JAIPURIA INSTITUTE OF MANAGEMENT LUCKNOW

PROJECT ON WORKING CAPITAL MANAGEMENT

SUBMITTED TO Submitted by
SHEENA SAXENA SHIKHA KASSODAN SHOBHIT SRIVASTAVA SUJESH KHARE SUJEET YADAV JIML-10-131 JIML-10-133 JIML-10-138 JIML-10-147 JIML-10-FS-45

Dr. SUSHMA VISHWANANI

Acknowledgment

The project of operating cycle is done in the partial fulfillment of 2 trimester of post graduate diploma in management. This project has been done under the guidance of Dr. SUSHMA VISHWANANI professor of FINANCIAL MANAGEMENT. We are grateful to her for her guidance and providing us an opportunity to understand working capital management and operating cycle.
nd

Objective of the project

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It is crucial for us, all that businesses get a better handle on the whole working capital cycle, and the drivers behind it. Working capital management is a key issue for any business'ssurvival and sustainability. Much more focus needs to be put on educating companies on theimportance of strong management of working capital, and that the focus in the good times hasbeen far too much on profit and debt "Cash is the lifeblood of business" is an often repeated maxim amongst financial managers. Working capital management refers to the management of current or short-term assets and short-term liabilities. Components of short-term assets include inventories,loans and advances, debtors, investments and cash and bank balances. Short-term liabilities include creditors, trade advances, borrowings and provisions. The major emphasis of this project is, however, on shortterm assets, since short-term liabilities arise in the context of shortterm assets. It is important that companies minimize risk by prudent working capital management

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Contents
Contents......................................................................................................................................4 References................................................................................................................................27

INTRODUCTION

Fertilizer can be described as any substance, organic or inorganic, natural or artificial, which supplies one or more of the chemical elements required for plant growth. According to experts sixteen elements are identified as essential elements for plant growth, of which nine are needed in larger quantities and seven elements are required in smaller quantities.

Future Trends

India's demand for fertilizers in 2007-08 was 26 MM tons,

which went up to 29 MM tons in 2008-09 against a supply of 20 MM tons in 2008-2009.

The demand for fertilizers in 2011-12 is forecasted to be around

35.5 MM tons.
 

More fertilizer projects are in the pipeline. Gujarat is expected to play a leading role in fertilizer

production.

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Indian companies have penetrated the overseas market,

signaling a new phase for the industry.

WORKING CAPITAL

Working capital typically means the firm’s holding of current or shortterm assets such as cash, receivables, inventory and marketable securities. These items are also referred to as circulating capital. Corporate executives devote a considerable amount of attention to the management of working capital.

Working capital definition
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital. Company’s operating cycle typically consists of three primary activities:

 Purchasing resources,  Producing the product and

Distributing (selling) the product.

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Objective of working capital management:
  

Working capital objective is to keep adequate level of short term assets. It converts an asset from non productive to productive one and vice-versa. To establishes the relationship between current assets and current liabilities.

Operating and cash cycle
The average time between the purchasing or acquiring inventory and cash proceeds from its sales. The time that elapses between the purchases of raw materials and the collection of cash for sales is referred to as the operating cycle, whereas the time length between the payment of raw materials purchases and the collection of cash for sales is referred to as the cash cycle. The operat.ing cycle is the sum of the inventory period and the accounts receivable period, where as the cash cycle is equal to the operating cycle less the accounts payable.

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”OPERATING CYCLE”

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ARIES AGRO LTD.f Company was founded by Dr. T. B. Mirchandani and Mrs. Bala Mirchandani in 1969. The company is into the business of manufacturing of micronutrients and other nutritional products for plants and animals. It started its activity by manufacturing a small range of mineral feed additives for animals & birds and then diversified into mineral additives for the agriculture use. The products were immediately accepted by the consumers and slowly it became the brand leader in the field of mineral nutrition with a range of products including mineral premixes, milk boosters, protein concentrates, vitamin premixes, anti-coccidian and anti-bacterial feed additives. In 1975, the company diversified into nutrients for plant. It had in-house expertise in the area of mineral nutrition and thereby decided to concentrate on the same. It conducted research on compounds that could deliver mineral nutrients to plants more efficiently. The research zeroed in on "Metal Chelates". The product had to be manufactured in accordance with the locally available ingredients and expertise which posed a challenge for the Company. Through in-house R&D efforts, Company branched out into Agrochemicals in 1975 with the introduction of Chelated Micronutrients. They pioneered the concept of Chelates in India with the introduction of "Agromin", a micronutrient fertilizer in the year 1975, followed by "Chelamin" in 1976. Agromin (chelated micronutrients) and Chelamin (chelated zinc) are the company's flagship brands. They are the one of the leading manufacturer and seller of Chelates in the Country.

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Financial information for year 2006, 2007 &2008

YEARS Particulars SALES CREDITORS PURCHASE RECEIVABLE INVENTORY

2006 7

200

2008

59.36 9.75 9.20 20.61 9.20

74.05 11.68 16.98 27.55 16.92

103.38 16.67 30.99 57.04 30.99

COGS ARP IHP APP

1.48 146.04 3176.75 419.28

12.91 205.62 528.57 300.53

11.62 208.13 1260.15 238.48

Operating cycle Cash Cycle

3322.79 2903.51

734.18 433.65

1468.28 1229.80

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Analysis

In 2007 operating cycle was short it means that there were fast cash inflow but the operating cycle of 2006 was longest period were it can interpreted that late cash inflow was there due to which there is increase in working capital requirement In 2008 operating cycle got high due to increase in account receivable and inventory holding period increases. The inventory holding period in 2008 was high which increases firms holding cost of inventory. In 2008 the longer cash conversion cycle indicates that the greater the amount of investment tied up in low return assets, the higher costs and lower profits and increases the risk and the firm had liquidity problem. So, it can concluded that 2007 was the best year where the operating cycle was low and it has the lowest cash cycle where APP is medium and ARP compare to 2008 is low which indicate that the firm is able to convert receivables into cash indicates that fast cash inflow in a firm.

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Aimco Pestisides LTD.
Aimco Pesticides Limited (Aimco) is a leading company in the field of Agrochemical manufacturing, formulation and marketing since the last 45 years and is a major player in Insecticides,Fungicides and Herbicides , in India & across the world, having 5% of domestic market share with a large dealer and distributor network. Aimco’s Inhouse R & D facilities at Lote-Parshuram are recognized by DST [Department of Science and Technology], Govt. of India, since 1996. Aimco is a Government recognized Export House. It was promoted by Mr. Pradeep P. Dave. UK. Aimco is a manufacturer of various technical grade pesticides, some of the key products being Chlorpyrifos [ Ethyl & Methyl], Temephos, Cypermethrin, Permethrin, Hexaconazole, Glyphosate, Triclopyr & Fluroxypyr and a vast range of pesticide formulations, viz liquids, wettable powders, dusting powders , suspension concentrates and dry flowables Aimco’s products are marketed under the brand name“AIMCO’’. Aimco is one of the leaders in Chlorpyrifos, Triclopyr & its formulations The Company has set-up a fully automatic liquid formulation plant having capacity of 2 million litres per annum. The capacity utilisation is dependent on the product mix adopted during the year. Due to the backward integration, the Company has an edge over other manufacturers by being able to supply a wide range of pesticide formulations to the farmers.

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Financial information for year 2006, 2007 &2008

YEAR S Particulars SALES CREDITORS PURCHASE RECEIVABLE INVENTORY 6

200 7

200 8

200

15.68 0.02 1.81 5.30 1.81

18.24 2.16 2.73 5.42 2.73

24.58 1.55 2.94 5.41 2.94

COGS ACP IHP APP

0.89 123.06 918.20 216.79

2.52 106.87 405.00 244.61

3.44 63.63 281.51 178.16

Operating cycle Cash Cycle

1041.26 824.47

511.87 267.26

345.15 166.99

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Analysis
In 2008 operating cycle was short it means that there were fast cash inflow but the operating cycle of 2006 was longest period were it can interpreted that late cash inflow was there due to which there is increase in working capital requirement. In 2007 operating cycle was of 511.875 which shows account receivable and inventory holding period was comparatively higher from 2008. The inventory holding period in 2006 was high which increases firms holding cost of inventory, the longer cash conversion cycle indicates that the greater the amount of investment tied up in low return assets, the higher costs and lower profits and increases the risk and the firm had liquidity problem. So, it can concluded that 2008 was the best year where the operating cycle was low and it has the lowest cash cycle where APP is medium and ARP compare to 2007 is low which indicate that the firm is able to convert receivables into cash indicates that fast cash inflow in a firm.

Basant Agro Tech India ltd.

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Basant Agro Tech (I) Ltd, a leading agribusiness company committed to sustainable agriculture through innovative research and technology. Company believes in delivering better food for a better world through outstanding crop solutions, and has been working relentlessly to improve the farmers' plight through extensive R & D and rendering quality seeds, fertilizers and services to meet the changing requirements of a farming community.. Basant Agro Tech (I) Ltd is engaged in Manufacturing, Marketing & Distribution of NPK mixed fertilizer, Single super phosphate, Secondary nutrient & quality seed under "KRISHI SANJIVANI" brand name. Company is also engaged in the business of green power generation, through its wind mills. At Basant Agro Tech (I) Ltd, use of genetics to leapfrog in to the future and innovation to usher in prosperity. While continuing with traditional breeding principals, the company have over the years successfully adopted latest technological innovations to fast track our crop research. Keeping pace with the fast changing future marketing scenario, Basant Agro Tech (I) Ltd., has ventured in the field of Biotech research to develop transgenic crop for resistance to biotic and abiotic factors. The company entered into strategic alliance with some of the leading and very best technology innovation companies like Mahyco Monsanto Biotech, for value added biotech traits.

Financial information for year 2006, 2007 &2008

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YEARS Particulars SALES EXPENSES CREDITORS: RAW MATERIALS FINISHED GOODS RECEIVABLE S

2006

2007

2008

23.94 26.02 2.42 1.68

18.73 19.27 2.64 2.42

18.20 16.08 24.00 2.04

2.39 2.68

3.10 2.90

5.72 3.85

COGS IHP ACP APP

12.69 136.02 220.70 220.70

4.4 1733.31 76.70 628.77

27.65 343.00 75.06 86.58

Operating cycle Cash cycle

356.72 136.02

1810.01 1181.24

418.06 331.48

Analysis
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In 2006 operating cycle was short it means that there were fast cash inflow but the operating cycle of 2007 was longest period were it can interpreted that late cash inflow was there due to which there is increase in working capital requirement In 2008 operating cycle decreased due to decrease in account receivable and inventory holding period increases.The inventory holding period in 2007 was high which increases firms holding cost of inventory. So, it can concluded that 2007 was the best year where the operating cycle is low. APP is lowest and ARP compare to is low which indicate that the firm is able to convert receivables into cash indicates that fast cash inflow in a firm.

Bharat Fertiliser Industries. Ltd.
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Bharat Fertilizer Industries Limited is an India-based company. The Company is engaged in the manufacturing of single super phosphate (powder and granulated), sulphuric acid and alum (liquid and solid) at its plant situated at Kharvalli Village, Tal. Wada. District Thane. The Company operates in two segments: fertilizer and chemicals and construction. The Company has undertaken real estate development activity at Majiwada. Its subsidiaries include Yogi Investments Pvt. Ltd, Vijal Shipping Pvt Ltd., WadaAgro Chemicals Pvt. Ltd., Wada Bottling Industries Pvt. Ltd., Patel Combi-Therm (India) Pvt. Ltd., Chavi Impex Pvt. Ltd. and Wada Alums and Acids Pvt Ltd.

Financial information for year 2006, 2007 &2008

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YE ARS Particulars SALES EXPENSES CREDITORS RAW MATERIALS FINISHED GOODS RECEIVABLE S INVENTORIES

2006

2007

2008

68.11 64.84 7.81 8.66 5.48 15.98 14.14

92.41 89.57 7.75 9.87 5.72 20.52 15.59

109.37 109.58 7.62 16.34 10.44 18.86 26.78

COGS IHP ARP ACP Operating cycle Cash Cycle

0.21 4474.28 756 968.57 5230.28 4261.71

0.08 20992.5 251.68 2542.50 21244.18 18701.68

0.95 2656.42 427.32 348.63 3083.74 2735.11

Analysis
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In 2008 operating cycle was short which shows that there were fast cash inflow but the operating cycle of 2007 was of longest period were, it can interpreted that late cash inflow was there due to which there was an increase in working capital requirement. In 2008 operating cycle again got low due to decrease in account receivable and inventory holding period. The inventory holding period in 2007 was high which increases firms holding cost of inventory. In 2007 the longer cash conversion cycle indicates that the greater the amount of investment tied up in low return assets, the higher costs and lower profits and increases the risk and the firm had liquidity problem. So, it can concluded that 2008 was the best year where the operating cycle was low and it has the lowest cash cycle where APP is medium and ARP compare to 2007 is low which indicate that the firm is able to convert receivables into cash indicates that fast cash inflow in a firm.

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Asian Fertilizers Ltd

Asian Fertilizers (ASIANFR), incorporated in 1986, is engaged in the manufacture of single super phosphate fertilizer, both in powder and granulated form, and sulfuric acid. The company has its manufacturing unit located in the Gorakhpur district of Uttar Pradesh with annual installed capacities of 66,000 MT single super phosphate powder, 66,000 MT granulated single super phosphate, and 33,000 MT sulfuric acid. It has a purchase agreement with Shriram Fertilizers & Chemicals, a division of DCM Shriram Consolidated. It has been suspended from the BSE on account of non compliance with listing agreement clauses. The registered office is located at 47/81, Hatia, Kanpur-208001, Uttar Pradesh.

Financial information for year 2006, 2007 &2008
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YEARS Particulars SALES EXPENSES CREDITORS RAW MATERIALS FINISHED GOODS RECEIVABLE S INVENTORIES 2.00

2006

2007

2008

4.52 2.14 00.59 00.83 00.84 15.98 01.88 4.91 00.54 02.64 00.09 20.52 03.34

1.31 6.52 00.59 2.96 00.03 18.86 5.99

COGS IHP ACP APP

02.62 658.85 41.95 368.24

07.72 206.11 65.15 67.15

1.95 730.15 60.62 170.76

Operating cycle Cash Cycle

700.8 332.56

271.26 204.11

790.77 620.01

Analysis
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In the year 2006 and 2008, operating cycle and cash cycle of Asian Fertilizers Ltd. was quite high in comparison to year 2007. In the year 2007, the operating cycle was 271.26 days which reflects sound management of working capital. Whereas in year 2006 and 2008, it was 700.80 days and 790.77 days that denotes that capital is occupied when the commercial entity is expecting its clients to make payments. Company is facing long inventory holding period in the year 2006 and 2008. That means it is holding inventory for long time. Also inventory holding period has increased in the year 2008 which shows company has blocked a lot of cash in inventory. It further implies that company is not able to sell its goods at faster rate. So it needs to take action in that respect may be by reducing its selling price. But this can be because company is facing difficulty in procuring raw material because of increase in the cost of raw material. So it can be concluded that 2007 was the best year for Asian Fertilizers Ltd. As its operating cycle period and cash cycle period both were low.

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Comparison between the companies
Year 2008 Company Particulars COGS IHP APP ACP Operating cycle Cash cycle Aries Agro ltd. 11.62 208.13 1260.15 238.48 1468.28 1229.80 Basant Aimco Agrotech Pesticide ltd. s ltd. 27.65 343 86.68 75.06 418.06 331.48 3.44 63.63 281.51 178.16 345.15 166.99 Bharat Fertilizer s ltd. 0.95 2656.42 427.32 348.63 3083.74 2735.11 Asian fertilizers ltd. 1.95 730.15 170.76 60.62 790.77 620.01

After analyzing the above data, we can say that AMICO Pesticides Ltd. has the best operating cycle period and cash cycle period, which suggests effective management of working capital required in the company. Whereas on the other hand, Bharat Fertilizers Ltd. has the longest operating cycle period and cash cycle period, which shows company’s inefficiency in handling the working capital requirement of company. The above comparison of all company can also be seen in the graph on next page.

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GRAPHICAL PRESENTATION OF YEAR 2008 OF COMPANIES:

3500 3000 2500 2000 1500 1000 500 0 AR IES B ANT AIMCO B AS HAR AT AS IAN COGS IHP APP ACP OC CC

It is seen from the chart that AMICO Pesticides Ltd has smallest operating cycle period and cash cycle period in comparison to all other companies.

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Formulas used In Calculation

COGS ( Cost Of Goods Sold) = Net Inventory(Opening – Closing) + Purchases

IHP (Inventory Holding Period) =

360 ITR

ITR ( Inventory Turnover Ratio) =

COGS Avg. Inventory

ACP (Avg. Collection Period)

= 360 * Avg. Debtors Credit Sales

APP (Avg. Payment Period)

= 360 * Avg. Purchases Credit Purchases

 Operating Cycle = IHP + ACP

Cash cycle = Operating Cycle – APP

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References

 Data from proasis  Annual Reports  Company websites
 

www.google.com www.business-beacon.com

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