Chapter I INTRODUCTION

INTRODUCTION
In an agriculture intensive country like India, the significance of fertilizers is high. Equally evident is the complexity involved in manufacturing fertilizers. Fertilizer has played a very important role in the growth of Indian agriculture. Fertilizer is substance that is added to soil for stimulating plants growth from thousands of years. Farmers use various kinds of natural fertilizers to produce abundant crops. India is the third largest producer of chemical fertilizers in the world and also accounts for about 12% of world fertilizer consumption. The country produces several straight nitrogenous fertilizers such as urea, ammonium sulpahate, calcium, phosphate and several NPK completes urea and DAP are the main fertilizers produced in India. Nagarjuna fertilizers, coromandel fertilizers and FACT are some of the fertilizer companies in India. Making fertilizers in India is not easy. The Fertilizers and chemicals Travancore Ltd is the first large scale fertilizer unit in India. It was set up in 1943 , on the banks of Periyar at Udyoganmandal near Cochin Port. FACT was set up as a public limited join stock company, under shesharyee Brothers Management . FACT became a Kerala state public sector Enterprises on 1st August 1960 and on 21st November 1962 the Govt. Of India became major shareholder. The company started its commercial production in 1947 with single Ammonium sulpahae plant .

1.1

OBJECTIVES OF THE STUDY

1. To analyse the structure and growth of working capital of the FACT for the period of 2006-07 to 2010-11. 2. To analyse and evaluate the working capital position. 3. To ascertain the profitability of the firm 4. To ascertain the duration of operation cycle of the company 5. To analyse the effectiveness of the FACT in managing the different elements of working capital viz cash, receivables& inventory.
2

6. To analyse to major source of funds and their application in financing the working capital requirements of the firm . 7. To assess the liquidity of the firm. 8. To find out whether the company maintains satisfactory level of working capital or not . 9. To appraise financial position of the company through ratios.

1.2

SCOPE OF THE STUDY

The scope of the study is to understand the working capital position of FACT Ltd Eloor Udyogamandal division. The study may help the company to improve the working capital position of the company. The study of working capital and related ratios like current ratio, liquidity ratio etc will help to know the working capital position. Many crucial decisions have to take by the company in order to withstand and to improve in this competitive world. Therefore the analysis of working capital management may help to take decisions at the right time which will lead to the success of the organization.

1.4

NEED OF THE STUDY

The project work is conducted in Fertilizers and Chemicals Travancore Ltd and is mainly focused on the working capital management and profitability during the last 5 financial years (2006-2011) A study on working capital is important to internal & external analysis because of its close relationship with the day to day operations of a business. Here the study to analyse the working capital position of FACT, the approach use to finance its working capital ,its management of current assets and the components of current assets. Profit is the engine that drives the business enterprise. A business needs profit not only for its existence but also for expansion ad diversification. Therefore, the organization has to attain maximum economic efficiency. It is necessary to earn sufficient profits in order to produce funds from investors to expansion and growth. The management strives to achieve maximum operating efficiency and increase
3

return to investors. The management has to increase the confidence of creditors as well as financial institution whom extent financial assistance to the company. These entire objectives are achieved by measuring the profits earned and available dispersal and adopting new measures to increase profits.

1.5

COMPANY PROFILE

FACT, Indias first large scale fertilizer units was set up in 1943 , on the bank of river periyar at Udyogamandal . FACT was the first scale fertilizer factory in the country. It started its working in 1944 as a public limited joint stock company under the management of M/S Seshasayee Brothers. The company is under the administrative control of the department of fertilizers and ministry of chemicals and fertilizer. In 1947 FACT Udyogamandal started production of Ammonium Sulphate with an installed capacity of 10,000MT Nitrogen. FACT becomes Kerala state Public sector enterprises ion 15* August 1960 and 21 st November 1962 the Government of India becomes the major shareholder. The second stage of expansion of FACT was completed in 1962 . The 3rd stage expansion of FACT was completed in 1965 with setting up of a new Ammonium Sulphate plant. FACT Engineering and Design organization was et up on 24th July 1965 to meet the emerging need for indigenous capabilities in Intel area of Engineering Design and consultancy for establishing large and modern fertilizer plants . FEDO has since then diversified in to chemicals, Petrochemicals, Hydrometallurgy,Pharmaceuticals and other areas. FEDO offers services from project identification and evaluation stage to plant design, procurement, project management, site supervision and commissioning of new plant was well as revamping and modernization of old plants. FACT engineering works was established on 13th April 1996 as a unit: o fabricate and install equipments for fertilizer plants. Over the years few developed capabilities in the fabrication of pressure vessels and heat exchangers. FEW have also undertake lying of cross country piping, fabrication and installation of large Denstocks of hydro projects .

The Cochin Division of FACT, the 2nd production unit was set up at Ambalamedu and the 1st phase was commissioned in 1973 . The 2 nd phase of FACT Cochin Division was commissioned in 1976. As diversification plants from the traditional field of fertilizers and chemicals, 50000 TPA Caprolactam plant at Udyogamandal was commissioned in 1990. FACT set up 900 TPD Ammonium plant at Udyogamandal at a cost of 638 crore follwing an order of the High Court of Kerala in February 1994 for the public interest litigation, to decommission the existing imported Ammonia storage and handling facility at Wellington Island 9Xohin Port). The Ammonium plant was commissioned in 1998. The companys main business is manufacturing and marketing of (a) fertilizer (b) Caprolactam and Engineering consultancy and fabrication of equipment. VISION OF THE COMPANY With a decade FACT will emerge as a leader in the business of agricultural inputs, industrial intermediaries and engineering consultancy and construction of industrial infrastructure facilities The above vision would mean the following things to the company. It wills begins its financial health in the shortest possible time and strive to improve shareholder value . It will attract capital managerial trends through suitable modification to its financial organization and leadership structure. It will become an effective and competitive manufacturer and distributor of products and services with high emphasis on information technology. It will collaborate with the local industry and also globally. It will design and develop technology to manufacture and distribute new products and services to satisfy customer requirements in the above area or business. It shall faster sustainable development through clean and environment friendly technology process and be responsible corporate citizen. MISSION OF THE COMPANY FACTs mission is to function as a dependable and competitive producer of fertilizer and other allied products and to develop self reliance in the field of
5

engineering and technology especially in the field of fertilizers, chemicals and petrochemicals, oil and gas industries. The above vision would mean: FACT aims to provide best products and services. Globally competitive supplier means the products and services offered by FACT will match with the quality and price offered by competing international firms. Maximum shareholder value would mean that the company would operate profitability and generate enough resources for growth. To sustain such growth the company would identify profitable opportunities and diversify. MILESTONES 22.9.43 26.647 1959-60 15.8.60 21.11.62 1962 24.7.65 incorporation Production started U.D-1st stage expansion completed. FACT came under public sector Government of India Major shareholder. U.D 2nd stage expansion completed FACT Engineering and Design organization Started FACT Engineering Works C.D. phase 1 License Issued U.D.3rd stage ammonia plant U.D 4th stage ammonia plant U.D4th stage150T.P.D ammonium, phosphate. C.D-1st urea plant commissioned C.D-11-Sulphuric acid plant commissioned Phosphoric acid plant commissioned C.D. NPK commer5cial production started. P.D Caprolactum, technical collaboration agreement P.D. caprolactum license issued
6

13.4.66 7.6.66 15.10.66 1.10.71 1.10.73 27.4.73 10.11.76 10-12-76 1.4.79 18.5.84

6.8.85

 13.12.89 20-12-90 1.3.91 1.3.91 25.9.93 22.3.98 Objectives of the FACT

FEW shifted To Pallurthy C.D- 12 M.W captive power plant P.D. caprolactum commercial production Started U.D. ammonium sulphate commercial production started Foundations tone -900 T.P.D ammonia plant 900 T.P.D. ammonia plant commercial

1. To maintain optimum levels of efficiency and productivity in all activities 2. To generate a reasonable rate of return on investment 3. To continuously improve the plant and operational safety to achieve statutory pollution control standards. 4. To carry out R&D activities for recovery of useful material and products and improve the efficiency of fertilizers and chemicals. 5. To make reduction in cost and technology up gradation in order to compete with the rivals and to stay in the business. 6. To invest in new business lines where profit can be made ion a sustainable basis over the long term. 7. To take care the community around SOME SPECIAL FEACTURES OF FACT FACT is one of the largest fertilizer companies using sophisticated process technology . It manufactures Caprolactam, a versatile petrochemical Specialists in engineering design and project consultancy Undertaken fabrication works for process and infrastructure industry. Award winning Research ad Development centre with a number of patents to its credit, A state of art IT centres. Nucleus for training managers of today and tomorrow. The mother unit of fertilizer industry in India .

FUTURE PLANS Increasing the sales by reducing the cost. Reduce cost of production Increasing the quality of export by maintaining the good quality. Reducing the promotional cost Expansion of business from south India FACT, Egypt and Syria project Marketing of Organic Fertilizer . Fact intends to setup container freight station at Udyogamandal in association with Container Corporation of India Ltd & Central warehousing corporation. New Urea plant OUT LOOK FOR THE FUTURE On completion of all these projects & implementation of the vision plan for the next 5 years, FACT will become profitable on a substantial basis. The profitability will increase substantially after FACT is able to switch over from Naphtha to LNG as Feed stock . FACT expects to achieve a 100% increase in its present turnover & profit during the next 5 years.

FACT DIVISIONS The major divisions of FACT are:1. UDYOGAMANDAL DIVISION The Udyogamandal Division of FACT can be the mother unit of the entire commissioning of a 50,000 tonnes per annum. Ammonium Sulphate plant in 1947. The oldest division of FACT has undergone several stages of expansion and diversification giving up old and obsolete teaching and installing new and sophisticated plants making use of Naphtha as raw material, Today the Udyogamandal Division has an installed capacity of 76050 tonnes of P2054. Ammonium Sulphate liquor obtained as a by products from the Caprolactam plant of the petrochemical division is converted in to a useful fertilizer product in a new Ammonium Sulphate plant of 225000TAP capacities, put up in October 1990 at cost of Rs. 35 crore. In the decades that followed multistage expansion programmes were undertaken bringing in the latest technology of the day, which were quickly
8

mastered, and successfully implemented. Today , the division is 35 year old small capacity plants and 2 year old state of the technology plants . The latest addition to this unit is a 900TPD Ammonium Complex setup with an investment of Rs. 642 crore. FACT Udyogamandal Division is ISO 14001 certified. 2. COCHIN DIVISION FACT Cochin Division was set up in the 1970s at Ambalamedu, 30 Km from udyogamandal and adjacent to the Cochin Refineries . Phase 1 of the division saw the setting up of integrated Ammonia, Urea Complex utilizing Indian Engineering skills. A large scale complex fertilizer plant of 485 TPA was setup on phase 2 of Cochin Division and Sulphuric Acid and Phosphoric of making plant capacity.

1.6

INDUSTRY PROFILE

Fertilizer and Fertilizer industry Fertilizer is generally defined as Any material, organic or inorganic natural and synthetic big supplies one or more of the chemical element required fir plant growth. The essential elements required for the plant growth consists of both primary as well as secondary nutrients. These are required in micro as well as macro quantities . Carbon , Oxygen and hydrogen plant are supplied by air and water there is not treated as nutrients by fertilizer industry. Primary nutrients are normally supplied through chemical fertilizers. They are chemical components containing one or more of the primary nutrients sand are important ingredients for the plant growth . Nitrogen, Phosphorus and Potassium which constitute primary nutrients are expressed as percentage of total Nitrogen (N) available phosphate (P205) and soluble (K20).

International Scenario:The use of manure and compost is probably as old as agriculture itself and many other materials such as ground bonds, wood ash from burning the fallen trees, were the employer long before the chemistry of soil. The disappearance frontiers companied with the improvements in the technology of the fertilizer manufacture ad here transportation led to a growing role fertilizer for producing the need food and fiber.
9

Worlds leading fertilizer producers are Russia an US,. Other leading producer includes China, Canada, France and India. The Fertilizer industry in US is organized in to separate segment for producing and making Nitrogen, Phosphate or Potash, intermediates and products. Around 95% of the fertilizer produced in the world is used by farm crops. Industry in the European Union is governed by wide number of manufacturing regulations. A regulation pertaining to the fertilizer industry covers health and safety of employees and general public conditions for safe storage and transportation of manufactured fertilizer natural and intermediates limits on to the mission of atmosphere and water limits on noise level and treatment and disposal of waste products resulting form the production of fertilizer intermediates. All fertilizer manufactures in the European Union strive to minimize the environmental impact of their manufacturing processes both by improving the efficiency of these processes and by reducing wastages.

National Scenario:Indian economy is an agrarian economy. Agriculture is the back bone of the Indian economy. India is the 31 largest producer as well as consumer of fertilizer in the world with population growing at a faster rate food production was given highest priority in India since 1990s . Fertilizers play an important role in agriculture development for ensuring food security of humble beginning in 1906 , when the first manufacturing units of single space phosphate were set up in Ranipet near Chennai with an annual capacity of 6000MT. Fertilizer and chemical industry in India is undergone major transformation . This industry is gradually being decontrolled. Pricing is also being replaced by market determined pricing . The FACT at cochin in Kerala and FCI (Fertilizer corporation of India) in Sindri, Bihar where the first large sized fertilizer plants set up in the forties and fifties with a view to establish an industrial base to achieve self sufficiency in food grains subsequently, Green Revolution in last sixties gave an impetus growth of fertilizer industry in India. The seventies and eighties witnessed a significant addition to the fertilizer production capacity. The rapid building up of fertilizer production capacity in the country has been achieved as a result of a factorable policy environment facilitating
10

large investment in the public cooperative and private sector. Presently there are 57 large sized fertilizer plants in the country manufacturing a wide range of Nitrogenous phosphate and complex fertilizers. 13 plants manufactured Ammonium sulphate, Calcium Ammonium, Nitrate and other low analysis nitrogenous fertilizers. . Besides there are about 64 medium and small scale units in operation producing single space phosphate the fertilizer in India consists of three major players. The Government owned public sectors, the fertilizer industry has IFFCO, KRIBHCO and units from private sectors. The fertilizer industry has organized itself through FAI (Fertilizer Association of India) to co-operative with government of India to achieve the macro economic objectives relate to agricultural sector and to provide other services. Fertilizer industry in India is almost solely dependent on imported raw materials like phosphoric acid for the production of Phosphate and complex fertilizers . The over dependence and high volatility of prices of feed stock are the major issues controlling the industry. State scenario:Kerala has high degree of land use and cropping intensity. The states agricultural productivity is decreasing year to year. The production and cultivation of rice is decreasing and the farmers are attended to commercial crops like rubber and coconut. Due to the decreasing cultivation of rice the consumption of hit rate and potash has come down. The per hector consumption of fertilizer in India. The position of Kerala is one of the low ranking states. In Kerala FACT has sold total volume of 2333373 MT against target tons of FACTAMFOS was sold during the year achieving 70 percentage of target. To gain market share FACT is planning to increase its marketing programmes in several areas of Kerala state. The main competitors of FACT are SPIC and Madras fertilizers Ltd.

11

1.7

PRODUCT PROFILE

FACT manufactures straight fertilizers , complex fertilizers, fertilizer mixtures, and chemicals . Finished Products Ammonium Sulphate - Udyogamandal Division Ammonium phosphate /Complex fertilizers/ Factamfos - Udyogamandal Division &Cochin Division Caprolactam - Petrochemical Division Bio- fertilizers- research & Developmentment Division Exported Products Carolactam - Petrochemical Division Ammonium Sulphate - Udyogamandal Division By Products Nitric Acid and Soda Ash- Petrochemical Division Gypsum- Udyogamandal Division and Cochin Division Carbon Dioxide Gas- Udyogamandal Division Intermediary Products Ammonia Udyogamandal Division Synthesis Gas Udyogamandal Division Sulphuric Acid Udyogamandal and Cochin Division Oleum Udyogamandal Division Phosphoric acid Udyogamandal Division SO2 gas Udyogamandal and Cochin Division PRODUCT MIX Straight Fertilizers Ammonium Sulphate- containing 20.6%N in Ammonial form and 24% Sulphur , an important secondary nutrient.
12

 Ultraphos-FACT markets imported rock phosphate containing 32% P205 under brand name Ultraphos. This high analysis fertilizer is found suitable for the application especially in coconut/rubber/oilpalm etc. Complex Fertilizers Factomfos 20:20:20:15-NPKcomplex fertilizer It contains 20 % N in Ammmonial form 20% P in water soluble form and 15% Sulphur , a secondary plant nutrient which is now attaining great importance in agriculture.

NPK Mixtures NPK Mixtures- FACT prepares crop specific standard mixture for all crops in Kerala and also special mixtures for plantations plantation crops like tea , coffee , cardamom , rubber etc. Rose Mixture A fertilizer tonic for roses Vegetable mixture A special blend prepared special for vegetables. Garden mixture-A special nutrient combination for both flowering and foliage ornamental plants. Chemicals Anhydrous Ammonia-FACT produces Ammonia of over 99.96% purity. Sulphuric Acid FACT has one of the largest plant in Asia and manufacture Sulphate acid for 98% purity. Caprolactum - It is the raw material for Nylon-6.This caprolatum produced in the FACT is the best in the world. Nitric Acid and Soda Ash-Small qualities of these are obtained from caprolactum plant byproduct.

13

Chapter II REVIEW OF LITERATURE

14

CHAPTER - II 2. REVIEW OF LITERATURE Dr. Anupam Jain (1988)1, in a study on, Effect of working capital management on profitability of firms- A study on the Indian oil drilling & exploration industry. Efficient management of working capital is one of the pre-conditions for the success of an enterprise.Efficient management of working capital means management of various components of working capital in such a way that an adequate amount of working capital is maintained for smooth running of a firm. An optimal working capital management is expected to contribute positively to the creation firm value. To reach optimal working capital management firm manager should control the tradeoff between profitability and liquidity accurately. The purpose of this study toinvestigate the relationship between working capital management and firms profitability. M.A., Zariyawatia, M.N., Annuar A.S.,(1992) , in the study is Effect of working capital management on profitability of firms in Malaysia to University Putra Malaysia,Malaysia. Working capital management is important part in firm financial management decision. An optimal working capital management is excepted to contribute positively to the creation of firm value. To reach optimal working capital management firm manager should control the tradeoff between profitability and liquidity accurately. The purpose of this study is to investigate the relationship between working capital management of firm profitability. Cash conversion cycle is used as measure of working capital management. This study is used data of 1628 firm year for the period of 1996-2006 that consist of six different conomic sectors which are listed in bursa Malaysia. The coefficient results of poolled OLS regression analysis provide a strong negative significant relationship between cash conversion cycle and firm profitability. This reveals that reducing cash conversion period results to profitability increase. Thus, in purpose to create shareholder value, firm manager should concern on shorten of cash conversion cycle till accomplish optimal level. 1) Dr. Anupam Jain (1988), Effect of working capital management on profitability of firms- A study on the Indian oil drilling & exploration industry. Volume 1; Page No 55-61
15

2) M.A., Zariyawatia, M.N., Annuar A.S (1992) Effect of working capital management on profitability of firms in Malaysia to University Putra Malaysia, Malaysia. Volume 3; Pages No 132-142

Myers.S., & Allen. F. (1997)3 in a study on Determinants of profitability underlining the working capital management and cost structure of Sri Lankan companies. Efficient working management is an integral part of the overall corporate strategy create shareholder value. Researchers investigated the relation between the companies working capital. This relationship is examined using correlation and regression analysis. In this research, researchers have selected a sample of 65 Sri Lankan companies listed on Colombo Stock Exchange for a period of 5 years from 2003-2007, researchers have studied the effect of different variables of working capital management and cost structure on the profitability of Sri Lankan companies including the debtors turn over in days. Inventory turnover in days and working capital cycle representing the working capital and administrative selling and finance expenses repressing the cost structure. Brealey, R., (1997)4 in a study on, Working Capital management concepts worksheet university of phoenix. Concept application of concept in the Simulation reference to concept in reading cash conversion cycle cash conversions is the process of managing a companys cash inflows and outflows. In the simulation, the finance manager was responsible for balancing sales with collections or accounts receivables (cash inflows) and purchases with payments or accounts payables (cash outflows). This delicate balance maintains the companys balance sheet keeping the cash and loans in a situation of financial stability and keeping the money from being tied up. Principles of corporate finance. Working capital management. NewYork: McGraw-Hill.Abdul Rahim (1999)5 in a study on, Relationship between the efficiency of workingcapital management and company size. The General Electric (GE), the creative company isnow bringing light to healthcare finance. Recent surveys of healthcare Chief Financial Officers (CFOS) revealed that an overwhelming majority feel that the management of working capital
16

has become increasingly more and more difficult and the difficulty facilities and increasing capital spending on a yearly basis. 3) Myers.S., & Allen. F. (1997) Determinants of profitability underlining the working capital management and cost structure of Sri Lankan companies Volume 3; Pages No 132-135 4) Brealey, R., (1997) Working capital management Working Capital management concepts work sheet university of phoenix. Volume 1; Pages No 123-128 5) Abdul Rahim (1999) Relationship between the efficiency of working capital management and company size. Volume 1; Issue 1 ; Pages No 115-119 Kouma Guy, (2001)6 in a study on, Working capital management in healthcare, Working capital is the required to finance the day to day operations of an organization. Working capital may be require to bridge the gap between buying of stocked items to eventual payment s for goods sold on account. Working capital also has to fund the gap when products are on hand but being held in stock. Products in stock are at full cost, effectively they are company cash resources which are out of circulation therefore additional working capital is required to meet this gap which can only be reclaimed when the stocks are sold (and only if these stocks are not replaced) and payment for them is received. Working capital requirements have to do with profitability and much more to do with cash flow. Mehmet SEN, Eda ORUC (2005)7 in the study Relationship between the efficiency of working capital management and company size, As it is known, one of the reasons which cause change in working capital from one period to another is the change in management efficiency. The change in management efficiency will affect the change in working capital in a way as increaser or reducer from on period to another. In this study, the effect of change in management efficiency in working capital management in to the chane in working capital is compared by company size and sectors. The data of this study covers sixty periods as the total of quarterly financial statement of 55 manufacturing companies which were in operation in Istanbul Stock exchange (ISE) between the years 1993 and
17

2007. In every period we studied, for inventories short term commercial receivables and short term commercial liabilities, and calculated the effect of change in management efficiency on to the effect of working capital change. In all sectors considered, in the change in working capital, and observed the effect of reducing of efficiency in inventory management. It is also observed that efficiency change in the management of the short term commercial receivables and the short term commercial liabilities by the company sizes and sectors make a positive effect in to the change in working capital. 6) Kouma Guy, (2001)Working capital management in healthcare www.@akdesniz.edu.tr Volume 5; page No 76-89 7) Mehmet SEN, Eda ORUC (2005) Relationship between the efficiency of working capital management and company size, www.@akdesniz.edu.tr Volume 2; Pages No 32-42 Deniz KOKSAl, (2005)8 in a study on Research Journal of Business Management.Working capital Management and corporate profitability: Evidence from panel data analysis of selected quoted companies in Nigeria. The study aimed to provide empirical evidence about the effects of working capital management on profitability performance for a panel made up of a sample of Nigerian quoted nonfinancial firms for the period 1996-2005. The study utilized panel data econometrics in a pooled regression, where time-series and cross sectional observations were combined and estimated. The study found a significant negative relationship between net operating profitability and the average collection period, inventory turnover in days.Average payment period and cash conversion cycle for a sample of fifty Nigerian firms listed on the Nigerian stock exchange. Furthermore, the study found no significant variations in the effects of working capital management between large and small firms. These results suggest that managers can create value for their shareholders if the firms manage their working capital in more efficient ways by reducing the number of days accounts receivable and inventories to a reasonable minimum. David N Jose (2007)9 in a study on The international Journal of Applied Economics and Finance The effect of working capital Management on firm
18

profitability : Evidence from Turkey. The aim of this study is to analyze the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationships between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul stock exchange (ISE) listed manufacturing firms for the period of 1998-2007 has been analysed under a multiple regression model. Empirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively; while growth (in sales) affects firm profitability positively. 8) Deniz KOKSAl, (2005)Research Journal of Business Management. Volume 1; Pages No 232-242 9) David N Jose (2007) The international Journal of Applied Economics and Finance Volume 3; Pages No 325-335

19

CHAPTER III RESEARCH METHODOLOGY

20

RESEARCH METHODOLOGY The study is undertaken to analyse the working capital management and profitability of the FACT Ltd, undyoghamandal, Eloor, Cochin, Kerala. TYPE OF RESEARCH The researcher has adopted analytical research in the present day. Analytical research is to use facts or information already available, and analyze these to make a critical evaluation of the problem. SOURCES OF DATA Both primary and secondary data were used for the study Primary data collected through discussion and interview with the officials of finance department. Secondary data was collected from the annual reports of the company books and periodicals and other literature relevant for the study Website of FACT

Tools used for the study The tools used here can be classified as :1. Financial accounting Tools- Ratio Analysis 2. Mathematical of statistical Tools - Trend Analysis , Percentage Analysis 1. RATIO ANALYSIS: Analysis and interpretation of financial statements with the help of ratios is termed as ratio analysis. Ratio is a mathematical relationship between two items. 1) CURRENT RATIO Current Raito = Current Assets Current Liabilities
21

This ratio measures the solvency of the company in the short-term. Current assets are those assets, which can be converted into cash within a year. Current liabilities and provisions are those liabilities that are payable within a year A current ratio of 2: 1 indicates a highly solvent position expressed in a quantitative form. It is a process of computing determining and presenting the relationship of items. It helps in measuring the profitability, solvency and activity of a firm. 2) QUICK RATIO Quick Raito = Current Assets -Inventory Current Liabilities Quick ratio is used as a measure of the companys ability to meet its current obligations. Since bank overdraft is secured by the inventories, the other current assets must be sufficient to meet other current liabilities. A quick ratio of 1:1 indicates highly solvent position. This ratio is also called the acid test ratio. This ratio serves as a supplement to the current ratio in analyzing liquidity 3) DEBTORS TURNOVER RATIO Debtors Turnover Ratio = Net Sales Average Cash Balance Debtors turnover ratio shows how quickly receivable are converted into cash. In other words the debtors turnover ratio is test of the liquidity of the debtors. Turnover ratio indicates the number of time the debtors turnover each year. 4) CASH TURNOVER RATIO Turnover of cash = Net Sales Average Cash Balance It shows the number of times the average cash balance of a firm turned over during the year. The higher the turnover, the less the cash balance required for any given level of sales.

22

5) FIXED ASSET RATIO Fixed Asset Raito = Fixed Assets Long Term Funds This ratio an indicator and a measure of the amount of capital, which is invested in assets of theorganization. Ratio more than 1 indicates that fixed assets are purchased either with both equity and short-term funds or with any one of the mode of financing. Here, the ratio is slightly more than 1 which indicates the pumping of funds from any of the sources as mentioned above. 6) INVENTORY TURNOVER RATIO Turnover of cash = Net Sales Average Inventory It shows the number of times the average cash for inventory is turned over during the year. The higher the turnover, the less the cash balance required for any given level of sales. 7) PROPPRIETARY RATIO Proprietary Ratio = Shareholders Funds Fixed Asset Proprietary ratio refers to relationship between shareholder fund and fixed assets. It is also known as owner fund ratio or net worth to fixed assets ratio. 8) CURRENT ASSET TURNOVER RATIO Current Asset Turnover Ratio = Net Sales Current Assets The current asset turnover ratio is calculated by dividing sales by current assets. A firm ability to produce large volume of sales for a given amount of current assets is the most important aspects of its performance. 9) DEBT- EQUITY RATIO Debt-Equity Ratio = Long term debt
23

Shareholders Funds A high ratio means less protection for creditors. A low ratio, on the other hand, indicates a wider safety cushion. 10) WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio =

Net Sales Average Cash Balance Working capital turnover ratio indicates the velocity of the utilization of networking capital. This indicates the number of times the working capital is turned over in the course of a year. Representation of data Tables Bar chart Line chart Pie chart LIMITATIONS OF THE STUDY 1. The analysis of working capital and profitability study are based on the published annual report of the company. 2. The study is restricted to a period of 5 years. 3. Ratio analysis itself has its own limitations, hence the study may be affected by this. 4. The data is mostly secondary in nature. 5. In the absence of sufficient data personnel judgment have been taken on reasonable assumption 6. The limitation of the study is time constraint as the time given for the study was 3 month it was not possible to make an extensive study. PERIOD OF THE STUDY The period considered for the purpose of the study on FACT is for 5 years i.e from 2006-07 to 2010-2011.

24

ORGANISATION STRUCTURE
ORGANIZATION CHART INCDICATING REPORTING RELATIONSHIP BOARD OF DIRECTORS

CMD

CVO

DIR (TECH)

DIR (FIN)

DIR (MAR)

GM CD

GM UC

GM (Per) GM(IA)

GM (CF)

CGR/ED (MAR)

DGM CD

DGM Financing DGM legal DGM Cor mat DGM FEW DGM FEW

DGM Costing

DGM A/C

CM (UD)
Tech ser Safety & Fire Duality assurance stores projects

CM (PD)

DGM (Adm &co.sec)

Production Tech services safety & fire Quality assurance Maintaince R&D Projects

Per .Est. Ind.rel Pub.rel M.D.C Welfare

Sales Distribution Agronomy Area manager Prom. Ser.

25

FINANCE DEPARTMENT
Finance is considered to be the lifeblood of every organization. Managing finance is very important the success of every organization. The functions within the finance department are diverse with distinct procedures for accounts related to personnel;, purchase, costing, budgets, tax and duties , audit, general a/c, bank and payroll, bills and so on. Accounting Procedure In a multi unit organization , it is necessary to lay down uniform classification in the financial accounts to be followed by all the units . A 9- digit code number is used to record all transitions, First 4 digits indicates the general account, last 5 digits indicates the sub ledger accounts. Main functions of the Finance Department 1. 2. 3. 4. 5. 6. 7. 8. Preparation of final accounts Preparation of bank advice statement Budget preparation Payroll system {reparation of monthly journal, ledger and trial balance Calculation of attendance bonus Auditing Preparation of cost sheet etc.

General Accounting section 1. Maintenance of registers for fixed assets, giving details of depreciation and Classification of asset etc 2. Ledger scrutiny 3. Inter unit reconciliation for inter unit transactions Cash and Bank Accounts Section 1. Receipt of cash, cheques, bank drafts, and postal orders 2. Payment of cash, cheques, bank drafts, and letters of authority 3. Handling of bam deposits/withdrawals, custody of cash and interunit
26

4. 5. 6. 7. 8. 9.

Transfer of funds Maintenance of petty cash books and cash book Reconciliation of bank accounts Security arrangement of cash handling Safe custody of valuable documents Cash interests Any other duties assigned buy authorized officer.

Payroll Section Functions 1. Preatation and disbursement of salaries and wages to managerial and nonmanagerial employees 2. Effects various recoveries through payroll and remit the same to concerned Agencies 3. Processing of various personal payments, advances etc 4. Keeps books of a/c for the above transactions Budget Section Budget preparation- every year two separate budgets are prepared 1) Capital Budget 2) Revenue Budget Both the budget is usually prepared during September /October every year. Two types of estimates are prepared for both the budget i.e., the revise Estimate (RE) and Budget Estimate (BE) . RE is the revised budget for the current year and BE is the budget for the next year . Corporate Plan Corporate plan is prepared by taking estimates and future projection for 5 years. The corporate plan is revised every year by deleting one year in the beginning and one year in the end, keeping total budget period as 5 years, This plan projects the companys position for the next 5 years.

27

Capital Budget The capital Budget shows all the items of capital expenditure to be undertaken during the budget period Revenue Budget Control of revenue expenditure is achieved through the revenue budget for the next financial year and revisions of revenue budget for the current year are taken up together.

Bills Section Bill section deals with the contract accounts for execution of civil works and other works for construction/ erection/maintenance /service . It Includes :1. 2. 3. 4. 5. 6. 7. Sale of tender form Remittance of EMD Remittance of security deposit Issue of materials o to the extractors. Receipts to certified bill in the specified format Security of running a/c bills and final bill Statutory procedures and formalities in works contract.

Foreign Currency management Committee formed to look and take designs on a periodic basis relating to the foreign currency. The committee has been constituted with chief of internal audit as chairman and members being the chief of finance, heads of cochin division, petrochemical division and head office . Stores Accounts Section The section shall maintain quantity and valuable accounts of receipts issues and balances of stores in hand; reconcile the numerical balance held by the stores department with the value account .
28

Insurance Schemes 1. Fire Insurance 2. Machine break down insurance 3. Electronics equipment insurance 4. Fidelity insurance and cash in transit/cash at sage/payroll insurance 5. Insurance for vehicles and heavy equipments 6. Open transit risk insurance for all inland and all foreign purchases 7. Loss on profit insurance 8. personal accident insurance 9. Storage -cum-erection insurance 10.Insurance for stock of finished goods, raw materials, & industrial products Cost Accounts Section Cost Center Cost records in production divisions are maintained on the basis of cost centers. A cost center is a location or an equipment or group of both together for which cost can be ascertained separately. An expenditure which is incurred exclusively for a cost centre and can be identified as relating to a specific cost centre will be location or identification to a cost centre is not possible , such expenditure will be apportioned to different cost centers on an accepted or pre determined basis . Cost of Production The process cost system is followed in the production divisions for finding out the cost of production of various products and services . Cost sheet is prepared in two ways. The items in the cost sheet are complied on the baswis of elements of the products, Cost sheet of all the products are prepared both in process wise and elements wise . Compilation of annual accounts; 1. P&L Account 2. Balance sheet

29

Published accounts of the company includes 1. 2. 3. 4. 5. P&L a/c and P&L appropriation a/c Balance sheet Auditors report Board of directors report Information required as per stock exchange requirements

Estimation of Working capital needs in FACT The working capital requirement is essential for any iron to meet its day to day requirements. Working capital may be specified as the firms current assets over current liabilities . As a large scale company,. FACT also requires a sufficient working capital to meet its daily requirements. FACT uses letter of credit and bank guarantee mainly for the purpose of financing the import of rasw material. If it has to avail more than the assigned quota the finance department will have to take permission of Board of Directors. FACT approaches different banks to meet its working capital requirement and FACT maintain a consortium of banks for the same, they are: Cash management techniques in FACT Cash management techniques have done through the preparation of cash budget. It is routinely prepared in FACT and it helps in : Estimating cash requirements Planning short term financing Scheduling payments in connection with capital expenditure Planning purchase of material Planning credit policy

30

STRUCTURE OF FINANCE DEPARTMENT DIRECTOR FINANCE

DGM I.A

DGM (F) COSTIN G

DGM (F) BANKING PAYROL

DGM FINANCE

DGM FINANCE &A/C

DY.CM

DY.CM (IA)

DY.CM BANKING

DY. CM GEN

CM(F) SALES

CM(F) BILLS

DY.CM SALES DY.CM COSTI NG DY.CM TAX

AM BANKI NG AM. PAYRO LL

DY.CM BILLS

DY. FINANC E

AM COS

AM FINAN CE

Am GEM A/C AM sales

AM BAN K

AM TAX

AM INS
AM RM

CO LL AM BILL AM FIN

31

ANALYSIS AND INTERPRATATION OF THE STUDY WORKING CAPITAL MANANGEMENT Gross working capital is the firms investment in current assets Table 5.1 Structure of Gross working capital in FACT
Particulars Inventories Sundry Debtors Cash & Balance Other Assets 2006-07 34615.62 19233.92 2007-08 31844.48 7585.22 6746.39 2008-09 41260.03 27137.12 2242.06 2009-10 57584.37 50978.94 2818.28 2010-11 61374.75 61229.91 5525.69

Bank 7781.95

Current 730.39

501.98

1071.17

1138.18

956.51

Loans & Advances 9668.21 Total Current 72030.09 Assets (A)

11068.34 57746.41

10642.31 82352.69

15574.87 128094.6

18156.42 147243.28

Source : Complied from annual report Interpretation The above table shows the structure of gross working capital. It is evident from the table that the total current assets are dominated by inventories during the period of study. Next to inventories sundry debtors occupies an important position in the working capital composition.

32

NET WORKING CAPITAL OF FACT Net working capital =Current asset-Current liability Tables 5.2 Statement showing Net working capital
Particulars Inventories Sundry Debtors Cash & Bank Balance Other Current Assets Loans & Advances 2006-07 34615.62 19233.92 7781.95 730.39 9668.21 2007-08 31844.48 7585.22 6746.39 501.98 11068.34 57746.41 25414.43 3596.65 29011.08 2008-09 41260.03 27137.12 2242.06 1071.17 10642.31 82352.69 35122.53 4097.67 39220.2 2009-10 2010-11

57584.37 61374.75 50978.94 61229.91 2818.28 1138.18 5525.69 956.51

15574.87 18156.42 128094.6 147243.28 57191.56 55542.46 9954.25 17071.94

Total Current Assets (A) 72030.09 Current liabilities Provisions 39098.07 2282.53

Total Current liabilities 41380.6 (B) Net Working capital (A- 30649.49 B)

67145.81 72614.40

28735.33

43132.49

60948.83 74628.88

Source: Complied from Annual report Interpretation From the above table, it is found that the networking capital of the company was highest in the year 2010-2011, i.e. 74628.88 lakhs. From 2008-2009 onwards the net working capital shows increasing trend.

33

Ratio Analysis A. Liquidity Ratio 1. Current Ratio Current ratio is also known as working capital ratio. The standards level of current ratio is 2:1 It is the ratio of total current assets to total current liabilities .

Current ratio= Total Current Assets Total Current liabilities Table 5.3 Table showing Current Ratio
SI.No 1 2 3 4 5 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Total Current Assets 72030.09 57746.41 82352.69 128094.6 147243.28 Total Current Liabilities 41380.6 29011.08 39220.2 67145.81 74628.88 Current Ratio 1.740672924 1.990495011 2.099751914 1.907708016 1.973006696

Interpretation : Here the current ratio of FACT is increasing , which shows the company is running in short working capital. In the year 2008-2009, only the current ratio of the company is in satisfactory level of 2.1 Current ratio is very low in the year 20062007. There is a small increase in current ratio during from 2006-2007 to 20102011 .

Current Ratio
2.5 2 1.5 1 0.5 0 2006-07 2007-08 2008-09 2009-10 2010-11 Current Ratio

34

Chart 1 2. Quick Ratio Quick ratio is known as liquid ratio or acid test ratio. It establishes a relationship between liquid assets and current liabilities .

Quick ratio = Quick assets Current Liabilities Quick assets include all the current assets exclude stock and prepaid expenses. Table 5.4 Tables showing Quick Ratio
SI.No 1 2 3 4 5 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Quick Assets 37414.47 25901.93 41092.66 70510.23 72768.53 Total Current Liabilities 41380.6 29011.08 39220.2 67145.81 72614.40 Quick Ratio 0.904154846 0.892828878 1.047742235 1.050106179 1.002122581

Interpretation The ideal quick ratio is 1. The quick ratio of FACT is around one, which is satisfying from 2008-2009 onwards . From 2006-2007 it shows a decreasing trend, and in 2008-2009 the ratio raises to a high value of 1.04.

35

Quick Ratio
2.5 2 1.5 1 0.5 0 2006-07 2007-08 2008-09 2009-10 2010-11 Quick Ratio

Chart II B. Activity Ratio

1. Working Capital Turnover Ratio Working capital Turnover ratio establishes relationship between sales and net working capital. As working capital has direct and close relationship with cost of goods sold, therefore, the ratio provides useful idea of how efficiently or actively working capital is being used,. Increasing ratio indicates that working capital is more active, it is supporting comparatively, higher level of production and sales., it is being used more intensively

Working capital turn over ratio = Annual Net Sales Working capital turnover ratio = Annual Net Sales Net Working capital Net Working capital

36

Tables 5.5 Tables Showing Working Capital Turnover Ratio

SI.No Year Sales Working capital Working Capital T/O ratio 30649.49 4.754293465 28735.33 2.97658179 43132.49 4.90897465 60948.83 3.437023976 61528.88 3.9826286

1 2 3 4 5

2006-07 2007-08 2008-09 2009-10 2010-11

145716.67 85533.06 211736.3 209482.59 245046.68

Interpretation : When we analyze the working capital turnover ratio of FACT , we can see the firm shows an upward trend in the year 2006-07. It is a sign for excellent management and better utilization of current assets. In the 2006-2007 and 2008-09 the ratio made big leap of 4.75 and 4.90. But from 2009-10 to 2010 -2011 shows the declined nature.

Working Capital Turn Over Ratio

6 5 4 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 Working Capital Turn Over Ratio

2)Fixed Assets Turnover Ratio Fixed assets turnover ratio indicates the efficiency with which a firm uses all its assets to generate sales .

37

Fixed Assets Turnover Ratio = Net Sales Fixed Assets

Table 5.6 Table showing Fixed turnover ratio

SI.No 1 2 3 4 5 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Sales 145716.7 85533.06 211736.3 209482.6 245046.68 Fixed Assets 44762.93 42419.8 38606.11 36349.83 34848.08 F.A.T.O Ratio 3.255297855 2.016347555 5.484528226 5.762959277 7.031855987 1/F.T/O Ratio 0.307191552 0.495946246 0.182331088 0.173521962 0.142209965

F.A.T.O Ratio
0.6 0.5 0.4 0.3 0.2 0.1 0 2006-07 2007-08 2008-09 2009-10 2010-11 F.A.T.O Ratio

Interpretation : In the case of FACT till 2007-2008 the fixed assets turnover ratio is in a declining trend. But from 2008-2009 gives a sign of reversing trend. The existing trend shows that the firm has the capacity to overcome the situations without any additional investments . The last column of the tables shows the amount of fixed asset FACT need while generating every single rupee sale. In 2008-3009 FACT
38

need 0.18 ps for each rupees sale, in 2009-2010 it requires only 0.17ps rupees sale. For the year 2010-11 it requires only 0.14 ps for each rupee sale. 3) Current Assets to capital Employed Turnover Ratio This ratio reveals the relationship between amount invested in current assets and total capital employed by the organization. This ratio helps to understand how much percentage of total capital employed is represented by the current assets of the firm.

Current Assets to capital Employed Turnover ratio = Current Assets Capital Employed

Tables 5.7 Tables Showing Current Assets to Capital employed ratio

SI.No 1 2 3 4 5 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Current Assets 72030.09 57746.41 82352.69 128094.6 147243.28 Capital Employed 64802.36 64798.36 64794.23 64790.31 64786.57 CA/CE T.O Ratio 1.111 0.891 1.270 1.977 2.272

Interpretation : Table shows that in FACT Current asset to capital employed turnover ratio is an increasing trend. From 2008-2009 onwards the ratio is moving to high. The year 2007-2008 shows the low value. It indicates that the current assets played a vital role in the working capital management of the firm.

39

CA/CE T.O Ratio

2.5 2 1.5 1 0.5 0 2006-07 2007-08 2008-09 2009-10 2010-11 CA/CE T.O Ratio

C) Solvency ratio Debt Equity Ratio It measures the ratio of long- term total debts to share holders equity. D.E.R is a popular measure of the long-term financial solvency of a firm. A higher ratio shows a large share of financing by the creditors of the firm and low ratio implies the smaller claim of the debtors .

Total Debt Debt Equity Ratio = Net Worth

40

Table 5.8 Table Showing Debt Equity Ratio

SI.No 1 2 3 4 5 Year 2006-07 2007-08 2008-09 2009-10 2010-11 Debt 19233.92 7585.22 27137.12 50978.94 61229.91 Net Worth 64802.36 64798.36 64794.23 64790.31 64786.57 Debt Ratio 0.296 0.117 0.418 0.786 0.945 Equity

Interpretation The debt equity ratio of FACT is showing the increasing trend since the years 2008-09. In the financial year 2010-2011it reaches 0.945. So the debt equity ratio of FACT is in comfortable position.

Debt Equity Ratio

1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2006-07 2007-08 2008-09 2009-10 2010-11

Debt Equity Ratio

41

ANALYSIS OF WORKING CAPITAL COMPONENTS

Cash Management Management of Receivables Inventory Management

42

CASH MANAGEMENT Cash is the money, which a firm can disburse immediately without any restriction. Cash includes coins, currency and cheques held by the firm and balance in its bank account. The firm holds cash mainly for two reasons: To meet the needs of day-to-day transactions and To protect the firm against uncertainties characterizing its cash flows Cash management is concerned with the meaning of a. Cash flows into and out of the firm b. Cash flows within the firm c. Cash balances held by the firm at a point of time by financing deficit or investing surplus cash CASH MANANGEMENT IN FACT The following items constitute cash and bank balance in FACT a. Cash in Hand Cash and bank cheque and stamps in hand b. Cash Balance 1. In current a/c 2. Post office treasury saving a/c 3. Short term deposit with scheduled bank 4. Remittance in Transit. Sources and Uses of Cash in FACT SOURCES OF CASH IN FACT a. The main sources of cash in FACT are . 1. Cash sales 2. Realization from Debtors 3. Subsidy from central govt. 4. Insurance claims 5. Loans & other deposits b. The main uses of cash in FACT are : 1. Purchase of raw material, stores and spares 2. Salary and allowances 3. Power, Electricity and fuel 4. Packing and transportation expenses 5. Interest and other charges 6. Insurance
43

7. Loan repayment and adjustments Cash Management techniques in FACT Cash budget is routinely prepared in FACT and it helps in: 1. Estimating cash requirements 2. Planning short term financing 3. Scheduling payments in collection with capital expenditure. 4. Planning purchase of materials 5. Planning credit policy. The cash forecasting prepared under this method shows the timing and magnitude of the expected cash receipts and payments over the forecasted period . The basis of cash budgeting is: 1. Revenue budget 2. Capital budget 3. Statutory dues 4. Outstanding dues 5. Company policy for payments of personal and other advances. 6. Credit and collection policy as well as past trends etc. For monitoring cash budget as well as cash and bank balance , the following tools and techniques are normally adopted. 1. Cash flow analysis and reporting - monthly./weekly/daily 2. Cash and bank balance reporting - monthly/weekly/daily 3. Periodic reconciliation of bank statements with cash book 4. Timely accounting of time based cheques. 5. Periodic physical verification of cash and bank balances 6. Adequate internal check system to avoid the possibility of cash defalcation. ANALYSIS OF CASH MANAGEMENT IN FACT 1. Cash/Current Liabilities Cash is the most important liquid asset in any organization .Cash must be available to pay bill that would be due in the future. So it is very important for every organization to maintain an adequate level of liquid cash. The cash to current liabilities helps us in identifying the ability of the firm to pay out immediate current liabilities.
44

Table 5.9 Tables showing Cash/Current Liabilities

YEARS
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

CASH
7781.95 6746.39 2242.06 2818.28 5525.69

CURRENT LIABILITIES
41380.6 29011.08 39220.2 67145.81 74628.88

CASH/C.L
0.188 0.232 0.057 0.041 0.074

Interpretation In the case of FACT cash/current liabilities ratio is varying ground. The cash to current liabilities of company indicates the amount of current liabilities which are payable through cash. It is to be noted that FACT is going on with almost ideal cash to current liabilities ratio.

2. Cash/Total Assets The total asset ratio indicates the level of cash as a component in the firms over all asset mixture. This basically tells us the management perception regarding keeping high liquidity assets or investing in fixed assets. Table 5.10 Table showing Cash/Total Assets YEARS CASH TOTAL ASSETS CASH/TOTAL ASSETS
2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 7781.95 6746.39 2242.06 2818.28 5525.69 118115.36 101128.51 149776.01 194216.48 183712.89 0.165 0.066 0.014 0.014 0.030

Interpretation In the case of FACT Cash/total assets is moving around .01 during the past 5 yrs. It is not favorable for the company.

45

3. CASH TO CURRENT ASSETS RATIO Cash to current asset is very important because it tell us the cash position in current assets . Cash is a constituent of current assets. If the cash reserves in current assets are too low, then in needy hours will not be in our hands .
Cash Current Assets = Cash
Current Assets

Table 5.11 Table showing Cash to current Assets

YEARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-11 CASH 7781.95 6746.39 2242.06 2818.28 5525.69 CURRENT Assets 72030.09 57746.41 82352.69 128094.6 147243.28 Cash/Current Assets 0.108 0.116 0.027 0.022 0.037 Cash /C.A * 100 10.8 11.6 2.7 2.2 3.7

Interpretation The table shows that cash to total current assets. The cash holding is highest in the year 2007-2008 during the period of study .i.e, 11.6 From 2008-2009, the ratio shows a decreasing trend till the last financial year and in the year 2010-11 it shows a slightly increasing trend from that of previous years . This shows that the company stands in the lowest position n the component of current assets . 4. CASH TURNOVER RATIO This ratio tells us about how cash place an important role in the activities of sales generation. It gives an idea of cash requirement of the company. When the cash turnover ratio is high the company requires less cash and when the ratio is less, the company requires lot of cash.

46

Cash Turn over ratio = Cash Sales Table 5.12 Table showing Cash Turnover ratio
S.L. No. 1 2 3 4 5 YEARS 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 CASH 7781.95 6746.39 2242.06 2818.28 5525.69 Sales 145716.67 85533.06 211736.3 209482.59 245046.68 Cash Turnover ratio 0.053404665 0.078874648 0.010588926 0.013453529 0.022549540

Interpretation From the table it is clear that FACT is able to generate sales by maintaining low cash level. In order to be competitive in the market the firm must maintain sufficient amount of money in its pocket. Hence FACT is using its cash balances effectively.

Cash Turnover Ratio

8 7 6 5 4 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 Cash Turnover Ratio

47

MANAGEMENT OF RECEIVABLES Receivables are one of the most important parts of current assets. The term receivables are defend as debt owned to the firm by customers arising from sale of goods or services in the ordinary courses of business. The period of credit and the extent of receivables depend up on the credit policy allowed by the firm. The object or receivables management is to achieve a trade off between risk and profitability. The aim of receivables management is neither to maximize the sales nor to reduce the risk of bad debts. Factors influencing the size of receivables Following factors directly and indirectly affects the size of receivables they are : a. Size of credit sales The volume of credit sale is a first factor which increases or decreases the size of receivables. b. Credit Policy A firm with conservative credit policy will have a low size of receivables, while a firm with liberal credit policy will be increasing this figure. c. Terms of trade The period of credit allowed and rate of discount given will also affects the amount receivables. d. Credit collection effort The collection of credit should be streamlined. An efficient credit collection effort will reduce the size of the receivables. e. Habits of customers The paying habits of customers also have a bearing on the size of receivables COST OF MAINTAINING RECEIVABLES The maintenance of receivables involves a credit sanction and it involves costs. The major categories of cost associate with the extension of credit and accounts receivables are:1. Collection cost 2. Capital cost 3. Administrative cost 4. Default costs 5. Delinquency cost
48

ANALYSIS OF REVEIVABLES MANAGEMENT IN FACT 1. Receivables /Debtors turnover Ratio The analysis of debtors turnover ratio supplements the information regarding the liquidity of one component of currents and as such has direct influence on working capital position of the company. This ratio how rapidly debts are converted into cash. A high ratio is an indicative of shorter time lag between credit sales and cash collection and low ratio shows that debts are not being collected rapidly.

Receivables/ Debtors turnover ratio

Annual net credit sales Average debtors

Tables 5.13 Table showing Debtors Turnover ratio

S.L No 1 2 3 4 5 Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Credit Sales 105500.96 56296.97 70689.03 108966.01 129119.16 Average Debtors 19233.92 7585.22 27137.12 50978.94 61229.91 Debtors T/O Ratio 5.485151233 7.421929753 2.604883274 2.137471081 2.108759591

Interpretation The table shows an increasing trend during the first two year of study. Since the financial year 2008-2009 the ratio shows a declining trend on the Debtors turnover ratio and decreases to 2.60 for the year 2008-09 , 2.13 for the year 2009-10 and 2.10 for the year 2010-11 respectively. . The decreasing ratio implies that a lot of cash has locked up as debtors. This would mean that more working capital has to be raised in order to smoothly carry out of the operations of FACT. If the dues from the debtors are properly collected, the cash collected can be used to finance working capital requirement.

49

Debtors Turnover Ratio

8 7 6 5 4 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 Debtors Turnover Ratio

2. Average Collection period (ACP) Average collection period means the average number of days which bad debts remains outstanding.
Average Collection Period 360 Debtors Turnover ratio

Tables 5.14 Average Collection Period (ACP)

S.L No 1 2 3 4 5 Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 No. of days 360 360 360 360 360 Debtors Turnover Collection Ratio (Days ) 5.485151233 65.63173642 7.421929753 48.50490533 2.604883274 138.20197 2.137471081 168.4233313 2.108759591 170.7164731 Average 118.2956795 Period

Interpretation: From the above table it could be seen that the average collection period is fluctuating year after year. There is a high increase in collection period from the year 2008-09 to 2010-11.For the year 2010-11 the collection period is 170 days. The average collection period of the company is 118 days.
50

Average Collection Period

20 18 16 14 12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11

Average Collection Period

3. Payable/Creditors Turnover ratio It is ratio between net credit purchase and the amount of Sundry creditors. A high creditors turn over shows that creditors are being suppliers. It indicates the speed with which the payments are made to the trade creditors.
Payable /Creditors Turnover Ratio Credit Purchase Average Creditors

Tables 5.15 Table showing Creditors Turnover ratio

S.L No Year Credit Purchase Average Creditors CollectionPeriod (Days )

1 2006-2007 108897.55 24547.85 4.436133918 2 2007-2008 60204.28 9890.48 6.087093852 3 2008-2009 162726.89 8718.79 18.66393043 4 2009-2010 150865.6 37809.27 3.990174896 5 2010-2011 158200.86 31809.61 4.973366853 Interpretation From the table we can see that the creditors turnover ratio is increasing from 200607 onwards. It shows that company gets liberal credit facility from the suppliers, On the average of 4.97 on creditors turn over during the period of study.

51

Creditors T/O ratio

20 18 16 14 12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11

Creditors T/O ratio

4. Average Payment Period Average payment period gives the credit period enjoyed from the creditors. A low creditors payment period signifies that the creditors are paid promptly , thus enhancing the credit worthiness of the company . Creditors Payment Period 365 Creditors Turnover ratio

Tables 5.16 Table showing Average Payment Period

S.L No 1 2 3 4 5 Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 No. of days 365 365 365 365 365 Creditors Turnover Ratio 4.436 6.087 18.663 3.99 4.973 Payment Period (Days ) 82.28133454 59.9638574 19.55741306 91.47869674 73.39634023

52

Interpretation From the above table it could be seen that the average collection periods is fluctuating year after year. In 2009-10 it was high ie , 91 days. The average payment period of the company is 65 days.

Payment Period (Days)

60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2010-11 Payment Period (Days)

5. Debtors current assets Ratio Debtors / current assets ratio shows relation between debtors and current assets and it reveals the percentage of debtors in total current assets. Debtors Debt to current assets ratio x 100 (Debtors as percentage of current assets) Current Assets

53

Tables 5.17 Table showing Debt to Current Assets ratio

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Current Assets 72030.09 57746.41 82352.69 128094.64 147243.28 Debtors 19233092 6746.39 27137.12 50978.94 61229.91 Ratio 0.267 0.116 0.329 0.397 0.415 Debtors/C.A *100 26.7 11.6 32.9 39.7 41.5

Interpretation The table shows the position of debtors in total current assets. In 2006-07 financial year 26.7% of the current assets are debtors. In the year 2007-08 it declined to 11.6 as the credit sales is low. The current year shows the highest ratio. INVENTORY MANAGEMENT IN FACT 1. Inventory/Current Asset ratio Inventory/current asset ratio reveals how much is the contribution from the inventory to the total current assets of the firm. This helps to decide in advance the amount to be invested in inventory/stock. Inventory to current assets ratio Inventory /Stock Current Assets Tables 5.18 Table showing Inventory to Current Assets ratio
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Inventory 34615.62 31844.48 41260.03 57584.37 61374.75 Current Assets 72030.09 57746.41 82352.69 128094.64 147243.28 Inventory/C.A 0.480 0.551 0.501 0.449 0.416 Inventory /C.A*100 48.0 55.1 50.1 44.9 41.6

54

Interpretation In the case of FACT, in inventory/Current asset ratio moves around 40% in the last 5 years. The ratio is high in the year 2007-08 i.e. 55% and low in the year 2010-11 i.e. 41.6 As per as FACT is concerned, a proper management of inventory is important , since inventory contributes minimum 40% of the total current assets of the firm during the last 5 years .

Inventory to Current Asset Ratio

60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2010-11 Inventory to Current Asset Ratio

2. Inventory Turnover Ratio Inventory turnover ratio give the number of times inventory has been turned over during a year. Inventory Turnover Ratio Cost of goods sold Average Inventory Average Inventory
Opening Stock + Closing Stock 2

55

Tables 5.19 Table showing Inventory Turnover ratio

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Cost of Goods Sold 65338.93 27060.88 70358.24 84449.43 64241.5 Average Inventory Inventory Turnover ratio 17016.41 3.839 12614.09 2.145 6318.30 11.135 32896.16 2.567 37797.85 1.699

Interpretation This ratio is an indication of efficiency of the inventory management. A high ratio shows efficient inventory of control and sound sales policies. Low turnover ratio shows possibility of slow moving of products, over investment in stock . The inventory turnover ratio of FACT shows a fluctuating trend. The highest ratio is 11.13 in 2008-2009.

Inventory T/O Ratio

12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11 Inventory T/O Ratio

56

ANALYSIS OF OPERATING CYCLE The Operating Cycle refers to the length of time required to convert non- cash current assets in to cash, it is the time involved to convert cash in to inventory, inventory in to receivables and receivables in to cash. A firm needs working capital, because the production, sales and cash flows are not instantaneous. There is always a time gap between the sale of goods and receipt of cash. Working capital is required for this period in order to sustain the sales activity. The firm needs cash to purchase raw materials and pay expenses as there may not perfect matching between cash inflows and cash outflows. Cash may also help t meet future contingencies./ The stocks of finished goods have to be carried out to meet the demands of the customers on a continuous basis and sudden demands from some customers. Goods are sold on credit for competitive reasons. Thus adequate amount of funds has to be invested in current assets for a smooth and interrupted production and sales process. Because of the circulating nature of current assets, working capital is sometimes called as Circulating Capital. The operating cycle can be explained as the continuing flow from cash to suppliers, to inventory, to accounts receivable and back in to cash. It is the time duration required to convert sales after the conversion of resources in to inventories, in to cash. The operating cycle includes:a. Raw material conversion Period (RMCP) b. Work in Progress conversion period(WIPCP) c. Finished Goods conversion period (FGCP) d. Receivables conversion Period 9RCP) e. Payable Difference Period Gross Operating Cycle = RMCP +WIPCP+FGCP+RCP The difference between Gross Operating Cycle and Payable difference period is Net Operating Cycle (NOC)

57

The following figure gives a snapshot of the operating cycle of the manufacturing firm .

Account Receivable

Cash

Finished Goods

Raw Material

Work in Progress

The operating cycle should be of a lesser period to reduce the amount of working capital .

PROCEDURE FOLLOWED The components of the operating cycle are obtained using the following formula:1. Raw material conversion period = Average Stock of raw materials Raw material consumption per day (RMCP)

2. Work in progress conversion period (WIPCP) = Average stock of WIP Total cost of production per day
58

3. Finished Goods Conversion Period (FGCP) = Average stock of Finished Goods Total cost of sales per day 4. Receivables Conversion Period (R,C.P) Average accounts receivables Total cost of sales per day

= 5. Payable Difference Period =

Average accounts Payable Net credit purchase per day

6. Gross operating cycle

= RMCP +WIPCP +FGCP + RCP

Net operating cycle = Gross operating cycle - payable Difference period

The following table summarizes the operating cycle of FACT over a period of 5 years ie, from 2006-07 to 2010-2011. It analyse the efficiency of the firm in converting the sale of products through conversion of resources into inventories and finally realization of cash. The operating cycle of the firm is determined by comparing growth of operating cycle and the payable difference period.

59

Tables 5.20 OPERATING CYCLE ANALYSIS OF FACT from the period 2005-06 to 2009-2010 (in days)
Year Raw conversion (RMCP) Work in Progress 29 Period 22 30 38 35 31 2006-07 material 6 period 2007-08 15 2008-09 6 2009-10 5 2010-11 Average 11 9

Conversion (WIPCP) Finished

Goods 56

38

46

39

61

48

Conversion Period Receivables Conversion (RCP) Gross Cycle 9RMCP+WIPCP+F GCP+RCP) Payable Period Net operating cycle. 80 (Gross operating 66 58 38 87 66 Difference 94 103 114 76 89 95 Operating 174 169 172 114 176 16 Period 84 94 89 32 69 74

cycle-payable Difference Period )

60

Chapter V FINDINGS AND SUGGESTION

61

FINDINGS Net working capital of the FACT shows that, increasing trend in the working capital w. Which indicates that working capital is more active, supporting comparatively, higher level of production and sales and it is being used more intensively. The current liabilities of the FACT show an increasing trend. It affects the liquidity and solvency position of the company. The current ratio shows a declining it trend for the last few years. Deceasing ratio signals that there has been deterioration in the liquidity position of the business The quick ratio is increasing. The liquidity position of the company is increasing. It indicates that sound financial position of the company. The cash ratio of the company is also decreasing. The cash ratio sign indicate that the company is going to face serious liquidity crisis. The working capital turnover ratio of FACT shows an upward or satisfactory level. This implies that the firm has efficient management and effective utilization of assets. It shows the firms velocity of utilization of net working capital. The fixed assets turnover ratio is showing an upward trend, after being made a declining trend till 2007-08. In operational terms it implies that the firm can expand its activity ( in terms of production and sales ) without requiring additional investment . Debt equity ratio of FACT is showing increasing trend during the last few years. It indicates that company is moving in a favorable situation. The cash management in FACT shows that : The firm has ideal cash to pay of f its current liabilities. The level of cash as a component in the firms total assets is very low. Cash stands in the lowest position in the component of current assets. FACT is able to generate sales by maintaining low cash level. These from the Government and Banks.
62

 The receivables management in FACT shows that : The Debtors turnover ratio of FACT has been successfully made a turnaround from the declining trend in 2007-08. Decreasing ratio shows that a loss of cash has locked up as debtors. The average period for collection is 94 days. If the dues from the debtors can be properly collected, the cash collected can be used to finance working capital requirement

The Inventory Management of FACT shows that : Inventory turnover ratio shows the efficiency of management of inventory. FACT has achieved the highest I.T.O.R in 2008-09. The inventory turnover ratio of FACT is in a fluctuating trend.

63

SUGGESTION 1. Company should take immediate step to increase its liquidity position. The working capital of the company should be increased by increasing cash and bank balances by adopting efficient marketing strategies. 2. Inventory management of the company is not satisfactory. The raw material and work in progress inventory holding periods are high . reduce the holding period as much as possible. 3. The debtors of the company are decreasing over the year. The company should adopt a competent credit policy to attract the customer. Increasing debtors is a solution to over come the liquidity problem. 4. The company has adequate internal control system with its size and nature of business. 5. In order to became competitive in each line of business, the FACT has to focus on cost reduction and technology up graduation. 6. In order to meet the needs of the customers, FACT has to constantly innovate and develop new products. 7. The availability of sufficient working capital will enable FACT to operate with positive working results.

64

CONCLUSION Working capital management is important part in firm financial management decision. The ability of the firm to continuously operate in linger period depends on how they deal with investment in working capital management. The optimal of working capital management could be achieved by a firm that manage the tradeoff between profitability and liquidity. The purpose of this study is to investigate the relationship between working capital management and firms profitability. The project study on working capital management and profitability study constitute the basis to analyze the structure and growth of working capital and to ascertain the profitability of fertilizers and Chemicals Travancore Ltd., Eloor, Cochin. FACT Ltd is the first large scale fertilizer unit in India. It has been found that the company has suffered a severe financial crisis during the last four years (from 2008-09) and also has a shortage in working capital. Even though the company has a good capital structure, it requires a financial relief package for the survival of FACT. Cabinet committee on economic affairs has approved a financial relief package for the company. This helps to support the company to attain a good net profit. Effective measures of financial controls can surely help the company in future activities.

65

BIBLIOGRAPHY

66

BIBLIOGRAPHY J Khan & Jin, Financial Management , Tata Me Graw Hill 4th Edition. Khan & Jain, Basic Financial Management, Tata Me Graw Hills 3rd Edition J Maheswari S.N, Financial Management Sulthan Chand And Sons Publishers . Mohan Juneja.C.& Rajesh Bagga Kalyani Publishers. Pandey I.M Financial Management , Vikas Publishing House Pvt. Ltd 8th Edition, New Delhi 1996. *** Prasanna Chandra, financial Management , Tata Me Graw Hill. Publishing Company Ltd 3rd Edition 1994. Annual reports of FACT. Web reference www.fact.co.in www.fertilisers india.com

67