of anticipated cash inflows and outflows of a firm should hold cash for different un-anticipated events.Working Capital Management able to make timely payments. Thus precautionary cash balance serves to provide a cushion to meet unexpected demands upon the predicted cash flows. The emergency cash balanced can be maintained after predicting the cash flow. the firm may invest its cash in marketable securities. 33 . such as payment of taxes. (3).3 CASH PLANNING: As we know that if there can be a perfect synchronization of cash inflows and cash outflows then there would have no problem in making payments and for investments. Another factor which has a bearing as the level of such cash balances is the availability of the short term credit if the firm can borrow at a short notice. then there is no need to maintain a huge balance. Thus. dividends. 3. at that time the firm may invest in that security for this they need. Suppose there is attend of not raising prices of certain shares in stock market. The precautionary amount of cash depends upon the predicted cash flows.

The forecast may be based on present operations. Cash planning may be done on daily. The other advantages of short term forecasting includes:(a) (b) (c) Planning. The purpose of cash budget is to co-ordinate the timing of cash needs. Mostly two types of methods are used in short term forecasting:. Receipts and payment method . The adjusted net income method Receipts and Payment Method:- 34 . weekly or monthly basis which depends upon the like and nature of business. It is a summery statement of the firm expected cash inflow and outflow over a projected time period.4 CASH FORECASTING & BUDGETING Simply cash budget is a forecast or cash flows. Which helps the finance manager to determine the future cash needs of the firm. plan for financing the needs and excessive control over the cash and liquidity of the firm? Cash budget may be done weekly. SHORT TERM FORECAST:The function of short term forecasting includes the cash requirements. It gives information on the timing and magnitude of expected cash flows and cash balances over a projected period. monthly or semi-annual basis totally depends upon the nature of the firm and the amount of the fluctuations. Taking advantages of cash and discount offered by suppliers. 3. Cash planning helps in developing a projected (estimated) cash statement by forecasting the expected cash floes for a given period which helps in protecting the firm from the financial disaster.Working Capital Management Cash planning is teaching to plan and control of the cash. the future availability of short term finance and the investment of surplus cash. This is also referred to as ways and means to budget. Reduction of short term and long term debt. Cash forecasting may be short term or long term forecasting. Selection and amount of inventories to be purchased.

payments of payables. advances to supplier. This method is very useful in those case where the item is expensive and are considered important. The cash out flows are of three types:Operating outflows Capital expenditures Contractual payment Operating outflows like cash purchase.Non-operating cash inflows include sale of old assets. are also considered while preparing cash budgets.Working Capital Management This method is used to forecast all the receipts and disbursement which are accepted during this year. investment casts. Contractual payments like repayments of loans and interests. Capital expenditure includes purchase of machinery. The term of credit and the speed with which the customers pay would determine the lag between the circulation of the accounts receivable and the bill collection. dividend received and interest received on investment. (2) Non-Operating:. also discounts allowances for early payments returns from the customers and bad debts affects the cash inflows.Among the operating factors affecting the cash flows are the collection of accounts receivable. Cash sales and collection from customers are important parts of the operating cash inflows.Financial sources are also responsible for cash inflows. etc. taxes payments. wages & salaries and others are also important part of cash budget. (3) Financial:. The amount may be very less but are useful when internal generated source are insufficient. The main objective is to summarize these flows during the pre-determined period. financial sources include borrowing insurance of securities etc. The factors that generate cash flow are generally divided for the purpose of cash budget into three broad categories:(1) Operating (2) Non-operating (3) Financing (1) Operating:. 35 . discretionary payments like common & preference dividends etc.

etc. The major uses are:(a) (b) (c) Company’s future working capital needs. 3. Long term forecasting can be made with receipts and disbursement method adjusted net income methods which are used for short term forecasts. The major benefits of net income method are that it helps in keeping a control on working capital and anticipating financial requirements. sudden policy changes of government etc. depreciation. Companies long term projected are evaluated in terms of finance. 5 MANAGEMENT OF CASH FLOW: The strategy aspects of efficient cash management are:(a) (b) Speedy Collection Of Accounts Receivable Delaying Payments On Accounts Payable 36 . expansion or acquisition. taxes. Long term forecasts reflect the impact of growth. dividends. can easily be determined from the costs annual operating budget. In preparing such forecast items such as net income. Helps in corporate planning. It is intact a projected cash flows statement. It has three parts or sources and uses of cash and cash balances. how much it can generate internally and externally. It predicts the firm’s future requirements of cash.Working Capital Management Adjusted Net Income Method:This method also called as sources and uses approach. These forecasts are generally made for more than three years. LONG TERM FORECASTING:Long term forecasting is made keeping the companies future financial objectives in mind. The estimates of receivable and payable pose problem because they are influenced by different factors creating difficulty in estimating working capital changes. They are very much prone to different environmental impacts such as product development.

In this case customer of a particular area make payments to a company headquarter. planning and refined techniques.e.:. At the same time you have to discourage the buyers float i. the collection can be expected by prompt encasement of the cheque.the time taken by the post office to transfer the cheque from the customer to the firm.Once the customer makes the payments by writing a cheque in favour of the firm. Time taken in processing the cheque within the firm before their deposited in bank. This can be done by:(a) (b) (c) Removing postal float i.For efficient cash management. the cash inflow process can be accelerated through systematic. An important aspect at cash management Decentralized collection.e. Collection time within the bank.:. This can be removed by prompt billing. The local branch office then deposits the cheques 37 .the extra time enjoyed by the buyer for paying bills. This total delayed in time is Called deposit float.e.the time taken to get the invoice to the buyer. Prompt Payments: . The local branch office rather than to a company headquarter. For this customers should be encouraged to make the payments promptly and the receipts from customers should be converted into cash immediately.:.For this you have avoid order processing float i. There are two methods in decentralized collection:(1) (2) Concentration Banking Lock-Box Method (1) Concentration Banking: .Working Capital Management (a) Speedy Collection Of Accounts Receivable:- Accelerating Cash Collection: . Early Conversion of Payment into Cash: .

Excess cash should normally be invested in marketable securities.6 DELAYING PAYMENT: The effective control of disbursement can also help the firm in conserving cash and reducing the financial requirements. In a lock-box system the company rents a locked post office box in each principal region are instructed to send their payments to the post office box. 3. Surplus funds are periodically transferred to a concentration account at one of the company’s principal banks. Concentration banking brings small balances together into central balances. the availability of funds. The firm also uses the technique of paying the float to minimize. But this may in danger the firm’s credit position.Working Capital Management into a local bank account.Often concentration bank combined with a lock-box system. (2) Lock-Box System: . first it involves administrative costs to reward the banks for their services and cost of transferring funds to the concentration banks. The local bank as agent for the company empties the box at regular intervals and deposits the cheques in the company’s local account. Concentration Banking reduces mailing time and time taken to clear the cheques. It has some limitations. The firm can take maximum advantages of trade credits. Disbursement arises due to the trade credit. 38 . which then can be invested in interest paying assets through a single transaction. But this is a risky game and should be discouraged. Surplus funds are transferred periodically to one of the company’s principal banks. As sources of funds by paying later than agreed.

but they have to inform the daily transactions to the corporate office.21 2193. it fulfils the gap by liquidating the marketable securities. Different instruments are used for collection. Disbursement is also centralized. When there is excess of cash. thus avoiding the manual error. ANALYSIS Cash Trend:Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 . sometimes. but preference is given to drafts & then letter of credit (LOC). The optimum level of cash balance is prepared by means of cash budget. From this they forecast the future cash flow.71 3686. When there is shortage of cash i.36 755.46 39 . As Nalco is a cash rich company. Also company tries to find out the buffer or safety stock. Company also dues the float for its working capital requirements.53 3516. then pay to the liabilities. it invests them first in purchasing marketable securities.e. Also cash report is prepared monthly.Working Capital Management 4. each department has the full liberty to spend. but dependent on the bank finance.98 Crores in the year ended 31st March 2008. Daily cash transaction is done on computer system of account. CASH MANAGEMENT AT NALCO As we know that Nalco is a profit making company having a profit of Rs. In Crores) 98. For collection of cash flow centralized collection method is applied. cash balance goes below the minimum level. then it lend to associates. Mainly CDA/Deposits are purchased when there is excess of cash. 2491. Cash & Bank Balance(Rs.

19 4988. ratio is fluctuating.21 2193.42 crores. what should be the amount of cash. Sales increases up to 5940.Working Capital Management The reflections of these variations can be seen from the cash & bank balance increases very rapidly from 2003-2004 to 2006-2007. it can be seen that even if sales and cash balance are increasing. This turnover ratio indicates the velocity of utilization of cash.36 755. From the above table it can be seen that sales is increasing very rapidly from 20032004 to 2006-2007.46 2.37 4123.21 1. 40 .53 3516. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Sales 3114.46 Cash Turnover Ratio 31.19 crores but it decreases in the year 2007-2008 to 4988-80 crores.96 4851.80 Closing Cash Balances 98. That means to generate one rupee of sales the firm need. CASH TURNOVER RATIO Cash turnover = Sales/Closing Cash Balances (Rs. It indicates the number of times cash is turnover in the course of a year.66 5. how much cash is to be employed.71 3686.61 1. In the year 2003-2004 the cash turnover ratio is 31. But when we come across the trend of ratio.90 5940.42 Cash turnover ratio shows that per rupee of sales. but in the year 2007-2008 it decreases as compared to the previous years.66 crores but it decreases very drastically in 2004-2005 then after words it decreases proportionately and by the end in the year 2007-2008 it reaches to around 1.

75 This ratio indicates that what is the percentage of cash to current assets i.52 74.04 3297.66 5. In Crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Cash Turnover 31.Working Capital Management CASH IN TERMS OF NUMBER OF DAYS OF OBLIGATION Cash in terms of no. i.21 2193. Then again it goes up to 258 days in the year 2007-2008.71 3686.11 69. The cash in terms of number of days of obligation also jumps from 12 days in 2003-2004 to 67days in 2004-2005.33 Percentage 9. there is a complete controlled over the cash balance. CASH TO CURRENT ASSET PERCENTAGE Cash to current asset percentage = cash/current asset*100 (Rs. and in the same time lack of cash will lead to stoppage of work there is a need for 41 .70 66.53 3516.46 2.61 1. there is a sudden drop from 31.36 755.42 Number of days in Cash a year 365 365 365 365 365 Period 12days 67 days 166 days 227 days 258 days Holding We can see that as the ratio of cash turnover is fluctuating.66 crores in 2003-2004 to 5.e.08 5041.46 crores in 2004-2005. So. of days = 365 days/Cash turnover (Rs.88 4974.51 1811. whether cash captures a major portion of current asset or not? As idle cash generates nothing.93 41. In Crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Cash 98.46 Current Asset 990.21 1.e.

39 940.53 crores in (2003-2004) to (2006-2007) but it decreases to 3516.28 806.56 2.61 1540. debtors. yet there may be doubts regarding their realisation into cash immediately or in time. It also increases the quick assets in every year.36 crores to 3686. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Quick Assets 510.75% due to decrease in cash balance.30 4339. this ratio should be calculated along with current ratio and acid test ratio to examine the liquidity of the firm at worst emergency time. Like wise current asset increases from 990.70% (2004-2005).93% (2003-2004) to 41..59 2. 510. 42 .12 4354.88 3.03 crores in 20032004 to Rs.98 crores in 2004-2005. It can be observed from the above data that cash increases from 98. So all the fluctuations in cash as well as current assets comes to a mixed picture in the ratios.03 1281. this increase may due to increase in current asset. So.88 Absolute Ratio 0. It can be seen that there is an increase in quick assets from Rs.68 Current Liability 864. In 2005-2006 the ratio was 66.98 2706.52% while in 2006-2007 it was 74. This may arise due to increase in cash balance.59 1.Working Capital Management optimal cash balance.15 1218. 1281. The ratio trend increases from 9. In 2007-2008 it decreases to 69. etc.83 Liquid Although there are other current assets like receivables.51 crores (2003-2004) to 5041. The firm should try as much to finance the working capital with other current assets provided the other current assets giving profits.11%.46 crores in the year (2007-2008). ABSOLUTE LIQUID RATIO Absolute Liquid Asset= Quick asset/ Current liability (Rs.33 crores(2007-2008).

98 crores. while in 2004-2005 it decreases to 1.71 3686. 16.44% in 2006-2007 and 0.59 in 2003-2004 then it becomes 1. In the year 2005-2006 it increases to Rs. 1281. 806.07%.83% and it again decreases to 0. has a drop in the year 2007-2008. 806.83 0.39 crores and increase in quick asset from Rs. the ratio was 0. PERCENTAGE OF SHORT TERM DEPOSITS TO CASH BALANCES Percentage of short term deposits to cash balances= Short term deposits / Cash balances *100 (Rs.39 crores in 2004-2005. increases to Rs.53 3516. 510. 64. This may be done due to decrease in current liability from Rs.22 16.07 1.85.92 13. Then it again rises from 1. 13.28 crores to Rs. Again the ratio drops to 2. The deposits decreases to Rs.15 crores and so on.37 16.28 crores in 2003-2004 to Rs. This may happen due to increases in current liability. In 2003-2004 it was 9.03 crores to Rs. It can be seen that nearly all the cash is deposited in short term / fixed deposits.92. In 2003-2004 it was Rs. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Cash Balances 98.38 0. 8.59 to 2. 940.Working Capital Management Current liability drops from Rs.59 in 2004-2005.88 in 2005-2006 and a sudden increase from 2. Short term / fixed deposits is rather fluctuating irrespective of increasing cash balances.85 8.44 0.22 in the year 2006-2007 and at last year it decreases to Rs. 43 .36 755.46 It shows that cash trend although increasing.88 to 3. 864.56 in 2006-2007.38% and further rises to 0.83 in 2007-2008.21 2193.46 Short term/ Fixed deposits 8. 16.37 in 2005-2006 and again increases to Rs.03 Percentage 9.03. 8.46% in 2007-2008. Due to the fluctuations in both current assets and current liability. This may be due to increase in cash balance.

42. Again it decreases to 2. which is a good sign for the firm. But in the year 2007-2008 it reduces to 69. But the real good sign can be shown / known from the cash turnover in sales ratio. Looking at the cash to current asset ratio and absolute liquid ratio. The cash in terms of number of days of obligation in 2003-2004 is only 11.66. This indicates that per one rupee of sales of cash. The table showing percentage of short term / fixed deposits to each cash balance. which is a good sign.46. because it invests a larger amount of cash balance in short term or fixed deposits.04 days in 2007-2008. Next year it decreases to 5. it can be seen that cash has a major portion in filling the working capital gap.75%.11% in 2006-2007.93% increases to 41. This was a very good performance of the firm. The cash to Current Asset in 2003-2004 is 9. If the ratio decreases in the next future year it would not be a healthier indication for the firm. In 2006-2007 and in 2007-2008 it comes to 1.Working Capital Management SUMMARY From the cash trend it is seen cash is increasing each year expect in 2007-2008.00 expect in 2003-2004. The standard ratio for absolute liquid ratio is 0. it can be well understood that Nalco has not much of idle cash. But in Nalco it was always above 1. it seems that Nalco is a cash rich company and has heavy amount idle cash. So. This position can also be understood from the absolute liquid ratio.70% in 2004-2005 and it rises up to 74. 44 . But in Nalco it was for absolute liquid ratio is 0. But then it starts increasing to 257.21 in 2005-2006.53 days.5.5. From cash turnover sales ratio it is seen that cash turn ratio in 2003-2004 was 31.

which is the most significant part of current assets. The term inventory refers to stockpile of the product a firm is offering for sale and the components that make up the product. research and development. INVENTORY MANAGEMENT One of the major portions of working capital constitutes inventory.Working Capital Management 5. 45 . The major difference between inventory and other current assets is that in case of inventory person from different fields like marketing. purchasing.

The quantum of working process depends upon the time taken in the manufacturing process. 4) Supply:This kind of inventory maintained by the firm for the necessity of smooth operation. 5.Working Capital Management finance are involved. In accounting language it may mean a stock of finished goods only. They are required to carry out production activities uninterruptedly. which do not enter production process. In manufacturing concern it may include raw materials. This supply contains a small part of inventory. store supplies etc. 2) Work-in-Progress:These are the basic inputs which have gone through at least one of the manufacturing operation and are stored for future operations. The quantity of raw materials required will be determined by the rate of consumption and the time required for replenishing the supplies. 46 . Mainly lubricants. etc. lights. work-in-progress. this predominant position of inventories in total working capital obviously cost for the maximum efficient management of working capital. So its management should be done both commercially and scientifically. The inventory consists of:1) Raw Material:These are the primary products purchased by the firm to convert into useable products through the manufacturing process. 3) Finished Goods:These are the products which have gone through the total operations and are ready to use.1 COMPONENTS OF INVENTORY: The word “inventory” is understood differently by various authors. bulbs. To understand the exact meaning of the word inventory we may study it may from the usage side or from the “side of point of entry” in the operations. These products are then processed for finished goods. Finished goods are store to effective marketing operations.

3 OBJECTIVES: The primary objectives of inventory management are:- 47 . 5. The firm reduces or increases the inventory according to the price situations. It is impossible for the firm to get raw material in time. For this difficulty the firm maintains a certain level of inventory for this smooth operation. So they keep inventory in order to keep the business going without any risk.2 NEED TO HOLD INVENTORIES: If the question arises why do we need to hold inventory? The answer is same as that of holding cash. There are three general motives for holding inventories:• • • Precautionary motive Transitive motive Speculative motive PRECAUTIONARY MOTIVE:This motive emphasis the need for holding of inventories against the risk associated with the short-term supply of raw material and semi-finished goods. TRANSITIVE MOTIVE:This motive emphasizes the need to hold inventories for the uninterrupted flow of production operations.Working Capital Management 5. There is a time lag between demand for materials and supply materials. SPECULATIVE MOTIVE:This motive emphasizes the need to purchase raw materials by taking the optimum advantage of time and facilities available. to predict the wastages during production. Other factors which may affect the purchase decisions are discounts. unanticipated inventory. It is impossible for the firm to predict all the future irregularities and risks attached with the supply of raw material.

COSTS:There are several costs included in maintaining and inventory we categorized them as follows:Ordering cost:Also known as the acquisition or set up costs are the entire costs associated with the acquisition of raw materials. purchase ordering.e. But acquisition of a larger quantity would increase the cost associated with the maintenance of inventory that is carrying cost. b) The opportunity cost of funds which are in raising the finance of acquisition of inventory which may have used in any profitable work. The optimum level of inventory sought for striking a balance between excessive and too little inventory. utilities and janitorial services. The efficient management and effective control of inventories help in achieving better operational results and reducing investment in working capital which have a bearing on the maximization of owner’s wealth or net worth. These two converse objectives call for an optimum level of inventory. tax. receiving. Thus such costs can be minimized by placing fewer orders for a larger amount. stores and spares etc. detritions of materials due to pilferage. labour for handling inventory clerical and supervision cost. depreciation. This cost is directly proportional to the number of orders placed and inversely related to the size of inventory.e.Working Capital Management • • To minimize the possibilities of disruption in the production schedule of a firm for a want of raw materials. transporting. Carrying Cost:a) Those cost arising out of storing materials i. The major objective of the financial manager is to use the funds in maintaining an optimum level of inventory is determined on the basis of the trade-off between costs and benefits associated within the level of inventory. insurance. fire etc and service costs i. It includes costs of requisitioning. 48 . inspecting and storing. maintenance of the building. To keep down capital investment in inventories.

Otherwise you should carry on production continuously and make an extra inventory of finished goods which can be sold during the period of seasonal demand. So inventories held in order to bridge the gap between the current productions and actual sales. then you should go for it. Major problem are the classification problem i. 3) Benefits in Sales:The maintenance of inventory also helps a firm to enhance its sales efforts.4 TECHNIQUES OF INVENTORY MANAGEMENT As it been figured out that the financial manager should aim at an optimum level of inventory on the basis of the trade-off between cost and benefit to maximize the owners wealth. BENEFITS:Benefits are the functions of the firm. The efficient method of purchase sought for taking the advantages available if you purchase larger quantities. 2) Benefits in Production:During the pick sale season the firm should go for higher production. Again this reduces the carrying costs. how much to order and when to order. The sum of ordering cost and carrying cost contribute total cost. If there is no inventory of finished goods the sales have to be depend upon the Current production. For this he has to use some mathematical techniques to solve the problems arise at the time of determination of stock level. Inventory thus ensures the continued patronage of customers.Working Capital Management Carrying cost is directly proportional to the size of inventory. which hampers firms supply position. Again this bulk purchase may decrease the ordering cost. 5. Classification Problem:a) ABC Analysis:49 . 1) Benefits in Purchasing:The purchase of raw materials should not be tied to the production of sales. In other words inventories performed certain basic functions which are of crucial importance in the firm’s production and marketing strategies.e. For this firm may need for larger inventory.

Efficient inventory management demands that item of higher value should attract greater attraction of the management. determining the expected use in units and the price for unit of each item. this approach is known as proportional value analysis. The inventories are grouped as follows:Group A B C Investment Large Reasonable Least Inventory Control Most rigorous. intensive and Sophisticated method Less Sophisticated method then Group A Minimum attention on control The following steps are involve in implementing the ABC analysis:• • • • Classifies the items of inventories. Some items account for major portion of total consumption value of all the items. As items are classified in the importance of their value. Determining the total value of each item by multiplying the expected units by its unit price. but they are small in number. This ABC analysis is also known as always better control. 50 . ABC analysis is based on the concept that inventory item should be ranked according to their relative investments in each item in inventory.Working Capital Management The first step in the inventory control system is classification of different types of inventories to determine the type and degree of control require for each material. Compute the ratios of numbers of units of each item to total units of all items and the ratios of total value of each item to total value of all items. This ABC analysis concentrates on important terms and also known as control by importance and exception. Rank the items in accordance with the total value giving first rank to the item with highest total value and so on. This objective is achieved by selective control techniques or ABC analysis.

B&C. The classification of spares under three categories is an important decision. The demand for spares depends upon the performance of the plant and machinery. A wrong classification will create difficulties for the production department. ABC analysis may not be properly used for spare parts. Quantity Problem:EOQ model:One of the major problems is how much inventory is to be added when inventory is replenished. Generally economic order quantity it is assumed that cost off managing inventories is composed of two costs:-carrying cost & ordering cost. The non availability of vital spares will cause havoc in the concern.Working Capital Management • Combine items on the basis of their relative value to form three categories A. 51 . The requirements and urgency of spare parts is different from that of materials. Essential (E). Vital spares are must be stored adequately. The stocking of D type of spares may be avoided at times. If the lead time of this spares is less than stocking of this spares can be avoided. and Desirable (D). The determination of inventory level calls for trade-off between ordering cost and carrying cost and the benefits. 2) The rate at which the firms uses inventory is steady over time. The task of the firm is to determine or economic order quantity. The E type of spares is also necessary but their stocks may be kept at low figures. Spare parts are classified as Vital (V). Assumptions:The EOQ model. and should the quantity be purchased large/small or in one lot. as a technique to determine the economic order quantity is based on three assumptions 1) The firm is aware of its annual usage. b) VED Analysis:VED analysis is generally used for spare parts.

The EOQ is calculated in the following steps:Total inventory requirement No of order = Order size Average inventory = Order size / 2 Total carrying cost = average inventory *carrying cost per unit Total ordering cost= no of orders *cost per unit Total cost= cost of items purchased +total carrying cost and ordering cost The quantity which gives the lowest total cost is the EOQ. etc. Another formula for calculating EOQ:EOQ= 2so / c Where S= total inventory requirement in units O=ordering cost per order C=carrying cost per unit 2) Graphic approach:The EOQ can be calculated from the following graph also. monthly. It can buy all inventories in one lot required for one accounting year or it can buy in small lots periodically. quarterly. The lower the inventory the higher the carrying cost. EOQ is the order size with lowest total of carrying costs and using costs.Working Capital Management 3) The order placed to replenished inventory stocks are received at exactly that point in time when inventory reaches zero. Approaches:1) Trial and error approach:The firm has different options. The EOQ uses different permutation and combination of lots of inventory purchase. say weekly. 52 .

The total cost line seems to decline at instances but start rising when the decreases in average ordering cost is more than offset by the increase in carrying cost. Thus firms operating profit is optimum at point E. (i)Lead time (ii)Average usage (iii)EOQ Lead time refers to the time taken in receiving the delivery of the inventory after placing orders to the suppliers. Reorder point is that inventory level at which an order should be placed to replenish the inventory. 6.Working Capital Management In the above graph costs (both carrying and ordering along with total) are taken in Yaxis and order size is taken in X-axis. it has to employ a huge amount in investment in current assets. But real world situations are very much uncertain. To determine the reorder point with accuracy we have to calculate. Thus the lead time and average usage cannot be calculated accurately. The EOQ occurs at the point E where the total unit is minimum. of orders. It covers the time span from the point when a decision to place an order for the procurement of inventory is made to the actual receipt of the inventory by the firm. Thus reorder point =lead time*average usage 4) Safety stocks:We have already determined the EOQ and reorder point which are calculated under some conditions of certainty. mainly to 53 . It is seen that total carrying costs increases with regard to increase in order size and ordering cost decline as there is less no. 3) When to order (Order point problem):Another problem in inventory management is determination of re-order point. INVENTORY MANAGEMENT AT NALCO As Nalco is one of the largest limited companies of India with a huge production in every year.

Nalco has to go through all the methods and formalities required in inventory management from purchasing and supervision to disbursements. They have mainly few suppliers.Coke C. 54 .P.Pitch Aluminium Flouride Lime Others(Calcined Alumina) Finished Goods and Intermediary:Bauxite Aluminium Hydrate Calcined Aluminium Aluminium Ingots Aluminium Wire Rods Other Items Purchase Procedure:Due to large investment in inventories the purchase procedure is equally tough for Nalco officials. So. Raw Materials:Caustic Soda C.T. For the purchasing work all the formalities are maintained.Working Capital Management maintain the size of inventory. Finished goods are valued at the lower of cost or net realizable value. Valuation of Inventory:Raw materials. Value of scrap is recognized in the accounts as and when sold. The inventory in Nalco contains both raw materials and finished goods of intermediaries. stares of spare parts and loose tools are valued at weighted average cost. Intermediary products are valued at direct material cost.

48 Finished Goods 148. essential. classifying inventory according to their investments. Nalco is doing ABC Analysis for such classification i.41 235. i.42 260.e.e.08 56. For stores and spares the company is following vital.Working Capital Management The minimum level of inventory is determined by the EOQ model. In Crores) Year 2003-2004 2004-2005 2005-2006 Raw Material 48. Size of Inventory and Inventory Trend:Inventory in Nalco mainly comprises of:(a) Raw Material (b) Finished Goods (c) Stores & Spares RAW MATERIAL TURN OVER RATIO (Rs.35 55 Stores & Spares 251. As we know that there is a need for clarification of inventory. etc. Inventory report is prepared every month in Nalco.85 175. desirable (VED) analysis. For this the trial and error method is applied. Mainly fixed order quantity system is followed.70 526..12 241. by consumption during lead period and safety stocks. wastages. to keep a balance.35 491.03 Total Inventories 448.17 50. because there is necessity to check all the purchases.86 .

99 601.45 65.66 Crores in 2007-2008.66 576. 148.380 240.225 162. FINISHED GOODS TURNOVER RATIO Finished Goods Turnover Ratio= Cost of goods sold/ Average Finished goods inventory (Rs. In the year 2003-2004 it was Rs. Again it rises and reaches up to Rs. But the inventory of stores and spares is always increasing except in the year 20052006. Again it rises and reaches up to Rs. 260.12 Crores. 241.57 11.94 268. 56.130 205.18 From the above table we can see that raw materials always increasing except in 20052006.59 346.48 Crores from Rs.75 11.Working Capital Management 2006-2007 2007-2008 82.17 Crores in 2004-2005. 65. In Crores) Cost of goods sold 1658. Mixing all the figures we are getting that total inventory was increasing each year from 2003-2004 to 2007-2008.35 Crores and it was gradually increases and reaches to Rs.975 256.45 Crores in 2006-2007 and it again decreases to Rs.59 Crores in 2007-2008.60 266.03 1905.86 2278.03 Crores from Rs.85 crores and it was gradually increases in every year and at last it reaches up to Rs.41 2738. where it dropped to Rs.93 247. Finished goods are always in increasing trend. 50. 601.18 Crores in the year 2007-2008. 268. where it dropped to Rs.765 Finished goods turnover ratio 11. 82.66 Finished goods storage period (days) 32 days 32 days 33 days 38 days 35 days Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 56 . 266.09 Average finished goods inventory 143. 448.67 2342. In 2003-2004 it was Rs.93 crores in the year 2007-2008.72 10.09 9.

24 224. Slow disposal of stocks will mean slow recovery of cash.195 255.71 0.75.765 Crores in 2007-2008. 143. SPARE PARTS & STORES TURNOVER RATIO Stores & Spares Turnover Ratio= Stores & spares consumed /Avg.09 and.225 Crores & in the year 2004-2005 it was Rs.89 Storage Period In Days 515days 554 days 411 days .13 Crores and finally reaches to Rs.77 250. The total picture is reflected in the storage period also. 1905.73 170.86 Crores and rises up to Rs. From the above table it can be observed that cost of goods sold is increasing from 2003-2004 to 2007-2008. In 20032004 it was Rs. stores of spares (Rs.51 Avg. Looking at the turnover ratio. The storage period is always increases except in the year 2004-2005 & 2007-2008 i.57 & in 2004-2005 it was 11. 1658.58 57 Stores & Spares Turnover Ratio 0.e. 162. in the year 2004-2005 it was 32 days & in the year 2007-2008 it was 35days.Working Capital Management The finished goods turnover ratio shows how rapidly the finished goods are turning into receivables through sales. hence will effect the liquidity position of the firm.66 0. or a slow moving or absolute inventory. Average finished goods inventory also inventory is also in increasing trend. In 2003-2004 it was 11. Generally a high level of turnover is indicative of goods inventory management.09 Crores in 2007-2008.03 Crores in 2004-2005 Rs. Stores & Spares 250. In 2005-2006 it decreases to 11. In 2003-2004 it was Rs. 256. It also gradually decreases to 10. 2738. A low turnover implies excessive inventory of finished goods levels than warranted by sales activity. In Crores) Year 2003-2004 2004-2005 2005-2006 Stores & Spares Consumed 176. it can be seen that ratio is increasing from 2003-2004 to 2004-2005.66 in the year 2007-2008.

250.73 Crores and Rs.79 8.58 Crores. As a result of which the stores of spares conversion days shows that in the year 20032004 it was 515days and it was increased in the year 2004-2005 to 554 days.195 Crores. In Crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Avg. shows how effectively stores & spares inventory is used in emergency times and in the course of business. Stores & Spares turnover ratio which is the ratio between stores of spares consumed versus average stores & spares inventory. TOTAL INVENTORY TURNOVER RATIO Total Inventory Turnover Ratio= Sales / Avg.e. 0. Inventory (Rs.30 Crores.49 258.49 Crores but finally in the year 2007-2008 it increases to Rs. 255.58 634.06 591.30 0.96 686. in 2006-2007 also it drops down to Rs.89 but in further two year i.19 4988. 224. The trend of average stores & spares inventory is in fluctuation phase. in 2004-2005 it decreases to 0.48 529. But in next three years the conversion days decreases as compared to 2004-2005. it again increases to 0.71.35 7.20 9. Rs.66.27 Conversion Period 57 days 47 days 45 days 40 days 51 days .80 58 Turnover Ratio 6.65 Sales 3114.e. You can see that ratio in all 5 years is below 1.88 0. 258. Inventory 480. 244.37 4123.88 244.88 & 0.81 respectively. in 2004-2005 it increases to Rs.96 4851. In the year 2003-2004 it was 0.77 Crores and in 20052006 it drops to Rs 250. In 2003-2004 it was Rs.51 Crores but in remaining three years it decreases gradually. The reflection is on the stores & spares inventory ratios.Working Capital Management 2006-2007 2007-2008 215.34 209.e. 176.48 7.81 415 days 451 days From the above table it can be seen that the stores & spares consumed inventory is increase in the year 2003-2004 & 2005-2006 i. in 2006-2007 & 2007-2008 it decreases i.90 5940.

88 Raw material storage period 51 days 44 days 37 days . In 2003-2004 the average inventory Rs. In Crores) Year Raw material consumed 2003-2004 2004-2005 2005-2006 432. down to 47 days in 2004-2005.57 436. 4123.48 increased to 7.20 in the year 2005-2006.19 Crores in the year 2006-2007 and at last it decreases to Rs. In 2003-2004 it was 6. 5940. it further decreased to next three years and reached to 51 days in 2007-2008.23 8. Or in other words the selling activity of the firm is whether efficient or not. 686. In 2003-2004 the sales figures was Rs.Working Capital Management Inventory turnover ratio measures the velocity of conversion of stock into sales.80 Crores in the year 2007-2008.37 Crores and it increases to Rs. can be known from this ratio.33 59 Raw material turnover ratio 7. 3114.48 Crores and it gradually increases & reaches to Rs.74 Average raw material 59.13 53. peak to 8. 4988.79 in the year 2004-2005.35 in 2006-2007 & at finally it reaches to 7. From the above table it indicates that the average inventory increases from 2003-2004 to 2007-2008.85 52.37 9. As a result of which the days of inventory holding also shows some variation. again peak to 9. RAW MATERIAL TURNOVER RATIO Raw material turnover ratio= Raw material consumed*average of Raw material (Rs.27 in 2007-2008.96 Crores in 2004-2005 and it rapidly increases for the next two years & finally reaches to Rs. In 2003-2004 it was 57 days.15 526. The variation can be diagnosed in the ratio column. the lesser amount of money is required to finance the inventory. Usually a high inventory turnover / stock velocity indicates efficient management of inventory because more frequently the stocks are sold. 480.65 Crores in the year 2007-2008. A low inventory turnover ratio implies to an inefficient inventory management.

99 47 days 46 days The raw material inventory turnover ratio indicates how quickly the raw material is turning in to production. In the other hand a low quality raw material increases cost.74 crores in that period. The trend shows that raw material turnover ratio was increasing from 2003-04 to 2005-06. Here raw materials constitute a negligible amount of inventory ranging between 9%-14% where as finished goods inventory stands in second position.33 crores as compared to the year 2003-04. it is a increasing two expects in 2004-05. Before that period it was Rs.47 47.15 crores in 2004-05.99 in 2007-08 as compared to 1st 3 years.53.432. It can be observed from the above tables that the consumption of material was at its peak in 2005-06.62 591.02 7.591. A high raw material hence less cost of supervision and the chance of deterioration in quality is decreases.88 in 2005-06. From 2006-07 onwards it starts decreasing & reaches to 7.52. 60 . SUMMARY Looking at the inventory imposition in NALCO.21 crores in 2007-08.23 and reaches up to 9. As a result of which the raw material storage period starts decreasing from 2003-04 (51 days) to 46 days in 2007-08.57 crores in2003-04 and Rs.62 crores in 2006-07 and again it peaks to Rs.e.Working Capital Management 2006-2007 2007-2008 526. After 2005-06 it was slightly decreases to 526. In 2003-04 it was 7.526.91 7. we can see that stores and spares control a major portion of investment in inventory. Having a glimpse and the average raw material inventory trend. Rs. The reflection of both raw material consumption trend and average inventory trend is on the raw material turnover ratio trend.436. 2005-06 i. It was Rs.13 crores & Rs.21 66.

As we know that NALCO is VED Analysis and has some stores and spares which has very limited use and the event for using them is unexpected. Finished goods turnover ratio. here stores and spares turnover ratio is not in a good position. so it is a bad sign for management. shows that the holding period after three consecutive years of increase and then decrease. 61 . In first three years it performed well as compared to previous years but after that in the year 2005-06 the turnover ratio goes on decreasing while the raw material storage period increasing simultaneously. But only in this decline continuous in the future years will be a satisfactory thing for management. larger is the maintenance cost and extra storage space has to be taken. Shortage of one of these stores and spares material at the time of need may lead to production ceasing.Working Capital Management Thus from the above analysis it can be concluded that there some important stores & spare material which are required at any moment & are costly. Stores and spares are also plays a vital role. This slight decrease is a rather of satisfaction for the management. Because the larger the inventory. The raw material inventory ratio is not constant in case of NALCO. the greater responsibility for this is goes to in the hands of management. But the trouble comes in utilising the raw material inventory. In these five years only in the year 2005-06 there is an improvement.

(a)It involves an element of risk. ESTABLISHING OPTIMUM CREDIT POLICY 62 .Working Capital Management 7.e. This accounts receivable or trade credit has three features i. Therefore it is important to analyze the important dimensions of the efficient management of receivables within the frame work of a firms objectives. (c)It implies futurity. (b)It is based on economic value. MANAGEMENT OF ACCOUNTS RECEIVABLES It has been observed that a basis strategy to reduce the operating cash requirements of firm is to accelerate the collection of receivables so was to reduce the average collection period. Therefore credit manager and academic persons have a common interest in designing models that monitor the growth rate level of account receivables.

• Company’s bargaining power: . of business sector there is a need for credit without which the buyer cannot operate.Working Capital Management A firm’s investment in account receivables depends on (a)The volume of credit sales (b)The collection period Then the firm’s average investment in accounts receivables is daily credit sales * average collection period. credits and granted for longer periods even to those customers who may become doubtful debtors in future. Total sales depend on market size. • Buyer’s requirement: . firm’s market share. economic condition. There is one way in which the financial manager can affect the volume of credit sales and collection period &consequently. The average collection period can be computed as follows:Average collection period =360/Debtors turnover The investments in receivables may be expressed in terms of costs instead of sales value. the talkative power of the buyer etc. The bargaining power depends on the buyer’s personal report with the marketing manager.The no. 63 . The volume of credit sales is a function of firm’s total sales and percentage of credit sales to total sales. The finance manager hardly has any control over these variables. In practice nearly all firms follow credit policies in between lenient credit policy and stringent credit policy. change in Government policy etc. The percentage of credit sales to total sales is mostly influenced by the nature of business and industry norms. product quality. In contrast a firm following a stringent credit policy sells on credit on highly selective basis only to those customers who have already proved their creditworthiness in the past or whose financial resources are very strong. intensity of competition. investment account receivables. So the credit is granted. The term credit policy is used to refer to the combination of 3 decision variables.This is a major reason of companies granting credit. Goals of credit policy:A firm may follow lenient or stringent credit policy tends to sell on credit to customers on very liberal terms and standards. The reasons for allowing credit:• Competition: .Generally the granting of credit is directly proportional to the degree of competition.

Credit policy variables: The credit policy of a firm provides the framework to determine: a.Buyers creditworthiness is also a major factor in granting credit. How much credit should be granted? In establishing an optimum credit policy the financial manager must consider decision variables which influence the level of receivables. On the contrary if the firm adopts loose credit standards the firm may have larger sales but may have heavy bad debt losses. Such standards avoids bad debt losses and less cost of credit administration. that is it may sell mostly in cash basis.Credit is used as a marketing tool. b. ii. Therefore it is advisable that the firm’s credit policy be formulated by committee which consists of executives of all the 3 departments. The major decision variables are i. Credit standards Credit terms Collection efforts The credit policy of a firm may be administered by financial manager. and may extended credit to only reliable customers. transit delays etc. Whether or not to extend credit to a customer. marketing and finance functions. It should however appreciate that credit policy has important implications of the firm’s production. 64 . iii. particularly when a new product is launched or when a company wants to push its weak product. Other reasons may be industry practice. But the firm’s sales may be squeezed. Credit standards:Credit standards are the criteria which a firm follows in selecting customers or the purpose of credit extension the firm may have tight credit standards. • Marketing tool: .Working Capital Management • Buyer’s status: .

and in tightened condition this will decrease. Sales Volume: . The more the liberalized credits. thus a lower average level of accounts receivables. The trade off with reference to credit standards covers.Working Capital Management The quantity basis of establishing credit standards are factor such as credit ratings.This will increase when there will be liberalized credit standard position. iv. But when the firm move from line to stringent condition the reverse will happen. Further. who will take a longer period to pay there overdue.These happen when customer fails to pay. Collection cost Average collection period The level of bad debt losses Level of sales Collection cost: . and in case of more tightened credit the less is collection cost. Average collection period:-The investments in accounts receivables involves a capital cost as funds have to be arranged by the firm to finance them till customers make payments. They will increase with relaxation of credit standards and decrease in tightened credit standard position. Every company giving credit on liberal terms makes provisions for doubtful debts. i. who can promptly pay there bills. credit references. 65 . A relaxation credit standard implies an increase in sales which in term would lead to higher average accounts receivables. relaxed standards would mean that credit is extended liberally so that it is available to even less credit worthy customers. ii. This is a semi-variable cost. In case of a strict credit standards would signify a decrease in sales and extension of credit limit to more credit worthy customers. average payment period and certain financial ratio. Bad debt losses: .These are the cost relating to the collection of accounts receivables. the opportunity cost declines but administration cost and bad debts risk is increased. It releases itself from tight to loose credit policy. Thus change in sales and collection while standards are relaxed produce a higher a carrying cost and in tightened credit standards produce lower cost. Thus the choice of optimum credit standards involves a trade off between incremental rate of return and incremental cost. iii. the more will be the collection costs.

Thus the level of receivables and associated cost may be reduced. Firm extension of credit is mainly for increasing the sales. Credit Period varies industry to industry. Normally cash discount period is less than that of the credit period.Working Capital Management Credit Terms: Credit terms are the conditions and stipulation under which the firm extends credit to the customer. depending on the firm’s nature objectives and policy.The times span for there repayment of debts is called credit period. Incremental investment in receivables =New level of receivables-Old level of receivable = ((New sales/360)*New average collection period) = ((Old sales/360)*Old average collection period) = ((SalesN/360)*ACPN) = ((SalesO/360)*ACPO) Where Sales N= New sales Sales O= Old sales ACPN= Average Collection Period (new) ACPO= Old Collection Period Cash Discount: . Credit term has two components. However there will be net increase in operating profit only if the cost of extended credit period is less than the incremental operating profit. Credit Period: .This is the amount of cash reduction from the prompt creditor. A firm uses cash discount as tool to increase the sales and accelerate cash collection from customers. Incremental sales result into incremental receivables and existing customers will take more time to repay credit obligation. generally expressed in terms of a net date. 66 .

Credit Procedures for Individual Accounts:For effective management of credit. This will result in declined in average collection period. For small account.Working Capital Management Collection Policies/ Efforts: The main objective of collection policies is to accelerate collections from the smooth payers and to reduce bad debt losses. The incremental cost of funds is the rate of return required by the supplier of funds given the risk of the investment in accounts receivables. The required rate of return is directly proportional to higher risk of investment. Depending on these two factors of time and cost. Prompt collection is necessary for fast turnover of working capital. 4) Credit Bureau Reports etc. The firm should adopt different procedures for granting credit. 1) Financial Statements. 67 . be less than the potential profitability. It is also known that firm’s value becomes optimum value when marginal rate of return becomes equal to marginal cost of capital. 2) Bank References. keeping collection cost and bad debts within limits and maintaining collection efficiency. Optimum Credit Policy (A Cost Benefit Analysis):It is known that optimum credit policy is that credit policy which maximizes the firm value. the firm should ensure that receivables are collected in full and on due date. The credit evaluation procedure of the customers should involve the following steps. Collecting credit information involves expenses the cost of collecting information should. Thus the rate of required rate of return is upward sloping curve. Otherwise the firm will suffer a great loss.In extending credit to customers. (a)Credit Information: . the firm should lay down clear cut guidelines and procedures for granting credit individual accounts. or a combination of the following sources may be employed to collect the information. In addition to cost the time required to collect information should also be considered. the decision to grant credit may be made on the basis of limited information to lesser the cost. any. therefore. 3) Trade References.

7.13 60.1 ACCOUNTS RECEIVABLES MANAGEMENT AT NALCO Sundry debtors trend:Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Sundry Debtors(Rs. A Comprehensive and meaningful investigation requires adequate data about the customer and his business. 5) Companies credit policies and practices.81 29.42 34. In practice cash discount is given for the prompt payment. as stated above the collection steps be taken in sequence. it starts decreases from the year 2004-2005 Rs92. after that all the legal works.24 crores. Unnecessary delay in responding to a customer request can prove to be detrimental. In the earlier years it starts increasing in 2003-2004 it was Rs102. 4) Size of customers order and expected further volumes of business with him. To collect dues from slow paying or non paying customer. In Crores) 102. 2) The customer business line.24 92.Working Capital Management (b)Credit Investigation and analysis: After collecting all the record information the firm will get an idea regarding the matter which should be further investigated the factors affecting the credit investigation are:1) The type of customers. 3) The nature of the product. As we know that sales are increasing in NALCO each year except in the year 2007-2008.13 crores in 200668 .81 crores to Rs34.65 From the above table we can see that Sundry Debtor is devoid of sales. But the Sundry Debtor have taken and trend. The data should be promptly gathered. which can be seen from the graph as if a y=sin x curve. First with a letter with additional letters.

In Crores) Domestic Year Sales Average Debtors 69 Debtors turnover ratio Average collection period .04 3297. and it further decreases in 2005-2006 to 2006-2007 and finally it reaches to 1.42 34.33 Percentage of S.20 This ratio shows how much portion the trade debtors have taken in total current asset.65 Total Current Assets 990.13 60.89 0.81 29.12 in 2004-2005. which means a loss for the company.20 in 2007-2008. In 2003-2004.Working Capital Management 2007 but finally in the year 2007-2008 it was Rs60.32 5. Debtor’s turnover ratio:Debtor’s turnover ratio= Domestic Sales/Average debtor (Rs.51 1811.12 0. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Total Sundry Debtor 102. There is a chance of bad-debt or doubtful debt.08 5041. Percentage of share of trade debtors to current assets:= Trade Debtors/Current assts*100 (Rs. As we know that trade debtors are those buyers who buy goods on credit.D to C.69 1. decreases to 5.24 92.A 10. the ratio was 10.65 crores as compared to last 3 years.32.88 4974.

08 crores.48.08 97.53 crores and it was gradually decreases to Rs31.Working Capital Management 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 1621.48 23 days 16 days 74 days 3 days 6 days Debtor’s velocity indicates that number of times the debtors are turned over during a year. As a result of which the debtor’s turnover ratio shows to increasing trend except in the year 2007-2008. But it has come nearly 50% in 2007-2008. thereby losing sales and profits.53 61. In Average Collection period it shows that it was in fluctuating stage i.12 31. But if we move deeply we can see that sundry debtor captures a significant portion in total current asset.11 3339. But a precaution is needed while interpreting a very high debtors turnover ratio because a very high ratio may imply a firms inability due to lack of resources to sell on credit.96 49.78 47. Generally higher the value of debtor’s turnover the more efficient is the management of debtors or more liquid is the debtors. 70 .74 3017.e. in 20032004 it was 23 days. From the above table we can see that average debtor for the 1 st year was Rs102. it rise up to 74 days in 2005-2006.89 22. In 2004-2005 it was Rs97. in 2004-2005 it increases to 22.39 crores in 2007-2008. it has to make control over it and also try to decrease the debtor amount. NALCO is granting credit on only domestic sales. The domestic sales trend always increasing from 2003-2004 to 2007-2008.39 15. SUMMARY From the above tables it is seen that the sundry debtors are increasing till 20052006 and after that it increases. again it decreases to 3 days in 2006-2007 and finally it increases to 6 in 2007-2008.96 3929.60 2239. in 2004-2005 it was decreases to 16 days.89 and finally it increases to 123. In 2003-2004 it was 15. so it is a bad sign for NALCO.63 in 2006-2007 and in the last year it decreases to 70.89.63 70.38 123.83 102.78 crores in 2006-2007 and finally it reaches to Rs47.

a heavy amount is still unpaid in the year 2003-2004 but in the year 2006-2007 it reduce to minimum i. it has been seen that the average collection period. 3 days and afterwards it again increased. From the above findings it has been seen that management should look after the collection of debts as quickly as possible through every possible methods. 71 . 8. the company will face trouble in future.e. FINANCING OF WORKING CAPITAL Having determined the requirements of current assets in the aggregate and in various components of working capital. the next important task before the financial manager is to select an assortment of appropriate sources to finance the current assets.Working Capital Management Analyzing the turnover ratio of sundry debtors. So.

It contributes to about one third of the short term financing. This deferral payment is called trade credit. Sources of finance:The major sources of finance are 1) Trade credit 2) Bank Finance 3) Long term sources comprising equity capital and long term borrowings 4) Others TRADE CREDIT:It has been indicated by R. Trade credit is mostly done informal.I. Once the trade links has been established. in India it is one of the largest sources of working capital finance. In selecting a particular source a financial manager has to consider the merits and demerits of each source in the constraints of the firm. A supplier sends raw material and the buyer accepts it on the credit.Working Capital Management A business firm has diverse sources to meet its financial requirements. Small firms mainly revive on these trade credits. However he doesn’t formally acknowledge it as debt.B. But the distinction between the temporary and permanent working capital is that the minimum level of current asset must be determinable precisely which in practice is difficult. It has been emphasised by financial experts that the permanent working capital should be financed by equity capital or other long term sources of finance where as temporary working capital should generally be financed from short term sources. All customers do not pay immediately after getting services or the products. Trade credit is a ratio of current asset is about 40 per cent. the confidence grows and the trade credit 72 . that in India the use of trade credit has grown faster than of sales. Trade credit refers to the credit that a customer gets from supplier of goods in the due course of business. The concept of permanent and temporary working capital helps in determining the quantum sources of finance.

Working Capital Management becomes routine activity. When the buyer signs a bill a negotiable instrument to obtain trade credit. As the volume of the firms purchase and number of supplier increases the trade credit also increases.e. But the basic limitation of trade credit is that originally it is available in the form of goods or services only. Open account trade credit appears as trade creditors on the buyer’s balance sheet. so it is easily available and automatic. which is very useful to smaller firms? 2) Flexibility:- 73 . the payment is due by the zth day. The advantages are:1) Easy Availability:- As the trade credit does not mostly depend upon the mutual understanding between the supplier and the buyer.In India trade credit is spontaneous process and older marketing activity. It appears the buyer’s balance sheet as bills payable. being available without any formalities. The period and volume of open account trade credit varies from firm to firm and industry to industry.Credit terms refer to the priority agreed conditions under which the supplier sells on credit to the buyer. it is comparatively the costliest of all. Credit terms: . The term of trade are so determined that as far as possible it is not utilized for other purposes. Due date is the last date on which the buyer has to repay cash discount is the cash exemption offered by the supplier for the prompt payment. x per cent of discount is available if the credit is repaid on the yth date and in case the discount is not taken. It is spontaneous. Trade credit may also take the form of bills payable. Both advantages and disadvantages prevail in trade credit. The typical way of expressing credit terms is x/y net z i. The main advantage of trade credit is that it has generally no cost if discount is not a part of credit terms. but if a firm fails to avail itself of discount offered. Benefits and costs of trade credit: . The conditions are due and may be cash discount for payment before schedule.

The expansion in the firms sales cause its purchase of goods and services to increase which is automatically financed by the trade credit. The cost of credit is added to the price of goods or services. In case the trade credit involves cash discount.Working Capital Management The growth of trade credit is parallel to the growth of the firm’s sales. But actually it involves an implicit cost. Trade credit is the opportunity cost for the supplier in the form of the fund which he may invest in some profitable operation. Also it saves time and cost as it does not poses restrictions which are usually parts of negotiated sources of finance. So the complete analysis of cost should be carried out before going for a trade credit. Trade credit appears to be cost less as it doesn’t involve any explicit cost. Therefore he should know the implicit rate of interest which can be known by the formula:- Implicit rate=%Discount/100-%Discount*360/(credit perioddiscount period) This implicit rate of interest makes the decision of buyer easy whether to accept trade credit or to negotiate for lower purchase price. So here the buyer should avoid trade credit if he has sufficient cash. 74 . 3) Informality:- Trade credit being a informal and spontaneous of finance is very useful to small firms for their existence. So he transfers this cost to the buyer via increased price of goods supplied by him. On the other hand the decline in the firms sales causes decline trade credit. the buyer should face the decision whether or not to avail it after considering the primary and consecutive.

cheque returned.Under this arrangement the borrower is allowed to withdraw funds in excess of balance in his current account up to a certain specified limit during a stipulated period. they generally continue for a long period by annual renewals of the limit overdraft facility may or may not backed by surety limit of overdraft is fixed keeping in view the value of the security. Besides the bankers take into consideration the order book position. The amount of fund approved by the bank for the firm’s working capital called credit limit which may be either peak level or normal non-peak level. constraints in achieving production/cash/sales generation and different ratios. Though overdrawn amount is repayable on demand. credit practices followed. turnover. bills returned sales tax and income tax assessments. Interest is charged on daily balance on the amount actually withdrawn subject to some minimum changes. Banks usually deduct some money which is used for security. But in other cases working capital is required to be assessed with reference to production schedule sales and cash generation through taking into consideration various other factors including utilization of capacity and requirement of raw material. operations of accounts in bank. Working capital requirements are assessed as part of total financing package and the bank needn’t do a separate appraisal. margin and credit worthiness of the client company. business cycle pattern.Working Capital Management BANK FINANCE: Bank credit is the primary institutional sources for working capital in India. It is very flexible arrangement from the borrower’s point of view since he can withdraw and repay funds whenever he desires within the actual stipulations. Types of bank finance for working capital Different forms of bank finance are as follows:• • Fund based Non-fund based Fund Based:(1) Overdraft: . This is known as margin money. 75 .

(4) Demand Loans: - Bank advances a fixed amount against demand promising notes executed by the borrower by crediting the amount to loan account. therefore the interest is payable on the amount actually utilised by the borrower.A credit limit is fixed by bank out of which the client is allowed to draw cash against security of the hypothecation or pledge of the stock/merchandise goods. only a part of the whole amount is withdrawn and the rest is deposited in his cash credit account. To encourage bill as instrument of credit R. corporate securities or pledge. Bills may be either clean bills or documentary bills.I introduced the new bill market scheme in 1970. It was also encouraged that the scheme will facilitate banks to deploy their surpluses or deficits by rediscounting or selling the bills purchased or discounted by them.Working Capital Management (2) Cash Credit: .B. There is no commitment charge. The scheme was interested to reduce the borrower’s reliance or cash credit system which is susceptible to misuse. Thus the cash credit facility may be provided against hypothecation or both depending upon the comfortable position of the borrower’s position. Non Fund Based:(1) Letter Of Guarantee: . Here the entire amount is not withdrawn. This facility covers the bills for collection. Fresh loans are granted only when the existing amount is liquidated security for demand loans may be in addition to the promissory notes the life policies. (3) Bill Finances: .Bankers provide facility to provide finance against the bill drawn by the purchaser in favour of the client company.Banks commit on behalf of their clients to pay to the third party in the event of default by the client by the way of a written 76 .

The person who parts within the interest in the property is called mortgager and the person in whose favour the transfer takes place is the mortgagee. Therefore pledge creates some liabilities for the bank.Under letter of credit the issuing banks commit to the supplier of goods to accept client bill up to the amount stated in the letter of credit provided to those confirm to the terms and conditions stipulated in the letter.It is the transfer of interest in specific immovable property for securing the payment of money advanced.Working Capital Management instrument known as letter of guarantee. The pledging of the goods by the pawner to the Pawnee is a kind of bailment. The borrower who offers the security is called a pawner. The rights of the lending bank depend upon the terms of the lender. The goods hypothecated.Here the borrower is required to transfer the physical possession of the property offered as a security to the bank to obtain credit. 77 . Security Required In Bank Finance (1) Hypothecation: . Such letter of credit may be revocable. Although the bank doesn’t have physical possession of the goods it has the legal rights to sell the goods to retrieve the outstanding loan. irrevocable or revolving letter of credit depending upon the terms agreed to between the parties. while the bank is called the Pawnee. (2) Pledge: .Under this mode of security the banks provide credit to the borrowers against the security of moveable properties. Such letter of guarantee is for a definite period not more than one year. however continue to be in possession of the owner. It must take reasonable care of the goods. (3) Mortgage: . specific amount and definite purpose related to business transactions. usually inventories of goods. (2) Letter Of Credit:.

(5) Accrued Expenses: . 78 .Lien refers to the right of a party to retain goods belonging to another party until a debt a due to him is paid. (6) Deferred Income: . They are therefore shown as liability in the firm’s balance.Working Capital Management Mortgage is thus conveyance of interest in the mortgaged property is thus determined as soon as the debt is paid. Banks usually accept general lien. These payments are not recorded as revenue until goods and services have been delivered to the customers. On the other hands general lien can be applied till all dues are paid. Accrued expenses represent a liability that a firm has to pay for the goods or services it has already received. (4) Lien: . It can be general or particular. Accrued wage and salaries represent obligations payable by the firm to its employees. Advance payments made by the customers constitute the main item of deferred income.Accrued expenses and deferred income are other sources of short term financing. Particular lien is a right to retain goods until a claim pertaining to these goods is fully paid.Deferred income represents funds received by the firm for goods and services which it agreed to supply in future. Accrued taxes and interest constitute another source of financing. This is an interest free spontaneous financing.

28 806.27 This ratio indicates the liquidity of the firm. WORKING CAPITAL MANAGEMENT ANALYSIS Current Assets Ratio (Rs.61 1540.33 Current liabilities 864. It indicates the availability of current assets in rupees for every one 79 .51 4.39 940. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Current Assets 990.15 2.88 Current Ratio 1.04 3297.88 4974.08 3.52 1811.Working Capital Management 9.08 5041.25 3.15 1218. This is a ratio between current assets and current liabilities.

marketable securities. except in 2007-2008.55 1.56 2. An asset is liquid if it can be converted into call immediately or reasonably soon without a loss of value.68 Current liabilities 864.28 806. A ratio greater than 1 means that the firm has more current assets than claims against them.15 1218. In crores) Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 Liquid Assets 510.30 4339.39 940. In the same way the trend of current liabilities also increases in every year except in 2004-2005. In 2003-2004 it was Rs864.33 crores in 2007-2008. The current ratio is always in increasing trend.51 crores and it finally reaches to Rs5041. Other assets which are considered liquid or bookdebts.98 2706.Inventory (Rs.12 4354. Cash is the most liquid asset.88 crores in 2007-2008.83 This ratio established between quick or liquid assets and current liabilities. In 2003-2004 it was Rs990.39 crores in 2004-2005 and finally it reaches to Rs1540.61 1540. Inventories are not considered less liquid.59 2.28 and decreases to Rs806. Liquid Ratio Liquid Ratio = Liquid Asset/Current liabilities Where liquid Asset = Current Asset . From the above table it shows that current assets trend always increases from year to year.Working Capital Management rupee of current liabilities.03 1281.88 3. Standard Ratio 1:1 80 .88 Liquid Ratio 0.

In 2003-2004 it was Rs510.03 crores and finally it reaches to Rs4354.37 4123.47 3500.49 0.80 0.24 0.96 4851.70 Working Capital turnover indicates the velocity of the utilization of net working capital.59 in 2004-2005 and it goes on increases and reaches to 3.56 in 2006-2007 and at last year it decreases to 2.65 2357. Year Net Working Capital Sales Ratio 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 126.68 crores in 2007-2008. in 20032004 it was 0.23 1004.Working Capital Management From the above table we can see that the trend of liquid assets increases from year to year.55 it increases to 1. From the liquid ratio column it is seen that it is fluctuating i.19 4988. The ratio indicates the number and items the working capital is turned over in the course of a year.73 3755.04 0.45 3114.63 0. We can also know that current liabilities are always increasing except in 2004-2005.90 5940.e. The ratio measures the efficiency with which the working capital 81 .83 in 2007-2008 Turnover of Working Capital Turnover Of Working capital= Net Working Capital/Sales Where Net Working Capital = Current Assets – Current Liabilities.

The column of sales also shows as same as net working capital i.e. In NALCO project we see that the current ratio and liquid ratio of NALCO is below standard in 2003-2004 and for further years it was maintaining the standards of current ratio and liquid ratio. But if NALCO invested in some more risky project it must have earned some more money. 82 . it first increased from 2003-2004 to 2006-2007. where the standard for current asset is 2:1. it is seen that the liquidity position of the firm is quite good which is proved by both the current asset ratio and the liquid ratio. in case of NALCO.Working Capital Management is being used by the firm. A higher ratio indicates efficient utilization of working capital of a low ratio indicates the opposite. it is above 1 in every year except in 2003-2004. But as we know that NALCO is putting all the cash in bank. it is more than 2 in every year except in 2003-2004 and in case of liquid ratio. So.e. SUMMARY From the above tables. sales increases from 2003-2004 to 2006-2007. there is definitely idle cash. We can also see that working capital turnover ratio is always in increasing trend form. so it must have earning interest. then it starts decreasing in 2007-2008. The column of net working capital shows that it was in a up-down curve i. then it decreases in 2007-2008.

DEHEJA to examine the purpose and direction of commercial bank landing operations in the country. Submitted its reports which are known as the “DEHEJA COMMITTEE REPORT. non moving inventories of stock piling were indirectly encouraged by easy availability of finance.T. In other words. The financing of inventories was of proportion compared to sales or production. The study group revealed that though the commercial banks theoretically financed 83 .Working Capital Management 10.” The committee high lighted the security and profitability oriented approach which prevented them. DEHEJA COMMITTEE REPORT The national credit council constituted in October 1968 a study group under the chairmanship of V.

The banking system should turn to financing industry on the basis of a total study of the borrowers operations rather than a security concerned the situation did not improve and the recommendation were not enforced strictly.Working Capital Management industry for the short term needs. This committee recommended that these term loans should be paid back by the borrowers in the shortest possible time. a big portion of bank lending was actually long term in character short term borrowing lasted over years. in practice. they were hardly paid off as they were renewed respectively. 84 . Look the shape of long term loans.

This committee recommended that the current assets requirements should be financed by industry out of equity and far out of long term borrowings from term financial at situations. It was represented that the present state of capital market was such that there were no prospects in the force able future of raising sustainable funds through equity to finance the hardcore. P.TONDON the then chairman of PUNJAB NATIONAL BANK.L. The rate of plough back of earning was also inadequate to provide required resources. Thus the logic of the hardcore being financed by equity and/or long term sources of funds has gained recognition.Working Capital Management 11. 85 . The responsibility to provide the funds for the hardcore as this would inevitably tie up their resources in financing old units instead of furthering their objective of financing the promotion of new industrial activities. TONDON COMMITTEE REPORT The reserve bank of India set up a study group to frame guidelines for follow up of bank credit in July 1974 under the chairmanship of Mr. The firm financing institutions also look clear state that they would not undertake. The problem however is one of the difficulties in implementing it quickly in the context of the passive state of the capital market and the long term sources.

86 . It was true that NALCO is a huge profit making govt. that it cannot face any problem in future. magazines. but proper and effective management will help in achieving stars in future. So. Stores & Spares were not in a good position in the last 3 years. but as per my consideration in the year 2007-2008 the cash and bank balances. NALCO has to minimize that amount by collecting them. As per debtors turnover ratio it has been observed that a heavy volume of amount has been unpaid in the year 2003-2004 and it was again seen in the year 2007-2008. in these five year we observed the ratios. at NALCO ANGUL. Overall the management of NALCO was good. sector which producing Aluminium. The turnover ratios of Raw Material. From my consideration I collected previous five years data i. so it will create problem of financing.Working Capital Management 12. and further try to collect the credit amount in that particular period. So it is an advice from me to NALCO. portfolios of NALCO and also came to a conclusion. from 2003-2008. brochures. Here I collected all the documents related to my topic from various annual reports. so these through proper management. CONCLUSION The project undertaken by me is working capital management. and also from net.e. but the finished goods turnover ratio is in a proper increasing order. sales decreases but the liability increases as compare to its previous years.

Pandey  Financial Management: .google.nalcoindia.com Magazines: .Annual Report Of NALCO 87 . BIBLIOGRAPHY  Financial Management: .I.Sharma & Gupta  Websites: .com www.Working Capital Management 11.M.www.

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