1

Working Capital
Management.

SUMMER TRAINING REPORT

ON

WORKING CAPITAL MANAGEMENT OF FCI

SUBMITTED IN PARTIAL FULFILLMENT FOR
THE AWARD OF THE DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION

(Banking and Insurance)
UNDER THE GUIDANCE OF

SUBMITTED BY

Mr.Inderpal Singh

Vishal Singh

(Assistant Professor)

00914701813
BBA(B&I)5rdSemester

MAHARAJA AGRASEN INSTITUTE OF MANAGEMENT STUDIES

Affiliated to Guru Gobind Singh Indraprastha University, Delhi
PSP Area, Plot No. 1, Sector 22, Rohini Delhi 110086

Working Capital
Management.

ACKNOWLEDGEMENT
There is always a sense of gratitude which one express to other for the helpful so needy services they
render during all phases of life. I would like to express my gratitude towards all those who have been
helpful to me in getting this mighty task of training to a successful end.

With the deepest sense of esteem and gratitude I express my sincere thanks to Mr.INDERPAL
SINGH (Assistant Professor), under whose able guidance I was able to learn much and successfully
completed my project.

I would take this opportunity to thank all my family members for their help& suggestions during the
course of project work.
I am also thankful to all my friends who gave me constant & continuous inspiration to complete this
project.

Working Capital
Management.

CERTIFICATE
This is to certify that MR. DHRUV TAMPA has successfully completed the Research project titled
Working Capital Management of Food Corporation Of India at Delhi as the partial
fulfillment of the requirement for the award of degree of Bachelor of Business Administration
(Banking and Insurance) by Guru Gobind Singh Indraprastha University, batch 2013-2016.

To best of my knowledge the report is original and has not been copied or submitted anywhere else.
It is an independent work done by him.

Mr.Inderpal Singh
(Assistant Professor)

Working Capital
Management.

Contents
PREFACE
ACKNOWLEDGEMENT
DECLARATION
CERTIFICATE
1.

CHAPTER 1

.06

Introduction
Significance of Study
Conceptualization
Industry profile
2.

CORPORATE PROFILE..15

3.

LITERATURE REVIEW..34

4.

RESEARCH METHODOLOGY ...36

Objectives of the Study
Scope of study
Problem Identification
Data Collection

5.

DATA ANALYSIS & INTERPRATATION

6.

CHAPTER ..59
FINDINGS

...........................................39

Working Capital
Management.
SUGGESTIONS
CONCLUSION
LIMITATION

7.

BIBLIOGRAPHY..64

Working Capital
Management.

CHAPTER-I

Working Capital
Management.

INTRODUCTION
As we all know working capital Management is one of the important decision in financing.
So it is very necessary to know the working capital & its cycle. Working Capital refers to the cash a
business requires for the day-to-day operations or more specifically for financing the conversions of
raw materials into finished goods, which the corporation sells for payment. In other words Working
Capital is the money the business process consumes. The longer the process takes, the more money is
consumed. Working Capital is calculated by deducting current assets from current liabilities. Current
Assets are resources, which are in cash or soon be converted into cash. Whereas Current liabilities are
commitments, which will soon require cash settlement in the ordinary course of business.
Working Capital can also be defined with an approach that encompasses all the processes
surrounding accounts payable, accounts receivables and inventory and one begins to understand the
potential knock-on impacts of a change in working capital practice or policy. When looking in detail at
any of these three core areas, it soon becomes clear that Working Capital Management touch all the
firm buys, makes and sells.
The diagram below demonstrates how a total approach to working capital covers all the
corporations activities relating to the vendor, the customer and the products.
Payments
&
Investme
nts

Collection

Planning &
Budgeting

Sales

Purchase

Working Capital
Management.

SIGNIFICANCE OF THE STUDY

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is
essential in the human body for maintaining life, working capital is essential to maintain the smooth
running of business. No business can run successfully without an adequate amount of working capital.
On one hand, inadequacy of working capital pose a danger to the short term liquidity and solvency
position of the business and on the other hand excess working capital leads to blockage of firms funds
in current assets, which reduced the profitability of the organization. Thus there is a need to maintain a
trade-off between the above aspects (i.e. liquidity, solvency and profitability aspects) so that the short
term funds of the corporation can be utilized in most effective manner.
Keeping the above in mind, the present study analyzed the various aspects of working capital
management of Food Corporation of India and pin-points on weak areas and suggests corrective action
to manage the working capital effectively. The study is useful for the different stakeholders in
understanding the working capital position of the corporation. The study would also help the future
researcher for their research in the organization.

Working Capital
Management.

CONCEPTUALISATION
The need of working capital is to run the day-to-day business activities. There is hardly any
firm, which does not require any amount of working capital. Firms may differ in their requirement of
working capital but it is necessary for all firms to maintain the working capital. The working capital is
the lifeblood for any corporation, as a person cannot live without blood, as it is any firm cannot
survive without working capital. Working capital is necessary for all type of companies whether it is a
small corporation or large corporation. Every corporation maintains the working capital to pay the
short-term expenses as creditors, short-term loans, daily wage other expenses. It is very important to
run a business effectively. It is a part of total investing capital. It does not give any return opposite of
long-term investment (fixed capital). But it is helpful in earning profit from the long-term capital.
Meaning of working capital: Working capital is also known as the short-term investment of capital. Working capital is that
capital which is capture in the business as in the form of cash or cash equivalents to run the rut ion
activities of business. Mainly it is known as the difference between the current assets and current
liabilities but in other sense it is known as the sum of all current assets. It is also known as the capital,
which is used to operate the businesss routine work. It is the short-term capital investment in the
business. The working capital includes those assets, which are converted into cash within an
accounting year and the current liabilities are include in working capital which are payable within an
accounting year. There are two concept of working capital as follows.

Working capital

Gross Working
Capital

Net Working
Capital

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Working Capital
Management.

Gross Working Capital:Gross Working Capital refers to the firms investment in the current assets. Current assets are those
assets which can be converted into cash within an accounting period (or operating cycle).current assets
include the debtors(account receivables ), cash , short term investment, bills receivables,
stock(inventories) ,prepaid expenses and accrued interest.

Net Working Capital: Net Working Capital refers to the difference between the current assets and current liabilities.
Current assets are those assets, which can be converted into cash within an accounting year (or
operating cycle). Current assets include the debtors (account receivables), cash, short term investment,
bills receivables, stock (inventories), prepaid expenses and accrued interest. And current liabilities are
those claims of outsiders which are expected to mature for payment within an accounting year and
include creditors (accounts payable), bills payables, out expenses (as standing salaries, outstanding
rent, outstanding wages), short term loans and bank overdraft. Net working capital can be positive or
negative. A positive net working capital will arise when the current assets exceed current liabilities. A
negative net working capital occurs when current liabilities are in excess of current assets.

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Working Capital
Management.

There is two other type of working capital on the Time basis are
as follows

Permanent working capital: It is also called fixed working capital. Permanent working capital is a certain level of
working capital on a continuous and uninterrupted basis.

Amount

Permanent working capital

Time
Variable working capital: It is also known as Temporary or Fluctuating working capital. Variable working capital is the
working capital needed to meet seasonal as well as unforeseen requirements. It is fluctuating with in
accounting year and cannot live fixed as shown in the figure.

Variable working capital

Amount

Time

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Working Capital
Management.

INDUSTRY PROFILE
Agriculture Industry at a Glance:-

Industry Overview
The Indian Agriculture Industry is on the brink of a revolution that will modernize the entire food
chain, as the total food production in India is likely to double in the next ten years.
As per recent studies the turnover of the total food market is approximately Rs.250000 crores (US $
69.4 billion) out of which value-added food products comprise Rs.80000 crores (US $ 22.2 billion).
The Government of India has also approved proposals for joint ventures, foreign collaborations,
industrial licenses and 100% export oriented units envisaging an investment of Rs.19100 crores (US
$ 4.80 billion) out of which foreign investment is over Rs. 9100 crores (US $ 18.2 Billion). The
agricultural food industry also assumes significance owing to India's sizable agrarian economy,
which accounts for over 35% of GDP and employs around 65 per cent of the population. Both in
terms of foreign investment and number of joint- ventures / foreign collaborations, the consumer
food segment has the top priority. The other attractive features of the Indian agro industry that have
the capacity to lure foreigners with promising benefits are the deep sea fishing, aqua culture, milk
and

milk

products.

Excellent export prospects, competitive pricing of agricultural products and standards that are
internationally comparable has created trade opportunities in the agro industry. This further has
enabled the Indian Agriculture Industry Portal to serve as a means by which every exporter and
importer of India and abroad, can fulfill their requirements and avail the benefits of agro related buy
sell

trade

leads

and

other

business

opportunities.

This Indian agro industry revolution brings along the opportunities of profitable investment and
agriculture-industry-india.com provides you the B2B platform with agro related trade leads,
exporters & importers directory etc. that help you make your way to profit easy.
To lead yourself to the destination of profit through the Indian Agriculture Industry, know maximum
about the EXIM policy, programs & schemes, price policy, seed policy and statistics at the Indian
agro portal and harvest benefits from India, world's second largest producer of food and a country
with a billion people. From canned, dairy, processed, frozen food to fisheries, meat, poultry, food
grains, alcoholic beverages & soft drinks, the Indian agro industry has dainty areas to choose for
business.

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Working Capital
Management.

MAJOR AGRICULTURE PRODUCTS IN WHICH FCI DEALS:Wheat

With a production reaching ten times in past five years, India is today the
second largest wheat producer in the whole world. Various studies and
researches show that wheat and wheat flour play an increasingly important
role

in

the

management

of

Indias

food

economy.

Wheat production is about 70 million tonnes per year in India and counts for approximately 12 per
cent of world production. Being the second largest in population, it is also the second largest in
wheat

consumption

after

China,

with

huge

and

growing

wheat

demand.

Production Area
Major wheat growing states in India are Uttar Pradesh, Punjab, Haryana, Rajasthan, Madhya
Pradesh, Gujarat and Bihar. All of north is replenished with wheat cultivation. Wheat has a narrow
geographic land base of production as compared to rice or pulses. Wheat is a temperate crop
requiring low temperatures and most of the country is tropical.

Rice
Introduction
Throughout history rice has been one of man's most important foods. Today,
this unique grain helps sustain two- thirds of the world's population.
Archeological evidence suggests that rice has been feeding mankind for more
than 5,000 years. Today, agriculture is the backbone of Indias economy, providing direct
employment to about 70% of working people in the country. It forms the basis of many premier
industries of India, including the textile, jute, and sugar industries. Agriculture contributes about
31%

to

GDP;

about

25%

of

India's

exports

are

agricultural

products.

Rice Production Area

The major rice growing area in India are West Bengal, Uttar Pradesh, Madhya Pradesh, Orissa,
Bihar, Andhra Pradesh, Assam, Tamil Nadu, Punjab, Maharashtra, Karnataka, Haryana, Gujarat,

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Working Capital
Management.

Kerala, Jammu- Kashmir, Tripura, Meghalaya, Manipur, Rajasthan, Nagaland, Arunanchal Pradesh,
Himachal Pradesh, Mizoram, Goa, Pondicherry, Sikkim, A & N Island and D & N Haveli.

15

Working Capital
Management.

CHAPTER-II

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Working Capital
Management.

CORPORATION PROFILE
FOOD CORPORATION OF INDIA
About FCI: Food Corporation of India (Hindi: ) was setup on 14th January 1965 under
Food Corporation Act 1964 with authorised capital of almost $600 million to implement the national
policy for price support operations, procurement, storage, preservation, inter-state movement and
distribution operations.
It operates through 5 zonal offices and a regional office in Delhi. Each year, the Food Corporation
purchases roughly 15-20 per cent of India's wheat output and 12-15 per cent of its rice output. The
losses suffered by FCI are reimbursed by the Union government, to avoid capital erosion, and thus
declared as a subsidy in the annual budget. In 2007, such food subsidies were met by government
bonds worth almost $8 billion.
The Food Corporation of India was setup under the Food Corporation Act 1964, in order to fulfill
following objectives of the Food Policy:

Effective price support operations for safeguarding the interests of the farmers.

Distribution of food grains throughout the country for public distribution system ; and

Maintaining satisfactory level of operational and buffer stocks of food grains to ensure
National Food Security.

In its 45 years of service to the nation, FCI has played a significant role in India's success in
transforming the crisis management oriented food security into a stable security system. Since its
inception in 1965, having handled various situations of plenty and scarcity, FCI has successfully met
the challenge of managing the complex task of providing food security for the nation. A strong food
security system which has helped to sustain the high growth rate and maintain regular supply of
wheat and rice right through the year. The efficiency with which FCI tackled one of the worst
droughts of the century not only cemented its role as the premier organization in charge of food
security in India, but also brought it accolades from international organizations.

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Working Capital
Management.

Today it can take credit for having contributed a great deal in transforming India from a
chronically food deficit country to one that is self-sufficient.

CORPORATE VISION

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Working Capital
Management.
Vision 2020

To aggressively promote Decentralized Procurement by State Governments with special

emphasis in non-traditional areas and commodities.

To ensure adequate buffer for meeting requirements under TPDS & Other Welfare Schemes.

To dispose of surplus and un-storage worthy godowns and introduce concepts of mechanized
handling in the conventional godowns.

To undertake R&D for conversion of some of the existing capacity to bulk and cost effective
utilization of existing bulk capacity.

To optimize monthly movement programme with existing state of art of computerization

within the country at various locations as per corporate policies and priorities.

Modernization of Quality Control equipments and systems for food preservation in order to
increase the shelf life of food grain.

To venture in the fields of Forward Trading and Exports of both surplus stocks of food grains
in Central Pool and no-traditional commodities.

To introduce state of art of financial management in order to reduce the dependency on the
present banking system in the country.

To initiate systems for settlement of storage loss and transit loss through insurance coverage
and revised inventory mechanism.

To develop efficiency in human resource management both in staff/officers and workers with
changed circumstances in the work approach of P.S.U. s.

To achieve state of art in computerized communication between different offices/ depots

throughout the country.

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Working Capital
Management.

NEW INITIATIVES

Having been acknowledged a major player in food grain management within the Country and
abroad, FCI is now endeavoring for

Resource mobilisation to reduce burden on food subsidy.

Better financial & Treasury Management.

Improved stock inventory management real time on-line system through a recently launched
IISFM (Integrated Information System for Food grains Management) in collaboration with
NIC.

Creation of Profit Centers.

Up gradation of technology through interface with Agriculture Universities/Management

Institutes.

Use of A Twill texture gunny bags as against 'B' Twill bags as a project to reduce losses in
storage and transit.

Multimodal transportation system through riverine / container.

Micro level Inventory Management through focused weekly movement plans.

Sustained corporate communication for improving image perceptions

CORPORATE MISSION

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Working Capital
Management.

While homemakers are busy making chapati, roti, and pooris, Food Corporation of India (FCI)
stays busy managing India's grain supplies. FCI buys and markets wheat and rice for the Indian
government, purchasing both domestically grown and imported grains, keeping the stockpiles in its
own warehouses. Through periodic sales, FCI controls and manages the domestic grain supply,
regulating the market prices for those commodities. It also provides some of its stores of grain to
government-subsidized food programs, and it builds up buffer stocks to meet any food crisis. One
of Asia's largest companies, FCI operates under the direction of the Indian government's Food
Ministry. It was founded in 1965.

QUALITY POLICY
FCI, as the countrys nodal organization for implementing the National Food Policy, is committed to
provide credible, customer focused services, for efficient and effective food security management in
the country. focus shall be:

Professional excellence in Management of food grain and other commodities

Service quality and stake holder orientation

Transparency and accountability in transactions

Optimum utilization of resources

Continual improvement of systems, processes and resources

Competitive Landscape for Food Corporation of India

Demand is driven by federal agricultural policy programs, food consumption trends, and the grain
and oilseed export market. The profitability of individual companies depends on maximizing crop
yield and minimizing disease risk. Large companies have advantages in highly automated
technologies and access to the latest in seed and crop technologies. Small operations can compete
effectively by harvesting heirloom, non-genetically modified (GM), or specialty products. The
industry is labor-intensive: average annual revenue per employee (operator and hired laborers) is
$100,000.

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Working Capital
Management.

Top Food Corporation of India Competitors

Companies
Location
Cargill, Incorporated Wayzata, MN
ITC Limited
Kolkata, India
Louis Dreyfus SAS
Paris, France
Adani Group
Ahmedabad, India

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Working Capital
Management.

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Working Capital
Management.

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Working Capital
Management.

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Working Capital
Management.

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Working Capital
Management.

Food Subsidy Released to FCI and Incurred by FCI (Rs. in Crores.)

Food subsidy released to FCI
Year

Total

Food Subsidy Incurred by FCI

Against Earlier For the Year Subsidy

years

2001-

Status of Accounts %of Subsidy

Incurred

released in

during the

the year

year

incurred

16274.00 .

16274.00

18005.00

Audited

90.39%

22673.72 .

22673.72

25321.90

Audited

80.54%

23474.04 4945.86

18928.18

21587.28

Audited

87.68%

23280.00 4090.39

19189.61

20773.60

Audited

92.37%

19871.00 473.32

19397.68

21343.99

Audited

90.88%

02
200203
200304
200405
200506

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Working Capital
Management.
Food Subsidy Released to FCI and Incurred by FCI (Rs. in Crores.)

Food subsidy released to FCI

2006-

Food Subsidy Incurred by FCI

20786.21 1411.08

19375.13

28027.84

Audited

69.13%

27759.68 5218.75

22540.93

30051.50

Audited

75.01%

36717.00 7627.90

29089.10

34787.47

Audited

83.62%

46456.52 7600.43

38856.19

45717.00

Prov.Estimate

84.99%

45954.56 5379.15

40575.41

57925.00

Revised Estimates 70.05%

07
200708
200809
200910
201011(#)

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Working Capital
Management.

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Working Capital
Management.
CORPORATE SETUP

The General Superintendence, Directions and Management of the affairs and business of the
Corporation vests with the Board of Directors
Board of Directors as per section 7(1) of the Food Corporation Act shall be:

Chairman

Managing Director

Managing Director, Central Warehousing Corporation (Ex-Officio)

Government Representatives : -

Three Directors to represent respectively the Ministries of the Central Government

dealing with : -

I.
II.
III.

Food
Finance
Co-operation; and

Six other Directors (out of which four(4) are non-official Directors)

OBJECTIVES OF FCI

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Working Capital
Management.

To provide farmers remunerative prices

To make food grains available at reasonable prices, particularly to vulnerable section of the
society

To maintain buffer stocks as measure of Food Security

To intervene in market for price stabilization

SIGNIFICANT ACCOUNTING POLICIES

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Working Capital
Management.
OF
FOOD CORPORATION OF INDIA

1.

PURCHASES AND IMPORTS

(A) Purchases of indigenous food grains represent the payment made at the Procurement/
Purchase prices reduced by the amount of income from quality cuts wherever applicable
and include the procurement charges incurred on direct purchases and paid to the State
Governments and other agencies for the purchases made from them.
In respect of imported food grains, purchases are accounted for on the basis of the payment
made for the quantities shown in the bills of lading together with the expenses incurred on
ocean freight, port clearance charges and marine insurance. Stocks on high seas, in ship
awaiting berthing and in ship holds are also valued in the same manner except that the port
clearance charges and cost of gunnies (both not accrued) are not added the in . Such
purchases are taken in the account for vessels sailed up to 31st March. If there is more than
one bill of lading of different financial years for the same vessels, the bills of lading bearing
dates on or before 31st March are to be accounted for as purchases of the relevant financial
year.
(B) In case of import of food grains, the dispatch money earned at the unloading port
Accounted for on the basis of provisional time-sheets where the final time-sheets are not
available and for the loading pot, it is accounted for only on receipt of final time-sheets.
However, in the case of export of food grains the dispatch money earned at the loading port
is accounted for on the basis of provisional time-sheets.
2.

SALES
a. Sales affected on behalf of the Government of India are reflected at the issue prices
fixed by the Government. The difference between the economic cost and the sales
realization is claimed as subsidy.

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Working Capital
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b. Sales of sugar are reflected at the net value after deducting sub-wholesalers/retailers
margin and transportation charges.
c. Sales are accounted for on actual delivery of stocks.

3.

BANK TRANSACTIONS
The accounting of cash and bank transactions including Inter-office remittances is made as
per the books maintained by the Corporation. The differences in the banking transaction
between the figures of the Corporation and those appearing in the bank accounts are
reflected in the bank reconciliation statement.

4.

INCOME/EXPENSES RELATING TO PREVISOUS YEARS

Items of income/expenses for each claim/bill pertaining to the previous years above
Rs.25000/- which arise in the current period as a result of errors or omissions are accounted
for under the head Adjustment relating to previous years. The charges/ credits arising on
the outcome of a contingency which at the time o f occurrence could not be estimated
accurately do not constitute an error but a change in estimate. Such an item is not treated as
prior item.

5.

PROVISION OF LIABILTIES

(A) Provision for accrued expenses UP to 31 st March, irrespective of amount of each bill/claim
is made in the accounts.
(B) All undisputed taxes, levies i.e. Central Sales tax, purchase tax, Market fee, Octroi, Entry
tax, Nirashrit tax, Excise / Custom duty etc. which are legally payable and paid within the
stipulated period are accounted for on accrual basis.
(C) Property taxes and other levies/ service charges etc. On the godowns belonging to the
Corporation charged by the local authority/ administration and which are legally payable
shall be accounted for on accrual basis.
(D) Interest due on loans or borrowings or advances from public Financial Institutions/
Scheduled Banks up to 31st March and paid on or before finalization of Accounts or by the

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Working Capital
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specified date for filing of Return of Income whichever is earlier, is accounted for on
accrual basis.

(E)

Where the arbitration award is against the Corporation and the Corporation has not
challenged the award within the period of 3 months from the date of pronouncement of
award or the appeal to set aside the award has been rejected/dismissed by the court,
liabilities are provided for on accrual basis.

(F)

Prepaid expenses Up to Rs.10,000/- in each case are charged to revenue.

(G) Contingent liabilities (claims against the Corporation not acknowledged as debts) are
disclosed in each case, above Rs.25,000/(H) Liabilities other than those relating to Central/State Governments which have not been
claimed within a period of three years are generally written back. However, this limitation
is not applicable to Central/State Government liabilities which are valid for 30 years and
also to the claims/ counter-claims of state /Government / Agencies, where there are
continuing transactions and where
Accounts are pending reconciliation/claims are pending acceptance.
(I)

The accounting of expenditure towards reimbursement of Hill Transport subsidy and Road
Transport charges is made upon receipt of claims as per prescribed procedure, from
concerned state Governments.

(J)

Payment under Voluntary Retirement Scheme excepting one-fifth of the amount so paid, are
treated as Deferred Revenue Expenditure and equally claimed as expenditure in succeeding
four years.

(K) Liability for un-responded debit/excess credit given by the Bank as well as claim on the
Bank for excess debit/un-responded credit alongwith interest accrued thereon is retained for
12 years. Thereafter the net amount alongwith interest is written back/charged off as current
years income/expenditure, however, in case of nit liability the same alongwith interest
thereon, or reflected under contingent liability.
6

DERIVATIVE TRANSACTIONS
The realized gain or loss in respect of commodity hedging contracts and interest rate swap
transactions, entered into by the Corporation to manage the commodity price risk and
interest rate risk respectively, the settlement period of which has expired during the year, are
recognized in the Profit and Loss Account. However in respect of contracts the settlement

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Working Capital
Management.
period of which extend beyond the Balance sheet date, are treated as off Balances Sheet
transactions. Gain or losses arising there from are recognized, as and when settlement takes
place, in accordance with the terms of the contracts.

FIXED ASSETS
a. Fixed assets are accounted for on historical costs less depreciation (except freehold land
at cost) on written down value basis. The rates and methods of depreciation are being
adopted as prescribed in the Income Tax Act, 1961 and Rules framed there under as
amended from time to time
b. Depreciation claimed less/more in earlier year(s) is not charged off/reversed in the
current year.
c. Land(s) allotted to the Corporation free of cost by the State/Central Government are
valued at Notional Cost of Re.1/-(for each plot of land).

REVENUE RECOGNITION
The following items of income and expenses are accounted for on cash basis(A) Income
(1)

Claims against Central/State Governments and their agencies/Banks which are prima
facie under dispute.

(2)

Refunds including rebate/interest thereon, due on account of taxes and levies.

(3)

Claims on duty drawback on exports.

(4)

Claims on Railways for freight on missing wagons, disputed demurrages and

compensation for shortages/ damages.

(5)

Interest on advances to the State Governments/Agencies/Staff and on delayed

realization of sales.

Working Capital
Management.

35

(6)

Claims on shipping agents for short Landing in weight in bulk cargo as well as in
bagged cargo where number of bags are found correct having no slack and torn bags noticed
at the time of discharge of vessel and for disputed demurrages.

(7)

Penalties and compensation for breach of contracts.

(B) Expenses
1.

All disputed taxes/levies i.e. CENTRAL/State Sales tax, Purchase tax, Value Added
Tax, Market fee, Octroi, Entry tax, Nirashrit tax, Excise/Custom duty etc. However, the same
should be shown as contingent liability provided the amount/claim in each case exceeds
Rs.25,000/- Sales tax paid over and above the actual collection and disputed is shown as
deposit recoverable and is charged in the year of settlement after the assessment is over.

2.

Penal interest other than that accepted by the Corporation.

3.

Claims against the Corporation including salaries and wages which are prima facie
under dispute.

4.

Prorata pension payments to the Government of India, Gratuity and Encashment of

leave.

5.

Payment to the families of deceased employees under the FCI Group Insurance
Scheme, 1980.

6.

Provident Fund Contribution in respect of Contractors labour.

PHYSICAL VERIFICATION
(A) The physical verification of stocks (including non-issueable, below I.S.S and damaged) of
foodgrains, sugar and other commodities is required to be made at the end of year on the
basis of peripheral count and weighment is conducted in all depots including CWC/SWC
godowns. Provision for shortages assessed on peripheral count, if any, is considered at
Headquarters.
(B) The physical verification of stocks is conducted by 100% weighment is conducted in
respect of baby stacks (baby stacks are defined where the number of bags is less than 20%

Working Capital
Management.

36

of the total number of bags received right from the creation of the stack) excepting for
those baby stacks where the stocks are covered by tender sales or subject to litigation.
(C) Where the stocks are held in silos/bins and in transit at port/Railway-siding, the book
balances are adopted. The variations, if any, are adjusted when the silos/bins are emptied
and / or the stocks received at godowns. Stocks under fumigation at the year end are also
taken at the book balances.
(D) Where the stocks are loaned to/held by other parties, these are adopted as per book
balances.
10

VALUATION OF CLOSING STOCK.

(A) The closing stock of issueable foodgrains, by products and sugar are valued at weighted
average acquisition cost. In cases where the stocks comprise of both indigenous and
imported varieties of a particular commodity, the stocks are valued at common weighted
average acquisition rate/cost.
(B)

The stocks of foodgrains, by-products/sugar declared as non-issueable, below I.S.S after

due segregation and analysis by Quality Control Division and as approved by Competent
Authority, are valued at estimated realizable value.

(C)

The stocks of other commodities i.e. gunnies and stores & spares etc. are valued at average
acquisition cost.

11

INVESTMENT
The investments in Govt. of India Bonds are valued at cost.

FINANCIAL FEATURES AT A GLANCE

Average Bank Borrowing during

2008-09

Rs. 22333 Crores

Working Capital
Management.

37

(Consortium of 65 Banks as on 31.3.08)

Commercial Borrowing (Bonds)

Rs. 8605 Crores

Rate of Interest on Bank Borrowing w.e.f.

01.03.2008
Rate of Interest on Bonds

10.15 % p.a. (Monthly Compounding)

7.31%p.a.(Annually Payable)

Equity Released for Plan Schemes and Working Capital (as on 31.03.08)

Rs. Cr.
Working

Construction

Capital

Godowns

Upto 2002-03

1484.00

855.11

Nil

13.89

2353.00

2003-04

Nil

23.96

15.50

Nil

39.46

2004-05

Nil

5.87

39.14

Nil

45.01

2005-06

Nil

20.78

15.00

Nil

35.78

2006-07

Nil

7.50

Nil

Nil

7.50

2007-08

First Quarter

Nil

Nil

Nil

Nil

Nil

Second Quarter

Nil

Nil

Nil

Nil

Nil

Third Quarter

Nil

3.18

14.49

Nil

17.67

Fourth Quarter

Nil

0.82

10.51

Nil

11.33

Total

Nil

4.00

25.00

Nil

29.00

Total paid-up Capital

1484.00

917.22

64.64

13.89

2509.75

Authorised Capital

3500.00

Year

of

IISFM Project Other Schemes Total

Accounting Year-Wise opening Stock adjusted weighted Economic Cost

Year

Status

Wheat

Rice

2001-02

Audited

852.94

1097.96

2002-03

Audited

884.00

1165.03

2003-04

Audited

918.69

1236.09

2004-05

Audited

1019.01

1303.59

2005-06

Audited

1041.85

1339.69

2006-07

Audited

1214.39

1411.60

38

Working Capital
Management.
2007-08

Audited

1348.69

1571.36

2008-09

Audited

1458.83

1698.90

39

Working Capital
Management.

CHAPTER-III

Literature Review
REVIEW OF EXISTING LITERATURE

Review of existing literature means review or readout the present available information that
is collecting before the study by any other person. The existing literature is very important in the study
of any topic because the existing literature give the basic idea about the study. It does the work as the
secondary data in the preparation of the study report. Without existing data it is difficult to start the
study because we dont have any clue about our study so the review of existing data is necessary for
every researcher. In the study of working capital management it is very necessary to study the
information available of the past studies.

40

Working Capital
Management.
J. Fred. Weston finds the some main important function of the financial manager in the

aspects of working capital management. Time, working capital management requires much of
financial managers time. Investment, working capital represents a large portion of the total investment
in assets. Criticality, working capital management has great significance for all the firms but it is very
critical for the small firms. Growth, the need for working capital is directly related to the firms
growth. From the above study it is clear that the working capital management must have the long
time and it is related to the firms growth directly and it is a large part of the total investment in the
assets.
According to the RBIs report on the study of working capital management, investment in the
current assets represents a very significant portion of the total investment in the assets. In large
companies like BHEL, the current assets as a percentage of total assets may be high as, say, 70
percent.
E. W. Walker gives the suggestion after his study on working capital management that the
financial manager should determine the optimum level of the current assets so that the wealth of
shareholders is maximized.

CHAPTER IV

41

Working Capital
Management.

RESEARCH
METHODOLOGY

NATURE OF RESEARCH: The research is of analytical as well as descriptive in nature, where the problem has been
analyzed with help of financial information available with the corporation.

FOCUS OF THE PROBLEM

The study is based on the premise that an efficient and effective management of working
capital enhances the profitability of the corporation and utilizes the corporations fund in most
optimum manner. Thus the present study entitled Working Capital Management at Food Corporation
of India. is focused on evaluating the various components of working capital so that the suitable
strategies may be suggested to the corporation for its effective management.

42

Working Capital
Management.

RATIONALE & OBJECTIVES OF THE STUDY

To find out the liquidity position of the corporation.
To analyze the credit policy of the corporation.
To know the how a firm made the payments.
To know the inventory position of the corporation.
To find out the effectiveness of working capital management.

DATA COLLECTION & DATA SOURCE: Due to the nature of study, study is primarily based on the secondary data. The secondary
data is collected through annexure, schedules, other pertinent details from various sources in the
corporation and references books. Annual reports and records of the corporation have been used for
the purpose of study.
TOOLS & TECHNIQUES OF ANALYSIS: In order to analyze the problem and to arrive on a fair view Ratio Analysis, Interview
Methods & different techniques related to inventory management, cash management, receivable
management & payable management have been incorporated. Some of them are as follows:

Estimation of components of working capital method

Percentage of sales approach

Operating cycle approach

43

Working Capital
Management.

CHAPTER V

44

Working Capital
Management.

DATA ANALYSIS &

INTERPRETATION

THEORETICAL FRAMEWORK OF WORKING CAPITAL

MANAGEMENT
Working Capital Cycle
Working capital is vital to a business. They have to have funds available to pay their day-today bills, wages and so on. The working capital is made up of the current assets net of the current
liabilities. It is very important to a corporation to manage its working capital carefully. This is
particularly true where there is a substantial time lag between making the product and receiving the
money for it. In this situation the corporation has paid out all the costs associated with making the
product (labor, raw materials and so on) but not yet got any money for it. They must therefore ensure
they have enough cash to do this.
The way working capital moves around the business is modeled by the working capital cycle. This
shows the cash coming into the business, what happens to it while the business has it and then where it
goes. A simple working capital cycle may look something like: -

45

Working Capital
Management.

Between each stage of this working capital cycle there is a time delay. For some businesses this
will be very long where it takes them a long time to make and sell the product. They will need a
substantial amount of working capital to survive. Others though may receive their cash very quickly
after paying out for raw materials etc. (Perhaps even before they've paid their bills) - They will need
less working capital. For all businesses though they need to plan how much cash they are going to
have.

Process flow of Cash planning & Budgeting

Input information received from all units- firm for the first week &
tentative for the 2nd, 3rd, 4th week for raw material, sales,
manufacturing exp. Etc. on the basis of debtors & inventory
aging reports etc.

Plan firmed up after discussion and modified

with reference to inflows & outflows on unit
basis.

Monitored & reviewed on daily basis including

follow-up collection /funds-in-transit.

46

Working Capital
Management.

Plan met

No

Carried to next
month

Yes

Month closed
Explanation of above:
Cash is the lifeblood of every business organization. Every organization needs to have
adequate flow of cash to meet its all requirement whether short term or long term. In any organizations
before starting any business activity proper planning of cash inflow & outflow is required to be made.
So, on the basis of receivable period cash inflow is planned for the beginning of each month and
accordingly outflow that is to be made is also planned as to when payment is to be made.

Purpose of preparing cash flow

Cash flow is concerned with the movement of money in and out of a business. More
importantly, it is concerned with the time at which the movement of the money takes place. You might
even say the concept of cash flow is more in line with reality.
It is being identified in which unit the outflow is greater than the inflow, & where there is
discrepancy between the Budgeted & Actual inflow & outflow.
In this format on daily basis cash inflow & outflow is entered under respective heads. This is
done in all the units of Food Corporation of India then at the end of the day cash balance remaining
with all banks are also added & it is found whether the cash balance reduced between two consecutive
days are equivalent to the net of cash flow or not? If not, then any discrepancy is there & that is tried
to found out. It also helps in finding out the item wise expenditure of the firm & help in knowing the

47

Working Capital
Management.

surplus/deficit generated in each unit & also helps in finding out the reason for difference between the
inflow & outflow of various units.

Working Capital Management

Components of Working Capital: Receivable Management
Inventory Management
Payable Management
Cash Management

Receivables Management
The term receivable is defined as debt owed to the firm by customers arising from sale of
goods in the ordinary course of business. The credit sales are generally made on open account in the
sense that there are no formal obligations through a financial instrument. However extension of credit
involves risk and cost. Management should weigh the benefits as well as the cost to determine the goal
of receivable management.

48

Working Capital
Management.
The benefits from receivables are the increased sales and profits anticipated because of a

more liberal policy. When firms extend their trade credit, i.e. invest in receivables; they intend to
increase the sales level. The motive of liberal credit policy can be either growth oriented or sales
retention. The extension of credit has a major impact on sales, costs and profitability. Other things
being equal, a relatively liberal policy and therefore higher investment in receivables will produce
larger sales. However cost will be higher with the liberal policies than with more stringent measures.
Therefore accounts receivables management should aim at a trade-off between profit (benefits) and
risk (cost).

The cost associated with the extension of credit and accounts receivables are:
1. Collection cost
2. Interest cost
3. Delinquency cost and
4. Default cost.

Receivable Management in Food Corporation of India

These sales are made against invoice. Receivable management is beyond credit control.
In Food Corporation of India Sales ledger debtors day collection is prepared to calculate on
a consistent basis throughout the corporation and for each unit, the number of days sales represented
by customer debts.
Department involved in receivable management
1. Accounts & Finance department
2. Sales & marketing department
Credit terms followed
All sales made are credit sales.

49

Working Capital
Management.

1. It has different payment terms with different customers and it is mutually agreed which is
shown on the PO (purchase order) made with each customer.
2. In general credit offer to most of the customers is for 30-45 days, and to few customers it is
60 days.
3. Advance payment is received in case of foreign customer & the customer who are one time
purchaser or whose credit worthiness is not checked.
Credit policy: In credit policy as credit standards & credit analysis is done. But in Food Corporation of
India there is no written credit policy as such. No credit analysis is done before selling goods to them.
No documents are being filled by the customer & their financial performance is also not judged.
Sometime they just refer to their balance sheet. No information is collected either internally or
externally.
Collection policy: There is distinct credit collection policy in Food Corporation of India because no credit sales are
allowed in FCI and that is FCI not having any uniform collection policy.

Inventory management
Inventories are stock of the product, a corporation is manufacturing for sale. Inventories can exist in
the form of raw material, work-in-progress, finished goods, components and supplies, whereas motive
for holding inventories can be transaction motive, precautionary motive and speculative motive.
But many companies cant operate under this model. Those that sell time-sensitive items have to have
materials, if not finished products, on hand to satisfy the expectations of the customer who needs an
order right away. Now-a-days many large manufacturers operate on a just-in-time (JIT) basis whereby
all the components to be assembled on a particular day, arrive at the factory early that morning, no
earlier no later. This helps to minimize manufacturing costs as JIT stocks take up little space, minimize
stock holding and virtually eliminate the risk of obsolete or damaged stock, because JIT manufacturers
hold stock for a very short time, they are able to conserve substantial cash.
Inventory Management Objective

50

Working Capital
Management.

The basic objective of inventory management is twofold. First is the avoidance of over or under
investment in inventories and second is to provide the right quantity of material to the production
department at right time. The key issue for a business is to identify the fast and slow stock movers
with the objective of establishing optimum stock levels for each category and, thereby, minimize the
cash tied up in stocks. Factors to be considered when determining optimum stock levels are:
The projected sales of each product.
Availability of raw materials, components etc.
Delivery time by the suppliers
Can one remove slow movers from ones product range without compromising best sellers?
Inventory Management Techniques
An inventory management technique includes the following:

Effective and efficient purchasing, storage and issuing procedures.

Settings of various levels like maximum, minimum, recorder level etc.

Fixation of economic order quantity.

Establishment of inventory budgets.

Use of perpetual inventory system.

Min-max plan.

Order cycling system.

ABC analysis.

VED analysis.

XYZ analysis.

Use of inventory ratios.

Aging schedule of inventories.

INVENTORY MANAGEMENT OF FCI

In Food Corporation of India inventory management is done as various types of inventory are required
to be kept & valuation of inventory is done.

51

Working Capital
Management.

Types of Inventory
1. RAW MATERIAL

BOP (Brought out part): - It is the inventory of main raw material. It is kept for continued
production.

Development material: - It is the inventory that is being developed for new order until the
sample is being finalized.

Key material: - It is the raw material of keys

Plastic material: - It is the inventory of plastic material that is used for covering the keys.

Job Work (3rd party RM): - It is the inventory that is being used by third party for producing
our goods. This stock is in a way the stock of Food Corporation of India only.

2. Work-in-progress: - It is the inventory of semi-finished goods.

Key section: - It includes following:-

Key blank: - It is the inventory of plain key material.

Key bitted: - It is the inventory of key that is being cut as per the requirement of locks of
different vehicles.

Key molded: - It is the inventory of key that is being molded to suit the requirement of vehicle.

3. Rejection: - It is the inventory of item that has been out of use.

The material that can be used from rejected inventory is taken out & rest is the scrap
Technique of Inventory Management used
Effective and efficient purchasing, storage and issuing procedures are being followed. On the basis of
schedules received from the customer forecasting of material requirement for the full lead period is
done.

52

Working Capital
Management.

Procedure of purchase, stock & issue are as follows:

Process flow of purchase, stock & issue

Schedule is received from customers i.e.

Central Govt. or State Govt.

Bill of material is prepared

MRP (material requirement planning) is done

Availability of stock is checked

Production schedule is checked

Accordingly Order is placed with

suppliers/vendors

53

Working Capital
Management.

Material received is stored (one day

inventory is maintained)

Material is issued for production

using FIFO method

When supply is received then check is done at the gate of the wherehouse & it is checked whether the
material is supplied as per the invoice. If satisfied then MRR (material received receipt) is issued at the
gate. Material is then sent to the receiving department, there the quantity of material is checked to
know whether it is as per the order or not? After checking it is then passed on to the quality store for
the quality check i.e. whether the quality is as per the order requirement or not? Then the material is
finally stored in the store from where it is issued to the production department through the issue slip.
Material is issued using FIFO (first in first out) method, where the material that comes first is issued
first for the production. They use the practice in which material is kept in racks in such a way that
material coming first will be used first.

JIT method: In Food Corporation of India JIT system of inventory management is used. It is the method
in which inventory is ordered only when demand comes. As in Food Corporation of India the
production schedule is followed. When & how much quantity of purchase & sale is to be made is
know beforehand. Thats why no excess inventory is maintained.

Aging schedule of inventories: Inventory aging is done where on the basis of period of stock holding inventory is divided
into four categories:

30-60days

:- Fast Moving

54

Working Capital
Management.

60-90 days

90-120 days

120 above

Slow Moving
:- Non-Moving

Continued Inventory aging is done to know the status of inventory. Analysis is done so as to control &
reduce the slow moving inventory.
Non-moving inventory are removed either by selling it as scrap or by making some modification in it
through job work and then using it again, if possible.
Which type of inventory is higher in different months? Remedial action can be taken against the
inventory. With the help of chart comparison becomes easy.

Payable Management
Creditors are a vital part of effective cash a management and should be managed carefully to enhance
the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can
create liquidity problems. Ironically, some companies looking to take working capital off the balance
sheet nurture slow, inefficient or even obstructive A/P processes. Its one case where negligence can
improve financial performance. But squeezing the vendors is a shortsighted policy. A better strategy is
to shrink the vendor base radically, then use ones clout to negotiate longer terms with the vendors.
Vendor rationalization is a process that can pay off in a big way. Apart from the question that who
should authorize purchasing in the corporation- should it be tightly managed or spread among a
number of (junior) people? The following comes under good payable management.
1. Purchase quantities should be geared to demand forecasts
2. Order quantities should be used which takes account of stock holding and purchasing costs.
3. The cost to the corporation of carrying stock should be clearly defined.
4. A corporation should have alternative sources of supply. It should get quotes from major
suppliers and shop around for the best discounts, credit terms, and reduce dependence on a
single supplier.

55

Working Capital
Management.

Payable Management in Food Corporation of India

In Food Corporation of India it is being ensured that timely payment is made to the supplier/vendors.
The payment schedule is so designed that it will be made when the payment is received from the
debtors/customers & they have tried to delay the payment as much as they can so that the excess cash
balance is not required from the bank& their WCDL (working capital draw down limit) is not used.
Payment terms: 1. Payment terms with the various vendors is decided on the basis of their PO i.e. purchase
order. The unit to be purchased cost of each unit, period of credit, when & how payment is to
be made. Everything is stated in the PO.
2. Payment is made to the vendors twice in a month in all the units of Food Corporation of
India. First installment is made in between 8 th-10th & second installment is made in between
25th29th.
3. Payment is made to the vendors through RTGS, NEFT only if all the required bank detail
(like IFSC code, Bank name, its branch, a/c no.) of the respective vendor is available, if not
then the payment is made through a/c payee cheque.

56

Working Capital
Management.

Methodology of payment
In Food Corporation of India the complete data base of the vendors is made in which each & every
information & bank detail of the suppliers is available.
1. For making the payment every time it become due, the suppliers liability is checked on the basis
of their credit period and amount that is due for the respective period is found out and it is being
tallied with the ledger of that supplier.
2. If the amount in ledger doesnt tally with the ledger of supplier then balance confirmation is asked
from the respective supplier to know the due amount.
3. Then the amount due is recorded in the database & it is checked that through which medium
payment is to be made. If amount is more than one lack then payment is made through RTGS
otherwise through NEFT, and if bank detail is not available or the supplier whose bank is not
registered with RBI then in that case payment is made through account payee cheque.
4. Food Corporation of India has recently started the service of outsourcing cheque payment from
HSBC bank, whereby, now only the details of supplier & the amount to be paid will be sent to the
bank & bank will make the cheque & payment on its behalf this will save the time & efforts of the
employees & the process will also get fastened.

CASH MANAGEMENT
Cash is an important part of any business organization; therefore it should be manage properly so as to
ensure smooth functioning of the organization.

It is the

maintaining of liquidity of a firm to minimize the risk of insolvency? (An insolvent corporation is one
where it is unable to meet its maturing liabilities on time because it has inadequate liquidity to meet its
debt obligation). Cash Management is also about the proper balancing of keeping cash without letting
it idling around. Profit is not equating to cash flow. A highly profitable corporation might collapse if
without adequate cash flow due to the tying up of corporations funds with the accounts receivable and
worsen by the needs to make regular payments like wages, rent & utilities, taxes

57

Working Capital
Management.

Motives/Reasons of Holding Cash

Three (3) motives advocated by British economist, John Maynard Keynes namely for:
1. Transaction motive
2. Precautionary motive and
3. Speculative motive

Cash Management in Food Corporation of India:

Cash is the lifeblood of every business organization. Every organization needs to have
adequate flow of cash to meet its entire requirement, whether short term or long term. In any
manufacturing organizations before starting any business activity proper planning of cash inflow &
outflow is required to be made. So, on the basis of receivable period cash inflow is planned for the
beginning of each month and accordingly outflow that is to be made is also planned, as to when
payment is to be made.
On daily basis unit wise cash flow is prepared as discussed above & the position is
monitored. It is being identified in which unit the outflow is greater than the inflow, & where there is
discrepancy between the Budgeted & Actual inflow & outflow.
Payment is received on 2nd, 8th, 18th- 22nd of each month, accordingly payment is made on 2nd, 8th, &
22nd of each month.
Receivable & payable of the organization are so managed that the cash limit available with
the Banks are minimally used.
Food Corporation of India has maintained the accounts with many banks but major ones are
SBI BANK, IDBI BANK and AXIS BANK.
Bank provides the facility of WCDL (working capital draw down limit).it is the limit
available with the bank for meeting the short term cash requirement of the firm.

58

Working Capital
Management.

Different bank charges differed rate of interest for the service. As WCDL is the zero balance schemes
where firm can use the credit limit of the bank up to certain extent as agreed upon by them.
WCDL (working capital draw down limit) is of two types: Short-term loan: - It is the short-term loan facility that the firm can avail with the bank it is having 15
days roll over period i.e. after using for 15 days this facility gets rolled for next 15 days.
CC (Cash Credit) limit: -It is the facility similar to credit card facility available with the bank. The
organization can avail up to certain extent the credit facility of bank. In case of standard chartered
bank it is 500 Crores.
To know the position of WCDL used with the banks daily bank statements are checked of all the three
banks, this is done because there is always difference between the our bank book & books maintain by
bank, so to get an accurate picture of cash bank statements are checked. It is identified on daily basis
that whether the firm is having fund with bank or it is using banks fund i.e. Banks CC limit. This is
done to know the cash position of firm at the end of each day so that decision could be taken on time
regarding Sweep to other unit or regarding investing the surplus fund.
Chart is prepared to show the WCDL utilization position. In the next page WCDL Average chart is
shown in which average utilization of the WCDL is shown.

59

Working Capital
Management.

As per this chart WCDL utilization increases on 12 th 18th of every month as payment is
being made to suppliers between these days in maximum number of units of Food Corporation of
India. The utilization is minimum on 8th & 22nd of every month as payment is received on these days
from customer.

STATEMENT OF WORKING CAPITAL

Statement of Working Capital as on 31 March 2009

Particulars
Amount Rs. (in Cr.)
Current Assets:
(1) Cash
16.74
(2) Debtors and receivables
20843.27
(3) Stock
15135.81
(4) Advances to suppliers & employees
75.97
(5) Short term investment
631.90

60

Working Capital
Management.
Total of current assets (A)
Current Liability:
(1) Creditors
(2) Provisions for FBT
(3) Advances from customers
(4) Short term loan
Total of current liability (B)
Net working capital (A-B)

36703.69
3741.09
3.87
142.15
1224.29
5111.4
31592.29

Operating Cycle Framework

Operating Cycle
Working capital is also known as revolving capital and a circular
path of conversion/reconversion takes place. This revolution of cycle is
called as the operating cycle. Let us consider an example to better understand operating cycle. A
person starts a business with an initial investment. With credit extended by expense creditors, he
starts production process. Goods of varying levels of finish results, and thus called as work-inprogress. Once complete processing is done, it is called as finished goods. Until these goods are sold,
they remain in stock. Sales may be for cash and/or credit basis. The business person needs to wait a
little to realize cash from credit customers. The realized cash is used to pay creditors. But he needs to
maintain cash balance for day-to-day operations as well as for meeting sudden spurt in payment
obligations accompanied by sluggish cash collections from debtors. Thus a revolution or cycle from

61

Working Capital
Management.

cash to raw materials to Work-in-Progress, to finished goods, to debtors, and back to cash takes
place. This revolution is called as operating cycle.
Thus, we can say that the term operating cycle, otherwise called as cash cycle refers to the
length of time necessary to complete the following cycle of events:
1. Conversion of cash into inventory
2. Conversion of inventory into debtors
3. Conversion of debtors into cash

Stage 1: Cash to Inventory In this stage, cash first gets converted into raw materials, then work-inprogress and then finished goods in a typical manufacturing concern. As regards non-manufacturing
concerns, when the goods are purchased, cash gets converted into Inventory.
Stage 2: Inventory to Debtors The inventory thus produced or purchased, gets converted into
debtors or receivables upon credit sales.
Stage 3: The debtors or accounts receivables get in turn converted back into cash when they make
payment.
Length of operating cycle: When raw materials remain in store pending issue for production for a
less duration, when raw materials gets converted into WIP in a short duration, when finished goods
remain in warehouse pending for sales for a short duration only, and when cash realizations out of
sales are made quickly and finally when payment to creditors is made slowly, the operating cycle
would be smaller and consequently the working capital will also be reasonable. Thus shorter
duration of operating cycle indicates an efficient working capital management.

62

Working Capital
Management.

For Example:
Computation of length of operating cycle:
Period covered
Average credit period allowed by creditors
Average total of debtors outstanding

1 year of 365 days

16 days
$480,000

Total consumption of raw materials per annum$4,400,000

Total production cost per annum
$10,000,000
Total cost of sales
$10,500,000
Sales during the year
Value of stock maintained:

$16,000,000

Raw materials
Work in progress
Finished goods stock

$320,000
$350,000
$260,000

Calculate the operating cycle.

Solution:
Age of Raw materials

= $320,000 x 365 =

27 days

$4,400,000
Age of WIP

= $350,000 x 365 =

13 days

$10,000,000
Age of finished goods

= $260,000 x 365 =

9 days

$10,500,000
Age of debtors

= $480,000 x 365 =
$16,000,000

Less: Age of creditors (given)

Length of Operating cycle

11 days
60 days
16 days
44 days

Computation of Working capital need through Operating cycle

The length of operating cycle can be used to estimate total working capital required. First, we
have to calculate the number of operating cycles in the period under study, normally a year.

63

Working Capital
Management.

Therefore, number of operating cycles =

Number of days in a year

Length of operating cycle in days

In the above example, the number of cycles per annum would be 365 / 44 = 8.3 times.
Amount of working capital = Total Operating cost
No. of Operating cycles

If the operating cost per annum is $10,500,000, the amount of working capital would thus come to
$10,500,000 8.3 = $1,265,060 per operating cycle. Hence the significance of operating cycle
concept in the efficient management of working capital.

Relevancy of Operating Cycle Approach in Food Corporation of India

Food Corporation of India still not adopted these methodologies but in forthcoming years they will
have to adopt these terminologies not in theoretical sense but in they have to put themselves in
practical manner also. This is the main reason that I have put myself to explain these methodologies
with the help of an example.
In Food Corporation of India everything is controlled by Central Government, buffer stock, targets
of the forthcoming years for purchase of food grains, minimum support price for food grains,
shortage ratios, purchase price and sales prices of food grains that are the main reason for not
adopting these methodologies in practical manner mainly not practicable for FCI, where everything
is controlled by Ministry of Agriculture, Central Government.

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CHAPTER-VI

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Working Capital
Management.

FINDINGS
The study of working capital primarily aimed at pinpointing the strengths and weaknesses of
a business undertaking by regrouping and analyzing the systems and procedures involved in preparing
financial statements and procedures involved in. It is useful for management for its internal affairs and
to outside parties who are directly or indirectly related with the affairs of the corporation. These are
crucial reports, which reflect the financial soundness of a business enterprise through well- arranged
data.
On the basis of the study of financial accounting system of Food Corporation of India
following are the main findings:
1. The working capital management of corporation is good. Corporation pays its creditors on
time and well manages the current assets.
2. There is a time gap between debtors and creditors. And its a good health sign for a
corporation. Because a corporation can invest for short term & earn return.
3. Firm made its payment through NEFT (national electronic fund transfer) & RTGS (real time
gross settlement). And by this a firm can made payment quickly and there is no need of paper
work.
4. As corporation uses JIT policy for inventory. Thats why there is very less chances for
obsolescence of inventory.

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SUGGESTIONS
On the basis of the study of procedures of Food Corporation of India following are the
suggestions: 1. They should list their Corporation in stock Exchange to generate funds so that they can
expand their business and earn more revenue.
2. Corporation is working on Offline. Thats why corporation should adopt other software like
Oracle etc.
3. There should have uniform policy in every unit like in making provisions, valuation of
inventory etc.
4. If firm has JIT policy then why there is non-moving stock exists in the firm. A firm should
keep check on it.

CONCLUSIONS
Food Corporation of India is a growing enterprise. Its sales are increasingly gradually.
Depending upon which its working capital requirement s also increased.
The management of working capital in Food Corporation of India is quite satisfactory. This is
shown by different calculations. calculations like net working capital, Current Assets, current Liability
and operating cycle shows that liquidity position of the corporation is good which means corporation
can easily pay to its short term liabilities as and when it become due.
And if one can get money to move faster around the cycle (e.g. collect money due from
debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to
sales), the business will generate more cash or it will need to borrow less money to fund working

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capital. As a consequence, one can reduce the cost of bank interest or generate additional free money
available to support additional sales growth or investment. Similarly, if one can negotiate improved
terms with supplier e.g. get longer credit or an increased credit limit; one can effectively create free
finance to help fund future sales.

LIMITATIONS OF THE STUDY

The study is based on secondary data which may incorporate the limitations of the same.
The study is restricted to the period of three years (2006-07), (2007-08), (2008-09).

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CHAPTER VII

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Working Capital
Management.

BIBLIOGRAPHY

BOOKS: 1. Khan M.Y. and Jain P.K (2001), Financial Management, Tata McGraw Hill.
2. Kothari C.R. (2005), Research Methodology-Methods & Techniques, New Age
International Pvt. Ltd. Publishers, New Delhi.
3. Pandey I.M. (2003), Financial Management, Tata McGraw Hill.
4. Shapiro Alan C. (2003) Multinational Financial Management John Wiley & Sons (ASIA)
Pvt. Ltd.
REPORT: Bulletin and Annual Report: - Food Corporation of India. (From 2004-2005 to 2008-09).
Annual Report of FCI for the financial year 2009-10 is under submission to Food Ministry, so
unavailable.
WEBSITES: 1.

www.economictimes.com

2.

www.financialexpress.org

3.

www.fciweb.nic.in

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Management.
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