A STUDY ON

WORKING CAPITAL MANAGEMENT IN RINL,

VISAKHAPATNAM

A Project report Submitted to Pune University, in partial fulfillment for the award
of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted By

Mohammed Imran

(Roll no: 122)

Under the esteemed guidance of

Prof. Bandita Sinha,

AIMS

ALARD INSTITUTE OF MANAGEMENT SCIENCES

(Affiliated to Pune University& Approved by AICTE)

Campus: S.No:50, Marunje, Rajiv Gandhi InfoTech park

Pune

2009 – 2011

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 ACKNOWLEDGEMENT

The summer training at Steel Plant, Visakhapatnam was knowledgeable

experience for me. I have this opportunity to express my deep sense of gratitude to
all who have given their valuable time, able guidance, support and inspiration to
undertake this challenging work.

First I would like to express my sincere thanks to Prof. J.K.Sirur, Director,

Alard College of management sciences, who permitted me to do my project work
under the esteem guidance of Prof. Bandita Sinha, Alard Institute of management
sciences, pune who is also my esteemed guide and for giving me an opportunity &
permission to undergo training at Steel Plant, Visakhapatnam.

I am deeply indebted to Mr. Prema Sundram (Asst. manager Finance) RNIL

for giving permission to undergo training in the RINL.

I also thank the employees of steel plant Vishakhapatnam for extending their support
in completion of my project.

Lastly I am very thankful to my parents and friends who supported me in every

aspect during project work.

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 DECLARATION

I, Mohammed Imran, hereby declare that the project work entitled ““A STUDY

ON WORKING CAPITAL MANAGEMENT IN RINL” in VISAKHAPATNAM is

the original work done by me and submitted to the Pune University in partial fulfillment

of requirements for the award of M.B.A. in FINANCE is a record of original work done

by me under the supervision of Prof. Bandita Sinha, Alard institute of management

sciences.

Enrollment No. 122(MBA)

Date: Mohammed Imran

Place: Pune

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 EXECUTIVE SUMMARY

The concept of working capital is used in two ways i.e., gross and net. Gross working
capital refers to the firms investments in current assets. Net working capital means the
difference between current assets and current liabilities, and therefore represents the
position of current assets, which is financed either from long term funds or banks
borrowings.

Cash is required to meet a firm’s transactions and precautionary needs. A firm

needs cash to make payments for acquisitions of resources and services for normal
conduct of business. Cash is also held to meet emergency situations. Some firms hold
cash to take advantage of speculative changes in prices of input and output. Management
of cash involves three things.

a) managing cash flows in and out of a firm

b) managing cash flows within a firm

c) financing deficit or investing surplus cash

And thus, controlling cash balance sat any point of time. Firms prepare cash budget to
plan and control and cash flows. Cash budget can serve its purpose only when firm can
manage its collection and payments within the allowed limits. A firm should hold
optimum amount of cash at any time and invest the temporary excess amount in short
term securities.

Trade credit creates book debts accounts receivable. It issued as a marketing tool to
expand or maintain the firm’s sales. A firm’s sales. A firm’s investment on account
receivable depends on volume of credit sales and collection period through credit policy.

Credit policy. Credit policy includes credit terms and collection efforts the firm’s
credit policy will be considered optimum at the three methods monitor book debts.

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They are:

a) average collection period

b) ageing schedule

c) collection experience matrix

The first two methods are based on the showing payments patterns and hence do
not provide meaningful information for collecting book debts. The third approach uses
the desegregated data and it is better method than first two methods.

Inventories constitute about 60% of current assets to public limited companies of

India. The manufacturing companies hold inventories in the form of raw materials work
in process and finished goods. They are three motives for holding inventories. They are
transaction motive, precautionary motive and speculative motive.

RINL is a multi product manufacturer unit with varying cycle time for each
product. The capital required by each manufacturing unit of RINL depends on the
individual products cycle of each item. The department wise capital whose capital
requirement coupled with their production target for a year invites and effective working
capital management.

In finance, working capital is synonymous with current assets; RINL is a multi

product large organization with huge capital turnover where the working capital
requirement depends on the level of operation and the length of operation cycle.
Monitoring the duration of the operating cycle is an important aspect of current assets
management and control.

During the year 2005-06 the turnover is Rs8181 crores and profit is Rs2008
crores, during the year 2004-05 turnover is rs6174 crores and profit is rs1547 crores. It
indicates that the net profit forms nearly 25% of the total sales turnover. During the last
financial year average rate is of interest 2-3%. In such situation the company should try
to go for expansion, such as production enhancement system, so that the company comes
to a position for further increasing its profits.

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 * During the financial year 2004-05 the company’s average cost of interest is 3-4%,
which the company has acquired by forex funds replacing domestic loans and working
capital facilities. If the company utilizes the forex replacing domestic loans and
working capital facilities. F the company utilizes the forex funds where ever it is
possible i.e. whenever the payment are made in Indian rupees of foreign currency such
as ocean freight, other music payments like suppliers. The company will be in position
to take a better advantage to increase the profits.

* Currently the company’s payables towards raw material are replaced with buyer’s
credit/suppliers credit in the form of forex funds. The company has tried to nullify the
exchange risk by going for forward cover considering India’s dependency on other
countries in exchange .Better risk monitoring would be required at the expansion stage
when the quantum of import rises.

• The steel industries are having very good time but RINL could not able to take
full of its advantage due to the constraints, primarily raw materials. Unlike any
other steel company, RINL is not having its own sources of raw material i.e coal
mine. These are very basic needs as the company always depends on its supplier
for its raw material. Had the company always depends on its supplier for its raw
material. Had the company utilized its 2-3 half% of working capital limits for
acquisition of mines, purchasing of mines, etc. It could have been a favorable
situation.

* The company is getting all its funds i.e. day zero (0) when the rates are compared, the
company is investing surplus funds at 8-8.5% and paying at 7-8% to get the funds on
zero (0) day. This spread should be maintained during the time of expansion also.

* The company has already accumulated funds in excess of Rs.5500 Crores and can
look forward to bigger investment in building up capacities as compared to the
proposed 6.1 Million tons.

CONTENTS

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 Page No.

CHAPTER-1 7-11

 Introduction

CHAPTER-2 13-35

 Theoretical Framework

CHAPTER-3 37-61

 Method of Research

CHAPTER-4 63-84

 Analysis and Interpretation

CHAPTER-5 86-90

 Conclusion
 Limitations

CHAPTER-6

 Suggestion

 Findings

REFERENCES 91

7
LIST OF TABLES AND GRAPHS

8
CHAPTER-1

Introduction

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 COMPANY PROFILE

INTRODUCTION:

Steel occupies the foremost place among the materials in use today and pervades
all walks of life. All key discoveries of human genius, for instance, Steam Engine,
Railway, Means of Communication and Connection, Automobile, Aero plane and
Computers are in one way or other, fastened together with Steel and its sagacious and
Multifaceted applications.

Steel is versatile material with multitude of useful properties, making it

indispensable for furthering and achieving continual growth of economy be it
Construction, manufacturing, infrastructure or consumables. The level of steel
consumption has long been regarded as an index of industrialization and economic
maturity attained by a country.

Keeping in view of the importance of steel, the following integrated steel plants
with foreign collaborations were set up in public sector in post independence era (Table
2.0)

INTEGRATED STEEL PLANTS IN INDIA

STEEL PLANT COLLABORATION

1.Durgapur Steel Plant British
2.Bhilai Steel Plant Erstwhile USSR
3.Bokaro Steel Plant Erstwhile USSR

4.Rourkela Steel Plant Germany

Background of RINL:

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 To meet growing domestic needs of steel, Government of India decided to set up
an Integrated Steel Plant at Visakhapatnam. An agreement was signed with erstwhile
USSR in 1979 for co-operation in setting up 3.4 MT integrated steel plant at
Visakhapatnam. The project profile of 3 MT Stage in Table 2.1

3 MT STAGE
Description Original First Second Third
Revision Revision Revision
Sanction
Implementing Agency SAIL RINL RINL RINL

Date of sanction by GOI 19-06-79 30-07-82 24-06-88 12-07-95

Zero Date Not specified 01-02-82 01-02-82 01-02-82

Gestation period 6 years 6 years 8 1/2 years 101/2 years

Anticipated Date of Not specified Dec 87 June 90 July 92

Commissioning
Capital Cost (Rs crores) 2256.00 3897.28 6849.70 8593.29

Base Date 1 qtr 79 4 qtr 81 4 qtr 87 Jan 94

FE Component(Rs crores) 500.20 679.59 1214.86 1521.55

Cost Escalation Rs. Crores _ 1641.28 2952.42 1743.59

Capacity (MT liquid steel 3.40 3.40 3.00 3.00

per annum)

TECHNOLOGY

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 RINL was equipped with state of the art technology of steel making, large scale
computerization and automation was incorporated in the plant to achieve International Level of
Efficiency and Productivity, the organizational man power has been rationalized.

The following are some of the important technologies used in the plant.

• 7 meter tall coke over batteries with coke dry quenching plant

• 3200 cubic meter blast furnace, biggest in the country.

• Bell-less top charging system in blast furnace.

• 100% slag granulation at BF cast house

• Suppressed combustion LD gas recovery

• 100% continuous casting of liquid steel

• “T EMPCORE” and “ STELMORE” cooling process

• Extensive Waste Heat Recovery System

• Comprehensive Pollution Control Measures

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Major Sources of Inputs:

Raw Material Area/Location

Iron Ore lumps and fines Bailadilla, MP

BF Limestone – Indigenous
Jaggayyapeta, AP
Import
Dubai

BF Dolomite Madharam, AP

SMS Dolomite Madharam, AP

Manganese Ore Chipurapalli, AP

Boiler Coal Talcher, Orissa

Coking Coal Australia

Coke China

Quartz lump & Fines Garbhamam, AP

Water Supply:

Operational water requirement of 36 MGD is being met from Yeleru Water

Supply Scheme.

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Power Supply:

Operational power requirement of 180-200 MW is being met through captive power

plant. The capacity of captive power plant is 286.5 MW. The plant is selling around 60 MW of
power to APSEB (Andhra Pradesh State Electricity Board).

Major Units of RINL

DEPARTMENTS ANNUAL CAPACITY UNITS AT 3 MT STAGE

‘000T

COKE OVENS 2261 3 batteries each of 67

ovens of 7Meter height.

BLAST FURNACE 3400 2 furnaces of 3200 m3 each

SINTER PLANT 5256 2 sinter machines of 312 sq

meter grate area each

STEEL MELTING SHOP 3000 3 LD converters each of 150

M3 volume and six four strand

bloom caster.

LMMM 710 Four strand finishing mill

WRM 850 2x10 strand finishing mill

MMSM 850 6 strand finishing mill

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VISION MISSSION & OBJECTIVES:

RINL VISION:

To become a continuously growing world class company.

• To harness the growth potential & sustain profitable growth.

• To deliver high quality & cost competitive products & to be the first choice of
customers.

• Create an inspiring work environment to unleash the creative energy of people.

• Achieve excellence in enterprise management.

• Be a respected corporate citizen, ensure clean & green environment & develop
vibrant communities.

RINL MISSION:

To attain 16 million ton liquid steel capacity through technological up- gradation,
operational efficiency and expansion; to produce steel at international standards of cost
& quality; and to meet the aspirations of the stakeholders.

CORE VALUES:

• Commitment

• Customer satisfaction

• Continuous improvement

• Concern for environment

• Creativity & innovation

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OBJECTIVES:

Towards growth:

Expand the plant capacity to 7 MT by 2011-12.

Towards profitability:

Achieve net profits with special emphasis on enhancement of production of value

added steels & cost reduction.

Towards employees:

Make RINL the employer of choice. Upgrade the skills and efficiency of
employees through training & development & maintain high levels of motivation &
satisfaction.

Towards customers:

Promote branding of products for quality & customer relations management.

Towards quality:

Promote quality movement in all functions of the company through quality

management system.

Towards technology up gradation& productivity:

Upgrade technology & practice bench marking to achieve continuously

international efficiency levels. Adopt latest developments in information &
communication technology.

Towards safety, environment & society:

Continue efforts towards the safety of employees, conservation of environment &

be a good corporate citizen.

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POLICIES & RULES OF RINL/RINL:

RINL takes all necessary actions for the fulfillment of regulatory requirements. In
this regard RINL follows the following policies.

Quality policy:

Continuously improve the quality of all materials processes and products,

services for customers.

1. Environment policy:

Maintain a high level of environmental consciousness amongst employees and

prevention of pollution by minimizing emissions and discharge.

2. Energy policy:

By adopting appropriate energy conservation technologies, RINL controls the

consumption of various forms of energy.

3. OSHAS policy:

RINL is committed to occupational health and safety of employees and contract

workers.

4. HR policy:

RINL believe that their employees are the most important resource, so it provides
good working environment that makes the employees committed and motivated
for maximizing the productivity.

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ACHIEVEMENTS AND AWRDS:

 ISO 9002 for SMS and all the down streams units is a unique distinction in The

Indian steel industry.

 Received Indira Priya Dharshini Vriksha Mithra Award 1992-93.

 Nehru Memorial National Award of pollution control: 1992-94

 EPCC Export Excellence Award 194-95

 Golden peacock(1st prize) “National Quality Award-96”.

 Steel Minister’s Trophy for “BEST SAFETY PERFORMANCE”-1996

 Selected for “ world quality commitment award-1997” of Japan, Spain.

 UDYOG excellence gold medal award for excellence in steel industry

 Excellence award for outstanding performance in productivity management, quality

and innovation.

 Ispat Surakshya Puraskar(1st prize) for longest accident free period 91-94.

 Best labour management award from the government of A.P.

 SCOPE Award for Turn around 2000-01

 Environment excellence award from green tech foundation for energy conservation

in 2002 & environmental conservation and pollution control given by Asia pacific

chamber of commerce and industries – 2005 for second time.

 Best Enterprise award from SCOPE WIPS for 2001-2002.

 SAIL Chairman’s Silver plaque for no fatal accidents-2000.

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 ISTDA ward for “Best HR practices”-2002.

 Prime Minister’s Trophy for the year 2002-2003.

 Best Enterprise award from SCOPE FOR surpassing MOU targets 2003-04.

 World Quality Commitment International star award performance excellence, given

by Business initiative direction in 2004.

 Organisational excellence award” for 2003-04 conferred by INSSAN.

 National Energy Conservation Award ,2004 and special prize from Ministry of

power, government of India.

 CII-EXIM bank Award for “Strong Commitment for Business Excellence 2005”

 Strong Commitment Award for “CII HR Excellence 2005”

 Six Vishwakarma Rashtriya Puraskars of 32 employees in 2005 and two Vishwakarma

Rashtriya Puraskars for 11 employees in 2006.

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PERFORMANCE TRENDS:

Currently RINL is producing about 4.1 MT of hot metal, 3.6 MT of liquid steel and 3.2
MT of saleable steel and operating at over 120% of its rated capacity levels.

STATISTICAL INFORMATION:

PRODUCTION PERFORMANCE- (‘000 TONS)

Year Hot Metal Pig Iron Liquid Steel Saleable Steel

Target Actual Target Actual Target Actual Target Actual

2004-05 3120 3485 363 374 2730 3083 2411 2757

2005-06 3400 3942 341 517 3000 3357 3675 3056

2006-07 3850 4055 539 439 3235 3508 2900 3169

2007-08 4000 3920 416 273 3500 3560 3125 3173

2008-09 4120 4153 461 439 3650 3603 3261 3237

COMMERCIAL PERFORMANCE–(RUPEES IN CRORES)

Year Sales Turnover Domestic Sales Exports

2004-05
6169 5400 769
2005-06
8181 7933 248
2006-07
8482 8039 442
2007-08
9131 8707 425
2008-09
10433 9878 555

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FINANCIAL PERFORMANCE (RUPEES IN CRORES)

Year Gross Margin Cash Profit Net Profit

2004-05 2073 2024 1547
2005-06 3271 3260 2008
2006-07 2369 2338 1252
2007-08 2632 2583 1363
2008-09 3515 3483 1943

BOARD OF DIRECTORS

CHAIRMAN-CUM-MANAGING DIRECTOR P. K. Bishnoi.

DIRECTOR (FINANCE) P.K. Bishnoi

DIRECTOR (PERSONNEL) Y. Manohar.

DIRECTOR (COMMERCIAL) H. S. Chatwal.

DIRECTOR (OPERATIONAL)
P. K. Misra.
Dr. V. K. Bhalla.
DIRECTORS J. S. Mathur.

AGM (CA) & COMPANY SECRETARY P.Mohan Rao

Adimistrative Building
RINL
OFFICE Visakhapatnam -- 530 001

21
MEANING AND DEFINITION OF WORKING CAPITAL

DEFINITION:

According to Ralph Kennedy and Steward Mc Muller “a study of working capital is of

major importance to internal and external analysis because of its close relationship with
the current day to day operations of business”.

MEANING:

Working capital refers to the funds invested in current assets i.e. investment in
stocks, sundry debtors, cash and other current assets. Current assets are essential to use
fixed assets profitably. For example a machine cannot be used without raw material.
Thus it is obvious that certain amount of funds is always tied up in raw materials, work
in progress and finished goods. However, the business also enjoys credit facilities from
its suppliers who may supply raw materials on credit and the firm may not pay all the
expenses immediately. Therefore, certain amount of funds is automatically available to
finance the current assets requirements. However the requirements for current assets are
usually greater than the amount of funds payable through current liabilities. In other
words, current assets are to be kept at a higher level than the current liabilities.

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 NEED FOR THE STUDY

The term working capital refers to the capital required for day-to-day

operations of a business enterprise. It is represented by excess of current assets over

current liabilities. It is necessary for any organization to run successfully its financial

activities by providing adequate working capital. Moreover, the management should also

pay due attention in exercising proper control over working capital. Management of

current assets can be costly. Too large are investments in current assets means typing up

capital that can be used productively elsewhere. On the other hand too, little investment

can also be expensive. For example, insufficient inventory may mean that sales are not

sufficient to meet the needs of the customer.

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 OBJECTIVES OF THE STUDY

 To study in general the working capital management procedure in RINL,

Visakhapatnam.
 To analyze and apply operating cycle concept of working capital in RINL,
Visakhapatnam.
 To know how the working capital is being financed.
 To know the various methods to be followed by RINL for inventories and
accounts receivables.
 To give suggestions, if any, for better working capital management in RINL.

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CHAPTER-2

Theoretical Frame Work

25
 THEORETICAL FRAME WORK

INTRODUCTION

Every business needs funds for two purposes for its establishment and to carry
out its day to day operations. Working capital refers to that part of the firm’s capital,
which is required for financing short term or current assets such as cash, marketable
securities, debtors and inventories. Working capital is the amount of funds to cover the
cost of operating the enterprise.

The goal of working capital management is to manage the current assets and
current liabilities of the firm in such a way that a satisfactory level of working capital is
maintained. Working capital is the difference between the inflow and outflow of funds.
Working capital is also known as revolving or circulating or short term capital.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital

(a) Gross working capital

(b) Net working capital

(a) Gross working capital

Gross working capital refers to the firm’s investment in current assets. Current
assets are the assets, which can be converted into cash within an accounting year and
include cash, short-term securities, debtors (accounts receivables or book debts), bills
receivables and stock (inventory).

(b) Net working capital

Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year and include creditors (accounts payable), bills
payable and outstanding expenses.

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 Net working capital can be positive or negative. A positive working capital will
arise when current assets exceed current liabilities. A negative working capital will occur
when current liabilities are in excess of current assets.

List of current assets and current liabilities

CURRENT ASSETS CURRENT LIABILITIES

 Cash in hand Bills payable

 Cash at bank Sundry creditors

 Bills receivables Accrued expenses

 Sundry debtors Short term loans

 Stock Dividend payable

 Prepaid expenses Bank overdraft

 Accrued income Provision for taxes

 Short term investments

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways.

(a) On the basis of concept:

Gross Working Capital

Net Working Capital

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(b) On the basis of time:

Permanent or Fixed Working Capital

Regular Working Capital

Reserve Working Capital

Temporary or Variable Working Capital

Seasonal Working Capital

Special Working Capital

Types of Working Capital

Working capital can be divided into two categories on the basis of time:

1. Permanent Working Capital

This refers to that minimum amount of investment in all current assets which is
required at all times to carry out minimum level of business activities. In other words, it
represents the current assets required on a continuing basis over the entire year. Tandon
Committee has referred to this type of working capital as “core current assets”.

The following are the characteristics of this type of working capital:

1. Amount of permanent working capital remains in the business in one form or

another. This is particularly important from the point of view of financing.
The suppliers of such working capital should not expect its return during the
life – time of the firm.

2. It also grows with the size of the business. In other words, greater the size of
the business, greater is the amount of such working capital and vice-versa.

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 Permanent working capital is permanently needed for the business, and
therefore, it should be financed out of long-term funds. This is the reason why the current
ratio has to be substantially more than one.

2. Temporary Working Capital

The amount of such working capital keeps on fluctuating from time to time on
the basis of business activities. In other words, it represents additional current assets
required at different times during the operating year. For example, extra inventory has to
be maintained to support sales during peak sales period. Similarly, receivables also
increase and must be financed during period of high sales. On the other hand, investment
in inventories, receivables, etc., will decrease in periods of depression.

Suppliers of temporary working capital can expect its return during off season
when it is not required by the firm. Hence, temporary working capital is generally
financed from short-term sources of finance such as bank credit.

MEASURING THE WORKING CAPITAL

Working capital is very essential to maintain the smooth running of business. No

business can run successfully without an adequate amount of working capital. However
it must also be noted that working capital is a means to run the business smoothly and
profitably and not an end in itself. Thus concept of working capital can be conducted
through a number of devices such as

1. Ratio analysis

2. Funds flow analysis

3. Budgeting

1. RATIO ANALYSIS

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 A ratio is a simple arithmetic expression of the relationship of one number to
another. The technique of ratio analysis can be employed for measuring short term
liquidity or working capital position of a firm. Several ratios like current ratio, quick
ratio, inventory turnover ratio, receivable turnover ratio, payables turnover ratio, working
capital turnover ratio, cash position ratio etc.

2. FUNDS FLOW ANALYSIS

Funds flow analysis is a technical device designated to study the sources from
which additional funds are derived and the use to which these sources are put. It is an
effective management tool to study changes in the financial position (working capital) of
a business enterprise between beginning and ending financial statements dates. The
funds flow analysis consists of:

(a) Preparing schedule of changes in working capital

(b) Statement of sources and application of funds.

3. WORKING CAPITAL BUDGET

Working capital budget, as a part of total budgeting process of a business, is

prepared estimating future long term and short term working capital needs and the
sources to finance them, and then comparing the budgeted figures with the actual
performance for calculating variances, if any, so that corrective actions may be taken in
the future. Its main objective is to ensure availability of funds as and when needed, and
to ensure effective utilization of these resources. The successful implementation of
working capital budget involves preparing separate budgets for various elements of
working capital, such as, cash, inventories and receivables.

OBJECTIVES OR NEED OF WORKING CAPITAL

The need for working capital cannot be over emphasized. Every business needs
some amount of working capital. The need for working capital arises due to the time gap
between production and realization of cash from sales. It requires:

30
 1. For the purchase of materials, components and spares.

2. To pay wages and salaries.

3. To incur day- to- day expenses and overheads such as fuel, power and office
expenses etc.

4. To meet the selling costs as packing, advertising etc.

5. To provide credit facilities to the customers.

6. To maintain the inventories of raw materials, work in progress, stores and spares,
and finished stock.

IMPORTANCE OF WORKING CAPITAL

Working capital is just like the heart of the business. If it becomes weak; the
business can hardly prosper and survive. It is an index of solvency of a concern. Its
proper circulation provides to the business the right amount of cash to maintain in
business. Without adequate amount of working capital, production interruption may take

31
place and results in reduction of profit. Just as circulation of blood is very necessary in
human body to maintain life, smooth flow or circulation of working capital is necessary
for the health of the enterprise. The prime object of management is to make profit.
Whether or not this is accomplished in most business depends largely in the manner in
which the working capital is administered.

KEY AREAS OF WORKING CAPITAL

Generally in the working capital management there are three important areas.
Those are:

1. Cash management

2. Receivables management

3. Inventory management

ADVANTAGES OF ADEQUATE WORKING CAPITAL

Working capital is the life blood of the business. Just as circulation of blood is essential
in the human body for maintaining life, working capital is very essential to maintain the
business.

The main advantages of maintaining adequate amount of working capital are as follows:

• Good solvency position in the business

• Goodwill, it is easy to get loans

• Cash discounts

• Regular supply of raw materials

• Regular payment of salaries, wages and other day to day commitments

• Exploitation of favorable market conditions

• Ability to face crisis

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 • Quick and regular return on investment

• High morale

Every business concern should have adequate working capital to run its business
operations. It should not have either redundant/ excess or shortage of working capital.

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

1. Excessive working capital means idle funds which earn no profit for the business
and hence the business cannot earn a proper rate of return on its investment.

2. Where there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,
wastage and losses.

3. Excessive working capital implies excessive debtors and defective credit policy
which may cause higher incidence of bad debts.

4. It may result in overall inefficiency in the organization.

5. When there is excessive working capital, relations with banks and other financial
institutions may not be maintained.

6. Due to low rate of return on investments the value of shares may also fall.

7. The redundant working capital gives rise to speculative transactions.

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

1. A concern, which has inadequate working capital, cannot pay its short time
liabilities in time. Thus it will loose its reputation and shall not be able to get
good credit facilities.

2. It cannot buy its requirements in bulk and cannot avail of discount etc.

33
 3. It becomes difficult for the firm to exploit favorable market conditions and
undertake projects due to lack of working capital.

4. The firm cannot pay day to day expenses of its operations and it creates
inefficiencies, increase costs and reduces the profits of the business.

5. It becomes impossible to utilize efficiently the fixed assets due to non-availability

of liquid funds.

6. The rate of return on investments also falls with the shortage of working capital.

FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS

A firm should plan its operations in such a way that it should have neither too
much nor too little working capital. The working capital requirements are determined by
a wide variety of factors.

1. Nature and size of business:

Working capital requirements of a firm are basically influenced by the nature of its
business. Trading and financial firms have a very small investment in fixed assets, but
require a large sum of money to be invested in working capital. Whereas public utilities
have a very limited need for working capital and have to invest abundantly in fixed
assets. Their working capital requirements are nominal because they may have cash
sales only and supply services but not products. Working capital needs of most
manufacturing concerns fall between too extreme requirements of trading firms and
public utilities. Such concerns have to make adequate investments in current assets
depending upon the total assets structure and other variables. The size of the business
that is measured in terms of scale of operations also has an impact on the working capital
needs. As BHPV’s scale of operations is large, the firm needs more working capital then
small firm does.

2. Manufacturing cycle:

34
 The manufacturing cycle comprises of the purchase and use of raw material
in the production of finished goods. As the firm’s manufacturing cycle is lengthy the
working capital requirement of the firm is large.

3. Sales growth:

The working capital needs of firm increase as its sales grow. Current assets
will have to be employed before growth takes place. A growing firm needs to invest
funds in fixed assets in order to sustain its growing production and sales. This in turn
increase investment in current assets to support enlarged scale of operations, a growing
firm needs funds continuously.

I. Demand conditions:

The business variations such as seasonal and cyclical fluctuations in the

demand for products and services affect the working capital requirements. When there is
an upward swing in the economy, sales will increase. Correspondingly, the firm’s
investment in inventories and book debts will also increase. During boom, additional
investments in fixed assets may be made by some firms to increase their productive
capacity. These act as further additions to working capital.

4. Production policy:

To reduce working capital problems arising due to changes in demand for

the firm’s products, a steady production policy may be maintained. If the firm’s
productive capacities can be utilized for manufacturing varied products, it can have the
advantage of diversified activities and solve its working capital problems.

Price level changes:

Generally, rising price levels will require a firm to maintain higher amount of
working capital. However companies which can immediately revise their product prices
with rising price levels will not face a severe working capital problem.

35
 5. Operating efficiency and performance:

The operating efficiency of the firm relates to the optimum utilization of

resources at minimum costs. The use of working capital is improved and the pace of cash
cycle is accelerated with operating efficiency .Better utilization of resources improves
profitability and thus helps in decreasing the pressure on working capital. A high net
profit margin contributes towards the working capital pool. In fact, the net profit is a
source of working capital to the extent it has been earned in cash. A firm can enhance its
working capital funds by saving taxes through appropriate tax planning.

6. Firm’s credit policy:

The credit policy of the firm affects working capital by influencing the level of
book debts. The credit terms to be granted to customers may depend upon norms of the
industry to which the firm belongs. The firm should be discretionary in generating credit
terms to its customer. Depending upon the individual case different terms may be given
to different customer’s .A liberal credit policy with out rating the credit worthiness of
customers will be detrimental to the firm and will create a problem for collecting funds
later on. Slack collection procedures result in increase of book debts. The firm should
follow a rationalized credit policy based on the credit standing of customers and other
relevant factors.

OPERATING CYCLE

Operating cycle is the time duration required to convert sales, after the
conversion of recourses into inventories into cash. The operating cycle of a
manufacturing company involves three phases:

 Acquisition of resources such as raw material, labor, power and fuel etc.

36
  Manufacturing of the product which includes conversion of raw material into
work in progress and WIP into finished goods.

 Sale of the product either for cash or on credit. Credit sales create accounts
receivables for collection.

 If the operating cycle length is high, we need to invest large amount as working
capital and vice- versa.

 Sometimes basing on the competition we need to invest huge amount in debtors

as a credit sales.

 Fluctuations in the prices also need increase or decrease in the amount of working
capital.

 Some seasonal factors also influence the need of working capital.

Operating cycle involves the following sequence of events:

 Conversion of cash into raw materials and labor.

 Conversion of raw material and labor into work in progress.

 Conversion of work in progress into finished goods.

 Conversion of finished goods into debtors through credit sales.

 Conversion of debtors and bills receivables into cash.

WORKING CAPITAL CYCLE OF A MANUFACTURING FIRM

37
 Cash

Debtors

Raw
Materials
Finished
Goods

Work-in-progress

38
Uses of operating cycle:

The operating cycle is helpful to the company in two ways:

 It helps in forecasting working capital requirements.

 Control of working capital can be done efficiently by the use of operating cycle.

Determination of the length of operating cycle:

The length of the operating cycle of a manufacturing firm is the sum of:

 Inventory conversion period.

 Book debts conversion period.

GROSS OPERATING CYCLE (GOC):

The firms’ gross operating cycle (GOC) can be determined as inventory

conversion period (ICP) plus debtors’ conversion period (DCP). Thus, GOC is given as
follows:

Gross operating cycle:

=Inventory conversion period + Debtors conversion period

INVENTORY CONVERSION PERIOD:

The inventory conversion is the sum of raw material conversion period

(RMCP), work-in-progress conversion period (WIPCP) and finished goods conversion
period (FGCP):

ICP = RMCP + WIPCP + FGCP

 RAW MATERIAL CONVERSION PERIOD (RMCP):

The raw material conversion period (RMCP) is the average time period
taken to convert material into work-in-progress. It depends on:

39
 I. raw material consumption per day

II. raw material inventory

The raw material conversion period is obtained when raw material inventory is divided
by raw material consumption per day.

Raw material inventory

Raw material conversion period =

[Raw material consumption]/360

WORK-IN-PROGRESS CONVERSION PERIOD (WIPCP):

Work-in-progress conversion period (WIPCP) is the average time taken to

complete the semi-finished or work-in-progress. It is given by the following formula:

Work-in-process inventory

Work-in-process conversion period =

[Cost of production]/360

 FINISHED GOODS CONVERSION PERIOD (FGCP):

Finished goods conversion period (FGCP) is the average time taken to sell the
finished goods. FGCP is given by the following formula:

Finished goods inventory

Finished goods conversion period =

[Cost of goods sold]/360

 DEBTORS (RECEIVABLES) CONVERSION PREIOD (DCP);

40
 Debtors’ conversion period (DCP) is the average time taken to convert
debtors into cash. DCP represents the average collection period. It is calculated as
follows:

Debtors

Debtors conversion period (DCP) =

Credit sales/360

 CREDITORS (PAYABLES) DEFERRAL PERIOD (CDP);

Creditors (Payables) Deferral Period (CDP) is the average time taken by the
firm in paying its suppliers (creditors). CDP is given as follows:

Creditors
Creditors Deferral Period (CDP) =

Credit purchases/360

CASH CONVERSION OR NET OPERATING CYCLE:

Net Operating Cycle (NOC) is the difference between gross operating cycle and
payables deferral period.

Net Operating Cycle (NOC) = Gross operating cycle – Creditors deferral period.

KEY AREAS OF WORKING CAPITAL

Generally in the working capital management there are three important areas
which are very important .Those are

1. Cash management

2. Receivables management

3. Inventory management

MANAGEMENT OF CASH

41
 Cash management is one of the key areas of working capital management. The
term cash reference to cash management is used in two senses. In a narrow sense it is
used broadly to cover currency and generally accepted equivalent of cash such as
cheques, drafts and demand deposits in banks. The broader view cash also includes near
cash assets such as marketable securities and time deposits in banks. The main
characteristic of these is that they can be readily converted into cash.

The three primary motives for main cash balance are as follows:

Transaction motive:-

This refers to the holding of cash to meet routine cash requirements to finance the
transactions which a firm carries on, in the ordinary course of business.

Precautionary motive:-

This motive of holding cash implies the need to hold cash to meet unpredictable
obligations.

Speculation motive:-

It refers to the desire of a firm to take advantage of opportunities which present

themselves at unexpected moments and which are typically outside the normal course of
business.

Cash cycle:-

The cash cycle refers to the process by which cash is used to purchase material
from which goods are produced and then sold to customers to later pay bills. The firm
receives cash from customers and cycle repeats itself.

Cash budget:-

It is a device to help a firm to plan and control the use of cash. It is a statement
showing the estimated cash inflow and outflow over the firm’s planning horizon.

42
 RECEIVABLES MANAGEMENT

Meaning of receivables:

Receivables are asset accounts representing amounts owed to the firm as a result
of sale of goods/services in the ordinary course of business.

When a firm makes an ordinary sale of goods and services and does not receive
payment, the firm grants trade credit and creates accounts receivables, which would be
collected in future. The management of these is known as receivables management. The
management of receivables involves crucial decision in three key areas: credit policies,
credit terms and collection policies.

Credit policy

The credit policy of a firm provides a frame work to determine whether or not to
extend credit to customer.

 How much credit to extend

 Credit standards are criteria to decide the type of customer to whom the goods
could be sold on credit. If a firm has more slow paying customers its investment
in accounts receivables will increase. The firm will also be exposed to higher risk
of default. The choice of optimum credit standards involves a trade off between
incremental return and incremental cost.

 Analysis of customers:- Credit standards influence the quality of the firms

customers. The two aspects of the quality of customers:

(a) The time taken by customer to repay credit obligations and

(b) The default rate

43
CREDIT TERMS

Credit terms specify the duration of credit and terns of payment by customers.
Investment in accounts receivables will be high if customers are allowed extended time
period for making payments.

Credit period

Credit period is the length of the time for which credit is extended to customers.
A firm lengthens credit period to increase its operating profit through expanded sales.

Cash Discount

Cash discount is a reduction in payment offered to customer to induce them to

repay credit amount within a specified period of time which will be less than the normal
credit period.

COLLECTION EFFORTS

This determines actual collection period. The lower the collection period, the
lower is the investment in accounts receivables and vice versa. Prompt collection is
needed for fast turnover of working capital. Keeping collection costs and bad debts
within limits and maintaining collection efficiency also influence the working capital
needs of the firm.

44
 INVENTORY MANAGEMENT

Inventory is one of the major current assets. The term inventory refers to the
stockpile of the product a firm is offering for sale and components that make up the
product. The assets which firms stores as inventory in anticipation of need are raw
materials, work in progress and finished goods.

The main objective of inventory management is:

 To minimize the firms investment in inventory

 To meet a demand for the product by efficiently organizing the firms production
and sales operations.

The major objective of inventory management is to minimize cost. The cost

associated with inventory management falls into two basic categories.

• Ordering / acquisition / set-up cost

• Carrying cost

Many sophisticated mathematical techniques are available to handle inventory

management problems. The major problem areas that comprise the heart of inventory
controls are.

 Classification problem to determine the type of control required.

 The order quantity problem

 Safety stocks

45
 ABC SYSTEM

This technique is based on the assumption that a firm should not exercise the
same degree of control for all items of inventory. It should rather keep a more rigorous
control on items that are:

 Most required, and / or slowest turning

 Items that are less expensive should be given less control efforts.

On the basis of cost involved inventory items are categorized into three classes.

 ‘A’ group items involve largest investment and inventory control should be most
rigorous and intensive.

 ‘B’ group stands midway.

 ‘C’ group consists of items of inventory, which involve relatively small

investment although the number of items is fairly large. These items deserve
minimum attention.

The company has prepared lists of items of inventory identifying the same as
category A, B & C items, but only for the purpose of physical verification.

46
 ECONOMIC ORDER QUANTITY

It is the optimum level of inventory, which is also defined as that level of

inventory order that minimizes total costs associated with inventory management. The
two costs associated with inventory is ordering and carrying costs. The determination of
appropriate quantity to be purchased in each lot to replenish stock as a solution, which
assures:

 Smooth production or sales operations

 Lower ordering or setup costs

But it involves higher carrying costs. On the other hand small orders would
reduce the carrying costs but the ordering cost would increase, as there is a likely hood of
interruption of operations due to stock outs.

The company usually procures inventory in excess of requirement which leads to

extra carrying costs and demurrage changes due to non clearance of imported materials
in time from ports.

SAFETY STOCKS

47
 Safety stock is defined as the minimum inventory to serve as a safety margin or
buffer to meet an anticipated increase in usage resulting from an unusually high demand
and or an uncontrollable late receipt of incoming inventory. It involves two types of
costs.

 Stock out cost associated with shortage of inventory

 Carrying costs associated with maintenance of inventory

The company keeps a safety stock of only electrodes, loose tools and spare parts. The
company holds a stock of six months consumption.

Norms for holding each category of inventory fixed by bureau of public enterprise in
1976 were followed by the company till the company fixed its norms in Feb. 1995 for
better inventory control and increasing overall efficiency.

WORKING CAPITAL MANAGEMENT IN RINL

48
 Management efforts over the few years have been to inculcate cash consciousness
through constant emphasis on working capital, mainly inventory and book debtors. In all
thee, it is to be kept in mind that RINL is a multi product undertaking, were
management decisions affecting working capital are taken at managerial level.

Sources of funds:

RINL raises its working capital by multiple banking arrangements with 10

banks. The following are the 10 banks, where funds for working capital are raised:

1. State Bank of India

2. Canara Bank

3. UCO Bank

4. Bank of Baroda

5. Andhra Bank

6. Indian Overseas Bank

7. State Bank of Hyderabad

8. Allahabad Bank

9. IDBI Bank Ltd.

10. HSBC Ltd.

Types of Working Capital Source:

1. Fund based limits: under this source, RINL can obtain working capital finance by
bank borrowing in the form of cash credit of export packing credit.

2. Non-fund based limits: RINL receives non-fund based working capital in the form of
letter of credit or bank guarantee.

In RINL working capital requirements is assessed by:

49
 Fixing the target production

 Preparation of Budget (in rupees)

Working Capital requirement are prepared taking into account:

 Actual value of the previous two years working capital.

 Projected value for the next two years.

Procedure for procurement of funds:

RINL applies a credit monitoring and appraisal (CMA) report (a 40-page

document). The document consists of historical data about the company and profit and
loss account, balance sheet, current assets current liabilities, working capital assessment,
fund flows etc. SBI subscribes the maximum working capital limit (upto extent of 38%)
of the entire working capital assessed.

50
CHAPTER-3

Method of Research

METHODOLOGY

The information for the study has been obtained from two sources namely.

51
1. Primary Data

2. Secondary Data

Primary data:

The Primary Sources of date required for the study was collected by personal
interaction with the employees of the Steel plant, in the area of Finance, Production ,
HRD and Administration Departments. In till study it was mainly interviews with
concerned officers and staff, either individually or collectively, sum of the information
has been verified or supplemented with personal observation.

Secondary data:

The Secondary data has been collected from annual reports, websites, company
journals, magazines and other sources of information of steel plant and various financial
statements of the organization such as profit & loss account, balance sheet, cash flow,
funds flow statements and other statements which would contain the data related to
various current assets and current liabilities.

52
CHAPTER-4

Analysis and Interpretation

53
 YEAR WISE CHANGES IN WORKING CAPITAL

Gross Working Capital:

Gross Working Capital
Year (Rs.In crores)
2004-05 2726.69
2005-06 6047.52
2006-07 8252.00
2007-08 10448.10
2008-09 11804.59

Chart

Interpretation:

The above table indicates that working capital is highest for the year 2008-2009.

The Gross working capital has shown a gradual increase from 2004 till 2009.

54
NET WORKING CAPITAL:

The net working capital of RINL shows an increasing trend from 2004-05 to
2008-09. It is showing a positive figure till 2008-09.

The main reason for the decreasing trend in the years is due to the increasing
creditors year after year. If also indicates a weak cash balance to meet the liabilities. The
current liabilities of the company are increasing by 200 corers almost every year.

The increase in working capital is due to better sales and full capacity utilization.
Which has resulted in reduction of cost of production? The net working capital of RINL
for the past 5 years is depicted in the table.

Net Working Capital

Year (Rs.In crores)
2004-05 1491.34
2005-06 4623.36
2006-07 6664.14
2007-08 8343.80
2008-09 8612.97

55
Interpretation:

The net working capital has shown a gradual increase from 2004 till 2009.

Statement of changes in working capital is done in the pages that follow to give the

complete picture of variations in working capital.

Statement of changes in working capital for the year 2004-2005

56
 (Figures in crores)

2004 2005
Particulars March March Increase Decrease
Current Assets
Inventories 857.55 706.34 151.21
Sundry debtors 217.57 85.62 131.95
Cash and bank bal 541.57 1359.71 818.14
Other current assets 5.26 24.31 19.05
Loans and advances 241.63 550.70 309.07
Total current assets 1863.58 2726.68
Current Liabilities
Liabilities 1140.38 1078.84 61.54
Provision 90.70 156.51 65.81
Total current liabilities 1231.08 1235.35
Net Increase in Working Capital 858.83
Total 1207.80 1207.80

Source: Annual reports of RINL

INTERPRETATION:

Net working capital increase stood at 85881.54 lakhs. Cash & bank balances
have shown positive with an increase of Rs.818113.93 Added to this is the decrease in
liabilities. This resulted in increase in net working capital.

57
Statement of changes in working capital for the year 2005-2006

(Figures in crores)

2005 2006
Particulars March March Increase Decrease
Current Assets
Inventories 706.34 1255.31 548.97
Sundry debtors 85.62 49.30 36.31
Cash and bank balance 1359.71 3932.61 2572.90
Other current assets 24.31 100.18 75.86
Loans and advances 550.91 710.12 159.22
Total current assets (A) 2726.89 6047.52
Current Liabilities
Liabilities 1078.84 1154.88 76.05
Provision 156.51 269.27 112.76
Total current liabilities (B) 1235.35 1424.16
Net Increase in Working Capital 3131.82
Total 3356.94 3356.94

Source: Annual reports of RINL

INTERPRETATION:

There is a significant increase in net working capital, which amounts to

3131892.30 lacks. There noticeable increase in net working capital is due to increase in
cash & bank balances. The increase in cash is 257289.59 (189%). A positive growth is
observed in loan & advances and other current assets. The increase is offset by the
increase in total current assets. The net effect of the above changes has brought about the
increased working capital.

Statement of changes in working capital for the year 2006-2007

58
 (Figures in crores)

2006 2007
Particulars March March Increase Decrease
Current Assets
Inventories 1257.53 1216.45 41.08
Sundry debtors 49.30 165.65 116.35
Cash and bank bal 3932.61 5621.70 1689.09
Other current assets 100.18 184.36 84.18
Loans and advances 710.12 1063.84 353.72
Total current assets 6049.74 8252.00
Current Liabilities
Liabilities 712.46 871.49 159.03
Provision 269.27 716.37 447.10

Total current liabilities 981.73 1587.86

Net Increase in Working Capital 1596.13
Total 2243.34 2243.34

Source: Annual reports of RINL

Interpretation:

There is a significant increase in net working capital which amounts to 1596.13crores.

There noticeable increase in net working capital is due to increase in cash &bank
balances. The increase in cash is 1689.09 cores. A positive growth is observed in loans &
advances and other current assets. The increase in liabilities is offset by the increase in
total current assets. The net effect of the above changes has brought about the increased
working capital.

Statement of changes in working capital for the year 2007-2008

59
 (Figures in lacks)

2008
Particulars 2007 March March Increase Decrease
Current Assets
Inventories 1218.35 1203.24 15.11
Sundry debtors 166.27 216.8 50.53
Cash and bank bal 5621.7 7194.68 1572.98
Other current assets 184.36 314.48 130.12
Loans and advances 1061.32 1518.9 457.58
Total current assets 8252 10448.1
Current Liabilities
Liabilities 785.77 1011.53 225.76
Provision 716.37 1092.77 376.4
Total current liabilities 1502.14 2104.3
Net Increase in Working Capital 1593.94
Total 2211.21 2211.21

Source: Annual reports of RINL

Interpretation:

There is a significant increase in net working capital which amounts to 1593.94

crores. There noticeable increase in net working capital is due to increase in cash &bank
balances. The increase in cash is 15729.98 cores. A positive growth is observed in loans
& advances and other current assets. The increase in liabilities is offset by the increase in
total current assets. The net effect of the above changes has brought about the increased
working capital.

Statement of changes in working capital for the year 2008-2009

(Figures in lacks)

60
 2009
Particulars 2008 March March Increase Decrease
Current Assets
Inventories 1203.24 1761.15 558.15
Sundry debtors 216.80 93.41 123.66
Cash and bank bal 7094.68 7699.11 504.43
Other current assets 314.48 292.43 22.05
Loans and advances 1518.90 1958.49 439.59
Total current assets 10448.10 11804.59
Current Liabilities
Liabilities 1011.53 1610.15 598.62
Provision 1092.77 1581.47 488.7
Total current liabilities 2104.30 3191.62
Net Increase in Working Capital 1791.18
Total 944.02 944.02

Source: Annual reports of RINL

Interpretation:

There is a significant increase in net working capital which amounts to 1791.18

crores. There noticeable increase in net working capital is due to increase in cash &bank
balances. The increase in cash is 504.43 cores. A positive growth is observed in loans &
advances and other current assets. The increase in liabilities is offset by the increase in
total current assets. The net effect of the above changes has brought about the increased
working capital.

61
CURRENT RATIO:

Current ratios judge the firm’s ability to meet short-term obligations. These
ratios give a good insight into a firm’s ability to remain solvent in the events of
adversities. For this purpose, short-term resources are compared with short-term
obligations.

CURRENT CURRENT
YEAR CURRENT ASSETS LIABILITIES RATIO
2004-05 2726.88 1235.35 2.21
2005-06 6047.52 1424.16 4.25
2006-07 8252.00 1587.86 5.20
2007-08 10448.10 2104.30 4.97
2008-09 11804.59 1610.15 7.33

Interpretation:

62
 The current ratio for the year 2008-09 was 7.33 that is for every rupee of current
liability the firm is holding 7.33 of current asset. It shows that the firm was able to meet
its obligations.

WORKING CAPITAL TURN OVER RATIO:

Working capital turnover ratio of sales to net working capital. It is indicator of

efficiency of working capital management. Higher the ratio greater is the efficiency.

The working capital turnover ratio studies the velocity or utilization of the
working capital of the firm during a year.

Working capital turnover ratio= sales

Net working capital.

NET WORKING WORKING

CAPITAL CAPITAL TURN
YEAR SALES OVER RATIO
2004-05 5462.90 1491.33 3.66
2005-06 7359.84 4623.37 1.59
2006-07 7305.71 66641.14 1.10
2007-08 7932.66 8343.80 0.95
2008-09 9088.37 8612.97 1.06

63
Interpretation:

The ratio for the year 2008-09 was 1.06 times. Interpreting the reciprocal for the
year 2007-08 only 0.95 of net current assets are used to generate 1 rupee of sales.

64
 CASH MANAGEMENT IN RINL

Method of cash Management:

In RINL cash requirement is planned and arrived at in the following manner:

1. The Chairman cum managing director of RINL in consultation with board or directors
decided the production schedule for the following year.

2. The production schedule as approved by the directors is then circulated to all

departments, after which production target for each month is set.

3. The heads of each of 35 budgets, the directors formulate a master budget allocation for
each section.

4. After receiving all the budgets, the directors formulate master budget for the particular
year and the monthly budget allocation for each section.

5. At the end of each of month, the actual versus the projected budget is put up to the
management and directors discuss the reason for the variances. Any deficit in the cash
inflow is adjusted buy pushing the sales in the following month.

Cash Ratios:

Cash ratio is ratio of cash held by a firm to current liabilities. RINL is

maintaining almost an average cash of around 013 except for the past three accounting
periods. This is because as mentioned earlier cash holding is kept at minimum except for
some petty cash needs. The increase in cash ratio indicates the significant increase in
cash and bank balances in the total current assets.

Cash Ratio = Cash & Marketable securities

Current Liabilities

This ratio is also known as super quick ratio, it reflects only the absolute liquidity
available with the firm.

65
Year wise cash position and current liabilities

CURRENT CASH RATIO

YEAR CASH & BANK LIABILITIES
2004-05 1359.71 1116.25 1.10
2005-06 3932.60 1335.55 2.76
2006-07 5621.70 1587.86 3.54
2007-08 7194.66 2104.30 3.42
2008-09 7699.11 1610.15 4.78

66
Interpretation:

The case ratio for the year 2008-09 was 4.78 that is , for every one rupee of
current liabilities the firm is holding 4.78 cash in its current assets. That is, the firm is
able to maintain nearly 50% of cash reserves in its current assets. This could be obtained
due to increase in its turnover.

67
RECEIVABLES MANAGEMENT

Procedure of receivables management:

RINL sells its product directly to its customers. It has 27 marketing offices spread
through the country. The marketing and the finance department and top management at
the head quarter formalize the price of different products and different branches jointly.
The price list for each product in their region is circulated to all branch offices.

The sales and billing are done at the individual braches and the record of the daily
transactions is maintained. The cash deposits are done at one of the respective banks in
turn transfer the entire sum to the banks at Visakhapatnam through telegraphic transfer.

Credit policy of RINL:

The credit policy of RINL is strict in one sense and flexible in other. As RINL
has got a wide network of marketing offices numbering 27 there is always a possibility
of increased credit sales by the branch sales offices, resulting in liquidity crunch if proper
control is not maintained. Therefore, all regions and branches are given a limit for credit
sales beyond which they cannot sell on credit without prior approval of competent
authority. At any given point of time credit sales should not exceed the limit given.

At the same time branch sales offices are given the freedom to give interest
bearing credit which they can decide depending upon the level of finished goods
inventory in their stockyard and other aspects of customer.

68
Collection policy of RINL:

RINL follows two types of credit sales of its products. They are:

i) secured credit sales

ii) Unsecured credit sales

Secured sales are backed by securities which can be

a) Letter of Credit:

Letter of credit is an agreement whereby the banks opens letter of credit of its
customers in favor of suppliers and undertakes the responsibility of payment obligation
of its client.

b) Bank guarantee:

Bank guarantee to RINL is like issuance letter of credit where by the customer’s
bank gives the guarantee to RINL to undertake responsibility of payment obligation of its
credit.

Secured credit sales are primarily done with private customers. Cheque facility
extended to the customer based on the credit worthiness of the party. The average
collection period of RINL is 30 days. RINL stock holding period is 30 days. If the
Cheque is dishonored notice to the customer will be sent. In case of no satisfactory reply
from the customer RINL issues investigation notice to banker who guaranteed the
customer and the banker has to pay the money to RINL. Cheque facility for such
customers for all future sales stands cancelled.

Unsecured sales are made mostly to government agencies. There will be no

security in such cases. Credit period varies from 15-60 days. Generally, RINL cannot
compel government agencies for prompt releases of payments due unlike private parties
since they are also part of government undertakings.

69
INTEREST CHARGES FOR CREDIT SALES:

Penal interest on
violation of Credit
Type of customer Secured Unsecured period

Project customer 15% 17% 2%

Other customer 16% 18% 2%

Source: www.vizagsteel.com

Receivable turnover ratio:

Receivable turnover ratio is defied as ratio of total sales to average receivables.

This ratio indicates the number of items the management is able to convert the receivable
in to sales and it indicates the efficiency with which receivable are manage. The
receivable turn over ration of RINL for past 10 accounting years are given in the table.

Sales
Receivable Turnover Ratio =
Avg. Receivables

70
INVENTORY MANAGEMENT IS RINL

RINL is multi-product, integrated steel plant with 3.0 M.T capacities. This makes
RINL to store, handle and process of huge quantity of material. Also RINL being a
process industry running 365 days throughout the year 24 hrs a day it material. This calls
from efficient inventory management o the part of RINL. RINL holds three types of
inventory, they are:

1. Raw Materials

2. Stores, spares and scrap

3. Semi/finished goods.

Different sections carry out the procurement, storage and control of these inventories.

Raw materials:

The raw materials are produced and stored by raw materials department. The basic
principle followed by RINL in holding raw material inventory is to hold indigenous raw
material for 10 days.

Stores and spears:

The stores and spares are procured and stored by central stores department (a part of
purchase department).

The store and spares recategorized as

1. Automatic recoupment items:

2. Department specific items

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AUTOMATIC RECOUPMENT ITEMS:

A.R items are those, which are general consumables with standard specification and
required by more than one department. The main objective of stock control is to make
available vital items all time.

The AR items are classified as a class, b class and c class as per value given below.

a. annual consumption value more than rs.100,000

b. annual consumption value between rs.100,000-50,000

c. annual consumption value less than rs50,000

The stocks of these items are maintained as per their vitality, consumption frequency,
automatic indenting of the items done once the level of stock comes to recumbent level
foxed for each item.

DEPARTMENT SPECIFIC ITEMS:

User departments based on approval given by top management for level of inventory
to hold indents department specific items. The amount is fixed based on consumption of
a particular item in the previous years. These items are also stored by stored department
and are released against stores indent note issued by department.

INVENTORY CONTROL:

Inventory control is major responsibility of stores department in RINL. It adopts

following procedure for inventory control:

1. The stores department generates data periodically on the inventory status and
conducts analysis of it. The same is circulated to all departments once in a
quarter.

2. XYZ analysis of all items is carried out and circulated to all departments.
Categorization is based on values of item contributing to total value of stock.

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3. Identification of non-moving and slow moving items on regular basis and
intimating it to user departments and there by reducing the indent quantity.

4. Identification of absolute and surplus items which are of no use and disposal of
the same after receiving clearance from top management.

5. Standardization of general store material and spares and reduce the number of
items.

6. Conduct ABC analysis on consumption pattern o items and submit the same to
purchase department for regulation of supplies.

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The split of raw material, spares and stores and semi/finished goods inventory, their
percentage and total inventory are given in the table.

(Figures in lakhs)

Spares and
Semi finished Raw material stores

Total
% of % of % of Inv.
YEAR Value total Value total Value total Value

2004-05 49351.17 44.4 17557.2 15.8 44195.5 39.8 111103.8

2005-06 59689.19 49.4 19209 15.9 41849.3 34.7 120747.5

2006-07 53445.56 18.1 23442.6 21.9 34249.8 30.8 111138

2007-08 25336.44 29.54 28317.1 33.02 32101.6 37.4 85755.23

2008-09 22776 32.24 18569 26.3 29289 41.46 70634

The above table clearly shows that the contribution of spares and consumables to
total inventory is varying from 30-50%, which is very high. One of gray areas in
RINL’s management is inability to control inventory of non-moving, obsolete and
surplus items.

The main reason for such a high quantity of inventory is due to spares and
consumables indented irrationally during construction phase. One of the top priority
of RINL now is to either consume the non-moving items or dispose it at the earliest.

INVENTORY TURNOVER RATIO:

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 The ratio indicates how efficiently the firm is managing its inventory. The ratio
roughly indicates how many times per year the inventory is replaced.

The inventory turnover ration of RINL for the past 5 accounting periods is shown
in the table.

CURRENT CASH RATIO

YEAR CASH & BANK LIABILITIES
2004-2005 5462.90 781.95 6.99
2005-2006 7359.84 980.82 7.50
2006-2007 7305.71 1236.99 5.91
2007-2008 7932.66 1210.80 6.55
2008-2009 9088.37 1761.15 5.16

Inventory turnover ratio

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Interpretation:

The inventory turnover ratio for the year 2008-09 was 5.16 times. That is, the
firm is able to convert its inventory for nearly 5 times within a year.

Normally, higher the ratio indicates the better inventory management. Though the
ratio is not so high it is reasonable high. It shows that there is a rapid turning of the
inventory into receivables through sales. Hence, it is evident that the increase in the ratio
is obtained due to increase in its turnover.

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CHAPTER-5

Conclusion

Limitations

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Conclusion

78
 LIMITATIONS OF THE STUDY

1. Durations for the project study only 8 weeks, which was not Sufficient for
detail study of topic financial analysis of working capital management.
Hence time is a limiting factor.

2. There is no scope for comparison of RINL Performance with any other

organization as is the only one of its kind in country under taking
operations.

3. Some aspects of financial information were not available because of the

confidentiality of the RINL limited.

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CHAPTER-6

Suggestions

Findings

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 SUGGESTIONS

 Although, management cannot change the personal factors in job satisfaction, it

should appreciate the role of such factors and must take care to place the

employees where the personal factors of the individual will help him in achieving

job satisfaction.

 Management can use the factors inherent in the job to plan and administer jobs

more advantageously for its personnel. For example, the policy of job rotation,

job enrichment, and job enlargement may help increase job satisfaction.

 Management should also be able to recognize and appreciate the good work done

by the employees and take necessary steps to raise the occupational status of the

workers.

 Above all, while keeping in view the factors related to job satisfaction, the

management must recognize the importance of the stability of employee attitudes

that may lead to high morale and production.

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 FINDINGS

 The interest rate at which RINL is producing its working capital is about 14-15%
against a normal rate of 9-12% in 2001-02, in 2002-03 it was 12%-14%, in 2003-
04 it was 8%-9% and in 2004-05, and it was only 1.8%-3.6% because of forex
and exchange credit. Also higher profit realization by selling the produces in
higher margins will eventually result in higher cash accrual and hence higher
credit rating. Higher credit rating results in reduction in interest rates. Hence the
company should either try to enhance the production facilities or better
investment opportunities other than fixed

 The non moving inventory is one of the gray areas in RINL’s working capital
management. They account for 1/3 rd of value total inventory. This is really a
critical area where RINL’s management should focus to bring down the level of
non moving inventory. RINL has to identity areas for using inventory to dispose
it. Also identification of such items will help in preventing procurement of such
items on future.

 The other main area where RINL has tremendous scope for improvement is in
manufacturing value an added product. This will result in better sales realization
and higher profit.

 The export sales of RINL are only 30% of total sales during 2006-07. present
scenario of steel industry indicates the need for more steel even with the cause of
lower production facilities. The company should now give more importance to
exports because it provides good net sales realization but also export benefits.

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REFERENCES

83
84
 REFERENCES

Financial management I. M. pandey

Financial management Prasanna Chandra

Financial management My Khan

Working capital Management I.M. pandey

Financial Management R.K. Sharma & S.K. Gupta

Financial Management R.P. Rustagi

Annual Reports Of RINL

General Articles And Magazines Of RINL

Website: www.vizagsteel.com, www.indianinfoline.com,

www.jpcsteelonline.com,
www.cii.com.

BOOKS: Survey of Indian industry-the Hindu

Newspapers: Deccan Chronicle, The Hindu.

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