Professional Documents
Culture Documents
ON
CAPITAL BUDGTING
AT
IN PARTIAL
AL FULFILMENT OF TWO YEAR FULL TIME
COURSE
1
ACKNOWLEDGEMENT
This project report could not have been completed without the guidance of
our Prof. Mr. SK Sinha & project guide Mr. R Ballabh. Their timely help &
encouragement helped me to complete this project successfully.
I would like to thank Mr. W.Kullu (STRM), Mr. J.N.Bhilware (TRO), and
entire training department for giving me an opportunity to do my training and to
gain experience in a known and recognized organization like IOCL. It was a
wonderful experience to working with this Organization. People here were very
helpful and rendered the best help they could, at every point of time.
I would like to take the opportunity to thank my respected project guide Mr.
Pankaj kumar meena(CA) for his valuable enlightened guidance, suggestion,
direction and information in the completion of this Project Report.
THANKING YOU
Akhilesh kumar
2
PREFACE
The real objective behind the partial training and presentation of the report is
to gain experience to the actual work environment and the required knock to guide
knowledge towards facilitating its application for any professional practical
training and close contact with the prevailing system in an organization is of great
importance.
Efforts have been made to prepare this Project Report in most simple
language. While preparing this Project Report, a care has been taken to make it
comprehensive, reliable and analytical to make it easy to understand. Charts and
Diagram have been used to avoid difficulties.
Akhilesh kumar
3
INDEX:-
4
CHAPTER: 1
Objective:
5
Calculation of working capital gives clear idea about the requirement of the
needed inventories in the production and Ratio Analysis gives idea about
performance of the company. Besides that it also takes account of required
current assets. So, the calculation of working capital is an essential part of
financial planning.
6
The most important thing is that working capital is the one way through,
which a company’s profitability can be determined. Therefore, this study is
confined to how Barauni Refinery Unit (IOCL determines the amount of working
capital.
METHODOLOGY USED
The methods adopted for the collection of data and information for this work
was gathered mostly through various books, annual report and discussion with
various executives and office staff of Barauni Refinery Unit (IOCL). Moreover,
selective literature, previous research works and internet have also been referred
for the purpose.
CHAPTER: 2
7
INTRODUCTION:
Indian Oil Corporation Ltd. is India's flagship national oil company with
business interests straddling the entire hydrocarbon value chain – from refining,
pipeline transportation and marketing of petroleum products to exploration &
production of crude oil & gas, marketing of natural gas and petrochemicals. It is
the leading Indian corporate in the Fortune 'Global 500' listing, ranked at the 88th
position in the year 2010. It began operation in 1959 as Indian Oil Company Ltd.
The Indian Oil Corporation was formed in 1964, with the merger of Indian
Refineries Ltd. Indian Oil and its subsidiaries account for a 47% share in the
petroleum products market, 40% share in refining capacity and 67% downstream
sector pipelines capacity in India. The Indian Oil Group of Companies owns and
operates 10 of India's 19 refineries with a combined refining capacity of 60.2
8
million metric tons per year.On 30th June 2014 IndianOil will complete 50 years
of its existence and a series of events are being planned to celebrate its Golden
Jubilee Year.
Indian Oil was formed as joint ventures between one company and Government of
India but later become fully owned government undertaking. Indian Oil established
as an oil marketing entity on 30th June 1959, Indian Oil company ltd was renamed
Indian Oil Corporation Ltd. on 1st September 1964 following merger with the
refining entity. Indian Refineries Ltd. that was established in August 1958.
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VISION:
MISSION:
10
To help enrich the quality of life of the community and preserve ecological
balance and heritage through a strong environment conscience.
OBJECTIVE
To serve the national interests in oil and related sectors in accordance and
consistent with Government policies.
To ensure maintenance of continuous and smooth supplies of petroleum
products by way of crude oil refining, transportation and marketing activities
and to provide appropriate assistance to consumers to conserve and use
petroleum products efficiently.
To enhance the country's self-sufficiency in crude oil refining and build
expertise in lying of crude oil and petroleum product pipelines.
To further enhance marketing infrastructure and reseller network for
providing assured service to customers throughout the country.
To create a strong research & development base in refinery processes,
product formulations, pipeline transportation and alternative fuels with a
view to minimizing/eliminating imports and to have next generation
products.
To optimize utilization of refining capacity and maximize distillate yield and
gross refining margin.
To maximize utilization of the existing facilities for improving efficiency
and increasing productivity.
To minimize fuel consumption and hydrocarbon loss in refineries and stock
loss in marketing operations to effect energy conservation.
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To earn a reasonable rate of return on investment.
To avail of all viable opportunities, both national and global, arising out of
the Government of India’s policy of liberalization and reforms.
To achieve higher growth through mergers, acquisitions, integration and
diversification by harnessing new business opportunities in oil exploration &
production, petrochemicals, natural gas and downstream opportunities
overseas.
To inculcate strong ‘core values’ among the employees and continuously
update skill sets for full exploitation of the new business opportunities.
To develop operational synergies with subsidiaries and joint ventures and
continuously engage across the hydrocarbon value chain for the benefit of
society at large.
FINANCIAL OBJECTIVES:
PRESENT POSITION:
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Indian Oil Corporation Ltd. is India’s largest company by sales with a turnover of
Rs. 271,074 crore and profit of Rs. 10,221 crore for the year 2009-10.
IndianOil is the highest ranked Indian company in the latest Fortune ‘Global 500’
listings, ranked at the 125th position. IndianOil’s vision is driven by a group of
dynamic leaders who have made it a name to reckon with.
IOCL DISTINCTIONS:
HISTORY:
2001:
Public sector oil major Indian Oil Corporation has tied up with Standard Chartered
Bank to mobilize Rs 400 crore from the overseas market. Stan Chart is the book-
runner, lead arranger and the facility agent, and Union Bank of India is the joint
arranger for this loan syndication of IOC.
2002:
IOCL has bought out IBPs 25 per cent stake in Indian Oil Tanking (IOT), a
company engaged in the storage and handling of petroleum products, for Rs 44
crore.
2003:
IOCL has appointed McKinsey for conducting a 'structure, process, people' study.
2004:
13
IOCL the petroleum refining and marketing major, plans to merge with itself its
subsidiary, IBP Ltd, and also set up a new exploration company with an investment
of $2 billion
2005:
Tata Motors has initiated an informal project with Indian Oil Corporation for the
use of bio-diesel blended fuels in its buses. There is no written agreement between
the two companies for the project.
2006:
IOCL has signed an agreement with the West Bengal government for setting up a
petrochemical hub in the state. The company would be the primary investor in the
proposed hub housing petrol, chemical and petrochemical units.
2007:
Dabur India Ltd has entered into an agreement with IOCL to service rural market
demand for consumer goods through the latter's chain of Kisan Seva Kendra
(KSK).
2008:
Haldia refinery alone is expected to save an average Rs450 crore a year once crude
is sourced from Paradip IOCL's refineries had a capacity utilization of 104 per cent
in 2008, processing 48.9 million tonne of crude oil.
2009:
Essar Oil is reported to have expanded the number of its fuel retail outlets to over
1,000, with plans to have around 1,400 outlets operational by April 2009.
Unconfirmed reports said that Essar claimed a market share of around four per
cent, and was aiming to increase it further to over six per cent
14
OVERVIEW OF BARAUNI REFINERY:
Barauni Refinery, the second public sector oil refinery of the country, was
built in collaboration with the erstwhile USSR and limited Rumanian participation.
Situated 125 kilometeres from Patna, Barauni Refinery was commissioned in 1964
with a refining capacity of 1 Million Metric Tonnes Per Annum (MMTPA). The
refining capacity was increased to 3.0 MMTPA by 1969. It was built with an initial
cost of Rs. 49.40 Crore. It was dedicated to the Nation by the then Union Minister
for Petroleum, Prof. Humayun Kabir in January 1965. After de-bottlenecking,
revamping and expansion projects, its current capacity 6 MMTPA. With various
revamps and expansion projects at Barauni Refinery, capability for processing
high-sulphur crude has been added, thereby increasing not only the capacity but
also the profitability of the refinery.
Barauni Refinery was initially designed to process low sulphur crude oil
(sweet crude) of Assam. After establishment of other refineries in the Northeast,
Assam crude is unavailable for this refinery. Hence, sweet crude is being sourced
from African, South East Asian and Middle East countries. The refinery receives
crude oil by pipeline from Paradip on the east coast via Haldia.
15
Upgradation project of Barauni Refinery is in full swing to supply Bharat Stage-III
compliant petrol to the market.
The year 2008-09 saw Barauni Refinery achieve the highest ever-crude
throughput of 5.94 MMT, beating the previous best of 5.63 MMT, which was
achieved in 2007-08, along with sustaining the distillate yield of more than 85%
(i.e. 85.7%) year after year
Barauni refinery achieved lowest ever 65.5 MBN of energy in the year 2008-
09. It reduced energy consumption by almost 10% over the previous fiscal year of
2007-08. It excellence safety record during the year 2008-09 is another feather.
Barauni Refinery Coker unit was declared as a zero steam leak unit it has avoided
any accidents in the unit during the year 2008-09
Barauni petrochemicals plant is in the country the second oil refinery in the
public sector and forms an important part of the Indian petrochemical industry
Indian Oil Corporation Ltd is speeding up work on the high sulphur crude
maximization project at its Barauni refinery in Bihar. The project is estimated to
cost Rs 790 crore.
CHAPTER: 3
PRODUCT PROFILE
PRODUCTS:
Indian Oil is not only the largest commercial enterprise in the country it is
the flagship corporate of the Indian Nation. Besides having a dominant market
share, Indian Oil is widely recognized as India’s dominant energy brand and
customers perceive Indian Oil as a reliable symbol for high quality products and
services. Indian Oil is a heritage and iconic brand at one level and a contemporary,
global brand at another level. While quality, reliability and service remains the
core benefits to our customers, our stringent checks are built into operating
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systems, at every level ensuring the trust of over a billion Indians over the last four
decades. Indian oil has many products but few products are as follows.
1) Auto Gas:
Auto Gas (LPG) is a clean, high octane, abundant and eco-friendly fuel. It is
obtained from natural gas through fractionation and from crude oil through
refining. It is a mixture of petroleum gases like propane and butane. The
higher energy content in this fuel results in a 10% reduction of CO2
emission as compared to MS. Auto Gas is a gas at atmospheric pressure and
normal temperatures, but it can be liquefied when moderate pressure is
applied or when the temperature is sufficiently reduced.
IndianOil Aviation Service is a leading aviation fuel solution provider in India and
the most-preferred supplier of jet fuel to major international and domestic airlines.
Between one sunrise and the next, IndianOil Aviation Service refuels over 1500
flights – from the bustling metros to the remote airports linking the vast Indian
landscape, from the icy heights of Leh (the highest airport in the world at 10,682
ft) to the distant islands of Andaman & Nicobar. IndianOil is India's first ISO-9002
certified oil company conforming to stringent global quality requirements of
aviation fuel storage & handling. IndianOil Aviation also caters to the fuel
17
requirements of the Indian Defense Services, besides refueling VVIP flights at all
the airports and remote heli-pads/heli-bases across the Indian subcontinent.
3) Bitumen:
The common binders used in bituminous road constructions are road tars and
Bitumen. Bitumen has gradually replaced road tar for road construction
purposes mainly because of its greater availability as compared to road tars.
It is principally obtained as a residual product in petroleum refineries after
higher tractions like gas, petrol, kerosene and diesel, etc., are removed
generally by distillation from suitable crude oil. Indian standard institutions
define Bitumen as a black or dark brown non-crystalline soil or viscous
material having adhesive properties derived from petroleum crude either by
natural or by refinery processes.
Indian Oil’s XTRAMILE Super Diesel, the leader in the branded diesel
segment is blended with world-class ‘Multi Functional Fuel Additives
(MFA). XTRAMILE has brought in a huge savings in the high mileage
commercial vehicle segment. Transport fleets that operate a large number of
trucks crisscrossing the country are using XTRAMILE to not only obtain a
higher mileage but also for low maintenance costs.
5) Indane Gas:
18
Indane is today one of the largest packed-LPG brands in the world. IndianOil
pioneered the launch of LPG in India in the 1970s and transformed the lives
of millions of people with the introduction of the clean, efficient and safe
cooking fuel. LPG also led to a substantial improvement in the health of
women in rural areas by replacing smoky and unhealthy chullahs with
Indane. It is today a fuel synonymous with safety, reliability and
convenience.
7) MS/Gasoline:
19
Automotive gasoline and gasoline-oxygenate blends are used in internal
combustion spark-ignition engines. These spark ignition engine fuels are primarily
used for passenger cars. XTRAPREMIUM Petrol is India’s leading branded petrol
boosted with new generation multifunctional additives known as friction busters
that prevent combustion chamber deposits. XTRAPREMIUM is custom designed
to deliver higher mileage, more power, better pick up, faster acceleration, enhanced
engine cleanliness and lower emissions.
CHAPTER: 4
INTRODUCTION:
Working capital in simple terms means the amount of funds that a company
requires for financing its day-to-day operations. Finance manager should develop
sound techniques of managing current assets.
20
Symbolically, it means,
1) “Working capital is the difference between the inflow and outflow of funds.
In other words it is the net cash inflow”.
2) Working capital represents the total of all current assets. In other words it is
the “Gross working capital”, it is also known as “Circulating capital” or
“Current capital” for current assets are rotating in their nature.
In the business the Working capital is comparable to the blood of the human
body. Therefore the study of working capital is of major importance to the internal
and external analysis because of its close relationship with the current day to day
operations of a business. The inadequacy or mismanagement of working capital is
the leading cause of business failures.
In short, the cash and credit in the business, is comparable to the blood in the
human body like finance s life and strength i.e. profit of solvency to the business
21
enterprise. Financial management is called upon to maintain always the right cash
balance so that flow of fund is maintained at a desirable speed not allowing slow
down. Thus enterprise can have a balance between liquidity and profitability.
Therefore the management of working capital is essential in each and every
activity.
The working capital is the amount resolving capital to meet the day today
requirements of the firm. The other facets of the working capital is circulating
capital, floating capital and moving capital which are required to meet the
immediate requirements of the firm.
Working Capital is the key difference between the long term financial management
and short term financial management in terms of the timing of cash.
Long term finance involves the cash flow over the extended period of time i.e 5 to
15 years, while short term financial decisions involve cash flow within a year or
within operating cycle.
Working capital management is a short term financial management.
22
The Goal of Capital Management is to manage the firm s current assets &
liabilities, so that the satisfactory level of working capital is maintained. If the firm
can not maintain the satisfactory level of working capital, it is likely to become
insolvent & may be forced into bankruptcy. To maintain the margin of safety
current asset should be large enough to cover its current assets.
23
Net working capital is necessary because the cash outflows and inflows do
not coincide. In general the cash outflows resulting from payments of current
liability are relatively predictable. The cash inflows are however difficult to
predict. More predictable the cash inflows are, the less NWC will be required. But
where the cash inflows are uncertain, it will be necessary to maintain current assets
at level adequate to cover current liabilities that are there must be NWC.
The term profitability is measured by profits after expenses. The term risk is
defined as the profitability that a firm will become technically insolvent so that it
will not be able to meet its obligations when they become due for payment. The
risk of becoming technically insolvent is measured by NWC.
If the firm wants to increase profitability, the risk will definitely increase. If
firm wants to reduce the risk, the profitability will decrease.
Working capital is required to run day to day business operations. Firms differ in
their requirement of working capital (WC). Firm s aim is to maximize the wealth
of share holders and to earn sufficient return from its operations.
24
The extent to which profit can be earned is dependent upon the magnitude of sales.
Sales are necessary for earning profits. However, sales do not convert into cash
instantly; there is invariably a time lag between sale of goods and the receipt of
cash. WC management affect the profitability and liquidity of the firm which are
inversely proportional to each other, hence proper balance should be maintained
between two.
To convert the sale of goods into cash, there is need for WC in the form of current
asset to deal with the problem arising out of immediate realization of cash against
good sold. Sufficient WC is necessary to sustain sales activity. This is referred to
as the operating or cash cycle.
The working capital needs of a firm are affected by numerous factors. The
important factors are as follows:
(i) Nature of business: In some business organizations, the sales are mostly
on cash basis and the operating cycle (explained later) is also very short. In these
concerns, the working capital requirement is comparatively less. Mostly service
giving companies come in this category. In manufacturing concerns, usually the
operating cycle is very long and a firm has to give credit to customers for
improving sales. In such cases, the working capital requirement is more.
(iii) Market Conditions: Due to competition in the market, the demands for
working capital fluctuate. In a competitive environment, a business firm has to
give liberal credit to customers. Similarly, it will have to maintain a large inventory
of finished goods to service the customers promptly. In this situation, larger
amount of working capital will be required.
On the other hand, when a firm is in seller’s market, it can manage with a
smaller amount of working capital because sales can be made on cash basis and
25
there will be no need to maintain large inventory of finished goods because
customers can be serviced with delay.
(v) Growth and expansion activities: The working capital needs of the firm
increase as it grows in terms of sales or fixed assets. A growing firm may need to
invest funds in fixed assets in order to sustain its growth of production and sales.
This will in turn increase investments in current assets, which will result in
increase in working capital needs.
(vii) Credit Policy: Credit term granted by the concern to its customers as
well as to its suppliers will also effect the working capital requirements. If the
concern has allowed very liberal credit terms to its customer and has adopted a
slack collection procedure, more funds will be tied in book debts and working
capital needs will also be high. Where suppliers have granted liberal credit terms to
the concern, there will be less need for working capital. Not only will the Ratio of
cash and credit sales or purchase also effect the level of working capital.
(viii) Sales Growth: As the sales grow, the working capital needs also go
up. Actually it is very difficult to establish an exact proportion of increase in
current assets, as a result of increase in sales. Advance planning of working capital
becomes essential because current assets will have to be employed even before
growth in sales takes place. Once sales start increasing, they must be sustained. For
this a firm will have to expand its production facilities, which will require more
investments in fixed assets. This will in turn result in more requirements of current
assets, which will increase working capital needs.
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working capital will be required. The needs for working capital will be
substantially reduced if dividend policy is conservative.
Thus, there are several factors affecting the working capital requirements.
1. There is a positive correlation between the sale of the product of the firm
and the current assets. An increase in the sale of the product requires a
corresponding increase in current assets. It is therefore indispensable to
manage the current assets properly and efficiently.
2. More than half of the total capital of the firm is generally invested in
current assets. It means less than half of the capital is blocked in fixed
assets. We pay due attention to the management fixed assets through the
capital budgeting process. Management of working capital too, therefore,
attracts the attention of the management.
27
4. Working capital needs are more often financed through outside sources
so it is necessary to utilize them in the best way possible.
Distribution of dividends.
High moral.
28
Cash discounts.
Operating inefficiency.
29
Restrictive Policy:- Under this policy the investment in the current
assets is low. This means that the firm keeps a small balance of cash
and marketable securities, managers with small amount of inventories
and offers terms of credit, which leads to a low level of debtors.
However, as a general rule, it can be concluded that in most cases the period
which elapses between purchase of material and the receipt of sale proceeds of the
finished goods will determine the working capital requirements of any business.
CHAPTER: 5
WORKING CAPITAL MANAGEMENT IN CONTEXT TO
BARAUNI REFINERY UNIT (IOCL)
30
the Head Office. Barauni Refinery Unit does not purchase raw materials directly.
Head Office provides raw materials to this unit as and when required. Through this
unit does not purchase raw materials directly so it has no creditors. The major raw
materials of the Refinery Division are the CRUDE OIL. Since there are not
creditors, it acts as a limitation as it does not present the true picture of the working
capital requirement for the corporation. But in spite of this, there are all the
transaction done by the Head Office only. The Naraimo Refinery Unit maintains
the working capital at some extent to meet out the following requirements:
To incur day-to-day expenses and overheads cost such as fuel, power and
office expenses.
31
The following factors, which determined the working capital requirement of
the firms. The descriptions of these factors have already been discussed in the
previous chapter.
Nature of Business
Production Policy
Market condition
Seasonal Fluctuations
Operating Efficiency
Credit Policy
But in the context of Barauni Refinery Unit (IOCL), the working capital
requirement is mainly determined by factors like nature of the business,
manufacturing process, sales volume and turnover, production policy and
operating efficiency. Credit policy, seasonal fluctuation and are not
applicable in Barauni Refinery. This is a manufacturing concern and its
working depends on the manufacturing cycle and the time tag between
production and sale. The sales volume and turnover also has an impact on
the holding period of raw materials, work-in-progress and finished goods
and ultimately affects the working capital requirement for the concerned
department. The cyclical and seasonal fluctuations as do not affect the
business as the final product are utilized throughout the year.
OPERATING CYCLE
32
Marketing division
Finished goods
(LPG, Kerosene,
Cash Petrol, Diesel, etc)
Work-in-process
Raw Material
(Gasoline, Diesel,
(Crude Oil)
Nephtha)
The term cash cycle refers to the length of time necessary to complete the
following cycle of events: -
33
Raw material inventory
Work-in-progress turnover
Work-in-progress holding period
Work-in-progress inventory
34
Chemicals, Stores and spares 643,947,098 1,147,217,840
Power and Fuels 50,467,626 49,902,519
Repairs and Maintenance 671,090,249 912,475,932
Freight and Transportation charge 816,995,132 540,696,053
Other manufacturing expenses: 1,886,908,800 1,486,366,329
(Salary and wages to employees,
overtime, etc) 198,676,626,321 164,168,261,855
Add: Opening stock of work-in-process 1,971,777,039 2,115,521,609
200,648,403,360 166,283,783,464
Less: Closing stock of work-in-process 2,115,521,609 3,081,839,768
206,403,810,830 167,911,051,010
Less: closing stock of finished goods 4,363,813,291 4,252,292,110
35
Chemicals 759,020,855 639,199,259
Stores and spares 46,480,030 45,149,240
Power and Fuels 49,576,516 38,008,324
Repairs and Maintenance 955,066,394 882,564,438
Freight and Transportation charge 634,409,180 856,638,760
Other manufacturing expenses:
(Salary and wages to employees,
overtime, etc) 1,115,911,307 1,028,129,248
148,466,568,031 137,034,419,764
Add: Opening stock of work-in-process 1,766,187,119 2,126,733,280
150,232,755,150 139,161,153,044
Less: Closing stock of work-in-process 1,971,777,039 1,766,187,119
153,218,247,372 141,330,650,193
Less closing stock of finished goods 4,094,970,406 4,167,577,708
36
Chemicals 613,844,086 467,601,342
Stores and spares 48,446,036 22,096,267
Power and Fuels 52,510,171 32,465,854
Repairs and Maintenance 498,949,542 430,421,808
Freight and Transportation charge 400,362,721 500,309,128
Other manufacturing expenses:
(Salary and wages to employees,
overtime, etc) 783,052,036 880,634,729
117,091,279,622 82,237,010,773
Add: Opening stock of work-in-process 2,120,551,481 1,709,783,215
119,211,831,103 83,946,793,988
Less: Closing stock of work-in-process 2,126,733,280 2,120,551,481
121,561,228,244 84,804,596,219
Less: closing stock of finished goods 3,140,400,210 3,504,702,083
= 1,052,398,617 + 3,244,599,731
2
= Rs 2,148,499,174
37
Average Stock of R.M
= 160,031,603,182
2,148,499,174
= 74 times
= 2,148,499,174 x 365
160,031,603,182
= 5 days
= 160,031,603,182 x 5
365
= Rs 2,192,213,742
= 2,115,521,609 + 3,081,839,768
2
= Rs 2,598,680,689
38
= 163,547,237,719
2,598,680,689
= 63 times
= 2,598,680,689 x 365
163,547,237,719
= 6 days
= 163,547,237,719 x 5
365
= Rs 2,240,373,119
= 4,363,813,291 + 4,252,292,110
2
= Rs 4,308,052,701
39
= 163,658,758,900
4,308,052,701
= 38 times
= 4,308,052,701 x 365
163,658,758,900
= 10 days
= 163,658,758,900 x 8
365
= Rs 3,587,041,291
40
Operating Cycle Diagram for the year 2009-10
Rs 2,192,213,742
For 5 days
Raw Material
Cash
(Crude Oil)
Rs 2,240,373,119
Transferred to For 6 days
Mktg. Division
41
Raw Materials Conversion period: -
= 7,264,607,814 + 1,088,830,365
2
= Rs 4,176,719,090
= 194,607,217,416
4,176,719,090
= 47 times
= 4,176,719,090 x 365
194,607,217,416
= 8 days
= 194,607,217,416 x 8
365
= Rs 4,265,363,669
42
Work-in-process Conversion period: -
= 1,971,777,039 +2,115,521,609
2
= Rs 2,043,649,324
= 202,308,840,424
2,043,649,324
= 99 times
= 2,043,649,324 x 365
202,308,840,424
= 4 days
= 202,308,840,424 x 5
365
= Rs 2,771,353,978
43
2
= 4,094,970,406 + 4,363,813,291
2
= Rs 4,229,391,849
= 202,039,997,539
4,229,391,849
= 48 times
= 4,229,391,849 x 365
202,039,997,539
= 8 days
= 202,039,997,539 x 8
365
= Rs 4,428,273,919
44
Rs 4,265,363,669
For 8 days
Raw Material
Cash
(Crude Oil)
Rs 2,771,353,978
Transferred to For 4 days
Mktg. Division
45
Average stock of R.M = Opening stock of R.M + Closing of R.M
2
= 7,866,033,711 + 7,264,607,814
2
= Rs 7,565,320,763
= 144,906,103,749
7,565,320,763
= 19 times
= 7,565,320,763 x 365
144,906,103,749
= 19 days
= 144,906,103,749 x 19
365
= Rs 7,543,057,455
46
= 1,766,187,119 + 1,971,777,039
2
= Rs 1,868,982,079
= 149,050,669,664
1,868,982,079
= 80 times
= 1,868,982,079 x 365
149,050,669,664
= 5 days
= 149,050,669,664 x 5
365
= Rs 2,041,789,995
= 4,167,577,708 + 4,094,970,406
2
47
= Rs 4,131,274,057
= 149,123,276,966
4,131,274,057
= 36 times
= 4,131,274,057 x 365
149,123,276,966
= 10 days
= 149,123,276,966 x 10
365
= Rs 4,085,569,232
Rs 7,543,057,455
For 19 days
Raw Material
Cash
(Crude Oil)
48
Rs 2,041,789,995
Transferred to For 5 days
Mktg. Division
= 7,421,419,792 + 7,866,033,711
2
= Rs 7,643,726,752
49
Raw Material Turnover = Raw Material consumed
Average Stock of R.M
= 133,544,730,495
7,643,726,752
= 17 times
= 7,643,726,752 x 365
133,544,730,495
= 21 days
= 133,544,730,495 x 19
365
= Rs 7,683,395,453
= 2,126,733,280 + 1,766,187,119
2
= Rs 1,946,460,100
50
= 138,190,249,983
1,946,460,100
= 71 times
= 1,946,460,100 x 365
138,190,249,983
= 5 days
= 138,190,249,983 x 5
365
= Rs 1,893,017,123
= 3,140,400,210 + 4,167,577,708
2
= Rs 3,653,988,959
= 137,163,072,485
3,653,988,959
= 37 times
51
F.G Holding Period = Average stock of F.G x 365
Cost of good sold
= 3,653,988,959 x 365
137,163,072,485
= 10 days
= 137,163,072,485 x 10
365
= Rs 3,757,892,397
Rs 7,683,395,453
For 21 days
Raw Material
Cash
(Crude Oil)
Rs 1,893,017,123
Transferred to For 5 days
Mktg. Division
52
Holding Period and Working Capital Required for 2006-07
Graphically Presentation
80 74
70
60
47
TIMES
50
40 TIMES
30 19
17
20
10
0
2006-07 2007-08 2008-09 2009-10
YEAR
53
RAW MATERIAL HOLDING PERIOD
25
21
19
20
DAYS
15
DAYS
10 8
5
5
0
2006-07 2007-08 2008-09 2009-10
YEAR
WORK-IN-PROCESS TURNOVER: -
W.I.P TURNOVER
120
99
100
80
80 71
TIMES
63
TIMES
60
40
20
0
2006-07 2007-08 2008-09 2009-10
YEAR
54
W.I.P HOLDING PERIOD
7
6
6
5 5
5
4
DAYS
4
DAYS
3
2
1
0
2006-07 2007-08 2008-09 2009-10
YEAR
60
48
50
37 36 38
TIMES
40
30 TIMES
20
10
0
2006-07 2007-08 2008-09 2009-10
YEAR
55
FINISHED GOOD HOLDING PERIOD
12
10 10 10
10
8
8
DAYS
6 DAYS
4
2
0
2006-07 2007-08 2008-09 2009-10
YEAR
CHAPTER: 6
INVENTORY MANAGEMENT
INTRODUCTION:
56
customers. Inventory Management and the activities of Inventory Control do not
make decisions or manage operations; they provide the information to Managers
who make more accurate and timely decisions to manage their operations.
Effective Inventory Management helps organizations to meet or exceed customers'
expectations of product availability while maximizing the organization's net profits
and/or minimizing its inventory and its related costs.
NATURE OF INVENTORY:
Row Material: Raw materials are materials and components that are inputs
in making the final product through the manufacturing process. Purchasing and
production executives shape raw material policies.
Work-in-Process: Work-in-process inventories are semi-manufactured
products. They represent products that need more work before they become
finished products for sale. Work-in-process inventories are influenced by the
decision of production executives.
Inventory
57
Maintaining inventories involves tying up of the company’s funds and
incurrence of storage and handling costs. There are three general motives for
holding inventories:-
Reordering Level
This is the level at which the firm should go for fresh purchase requisition of
material through the storekeeper to meet the requirements. The reordering level
which takes into consideration of minimum level of consumption of raw material
during the course of production process as well as the amount material required by
the firm during period of purchase and goods in transit immediately after the order.
Reordering Level
Amount of materials
Minimum Level required during the period
of consumption
58
Reordering Level = Minimum level of stock for uninterrupted flow of production
process
+
Amount of materials required during the period of consumption
Or
Lead-time stock level
This method registers the maximum consumption of the firm during the production
as well as the maximum time period required for the supply of required materials.
Under this alternate approach, the firm at any moment will not face any difficulties
due to short supply or insufficient amount of materials.
The following points are most important in designing the minimum level of
stock:
59
Average and normal level of consumption is synonymous with each other. If
normal or average consumption is not given, the formula is as follows.
Maximum Level
This is the level at which the firm holds maximum quantity of materials as
stock during the process. The ultimate aim of fixing the level of maximum level is
that to avoid the overstocking. If the stock level of the firm exceeds the maximum
level already fixed is known as overstocking level of the firm, more than the
requirement.
Danger level
At this level, the firms should not further issue any materials to the various
functional departments. At the danger level, the purchase department is vested with
greater responsibility to immediately arrange the supply of raw materials in order
to maintain the flow of production as uninterrupted.
The consumption level of the materials is getting varied from one time period to
another. During the specified period, there may be maximum consumption and
minimum consumption which should be averaged to find the mid point in between
60
the two, in order either fulfilled the maximum consumption or maximum
consumption to the content possible.
The purpose of considering is that the greater period taken by the supplier to
supply the required materials.
The ordering of materials using tagged with three different components of cost viz.
The ordering quantity of materials may larger either or meager in volume, which
carries its own advantages and disadvantages.
If the quantity ordered is larger in volume, the following are the some of important
advantages: -
The bulk purchase order reduces the ordering cost of the materials. The
greater the size of the order, which leads to reduce the numbers of the orders
in procuring the materials.
Quantity discount – The discount can be classified into two categories viz.
trade discount and cash discount.
What is trade discount?
Trade discount is the discount granted by the supplier to the buyer of the materials
at the movement of bulk purchase. This percent of discount is greatly possible only
61
during the periods of greater of volume of purchase; which reduces the overall cost
of the acquisition.
The carrying cost will come down in the case of lesser inventories.
The cost of storage is lesser as far as the meager quantities of materials.
Lost due deterioration of obsolescence, wastage will be minimum.
Insurance cost is less due to meager volume of materials.
2AO
Economic Ordering Quantity = ------------
I
A = Annual requirements in units.
O = Ordering cost
I = Cost of storing per year or cost of carrying the inventory.
The Indian Oil Corporation (Barauni Refinery unit) maintains all these
sort of inventories. This unit maintains adequate stock of inventories of raw
material for the smooth functioning of the process of production. The company
also maintains an adequate level of inventories for work-in-process as per the
62
requirement. Till the completion of the production cycle, the work-in-process
inventories are maintained and some part of it is also used as fuel in the unit. Stock
of finished goods also has to be maintained by the Barauni Refinery unit. This unit
does not have authority to sell the finished product in the market directly. It has to
be sent to the Marketing division for further sale. As per the instruction of the
Head Office they have to keep an adequate level of finished goods for
compensating any loss of production during the period of election (governmental
hazards), production break down and other contingencies. It also sells finished
goods like LPG, Petrol, Diesel, etc. on behalf of the Marketing division. That’s
why a stock of finished goods also needs to be maintained.
Identify the need for Crude Oil Inventories and system of placing the order
The Barauni Refinery Unit (IOCL) identifies the need for inventories for
crude oil through Revenue Budget that is prepared on yearly basis. in the Revenue
Budget, the estimate for the consumption of Crude Oil inventories for the next year
is estimated on the part experience basis. Here a brief introduction about Revenue
Budget of Barauni Refinery Unit (IOCL) is given.
The Barauni Refinery Unit (IOCL) prepares Revenue Budget every year
in mid September. In the month of September, the Budgeted Estimates (BE) for the
63
next year and Revised Estimates (RE) for the current year are prepared for which
the Budgeted Estimates (BE) is prepared in the previous year.
For example:- In the financial year 2007-08 in the month of September, the
Budgeted Estimates (BE) for the financial year 2008-09 the Revised Estimates
(RE) for the next six months 2007-08 were prepared.
There is no system for placing order for crude oil in the Barauni Refinery
Unit (IOCL). Because they do not deal or purchase crude oil directly. The hear
office handles determination of crude oil and its supply to the Refinery unit. Head
office provides crude oil to the Refinery as and when required as per the
estimation. There is continuous supply of crude oil through pipelines and tankers to
the Refinery.
Identification for need for chemicals basically depends on the quantity and
types of crude oil processed. The quantity for chem8icals is decided in the ratio of
quantity and types of crude oil processed. Orders regarding the purchase of
chemicals and spares are made on past experiences. Inventory is maintained on
approximation. The user department sends the need for the item_ to the Material
department along with the consumption pattern. The reorder point is fixed in
certain cases and then the order goes to the Purchase department. Two kinds of
indent is raised:
64
Inventory control items, which are fixed where the reorder point or
indent, is raised and the consumption pattern is studied.
65
basis. Here there is a continuous flow of crude oil. Every day crude oil is supplied
to Refinery and also there is a continuous supply of finished product to the
Marketing Division. Every day crude oil is processed or converted in to finished
product and everyday it is sent to the stores and thereafter it is sent to the
Marketing Division. Crude oil enters in the tank and it is sent for the process and
after processing it is sent to the stores. All this happens automatically. This means
that the crude oil, which enters the tank, first, is sent for the processing first and
after processing it is sent to the sores. From the stores it is sent to the Marketing
Division and then the crude oil is sent for the process and so on. This is a
continuous process and it works on FIFO basis.
Stores Management: -
Valuation of Inventory: -
Generally the valuation of closing stock is done on the basis of market price
or cost price which ever is less. But here we will see how Indian Oil Corporation
(Barauni Refinery Unit) evaluates its stock, what rules and regulations are
followed by them etc. At first we will see how many types of closing stock they
maintain: -
66
Crude Oil
Finished Goods
There are many types of crude oil such as, indigenous crude oil and
imported crude oil. There are two types of indigenous Crude Oil (1) off-shore
crude oil and (2) on shore crude oil and imported Crude Oil separately for (1) High
Sulphur and (2) Low Sulphur.
There should be fall in the price of Crude Oil after the date of closing (31st
March). The expected realization from products to be produced out of crude oil
inventory results in realization lower than cost of crude oil.
For the purpose of valuation of crude oil following three elements are
required: -
1) Cost of Crude Oil.
67
freight, marine insurance, and other landing charges, custom duty,
pipeline cost, entry tax (if applicable).
3. For crude oil in transit FOB and other elements are booked in
purchase cost.
4. The above elements are to be considered for the purpose of
valuation of crude oil stock at cost.
5. All elements as considered for Refinery stock to be taken on
notional basis for crude oil stock in transit and in pipeline e.g.
Custom duty, entry tax etc.
1. If the crude oil quantity is processed during April, the realization of the
products is at the price applicable for the month of April.
2. For balance crude oil quantity (if any), the expected product realization
for the month of May will be considered based on Inventory Logistic
Plan (ILP)
3. Specific customer price and excise duty benefit to be considered for above
The elements for replacement cost will be same as considered for cost of
crude oil, however, following are to be taken additionally: -
68
3. Customs duty as based on percentage; the same should be revised taking
revised FOB value.
The cost of intermediate stock will be based on cost of crude oil as for
Refinery stock and 50% of operating cost as considered for product valuation and
50% of fuel and loss for the month.
The realizable value will be similar to crude oil stock valuation, however,
the balance operating cost & fuel & loss (50%) adjustment has to be done while
comparing with the cost of intermediate products.
69
Finished products to be divided into two categories.
CHAPTER: 7
CASH MANAGEMENT
The starting point for avoiding a cash crisis is to develop a cash flow
projection. Smart business owners know how to develop both short-term (weekly,
monthly) cash flow projections to help them manage daily cash, and long-term
(annual, 3-5 year) cash flow projections to help them develop the necessary capital
strategy to meet their business needs. They also prepare and use historical cash
flow statements to gain an understanding about where all the money went.
Cash is the most liquid asset in any business. It is a very crucial asset in the
day-to-day operations of a business firm. Cash is the basis input required to run
thebusiness continuously. A firm has to stike a balance between maintaining a very
high cash balance and very small amount of cash balance. It excessive cash
balance is maintained, the excess cash will remain idle affecting the profitability of
the business adversely. On the other hand, if too small amount of cash balance is
maintained, it will lead to shortage of cash resulting into disruption of
70
manufacturing operations of a business firm. Therefore, the major aspect of cash
management is to keep a peoper cash balance.
Cash collection
Business operation
Deficit Borrow
Surplus Invest
Information $
control
Cash payment
Sales generate cash, which has to be disbursed out. The surplus cash has to
be invested while deficit has to be borrowed. Cash management seeks to
accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve
liquidity and control. Cash management assumes more importance than other
current assets because cash is the most significant and the least productive asset
that a firm holds. The aim of cash management is to maintain adequate control
over cash position to keep the firm sufficiently and to use excess cash in some
profitable way.
71
IN CONTEXT TO BARAUNI REFINERY (IOCL)
The first and the foremost step in managing cash are identifying its
requirement.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit) identifies the need
for cash for meeting its working capital requirement and for day-to-day operations
of business is through the preparation of the cash budget. Budgeting is the
technique by which financial and/or quantitative expressions are given to a set
policy in the form of a plan prior to a defined of time.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit) prepares the cash
budget on the value dating system. As per this system the Barauni Refinery
(IOCL) maintains a special current account with the SBI. Barauni Refinery Unit
maintains this account with the campus branch as well as the Kolkata branch.
Cheques make every payment by this branch. Cash payment is made in rare cases.
Only for the payment to the employees, up to Rs. 20,000 is mae by cash above the
payment made by cheques. The arrangement of this cash payment is made through
the State Bank of India on behalf of the Head Office. Barauni Refinery Unit issues
cheques for the payment to the party every day as and when required. Out of those
cheques how many cheques are present for payment does not matter. Every day
payment is made for the Barauni payment Refinery Unit and every day they are
sent to the bank for payment for which the Head officer makes payment ultimately
to the Bank. It is a continuous or a cyclical process. It prepares the Estimated
Budget and the Revised Budget every month and every year. The estimated
budget is prepared every 10th of a month and the revised budget is prepared every
25th of the same month and the revised budget is prepared as per the approval of
the Head Office every cash budget is prepared as per the approval of the Head
Office. This cash budget is sent to the Refinery Head quarters New Delhi.
The SBI Branch at Kolkata maintains an account for the Barauni division in
order to make payment to the parties who are interested in getting the payments
72
conveniently form the Kolkata Branch. For example payments have to be made to
auditors, suppliers for chemicals and stores and spares, entry tax, excise duty, etc.
An amount of Rs. 10 crores is kept and maintained for payments to the concerned
parties and is authorized to spend Rs. 9 cores at a stretch.
The branch has to keep Rs 1 crore as a reserve. The amount of Rs. 9 crores
can be spent at any may be, within an hour or a day or a week. As and when it is
spent the amount is again reimbursed by the Indian Oil Head Office. The Kolkata
Head Office provides all details regarding the payment made to various parties,
after adjusting the amount received and paid, to the Head Office as a proof of its
payment
This Estimated cash budget is prepared in every month till the date of 10th
for the next month. In this it is estimated how much cash is required for the next
month. In this all the expected expenses are included and forecasted.
Revised cash budget is also prepared in the same month of the estimated
cash budget till the 25th of the month. It is also prepared for the next year for which
estimated cash budget is required. It is nothing but the system of finalizing the cash
budget. The only difference is that during the period of 15 days from 10th to 25th
there may be some expenses, which are included, further.
These are some items, which are included in the Cash Budget: -
Projected Expenditure:
73
This expenditure is capital in nature. As it is not finalized, it is considered to
be revenue in nature. When the project gets over then all the expenses relating to
this are capitalized. At present a project related the installation of 3rd sector of
Diesel Hydrogenating Treating Unit in under consideration.
These expenses are paid on the basis of occurrence. When these transactions
occur then it is shown in the cash budget. These expenses are on payment basis.
For example: - Expenses for the month of My will be paid in the month of June.
The Refinery pays custom duty, Excise Duty and Entry Tax on Crude Oil
Consumption.
Additional Facilities:
These expenses are also of Capital Nature. These expenses are related to
Plant, Furniture, Constructions, etc. Need for furniture for the coming period is
estimate basically in places where construction work is done. The repairs and
maintenance department of each section do this estimation.
Employee Payments:
This expense mainly depends on the existing number of employees INS the
Refinery and their pay scale. The estimation is done on the basis of how many new
employees are appointed, how may of them get retired, how many of them get
promoted, how many of them require advanced payment of salary, etc.
Other Expenses:
74
System of managing cash:
The Barauni Refinery basically does not deal with raw cash, at this division,
As the cash management is thoroughly dealt at Delhi and Mumbai Head Office.
The daily requirement of cash is met by direct transitions with the SBI where a
special current account is maintained. The income earned by the Barauni Division
is maintained and kept only on books.
The requirements of cash are met as per time and fulfilled by the Finance
department, which deals with the State Bank of India. Cash for petty uses are paid
to the concerned departments and maintained for further uses. Salary to the staff is
directly debited to the concerned accounts. This is how cash is managed in the
Barauni Division.
Cash Budgeting
Types of plans/budget
Perspective Plan
75
The perspective plan sets the long-term goals to be attained by the
corporation in line with the corporate objectives. The corporate goals are further
divided into Divisional goals and Units’ goals. The purpose of perspective plan is
to achieve efficiency and supremacy in the existing operation and also to diversify
into other areas of operation as may be possible taking into account the
opportunities thrown up by the environment. The perspective plan is updated once
in 2 years is available. This plan is prepared by the corporate planning dept based
on the inputs received by the divisions
In the short term the corporation prepares Revenue and Capital budgets
indicating the Revised Estimates for the current yea5r and the budget estimates fort
the next year. These budgets are more detailed and indicate the expected
physical/finance performance of operations and projects for close monitoring and
control.
76
The Barauni Division deals with the planning and the preparation of the
short-term budget and the long range planning and the HO Delhi Prepares the
perspective plans.
Revenue Budget:
77
technical considerations. Each Refinery indicates at the beginning of the Year, the
shut down schedules, on-Stream days available, etc. to HO. Head Office interacts
with OCC to ensure the availability of various type of crude and also projected the
demand for different products. Base doesn’t this data, the Unit’s workout the
possible product pattern which is again sent to the HO for review and
confirmation.
Operation Income:
Transfer of Products
Stock Variation:
Operating Expenses
Controllable Cost:
78
The operating cost is estimated based on zero based budgeting concepts in
respect of controllable items of expenditure. Zero based budgeting is a process in
which each manager is required to justify his requirements after evaluation of
various alternatives and raking them in order of importance by systematic analysis.
No allocation of funds can be justified merely because an activity was taken up in
the past The continuation of any activity is required to be justified along with other
competing claims. The following illustrative items are covered under ZBB:
In every business, of whatever size, there are payments, which are of small
amounts and high frequency, Examples are: payments of stationary, postage,
telegrams, carriage, leaning, traveling. If all these payments are record in the
cashbook, it will unnecessarily be overburdened. In order to make the task of the
cashier easy, a petty cashier is appointed and is handed over a small sum (say Rs.
100.00), which, from past experience, has been found sufficient enough to meet the
requirements of a given period (say one month). This small amount is called
“imprest’ or ‘float’. The petty cashier makes the payment of petty expenses for
which he is authorized and records them in his cashbook called “Petty cash book”.
Voucher and receipts support all these payments. All the end of the given period,
the petty cashier submits the account to the cashier show, after having examined
the accounts, makes the payment of the amount spent by the petty casher. Thus
again on the first day of the next month, the petty casher is found with the same
cash balance, which he had on the first day of the previous month.
For the daily requirements of the Corporation petty cash is required in each
department. Every department gets and maintains around Rs. 5000 as impressed
balance, even through there is no direct cash dealt by the Barauni Refinery unit.
The State Bank of India, Campus Branch, provides this cash. This a mount is
provided to the required department. It is not necessary to maintain or provide cash
to each and every department. When the department makes cash expenses up to Rs.
79
4500, they have to give the information to the cash department, to the cashier for
up dating the account for Rs. 5000. The departments have to give information to
the cashier when they make cash expenses up to Rs. 4500. They have to keep a
balance of cash of Rs. 500 for special cases. But they are authorized for making
cash expenses more than Rs. 5000 in times of need. On the next day or time they
are paid Rs. 5000 and the extra payment they had made. But till the 31st of March
of every year, each department is required to deposit the balance amount, which
they have at the end of the Year. It is necessary that on the March 31st of March
every department closes its petty cash account and sends a report to the cashier.
Again on the 1st of April the cash department distributes the amount of Rs. 5000 to
each department for the Petty cash requirement. Petty requirements of each
department are maintained with this balance and are updated at the end of every
year that is the 31st of March. This amount of cash is utilized only in case of
contingencies. They are not authorized to use that amount of money for their
personal requirements such as tea or coffee.
Thus this is how the “Petty Cash Book” is maintained in the Barauni
Refinery Unit.
CHAPTER: 8
RECEIVABLES MANAGEMENT
Trade credit arises when a firm sells its products or services on credit and
doesn’t receive cash immediately. A firm grants trade credit to protect its sales
from the competitors and to attract the potential customers to buy its products at
favorable terms.
The receivables out of the credit sales crunch the availability of the
resources to meet the day today requirements. The acute competition requires the
firm to sustain among the other competitors through more volume of credit sales
and in the intention of retaining the existing customers.
80
OBJECTIVES:
Capital cost:
Due to in sufficient amount of working capital with reference to more
volume of credit sales which drastically affects the existing of the working
capital of the firm. The firm may be required to borrow which may lead to
pay certain amount of interest on the borrowings. The interest, which is paid
by the firm due to the borrowings in order to meet the shortage of working
capital, is known as capital cost of receivables.
Administrative cost:
Collection cost:
Whatever the cost incurred for the collection of the receivables are
known as collection cost.
Defaulting cost :
This may arise due to defaulter and the cost is in other words
as cost of bad debts and so on.
Level of sales:
81
Credit Policies:
Terms of Trade :
The terms of the trade are normally bifurcated into two categories viz
credit period and cash discount.
Credit period :
Cash discount:
It the discount on sales is more, that will enhance the volume of sales
on the other hand that will affect the income of the enterprise.
82
CHAPTER: 9
PAYABLE MANAGEMENT
While business firms would like to sale on cash, the pressure of competition
and the trend persuades them to sell on credit. Firms grant credit to facilitate or
escalate sales. The credit period extended by business firms usually ranges from 15
days to 60 days. This helps them to have a much better hold in the market. Payable
management has become mandatory for any business firm, which wants to exist in
this world of competition because the system of payment is what decides the fate
of the business credibility
TERMS OF PAYMENT:
When goods are sold on cash, the payment is received either before the
goods are shipped (cash in advance) or when goods are delivered (cash on
delivery). Cash in advance is generally insisted upon when goods are made to
order. In such a case, the seller would like to finance production and eliminate
marketing risk. Cash on delivery is often demanded by the seller if it is in a strong
bargaining position and the customer is perceived to be risky open account system.
In this case the seller first delivers the goods and then sends the invoice (bill). The
creditor (cash period, cash discount for prompt payment, the period of discount as
on) are stated in the invoice which is acknowledged by the buyer.
CREDIT PERIOD:
The credit period refers to the length of time the customer is allowed to pay
for its purchases. It is usually mentioned in days from the date of invoice. For
example 15 days, 30 days, 60 days etc.
CASH DISCOUNT:
83
Firms generally offer cash discount to include customer to make prompt
payment. For example 2/10 which means if the payment is made within 10 days
one will get 2% discount.
DRAFT:
LETTER OF CREDIT :
84
PERIOD OF CREDIT ALLOWED:
The period of credit depicts the period for which any firm is allowed to have
possession of the materials without prior payment. The Barauni unit basically dos
not deal with any sort of credit as per the main goods for the unit is concerned.
Thus there isn’t any such credit payment except the accessories, which are used for
the comfort of the staff members here.
CHAPTER: 10
RATIO ANALYSIS
Financial ratio analysis groups the ratios into categories, which tell us about
different facets of a company's finances and operations. An overview of some of
the categories of ratios is given below.
Leverage Ratios, which show the extent that debt, is used in a company's
capital structure.
Liquidity Ratios, which give a picture of a company's short-term financial
situation or solvency.
Operational Ratios, which use turnover measures to show how efficient a
company, is in its operations and use of assets.
Profitability Ratios, which use margin analysis and show the return on
sales and capital employed.
Solvency Ratios, which give a picture of a company's ability to generate
cash flow and pay it financial obligations.
85
Financial ratio reveals the financial position of the company. This helps the
investors for finding the profitability of the company.
The ratios are very useful in inter-firm and intra-firm comparisons. Inter-firm
comparison is necessary to find out the exact position of a firm as compared to
other firm in the same industry. Intra-firm comparison is also necessary to
compare the performance of a firm of current year with that of previous years.
If financial ratios are calculated for a number of years, a trend can be
established. This trend helps in setting future plans and forecasting.
Financial ratios are of great assistance in locating the weak spots in the
organization.
= 13,487,811,770 = 4.30 : 1
3,134,060,391
86
For the year 2009-10
= 13,487,811,770 – 12,280,694,768 - 0
3,134,060,391 – 0
= 0.38 : 1
= 0.12 : 1
Since idle Current Ratio is 1 : 1. Therefore this ratio shows that Barauni
Refinery has less ability to pay its short-term liabilities in this year as compared to
its previous year.
87
NET PROFIT RATIO
2009-10
2008-09
Working Capital Turnover Ratio has been increased by 7.6 times. This
shows that the year 2009-10 is better utilization of the Working Capital as
compared to its previous year.
2009-10
2008-09
88
CONCLUSION
After completing this Project Report I would like to conclude that the
Working Capital occupies a major portion of the working of any type of
Organization whether it is small or big. This Project Report has been prepared
highlighting the need, use and the functioning of the Working Capital.
After completing this Project Report in Indian Oil Corporation Ltd., Barauni
Refinery Unit, I must say that working condition of Barauni Refinery is very
good. That’s why the position of Barauni Refinery unit is getting better day by
day and days are not far when this Unit will be the best among the all. The
Technology is getting upgraded day by day in order to cope up with rising
competition. The cash here is not dealt with actually but only on books. The
chemicals, stores and spares inventories is kept and maintained as per the past
experience. The proper coordination between the production department, stores
and the Finance department has let to the effective and efficient utilization of
Raw Material at its fullest. This Unit provides all relevant information to the
head quarters through application software (SAP), which helps the head office
to take corrective decision.
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BIBLIOGRAPHY
INTERNET
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I. M. Pandey – Financial Management
Khan And Jain –Financial Management
iocl.in
investopedia.com
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