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Submitted By:
(ID NO:-34)

Guided By





This is to certify that the report of Summer Training at GUJARAT
Ruchit S. And ID No:-34 towards the partial fulfillment of the
requirement for the degree of Master of Business Administration
has been found satisfactory.



✔ With the respect and pleasure, I have privilege to submit my report to the Gujarat
✔ MBA is a professional course. The main aim of doing an MBA is developing the
managerial skills, which helps me to become a good manager in the life. In the
management field you cannot create success stories if you are not a good learner. You
need to be a good learner to sharpen your knowledge in the particular field to achieve
and attain desired goals and heights.
✔ It gives me an immense pleasure being a part of GACL in a span of two months. This
precious time of project is fruitful to correlate theoretical concept and industrial
practices. I have tried to highlight what is the whole system is all about and how it

✔ The best thing about the G.A.C.L is the disciplines of their workers with their full
efforts as perhaps are working as family members. And through this hard work they
are successful to achieve their goals.

✔ So, the summer training is really helpful to generate those skills and developing the
learning process. This is the main reason why I have taken summer training at GACL.


✔ It is my pleasure that I could work on my project at GACL (GUJARAT ALKALIES

✔ We have pleasure in expressing our deep sense of gratitude to Dr.H.B.PATEL (CFO)
for permitting us in the training. We are also thankful to Mr.A.K.Mishra (DGM) for
sparing his valuable time and also Mr.V.J.Patel (senior manager HRD) for initiating
and coordinating us to the training when we reported him and guided us in the
collection of relevant material.

✔ I am very much thankful to Dr. Tripat Kaur (Director, Sigma Institute of
Management Studies, Vadodara), Mr. Manish Vyas (Faculty) and our all respected
faculties at Sigma Institute of Management Studies and also thankful to Mr. C.B.
Patel, Mr. Alkesh B. Patel, Mr. Suresh V. Shah, Mr. P.A.Shah, Mr.A.J.Shah,
Mr. M.P.Ganthi, Mr. P.U.Pathak and Mr.B.R.Patel who have provided me a lot
of co-operation, support & given me required necessary information.

✔ A Project report is the most important for any management student. “Experience is a
best Teacher”. In order to achieve Excellence and Success, the Theoretical Knowledge
must be supplement with practical knowledge and practical work.

✔ At the outset, I am very much thankful to Gujarat Alkalis And Chemicals Limited for
giving me an opportunity to work in FINANCE DEPARTMENT.

✔ At the last but not the least would like to thanks all the persons who directly or
indirectly helped us out in making a report.


✔ Summer training is the part of MBA programme, so I have to go under training of 8
weeks at GACL Vadodara. Gujarat Alkalis and Chemicals Ltd (GACL) is promoted
by Government of Gujarat and was established in the year 1973 in the State of Gujarat
by Gujarat Industrial Investment Corporation Limited (GIIC).

✔ I have completed my training at Finance Department. I have undertaken a unique,
step-by-step methodology for preparation of the report. Reference books, GACL
Annual Report, GACL Website and the data available at Training Hall really helped
me to make this report valuable.

✔ In this report first I have given the general information regarding the company. It
includes the history of company, financial position of the company and the products.

✔ I have worked on Working Capital and Ratio Analysis of GACL through different

 GACL - The Story 7
 Vision & Mission 11
 Company Profile 12
 GACL Products 14
 Growth Strategy 16
 SWOT Analysis 16
 5 ‘S’ MODEL 18
 Organizational Structure 19
 Objectives of working capital management 21
 Finance Department 22
 – The Nine sections of the Finance Department 23
 – Need of the study 30
 – Scope of the study 30
 – Definition of working capital 31
 – Types of working capital 34
 – Concept of working capital 34
 – Importance of working capital management 36
 – Factors influencing working capital needs 36
 – Factors determining working capital 37
 – Working capital financing 38
 – Working capital management at GACL 41
 – long term financing and short term financing 43
 – Working Capital Analysis 43
 – Working Capital Cycle 44
 Data processing and analysis 46
 Interpretation of ratios of GACL 47


GACL - The Story
Gujarat Alkalies and Chemicals Limited (GACL) was
incorporated on 29th March, 1973 in the State of Gujarat by
Gujarat Industrial Investment Corporation Limited (GIIC), a wholly
owned company of Govt. of Gujarat, as a Core Promoter, company
is listed in Mumbai, delhi and National Stock Exchange.

GACL has two units located at Vadodara and Dahej, both in the
State of Gujarat. It has integrated manufacturing facilities for
Caustic Soda, Chlorine, Hydrogen Gas, Hydrochloric Acid,
Chloromethanes, Hydrogen Peroxide, Phosphoric Acid, Potassium
Hydroxide, Potassium Carbonate, Sodium Cyanide, and Sodium
Ferrocyanide. The Dahej unit also has 90 MW Captive Power Plant
(CPP) for regular and economical power supply.

The Company commenced its operations in 1976 with 37,425
MTPA Caustic Soda Plant based on the then, state-of-the-art
Mercury Cell process at its Plant which is situated 16 km north
of Vadodara near Village Ranoli on the main Railway track
route between Ahmadabad and Mumbai.

Right from the inception, GACL has been following the strategy of continuous capacity expansion
in core areas. The first stage expansion of the Caustic Soda Plant raising the capacity to 70,425
MTPA was undertaken in October, 1981 followed by a diversification programmed to produce
2000 MTPA of Sodium Cyanide in December, 1982.

In 1984, the second stage expansion to increase the capacity of
Caustic Soda Plant to 103,425 MTPA was undertaken.
Simultaneously, the Company undertook the diversification
project for manufacture of 10,560 MTPA of Chloromethanes
using Chlorine, a co-product of the Company and in 1991, the
capacity of Chloromethanes production was doubled.
As power is the major input for production of Caustic Soda
and constitutes about 65% - 70% of the cost of production, the
Company alongwith other Corporations like M/s. GSFC,
Petrofils Co-operative Ltd. and Gujarat Electricity Board
promoted a gas based power unit in Vadodara under the name
of Gujarat Industrial Power Company Ltd. (GIPCL) during the
year 1985. As a promoter of GIPCL, the Company gets low
cost power, as the plant is gas based and is depreciated.

Since production of Caustic Soda is highly power intensive, in
order to reduce power cost and to eliminate mercury pollution,
the Company during the year 1989 converted one of its Cell
Houses producing Caustic Soda from Mercury Cell
Technology to environment friendly Membrane Cell
Technology, thereby eliminating the use of mercury. The
Capacity of Caustic Soda was also increased to 132000 MTA.

The conversion of second Mercury Cell to Membrane Cell was
carried out during March, 1994, thereby eliminating the total use
of mercury from the Complex for production of Caustic Soda and
increasing the capacity of plant along with this conversion to
170000 MTA including Potassium Hydroxide facility.

As part of this Membrane Cell Conversion Project, a new facility
for manufacture of 16500 MTA of Potassium Hydroxide Lye
based on Membrane Cell was also set up. The Company has
further set up facility for converting part of this Caustic Potash Lye
into Potassium Carbonate with a capacity of 13200 MTA.
In order to add further value to its products, the company had set
up manufacturing facility for production of 11000 MTA Hydrogen
Peroxide (100%) at Vadodara Complex during the year 1996 to
utilize Hydrogen gas, which is a co-product from Caustic Soda

In 1995, as a part of diversification programmed and to meet the
growing demand of its products in the State of Gujarat and nearby
areas, the Company had set up a plant for manufacture of
Technical Grade Phosphoric Acid with capacity of 26400 MTA
(85% Phosphoric Acid) at a new location at Dahej, District

The Company also set up Membrane Cell based grass root
Caustic-Chlorine Unit with a capacity of 100000 MTA at
Dahej. Alongwith this, a captive 90 MW co-generation Power
Plant was set up so as to ensure uninterrupted and low cost
power for its captive operations.


✔ To continue to be identified and recognized as a dynamic, modern and eco-friendly
chemical company with enduring ethics and values.


✔ To manage our business responsibly and sensitively, in order to address the needs of
our Customers & Stakeholders.
✔ To strive for continuous improvement in performance, measuring results precisely,
and ensuring GACL's growth and profitability through innovations.
✔ To demand from ourselves and others the highest ethical standards and to ensure
products and processes to be of the highest quality.


Name of the Company:-

Gujarat Alkalies and Chemicals Limited

Registered Office / Vadodara Complex:-
P.O. Petrochemicals -391 346
Dist –Vadodara
Gujarat (INDIA)

Phone - (0265) - 2232681 -82 / 2232701-82/2232981

Dahej Complex:-
Village: Dahej -392 130
Tal: Yagra
Dist: Bharuch
Gujarat (INDIA)
Phone - (02641) - 256315-16-17 / 25623



Form of the Organization:-
Joint Venture, PSU, company

Size of the Organization:-
Large Organization

Messrs Prakash Chandra Jain & Co.

Chartered Accountants,

Messrs Amarchand & Mangaldas

& Suresh A. Shroff & Co.

Company Secretary & General Manager:

Shri. V.L.Vyas


State Bank of India

Central bank of India

AXIS Bank Ltd. (UTI)

IDBI Bank Ltd.

UCO Bank

Indian Bank

HDFC Bank Ltd.



✔ Caustic Soda Flakes
✔ Caustic Soda Lye

✔ Caustic Soda Prills
✔ Sodium hypo chlorite
✔ Liquid Chlorine
✔ Compressed hydrogen Gas
✔ Hydrochloric Acid

✔ Caustic Potash Flakes
✔ Caustic Potash Lye
✔ Potassium Carbonate

✔ Methyl Chloride
✔ Methylene Chloride
✔ Carbon Tetrachloride
✔ Chloroform

✔ Sodium Cyanide
✔ Sodium Ferro cyanide

✔ Hydrogen Peroxide
✔ Bleach win


✔ Phosphoric Acid
✔ Calcium Chloride Flakes
✔ Calcium Chloride Powder

✔ Dilute Sulpharic Acid
✔ Scale win
✔ Aluminum Chloride Anhydrous
✔ Poly Aluminum Chloride


✔ To remain the largest producer.
✔ To maintain highest quality & be the first choice of customer.
✔ To remain in the lowest production through captive power.

✔ To have downstream value added products & flexibility of product
mix for better margins & wide market.
✔ To ultimate good to remain leader in the chlor alkalis.



✔ Single Largest caustic soda producer in country coin a capacity of 27000 TPA having
industry share of 13.75%.
✔ Leader in chlor-alkali industry.
✔ Low cost power from GIPCL.
✔ Integrated downstream plants.
✔ In house research and development.
✔ Dedicated men power.
✔ Proximity to raw material source and market.
✔ Excellent Industry relation.
✔ Strong and committed work force.
✔ The company has been awarded ISO9001:2000certificated from 20th Nov, 2003.
✔ National award by government of India 1993 for contribution of R&D department of
company in the pollution control environment protection.

✔ High Price.
✔ Highly power intensive products as power.

✔ Company's products are in commodity group and therefore the prices are purely
market driven.
✔ The supply of natural gas for the power plants varies depending upon availability.

✔ Foreign market the demand for company's products in foreign market is high therefore
GACL has golden opportunity to gain share market by exporting its products to
foreign countries.
✔ Excess capacity in power plant will help in setting up down stream projects for
increasing the capacity of caustic soda production

✔ The chlor alkali industry in cyclical in nature
✔ The industry has faced with over capacity in the country
✔ Dependence on the performance of consuming sectors
✔ Threats of impact of slow down Indian economic growth
✔ Highly competition market for the products of the company

✔ Information regarding to the working management is collected by way of
interviewing persons and from documents and knows basic things relating to topic by
observing the work.


✔ This is method used for collecting information. This is a standard and reliable method
of gathering information. Information relating to company, variously norms set by
banks while borrowing loans for working capital, policy followed by company
towards creditors and debtors etc is collected through studying various documents.
Various documents like budget files, monthly report files, audit reports, document
required at the time import and export etc.


✔ With the help of observation one should know the actual process of working which
we cannot understand by reading or listening. This method is very essential especially
to see actual working of manufacturing in plant. Observation is also important to
know purchasing process, stores process for inventory management, sales etc. With
the help of this method we know the cash management, monthly closing of accounts,
verification of stocks etc. In this way the overall functioning of the organization and
its culture can be better understood by actually observing the things.


To Study,

✔ The important objective of working capital management is that the company should
always be in a position to meet its current obligation which should properly be
supported by the current assets available with the firm. But maintaining excess funds
in working capital means locking of funds without return.

✔ To maintain solvency and helps in continuous production process.

✔ To maintain the composure of business through all the stages of trade cycle.


Types of Accounting Method:
✔ GACL is following all accounting standards and maintain books of Account as per
the company's act 1956. The main feature of GACL is that it prepares books of
account four times (l) on the daily basis (2) on the monthly basis (3) on quarterly
basis (4) on annually basis thus the financial performance is verified regularly and the
company is able to get true and fair view of it’s financial position.



Sales Accounting:-

✔ Sales Accounting has to deal with the external parties such as Government Bodies,
Sales Representatives, Dealers, Manufacturers, and Retail Traders etc. It also
maintains the details of sales and debtor account and related adjustment.


Different types of discounts are as follows:

➢ Trade discount

➢ Price discount

➢ Quantity discount

➢ Dealer discount

➢ Long distance discount & etc.

Bill Passing Section:
✔ Make the payment of routine expenses like payment for purchase as per order made
by purchase department and of the new project. All the bills related to plant, come to
this department for the sanction. For e.g. Purchase of raw materials, equipment,
machineries etc….. Here all the particulars are checked and approved. For local
purchase bill GRV (goods receipt voucher) is needed. Only after the bills have been
approved payments will be made. The company enjoys E-PAYMENT for CENVAT,
EXCISE and also the salaries.

Income Tax & Insurance Section
✔ This section takes care of all tax related issues. It is involved in tax planning and
update of all the laws with respect to taxation. This becomes very important for the
company because many decisions are taken; keeping in mind it’s tax implication. The
budget in this respect has also to be made for the payment and provision of advance
✔ They also manage the insurance part. GACL basically has the insurance for the Fixed
Assets and also a Group Insurance for the employees. For deciding on insurance the
company calls in for quotations from various companies and decides based on the
lowest and also considering the reputation.
➢ Involved in updating of taxation as per rules. Tax planning is under this
department as part of prior responsibility.
➢ Insurance of all the fixed assets.
➢ Tax consultants are appointed to follow up with tax laws.

Banking Section
✔ Check out the details of banking transactions and maintain the balance of bank. (Bank
reconciliation statement). Bank section looks after deposits in cash and bank account.
It also collects checks from marketing department. Banks like HDFC, IDBI, SBI,
AXIS BANK are involved in the transaction with GACL. Following are the basic task
perform by this section

➢ To consolidate the bank account.
➢ Take into account the cash credit limit.
➢ Cash credits are monitored so that interest payment can be control.
➢ Every month cash flow statement is prepared.
➢ GACL is using E-payment for ease of payment.

Central Accounting Section

✔ Central Accounting Section is the Heart of Finance. Activities of all other section are
connected with central accounting section. The different functions of this section are
Financial statements and accounts are prepared on monthly, quarterly & annually as
per the requirements and sent to SEBI and the stock exchange. Profitability is
calculated on day-to-day basis and reported to Managing Director.

➢ Verify the Account maintain by all the department and make financial analysis of
the statement and also give suggestion and recommendation.
➢ They also involved in Annual Report preparation and provide all required
information to the management.
➢ Find out profitability ratio every day to check whether the company is going
correctly as per the targets.

Cash & Establishment Section
✔ It prepares pay bill of employees, income tax, pension, gratuity, leave encashment,
LTA etc. It works in union with the HR department. The calculation of the salary for
both management and non management cadre is done here. All the deductions like
PF, loans etc. are done here. It also incorporates into the salary the various allowances

➢ Housing allowance
➢ Conveyance allowance
➢ Medical allowance
➢ Canteen allowance
➢ Shift allowance
➢ Washing allowance
➢ Garden allowance
➢ Chemical handling allowance
➢ Professional skill development allowance
➢ Transportation allowance
➢ City compensation allowance

Loan Section
✔ When new projects are taken up, a project report is prepared on the basis of market
survey. The report includes the present and future estimates, financial aspects i.e.
estimated cost, budget, production capacity, market trends and the likely sales.

✔ When project pass through then they goes to financial institution for its final approval
by this section. This section Do negotiation with bank for payment terms and rate of
interest and make long term arrangement for new project.

Costing & Budgeting section:
✔ Make estimation of cost to the company (CTC) and budget in advance and try to
reduce the cost and improve efficiency.

➢ Costing is done not only for whole activity but also for individual items.
➢ This section prepares the monthly cost incurrence budget and monitors it. They
have to ascertain the variable cost of the items being produced. This is because the
knowledge of the variable cost is very essential as if an item is sold below the
variable cost it would incur loss to the company.
➢ This section has a major hand in ascertainment of the prices of the items because
it provides data about the cost of production.

Inventory Accounting Section
✔ This section is concerned with the Valuation of Inventory. The Stores Department
prepares a Goods Receipt Voucher. Based on this voucher, cost of inventory is

calculated. It also prepares the Variance Report based on the purchase order placed
and the materials received.

✔ Monthly statement of inventory send to bank for the hypothecation of the stock of

✔ Many of the items company need for day-to-day maintenance and operations. The
time to procure these materials may be longer due to various reasons and it is not
possible to procure these materials instantaneously. Therefore it is necessary to keep
stocks of such items.

✔ On the one hand inventory is very valuable resource for uninterrupted production, and
on the other hand excess of inventory holding locked up capital. So optimize level of
stock must be necessary. GACL is having continuous production so optimum
inventory has to be maintained so that production does not affects due to shortage of
raw material.

GACL follows XYZ analysis for the Inventory Management

✔ XYZ analysis is used for the management of inventory at GACL. The raw materials
are classified as X, Y and Z on the basis of the basis of the cost of the raw materials.


“X” item “Y” items “Z” items

Salt Magnafloc/ Fastfloc HM-HDPE Barrels 200 Ltr.
Barium Carbonate Sodium Sulphite HDPE Bags-CSF
Soda Ash Sodium Thio Sulphate HM-HDPE Carboys
Sodium Bisulphate Ammonium Nitrate HDPE Bags- KOH Flakes
Alfa Cellulose Mono Ethline Gycol HM-HDPE Drums
Sulphuric Acid Nitric Acid Furnace Oil
Mono Ethylamine Cast Iron Powder
Palladium Catalyst Polythene Bags
MS Drum
Alumina Trihydrate Powder
Prills Bags

Need of the study

✔ Working Capital refers to that part of the firm’s capital, which is required for
financing short-term or current assets such as cash, marketable securities, debtors and
inventories. Funds, thus invested in current assets keep revolving fast and are
constantly converted into cash and this cash flow out again in exchange for other
current assets.
✔ Corporate executives devote a considerable amount of attention to the management of
working capital. Working capital is the life blood of any business, without which the
fixed assets are inoperative.

➢ To study how the company manage its current assets to maintain better
financial position.
➢ To know the reasons of deviations in the working capital position of the
➢ To study the liquidity management of the company
➢ To study the inventory management of the company
➢ To study the receivables management of the company

Scope of the study
✔ To study working capital management of the company, the choices of accounting
policies may distort intercompany comparisons.
✔ The businesses apply creative accounting to show the better financial performance or
position which can be misleading to the users of financial accounting.
✔ Ratios need to be interpreted carefully. They can provide clues to the company
performance or financial situation. But on their own, they cannot show whether
performance is good or bad.
✔ Ratios require some quantitative information for an informed analysis to be made.
✔ The figures in set accounts are likely to be at least several months out of date, and so
might not give a proper indication of the company’s current financial position.

✔ It is difficult to generalize about whether a particular ratio is ‘good’ or ‘bad’. For
example, a high current ratio may indicate a strong liquidity position, which is good
or excessive cash which is bad. Similarly, noncurrent assets turnover ratio may denote
either a firm that use its assets efficiently or one that is undercapitalized and cannot
afford to buy enough assets.
✔ Companies may have different capital structures and to make comparison of
performance when one is all equity financed and another is a geared company it may
not be a good analysis

Definition of working capital

✔ Working capital refers to that part of the firm’s capital, which is required for
financing short-term or current assets such as marketable securities, debtors and
inventories. Funds thus, invested in current assets keep revolving fast and are
constantly converted into cash and this cash flow again in exchange for other current
assets. Working capital is also known as revolving or circulating capital or short-term
✔ Current assets are those assets which are converted into cash, within the current
accounting period or within the next year as a result of the ordinary operations of the
business. They are cash or near cash resources.

Current assets include:-

➢ Cash and bank balance
➢ Receivables
➢ Inventory
➢ Raw materials, stores and spares
➢ Work in progress
➢ Finished goods
➢ Prepaid expenses
➢ Short-term advances
➢ Temporary investments

✔ Current liabilities are the debts of the companies that have to be paid during the
current accounting period or within a year.

Current liabilities include:-
➢ Creditors for goods purchased
➢ Outstanding expenses i.e. Expenses due but not paid
➢ Short –term borrowing
➢ Advances received against sales
➢ Taxes and dividend payables
➢ Other liabilities maturing within a year
➢ Other loans payables within a year

✔ Working capital is also known as circulating capital, fluctuating capital and revolving
capital. The magnitude and composition keep on changing continuously in the course
of business.

✔ Firm’s investment in currents assets is gross working capital and difference between
current assets and current liabilities is net working capital.

✔ Every business needs investment to procure fixed assets, which remains in use for a
longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed
Capital’. Business also needs funds for short-term purposes to finance current
operations. Investment in short term assets like cash, inventories, debtors etc. is called
‘Short-term Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorized,
as funds needed for carrying out day-to-day operations of the business smoothly. The
management of the working capital is as important as the management of Long-term
financial investment.

✔ Every running business needs working capital. Even a business which is fully
equipped with all types of fixed assets is bound to collapse without :-

➢ Adequate supply of raw materials for processing;
➢ Cash to pay wages, power and other costs;

➢ Creating a stock of finished goods to feed the markets demands regularly; and
➢ The ability to grant credit to its customers.

✔ All these require working capital. The business will not be able to carry on day-to-day
activities without the availability of adequate working capital. Working capital cycle
involves conversions and rotation of various components of the working capital.
Initially ‘cash’ is converted into raw materials.

✔ Subsequently, with the usages of fixed assets resulting in value additions, the raw
materials get converted into work in process and then into finished goods.

✔ This is how various components of current assets keep on changing their forms due to
value addition. As a result, they rotate and business operations continue. Thus, the
working capital cycle involves rotation of various constituents of the working capital.

✔ While managing the working capital, two characteristics of current assets should be
kept in mind viz. (a) short life span, and (b) swift transformation into other form of
current asset. Each constituent of current asset has comparatively very short life span.
Investment remains in a particular form of current asset for a short period. The life
span of current asset depends upon the tie required in the activities of procurement,
production, sales and collection and degree of synchronization among them. A very
short life span of current assets results into other form of current assets for a running

These characteristics have certain implications:

✔ Decision regarding management of the working capital has to be taken frequently
and on a repeat basis.

✔ The various components of the working capital are closely related and
management of any one component affects the other components too.
✔ The difference between the present value and the book value of profit is not


✔ There are two possible interpretations of working capital:

1) Balance sheet concept
2) Operating cycle concept

Balance sheet concept:-
✔ There are two interpretations of working capital under the balance sheet concept:

➢ Excess of current assets over current liabilities.
➢ Gross working capital or Gross or total current assets.
➢ Excess of current assets over current liabilities are called the net working capital
or net current assets.
➢ Working capital is really what a part of long term finance is locked in and used for
supporting current activities.
➢ The balance sheet definition of working capital is meaningful only as an
indication of the firm’s current solvency in repaying its creditors.
➢ When firms speak of shortage of working capital they in fact possibly imply
scarcity of cash resources.

➢ In fund flow analysis in working capital, as conventionally defined, represents
employment or application of funds.
➢ Gross working capital is equal to the total of all current assets of a company.

Operating cycle concept
✔ In any organization current assets are financed by current liabilities but all current
assets cannot be financed by current liabilities therefore there is need to maintain net
working capital.
✔ Why net working capital is needed can be understood by following cycle:
✔ Operating cycle consists of four phases:
➢ Utilization of cash by procurement of raw material
➢ Conversation of raw material into finished goods.
➢ Sale of finished goods to customers.
➢ Collection of many from customers.
✔ There is time lad between two successive phases. Procurement of raw material need
some time called as lead time. It can be short or long depends on availability of
material. Each product has processing time while converted from raw material to
finished goods. Finished goods can reach to customers by sales efforts lacks of proper
sales efforts can lead to accumulation of inventory of finished goods.
✔ Realization of cash against the finished goods depends on time taken by the cycle to
operate more time period to operate this cycle; more working capital is needed.

This is mainly due to:-
➢ Investment in current assets increase keeping level of current liabilities almost
constant so more working capital is needed.
➢ More time taken to operate cycle (i.e. more lead time, production cycle time,
credit period) naturally make investment in currents assets e.g. Inventory and

➢ Working capital management is important fact of financial management for two
reasons investment in current assets represents a substantial portion of total assets.

➢ Investments in current assets have to be geared up as per production level which
in turn depends on level of demands.
✔ The goal of working capital management is to manage affirm currents and current
liabilities in such a way that satisfactory level of working capital is maintained. This
is so because is the firm will not maintain satisfactory level of working capital;
company has to raise loan against fixed assets and fixed assets are at stake. Besides
this company has problem’s when it has “too mach and too little” working capital.

✔ The working capital needs of a business are influenced by numerous factors. The
important ones are discussed in brief as given below:
➢ Nature of Enterprise
➢ Manufacturing/ production policy
➢ Operations
➢ Market condition
➢ Availability of Raw Material
➢ Growth and Expansion
➢ Price Level Changes
➢ Manufacturing Cycle
✔ At times, business needs to estimate the requirement of working capital in advance for
proper control and management. The factors discussed above influence the quantum
of working capital in the business. The assessment of working capital requirement is
made keeping these factors in view. Each constituent of working capital retains its
form for a certain period and that holding period is determined by the factors
discussed above. So for correct assessment of the working capital requirement, the
duration at various stages of the working capital cycle is estimated. Therefore, proper
value is assigned to the respective current assets, depending on its level of
completion. The basis for assigning value to each component is given below:

➢ Nature of the industry
➢ Demand of industry
➢ Cash requirement
➢ Manufacturing time
➢ Volume of sales
➢ Terms of purchase and sales
➢ Inventory turnover
➢ Business turnover
➢ Business cycle
➢ Current assets requirement
➢ Production cycle
➢ Credit control
➢ Inflation or price level changes
➢ Profit planning and control
➢ Repayment ability
➢ Cash reserves
➢ Operation efficiency
➢ Changes in technology
➢ Firm’s finance and dividend policy
➢ Attitude towards risk

✔ The investment in raw materials, stock-in-progress, finished goods, and receivables
often varies a great deal during the year. Hence, the financial manager generally
spends a good chunk of his time in finding money to finance current assets.
✔ Typically, current assets are supported by a combination of long-term and short-term
source of finance. Long-term course of finance, primarily support fixed assets and
secondarily provide the margin money for working capital. Short-term sources of
finance, more or less exclusively support the current assets are,

➢ Trade credit
➢ Commercial banks
1. Cash credit/ overdrafts
2. Loans
3. Purchase/ discount of bills
4. Letter of credit
➢ Rights debentures
➢ Commercial paper

Trade credit

✔ It represents the credit extended by the suppliers of goods and services. It is a
spontaneous source of finance in the sense that it arises in the normal transactions of
the firm without specific negotiations, provided the firm is considered creditworthy
by its suppliers. It is an important source of financing representing 25 to 50 percent of
short-term financing.

Commercial banks
✔ It represents the most important source for financing current assets. Commercial
banks provides working capital advance in four primary ways:

1. Cash credit/ overdrafts: under cash credit or overdraft arrangement, a
pre-determined limit for borrowing is specified by bank. The borrower can
draw as often as required provided the outstanding do not exceed the cash
credit /overdraft limit. The borrower also enjoys the facility of repaying the
amount, partially or fully, as and when he desires. Interest is charged only on
the running balance, not on the limit sanctioned. A minimum charge may be
payable, irrespective of the level of borrowing, for availing this facility. This
form of advance is highly attractive from the borrower point of view because
while the borrower has the freedom of drawing the amount in installments as
and when required, interest is payable only on the amount actually

2. Loans: These are advances of fixed amount which are credited to the current
account of the borrower or released to him in cash. Interest is charged on
entire loan amount, irrespective of how much he draws.

3. Purchase/ discount of Bills: A bill arises out of a trade transaction. The
seller of goods draws the bill on the purchaser. The bill may be either clean or
documentary (a documentary bill is supported by a document of title to goods
like a railway receipt or a bill of landing) and may be payable on demand or
after a period which does not exceed 90 days. On acceptance of the bill by the
purchaser, the seller offers it to the bank for discount/ purchase. When the
bank discount/ purchase the bill it releases the fund to the seller. The bank
presents the bill to the purchaser (the acceptor of the bill) on the due date and
gets its payment.

4. Letter of credit: A letter of credit is an arrangement whereby a bank helps
its customer to obtain credit from its (customer’s) suppliers. When a bank
opens a letter of credit in favor of its customer for specific purchase, the bank
undertakes the responsibility to honor the obligation of its customer, should
the customer fail to do so.

Rights debenture:

✔ Public limited companies can issue “rights” debentures to their shareholders with the
object of augmenting the long-term resources of the company for working capital
requirement. The key guidelines applicable to such debentures are as follow:

➢ The amount of debentures should not exceed (a) 20% of the gross current
assets, loans, and advances minus the long term funds presently available for
financing working capital, or (b) 20% of the paid up share capital, including
preference capital and free reserves, whichever is lower of the two.
➢ The debt equity ratio, including the proposed debenture issued, should not
exceed 1:1.
➢ The debentures shall first be offered to the existing Indian resident
shareholders of the company on a pro rata basis.

Commercial paper:
✔ It represents short-term unsecured promissory notes issued by firms which enjoy a
fairly high credit rating. Generally, large firms with considerable financial strength
are able to issue commercial paper. The important features of commercial paper are as
➢ The maturity period of commercial paper ranges from 90 to 180 days.
➢ Commercial paper is sold at a discount from its face value and redeemed at its
face value. Hence the implicit interest rate is a function of the size of the discount
and the period of maturity.
➢ Commercial paper directly placed with investors who intend holding it till its
maturity. Hence, there is no well developed secondary market for commercial
✔ Since commercial paper represents an unsecured instrument of financing, the Reserve
bank of India has stipulated certain conditions meant primarily to ensure that only
financially strong companies can issue commercial paper provided certain conditions


✔ Working capital management at GACL starts at setting up the working capital required
by the company in the financial year. The amount of working capital required by the
company is financed by State Bank of India. The company has to provide the Income
Statement and the Balance Sheet to the State bank of India and after analyzing the
financial statements the bank sets the limit of working capital financed to the company
through cash credit. It is availed from different banks at a lower rate of interest then
the prevailing market rate through negotiations.

(Rs. in lacs)

✔ The amount of working capital used by the company in 2007 is Rs.130 crore. Out
of which Rs. 55 crore are availed from SBI, Rs.10 crore each from HDFC, AXIS
and UCO bank, Rs.15 crore from CBI, Rs.5 crore from IDBI and Rs.25 crore from
IB. The amount of Working capital has increased from Rs.70 crore in 2002 to

Rs.130 crore in 2007. The additional funds required for the operations are raised
through Short term loans which are taken for a period of 6 months. At present
GACL is having Rs.225 crore of
Short term loans out of which Rs.170 crore are financed from GSFS and Rs.55
crore are from HDFC.


GACL is efficiently managing its working capital through the effective management
of Inventory, Cash and Receivables. The payment and collection system of the
company also plays an important role in the optimum working capital management of
the company.


✔ The relevant question in current asset is what should be the relative proportion of
short term financing to long term financing.

✔ The two broad policy alternatively in this respect are:-
➢ Conservative current asset financing policy.
➢ Aggressive current asset financing policy.
✔ Conservative current asset financing policy relies less or short term sources like
debentures. Highly conservative policy would replace long term debt in equity. An
aggressive current asset financing policy on the other hand relies heavily on short
term bank finance and sicked to reduce dependence on long term financing.
✔ A conservative current assert policy reduces risk; affirm will be enable to repay or
replace its short term debt periodically. It however enhances cost of financing because
long term sources of finance debt or equity have higher cost associated with it. An
aggressive current asset financing policy relies more on short term banking policy
tends to have opposite effects. It exposes firm to higher degree of risk.
✔ The firm may be unable to cope with unanticipated change in market place; risk of
technical insolvency becomes more.
✔ The conservative policy resulting in higher investment in current assets depresses
profitability defined her EBIT/Total assets as the aggressive policy on the other hand
pauses up expected profitability because of lower investment associated with it.

✔ Operating cycle of firm begins with the acquisition of raw material and end with
collection of cash against finished goods. It may be divided into four stages.
➢ Raw material and storage stage
➢ Work in process stage
➢ Finished goods inventory stage
➢ Debtor’s collection stage

Working Capital Cycle

ACCOUNT PAYABLE Value addition




✔ Duration of an operating cycle is equal to sum of the duration of the duration
of each these stages less the credit period allowed by suppliers of firm.
➢ =R+W+D–C
➢ O= Duration of operating cycle
➢ R= Raw material and stores storage period
➢ W= Work in process
➢ D= Debtor collection period

➢ C= Creditors payment period


Data Analysis Techniques
✔ There are several tools of analyzing of working capital of a concern. The important of
them adopted as followed.

➢ Working Capital ratio
➢ Working Capital Trend Analysis

➢ Fund Flow analysis
➢ Cash Flow analysis
➢ Working Capital Budget


✔ Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as “the relationship between
two or more thing.” The relationship between two accounting figures, expressed
mathematically, is known as financial ratio. Ratio helps to summaries large quantities
of financial data and to make qualitative judgment about the firm’s performance.
✔ There are mainly three types of ratio consider for working capital:-
➢ Liquidity ratio
➢ Activity ratio
➢ Leverage ratio


1) Liquidity ratios

✔ Liquidity refers to the ability of a firm to meet its obligations in the short run, usually
one year. Liquidity ratios are generally based on the relationship between current
assets (the sources for meeting short-term obligations) and current liabilities. The
important liquidity ratios are,

A)Current ratio:-

✔ Indicates liquidity of the company. The standard is 2:1.

Current ratio = Current Assets
Current Liabilites

✔ Current asset = cash and bank balances, marketable securities, inventory of raw
materials, semi-finished goods and Finished Goods,bills receivables ,prepaid expenses
and provision for bad debts.

✔ Current Liabilites = Trade creditors, bills payable bank credit, provision for Tax,
Dividend etc.

✔ Rationale of Current Ratio : It indicates the ability of short-term solvency. It
indicates the rupee available for paying of current liabilities.

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Current 35183.55 38080.74 44026.73 53696.53 62392.70 53371.99

Current 13858.49 14512.65 23677.87 3113527 41440.03 1059548.3
(in lacs)

Current 2.54 2.62 1.86 1.72 1.51 1.70
Ratio (in


✔ The Current Ratio has been less in last three Years compared to 2003-04 and 2004-05
which Indicates that the company has lesser amount of cash available for meeting up
the current liabilities , but still the ratio is satisfactory as last year’s is 1.51 :1 i.e. 1.50
rupee of asset is available to pay off 1 rupee debt.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

a) Quick Ratio:

✔ It includes only the cash part of the assets. And hence is also called as Acid-test ratio.

Quick Ratio= Quick asset
Current liabilities

✔ Quick asset includes= Cash in Bank / Hand, Debtors receivables and short term
marketable securities – prepaid expenses and inventory.
✔ Use: It is a rigorous measure of a firm’s ability to service short-term liabilities; it is
widely accepted as the best available test of investors in the firm.

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Quick 23018.11 22923.54 18658.72 20617.90 62392.70 53371.99

Current 13858.49 14512.65 23677.87 3113527 41440.03 32084.39

Quick Ratio 1.66 1.58 0.79 0.66 0.60 0.68

(in pts)

Interpretation :
✔ The standard ratio is 1:1 and here it is 0.6:1 which indicates that some part of current
assets is tied up with slow-moving and unsaleable inventories and slow-paying debts.
This trend was for last 3 years but in 2003-04 and 2004-05 the ratio was more than the
standard required.


✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

1) Activity ratios:-

✔ Turnover ratios, also referred as activity ratios or assets management ratios, measure
how efficiently the assets are employed by firm. The important turnover ratios are,

a) Asset Turnover Ratio:

✔ This ratio is also known as the investment turnover ratio. Is based on the relationship
between the COGS and investments of a firm. The ratio however measures the
efficiency of a firm in managing and utilizing its assets. The higher the Turnover ratio
the more is the efficiency.

Asset Turnover ratio= External Sales + other Income
Net Fixed Current Assets

+loans and Advances

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-
Net Sales 70297.80 91363.15 97188.50 108534.83 120337.72 108687
(Rs in
Net 131346.58 132149.67 150360.72 167027.00 188772.91 168720.2
(in lacs)
Asset 54 69 65 65 64 64

Interpretation :
✔ The asset/investment has been above 60% for last 4 years i.e. above 60% of asset
were easily converted in to COGS. Hence GACL is capable to convert the
investment’s 64-65% into COGS. The prediction also shows that for year 2008-09 the
ratio would be 64%

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

b) Accounts receivable period:-
✔ Is the period in which the customers/debtors pay-back the amount hence. Its also
called as Bills receivables it is in terms of days.

Account’s receivable period= Total Debtors x 365
Net Sales

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Total 14675.05 19967.91 16061.27 17072.72 19391.32 17508.44
(Rs in
Net Sales 83131.12 107117.25 112098.47 125748.77 136361.03 124736.1
(Rs in
Accounts 64 67 52 49 51 51.25

✔ The Debtors payable period in days have remain almost of 2 months for Gacl it has
been reduced to 50 days to the current year. For the predicted year it may 51 days.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.

Inventory management at GACL

✔ Many of the items company need for day-to-day maintenance and operations. The
time for procure these materials may be longer due to various reasons and it is not
possible to procure these materials when instantaneously required. It is, therefore,
necessary to keep stocks of such items.
✔ Even for those items which are readily available in the market, it may not be
economically to buy these items every time as buying in piecemeal involve additional
cost to the administration. Therefore it is cheaper to buy in bulk and to stock some of
these items and supply indenters through such stocks.

✔ On the one hand inventory is very valuable resource for uninterrupted production, and
on the other hand excess of inventory holding locked up capital. So optimize level of
stock must be necessary. GACL is having continuous production so optimum
inventory has to be maintained so that production does not affects due to shortage of
raw material.
✔ GACL is using ABC (Always Better Control) analysis technique for the purpose of
inventory management. GACL is having more than one supplier for its raw material
as the quantity required by GACL is large which cannot be supplied by one supplier.
The procurement of raw material is done through yearly rate contracts which are
finalized in the beginning of the financial year. The various methods like Minimum
reorder period, stock level of inventory and the quantity to be order is decided by the
top management annually by framing a annual budget and on the basis of that budget
the rate contacts are issued.
✔ GACL uses its stock for getting credit for working capital from financial institutions.
So inventory management is very important issue for continuous production as well
as financing its working capital.

Setting of the Inventory level

✔ The various inventory levels like minimum stock level, maximum stock level, and
reorder level are set through the annualized budget by the top management.

Ordering of Raw Material

✔ The Raw material are ordered on receiving an Indent in which the quantity to be
ordered is mentioned. The purchase department then place the order on the basis of
indent received and then the order proposal is approved by the committee and then
finally the order is placed.

Committee for approving the order proposal

✔ There are different purchase committees for granting purchase approval which are as
➢ Purchase of 1 to 5 lacks: This committee consists of chief financial officer,
deputy general (finance), executive director (technical) and chief general manager
➢ Purchase of over 5 lacks: All the purchases above 5 lacks are made by a
committee consisting of Managing Director, Chief financial officer, chief general
manger (purchase), executive director (marketing).
➢ Purchase committee for salt: GACL is having a separate committee for salt
as this the most important raw material and is known as "black gold" in the
company. The committee consists of Managing Director, Chief Financial Officer,
Executive Director (Technical), Executive Director (Marketing).

a) Debtors Turnover Ratio:
✔ It Can also be termed as Bills receivable period,but here it is taken in times. The total
times the Debtors are able to pay out the outstanding bills with them.

Debtors Turnover Ratio = External Sales
(including excise duty recovered)
Average Debtors

Average Debtors= (Opening Balance+ Closing Balance)

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

External 81083.25 104641.99 109395.71 121510.69 132238.59 121048.3
(Rs in
Avg 15129.50 17321.48 18014.59 16567.00 18232.02 17604.54
(Rs in
Debtors 5.36 6.04 6.07 7.33 7.25 7
T/O Ratio

✔ Here the detors T/O ratio of GACL has been good for last year, the prediction shows
that the ratio will remain more or less the same compared to last year.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.

a) Invetory Turnover ratio:

✔ This indicates the number of times inventory is replaced during the year. It measures
the relationship between the COGS and the inventory level.

Invetory Turnover ratio: Net Sales ( including excise duty recovered)
Average Inventory

Average Inventory = (opening balance+ Closing Balance)

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Net Sales 81083.25 104641.99 109395.71 121510.69 132238.59 121048.3
(Rs in
Avg 5583.67 6313.14 7020.37 8545.11 10010.82 8525.433
(Rs. In

inventory 14.52 16.58 15.58 14.22 13.21 14.33

✔ Is similar to the Inventory holding period, but it shows the data in terms of times.Here
GACL was able to convert its inventory in COGS 13 times, the ratio is less compared
to previous year because of slow-down in demand and also because of the over-
stocking of chlorine . The predicted ratio for year 2008-09 is set-out to be 14 times.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.

a) Inventory holding period:
✔ Is the period of the cycle, when the Raw materials are converted into the finished

✔ The last year’s inventory holding was for 28 days and 33days.
✔ In 2006-07 hence it shows that the inventory holding period has decrease.
✔ Which indicates two things?
➢ The Production process is faster and efficient and
➢ The sales activities are faster.
✔ But the predicted ratio in red color shows that the days may go up to 32 days, the
projected ratio is the arithmetic mean of last 3 years.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.


✔ Financial leverage refers to the use of debt finance. While debt capital is a cheaper
source of finance, it is also a riskier source of finance. Leverage ratios help in
assessing the risk arising from the use of debt capital.

a) Debt/equity ratio:

✔ Actually indicates the proportion of Debt and Equity . i.e. the shareholders fund and
The Debt claims. Its major application is for long-term funding , but while funding
for the working capital Financial Institutions also consider this ratio for various
purposes importance for creditors, owners and firm itself. The higher the ratio is a
bad signal as owner’s are putting less money.

Debt/Equity= Secured Loans+Unsecured Loans-(secured+ unsecured Debts)
Share Capital+Reserve and Surplus

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Debt 77078.34 53981.01 47260.33 40062.62 31546.96 39623.3
(Rs in
Equity 38157.77 51440.56 70339.39 85919.74 103908.28 86722.47
(Rs in
Debt/ 2.02 1.05 0.67 0.47 0.30 0.48

✔ Here the last year’s ratio was 0.3:1 i.e. for every 0.3 rupee of debt the company has 1
rupee of owner’s capital. Since last 3 years the GACL’s Debt funding for long-term
project’s has been less as it less that 1(0ne).

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

✔ And according to the predictions taking last 3 years in consideration the ratio remains
to be near 0.48

b) DEBT/EQUITY RATIO (Secured Debts with Working Capital): Indicates the
total Debts including the WC
Secured Debts with Woriking Capital= Debt + Secured Debt

c) DEBT/EQUITY RATIO (Secured Debt without Working Capital):

✔ Indicates the Total debts less WC.

Debt/equity ratio=Debt + (Secured Loans- Working capital loan)


✔ Also known as “time –interest –earned ratio” It measures the debt servicing capacity
of a firm in so far as fixed interest on long-term loan concerned.
✔ But it is also used for analysis as it indicates the company’s capacity to pay-off the
long-term loan.
✔ The lower the ratio more the company is burden by that expenses. When the interest
coverage ratio is less than 1.5 or lower its ability to meet the expenses may be
questionable and interest Coverage below 1 indicates that company is not generating
sufficient revenue to satisfy interest expense.

Interest coverage ratio:Profit before Interest, Depreciation and Taxation

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

PBIT 24585.53 40499.89 41251.90 39879.77 39884.12 40338.6

Interest 7912.88 5975.54 3935.88 3773.00 2532.53 3413.803

Interest 3.11 6.78 10.48 10.57 15.75 12.26

Interpretation :
✔ Here its calculated wrt Times, Hence in 2007-08 15.75 times the GACL was able to
pay-off the Interest.


✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.

e) GROSS FIXED ASSET COVERAGE RATIO: The gross fixed asset coverage is
net of depreciation.

Gross Fixed Asset coverage Ratio =

Gross Fixed Assets + Capital Work in progress+ Expenditure on New Project
Secured loans- Installments of secured loans payable During Next year

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Gross 161950.94 167553.52 187648.57 203253.84 226048.64 205650.4
(Rs in
Secured 59684.16 44278.26 29982.00 16292.84 13054.74 19776.53
In Lacs)
Gross 2.71 3.78 6.26 12.48 17.32 12.02

Interpretation :
✔ In case of GACL it has been succesful in convertion of fixed asset into COGS.
✔ Current financial year it has done it 17.32 times, and during 2006-07 it was 12.48
hence its almost 5 times more compared to previous year.But taking last 3 years for
calculation it shows that for year 2008-09 the ratio may reduced to 12.02% which is
only an assumption without any specific reason.


✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

f) NET FIXED ASSSET COVERAGE RATIO: Is less the Net Depreciation.

Net Fixed Asset Coverage Ratio =

Gross Fixed Asses + Capital Work-in-progress+Expenditure on NewProjects depreciation

Secured Loans-Installments of Secured Loans Payable During Next Tweleve Months

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Gross 161950.94 167553.52 187648.57 203253.84 226048.64 205650.4
in Lacs)
Secured 59684.16 44278.26 29982.00 16292.84 13054.74 19776.53
In Lacs)
Net Fixed 1.61 2.12 3.55 6.96 9.68 6.73


✔ This is the ratio when the Net depreciation is removed from the Gross asset.Hence
compared to last year 2006-07 6.96(Times) It is 9.68(Times) the rise is almost by 3
times. But for year 2008-09 the ratio may dip to 3 times compared to the previous
which is a prediction as for calculation purpose the arithematic mean has been taken
of the last three years.

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years.

f) Debt service coverage ratio:

✔ The debt service coverage ratio (DSCR), is the ratio of cash available for debt
servicing to interest, principal and lease payments. It is a popular benchmark used in
the measurement of a company to produce enough cash to cover its debt (including
lease) payments. The higher this ratio is, the easier it is to obtain a loan. The phrase is
also used in commercial banking and may be expressed as a minimum ratio that is
acceptable to a lender; it may be a loan condition or covenant.


✔ In corporate finance, DSCR refers to the amount of cash flow available to meet
annual interest and principal payments on debt, including sinking fund payments
✔ In personal finance, DSCR refers to a ratio used by bank loan officers in determining
debt servicing ability.
✔ In commercial real estate finance, DSCR is the primary measure to determine if a
property will be able to sustain its debt based on cash flow.

Debt service coverage ratio=

Profit Before Interest and Depreciation but after Tax
Interest + Installments of Secured and Unsecured Loans

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

PBID-Tax 22064.84 28001.27 31581.71 31185.93 34741.55 32503.06

Rs in(lacks)

Interest+ 20042.60 15600.71 21149.56 27491.06 20985.95 23208.86
sec. &

Debt- 1.10 1.79 1.49 1.13 1.66 1.42

✔ In the late 1990s and early 2000s banks typically required a DSCR of at least 1.2, but
more aggressive banks would accept lower ratios, a risky practice that contributed to
the financial crisis of 2007–2009. A DSCR over 1 means that (in theory, as calculated
to bank standards and assumptions) the entity generates sufficient cash flow to pay its

debt obligations. A DSCR below 1.0 indicates that there is not enough cash flow to
cover loan payments. In case of Gacl the DSCR has always been above 1 required by
the banks. Hence company has never faced any problems for funding the working
capital requirement.
✔ The predicted ratio shows that the ratio may go up to1.42 which is beneficiary to the


✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.

h) Net Working Capital

✔ Net working capital (NWC) represents the excess of asset over current liabilities. The
term current asset refers to asset, which in the normal courses of business get
converted into cash over short period, usually not exceeding one year. Current
Liabilities are those liabilities, which are required to be paid in short period normally
one year. An enterprise should have sufficient NWC in order to be able to meet the
claims of the creditors and meeting the day-to-day needs of Business. The greater the
amount of the NWC, the greater the liquidity. Inadequate working capital is the first
sign of financial problem of the firm.

Net working Capital = Current asset-Current liabilities

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Current 35183.55 38080.74 44026.73 53696.53 62392.70 53371.99
Asset(in lacs)

Current 13858.49 14512.65 23677.87 3113527 41440.03 1059548.
Liabilities 3
(in lacs)

NET WC 2132.51 2356.8 2034.88 2256.12 2085.27 2125.45
Rs In lacs)

Interpretation :
✔ The Working capital requirement for the year 2007-08 is 2085.27 which indicates that
the net working capital requirement has been reduced because of the last year’s
unused inventory and cash, also most of the cash is been utilized from internal
accruals .

✔ The Red color Bar shows the predicted current ratio for the year 2008-09, the
prediction is done by taking the average of last three years. The predictions shows the
fall in paying-off capacity almost 3 times.


✔ During the 60 days Training I explore my Knowledge of corporate fields. I also know
that how to implement theory in practice. I also got the chance to study all the
Departments of GACL. So, that it improve my convincing power & also give chance
to meet different People. It also increases my Confidence. It is a memorable
Experience to be a part of GACL “PARIVAR”. I am always Thankful to them. I
studied lots may thing during my project work. I am very happy to say that GACL’s
is like “PARIVAR”. So there is a very less chance to arise negative conflict
dissatisfaction & grievance. In that Organization there is very less chance to fail. All
the employees of the company give the respect of each other & his/her boss.

✔ Finance is the blood of the any business or project. Thus, to manage and maintain
proper finance is very much necessary, it includes both owner’s finance and debt
finance. The ratio between debt and equity should be managed properly for the
smooth and efficient working. GACL knows this fact nicely and give proper attention
on this and this is one of the key elements of the GACL’s success.

✔ GACL is the Cash Cow for the Govt. of Gujarat.

✔ It is the single largest Caustic Soda producer in the country with the market share of

✔ A Leader in the Chlor-Alkalie Industry.

✔ Getting Raw Material (salt) at the lowest cost as Gujarat is having 1600km of Sea

✔ With the Captive Power Plant at Dahej, company enjoys low cost power which is also
considered as a Raw Material.

✔ The R&D department of GACL comes out with new products like Poly Aluminium
Chloride with even more low cost.

✔ The Chlorine Gas extracted from the production process of Caustic Soda used as a
Raw Material in its Sodium Cyanide plant.

✔ Strong and committed work force.

✔ Having won many awards on Quality Control and Environment Protection, the
company has shown its commitment towards becoming A Green Company. Company
has earned maximum Carbon Credit within its implementation in India.

✔ Demand for company's products in foreign market is high therefore GACL has
golden opportunity to gain market share by exporting its products to foreign

✔ Company has recently adopted Performance based Pay which will make it more
efficient in coming period.

✔ The financial position of the company is excellent. It can be seen from its Dividend
Payments in recent years.

✔ Company is having problems with dumping activity of Chinese Companies for last
many years. But, the Indian Govt. has granted all its recommendations and took anti

dumping measures against these Chinese companies every time it has complained.


➢ Dr Prasanna Chandra, director of Centre for financial Management is an MBA, PhD
(Finance).He has over three and half decades of teaching experience in postgraduate
and executive education programmes.

➢ Annual report of company

( Millions)
Mar 200 Mar 200 Mar 200
Particulars Mar 2007 Mar 2006
8 5 4
No of Months 12 12 12 12 12

+ Gross Sales 16026.83 15007.58 10939.57 10464.20 10716.29

Less :Inter divisional
2802.97 2856.51 0 0 0
Less: Sales Returns 0 0 0 0 0
Less: Excise 1901.89 1708.48 1507.49 1435.45 1125.39

Net Sales 11321.97 10442.59 9432.08 9028.75 9590.90
Increase/Decrease in
+ -23.59 -18.32 -52.45 26.55 20.04
Raw Materials
+ 3606.69 3258.19 2616.03 2215.80 2709.85
Power & Fuel Cost 2031.46 1515.65 1215.82 1090.50 3030.60
Employee Cost 870.77 687.52 595.07 465.75 478.35
Other Manufacturing
1083.22 1008.84 862.51 746.35 651.62
General and
Administration 203.67 180.00 137.28 403.02 127.35
Selling and Distribution
122.03 113.90 106.37 84.89 80.37
Miscellaneous Expenses 130.98 107.72 92.05 36.31 69.31
Less: Pre-operative
0 0 0 0 0
Expenses Capitalized
Total Expenditure 8025.23 6853.50 5572.68 5069.17 7167.48
Operating Profit (Excl OI) 3296.74 3589.09 3859.40 3959.59 2423.41
+ Other Income 706.99 405.13 277.81 115.96 49.45
Operating Profit 4003.73 3994.22 4137.21 4075.55 2472.86
Interest 259.05 386.04 405.67 614.66 811.06
PBDT 3744.68 3608.18 3731.54 3460.89 1661.80
Depreciation 989.57 873.24 784.79 768.25 778.21
Profit Before Taxation & 2755.11 2734.94 2946.75 2692.63 883.60
Exceptional Income / Ex 0 0 0 0 0
Profit Before Tax 2755.11 2734.94 2946.75 2692.63 883.60
+ Provision for Tax 514.26 869.38 967.02 1249.86 252.07
Profits After Tax 2240.86 1865.56 1979.73 1442.77 631.53
+ Appropriations 3851.94 2980.27 2382.19 1568.06 659.79
Equity Dividend % 35.00 27.00 20.00 15.00 7.50
Earnings Per Share 30.51 25.40 26.96 19.65 13.76
Book Value 141.49 117.00 95.78 70.05 77.13

31st MARCH, 2009

Year to date Year to date
3 Months 3 months
Sr. figures for the figures for
Particulars ended ended in the
No. year ended the year ended
(31/03/2009) previous year
(31/03/2009) (31/03/2008)
(Audited) (Audited) (Audited) (Audited)
[1] [2] [3] [4] [5] [6]
1 Net Sales / Income from
(a) 33,899 30,590 1,38,682 1,13,363
(b) Other Operating Income 800 854 3,372 5,650
Total ( a to b ) of Sr. No. 1 34,699 31,444 1,42,054 1,19,013
Expenditure :
2 (Increase) / Decrease in
a) stock in trade and Work in 1,213 967 (1,802) (248)
Consumption of raw
b) 14,444 9,220 51,963 35,485
c) Purchase of Traded goods 115 220 240 582
d) Power, fuel & other utilities 6,484 6,133 24,290 20,217
Other Manufacturing &
e) 2,300 2,430 12,292 11,214
Operative Expenditure
f) Employees Cost 1,705 2,862 9,060 8,715
g) Depreciation 2,884 2,539 10,943 9,896
h) Other expenditure 1,633 1,513 6,773 4,488
Total ( a to h ) of Sr. No. 2 30,778 25,884 1,13759 90,349
Profit from Operations
3 before Other Income, 3,921 5,560 28,295 28,664
Interest & Exceptional Items
4 Other income 161 164 953 1,325
Profit before Interest &
5 4,082 5,724 29,248 29,989
Exceptional Items (3+4)
6 Interest 582 540 2,459 2,533
Profit after Interest but
7 before Exceptional Items ( 5 3,500 5,184 26,789 27,456
Exceptional items [ Net ( Debit
8 ) / Credit ] :
a) Prior period adjustments (233) (5) (188) 95
b) Provision for impaired
- - (471) -
assets (AS-28)
Profit (+) / Loss (-) from
9 Ordinary Activities before 3,267 5,179 26,130 27,551
Tax ( 7 + 8 )
10 Tax Expense 1,109 3,344 6,903 5,143
Net Profit (+) / Loss (-) form
11 Ordinary Activities after Tax 2,158 1,835 19,227 22,408
( 9 - 10 )
Extraordinary items (net of tax
12 - - - -
expense Rs. - )
Net Profit (+) / Loss (-) for
13 2,158 1,835 19,227 22,408
the period ( 11 - 12 )
Paid-up equity share capital
14 7,344 7,344 7,344 7,344
(Face Value per share Rs.10/-
Reserve excluding Revaluation
( Millions)

Particulars Mar 2008 Mar 2007 Mar 2006 Mar 2005 Mar 2004
+ Share Capital 734.38 734.38 734.38 734.38 459.05
Share warrants & Outstandings 0.00 0.00 0.00 0.00 275.33
+ Total Reserve 10049.90 8150.38 6496.35 4684.09 3367.07
Shareholder's Funds 10784.29 8884.77 7230.73 5418.46 4101.45
+ Secured Loans 1649.52 2249.80 3718.28 5256.31 6185.21
+ Unsecured Loans 1505.17 1756.47 1007.76 141.79 1522.63
Total Debts 3154.70 4006.26 4726.03 5398.10 7707.83
Total Liabilities 13938.98 12891.03 11956.77 10816.57 11809.28
Gross Block 22351.61 19292.30 16847.55 16387.45 16143.83
Less: Accumulated Depreciation 9966.84 8992.34 8131.46 7348.46 6578.79
Less: Impairment of Assets 0 0 0 0 0
Net Block 12384.77 10299.97 8716.09 9038.99 9565.04
Lease Adjustment A/c 0 0 0 0 0
Capital Work in Progress 253.25 1033.08 1917.31 367.90 51.26
Pre-operative Expenses pending 0 0 0 0 0
Assets in transit 0 0 0 0 0
+ Investments 1205.09 1223.15 1224.89 625.09 584.63
Current Assets, Loans & Advances
+ Inventories 1047.22 954.94 754.09 649.99 612.64
+ Sundry Debtors 1939.13 1707.27 1606.13 1996.79 1467.51
Cash and Bank 544.76 354.52 259.75 295.56 834.31
Other Current Assets 0.00 0.00 0 0 0
Loans and Advances 2708.16 2352.93 1782.72 865.73 603.91
Total Current Assets 6239.27 5369.65 4402.67 3808.07 3518.36
Less : Current Liabilities and Provisions
+ Current Liabilities 1504.64 1128.40 1109.85 943.54 1160.48
+ Provisions 2639.36 1985.13 1257.94 507.73 225.37
Total Current Liabilities 4144.00 3113.53 2367.79 1451.27 1385.85
Net Current Assets 2095.27 2256.13 2034.89 2356.81 2132.51
Miscellaneous Expenses not written off 393.46 292.79 196.80 274.41 285.67
Deferred Tax Assets 146.27 76.62 60.36 608.20 1565.50
Deferred Tax Liability 2539.12 2290.71 2193.56 2454.83 2375.32
Deferred Tax Assets / Liabilities -2392.85 -2214.09 -2133.20 -1846.64 -809.82
Total Assets 13938.98 12891.03 11956.77 10816.57 11809.28
Contingent Liabilities 1630.52 2124.88 1533.95 1298.89 853.07


Mar 200 Mar 20 Mar 20 Mar 20 Mar 20
8 07 06 05 04
Profit Before Tax 2734.94 2946.75 2692.63 883.60
1304.5 1232.0 1241.1 1446.1 1679.6
0 9 0 7 3
+Changes In working Capital 95.20 -83.37 204.00 -57.89
Cash Flow after changes in Working 4154.8 3883.6 4391.8 3445.1 2505.3
Capital 1 5 5 1 3
Cash Flow from Operating Activites 2756.32 3358.05 2501.68 1615.49
- - -
- -
+Cash Flow from Investing Activities 2392.6 1648.6 2596.2
668.40 223.38
6 9 1
- -
- - -
+Cash Flow from Financing Activites 1012.8 2372.0
937.48 797.66 826.16
5 2
Net Cash Inflow / Outflow 190.24 94.77 -35.82 -538.74 565.95
Opening Cash & Cash Equivalents 354.52 259.75 295.56 834.31 268.36
Cash & Cash Equivalent on
0 0 0 0 0
Amalgamation / Take over / Merger
Cash & Cash Equivalent of
0 0 0 0 0
Subsidiaries under liquidations
Translation adjustment on reserves /
0 0 0 0 0
op cash balances frgn subsidiaries
Effect of Foreign Exchange
0 0 0 0 0
Closing Cash & Cash Equivalent 544.76 354.52 259.75 295.56 834.31

(Rs. In Million)