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Project Study Report


Training Undertaken at

Shree cement ltd.



Submitted in partial fulfillment for the

Award of degree of

Master of Business Administration

Submitted By: - Submitted To: -

Dolat Choudhary
MBA Part 2nd

Certificate from Summer Project Guide

This is to certify that Mr. Dolat Choudhary, a student of the

Master of Business Administration, has worked under out
guidance and supervision. This Summer Project Report has
the requisite standard and to the best of our knowledge no
part of it has been reproduced from any other summer
project, monograph, report or book.

Organizational Guide : Signature ……………………….

: Name
: Designation- General Manager

: Address- Shree Cement Limited

Ras, Beawar
District Ajmer
: Tel No:-

: Email:
Yagyavalkya Institute of Technology
(Approved by: AICTE, Govt. of India)
(Affiliated by Rajasthan Technical University, Kota)

In a developing country like India, where infrastructure plays its
pivotal role, cement industry is the building stone in any development
process, It is one of the infrastructure there sectors without which it is
impossible to imagine the development.

The cement industry in India become very much competitive in

last few years with the increasing growth of the cement industries day
by day. The competition is becoming more stringent & crucial.

Shree cement Ltd. was established in 1985, & presently is working

beyond its capacity.

I hereby submit a summer training project report on “Study of

Working Capital Practices”. The major points covered in the report are:-

I express my sincere thanks to my project guide, Mr. /Dr./Ms./Mrs.

_______________________________________, Designation
_________________, Deptt______________., for guiding me right form the
inception till the successful completion of the project. I sincerely
acknowledge him/her/them for extending their valuable guidance, support
for literature, critical reviews of project and the report and above all the
moral support he/she/they had provided to me with all stages of this

I would also like to thank the supporting staff

___________________________ Department, for their help and cooperation
throughout our project.

(Signature of Student)

Dolat Choudhary
Executive Summary

Shree Cement Limited is one of the fastest growing Cement Company in India.
Presently it has two plants in operation at Beawar and another plant at Ras. The
organization has performed exceptionally well in the year ended 2009 increasing
the PBT by 35460.12 RS. In lac in compare to year ended 2008. The reasons for
the remarkable achievement and key strengths of the company are discussed in
the report.

The title of my project study was “Study of Working Capital Practices”.

Working capital is taken to be the lifeblood of a business. Lack of working capital
may lead a business to “technical insolvency” and ultimately to liquidation. That is
why, the working capital management of a firm is considered to be one of the
most important tasks of financial managers. A decision regarding the volume of
current assets has its own importance no doubt, but the question of financing is,
in fact, the key area of working capital management. Since the management is
concerned with proper financial structure and cost of funds, so the funds required
for working capital must be raised judiciously.

The main aim of my project was to analyze the complete process of Working
Capital Financing and study the existing system in the organization and also to
suggest Working capital funding required by the company for the Current year,
i.e. 2009-10

The report can be divided into the following parts according to the project
analysis and was handled accordingly:

1. Literature Survey

This section is used to build a theoretical platform for further study in the project.
The concepts such as, sources of funds, working capital cycle, key ratios and
working capital management are discussed. The optimum level of working capital
and different financing policies are also reviewed.

2. Process of Working Capital finance

In this section, various steps involved in obtaining the Working Capital funding
from banks are discussed. The process of getting the Working Capital financed is
a very comprehensive one, consisting of a number of steps; starting from
assessing the fund requirements to the step of auditing by the Bank and the
The process of estimating the levels of inventory, receivables, other current
assets and liabilities is also discussed. The methods of appraisal, final sanction
and ways of disbursal of funds by the banks are also included.

3. Working Capital finance and Management at Shree Cement


This portion of the project study aimed at understanding the existing system of
working Capital Financing at Shree Cement Limited. This included a study of
innovative techniques of borrowings used by the company, like Commercial
Paper, FCNR (B) and MIBOR linked loans. The high credit rating of the company
is also mentioned in this section. Working Capital requirements for the current
year i.e. 2009-10. It has been suggested to increase the Working Capital
borrowing limit in view of the increased funds requirement due to commissioning
of the new plants. A suggested CMA has also been prepared which is attached in
the appendices along with the assumptions made.
A general conclusion arrived at the end of the project was efficiency of the
current practices and sound financial health substantiated by the adequate
current ratio, low cost of funds, high capacity utilization and other such
competent financial indicators.

1. Introduction about the Cement Industry

2. Introduction about the Organization
2.1Business Overview…
2.2Key Strengths ….
2.3Future Outlook….
2.4Financial Performance in the Year 2008-09

3. Research Methodology

3.1 Title of the Study

3.2 Duration of the Project
3.3 Objective of Study
3.4 Type of Research
3.5 Sample Size and Method of Selecting Sample:
3.5.1 Sources of data
3.5.2 Data collection procedure
3.6 Scope of Study
3.7 Limitation of Study

4. Facts and Findings:-

4.1Working Capital Financing and Management

4.1.1 Innovating techniques of Financing at SCL
4.1.2 Computation of working capital -
Requirements (Fund based)

4.1.3 Computation of working capital -

Requirements (Non-fund based)
4.1.4 Computation of bank borrowings
4.1.5 Credit rating
5. Analysis and Interpretation


5.1.1 Assessing working capital Requirements
5.1.2 Preparing CMA, Application & Other
Supporting Documents
5.1.3 Applying to Single Bank/Lead Bank
5.1.4 Appraisal by Single Bank/Lead Bank
5.1.5 Sanction by Single Bank/Consortium of Banks
5.1.6 Agreement & Creation of Security
5.1.7 Disbursement of Funds
5.1.8 Monitoring of Financial Progress by Banks
5.1.9 Inspection by Bank and Auditors




7. Conclusion

8. Recommendation and Suggestions

9. Appendix

10. Bibliography


Cement is a capital intensive and cyclical industry. The demand for cement is
linked to economic activity and can be categorized into two segments,
households’ construction and infrastructure creation. The real driver of cement
demand is creation of infrastructure. Hence cement demand is emerging
economies is much higher than developed countries, where its demand has
reached a plateau.

The India cement Industry is at present passing through a major structural shift,
and consolidation through mergers & acquisitions has become the order of the
day. Acquiring and existing cement unit is a preferred way of enhancing capacity,
as the replacement cost for setting up a new cement plant is pretty high, and the
Demand-Supply imbalance already exists.

Cement is the most preferred building material in India. The demand for cement
in an economy can be linked to the level of economic activity. This is because the
level of infrastructure in the economy drives the demand for cement. The Indian
Cement Industry is also sensitive to demand fluctuations caused by the housing
sector, which accounts for nearly 60 percent of domestic cement consumption. It
is a highly fragmented industry with a few large players & large number of small

The Indian cement industry can be viewed in terms of five regions:-

A. North: this region consists of the states- Punjab, Delhi, Haryana,
Himachal Pradesh, J&K, Utranchal and Rajasthan.
B. West: This region consists of the states- Maharashtra, and Gujarat.
C. South: This region consists of the states- Tamil Nadu, Andhra Pradesh,
Karnataka, and Kerala.
D. East: This region consists of the states- Bihar, Jharkhand, Orissa, West
Bengal, Assam, Meghalaya and other north eastern states.
E. Central: This region consists of the states- Madhya Pradesh and Uttar

With cement demand expected to grow at 9-10 percent in the medium term,
dynamics of the Indian Cement Industry are undergoing a gradual shift. While
demand for cement has picked up steadily, additions to capacity have risen at a
slower pace from an oversupply situation not so long ago, we are now moving
towards a scenario where demand is expected to outstrip supply.
Cement consumption has a strong correlation with GDP growth and with 9.03
percent GDP growth forecasts and thrust on infrastructure development; cement
demand is expected to be robust. The true long term potential is clearly visible
from the comparative analysis of per capita consumption of cement. The world
average is 260 kg, whereas for India it is 115 kg. Moreover, if one compares this
with our most talked about neighbor, china’s 660 kg, India has a long way to go.
Cement consumption rejections by National Council of Applied Economic
Research (NCAER), on a conservative basis, have placed cement demand at
225 million tones by the year 2010-11. If the government goes ahead with
infrastructure projects as planned, the consumption is pegged to be at much
higher levels of 291 million tones. So, the cement industry, undoubtedly, is in for
good times.

The increase in the cement demand can be attributed to the following sectors:

A. HOUSING: The demand for housing has increased on account of the

following factors.

 Increase in disposable income,

 Easy availability of finance,
 Housing being considered as an investment option,
 Aspiration to own a house among the youth,
 Increasing number of nuclear families,
 Cheaper housing loans.

B. INFRASTRUCUTURE: The government’s thrust on infrastructure is

expected to continue, as it wants the economy to grow 7.5-9 percent. The
Tenth Five Year Plan has allocated Rs 4, 76,100 crores for the
development of infrastructure. This is 63% more than the amount
allocated in the Ninth Plan. Spending on Roads and Urban Infrastructure
are expected to be the major demand drivers for cement.

C. CAPITAL EXPENDITURE: A large number of companies are planning to

increase their capacity in view of the increasing demand. During the next
5 years, about 2,900 billion rupees of industrial investments are planned.
If we assume the construction component to be 20%, then this translates
into construction investments of 580 billion rupees. Increased construction
activity in the IT/ITES sector is also contributing to the increased off take
of cement.
RETAIL: Increase in disposable incomes in urban areas has led to
a retail boom.
According to Crisinfac, nearly 75 million sq ft will be developed for
setting up of apparel stores, food marts, hypermarkets and
departmental stores. The increased construction of multiplexes is
also contributing to growth in cement demand.


Shree cement Ltd is an energy conscious and environment friendly

Cement Company based in Beawar in Rajasthan. The Company is a part of the
Bangur Group and was incorporated on 25th October 1979, at Jaipur with a
Vision: To register strong consumer surplus trough superior cement quality at
affordable price. The company is managed by qualified professionals with a
broad vision who are committed to maintain high standards of quality &
leadership to serve the customers to their fullest satisfaction.
Commercial production commenced from 1st May 1985 with an installed capacity
of 6 lac tones per annum in Beawar dist. Ajmer. The capacity of this plant was
upgraded to 7.6 lac tones per annum during 1994-95 by a modernization and up
gradation programmed. In 1995, the Company undertook the implementation of a
new unit of 1.24 Mn MT capacities per annum. In 1997, the Company
commissioned its second cement plant with a capacity of 12.4 lacs tones per
annum adjacent to its existing plant in order to take full advantage of its existing
infrastructure and already developed captive mining lease, enough to sustain a
new cement plan. The cumulative capacity was enhanced by de-bottlenecking
and balancing equipment in December 2001 to 3 MTPA.A new units has been
commissioned at Ras in Rajasthan, wit a capacity of 1.5 MN MT per annum in
February 2006.A product called “Tough Cemento” has also launched by the
company in April 2007. At present company is operating at over 100% capacity
utilization. It is the largest single location cement producer in North India (sixth in

The company services the growing requirements of the region with its various
plants located at Beawar and Ras. In 2009-10, the company produced 4.8 million
tones of cement. The company has been constantly operating at over 100%
capacity since the last 19 years by adopting innovative tactics like increased no.
of workdays, reducing idle time of plant & machines, planned shutdown, doing
normal repairs and maintenance during shut down period, using latest and
automatic machines and tools for repairs and maintenance, etc.
Shree manufactures Ordinary Portland Cement (OPC) and Portland Pozzolana
Cement (PPC). Its output is marketed under the “Shree ultra Red Oxide Jung
rodhak Cement” brand names. The Ras unit produces its premium product
offering-“Bangur Cement”, which is backed by large scale marketing efforts. A
new product called “Tough Cemento 3556” has also launched by the company in
April 2007.
The management of the company believes that increased production will
generate attractive economies of scale and help in occupying a larger shelf
space and lead to increased share of market. In view of this, Shree
commissioned a 1.5 million tonne Greenfield capacity with an investment of Rs.
300 crore at village Ras, District Pali, in Rajasthan in FEB 2006, which is about
32 Kms away fro the existing plant. Also the company has undertaken another 15
lac MT cement plant at the same site (Unit IV) which commissioned in March
2007. Similarly Unit V has also been undertaken at the same site which is likely
to be commissioned by December 2007. The company has also undertaken a
Cement Grinding Unit of 3 MTPA capacity at Khushkhera which has completed
to save on transportation cost, conserve precious fuel and manage its sales and
distribution in better manner.
With a view to finance the expansions, the company is in a comfortable position
to fund a part of the total project cost through internal accruals. The rest of the
investment is raised through low cost debt..
Over the years, Shree has established its reputation as one of the world’s most
efficient cement manufacturers due to the following reasons:
 Production has been consistently in excess of its rated capacity
 Its per tonne energy consumption is one of the lowest in the world
 It has the unique distinction of operating both cement as well as captive
power plant on Pet Coke.
 Finally, the company’s northern-most positioning within Rajasthan makes
it the closest among all Rajasthan manufacturers to Delhi, Haryana and
some parts of Punjab, giving it a significant cost edge.
Shree’s principal cement consuming markets can be classified as follows:

Markets States
Primary Rajasthan
Secondary Delhi, Punjab, JK, Haryana, Western
U.P. and uttaranchal
 Tertiary Gujarat, M.P. and Central U.P.
An extensive distribution network of about 1250 dealers ensures quick
dissipation of material in the principal cement consuming markets. Brand building
too has helped the company accelerate off take. The company’s brands are
supported by electronic and print media advertising as well as mason-architect
education programmes. Over the last few years, Shree is seeking to integrate the
pursuit of profitable growth with social responsibility and environment protection,
the ability to meet the needs of the present without compromising the ability of
the future generations to meet their own. Shree believes that a business is truly
sustainable if it is able to meet the economic, environmental and social needs of
the present and prospective generations of customers and stakeholders.


The key strengths associated with Shree Cements include:
 Captive Power Plant: Shree has a 42 MW captive power plant, which
produces thermal energy by pet coke, which is a by-product of oil
refineries. Shree enjoys the distinction of operating its cement plant and
captive power plant on pet coke. The company is installing an additional
power plant of 54 MW capacities, which would supply power to its new
cement units, thereby ensuring continuation of self sufficiency in terms of
power requirement. Shree Cement’s power usage power tonne of cement
at 75 Kwh is amongst the lowest in the industry. The power plant
generates power at Rs. 2.40 per unit which has reduced the dependence
of the company on Rajasthan State Grid and resulted in huge savings.
 Limestone Reserves: Shree Cement has a total of 700 Mn tones of
limestone reserves, which would be sufficient to meet its requirements for
the next 40 years. Shree Cement’s third unit is located at the pithead of
limestone reserves, unlike the other two units in Beawar, Rajasthan. Unit
IV, which is also located at the pithead of company’s limestone reserves.
The raw material cost per tonne of cement is expected to go down as the
company would be saving in cost of transportation
 Information Technology: A robust IT platform with “SUMriddhi”, Shree’s
ERP enables a seamless integration of management practices with
business processes at Shree, resulting in the achievement of optimum
speed, efficiency, transparency, internal controls & overall profitability.
 Logistics Management: An efficiency in logistics management helps
rationalize freight costs, shrinking the truck turnaround time & delivery
 Research & Development: Shree’s R&D initiative is driven through its
DSIR certified laboratory it has invested in sophisticated laboratory
equipment and quality control devices to test in-process material & end
 Manufacturing: Shree has consistently increased cement production
through effective debottlenecking and a high sweating of assets. The
company has enhanced productivity through improved kiln operations,
better raw material mix and the optimum utilization of human & financial

Besides these, Shree exhibits unique strengths in:

 Quality Management,
 Raw Material Management,
 Human Resource Management,
 Sales & Marketing,
 Fiscal Management.


The company has been operating at more than 100% production capacity since
the last twenty years. The power & coal consumption per tonne of cement is one
of the lowest in the cement industry. The company has installed 36 MW captive
power plants in 2003-04 which has helped to save power costs by 50% and this
has given the company an edge over competitors. The profitability of the
company is increasing every year. Looking at Govt. policy of development of
infrastructure activities, economic growth and incentives to the Housing Sector,
demand for cement is expected to increase by 9-10% in the coming years.
Further, since there is no substitute for cement, prospects of the cement industry
as well as that of the company looks very bright.
Since the past few years, the company has been swapping high cost debts with
low cost debts, which have resulted in substantial savings in interest cost. This
has enabled the company to withstand in the competitive market and increased
the profitability.
In 2008-09 the operating profits of the company has increased by 181% and
production raised by 49% and become 4.8 MTPA while the industry growth was
only 9% for the same time.
To tap the market potential, the company has already commissioned a 1.5 MTPA
Plant (Unit III) at village RAS, District Pali, in Rajasthan. This plant has started its
operations from 26 Feb. 2006. Also the company has undertaken another 1.5 Mn
MT cement plant at the same site (Unit IV) which has started, similarly Unit V has
also undertaken at the same site.
The company has also undertaken a Cement Grinding Unit of 3 MTPA capacity
at Khushkhera. The location of the Ras plant is in the immediate vicinity of the
company’s quality captive Nimbetti limestone mine, which is expected to reduce
raw mix cost. The other advantages associated with the Ras project are:
Company’s major markets of Delhi, Haryana and Rajasthan will be in close
proximity to this plant helping in controlling the freight cost considerably. Also, the
company’s captive power plant allows the unit to enjoy access to quality captive
power as well as adequate manpower. After the expansions go on stream, the
company will be able to address the emerging regional deficit competently.




Regd. Office : Bangur nagar , Beawar-305901 , Distt Ajmer (Rajasthan)

Year ended Year ended

31.3.2010 31.3.2009
RS in Lakh
1 Segment Revenue
(Net Sales)
a. cement 263,438.83 21,0911.80
b. powers 53,693.81 32,420.98
Total 317,132.64 243,332.78
Less : inter segment 45,630.62 32,420.98
Net Sales 271,502.02 210,911.80
2 Segment
Results(profit before
interest, exceptional
items and tax)
a. cement 47,267.64 30,450.76
b. power 29,763.64 9,728.76
Total 77,031.28 40,179.52
(a) interest 7,443.18 5,329.64
(b) exceptional items 3,093.05 3,888.46
(c)other Unallocable
expenditure /(income) (5,795.99) (5,869.50)

Profit before Tax 72,291.04 36,830.92

3 Segment Capital
a. cement 102,240.21 84,313.37
b. power 22,461.34 9,839.43
c. Unallocated
capital employed
145,915.47 106,197.55
Total 270,617.02 200,350.35

As may be observed, there is a continuous increase in profitability (PBT)

which has been analyzed and explained in the table above.Net Sales of
the Company during the year 2009-10 were Rs. 271,502.02 lac

compared to Rs. 210,911.80 lac in 2008-09 due to higher volumes as

well as realization.
This is mainly due to favorable market conditions in view of emphasis on
infrastructure and housing resulting into good demand of cement.



“Study of Working Capital Practices”


“ Working Capital” refers to the cash a business requires for day-to day
operations, or more specifically, for financing the conversion of raw materials
into finished goods, which the company sells for payment. Working Capital
typically means the firm’s holdings of current or short-term assets such as
cash. Receivables, inventory, and marketable securities. These items are
also referred to as “Circulating assets” because of their cyclical nature. In a
retail establishment, cash is initially employed to purchase inventory which is
in turn sold on credit and results in accounts receivables. Once the
receivables are collected, they become cash, part of which is reinvested in
additional inventory and party going to the profit or cash throw-off. According
to the Balance Sheet concept, it is simply represented by the excess of
current assets over current liabilities and is the amount normally available to
finance current operations. In this case the Current Assets are called Gross
Working Capital and the excess of Current Assets over Current Liabilities is
called Net Working Capital.
Current assets mainly include, stocks of raw materials, work-in-progress,
finished goods, trade debtors, prepayments and cash balances. Whereas the
main components of Current Liabilities are trade creditors, accruals, taxation
payable, dividends payable and short term loans.
In financial reporting, the term ”funds” has usually been defined as Working
Capital, or the excess of current assets over current liabilities. According to
this concept, the statements reporting financing and investing activities, do so
as a summary of the sources and uses of working capital for the period. Thus,
the purpose of the statement is to indicate the sources of working capital
inflow into the firm and the uses which were made of working capital during
the period.


Duration of this project was 17th June 2010 to 1st Aug 2010


The principal objective of the project is to study and analyze the complete
process of financing of working capital from banks. The objective of the
present study is limited to mere understanding of the procedure of
Working Capital Finance and estimating levels of Working Capital for the
current year.



The methodology followed in completion of this project study could be

enumerated as follows:
• Analyzing relevant figures for last year,
• Study of the complete process of Working Capital Financing using the
literature and by the way of discussions with the organizational guide,
• Preparing assumptions for the estimation of figures for the current year,
• Forecasting figures for sales, expenses and other levels of inventory and
receivables to be kept for the current year i.e. 2009-10,
• Using formulae to calculate the absolute values of current assets and
current liabilities and their justification,
• Linking of all the statements to arrive at a final estimation of the working
capital requirements and the Maximum Permissible Bank Finance
• Creation of CMA and other supporting documents,
• Complete documentation of the project study.




The major sources of data in the project study were past year’s
financial statements and information gathered from my guide. The
entire set of information and data was available within the
organization, without any need for collecting data from outside.


Information was taken directly from the Finance Department.
Figures and Financial Statements for the past 3 years were made
available from annual reports. Literature pertaining to the bank
norms and other relevant documentation was taken from the
organizational guide for reference purposes.


At Shree Cements Limited, the entire exercise of Working Capital

Financing either for getting any new sanction or reviewing the existing
borrowing limits is carried out at the start of the financial year. During the
course of this project, I was able to get first hand experience of all the
documentation and fulfillment of other formalities laid under the bank
norms for getting the funds sanctioned.

In my study of the process of Working Capital Financing at Shree Cement

Limited, the following points have been covered:
• Complete Analysis of the last year’s performance and critical of the
inventory levels, debtors, creditors and other important factors affecting
working capital needs,
• Computation of Working Capital requirements for the current year and
assessment of borrowing limits,
• Preparing CMA and other supporting documents,
• Application to consortium of Banks,
• Clearance of any objection raised by the member Banks, and
Creation of Security


The main aim of this project was to study the complete process of
Working Capital Financing, both at Shree Cement Limited in general.
Every organization carriers out the entire exercise of analysis of last year’s
performance, assessment of working capital requirements, and creation of
CMA and other documents for the purpose of obtaining bank borrowings
at the end of every financial period. Forecasting the levels of different
components of current assets and current liabilities becomes very crucial,
as on their basis the final working capital requirements are calculated. In
my project, I have calculated and suggested the required levels of current
assets and current liabilities on the basis of past years performance, future
targets, and expansion plans




The cement industry is one, which is characterized by high working capital

requirement. This arises principally on account of a long production-to-
market cycle time and high debtors arising out of strong competition. The
ability to manage the entire cycle from raw material procurement of
receivables management holds the key to better working capital

Figure 1






2006-07 2007-08 2008-09 2009-10

Inventories during the year 2009-10 increased from a level of Rs. 156.5
crores to 176.57 crores, an increase of 12.82% which is due to increase in
stock-in-process and finished goods inventory.
Figure 2






2006-07 2007-08 2008-09 2009-10

The company’s debtors during 2009-10 stood at Rs. 49.38 Crores as

against Rs. 26.27 Crores in 2008-09, an increase of 87.97%.

Figure 3

2007-08 2008-09 2009-10

Creditors (Trade) in 2009-10 stood at Rs. 166.76 lacs against Rs.149.21

lacs in 2008-09, representing an increase of 11.76%.

Figure 4







2006-07 2007-08 2008-09 2009-10

Interest in 2009-10 stood at Rs.49.72 lacs against Rs.10.37 lacs in 2008-

2009.An increase at 379.45%.


(i) Commercial Paper (CP): It consists of short-term promissory notes

issued by the corporation. Maturities on CP at the time of issue
range from several days to months. Large issuers of CP normally
attempt to tailor the maturity and amounts of an issue to the needs
of the investor. Only companies with god credit ratings are able to
borrow funds through the sale of CP. Purchasers of CP include
corporations with excess fund to invest, banks, insurance
companies, pension funds, money market mutual funds, and other
types of financial institutions. Interest rates on CP issues tend to be
lower than the prime lending rate. CP is sold on a discount basis
which means that the firms receive less than the stated amount of
the note at issue and then pays the inventory the full-face amount
at maturity. The annual financing cost of CP depends on the
maturity date of the issue and the prevailing short-term interest
rates. But CP is not a very reliable source of funds. A investors are
unwilling to purchase new issues of CP to replace maturing issues.
Also a CP issue usually cannot be paid off until maturity. Generally
the amount of CP issued is included in the credit limit by banks but
CP external to bank credit limits can also be issued. Commercial
Paper provides funding at very cheap rates (around 7%) which is
very low as compared to normal lending rates of banks of 11-12%.
(ii) FCNR (B) Loans: This is an abbreviation for Foreign Currency Non
Resident loans. In his type of funding bank provides the foreign
currency deposited with them by non residents for borrowings
purposes. The rate of interest is decided on the basis of LIBOR
after adding the bank margin to it. In such type of funding, the
disbursement and repayment of principal and interest is done in
Indian Currency, but the liability is in foreign currency. So this
innovative technique carries the risk of fluctuations in the exchange
rate of that particular foreign currency. Generally the firm (borrower)
hedges this risk by paying a forward rate of 2% to the bank and
some exchange rate is fixed at which the repayments will be made.
So if the borrowing is done at 4%, adding another 1.5% as bank
margin and 2% for hedging against exchange rate fluctuations, the
final cost of borrowing under this scheme comes out to be around
(iii) MIBOR linked Loans: This is an abbreviation for Mumbai Inter
Bank Offer Rate. The duration of this funding ranges from 30 days
to 90 days. The interest rate under this type of loan is decided on
the basis of prevailing MIBOR rate and adding a bank margin to it.
The rate is on floating basis which changes daily. The amount
taken in this scheme is also covered in the credit limit decided by
the banks for the borrower. The rate of interest in this type of
borrowing comes out to be as low as 7%.

Generally Banks restrict funding under the above schemes to 50% of the total
credit limits of the borrowers.

(Rs. in lacs)
S.No. Particulars of Current Liabilities 2008-09 2009-10
(Actual) (Actual)

1. Liabilities 19,629.06 23,617.63

2. Provisions 8,831.61 24,372.56

Total 28,460.67 47,990.19

Table 5. Current Liabilities & Provision for Shree Cement Ltd. for the year

(Rs. in lacs)
S.No. Particulars of Current Assets 2008-09 2009-10
(Actual) (Actual)
1. Inventory
(a) Raw Material 1123.38 719.94
(b) Stock in process 3632.93 2222.76
(c) Finished Goods 1148.01 1745.50
(d) Other Consumables & Spares 5356.57 8578.98
(e) Materials-in-Transit 230.57 468.87
(f) Fuels 4115.86 3921.42

2. Sundry Debtors 2,627.17 4,938.68

3. Cash & Bank Balances 35,330.90 46,743.43

4. Loans & Advances 23,841.80 40,263.01

Total 77,407.19 109,602.59

Table 6. Current Assets & Loan and Advance for Shree Cement Ltd. for the
year 2009-10

Statement showing change in working capital

08-09 09-10 Increase Decrease

(A) Current assets-
Inventory 2 17657.47 2050.15
Sundry Debtors 2,627.17 4,938.68 2311.51
Cash & Bank Balances 35,330.90 40,263.01 4932.11
Loans & Advances 23,841.80 46,743.43 22901.63

TOTAL (A) 77,407.19 109602.59

(B) Current liabilities

Liabilities 19,629.06 24,372.56 4743.5

Provisions 8,831.61 23,617.63 14786.02

TOTAL(B) 28460.67 47990.19

(A-B) 48946.52 61612.4 32195.4 19529.52

Increase in working capital 12665.88 - - 12665.88

TOTAL 61612.4 61612.4 32195.4 32195.4


The amount of borrowings for Shree Cement Ltd. for the year 2009-10 is
calculated as follows:
(Rs. in lacs)
S.No. Particulars 2008-09 2009-10
(Actual) (estimated)
1. Total current assets 39090 55051
2. Current liabilities(other than bank 3383 7095
3. Working Capital Gap (1-2) 35707 47956
4. Min. stipulated net working capital i.e. 9773 13763
25% of total current assets
5. Actual/projected net working capital 35707 35956
(short term bank borrowings)
6. Item 3 Minus Item 4 25934 34193
7. Item 3 Minus Item 5 0 12000
8. Maximum permissible bank finance 0 12000
9. Current Ratio 3.71 1.96

Table 8. Bank borrowing requirement for Shree Cement Ltd. for the year

As shown in the above table bank borrowings (fund based) for financing the
working capital requirements of Shree Cement Ltd. for the year 2009-10 has
been estimated to be 12000 lacs. For this, application should be given to banks
for funding, and the balance amount is to be self financed by the firm.


Another reason for such a low cost of funds is the rating enjoyed by the
company. Shree Cement Limited enjoys the highest rating for both short-term
and long-term loans. The rating awarded by State Bank of Bikaner & Jaipur is
SBBJ-1. This is the highest rating possible and they have been able to maintain
this rating for the last three years. Also an external agency, CARE (Credit
Analysis & Research Limited) has awarded them the highest rating PR-1 PLUS
for working capital loans and AA for long-term loans which is investment grade
rating. Again the company was consistent in achieving these grading from CARE
for the last three years. One of the most important challenges facing the
management is to keep these ratings at the highest level.

5. Analysis and Interpretation


The process of working capital financing from banks is a very comprehensive

one. It consists of a number of steps starting from assessing the fund
requirements to the step of auditing by the Bank and Auditors. A firm can get the
financing done from a single Bank or a Consortium of Banks. Generally a firm
has to go for a consortium of Banks because every bank has a limit up to which it
can fund the working capital requirements of a firm in a specific industry. This is
because investing money in a single industry is much riskier than diversified
investments. Banks have to adhere to the norms laid down for limits of industry
exposure (investment) as well as company exposure. Other steps include the
preparation of Credit Monitoring Arrangement (CMA) in which the future cash
flows are projected and accordingly the various requirements are assessed,
which further consolidates into the working capital requirements in the following
year. Then there is preparation of other supporting documents, applying to the
bank or the lead bank in case of consortium of banks, then appraisal and
sanction by the bank (or banks as the case may be), creation of security,
disbursement of funds and finally monitoring and auditing by the Banks and the
auditors. In appraisal of the loan application by any bank, the most important part
is to award a credit rating to the firm, on the basis of which the final for every firm
to maintain a high credit rating. These ratings also help the firm in issuing other
instruments like Commercial Paper, debentures, etc. also, monitoring by banks
constitutes an important step. The drawing power of a firm is decided on the
basis of the stock levels, as Cash Credit limit is given after hypothecation of
inventory and stocks. So, the drawing power of a firm keeps on changing
according to the levels of the stock. Therefore reporting of financial position
becomes very important. It is important from the company’s performance on a
regular basis. The whole sequence of Working Capital Financing is shown in the
following flowchart:

Assessing Working Capital

Preparing Application, CMA &other
Supporting Documents

Applying to Bank/Consortium

Single Bank Consortium

Banks By

Appraisal by lead Bank

Appraisal & sanction by
single Bank
Circulation of appraisal to
member Banks

Holding of consortium
meeting & appraisal of limits
by member Banks

Sanction by member Banks

Agreement & Creation of security

Disbursement of Funds

Monitoring of financial progress by Banks

Inspection by Bank and Auditors

Fig. Process flowchart for Working Capital Financing

5.1.1 Assessing Working Capital Requirements

The money required for day to day use in a business organization contributes to
the working capital requirements of the firm. Examples of suck activities are
payment of electricity bill, salaries & wages, mining compensation, purchase of
raw material, payment of excise and sales tax etc., payment of factory and office
expenses like telephone bills, traveling expenses and computer expenses etc.
Working Capital Requirements (WCR) may be defined as the difference between
operating assets (consisting of prepaid, inventory and receivables). These
accounts represent spontaneous uses and sources of funds over the firm’s
operating cycle.

All the current assets like raw materials, stock in process, finished goods, stores
& spares, debtors, loans and advances and cash & bank balances, constitute the
Gross working capital. Whereas, the difference between current assets and
current liabilities given the Net Working Capital (NWC). It is generally agreed that
greater the current assets relative to the level of current liabilities, the more liquid
the company is.

Another term Net Liquid Balance (NLB) is defined as the difference between
current financial assets such as cash and marketable securities and current
discretionary or non spontaneous financial liabilities such as notes payable and
current maturities of long-term debt.
The absolute NLB may be used as a measure of a firm’s liquidity. If the measure
is negative, it indicates a dependence on outside financing and is indicative of
the Minimum borrowing line required. A negative NLB does not by itself suggest
that the firm is going to default on its debt obligations.
From the above equations, the relationship between WCR, NLB and NWC can
be represented as:


Out of the above, Working Capital Requirement is the most appropriate approach
to calculate the real requirements of a firm because the traditional NWC figure
includes accounts that are not directly relaxed to the operating cycle. For
example, the marketable securities account, and the notes payable balance
should be viewed as balances that result from internal financial decisions or
policies, not balances resulting form the operating cycle of the firm. They should
therefore by exclude from consideration. This approach is consistent with the
decomposition of net working capital into net liquid balance and working capital
requirements. Formulae for Computation of Current Assets and Current


Working capital requirements of a firm is calculated as the difference between

the current assets and current liabilities. The levels of the various components of
current assets like raw material, stock-in-process, finished goods, other
consumable spares, receivables, advances to suppliers and other current assets,
are decided by considering the levels of past years and peak level in the last
year. Also, financing of the various levels is based on judgmental decisions by
financial analysts.
Formulae for calculating the requirements of different components of current
assets can be given as:

Raw material inventory

(Budgeted Requirement* cost of Raw Material per unit* Average inventory
Holding Period in months)/12

Stock-in-process inventory
(Total Cost of Sales* Average inventory holding period in months)/12

Finished Goods Inventory

(Total Cost of Sales*Average Inventory Holding Period in months)/12

Sundry Debtors
(Budgeted Credit Sales*Price of finished goods per unit*Average debt collection
period in months)/12

Sundry Creditors
(Budgeted Credit Purchase*Cost of Raw Material per unit*Average payable
period in months)/12



At the time of fresh sanction, sanction for review with modifications in the existing
limits, and also for modification in any of the stipulated terms and conditions,
borrowers are required to furnish the following forms:
(I) Form No. I: This includes particulars of existing/proposed
limits/facilities/finance from: (a) each bank (b) each financial
institution; for working capital credit requirement. This from is
applicable to all borrowers irrespective of the size of the finance
(II) Form No. II: This includes operating statement with additional
particulars required under the Desirable Bank Finance method.
(III) Form No. III: This includes analysis of the Balance Sheet with
additional particulars required as per his bank norms.
(IV) Form No. IV: This includes comparative statement of current assets
and current liabilities.
(V) Form No. V: This includes a Cash Budget with all the current year
(VI) Form No. VI: This includes a report on financial indicators.

The above forms are combines to prepare Credit Monitoring Arrangement

(CMA). It is a comprehensive document consisting of the company’s
performance in the past 3 years along with estimations for the current year (the
year for which loan is required) and projections for the next year. This CMA is a
consolidation of the Profit & Loss statement, Balance sheet and Cash flow
statement showing the sources and uses of funds. This document is very
descriptive, consisting of all the information about the levels of current assets
(inventory holdings, receivables, and other current assets), current liabilities
(creditors, statutory & other liabilities). Also, details are given about the holding
levels of current assets during the past 3 years and peak level during the last
year, so as to justify the estimated levels for the current year. A complete
bifurcation of sales, production, expenses on labor, salary & allowances,
administrative expenses are also given at the end, which mainly includes the
prices taken for raw material, power, fuel, stores & maintenance and other
For obtaining the bank credit limits, working capital requirements are estimated
and on that basis with requisite supporting data, application is given to the bank.
For the purpose of bank financing, minimum current ratio requirement is 1.33:1. if
the current ratio is lower than 1.33 then the bank charges a higher rate of interest
or assesses the bank borrowing at a lower level, so as to achieve the current
ratio of 1.33 (as by reducing the bank borrowing, current liabilities get reduced,
which is the denominator in the calculation of current ratio, hence leading to a
higher current ratio). Working Capital Gap and Bank Finance

The working capital gap viz., the borrower’s requirements of finance to carry
current assets other than those financed out of other current liabilities could be
bridged partly from his owned funds and long term borrowings and partly by bank
(I) Bank can work out the working capital, i.e., total current assets less
current liabilities other than bank borrowings and finance a
maximum of 75% of the gap; the balance to come out of long-term
funds, i.e. owned funds and term borrowings.
(II) Borrower to provide for minimum of 25% of total current assets out
of long-term funds, i.e., owned funds plus term borrowings. A
certain level of credit for purchases and other current liabilities will
be available and the bank will provide the balance. Total current
liabilities inclusive of bank borrowings will not exceed 75% of
current assets.
(III) Same as (ii) above, but excluding core current assets form total
current assets on the theory that current assets should be financed
out of long-term funds, i.e., owned funds plus term borrowing.

The last method will provide the largest multiplier of bank finance; however, to
avoid hardship to borrowers, a beginning may be made with the first method,
placing all borrowers in this method within a period of about one year, and the
ideal of the last method may be reached in stages.
It is important to note that for computing the level of bank finance, the
classification of current assets and current liabilities should be made as per the
usually accepted approach of bankers and not as per definitions in the
Companies Act. For instance, installments of term loans payable within 12
months from the date of balance sheet are classified by the banker as current
liabilities while it is not so in the balance sheet prepared in accordance with the
companies Act. These differences in classification have been brought out in the
form for analysis of balance sheet prescribed by the Reserve Bank under its
Credit Authorization Scheme.


Now as per the amount of the bank borrowings required, the firm can apply to a
single bank or to a consortium of banks. A firm has to apply to a consortium of
Banks because as per the bank norms every bank has a limit up to which they
can provide funding to a firm in a specific industry, as investing money in a single
industry is much riskier than diversified investments. For all this, banks have to
adhere to the norms laid down for the limits of industry exposure (investment) as
well as company exposure. So, whenever the borrowing requirements of a firm
exceed the lending limits of a bank then it has to approach a consortium of two or
more banks. Once of the banks out of the consortium is chosen as the lead bank
by the company. Generally the bank with the highest share in the sanctioned
loan is chosen. The lead bank is responsible for the primary appraisal of the loan
application and then circulates the appraisal to the member banks. The
application along with CMA & other supporting documents are sent to all the
member banks of the consortium which is then appraised and loan amount is
accordingly sanctioned.

After the bank/consortium of banks receive the application for funding of working
capital requirements, a comprehensive process of appraisal is carried out. In
case of a consortium of banks, the lead bank bears the responsibility of primary
appraisal and then passing the information to member banks. Borrowers are
categorized on the basis of their requirements in the following manner and
accordingly the process of appraisal is carried out. CATERGORISATION OF BORROWERS

(i) For Non-SSI borrowers requiring working capital finance over Ras.
2 laces and up to Rs. 100 lacs from the banking system. From the
banking system, for such small-scale borrowers, a method of
perceiving W/C credit requirement is applied.
(ii) For Non-SSI borrowers requiring working capital finance over Rs.
100 lacs and upto Rs. 500 lacs, and SSI borrowers requiring
working capital finance over Rs. 200 lacs but upto Rs. 500 lacs
from the banking system, for this segment of borrowers are pre-
supposed to have a better data base of their operations and of
financial health and, size of the limit to these borrowers demands a
high level of bank-exposure, a relatively detailed analysis and
supervision is proposed.
(iii) For all borrowers requiring working capital finance over Rs. 500
lacs and up to Rs. 1000 lacs (for both SSI as well as Non-SSI
borrowers) from the banking system. The borrowers requiring the
above said size of limit are either corporate of likely to graduate to
corporate-constitution in near future and, as such, are believed to
have a better data-base of their operations. Moreover, the
aggregate of the limits under the above said size puts the bank’s
exposure as a whole at a substantial level. Therefore, the
assessment of working capital finance within this size of limit should
be on the basis of holding of Current Assets/Liabilities.
(iv) For all borrowers requiring working capital finance over Rs. 1000
lacs (for both SSI and Non-SSI borrowers) from the banking
system, the borrowers, requiring this size of limit, (i) are in upper
strata of the economy, (ii) are predominantly corporates, and
therefore, are statutorily required to maintain various financial data
base and statements as per the requirements prescribed under the
relevant statutes/Acts apart from being statutorily subjected to at
least annual audits, (iii) have in-built systems to maintain easily and
promptly retrievable wide data-base to facilitate in depth analysis
and understanding level of inventory and/or receivables but suffer
more from cash deficits arising fro time to time. Further, because of
the mammoth size of the finance required by such borrowers, the
banks are more required to vigil their funds-managing ability to
timely resource the funds-availability as well as to conceive a
proper funds-development.

In view of the above, for arriving at a merit based credit decision a

closer risk forecasting in necessary which is derived from:
(I) detailed risk-analysis carried out with the intra-firm
comparison, and inter-firm comparison if necessary, of the
borrower’s financial and operational statements and
projections, and
(II) Risk-perceptions based on the interface with the borrowers,
the market reports, industry/activity-profile, managerial
competence, government policies and cross-country risks
(wherever applicable).

Appraisal of credit applications is done with reference to the total financial

situation, existing and projected, as shown by the cash flow analysis and
forecasts submitted by the borrowers. This helps in a diagnosis of the extent to
which current liabilities of the firm had been put to non-current use and the
manner in which liabilities and assets were likely to move over a period of time.
The bank prepares a detailed proposal for the loan which includes details of the
requirements of the firm, along with justification for those requirements with the
budgeted levels of current assets and current liabilities. Also, the levels for the
past year both proposed (for last year loan) and actual are also provided for the
purpose of comparison. Financing pattern of current assets is also provided
using various ratios. Within the proposal, a critical scrutiny is done of the
performance indicators of the company like Net sales, operating profit, PBT,
PAT, cash accruals, etc. the firm is asked to provide justifications for major
variances from the past performances if there are any. Also, financial indicators
like total net worth, total outside liabilities, current ratio and net working capital
are reviewed very closely. Current ratio is the most important ratio taken into
consideration during appraisal. Other efficiency ratios like net sales to total
tangible assets, PBT to total tangible assets, operating cost to net sales, bank
finance to current assets, etc are also analyzed to measure the company’s
performance in the past year. The bank also considers the industry scenario to
which the fir belongs and the future prospects of that firm in that scenario.
Comparison of the company’s performance is also done with other industry
players so as to judge its performance vis-à-vis other players in the industry. The
justification for non-fund based limits viz. letter of credit and bank guarantee is
also discussed in the proposal. CREDIT RATING

The most important part of the appraisal process for a loan application is the
Credit Rating of the firm. Credit scoring is a statistical method used to predict the
probability that a loan applicant or existing borrower will default or become
delinquent. Scoring is also an important step in making the secularizations of
small-business loans more feasible. A higher score indicates lower risk, and a
lender bank sets a cutoff score based on the amount of risk it is willing to accept.
RBI had issued guidelines on Risk Management Systems in Banks in 1999 and
they have updated their guidance note on Management of Credit in January
2003. These documents detail the views/suggestions of RBI on Risk Rating, Risk
Pricing and broadly present some of the essential dimensions in the design of a
Credit Rating Framework. RBI has also permitted banks to make appropriate
changes to suit their requirements. Banks complying under State Bank of India
use credit risk assessment system for the credit rating of firms. In this system, a
firm is judged upon certain parameters and then awarded a rating according to
the marks obtained by the interest at which the borrowing will be provided to the
firm. A lower interest rate is provided to firms with a higher rating, in view of the
fact that lending to those borrowers is less risky as compared to borrowers of
lower rating, who are charged a higher rate of interest. Credit rating is done every
time an application for fresh sanction or sanction for review with modifications in
the existing limits is received by the bank. In the credit rating systems,
judgmental input at the operating level has a matching role to play in
supplementing the quantitative methods applied to assess the risks associated
with a credit proposal. The risk equivalence can be expressed as under:

Risk in a financial proposal = fixed Part + Perturbative

Fluctuations- Quantifiable +
Unquantifiable Parts
=Objectivity + Subjectivity

To measure the risk associated with any financial proposal various

Financial, business, industry, management and qualitative factors are
considered. The Company’s history and past performance have a strong bearing
on ratings; also the future prospects are reviewed closely. Performance in the
last year is analyzed very critically and financial indicators like current ratio; PAT,
ROCE, PBDIT, interest coverage ratio etc are observed and interpreted
accordingly. Other things like more collateral security provided also improves the
ratings considerably. The technology adopted, capacity utilization, environment
policies, quality, distribution network, etc. comprise the business risk factors. The
levels of competition and regulatory policies for the industry are also seen before
sanction is made. In the management risk category, the management policies,
their payment record, credibility, etc are monitored. Finally a Credit Rating is
awarded to the firm on the basis of which the interest rate is decided. The finance
department has this uphill task to keep the company at the highest rating at all
times, so as to achieve minimum cost of borrowings.
In case of a consortium of banks, after the appraisal process is complete, the
lead bank circulates it to its member banks. All the member banks have their own
norms for this appraisal process. As certified by RBI, every bank can adopt
different methods of appraisal. After all the banks complete their appraisal
process, a Consortium meeting is arranged in which all the member banks put
forward their view points about the loan application, and representatives from the
applicant’s side have to clarify any doubts or objections from the member banks.



After the consortium meeting, the bank/member banks sanction the loan to the
applicant. Each of the member banks send a sanction letter to the borrower in
which the limit of the loan and the interest applicable as per the credit rating
awarded by that particular bank is mentioned. All the terms and conditions of the
borrowing are also mentioned in the sanction letter.


After the sanction letter from the Banks is received by the borrower, an
agreement is prepared which includes all the terms & conditions of the deal,
along with the interest rate that will be charged on the borrowing. Also, other
rules and norms to which a borrower has to adhere to are mentioned in this
agreement. An agreement is a comprehensive document consisting of rights with
the lending banks and duties of the borrower to be fulfilled during the currency of
the borrowing. Also, it is mentioned whether interest rate on the borrowing will be
fixed or on floating basis. Generally banks have the right to enhance the rate of
interest anytime during the year.
The borrower also has to offer some property, goods, debt-book, movables or
immovable for mortgage as security to the bank. The properties offered as
security should be absolute property free from prior charges. In respect of
security created by way of hypothecation/pledge/mortgage, the borrower has to
maintain a sufficient quantity and market value of goods, book-debts. Movables
and other assets and also all immovable properties given as security at all times,
to provide margins of security required by the bank from time to time. In respect
of letter of credit opened or guarantees or indemnities issued by the bank on
behalf of the borrower, he has to deposit sufficient cash or other security as
margin money as stipulated by the bank. Banks are given charge of the security
on PARI PASSU basis which indicates that all the banks in the consortium have
first hand charge on the borrower’s assets kept as security. It means that all the
banks providing funds have equal rights on the property of the borrower. In case
of any default, they can claim the assets in proportion of the outstanding to them
by the borrower. Machineries of the borrower hypothecated and charged to the
bank are treated as movable property, and not as an immovable property and it
has to bear the name of the bank indicating that the said machineries are
hypothecated and charged to the bank.


Indian Banks follow Line of Credit System (LCS) for disbursement of working
capital funds. Under LCS, the borrower’s working capital credit requirement is
assessed at an outer limit i.e. the maximum limit which is flexible enough to be
used in one or more of the following forms as selected by the borrower in lieu of
his requirements from time to time. In other words, the Line of Credit is not a
credit facility per se, but, is an outer limit for total (funded and non-funded)
working capital finance. Within this outer limit, various types of working capital
funded and non-funded credit facilities with appropriate limits shall be made
available to the borrower. Different Types of Credit Facilities under Line of Credit


(i) Cash credit- Cash Credit limit is granted against inventory of raw
material, stock in process, finished goods, stores & spares and
other items. For availing the above limit, the borrower has to submit
a stock statement. On the basis of the stock statement, credit is
allowed to the borrower after deducting a margin from the stock
values. The value which comes after deducting the margin is called
Drawing Power and banks provides credit only to the extent of
drawing power, in spite of the fact that the cash credit limit may be
fixed at a higher level. Drawing Power may get changed after
submission of the next stock statement, as per the stock held by
the borrower. Normally, stock statements are submitted monthly.

The concept of CC limits can be understood by the following example:

(amount in lacs)
INVENTORY Stock Margin% Margin Drawing
Value Va Power
Raw material 750 25% 188 572
Stock in 400 33% 132 268
Finished 500 25% 125 375
Stores & 600 33% 200 400
TOTAL- 1605

Table. Example to Show Calculation of Cash Credit Limit

In the above case, the borrower can enjoy a credit limit of up to Rs. 1605 lacs in
the form of cash credit. The advantage of a cash credit limit is that the borrower
may utilize the said limit as per his requirement, and interest is charged only on
that portion of the limit which has been utilized by him.

(ii) Bills Limit- As we have seen that in case of inventories, credit is

given by way of a cash credit limit. Similarly, credit in case of
receivables is given by way of a bills limit. Normally credit is
granted to the extent of 90% of receivables/debtors. But the final
limit is subject the overall limit (which includes CC as well)
sanctioned to the borrower. It can be availed after making a credit
sale to any other firm XYZ and submitting the invoice, delivery
challan, excise gate pass, RR/MTR, bills of exchange and covering
letter to the bank and the following actions are performed:

• Bank will verify the documents,

• Allow 90% of the sale amount as advance to the borrower,
• Send the documents to the purchaser through his agent,
• The agent at the other place collects the sales amount from the
• Deliver the documents to the purchaser,
• Send the proceeds to the suppliers bank,
• The bank will recover the advance given to the borrower and
balance will be given to the borrower,
• Bank will charge interest/commission for the transaction.
(iii) Letter of credit for purchase (with subdivisions into usance
L/C and sight L/C)-It is an accommodation from a bank stating that
payment will be made to the client if specified conditions are met. It
is commonly used to finance international trade, as an exporter
does not know an importer, or because information, language and
cultural differences make it difficult to perform an adequate credit
analysis, the exporter is not willing to sell to the importer on open
credit. The importer presents a letter of credit from its bank, stating
that the amount necessary for payment of the shipment will be paid
on a specified date if conditions are met. This enables the importer
to provide security to the exporter thereby reducing the risk of the
(iv) Guarantee (with subdivisions into Performance Guarantee,
Financial Guarantee)


To meet the specific requirements of new ventures and to ensure the end-use
and safety of the bank advance, the borrower is expected to subject himself to a
budgeting and reporting system. The borrower will supply appropriate operational
data and figures related to its financial position at periodical intervals on the
prescribed forms which have been devised for the purpose. The information so
furnished by the borrower will have to be screened thoroughly and speedily and a
view taken of the total activities of the firm. All the borrowers with total credit
facilities fro the banking system in excess of Rs. 10 lacs have to submit (i)
Operating statement, (ii) funds flow statement, (iii) Peak level Balance sheet and
Performa balance sheet for the ensuing year. The borrowers with aggregate
credit facilities exceeding Rs. 1 crore have to submit (i) Quarterly operating
statement, (ii) Quarterly funds flow statement, and (iii) Current assets and current
liabilities every quarter for the purpose of follow-up. This is very important as the
drawing power is calculated with the periodical statements of stock, book-debts


In respect of goods, book-debts, movables and other assets hypothecated,

pledged, mortgaged or otherwise charged to the Bank or which are released to
the borrowers on trust under a factory pledge or other basis, the Bank’s agents
and nominees are entitled at all times without prior notice to the borrower to enter
any place during the working hours where the said goods, book-debts, movables
and other assets may be kept and inspect value, insure, superintend, dispose
and/or take particulars of all or any part of the said goods, and check any
statements, account reports and information. Banks can do all such acts, deeds
and things necessary to preserve and protect the amount borrowed. Also the
borrowers has to give all the assistance/co-operation as may be necessary in this

Transactions that increase working capital are sources of funds. The primary
sources of working capital of a firm include:
Funds generated from operations:
The earnings of a business represent one of the principal “sources of funds”.
The amount of funds generated from operations is not the net income shown
in the income statement, because some of the expenses, principally
depreciation and amortization, do not involve the expenditure of funds. In
order to determine working capital provided by operations, it is necessary to
deduct fro revenues only those expenses which require an expenditure of
funds and therefore cause a reduction in working capital. A convenient way of
determining working capital from operations is simply to add back to net
income all those expenses, which did not require an outlay of funds, i.e.
working capital.
Certain items included in the income statement decrease expenses without
increasing working capital like amortization of premium on bonds payable
causes interest expense to be less than the amount of cash paid. Therefore,
these items should be deducted from net income in computing the amount of
working capital provided by the operations. The computation of the working
capital fund provided by operations be summarized as follows:
Net income + items reducing Net Income which do not affect Working Capital
+ Non-operating Losses – Non-operating Gains – Items increasing Net
Income which do not affect working Capital.

Increase in Long-term liabilities:

A second source of funds is long-term borrowing. A positive change in the
long-term borrowings is a source of fund whereas a negative change is a use
of fund.

Increase in share capital:

If a firm has issued share capital during the period, the amount for which the
shares were sold is a source of funds.
Sale of Non-current Assets:
This will be another source of funds equal to the net proceeds from the sale.

Transactions that decrease working capital are classified as uses of funds.

Typical uses of working capital include:

Purchase of Non-Current Assets

One of the major uses of funds is the purchase of non-current assets,
principally land, buildings, machinery investments, and intangible assets.
Non-current assets accounts are not affected only by purchases, but also by
the amount of depreciation taken during the year and the sale or disposition
of assets during the year.
The declaration of cash dividends to be paid at a later date is also a use of
funds. Working capital is reduced at the time the declaration is made because
a current liability, dividends payable, is incurred and recorded at that time.
Decrease in long-term liabilities:
Funds may be used to pay-off long-term liabilities, so a decrease in long-term
liability is a use of funds.


In determining changes in working capital, only those accounts are

considered which determines the working capital and the accounts not
included in working capital (i.e., non-working capital accounts) at the same
time. Transactions that involve only working capital accounts or non-working
capital may be ignored in determining the changes in working capital. For
example, if a cash payment is made to creditors, working capital is not
affected because cash (and current assets) and creditors (and current
liabilities) decrease by equal amounts. Likewise, if shares are exchanged for
a machine, working capital does not change because no working capital
accounts are involved in exchange. Transactions like transfer form long-term
assets to current assets or current liabilities viz sale of fixed assets, transfer
of a long-term asset to a creditor satisfying a current debt, etc increases the
working capital.
Whereas transactions like transfer from current assets to long-term
assets or long-term liabilities viz purchase of fixed assets,
debentures payable paid from cash, etc decreases the working

Working Capital Cycle refers to the period of time which elapses between the
point at which cash begins to be expended on the production of a product and
the collection of cash from a customer. This cycle or loop starts at the cash and
marketable securities account, goes through the current accruals accounts as
direct labor and materials are purchased and used to produce inventory, which is
in turn sold and generates accounts receivable, which are finally collected to
replenish cash. The major point to notice about this cycle is that the turnover (or
velocity) of resources through this loop is very high as compared to the other
inflows and outflows of the cash account.
Fig. Working Capital Cycle

Used in

Accrued Direct Labor Materials

Accrued Fixed

Production Used to purchase Expenses
Process Used to
Generates Cash and Marketable Securities


Process Used to
Via Sales Financing
Return to Capital

Fixed Assets

Accounts receivables
Suppliers of Capital
Each of the boxes in the above diagram can be seen as a tank through which
funds flow. These tanks, which are concerned with day-to-day activities, have
funds constantly flowing into and out of them.
The faster a business expands the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right
within the business. Good management of working capital will generate cash, will
help improve profits and reduce risks. Bear in mind that the cost of providing
credit to customers and holding stocks can represent a substantial proportion of
a firm’s total profits.
There are two elements in the business cycle that absorb cash- Inventory
(stocks and working-in-process) and Receivables (debtors owing you money).
The main sources of cash are payables (your creditors) and Equity and Loans.

Equity & Cash


Overheads etc.

WC Cycle
All the above periods are measured in days to calculate the final Working Capital
Cycle or the Cash Conversion Cycle. Each component of working capital (namely
inventory, receivables and payables) has two dimensions- TIME and MONEY.
When it comes to managing working capital- TIME IS MONEY. If you can collect
money due from debtors more quickly or reduce inventory levels relative to sales,
the business will generate more cash or it will need to borrow less money to fund
working capital. Similarly, if terms with suppliers can be improved e.g. getting
longer credit or an increased credit limit, then free finance to help fund future
sales can be created.
The key ratios, their formulae and their interpretation, which are
important in measuring the Working Capital Utilization, are given in
the table below:-
Invento Average =X On average, the value of the
ry Stock*365/ days entire stock is turned over
Turnov Cost of every x days. Obsolete stock.
er Goods sold Slow moving lines will extend
(in overall stock turnover days.
days) Faster production, fewer
product lines, just in time
ordering will reduce average
Receiv Debtors*36 =X It take on an average x days
ables 5/Sales days to collect monies due on the
Ratio(in debtors.
Days) One or more large or slow
debts can drag out his
average days. Effective
debtor management will
minimize the days.
Payabl Creditors*3 =x On average, suppliers are
es 65/Cost of days paid every x days. If one
Ratio(in Sales (or negotiate better credit terms
Days) Purchase) this will increase. If payment
is made earlier, say, to get a
discount this will decline. If
one simply defer paying the
suppliers (without agreement)
this will also increase-but
your reputation, the quality of
service and any flexibility
provided by your suppliers
may suffer.

Current Total =XCurrent Assets are assets

Ratio Current times
that can readily turn in to cash
Assets/Total or will do so within 12 months
Current in the course of business.
Liabilities Current Liabilities are amount
which are due to pay within
the coming 12 months. CR
less than 1 times e.g. 0.75
means that one could have
liquidity problems and be
under pressure to generate
sufficient cash to meet
oncoming demands.
Quick (Total =X Similar to the Current Ratio
Ratio Current times but takes account of the fact
Assets- that it may take time to
Inventory)/T convert inventory into cash.
otal Current
Working (Inventory + As % A high percentage means that
Capital Receivables Sales working capital needs are
Ratio - high relative to your sales.

Table. Key Ratios, their formulae and interpretation

5.4 Working Capital Management

Working capital management is the management of all aspects of both current

assets and current liabilities, so as to minimize the risk of insolvency while
maximizing return on assets. Even profitable companies fail if they have
inadequate cash flows. Liabilities are settled with cash, not profits. The primary
objective of working capital management is to ensure that sufficient cash is
available to:

• Meet day-to-day cash flow needs,

• Pay wages and salaries when they fall due,
• Pay creditors to ensure continued suppliers of goods and services,
• Pay government taxation and providers of capital-dividends and interest,
• Ensure long- term survival of the business entity.

Poor working capital management can lead to:

• Over-capitalization (and therefore waste through under utilization of
resources and hence poor returns), and
• Overtrading (trying to maintain a level of sales which is higher than
working capital can sustain-for businesses which extend credit terms,
more sales means more debtors and higher working capital demands).

Basically Working Capital Management is the process to shorten the working

capital cycle as much as possible with the most efficient use of the available
resources. This can be done by reducing the inventory conversion period and
receivables collection period or by increasing the payable deferral period.
Control of the debtor’s element involves a fundamental trade-off between the
cost of providing credit to customers and the additional net revenue that can be
earned by doing so. The former can be kept to a minimum with effective credit
control policies which will require:
• Setting and enforcing credit terms,
• Vetting customers prior to allowing them credit,
• Setting and reviewing individual credit limits,
• Efficient invoicing and statement generation,
• Prompt query resolution,
• Continuous review of debtors position(generating “aged debtors” report),
• Effective chasing and collection procedures, and
• Limits beyond which legal action will be pursued.

Debtors represent future cash – or they should do if proper credit control policies
are pursued. Likewise, stock will eventually become cash, but in the meantime
represents working capital tied up in business. Keeping levels to the minimum
required for efficient operations will keep costs down. This means controlling of
buying, handling, storing, issuing, and recording stock. 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.
The factors to consider when establishing the control levels are:
• Working capital available and the cost of capital,
• Average consumption of production requirements,
• Reordering periods and economic order quantity,
• Storage space available and likely life of stock,
• The cost of placing orders including generating and checking the
necessary paperwork as well as physical checking and handling

Trade creditors, which are amounts owed by the business for supplies and
services, are a plus in the working capital equation. The higher the figure, the
more has been extended by others (usually at no cost) towards working capital
needs. But there are limits to the credit a firm can go for. Firms that go beyond
agreed credit limits run into trouble, they lose out on cash discounts, can incur
interest charges, and upset their suppliers who may refuse future orders, may
damage their credit rating, and even find themselves in court with additional
costs and penalties to pay.
It is not possible to extend credit, order stock or pay creditors if there is not cash
available to meet working capital demands. So it becomes empirically important
for a firm to efficiently manage the cash available as the working capital.


The conventional definition of Working Capital, in terms of the difference between

current assets and current liabilities is somewhat confusing. Working capital is
really what a part of long-term finance is locked in and used for supporting
current activities consequently, larger the amount of working capital so derived,
greater the proportion of long-term capital sources siphoned off to short-term
activities. It is difficult to say whether this is right or wrong. A relatively large
amount of working capital according to this definition may produce a false sense
of security at a time when cash resources may be negligible, or when these may
be provided increasingly by long-term fund sources in the absence of adequate
profits. So the paradox is that current assets which are relied upon to yield cash
must themselves to be supported by long-term funds until they are converted into
cash. Strategies that utilize investment or financing with working capital accounts
often offer a substantial advantage over other techniques. Several strategies may
be formulated to address the uncertainty regarding the levels of its future cash
flows and the costs that it may engender. Among these strategies are some that
involve working capital investment or financing suck as holding additional cash
balances beyond expected needs, holding a reserve of short-term marketable
securities, or arranging for the availability of additional short-term borrowing
One of the major features of this world is uncertainty (risk), and it is this feature
that gives rise to many of the strategies involving working capital accounts.
Moreover, a firm’s net working capital position is not only important from an
internal standpoint; it is also widely used as a measure of the firm’s risk. Risk
deals with the probability that a firm will encounter financial difficulties. Such as
the inability to pay bills on time. All other things being equal, the more net
working capital a firm, the more likely that it will be able to meet current financial
obligations. Many loan agreements with commercial banks and other lending
institutions contain a provision requiring the fir to maintain a minimum level of net
working capital position likewise; bond indentures also often contain such
provisions. With the liquidity-profitability dilemma solidly authenticated in the
financial scheme of the management, concerted efforts are made to ensure the
ability of the firm to meet those obligations which mature within a twelve month
period. Keeping all the factors in mind, management decides the levels of current
assets, despite the fact that sales dictate some fluctuations in short-term asset
investment. Excessive current assets are usually not advisable because they are
generally not considered to be the “Earning Assets” of the firm. The yield from
short-term assets is usually low, while returns from long-term, more permanent
assets are usually quite high. So, management may be considered to be
aggressive or conservative according to investment in current vs. long-term
Not all Companies and Businesses are similar. Different industries have different
optimum working capital profiles, reflecting their methods of doing business and
what they are selling. Businesses like supermarkets with a lot of cash sales and
few credit sales should have minimal trade debtors, some seasonal business like
travel agencies will receive their monies at certain times of the year although they
may incur expenses receive their monies at certain times of the year, although
they may incur expenses throughout the year at a fairly consistent level. Some
finished goods, notably foodstuffs have to be sold within a limited period because
of their perishable nature. The size and nature of a firm’s investment in current
assets is a function of a number of different factors, including the following:
• The type of products manufactured and the length of the operating cycle,
• The sales level, as higher sales require more investment in inventories
and receivables.
• Inventory policies, e.g. the amount of safety stock maintained,
• Credit policies,
• Efficiency in Management of current assets.

Some companies are inherently better placed then others. Insurance companies,
for instance, receive premium payments up front before having to make any
payments. However, insurance companies do have unpredictable outgoings as
claims come in. Normally an ig retailer like Wal-Mart has little to worry about
when it comes to accounts receivable, as customers pay for goods on the spot.
Inventories represent the biggest problem for retailers, who must perform
rigorous inventory forecasting or they risk being out of business in a short time.
Manufacturing companies, like Shree Cement, incur substantial up-front costs for
materials and labor before receiving payment. Much of the time they eat more
cash than they generate.


Working capital is taken to be the life-blood of a business. That is why, working

capital management of a firm is considered to be one of the most important tasks
of financial managers. A decision regarding the volume of current assets has its
own importance no doubt, but the question of financing is in fact the key area of
working capital management. Since the management is very much concerned
with proper financial structure, these and other funds must be raised judiciously.
Various sources of Working Capital financing are bank borrowings, public
deposits, trade credit, long-term borrowing and equity capital. Of the different
sources, bank credit has been a major source of working capital in India and
abroad. Frequently, current assets are financed from short term loans. Larger the
percentage of funds obtained from short term funds, the more aggressive(and
risky) is the firm’s working capital policy and vice versa. A company’s need for
financing is equal to the sum of its fixed assets and current assets. Current
Assets can be divided into the following two categories:
- Permanent current assets,
- Fluctuating current assets.

Fluctuating current assets are those which are affected by the seasonal or
cyclical nature of a company’s sales. For example, a firm must make larger
investments in inventories and receivables during peak selling periods than
during other periods of the year. Permanent current assets are held to meet the
company’s minimum long-term needs e.g. safety stocks of cash and inventories.
The following figure illustrates a typical firm’s financing needs over time.
Fluctuating fixed assets

Permanent fixed assets

Fixed Assets

Fig. Components of Total Assets

Both expected profitability and risk increase as the proportion of short-term debt
increases. The company’s net working capital position and current ratio would
depend on the financing policy chosen in summary, a firm can adopt any of the
following policies for financing its working capital needs:-

(I) Matching Approach to Asset Financing: In this approach,

the maturity structure of the firm’s liabilities is made to correspond
exactly to the life of its assets. This is illustrated in the figure given
below. As can be seen, fixed assets and permanent current assets
are financed with long-term debt and equity funds, whereas
fluctuating current assets ate financed with short-term debt. In
practice the uncertainty associated with the lives of individual
assets makes this approach difficult to implement.
Fluctuating current assets
Short term loans

Long term finance

Stock, bonds.

Fixed assets


Fig. Matching Approach to Assets Financing Policy

(ii) Conservative Approach to Asset Financing: In this approach, a

relatively higher proportion of long-term debt is used. The relatively low
proportion of short-term debt in this approach reduces the risks that the company
will be unable to repay its debt, and it also reduces the risk associated with
interest rate fluctuations. At the same time, however this approach cuts down on
the expected returns available to stockholders, because the cost of long-term
debt is generally higher than the cost of short-term debt. Net working capital and
current ratio will be highest under this plan.
Marketable Securites

Fluctuating assets
Zero short-term


Stock, Bonds

Fixed assets
Fig. Conservative Approach to Assets Financing Policy

(iii) Aggressive Approach to Asset Financing: This approach uses a

relatively higher proportion of short-term debt. In this approach debt must be
repaid more frequently, and this increases the risk that it will be unable to obtain
new financing as needed. Also, the greater possible fluctuations in interest
expenses associated with this financing plan also add to the firm’s risk (variability
in earnings). These higher risks are offset by the higher expected after-tax
earnings that result from the lower cost of short-term debt. Under this plan the
net working capital and current ratio would be the lowest.
Fluctuating Current Assets

Short-term Loans

Permanent Current assets Long-term Finance,

Stock, Bonds

Fixed assets

Fig. Aggressive Approach to Assets Financing Policy



• Second largest in the world in term of capacity.

• Low cost of production.


• Effect of global recession on real state and infrastructure.

• Demand-supply gap, Overcapacity
• Increasing cost of production
• High Interest rate

• Strong growth of economy in the long run

• Increases in infrastructure project
• Growing middle class
• Technological change
• Increases in govt. spending


• Imports from Pakistan effecting markets in northern India

• Excess over capacity can hurt margins as well as price


From the analysis of company’s performance in the past few years it is clear that
Shree Cement Limited has adopted very innovative techniques for the financing
and management of working capital.

2006-07 2007-08 2008-09 2009-10

Current ratio
The company has been able to maintain a Current Ratio. Also, with the help of
strict credit policies they have been able to bring down the Receivables collection
period. The inventory turnover period has increased by better management.

The company is using Pet coke as a fuel in kiln Pet coke is being supplied only
by Reliance and due to increase in demand, procurement time has increased
considerably. Further, due to implementation of RAS cement project and
increased competition in the market, the company has to extend long credit to its
customers. The company also has to give more focus on retail sales to
strengthen its position in the market, and consequently more stocks are required
to be kept at various depots.
The company is now in expansion mode. A 1.5 Mn Mt plant at Ras (Unit III) has
been commissioned in Feb. 2008. Another 1.5 Mn Mt plant at Ras (Unit IV) has
been commissioned in March 2009. In view of the expansion, working capital
requirements will also increase. As suggested above, in the current year the level
of total current assets is like to increase to Rs.550.51 crores as compared to Rs.
390.90 Crores in 2008-09. This increase can be justified on the grounds that with
expansion more inventories have to be maintained and the amount of
receivables will also increase. With the increasing popularity of the new products
i.e. Bangur Cement and Cemento 3556, more stock has to be kept at the dealer’s
With the continuous advancement made by the company interims of low cost of
funding, adequate current ratio, high capacity utilization and effective
management of assets. Shree Cement Limited is poised to set new benchmarks
for the Cement Industry.

8. Recommendation and Suggestions

1. Working Capital Requirement Fulfill On Time

Working capital is taken to be the lifeblood of a business. Lack of working
capital may lead a business to “technical insolvency” and ultimately to liquidation.
That is why, the working capital management of the company is considered to be
one of the most important tasks of financial managers.

2. Increase in stock-in-process and finished goods inventory are appreciable it

should be maintain continue.

3. Company’s Interest rate is high. So it’s should be try to decrease.

4. In present time the cost of production increases it’s also reduces.

5. Company should be better utilizing of borrowing fund.

6. The company also have to give more focus on retail sales to strengthen its
position in the market, and consequently more stocks are required to be kept at
various depots.

7. There should be control on the price variation.

8. The company have to maintain a Current Ratio. Also, with the help of strict
credit policies they have been able to bring down the Receivables collection
period. The inventory turnover period has increased by better management.


Q.1. Are you aware about Shree cement. ?


Q.2. Mention the Shree cement Strength and Weakness. ?




Q.3. What are the Incentives / Discounts you are getting from Shree


Q.4. What are the Various Incentives / Discounts getting from Other


Q.5. According to you, How Shree Cement can be made no. 1 in

your region?


10. Bibliography

1. Bhalla, V.K. (2001), Working Capital Management, Anmol

Publications Pvt. Ltd. New Delhi.
2. Mathur, S.B. (2002), Working Capital Management and
Control, New Age International Pvt. Ltd., New Delhi.
6. http://www.scribd.comdoc11715143Cement-Industry-Analysis