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Working Capital Management
Of Jindal Steel & Power Limited
Summer Internship Project Report Submitted In Partial Fulfillment of the Requirements for the Post Graduate Diploma in Management Submitted by Parnay Deep Supervisors: Company Guide: Ankit (Sr.manager Finance)
KURUKSHETRA UNIVERSITY KURUKSHETRA
I have to thank KURUKSHETRA UNIVERSITY KURUKSHETRA for giving me an opportunity to undertake my project work and for giving me knowledge in the field of finance during my two years course.
I would like to thanks Mr. ANKIT, Sr.Manager - Finance for their valuable guidance and support in completion of live project at the Jindal Steel & Power Ltd. I would express my sincere thanks to all the staff members of Jindal Steel & Power Ltd, without their support, this project would not have been a success.
Last but not the least I would like to thank those person whose encouragement and ideas enriched my project.
Table of Content
Executive Summary Introduction 5 6 9 10 13 16 22 23 24 27 28 52 54 62 67 71 72 75 78 84 85 87 88 90 91
Objective of Study
Theoretical Framework of Working Capital Management The House of Jindal’s JSPL & its Products Research Methodology-
Analysis of Working Capital Management of JSPL Working Capital policy of JSPL Working Capital Borrowings from Bank Financial Ratio Analysis for Working CapitalAlternative Investment Policies Managing the Components of Working CapitalDetermination of Operating Cycle - Analysis of Asset Percentage Statement of Change of Working CapitalEstimating Working Capital- Regression Analysis Trend Analysis for Working Capital Current Asset Financing Findings and Suggestions - Limitations - Bibliography References - Glossary -
List of Tables
No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 35 Tables Name ESTIMATED CASH FLOW FOR APR 10 TO JUNE 10 Working Capital Borrowing from Banks Return on Working Capital Liquidity ratios Current Ratio Acid Test Ratio for JSPL Comparison between current ratio and acid test ratio Cash ratio for JSPL Working capital management ratios Current asset turnover for JSPL Working capital turnover for JSPL Working capital to gross sale for JSPL Working capital to cost of sale for JSPL Debtor’s turnover ratio for JSPL Average collection period for JSPL Creditor’s turnover ratio for JSPL Inventory turnover ratio for JSPL Inventory holding period for JSPL Current asset to total asset ratio for JSPL Cash to current asset ratio for JSPL Inventory to current asset ratio for JSPL Current liabilities to total liabilities ratio for JSPL Loan & Advances to Current assets ratio for JSPL Table showing alternative current assets investment policies Table showing different cash ratios Table showing payables management Table showing Inventory turnover ratio Table showing analysis of asset percentage Table showing analysis of working capital Table showing analysis of current assets Table showing analysis of current liabilities Table showing statement of change in working capital Table showing Production capacity and Sales Table showing Sales and working capital Page No 24 27 28 29 30 31 32 33 34 35 36 37 39 40 41 43 44 45 46 47 48 49 50 53 56 57 59 67 68 69 70 71 76 77
List of Figures No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 Figures Name Cash Cycle Working capital flows House of Jindal’s JSPL & its Products Working capital borrowing from Banks Return on working capital Current Ratio Acid Test Ratio For JSPL Cash Ratio for JSPL Current Asset Turnover Working Capital Turnover For JSPL Working Capital to Gross Sale for the JSPL Working Capital to Cost of Sale for the JSPL Debtor’s Turnover Ratio for the JSPL Average Collection Period for the JSPL Creditor’s Turnover Ratio for the JSPL Inventory Turnover Ratio for the JSPL Inventory Holding Period for the JSPL Current Asset to Total Asset Ratio for the JSPL Cash to Current Asset Ratio for the JSPL Inventory to Current Asset Ratio for the JSPL Current liabilities to Total liabilities Loan & Advances to Current Asset Alternate current assets investment policies Percentage of Current Asset to Fixed Asset Net working Capital Current Ratio Trend Cash Ratio Trend Current Asset Turnover Trend Working Capital Turnover Trend Debtor Turnover Trend Creditor Turnover Trend Inventory Turnover Trend Page No 7 12 13 16 27 28 30 31 33 35 36 38 39 40 42 43 44 45 46 47 48 50 51 53 67 68 79 79 80 80 81 81 82 .
Executive summary The management had to depend upon certain relevant information for taking various strategic decisions. By adopting various calculation and analysis and then making interpretation with the solution of specific problem I put my efforts on giving appropriate suggestion to the company. To this context I adopted various methods and techniques like Trend analysis by using statistical tool. My project was related to “Analysis of Working Capital Management of Jindal Steel Power Ltd. My attempt is aimed to analyze the various aspects of working capital management of Jindal Steel & Power Ltd. estimation of working capital. I found that the organization faces the problem of liquidity. Regression analysis.”. The report also consists of qualitative and quantitative analysis of Working Capital Management of Jindal Steel & Power Ltd. In the course of my study. It was found that the operating cycle of the company is bit disturbed. . analyzing of operating cycle and use of various ratio to put an exact picture of company. This project report is the outcome of my eight-week live project in Jindal Steel & Power Ltd. The information is made useful by its analysis and interpretation. a work towards the optimal level of working capital.
Cash . unpaid dividends and other items. Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. Some of the decisions taken in working capital management are: An adequate supply of raw materials. Debtors . while its efficient management may lead not only to loss of profits but loss to ultimate downfall in a going concern. Working Capital includes four balance sheet items: Stock . Cash to meet the operational payments. Working Capital is the name given to the "short-term" area of the balance sheet. etc.amounts owed TO the company. unpaid tax demands. cash holdings and short-term investments. partly completed production and finished goods awaiting sale. . water.amounts owed BY the company.bank balances. It may be regarded as a life blood of a business. Appropriate sources of fund to finance current assets. Analysis of working capital is of major importance to internal and external analysis because it is closely related to the current day-to-day operations. possibly. Creditors . rent.Introduction Working Capital: “Working Capital includes the current assets and current liabilities areas of the balance sheet. Working Capital can be called by its alternative name . telephone."Net Current Assets”. Investment in various current assets.) but also. mainly from customers in respect of sales made on credit. services (electricity. mainly to suppliers of raw materials. its effective provision can do much to ensure the success of a business. The ability to grant credit to customers.stocks of raw materials.
e. from cash to inventories and then to receivables and then back to cash. Advantages of adequate working capital: Increase in debt capacity and goodwill..Payment of cash dividend.Proportion of long term and short term funds to finance current assets. Cash Cycle: As working capital moves from one process to another. it changes from one asset to another i. . Payment of cash dividend. This movement is represented by cash cycle as below: Figure 1: Cash Cycle Objective of Working Capital Management: Two fold objective of working capital management a) Maintenance of working capital. and b) Availability of ample funds at the times of need. Uses of Working Capital: The typical uses of working capital are as follows: Adjusted net loss from operations Purchase of non-current assets: Repayment of long-term debt (debentures or bonds) and short-term debt (bank borrowing) Redemption of redeemable preference shares 5.
It should neither be excessive nor inadequate. . So company must assure its working capital is adequate for its operations. excessive working capital remains idle and earns no profits for the company. Meeting contingencies and adverse changes Available cash discount: Solvency and efficiency of fixed assets Attractive Dividend to Shareholders Disadvantage of inadequate working capital: Loss of goodwill and creditworthiness Firm can‟t make use of favorable opportunities Adverse effects of credit opportunities Operational inefficiencies Effects on financial capacity Non-achievement of Profit Target Dangers of Redundant working capital: Low rate of return on capital Decline in Capital and Efficiency Loss of Goodwill and Confidence Evils of Over-Capitalization Destruction of Turnover Ratio Company must have adequate working capital pursuant to its requirements.Increase in production efficiency Exploitation of favorable opportunities. Both situations are dangerous. While inadequate working capital adversely affects the business operations and profitability.
Providing suggestions to solve the problems of the company. To assess Liquidity position. operational efficiency. To see whether the company is prepared with enough working capital to face any kind of contingencies. To see how the day-to-day operations of the company takes place.Objective of Study This project was undertaken to analyze the working capital policies. To study the working capital management process in Jindal Steel & Power Ltd. The objective of the study is to provide the solutions for reducing down the duration of the operating cycle. to analyze the working capital position of the company and the liquidity position. finding out the problems that the company is facing in managing the working capital and showing trend of particular ratios in future and at same suggesting them to solve their problems. To compare the performance of W/C for a particular year with previous years. Long term solvency. and overall profitability of JSPL. To study the working capital concept. . working capital management of the company and to reduce down their problems and finding the solutions with respect to the working capital management of the company.
Working capital is just like the heart of the business. the business can hardly prosper and survive. retained earnings.Theoretical Framework of Working Capital Management Many profitable companies fail each year because their management teams fail to manage the area of working capital. and increases liquidity of the business concern. reduces risk of payment. Working capital management thus throws a challenge and should be a welcome opportunity for a financial manger that is ready to play an important role in organization. The term working capital is closely related to the term funds and has two meaning. A) Long term Permanent Working Sources of Capital: Long-term sources of permanent working capital include equity and preference shares. Sources of Working Capital: The company can choose to finance its current assets by long-term or short-term sources. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly. It is an index of the solvency of a concern. The variable working capital would . Financing through long-term means provides stability. Various types of long-term sources of working capital are as follows: Issue of shares Retained Earnings Issue of Debentures Long term debts Other sources B) Short-term Temporary Working Source of Capital: Temporary working capital is required to meet the day-to-day business expenditures. If it becomes weak. or a combination of them. debentures and other long-term debts from public deposits and financial institutions. It is used to mean current assets minus current liabilities.
Fund flow analysis shows how much funds have been obtained from different sources to finance working capital and how they have been utilized. advances from customers. and only for the period needed. Reserves and other funds Sources of Additional Working Capital: Existing cash reserves Profits (when you secure it as cash) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans Various tools to measure & analyses working capital of a firm: Fund Flow Analysis: This technique helps to analysis the variation in working capital contents between two balance sheet dates. Business credit papers and customer credit are other sources of short-term working capital. Credit from suppliers.finance from short-term sources of funds. promissory notes. . bills of exchanges. Some of the sources of temporary working capital are given below: Commercial Banks: In the form of short-term loans. etc helps to raise temporary working capital. and overdraft and through discounting the bills of exchanges. cash credit. It has the benefit of low cost and establishes closer relationships with bankers. Public Deposits Various Credits: Trade credit. Working Capital Flows: Information regarding the financing and investment activities of an enterprise and the changes in the financial position for the period of time is essential for financial statement. used by owners as well as creditors for making business decisions. Due to need as well as importance of fund flow analysis finance managers of almost all the organization use it to make sound financial decisions.
Further. Moreover. Working Capital Flows Figure 2: Working capital flows Opening Balance of Working capital Changes in Working Capital Closing Balance of Working Capital SOURCES OF WORKING CAPITAL Operations of the business Issue of long-term debt Sale of fixed investments Sale of long-term investments USES OF WORKING CAPITAL Redemption of long term debt Investments Acquisition of fixed assets Payment of dividend . such as whether the capital is being used most efficiently and whether the current financial position of the firm has improved. this technique can be used only by the internal administration in its control of working capital. some important and significant question remains unanswered.
THE HOUSE OF JINDAL’S Figure 3: House of Jindal’s Shri. Naveen Jindal .
New directions. For that. O.P. Mr. From mining of iron-ore to the manufacturing of value added steel products. the group today is a US $ 12 billion conglomerate Jindal Organization aims to be a global player. with its overseas manufacturing facilities and strategic manufacturing and marketing alliances with other world leaders. Jindal has a pre-eminent position in the flat steel segment in India and is on its way to be a major global player. it is committed to maintain international quality standards. amalgamating and growing. the Jindal Organization is a celebrity. efficient delivery schedule. Jindal Organization set up in 1970 by the steel visionary late. new objectives. but the Jindal motto remains the same – “We are the Future of Steel”. Ranked 4th amongst the top Indian Business Houses in terms of assets. competitive price and excellent after sales service. integrating. the focus at Jindal has always been steel. The group has been technology driven and has a broad product portfolio. Haryana to present multi-billion. Jindal has grown from an indigenous single unit steel plant in Hisar.ORGANISATIONS PROFILE The House of JINDAL‟s Group profile: In the world of business. Yet. multi-location and multi-product steel conglomerate and the organization is still expanding. .
tracking and adopting the latest in world technology.The Technological Edge: The hallmark of the organizations achievement and growth has been its ability to develop and adopt the latest technology. Jindal Steel and Power Limited Jindal Strips Limited Saw Pipes Limited Jindal Iron & steel co. The Jindal team embodies one of the most coveted talent pools of technological acumen available in the country today with expertise that have enabled the organization to put up large-scale projects in record time. research is a self-imposed discipline. Ensuring synergy amongst its various business ventures spread over 13 plants at 11 pivotal locations in India. the match the demands of a dynamic and burgeoning Indian Industry. a challenge it has pursued with a pioneer‟s zeal. Seeing doors where others see walls At Jindal. For instance. attempting break through products and processes. together with its R&D capability has given it a head start over others. Jindal Family: Jindal organization has expanded and diversified into core business areas. Exploring new ideas. Jindal Power Limited Nalwa Sponge Iron Limited Jindal Stainless Limited Jindal United Steel Corporation Jindal Thermal Power Company Limited Jindal Praxair Oxygen Company Limited Vijayanagar Minerals Private Limited . Jindal‟s R&D investment. anticipating customer needs with constefficient. reliable solutions and promoting engineering skill and manpower caliber.
a O.P. 1998.e. Power Generation plants with a capacity of 290 MW. April 2. Jindal promoted JSPL as Orbit Steel Private Limited (OSPL) in 1979.000 TPA with Blast Furnace of 250. International Collaboration: . & it is the only sponge iron producer in the country with its own raw material source and power generation making it one of the most cost effective producers of sponge iron in the country.70.000 TPA capacity.000 tons per annum. The Company has plant at Raigarh (Chhattisgarh) for manufacture of sponge iron with an installed capacity of 13.P. O. Steel Melting plant with a capacity of 24.f. was formed by hiving off the Raigarh and Raipur facilities of Jindal Stainless Limited into a separate Company as part of a scheme of arrangement. Jindal Group Company.00.JINDAL STEEL & POWER LTD Company Profile: Mr. OSPL became a public limited company in 1998 and its name was changed to the current JSPL (Jindal Steel & Power Limited) Jindal Steel & Power Limited (JSPL). w.
providing enhanced safety. ushering a new era in safer rail-travel and making introduction of fast trains in India a reality.JSPL produces rails. What differentiates JSPL‟s 121 m long rails from others is that there is a drastic reduction in the welded joints. H-beams. Japan for technology transfer to produce superior quality. cost reduction and travel comfort. The beams are cost effective and provide design-flexibility. Company Products: Rail: Giving impetus to the significant rail sector. along with Parallel Flange Beams. Columns and Sheet Piles for the first time in the country. JSPL has pioneered the manufacturing of 121 metre long track rails in the Indian sub-continent. Our products are subjected to stringent quality norms and can therefore match all international standards Parallel Flange Sections JSPL pioneered the production of medium and large size Hot Rolled Parallel Flange Beams and Column Sections (H-Beams) in India. JSPL has entered into technical services assistance agreement with JFE (earlier known as NKK Corporation). columns and sheet piles with JFE's technical services assistance. world‟s longest rails of 120m finished length. This technical collaboration shall enable production of long rails requiring far less joints in tracks. . The world‟s longest track rails are a testimony of JSPL‟s manufacturing capabilities where continuous innovation is a practice rather than an exception.
3000 mm. (JPL) have come up in a big way and are producing about 1400 MW power through both captive and commercial facilities. The total production capacity of the plant is 1 MTPA. JSPL adheres to stringent international standards and the steel grades are manufactured under various specifications like EN. In the beginning it was a captive power facility using waste heat from the rotary kiln boilers and the coal rejects of the washery. for the first time in the private sector. LRS. ASTM. JIS. ABS. Over the years however. BS. etc. Power: In order to contribute significantly to India's growing need for power we started power generation over a decade back.5 and 3 metres width. The products are of premium quality. DNV.the -art plate mill that produces plates and coils of 3. owing to its sound steel refining properties. Plates & Coils JSPL is equipped with India's first 'one of a kind' stateof. . respectively. JSPL epitomizes its performance-oriented service by producing plates ranging from 7-120mm in thickness & widths of 1500 -3500 mm and coils varying in thickness of 7 -25 mm and widths of 1500 . Jindal Steel and Power Ltd (JSPL) and its subsidiary Jindal Power Ltd.
JSPL now offers Wire Rods from its first unit of 6 Million Tonne Steel Plant at Patratu. Sponge Iron: JSPL has world's largest coal-based sponge iron manufacturing facility and stands out as the market leader in coal-based sponge iron industry within India. Awards & Recognition: The Forbes Asia's 'Fabulous 50' international award 2009 Most promising entrant into the big league. 2009 . with its own captive raw material resources and power generation capacity helping the company to monitor both price and quality of its products. Wire rods: In line with our corporate philosophy of continuing efforts to expand our product range to offer a complete product basket to the customer.75 million tonne per annum capacity Rail & Universal Beam Mill and 1. Jharkhand.0 million tonne per annum capacity Plate & Stackle Mill. Efficient backward integration has rendered JSPL as the only sponge iron manufacturer in the country. Semi-Finished Products JSPL has a capacity to produce about three million tonne per annum of semis which are primarily used for captive use in JSPLs‟ 0.
1 billion (Rs.5 Lac MTPA Blast furnace A 12.0 Lac TPA Rebar. An MOU has been signed between JSPL and the Government of Chhattisgarh for setting up an additional 7. TMT and Wire Rod Mill 4. 2004. by the Minter of Labour IIM Quality Award for 2002-03 by the Indian Institute of Metals First Prize in the IIM Awards 2001 for Quality by the Indian Institute of Metals Future plans: 10. 30. third prize in the private sector-manufacturing segment. 2003. 26. National Award for Excellence in Cost Management 2005. 6 MT sponge iron and 10 MT iron ore pellet plant.0 MTPA steel plant in phases and a 1600 MW power plant with an investment of over US $ 5. An 11 million tonne integrated steel plant and 2600 MW captive power plant in phases in Jharkhand .00 billion (Rs.5 million tonne integrated steel plant and 2600 MW captive power plant in phases in Orissa with an investment of US $ 8. . 450 MW power plant.20 billion (Rs.000 crore).00 billion (Rs.0 Lac MTPA Coke Oven Plant 12.000 crore). South America. in the coming years for mining and setting up of an integrated 1.000 crore). 50 MW capacity Power Plant based on fuel gases of coke oven JSPL plans to invest US $ 2.Golden peacock Environment Management Award 2008. The first phase of 3 million tonne is expected to be commissioned by 2011. 2005 and 2009 by the Ministry of Power. Government of India National Safety Awards 2003-2004.500 crore) in Bolivia. 2002. with an investment of US $ 6. by the Institute of Cost & Works Accountant of India (ICWAI) National Energy Conservation Awards for 2001. 10. 40.0 Lac MTPA capacity Plate Mill 7.7 MT steel plant.
I required the annual report of the company.Research Methodology Information Requirement: Since my objective was to analyze the working capital policies. its nature. the performance of the company in last few years and what policy they adopt and studying what role the working capital plays in a manufacturing concern. working capital management of the company and to reduce down their problems and finding the solutions with respect to the working capital management of the company. the statement of working capital changes. its functioning. . So. analysing the operating cycle. So. the company provided me the required information. Research Methodology: The methodology adopted for the project was divided into two types of analysis: Qualitative and Quantitative Qualitative analysis required studying the business profile of the company. performing the analysis for estimating the working capital requirement. Then relevant calculations and analysis were done. the hierarchy and the functioning of the management of the company. Quantitative analysis required analyzing the current assets and the current liabilities of the company. to analyze the efficiency of the management in managing the working capital and to find out what are the problems that the company is facing. CMA of last few years and its working capital data to analyze the position of the company and correlate the theoretical and practical aspects of working capital management. analyzing the Working Capital Ratios to reveal the financial position and soundness of the business and give a good basis for quantitative analysis of financial problems and use of modern working tools to show the trend of working capital for upcoming year with adopting trend analysis.
Analysis of Working Capital Management Methods adopted for Working Capital analysis: The broad range of project management and financial advisory services include: Working Capital policy Financial Ratio analysis for Working Capital Management Managing the components of Working Capital of JSPL Determination of Operating cycle of JSPL Statement of change in Working Capital Estimating Working Capital needs. Permanent & Variable Capital Regression Analysis Trend Analysis of Working Capital Management .
72 34.00 58.00 58.30 243.00 SUB TOTAL 840 840 840 FUNDS REQUIREMENT FOR THE MONTH OPEX PAYMENTS NOT UNDER L/C RAIGARH EXCISE/ STAT TAXES PAYMENT RAIGARH OTHERS TAMNAR RAIPUR BABIL TENSA PATRATU DELHI 39.00 58.00 RS IN Crores.85 20.57 11. May-11 PROJECTED 750.00 12.00 6.78 115.00 84.00 SUB TOTAL 403.00 - - 39.00 19.00 SUB TOTAL 160.30 243.88 26.00 32.89 41.00 39.36 60.32 PROJECT PAYMENTS NOT UNDER L/C .30 243.35 27.00 Jun-11 PROJECTED 750.54 505.46 6.Working Capital policy of JSPL Table 1: ESTIMATED CASH FLOW FOR APR 11 TO JUNE 11 ESTIMATED CASH FLOW FOR APRIL 10 TO JUNE 10 PARTICULARS COLLECTION FOR THE MONTH STEEL -DOMESTIC -EXPORT POWER Apr-11 PROJECTED 750.52 395.48 444.00 32.00 49.41 60.13 46.06 14.00 10.30 61.50 0.43 27.85 20.46 309.70 SURPLUS/(DEFICIT) FROM OPERATIONS PROJECT PAYMENTS UNDER L/C RAIGARH RAIPUR ANGUL PATRATU BARBIL 269.00 15.00 32.00 15.42 127.76 0.00 11.80 570.35 397.85 20.41 27.60 0.46 5.79 12.00 11.12 0.46 6.76 389.50 15.90 RAIGARH-COKING COAL PAYMENT UNDER LC SUB TOTAL 167.43 104.
57 70.00 - 150.23 (24.66 18.32 162.74) (1.00 20.81) 52.00 15.65 204.15 429.00 8.77) 425.58) 167.99 34.00 - SUB TOTAL 230.55) (498.78 77.52 SUB TOTAL INTEREST PAYMENTS CORPORATE TAX 481.09 215.00 - 150.55) (434.00 SUB TOTAL 251.66 18.50 0.67 100.55 45.33 45.00 0.00 150.30 46.69 46.737.66 - 604.80 40.00 93.92 124.00 115.74 632.00 15.86 135.00 SUB TOTAL 40.92 .00 0.RAIGARH ANGUL PATRATU BARBIL RAIPUR FOREIGN PROJECTS REAL ESTATE GLOBAL LAW SCHOOL/WINDMILLS 86.29) (932.45 389.67 GROSS OUTFLOW CAPITAL INFLOW LIC NCD TERM LOANS FOR PROJECTS STL/BUYERS CREDIT FOR OPERATIONS (664.11 (115.00 15.82 (142.55) (648.00 20.40 292.00 4.84) (804.00 150.86 - 703.80 320.08 123.00 20.29) 420.00 269.74) 230.29) (954.13 85.00 169.70 107.60 0.60 40.79 TOTAL PROJECT OUTFLOW SURPLUS/(DEFICIT) FROM OPERATIONS & PROJECT FLOW FINACING OUTFLOW PRINCIPAL PAYMENTS LONG TERM LOAN/ECB/FCTL BUYER'S CREDIT / SHORT TERM LOAN/JPL 411.60 43.00 NET SURPLUS/(DEFICIT) AFTER COMMITTED CAPITAL FLOWS NET CUMMALATIVE SURPLUS/(DEFICIT) DEFICIT TO BE FINANCED BY Probable Buyers Credit Coking Coal Probable Buyers Capital Goods Probable Rollover of Buyers Credit (434.50 40.27 35.
34 . Working capital borrowing from Banks Table 2: Working Capital Borrowing from Banks WORKING CAPITAL BORROWINGS FROM BANKS (Rs.91 31st march 2007 118.27 (31.03) (323. 2008 213.59 31st March.03) First they collect details of projected cash inflow and outflow from their different branches and make Project for the Cash Flow for three months. in Crores) 31st march 2004 56.1021 31st march 2005 92.25 31st March. Now you see the above table there is deficit in last months. inter corporate loan and commercial paper etc.0640 31st march 2006 43.77 (379.26) -20 -50 (449.STL CP SUB TOTAL 100.81 31st March.78 425. To overcome this deficit they will borrow from bank.50) 55.00 521. If the fund is internally available no process takes place and if not available then they analysis all the option like short term loan.82 250.26 31st March.00 466.27 87. Then the process of procurement of fund takes place. 2009 44. 2011 251.72 Net Deficit Net Cummulative Deficit JPL WC Limit Net Cummalative Deficit 87. 2010 114.
st March.93 * 100 2099.74 % = 341.st March. Financial Ratio Analysis for Working Capital Management Return on Working Capital: Return on Working Capital (ROWC) = PBIT / Working Capital * 100 Table 3: Return on Working Capital Return on Working Capital For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 405. stores and spares and book debts.11 / 553.14 % = 1348.65* 100 = 393.11/ 320.00 100. Secured by hypothecation by way of first charge on stocks of finished goods.Figure 5: Working capital borrowing from Banks Working capital borrowing from Banks 300.19 * 100 1095.98 % = 310.00 Working Capital Borrowing 31st march 2003 31st march 2005 31st March.00 200. In 2005 it was highest but in later stage the bank borrowing had come down as low as 43 crores.47/ 155.00 50.16 / 396. and guaranteed by Directors and Second charge in respect of other moveable and immoveable assets.78 * 100 2170.52 / 142. raw materials.68 * 100 1711.00 250.49 % = 308.15 * 100 743.16 % = 522.00 150. work in progress.68 % = 205.25 * 100 815.55 / 103.2010 Analysis: In the year 2004 higher percentage of working capital was financed by bank borrowing. This shows that after 2006 onwards higher percentage of working capital is financed by their own cash inflow which reduce the liquidity problem as well cost of borrowing.79 / 699.84 % .00 0.2009 31st march 2004 31st march 2006 31 2007 31 200831 st March.
Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities + Proposed Dividend + Provision for Tax. Current Assets = Inventories + Debtors + Cash & Bank balance + Current Investments + Advance Income Tax + Advance recoverable in Cash.
Figure 6: Return on working capital
Return on Working Capital
1600 1400 1200 1000 800 600 400 200 0 1348.84
Rrturn (in %)
522.68 393.16 205.74 2005 2006 2007
341.49 310.14 308.98 2008 Years 2009 2010 2011
There has been a initial increase in the Return on Working Capital during 2006,which was followed by a decline in ROWC between the two years – it reduces more than half during 2007. This respectable situation arises because of increase in current liabilities in past years as company is having proposal of lots of investment due to which company is financing its project and there is less tendency of free cash flow. During 2008 there was increase in the ROWC, which later decreased and was maintained steady.
Snapshot of Liquidity Ratios:
Table 4: Liquidity ratios JSPL Basic Ratios Current ratio Acid test ratio Cash ratio 31 Mar 05 1.20:1 0.81:1 0.044:1 31 Mar 06 1.24:1 0.80:1 0.056:1 For the year ended 31 Mar 07 1.39:1 0.82:1 0.031:1 31 Mar 08 1.23:1 0.76:1 0.038:1 31 Mar 09 1.87:1 1.27:1 0.35:1 31 Mar 10 1.19:1 0.85:1 0.087:1 31 Mar 11 1.03:1 0.73:1 0.013:1
The current ratio is also known as the working capital ratio and is normally presented as a real ratio.
Table 5: Current Ratio Current Ratio For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 Current Assets: Current Liabilities Current Assets: Current Liabilities Current Assets: Current Liabilities Current Assets: Current Liabilities Current Assets: Current Liabilities Current Assets: Current Liabilities Current Assets: Current Liabilities Figure 7: Current Ratio 599.82:496.66 736.4:594.15 1403.56:1007.37 1698.51:1377.83 3060:1636.17 4216.08:3516.15 4603.1:4447.45 1.20:1 1.24:1 1.39:1 1.23:1 1.87:1 1.19:1 1.03:1
1.87 2 Current Ratio 1.5 1 0.5 0 2005 2006 2007 2008 Years 2009 2010 1.2 1.24 1.39 1.23 1.19
The current ratio is the measure of whether a company has enough short-term assets to cover its short-term debt and is index of strength of working capital. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. A ratio of greater than one means that the firm has more current assets then current claims. Current ratio of the company has increased from 1.20 in Year 2004-05 to 1.39 in Year 200607. Current Ratio of the company depicts that for every Re.1 worth of current liability there are assets worth Re.1.39. The company has sufficient liquidity as the ratio is increasing. This year there is an increase in ratio due to almost double inventory level in current year in comparison with previous year. But during the year 2009 there was steep increase in the current ratio of the company, not due to increase in the inventory level, but due to huge holding of the cash which was recovered from the debtors & not invested during that year. During last year i.e. 2011, the current ratio was found to be decreased because of the increase in sundry debtors and decrease in current investments..
In order to increase current ratio current assets should be increased. If we look into the detailed schedule of current assets then we can find out that major portion of current assets is due to debtors and inventories. Company should make market survey and should decide first that what should be the optimum amount of finished goods so that major portion of it can be sold off in the market. This will help in reducing the locking of funds or working capital in the finished goods.
Acid Test Ratio:
Table 6: Acid Test Ratio for JSPL Acid Test Ratio For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities Current Assets - Stocks: Current Liabilities 403.32:496.66 478.85:594.15 834.91:1007.37 1056.07:1377.83 2079.02: 1636.17 3005.62: 3516.15 0.81:1 0.80:1 0.82:1 0.76:1 1.27:1 0.85:1 0.73:1
Figure 8: Acid Test Ratio For JSPL
1.5 Acid Test Ratio 0.81 0.8 0.82
Acid Test Ratio
0 2005 2006 2007 2008 Years 2009 2010 2011
Acid test ratio is a more rigorous test of liquidity than the current ratio and when used in conjunction with it, gives a better picture of the firm s ability to meet its short-term debts out of short-term assets. This ratio is used to determine risk that is not detected by the Working Capital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm can easily or readily meets all of its current liabilities. Here JSPL had its acid test ratio around 0.8:1 during the year 2005-2008 which is constant from last three years, which indicates company was not having satisfactory financial position. But during the year 2009, the acid test ratio of the company was highly excellent and was able to pay its current liabilities which was followed by a decrease in the ratio. So it should be looked at with extreme care and also implies that current assets are highly dependent on inventory. .
80 0.15 60. tells us that the JSPL stocks are large.10: 4447.038:1 0.23 1. Normally that is not a good thing.03 Acid Test 0. Cash Ratio: Table 8: Cash ratio for JSPL Cash Ratio For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 Cash: Current Liabilities Cash: Current Liabilities Cash: Current Liabilities Cash: Current Liabilities Cash: Current Liabilities Cash: Current Liabilities Cash: Current Liabilities 21.39 1.87 1. Additionally.5% of current assets in 2008. The fact that the differences between the current and acid test ratio is around .91: 1636.83 577.Comparison between Current Ratio & Acid Test Ratio: Table 7: Comparison between current ratio and acid test ratio Comparison 2005 2006 2007 2008 2009 2010 2011 Current 1.056:1 0.013:1 .97:1377.37 52.96: 3516. meaning that the JSPL has a weak liquidity position than it had before. which is large.29:594.81 0.15 31.19 1.031:1 0.17 308. the acid test ratio has decreased over the three-year period.45 0.89:496.24 1.087:1 0.044:1 0.27 0.35:1 0.66 33. that's a huge level of stock holdings.73 JSPL's liquidity position had worsened when looked at its current ratio.76 1. The stocks are worth around 40.30:1007. The acid test ratio has fallen from 2004 to 2005.85 0. Current assets might not be that liquid since almost 80% of them are debtors.82 0.4.20 1.
which only increase the carrying cost.93 times 31 Mar 11 1.05 0.013 2009 2010 2011 Analysis: As cash is being the most liquid asset.97 Times 31 Mar 09 1.031 0.07 0.62 times 47. It is the notable point for the company as its current liabilities are much higher than the cash in hand. It can create problems in the future payments of current liabilities.77 times 12. Major portion of company‟s current assets goes to inventory and debtors.087 0.53 times For the year ended 31 Mar 31 Mar 08 2.01 31 Mar05 3. Company need to reduce these assets to their optimum level.08 0.23 times 31 Mar06 3. But during year 2009 the company carried large amount of cash in hand which was some what good as compared to the previous year but during the last year 2010.Figure 9: Cash Ratio for JSPL 0.2 0. the cash ratio was found to be decreased due to increase in current liabilities to large extent.07 0.038 0.3 0.76 times 9.5. quoted investment has been taken as marketable securities.81 times 10.04 Times 10.33 times .35 Cash ratio 0.06 0.4 Cash Ratio 0. Other Snapshot of Working Capital Management ratios Table 9: Working capital management ratios JSPL Asset Usage Current Asset Turnover Working Capital Turnover Efficiency Working capital to Gross Sale 0.12 0. From the above calculation it is clear that company‟s cash ratio had remained very low in comparison to the standard of . In our case the company carried small amount of cash during the year 2005-2008 so it was not having a favorable cash ratio.056 0.044 0.1 0 2005 2006 2007 2008 Years 0.77 times 31 Mar 10 1.92 times 07 1.84 times 6.51 times 15.
013 Times 0.43days 1.28 times 0.75/3060 7653.81 Days 18.4 times 0.81 times =1.36 times 0.82 2590.4 2589.30 times 5.17 times 0.12 days 10.77 times 0.036 times 0.24 times 0.98 days 13.14 days 8.16 times times 0.16 times 0.83 times 30.36 times 5.25 Times 0.25/736.1 = 3.95days 2.2 times 0.13times times 0.54 times 64.10times times 0.16 times 0.42 times 0.29/1403.07 days 0.26 times 0.41days 1.66 days 1.51 times 65.09 times 27.55 times 18.50days 2.times Working Capital to Cost of Sale Stock/Debtors/Creditors Debtors‟ Turnover Average Collection Period Credits‟ Turnover Inventory Turnover Inventory Holding period Ratio to analyze WC Structure Current Asset to Total Assets Ratio Cash to Current Asset Ratio Inventory to Current Asset Ratio Current Liabilities to Total Liabilities Loan & Advances to CA ratio 0.28 times 4.25 times 0.55 times 79.16 times 5.073 Times 0.81/1698.42 times 56.13 times 19.51 5410.46 Times 0.64 times 41.34 times 0.28 times 0.32 times 0.03 times 11.19/4216.75 times 41.47 times 6.22 times 0.78days 1.045 times 0.25 times Times 0.34 times 0.90/4603.97 times 60.33 days 0.75 Times 0.56 3519.99 times 18.47 Times 65.022 times 0.37 times 0.28 times 0.98 Times 32.77times = 3.30 times 5.15 times times 0.62 times .83 Times Working Capital Management I: Asset Usage Current Asset Turnover: Turnover Current Asset Turnover = Current Assets Table 10: Current asset turnover for JSPL Current Asset Turnover For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 2264.84 times = 2.20days ---6.32 times 56.72/599.76 times =1.188 times 0.18 times 0.07 times =1.47 times 0.32 times 0.96 days times 0.51 times = 1.031 Times 0.25 times 0.08 7484.14 times 8.
76 1.78 7653.97times = 9.92 times = 6.53times = 10. Working Capital Turnover: This ratio signifies how effectively working capital is being used in terms of the turnover.19 3519. The graph shows the company has managed to higher the ratio during the previous years however this year due to non-proportionate change in current assets and turnover the ratio declines to 1. Sales Working Capital Turnover = Working Capital Table 11: Working capital turnover for JSPL Working Capital Turnover For JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 1261.25 / 396.77 4 Current Assets Turnover (times) 3.81 1.33 times .5 2 1.07 1.81 / 320.75/553.72/ 142.84.93 times = 47.93 7367.5 3 2.5 1 0.59/155.62 3.84 2.51 Current Asset Analysis: High current assets turnover ratio is more judicious and shows efficiency of management and proper utilization of the assets. Due to more inventory this ratio falls.19/699.25 2590.67 5410.Figure 10: Current Asset Turnover 3.77 times = 10.61/ 103.5 0 2005 2006 2007 2008 Years 2009 2010 2011 1.23 times = 15.65 = 12.15 2264.
25 / 2775.93 2010 2011 Working Capital Turnover Analysis: What this ratio tries to highlight is how effectively working capital is being used in terms of the turnover it can help to generate: no ideal values here but the higher the better.92 10.05 = 0.06 times = 0.06 142.15 / 1547.Figure 11: Working Capital Turnover For JSPL 50 45 40 35 30 25 20 15 10 5 0 Working Capital Turnover 47. Management may think of increasing the sales in the market or it is going for certain expansion plans.12 times . The declining working capital turnover ratio in JSPL indicates that working capital is not being utilized properly over the period of time. the working capital turnover ratio was found to be sharply increased.05 times = 0.23 6.97 12.32 396. Working Capital Management II: Efficiency Working Capital to Gross Sale: Working Capital Working Capital to Gross Sale = Gross Sale Table 12: Working capital to gross sale for JSPL Working Capital to Gross Sale for the JSPL 31 March 2005 31 March 2006 31 March 2007 103. During 2011. surely.53 2005 2006 2007 2008 Years 9.19 / 3274.33 Working capital Turnover (Times) 15. this shows that the working capital has been utilized efficiently by the management.77 2009 10. But since 2009 the company managed to increase there working capital turnover as compared to 2008.
07 times = 0.06 0. the ratio was found to be decreasing and it decreased to 0.12 0.07 0.67 = 0.01 2005 2006 2007 2008 Years 2009 2010 2011 0.78 /6743.22 699. Since 2008.07 Working capital to Gross Sale 0. Thus the company has managed to utilize their working capital more efficiently as compared previous years.12 0.06 0.08 0.08 0. Working Capital to Cost of Sale: Working Capital Working Capital to Cost of Sale = Cost of Sale .93/8953.68 / 4336.05 there is a matter of concern but here also JSPL is far better than the industry‟s average.1 0.08 times = 0.12 from .02 0 Analysis: The Company was showing a favourable trend as it was showing decline in the financial periods till 2006 but now as the ratio increased to .54 553.31 March 2008 31 March 2009 31 March 2010 31 March 2011 320.04 0.65/8595.07 times = 0.01 in 2011.14 working capital to gross sale (in times) 0.01 times Figure 12: Working Capital to Gross Sale for the JSPL Working Capital to Gross Sale 0.77 155.05 0.
16 times =0.16 320. This shows that the working capital used by them is less as compared to the cost of sale.99 699.1 0.10 times =0.41 155.65 / 4872. Working Capital Management III: Stock/Debtors/Creditors Debtor’s Turnover: Debtor’s Turnover = Sales Debtors .15 / 760.93 / 5195.13 0.05 0 2005 2006 2007 2008 Years 2009 2010 2011 0.78 / 3296.15 0.1 0.13 times = 0.25 Analysis: The Company is showing a favorable trend as it is showing decline in the ratio during the financial periods 2007-2011.15 0.25 0.13 Working Capital to Cost of Sale 0.05 396.25times =0.15 times =0.2 0.Table 13: Working capital to cost of sale for JSPL Working Capital to Cost of Sale for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 103.93 553.16 0.13 times =0.03 0.3 0.75 142.19 / 1583.68 / 2116.25 / 1363.77 = 0.03 times Figure 13: Working Capital to Cost of Sale for the JSPL Working Capital to Cost of Sale Working Cpitak to Cost of Sales (in times) 0.
87 / 287.99 20 15 10 5 0 2005 2006 2007 2008 Years 2009 13.98 times = 18.36 = 5.83 2010 2011 Debtors’ Turnover Analysis: Firstly. On the other side during 2007-2010 turnover is increasing. this shows the debt collecting machinery of the company is not working efficiently.46 7367.99 times = 19. on average. shorter the time between sales and collecting cash.61 / 211.64 5. Soundness of this ratio is more depend on the business policy and the terms with the clients.16 2264. which implies higher the turnover.98 8.91 2590. and it means that.59/622.25 / 299.31 5459.Table 14: Debtor’s turnover ratio for JSPL Debtor’s Turnover Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 1261.19 / 391.55 Debtors turnover (in times) 11.54 3519.97 times = 13.72 / 172.09 times = 8.81 / 320. the ratio seems to have change by going from 5 to 19 times over the 6 years. .97 19. the JSPL‟s debtors are taking less days to pay their accounts.38 7653. It shows the company‟s debt-collecting machinery has improved through years. the debtors turnover ratio has decreased sharply due to increase in sundry debtors.09 10.64 times = 10.55 times = 11.83 times Figure 14: Debtor’s Turnover Ratio for the JSPL 18. But during last year 2011.
43 2004 2005 2006 2007 Years 2008 2009 2010 Analysis: The average collection period measures the quality of debtors since it indicates the speed of their collection.55 360 / 11.98 360 / 13.78 days = 18.95 18.09 360 / 8. The trend of JSPL was showing that the company was a success in decreasing the average collection period.50 days = 41. But during last year 2011.41 days = 30. the average collection period of the company has increased from 18. the better the quality of debtors.78 27.66 days = 32.64 360 / 10. which represent sound collection policy of the company.99 360 / 19.83 = 60.66 32.41 30.2 Average Collection Period 41. .43 days which is not a good sign for the company. The shorter the average collection period.20 days = 27. as a short collection period implies the prompt payment by debtors.5 18.98 360 / 18. Average Collection Period: 360 Avg.43 days Figure 15: Average Collection Period for the JSPL 70 Average Collection Period (in days) 60 50 40 30 20 10 0 60. Collection Period = Debtor Turnover Table 15: Average collection period for JSPL Average Collection Period for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 360 / 5.95 days = 18.41 to 30.
16/1222. Creditor’s Turnover: Creditor’s Turnover = Purchases Creditors Table 16: Creditor’s turnover ratio for JSPL Creditor’s Turnover Ratio for the JSPL 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 411.91/461.14 Creditor's Turnover Ratio 2.3 2006 2007 2008 Years 2009 2010 2011 Analysis: It is observed that the creditors turnover ratio has been decreasing since 2008 which implies terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This shows company keep its obligation for long time.03 1.51 1814.77 462.47 times = 1.5 0 2.14 times = 1.77 1156.16 1.93/1560.04/359.30 times = 2.23/191.5 Creditor's turnover Ratio (in times) 2 1.28 times = 1.5 1 0.28 1.46 1800.48 = 2.16 times Figure 16: Creditor’s Turnover Ratio for the JSPL 2.47 1. .1/567.36 601.03 times = 1.
47 4.75 times = 4.51 times = 6.50 = 6.56 7653.47 times = 5.75 6. alternative use of warehouse space.Inventory Turnover Ratio: Inventory Turnover = Net Sales Inventory Table 17: Inventory turnover ratio for JSPL Inventory Turnover Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 1261.60 / 257. Inventory turnover has decreased in 2011.19 / 1209.44 5410.75 / 980. seasonal fluctuations in orders.55 times = 5.42 8.55 2590.59 / 1328. but several aspects of inventory holding policy have to be balanced like lead time.47 2253.61 / 196.42 times = 8.54 times Figure 17: Inventory Turnover Ratio for the JSPL 10 Inventory Turnover Ratio (in times) 8 6 4 2 0 2005 6.32 5. The higher turnover ratio is good for the firm while A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse.25 / 568.54 2006 2007 2008 Years 2009 2010 2011 Analysis: It measures approximately the number of times an entity is able to acquire the inventories and convert them into sales.65 3519.81 / 642.32 times = 5.55 5.96 7367. than the previous years due to increase in inventory and decrease in sales .51 Inventory Turnover Ratio 5.
12 80 70 Inventory Holding Period (in days) 60 50 40 30 20 10 0 2005 2006 2007 2008 Years 2009 2010 2011 65.33 56.81 56.42 360 / 8.32 360 / 5.07 days = 41.14 65.98 Analysis: The company‟s inventory holding period was found to be fluctuating up and down during the year 2005 – 2007 .07 41. during last year i.55 360 / 5.98. this shows unnecessary locking up of working capital in the inventory and it shows inefficiency of the management.54 = 56.75 360 / 4.12days = 65.2011.33 days = 56.47 360 / 5.96 Inventory Holding Period 64.14days = 79.98 days Figure 18: Inventory Holding Period for the JSPL 79.Inventory Holding Period: Inventory Holding Period = 360 Inventory turnover Table 18: Inventory holding period for JSPL Inventory Holding Period for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 360 / 6. .81 days = 65. After hree year constant inventory holding period.96 to 64.e.the inventory holding period has increased from 56.51 360 / 6. which is not good for the company as it was unnecessary locking up of working capital in the inventory and it shows inefficiency of the management.96 days = 64.
51 / 6783.25 times = 0.25 times Figure 19: Current Asset to Total Asset Ratio for the JSPL Current Assets to Total Asset Ratio (in times) 0.26 times = 0.3 0.25 0.Working Capital Management IV: Ratio to analyze WC Str.63 3060 / 8456.56 / 5250.25 2009 2010 2011 Analysis: If we analyse the structural health of working capital for JSPL.15 0.36 0.1 / 17742.25 times = 0.4 0.25 0.40 / 3250.22 0.62 1403.55 1698. Cash to Current Ratio: Cash to current ratio = Cash Current asset .22 times = 0.36 times = 0. Current Asset to Total Assets Ratio: Table 19: Current asset to total asset ratio for JSPL Current Asset to Total Asset Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 599.2 0.78 736. This was due to increase in the application of funds in the fixed assets.26 0.31 4216.44 = 0. which shows that the company was having certain problems with its current asset management.05 0 2005 2006 2007 2008 Years 0.1 0.35 0.25 0.08 / 12279.82 / 2319.34 Current Asset to Total Assets Ratio 0.34 times = 0.99 4603. the proportion of current assets to total assets has been showing decreasing trend as compared to financial year 2009 & 2010 .
188 Cash to Current Asset Ratio (in times) 0.91/3060 308. But in 2011 the ratio again decreased sharply to 0.031 of 2008.013.05 0 0.045 0.013 2005 2006 2007 2008 Years 2009 2010 2011 Analysis: The company shows an increasing trend in 2006 & again it decrease in 2007.013 times Figure20: Cash to Current Asset Ratio for the JSPL 0.Table 20: Cash to current asset ratio for JSPL Cash to Current Asset Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 21.1 = 0.022 0.40 31. which is a positive sign for the company.51 577.2 0.073 times = 0.56 52. Inventory to Current Asset Ratio: Inventory Inventory to Current Asset = Current asset .90 / 599.97 / 1698.031 Cash to Current Asset Ratio 0. However in the year 2009.08 60.96/4216.1 0.073 0. which is almost more than six times from year 2008.045 times = 0.15 0.82 33. We can say that it will effect liquidity position of the firm but on the other hand it is observed that they do not keep any ideal cash with them.188 from 0. the cash to current ratio was found to be increased hugely to 0.l88 times = 0.30 / 1403.036 0.036 times = 0.022 times = 0.031 times = 0.10/4603.29 / 736.
32 times = 0.56 / 3060 1209.44 / 1698.2 0.50/4603.15 0.40 568.34 times = 0.05 0 2004 2005 2006 0.32 times = 0.28 times = 0.4 0.Table 21: Inventory to current asset ratio for JSPL Inventory to Current Asset Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 196.5 / 599.51 980.32 0.28 0.3 0.28 2007 Years 2008 2009 2010 Analysis: Here.1 0.28 times Figure 21: Inventory to Current Asset Ratio for the JSPL Inventory to Current Assets Ratio (in times) 0.4 0.40 times = 0.35 0. But since 2007.82 257.32 0.56 642.96 /4216.1 = 0.25 0.08 1328.37 0. the ratio is showing decreasing trend which is a good sign for the company as they are decreasing the locking up of working capital in the inventory. which represents that the company was locking up the working capital unnecessarily in the inventory. the company shows an unfavorable trend of increase in the proportion of the inventory to current assets during the year 2005 – 2007.34 0.37 times = 0. Current Liabilities to Total Liabilities: Current Liabilities Current Liabilities to Total Liabilities = Total Liabilities .65 / 1403.55 / 736.
24 0.17 / 9735.16 0.18 times = 0.16 times = 0.17 0.20 times = 0.05 0 2005 2006 2007 2008 Years 2009 2010 2011 0.2 0.15 / 3584. Loan & Advances to Current Asset Ratio: Loan & Advances Loan & Advances to Current Asset = Current Asset .53 1377.25 0.75 4447.3 0.21 3516.83 / 7599.60 594.16 times = 0.1 0.18 Current Liabilities to Total liabilities (in times) 0.28 times Figure 22: Current liabilities to Total liabilities Current Liabilities 0.66 / 2418.26 = 0.16 Analysis: The company shows a increasing trend in the proportion of the current liabilities in the total liabilities as this shows company is taking more loans to meet its liability and project investments are there.15 0.15 / 14409.37 / 5768.92 1007.84 1636.17 times = 0.Table 22: Current liabilities to total liabilities ratio for JSPL Current Liabilities to Total Liabilities Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 496.2 0.28 to Total Liabilities 0. hence this shows a burden on the management of JSPL.45 / 15844. This ratio is not the only means of reviewing a company's debt structure.24 times = 0.
36 0.82 572.47times = 0.46 times = 0.72/3060 3199.83 times means 83% of current assets are Loans and Advances.40 591.8 0. the picture of inventory turnover is bright.42 times = 0.4 0. Again if we look at the efficiency with which individual elements of working capital have been utilised.94/4603.2 0 2005 2006 2007 2008 Years 2009 2010 2011 0.56 785.54 / 736.Table 23: Loan & Advances to Current assets ratio for JSPL Loan & Advances to Current Asset Ratio for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011 218.94/1698.01 / 1403.75 times = 0.04/4216.47 0.77 times = 0.42 0. However this much increases in the ratio is not suggestible and due to the efforts of the company in the current year it is 0.46 0.77 0.83 Analysis: The increase in this ratio in the year 2011 shows the efficiency of the management.36 times = 0.1 = 0. . Interpretation (Ratio Analysis) As shown by current assets turnover ratio.6 0.83 times Figure 23: Loan & Advances to Current Assets Loan & Advances to Current Assest (in times) Loan & Advances to CA ratio 1 0.07 / 599.08 3865.75 0.51 1453. the utilisation of current assets in terms of sales has shown a decreasing trend as compared previous years which shows that current assets has not been effectively used during the last year 2011 to achieve sales.
Under the conditions of certainty. problem on the liquidity front. these policies differ with regard to the amount of current assets carried to support any given level of sales. while the reverse is true under a relaxed policy. Management of Current Assets Alternative Current Asset Investment policies Three alternative policies are there regarding the total amount of current assets. hence in the turnover of those assets. inventories and receivables are minimized. The line with the steepest slope represents a relaxed current asset investment (also known as “fat cat”) Policy. the holdings of cash. with the restricted current asset investment (also known as “lean and mean”) policy. securities. and inventories are carried. so each dollar of current assets is forced to “work harder”.As we look at the extent of liquidity of working capital. This indicates. but it entails the greatest risk. Conversely. The moderate current asset investment policy is between the two extremes. . and where sales are stimulated by the use of a credit policy that provides liberal financing to customers and a corresponding high level of receivables. marketable securities. Under the restricted. A restricted lean and mean current asset investment policy often provides the highest expected return on this investment. When uncertainty is introduced the firm requires some minimum amount of cash and inventories. while any smaller holdings would involve late payments to suppliers along with lost sales due to inventory shortages and an overly restrictive credit policy. Any larger amounts would increase the need for external funding without a corresponding increase in profits. As we look at debtors turnover ratio . we notice that the ratio had shown a increasing trend and a decreasing trend of average collection period during the period 2005-2010. where relatively large amounts of cash. all firms would hold only minimal levels of current assets. Essentially. current assets are turned over more frequently.But during last year the debtors turnover was found to be decreased and average collection period to be increased. we notice that the ratio shows a decreasing trend.
3X 6.72 Assets 3. but the relationship is often curvilinear.The Sales/current assets relationship is shown here as being linear.3X 4.Alternative Current Assets Investment Policies: Figure 24: Alternate current assets investment policies JSPL 60 50 Relaxed 40 Moderate 30 20 Restricted 10 0 50 100 150 Sales Table showing Alternative Current Assets Investment Policies: Table 24: Table showing alternative current assets investment policies Policy Current asset to support Turnover of Current Sales of INR 100/Relaxed Modified Restricted JSPL 30 23 16 61.3X 1. Managing the Components of Working Capital of JSPL Four main components: Cash Marketable securities/Account Payables Inventory Accounts Receivables .62X Note: .
Every month cash transaction report is sent to Finance department in the corporate office showing all the transaction of cash. As cash is a very important activity for a good operation of company here in JSPL cash is monitored every day and intimated to Finance Department.Cash Management in JSPL: Cash management system adopted by Finance Department in JSPL is very reliable and transparent. Although specific forecasting technique is used. All the need related to inventory are met through corporate office as well as individual efforts of unit. Corporate office acts as a linkage between the manufacturing unit and creditors. Fund Allocation: Here the initial allocation for manufacturing units is done by corporate office and all supplementary requirements are to look upon by Commercial department. profitability and inventory position. Finally the annual cash budget is made by the Finance Department in the corporate head office. then the plant has to justify its more utilization. Fund Utilization: Company operates an annual „Cash Budget‟ and a rolling „Cash Plan‟ drawn up every month. funds are deployed to different departments as per their requirements. If the utilization of cash is more than the allocation of fund. (inflow and outflows) actual utilization of cash and allocation of fund is compared. The daily cash report includes the all details of cash inflows and outflows. Monthly cash budgets are maintained for the estimated of monthly cash inflows and outflows. Daily reports on cash transaction are prepared by Procurement department to keep a track of all payments made in the days work. The corporate office allocates different amount of each to different manufacturing units as per their requirement. The corporate office provides cash to manufacturing units but there most function is controlled in unit itself. . Corporate office has determined the credit facility for every units of the company and this keeps on changing from year to year depending up on company‟s position transactions.
353 times 31 Mar 10 0.013 times 0.056 times For the year ended 31 Mar 07 0.013 Times Average: 0. Evaluation of cash management performances: To assess the cash management performance this phase is divided as follows: a) Size of Cash b) Liquidity and Adequacy of cash: This is depicted by the current ratio and acid test ratio. The following ratios have been applied to assess the efficiency of cash control: Cash to Current Assets ratio Cash turnover ratio Cash to current liabilities ratio Table 25: Table showing different cash ratios JSPL Efficiency of cash control Cash to Current Asset Ratio Cash to Current liabilities Ratio 31 Mar 05 0.038 times 31 Mar 09 0. JSPL kept less cash in hand to meet the entire cash requirement it depends on financing process.036 times 0.188 times 0. This is possible by effecting tighter controls over cash flows. as calculated in part ratio analysis for working capital management and respective position is shown in graph.031 times 31 Mar 08 0. c) Control of cash One of the major objectives of cash management from the stand point of increasing return on investment is to economize on the cash holding without impairing the overall liquidity requirements of the firms.11 (Cash to Current liabilities Ratio) .To meet the requirement of cash company approach to bank and present the required detailed by the bank.045 times 0.073 times 0.044 times 31 Mar 06 0.022 times 0.087 times 31 Mar 11 0.071 (Cash to Current Asset Ratio) Average: 0.031 times 0.
which ultimately affect the operational efficiency of the firm. The company is not able to make proper payment to its creditors as year on year company‟s creditors are increasing (creditors increased from 191.30 times 31 Mar 09 2. . Payable Management in JSPL: Mostly the creditor comprises of the bank who is financing the working capital needs and the suppliers to whom payments are to be given. is lowest as compared to previous years. Cash to current liability ratio shows the cash balance maintained by company at a certain point of time for meeting its current liabilities. This shows company keep its obligation for long time.16 times Summary: It is observed that the creditors turnover ratio has been decreasing since 2009 which implies terms of credit allowed by the suppliers are liberal and creditors are not paid promptly.28times 31 Mar 08 1.03 times 31 Mar 10 1. Evaluation of Payables Management: The evaluation for payable management is done with the help of ratios: Creditor‟s turnover ratio Table 26: Table showing payables management JSPL Payable Management Creditor’s ratio 31 Mar 06 2.47 times 31 Mar 11 1. This is basically done as per terms and condition with the respective parties.Summary: It can be inferred from the above table that cash to current assets ratio during 2010.14times For the year ended 31 Mar 07 1.77 Cr on 2005 to 1560. The cash to current liabilities ratio is nearly on decreasing trend shows the efficiency of operations.48 in 2011. This shows decrease in liquidity position of the company.
accommodation costs and interest charges. Inventory Management at JSPL: Inventory is stock of a company.Inventory Management: Here the inventory is categorized in to: (1) A B C analysis (2) X Y Z analysis 1) ABC Analysis: . and the d) Reorder quantity or economic order quantity – the quantity of stock.Items which constitutes to 70% of total consumption (of stores and spares) value when arranged in descending order of consumption value will be termed as „A‟ class items. There are the: a) Maximum level – achieved at the point a new order of stock is physically received. Higher than necessary stock levels tie up cash and cost more in insurance. Four basic levels will need to be established for each line/category of stock.Items which constitute top 70% of total stock of stores and spares holding value when arranged in descending order of stock holding will be termed a „X‟ class items next 20% of total stock holding value is „Y‟ class items and the rest 10% as the „Z‟ class. Once these controls are implemented an efficient system of recording receipts and issues is vital to exercise full control of inventories. In managing inventories the objective of the company is to determine and . which must be reordered to replenish the amount held at the point delivery. arrives up to the maximum level. b) Minimum level – the level at point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies). Next 20% of total consumption value will be termed as „B‟ class items and the rest 10% as the „C‟ class items. which is manufacturing for sale and component that make up the product. c) Reorder level – point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received. 2) XYZ Analysis: .
finished goods as well as the work in progress. The optimum level of inventory lies between two danger points of excess and inadequate inventories.75 times 4.54times Average: 6.54 times in 2011 and on average it is 6. Receivable Management: At a plant level mostly the finished goods are sold on credit to increase upon the market share and retain the customers but the major portion of debtors are dealt by Marketing Unit of the Commercial Department and the Finance Department. and the additional net revenue that can be earned by .42 times 8.51 times 6.maintain optimum level of inventory investment. In other words. It is consideration as an essential marketing tool. Procurement Department gives the data of closing stock of raw materials. finished goods and spares.47 times 5.08 times. work in progress.98 days in 2011.07 days as comparison of average at 61.08 Summary: Inventory turnover ratio establishes a relationship between the total sales during a period and average inventory hold to meet that quantum at 5.55 times 5.32 times 5. the stock held during 2005 is for 56. that signifies the quick moving of inventory. Inventory Turnover Ratio: Table 27: Table showing Inventory turnover ratio JSPL For the year ended 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11 Inventory Turnover 6. Monthly inventory report is sent to the finance department in the corporate office. Control of the debtors‟ element (the amount owed the business in the short term) involves a fundamental trade-off between the cost of providing credit to customers (which includes financing bad debts and administration).34 days for the view of 7 years which increases to 64. Inventory is monitored differently for raw material. Obviously the inventory report is prepared at plant level.
and Limits beyond which legal action will be pursued. The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge large interest on late payment of business debts by companies and public sector organisations. any settlement discounts. Nevertheless. . eventually building up to a huge order and a disappearing customer. and the importance of the business that is involved. One classic fraud is to start off with small amounts of credit. When the creditworthiness of a new customer is established. it is wise to inform customers this right will be exercised. But this is not a one-off requirement. and credit charges (if any). Continuous review of debtors position (generating „aged debtors‟ report). Vetting customers prior to allowing them credit. positive credit control calls for the setting of a credit limit. Prompt query resolution. The former can be kept to a minimum with effective credit control policies. Salesmen‟s views can also be canvassed and the premises of the potential customer visited. Efficient invoicing and statement generation. the period. past experiences with this customer or trade sector.doing so. which will require: Setting and enforcing credit terms. Effective chasing and collection procedures. Setting and reviewing individual credit limits. even for established customers. should therefore feature in regular procedures. The extent to which all means are called upon will depend on the amount of the credit sought. Before allowing credit to a new customer trade and bank references should be sought. Accounts can be asked for and analyzed and a report including any county court judgments against the business and a credit score asked for from a credit rating business. the credit period. Credit checking. with invoices being settled promptly.
The management of receivable is dealt on major part by corporate office and minor part by commercial department of the company. as could factoring – in its most comprehensive form a loan facility based on outstanding invoices plus a sales ledger and debtors control service. Use of collection agencies should be considered. Keeping levels to the minimum required for efficient operations will keep costs down. by the end of 2004. which further increased to 622. handling.43 days in 2010 to its debtors. Total Debtors amounted to Rs.211. The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out.36 Cr in 2010.16 Cr. Debtors represent future cash – or they should do if proper credit control policies are pursued. Efficient control of debtors will assist cash flow. Inherent in any system of inventory control is the concept of appropriate stock levels – normally expressed in physical units sometimes in monetary terms. and recording stock. Likewise stock will eventually become cash. . and effective telephone or e-mail follow up.Collection is a vital element of credit control and must include standard. polite and wellconstructed reminder letters. and help keep overdraft or other loan requirements down. This means controlling buying. but in the meantime represents working capital tied up in the business. JSPL in matter of granting a credit period to customers tighten their policy and reduce credit period to 30. and storing. issuing. Receivables Management in JSPL: Corporate office and the commercial department in coordination do the management of receivables. and hence reduce interest costs.
The total of inventory conversion period and debtors‟ conversion period is referred to as gross operating cycle (GOC). debtors and creditors. Inventory Conversion period = RMPC + WIPCP + FGCP The raw material conversion period is depends on: 1) raw material consumption per day. & debtors conversion period (DCP) A) Inventory conversion period: It is the total time needed for producing and selling the product. & 2) raw material inventory Raw Material Consumption per day = Total Raw Material Consumption/Number of days in the year Raw Material Conversion period = Raw Material Inventory/Raw Material Consumption per day Similar calculations can be made for other inventories. Typically. Gross Operating Cycle = ICP + DCP .Determination of Operating Cycle of JSPL The determination of length of the operating cycle of a manufacturing firm is the sum of : The broad range of project management and financial advisory services include: inventory conversion period (ICP). and c) finished goods conversion period (FGCP). B) Debtors’ conversion period: It is the time required to collect the outstanding amount from the customers. it includes: a) raw material conversion period (RMCP) b) work-in-process conversion period (WIPCP).
Raw material inventory = 2225. 4278.71 Cr Rs.37 = 11. 2225. The payables deferral period (PDP) is the length of time the firm is able to defer payments on various resource purchases. Payables.75 Cr Avg.C) Payable Deferral period: This is very common to get gross operating cycle but in practice.12 Cr Rs.60 330 --------11. a firm may acquire resources (such as raw materials) on credit and temporarily postpone payment of certain expenses. the net operating cycle also represents the cash conversion cycle. 1145. It also represents the time interval over which additional funds. which the firm can defer. It is net time interval between cash collections from sale of the product and cash payments for resources acquired by the firm. work-in-progress 4278.= 47. Net Operating Cycle = Gross Operating Cycle – Payable Deferral period If depreciation is excluded from expenses in the computation of operating cycle.24 times = = Rs. should be obtained in order to carry out the firm‟s operations. called working capital.72 . are spontaneous sources of capital to finance investment in current assets. A) Inventory conversion period: a) Raw Material Conversion Period: Raw material consumed = Rs.37 times = 29 days b) Work-In-Progress Conversion Period: Cost of Production Avg. 119.71 -------------195.12 -----------.
56 Cr.24 6.22 Cr.= 47.= 11. 7367.77 49. 7367. 551.87 days C) Payables Conversion: Average accounts payables Cost of sales = = Rs. 24.36 330 ------.= 11.545 330 ------. 622.83 times 622.70 days B) Debtors Conversion: Sales Closing Debtors 7367.4872. Rs.36 Cr 27.59 -----------.56 330 ------.35 = = Rs.77 Cr.59 Cr Rs.59 Cr.= 13.83 = = Rs.225 ------------.90.*330 Cost of Sales 727. Average accounts Payables Payables Conversion Period = ----------------------------------.25 days = = .727.59 --------------= 13.35 times 551.*330 4827.98 days c) Finished Goods Conversion Period: Sales Closing stock 7367. Rs.
The object of working capital management is to trim down on stocks and debtors and get the cash coming faster within the comfort zone of the business.7+27. will have to negotiate higher working capital funds.98+24. cash that had completed the working capital cycle would be reinvested in stock and the whole process would begin again. the shorter the cycle. In the normal periods of business activity.85-49. Having a large amount invested in stocks and debtors does not necessarily mean large profits. Company has tighten its steps towards the credit policy which signifies that in the current year company is proving itself more efficient. In general. The company had reduced down its payables deferral period significantly which strengthens its creditworthiness in the market and helps the company in getting the loans on liberal terms.87 87. This represents the efficiency of the management. One can have a vastly different working capital outlay while performing the same activity.25 39 days Analysis: The Net operating cycle of the firm is of about 39 days which shows that the company realizes its profits quickly and company can quickly acquire cash that can be used for reinvestment. The company policy had a significant change for the year with regard to inventory as it had increased continuously But this policy has a cost to the company in the presence of a significant decrease in payables deferral period. it as well as shows a increase in the market share of the company.Operating Cycle: Gross Operating Cycle (GOC) = = 29+6. but it can mean a drop in the prime calculation that every businessman is interested in the return on investment. the better a company is since less time capital is tied up in the business process. .85 days Net Operating Cycle (NOC) = = 87.
87 1.73 22. And if small part of total assets consists of current assets then it gives adverse impact on the rate of return.29 1.33 25.31 36. When we give a thought to the current ratio of last three years we can very easily depict that its current ratio is very low than the standard one i.03 31 Mar 05 599.23 1.18 Percentage of current assets over fixed assets 34. of 2:1.24 1.63 25.Analysis of Asset Percentage: Table 28: Table showing analysis of asset percentage JSPL Particulars Current asset Total asset Percentage of current assets over fixed assets Current ratios 1.39 1.18% 31 Mar 10 4216.99 34.51 6783.03% 31 Mar 09 3060 8456.78 25.94 2009 2010 2011 Analysis: From the above calculation it can be analyzed that JSPL is following a liberal policy of working capital from last 4 years.55 26.33% 31 Mar 11 4603. .44 25. As we know that profitability is measured by rate of return on total assets i.85% 31 Mar 06 736.82 2319.65 25.73% 31 Mar 08 1698.4 3250.94% Figure 25: Percentage of Current Asset to Fixed Asset Current assets to Fixed assets (in %) 40 30 20 10 0 2005 2006 2007 2008 Years 25.65% For the year ended Rs/Crs 31 Mar 07 1403.1 17742.56 5250.e.08 12279. PBIT / Total sales.03 36.85 26. This type of moderate approach gives the negative impact on the liquidity of the company.e.19 1.62 22.
4 594.78 4216.08 3516.68 3060 1636.19 320.65 Figure 26: Net working Capital 800 700 Net Working Capital (in Cr.37 396.83 320.82 496.65 2007 2008 Years 2009 2010 2011 Net Working Capital Analysis: As we can see from the above table and graph that company‟s Net Working Capital has been showing variation in its trend as last year‟s working capital is showing negative trend in increasing order.51 1377.25 155.1 4447.15 Net Working Capital 699.93 4603.93 553.15 142.25 1403.15 699.) 600 500 400 300 200 100 0 2005 2006 103.78 396.66 103. The above situation shows that company management is inefficient in management of working capital. .68 142.19 1698.15 736.56 1007. Making the comparison of current assets and current liabilities in 2010 & 2011 current liabilities are increasing which leads the working capital in negative range so company management is required to put a vigil look to manage working capital.45 155.Analysis of Net Working Capital: Table 29: Table showing analysis of working capital JSPL Particulars Current asset Current Liabilities Net Working Capital For the year ended Rs/Crs 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11 599.17 553.
26 506.55 33. Company should withdraw money from this locked up working capital and invest it in some other assets.96 308.78 44.56 577.07 647.47 21.65 31. due to excess of investments in the projects.98 31 Mar 11 2211.60 213.94 1801. This shows that the company holds less liquidity in hand.30 591.90 218.04 5109.72 3299.09 31 Mar 10 1471.33 43.54 568.63 . Cash & bank balance has decreased to large extent during last year. Inventory is showing an increasing trend that is the signal of danger for company‟s profitability and these are not giving any return by locking up working capital.91 24.57 114.46 1209.81 20.34 165.02 31 Mar 08 573.5 320.36 31 Mar 09 619.71 251. which are engaged in inventory.57 391.90 Analysis: Composition of all parts seems to be distribute but almost each component is showing increasing trend which has both kind of influence for the financial performance of the company so company need to mange this components very carefully.01 1490.29 299.47 118.31 642. Analysis of Current Liabilities: Table 31: Table showing analysis of current liabilities JSPL Particulars Sundry Creditors Banks borrowings Advances from customers 31 Mar 05 292.91 257.25 125.91 1453.94 5876.96 3199.57 31 Mar 06 298.50 60. Suggestions: First and foremost suggestion for the company is that.6 172. it should look into the idle funds.85 92.06 10.16 196.54 1036.Analysis of Current Assets: Table 30: Table showing analysis of current assets JSPL Particulars Debtors Inventory Cash & Bank balance Loans & Advances Total For the year ended Rs/Crs 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11 211.66 287.42 622.10 3865.44 52.97 785.59 31.38 980.36 1328.29 572.50 For the year ended Rs/Crs 31 Mar 07 505.
06 985.11) 32.14 100.53 1016.16) 74.05) (59.56) (646.48 189. By looking the seven years position of company in current assets and current liabilities it can be seen that current liabilities are increasing over current assets so within the time company need to manage its liability portion and need to make safer decision Suggestions: Due to the huge amount of current liabilities company has to lock up its funds in current assets.10) (126.33) (338.14) (73.94 294 1665. Therefore. Statement of Change in Working Capital Table 32: Table showing statement of change in working capital JSPL Particulars Current Assets Inventory Receivables Other Current assets Total Current assets (A) Current Liabilities Short term borrowings 35.76) (116.96 (48.81 467.81) (648.8) .94 499.59 599.54) (230.55 15.56) (46.34) 303.27 1343.65 3546.provisions Other Current liabilities Total 88.06 4493.99) 31 Mar 05 31 Mar 06 For the year ended Rs/Crs 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11 (200.91 1393.08) (118.25 (73.71 521. which is idle at this point of time and some amount from its inventory.59) (95.04) 38.45 Analysis: As we can see from the graph and table that major portion of current liabilities are with sundry creditors and every year it keeps on increasing.12) 82.97 179. it should pay off its creditors by withdrawing some cash from its debtors.67 (265. it should reduce its current liabilities by paying them off so that regular cash outflow of cash get restricted and outflow gets converted into inflow to increase in profitability of the firm.78 (169.32 272.99 52.63) (127.41) (565. One suggestion that could be made to the company is that.97 385.64 (94.42) (104.79) (213.94 581.93 (343.61 658. As the company obligations are increased so company need to put certain measure to control current liabilities.78) (22.98) (61.01) (311.31) (229.91 94.74) (980.
Ratio of sales: To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales. We shall illustrate here three approaches.9 (2696. which have been successfully applied in practice: Current assets holding period: To estimate working capital requirements on the basis of average holding period of current assets and relating them to costs based on the company‟s experience in the previous years. the business has no problems raising cash.29 1715. The statement of changes in working capital shows that there was a tremendous increase in current liabilities during 2009. However. .21) 447.Other Current Liabilities Total CurrentLiabilities(B) Working Capital Shortfall (A-B) 149. Estimating Working Capital Needs The most appropriate method of calculating the working capital needs of a firm is the concept of operating cycle.66) 245. a decrease in current assets and an increase in current liabilities represent a decrease in working capital.02 9.38 (569. Negative Working capital shows that customers pay upfront and so rapidly.62 320.There is a decrease in working capital mainly because of the locking of working capital funds in inventories and receivables and due to the increase in the liabilities. A wise financial policy of a firm requires that long-term funds be used to finance Fixed Assets and short term funds are used to finance Current Assets. This table shows the changes in net working capital of JSPL.06 (385. In these companies.36) 1412.79) 248.96 (1371.86 (105.67) 163.10 185.95) Analysis: A statement of changes in working capital helps us in locating where these changes took place.68 258.72 79. This method is essentially based on the operating cycle concept.32 1105.46 (471. products are delivered and sold to the customer before the company ever pays for them. Any increase in current asset and any decrease in current liabilities show an increase in working capital similarly.65) 58. a number of other methods may be used to determine working capital needs in practice.53 (885. Ratio of fixed investment: To estimate working capital requirements as a percentage of fixed investment. Since working capital it measured by subtracting current liabilities from current assets.
= (185.59 = ----------------.06 Rs/Crs 12 Therefore. 425.77 Total cost per month = -----------------.06)/12 =193.= 613.96 Crs 12 f) Operating Cash: 4872.= Rs.14Crs e) Debtors: Sales per month 7367.06 = 1445.56 Total cost per month = --------------.47 + (4278.71+45.71Crs 12 c) Finished Goods: 551. 185.96= Rs.47+193.= 45.12 / 2) = ----------------------------.47 +2139.= 406. Total Working Capital Required = 425.47Crs 12 b) Work in progress: Raw material per month + (Cost of Production /2) = --------------------------------------------------------12 185.Estimating Optimal Need of Working Capital Method: 1 a) Raw material consumed per month: 2225.71 = -----------.96+406.16 Rs/Crs .96 Crs 12 d) Total Inventory Needs: = 185.14+613.
The first method gives details of the working capital items. Factors such as seasonal variations in operations. of observations/past years First we will regress between the sales (x) and the production capacity (y) as the company had thought of increasing its production capacity to 95 % in the year 2007. Therefore. The method of least square is used in this regard. accuracy of sales forecasts. they should be given due weightage in projecting working capital requirements. one dependent on another. Regression Analysis The regression analysis is a statistical technique of forecasting working capital requirement. the dependence of amount of working capital on sale value is established which helps in making working capital requirement projections. In this case. This approach is subject to error if markets are seasonal. investment cost and variability in sales price would generally be considered. The relationship between sales (x) and working capital (y) is given by the equation: y = a + bx Simultaneous linear equation to obtain the value of a and b is as understated: ∑ y = na + b ∑ x ∑ xy = a ∑ x + b ∑ x² Where a = fixed component b = variable component x = sales y = working capital n = no. PBIT Rate of return = --------------------------------------------Net fixed investment + Working Capital A number of factors will govern the choice of methods of estimating working capital. . The production cycle and credit and collection policy of the firm would have an impact on working capital requirements. Under this method a mathematical relationship (y = a + bx) is established between two variables.
77 Table 33: Table showing Production capacity and Sales Year Production Capacity (in percentage)(x) 2004 2005 2006 2007 2008 2009 2010 2011 69 72 82 80 82 88 95 95 1261.72 2590.25 3519.31+ 0. 2 Solving for a and b a = -16534 . Linear equation between sales and working capital: 2371.61 2264.78= 30117. 1 12134284.04= 7a + 568b ------. 1 2565207.59 7860.87 7653.81 5459.78x Therefore for the year 2011 the sales will be y = -16534 + 256.78 y = -16534 + 256.04a + 168481954b ----------eq.78* 95 y = 7860.04962 y = 125. b = 256.77 Sales(y) Now we will regress between the sales (x) and working capital (y) by taking the forecasted sales of 2011 as x to forecast the working capital requirement for the year 2011.63 = 7a + 30117. 2 Solving for a and b a = 125.04b ------.34 = 568a + 46562b ----------eq.04962 x . b = 0.Linear equation between sales and production capacity: 30117.eq.31 .eq.19 7367.
77 y = 515. The regression analysis for the working capital requirement for the next year shows that the company will have to find additional sources of working capital as the company will require 515. Trend Analysis for Working Capital Management Trend analysis is comparative analysis of company‟s ratios over time.04962 * 7860.87 7653. Trend analysis is based on idea what is happened in past and given the idea what would happen in past.81 5459.72 2590.19 320.77 Working Capital (y) 103.15 142. .31+ 0. In trend analysis.36 Therefore the working capital requirement for the next year will be 515.59 7860.68 553.19 7367. Trend analysis works best with five years of ratios. It tries to predict the future movement based on past data. industry ratios are compared over time.93 155. So by the next year the company will have to maintain its current assets or decrease its current liabilities to meet its working capital requirement.36 Rs/Crs calculated on the basis of the sales estimates for the next year and presently the company has the positive working capital because the current liabilities does not exceed the current assets.25 396.61 2264.25 3519. typically years.78 699.Therefore for the year 2011 the working capital will be y = 125.36 Rs/Crs. Year-to-year comparisons can highlight trends and point up the need for action.65 515.36 Table 34: Table showing Sales and working capital Year 2004 2005 2006 2007 2008 2009 2010 2011 Sales (x) 1261.
Monthly 4.19 1.8 1.23 1.6 0.24 1. Ratio The "Time Factor" (X-Axis) can have the following granularity 1.004 . The following data points can be measured (Y-Axis) 1. Daily 2. Yearly Projection of Ratios through Trend Analysis Figure 27: Current Ratio Trend Current Ratio Trend 2 1. Oct-Dec) 5.2 0 1.2 1. Jul-Sept. we can see trajectories into the future ."With the past.2 1 0." The Trend Analysis module allows to plot aggregated response data over time.87 1.both catastrophic and creative projections. Apr-Jun.03 current ratio Current Ratio 2005 2006 2007 2008 Years 2009 2010 2011 Slope Constant: -0.4 1. Quarterly (Jan-Mar.39 1. Standard Deviation and Variance 3.6 1. Weekly 3. This is especially valuable on the basis of five-year data and a result of long survey.4 0.8 0. Mean and Mean Percentile 2.
5 1 0.84 2.79 2006 2007 2008 Years 2009 2010 2011 Slope Constant: -0.76 1.010 Figure 29: Current Asset Turnover Trend 4 3.15 0.Figure 28: Cash Ratio Trend Cash Ratio Trend 0.013 2011 Cash Ratio 0.1 0.81 1.62 Current Assets 0.5 0 2005 3.05 0 2005 2006 2007 2008 Years 2009 2010 0.087 0.35 0.3 Cash Ratio 0.4 0.044 0.056 0.031 0.51 Current Assets Turnover Trend 1.5 2 1.038 0.5 3 current assets 2.25 0.07 1.2 0.35 Slope Constant: 0.286 .
55 11.23 15.97 9.45 .93 2010 2011 Slope Constant: 3.33 Working Capital 12.83 Debtor Turnover Slope Constant: 1.99 15 10 5 0 2005 2006 2007 2008 Years 2009 2010 2011 5.53 2005 2006 2007 2008 Years 10.09 8.Figure 30: Working Capital Turnover Trend Working Capital Turnover Trend 50 45 40 35 30 25 20 15 10 5 0 Working Capital Turnover 47.77 2009 10.97 13.92 6.64 10.52 Figure 31: Debtor Turnover Trend Debtor Turnover Trend 25 Debtors Turnover 20 18.98 19.
10 Figure 33: Inventory Turnover Trend 10 9 8 7 6 5 4 3 2 1 0 Inventory Turnover Ratio Trend 8.16 Creditors Turnover 2.5 0 2006 2007 2008 Years 2009 2010 2011 1.75 6.3 1 0.47 5.55 5.47 Slope Constant: -0.51 Inventory Turnover… Inventory turnover 2005 2006 2007 2008 Years 2009 2010 2011 Slope Constant: -0.Figure 32: Creditor Turnover Trend Creditors Turnover Ratio Trend 2.42 4.32 6.28 1.54 5.5 1.5 creditors turnover 2 1.14 2.23 .03 1.
b. a. Cash Ratio trend shows that company is having low amount of cash for paying current liability which can influence the financial position of company in upcoming period. Inventory is showing good position in hand of company but still company need to keep a check over it as inventory is influenced by seasonal fluctuations and market conditions. As the Creditor‟s turnover ratio trend is decreasing which shows that payments of company are not prompt and keep it obligation for long time where as it also shows that credit allowed by the suppliers are liberal.Analysis on the basis of Trend: Trend of current ratio put a picture of company that company is not having short term fund in hand to meet short term debt hence it put a threat in meeting current obligations. Form II contains details about operations. . Accordingly Forms are prepared and sent to consortium of banks for approval. Form I contains information about Current Assets. this Form II should be sent six weeks from entering the Quarter. Current Asset Financing Process of working capital financing: 1) Predictions are made based on sales. Working capital turnover is in positive range over the period that shows that the liquidity position of the company is favourable & this shows efficiency in use of working capital Debtor‟s turnover trend is showing an increase in future that signifies that there is shorter time period in sales and collecting cash. 2) Company has Credit Monitoring Arrangement (CMA) with banks. this Form I should be sent one week before beginning of Quarter. Current asset turnover trend of company is fluctuating over the period.
As current ratio is showing a decreasing trend year on year. Receivables – 35%. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of inventory in turn which cause loss to the company by way of deterioration of stock. interest loss on blockage of stock etc. 5. The company itself should meet margin amount. Finding & Suggestions Findings: The study conducted on working capital management of Jindal Steel & Power Limited shows the evaluation of management performance in this context. Inventory – 25%. are less compared to current liabilities. Current ratio (1. 2.3) Accordingly margins are decided.26 Rs/Crs as its working capital. 4. which implies that current asset.e. Debtors Turnover ratio reveals an increasing trend during the period of study and average collection period came down from 60 to 30 days which shows that company is having specific policy for debtors‟ management. High current assets turnover ratio is more judicious and shows efficiency of management and proper utilization of the assets. 4) Advances are received. 6. . Normally margins are 25-35%. Major findings and suggestions thereon are narrated as under: 1.73:1) of the year 2009-10 are lesser than that of the ideal figures i. Current asset of the year 2009-10 is comprised of 25% of total investment in assets of the company. E. as it is continuously increasing which is not good for the company.36 Rs/Crs. From regression analysis the working capital requirement for the next year is estimated to be 515.03:1) and quick ratio (0.g. 7. ideal current ratio is 2:1 while quick ratio is 1:1. The operating cycle of the firm is disturbed. 8. The optimum need for working capital on an average basis company roughly will require more than 455. 3.
External environment influence was not considered while doing the theoretical standard rather than the industrial standard because of unavailability of any such specific standard. In case of inventory management ABC analysis. 2. 4. the following suggestions shall be helpful in increasing the efficiency in working capital management. VED technique should be adopted to increase the efficiency of inventory management. Availability of the financial data was very limited which is not disclosed due to sensitive nature for the company. 3. 2. the company can reduce the need for working capital and inventories can be financed through accounts payable. 3. which is not described in the project because of confidential nature. The company should try and maintain an optimum level of working capital in order to improve upon the workings of the company. The scope of the study was limited to Jindal Steel & Power Limited. 1. It is suggested to maintain a favorable current and quick ratios which shows a lesser than ideal figures. It can be done either through increasing current assets or decreasing liabilities. FSN technique. The main component of working capital is cost of capital. Further a inventory monitoring system should be introduced to avoid holding of excess inventory. . like demand-based management. etc. Limitations: 1.Suggestions: Keeping in view of detailed analysis for the 4 years of study and findings mentioned in above paragraphs. 4. With the help of proper inventory management systems.
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Bills Payable: Bills Payable is a current liability and arises when the bills written by creditors are accepted by the firm. Average Collection Period: Accounts receivables / (annual credit sales/360). accrued rent. and (iii) C-items: low value items which can be maintained at a flat minimum amount. accrued wages. Accrued Liability: Also known as outstanding liabilities or expenses. therefore a part of the cost of extending credit or receivables and are called capital costs.Glossary: ABC Analysis: An approach of inventory management. . Ageing Schedule: It is a tabular classification of receivables which showing the length of time which the account has been outstanding. Inventory items are thus categorized as (i) A.items: high value items for which careful management is needed. An Aggressive Policy: It resorts to short-term liabilities to finance temporary and also part or the entire permanent current assets requirement. accrued taxes and accrued interest and so on. For example. They typically represent obligations for certain services for which payments are yet to be made and are indirect sources of financing. which alternatively could be profitably employed elsewhere is. (ii) B-items: moderate value items for which rules of thumb such as past inventory turnover are adequate management techniques. Capital Cost: The cost of the use of additional capital to support credit sales. which classifies inventories according to their monetary values.A ratio that express how rapidly the firm is collecting its credit accounts. Balanced Policy: This policy is that balances the trade-off between risk and profitability in a manner consistent with its attitude towards bearing risk. Carrying Costs: These costs arise due to the storing of inventory and expenses made in raising funds to finance the acquisition of inventory.
Factoring: It is selling of receivables to a financial institution. Conservative Policy: A conservative policy ignores the distinction between temporary and permanent current assets. Current Assets: Those assets which can be converted into cash within an accounting year or within the operating cycle. It is an incentive for credit customers to pay invoices in a timely fashion. by financing almost all assets investments with long term capital. . Cash Cycle: This is length of the time between the purchase of raw materials and collection of receivables in the sale of the final product. at a discount of company receivables. Cash Discount: A percent reduction in sales or purchase price allowed for early payment of invoices. whichever is greater. Consumer Credit: Credit granted to an individual is referred to as consumer credit. Current Ratio: The ratio of current assets divided by current liabilities.Cash Budget: It is statement of the expected cash flows for a firm over a specified period of time. Factor: Specialized buyer. the factor. Collection Cost: These costs are administrative costs or legal costs incurred in collecting the receivables from the customers to whom credit sales have been made. Credit Period: It is total length of time period over which credit is extended to a customer to pay bill. It is used as a measure of liquidity. usually” without recourse.
Just-in-time Inventory Control: A production and management system in which inventory is cut down to a minimum through adjustments to the time and physical distance between the various production operations. Source of Funds: Decrease in an asset account or an increase in a liability or an equity account. Permanent Working Capital: These assets are required on a continuing basis over the entire year. Under this system the firm keeps a minimum level of inventory an hand relying upon suppliers of furnish parts “just-in-time” for them to be assembled. It is also called acid test ratio. . Alternatively it represents the difference between the bank balance and book balance of cash of a firm.Float: It refers to the amount of money tied up in Cheque that have been written but yet have to be collected and encashed. A ratio that measures the number of times a firm‟s inventories are sold and replaced during the year. This ratio reflects the relative liquidity of inventories. Inventory Turnover Ratio: Cost of goods sold / Inventory. It is a measure of liquidity. Operating Cycle: The period involved from the time cash is invested in inventory until the time cash is recovered from the sale of the goods. Liquidity Ratio: It indicates to the relationship between current assets and current liabilities. Gross Working Capital: The firm‟s investment in current assets. They represent the amount of cash. Optimal Cash Balance: Equal to the larger of (1) the sum of transaction balances and precautionary reserves and (2) compensating balance requirements. Quick Ratio: Current assets minus inventory and prepaid expenses items divided by current liabilities. receivables and inventory maintained as a minimum to carry on operations at any time.
Temporary Working Capital: Trade credit. . the current liabilities and the interrelationships that exist between them. that arises spontaneously in the firm‟s day to day operations. Trade Credit: Credit extended to another firm is known as trade credit. and other payables and accruals. Working Capital Management: It is concerned with the problems that arise in attempting to manage the current assets.
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