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FINANCIAL MANAGEMENT

INTRODUCTION:
Entails planning for the future of a person or a business enterprise to ensure a positive cash flow. It includes the administration and maintenance of financial assets. Besides, financial management covers the process of identifying and managing risks. The primary concern of financial management is the assessment rather than the techniques of financial quantification. A financial manager looks at the available data to judge the performance of enterprises. Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance. Financial management is broadly concerned with the acquisition and use of funds by a business firm. It deals with How large should the firm be and how fast should it grow? What should be the composition of firms level? What should be the mix of the firms financing? How should the firm analysis, plan and control its financial affairs?

While the first three questions express Ezra Solomons conception of financial management as discussed in his clerical worlds. The Theory of financial management. The forth one represents an addition that is very relevant in the light of the responsibilities shouldered by finance managers in practice.

MEANING:
Some experts refer to financial management as the science of money management. The primary usage of this term is in the world of financing business activities. However, financial management is important at all levels of human existence because every entity needs to look after its finances. 1

NATURE OF FINANCIAL MANAGEMENT:


Financial management is that managerial activity which is concerned with the planning and controlling of the financial resources. Though it was branch of economics till 1890,as a separate activity of discipline it is of recent origin still, it has no unique body of knowledge of its own and draws heavily on economics for its theoretical concepts even today.

SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:


The scope and functions of financial management is divided into two categories . The traditional approach The modern approach

THE TRADITIONAL APPROACH:


The traditional approach of the scope of the financial management refers to its subjects matter. The scope of the finance function was treated by the traditional approach in the narrow sense of procurement of funds by corporate to meet their financing needs.

The institutional agreement in the form of financial institution, which comprise the organization of the capital market. The financial instrument through which funds are raised from the capital markets and the related aspects of practices and the procedural aspects of capital markets. The legal and accounting relationships between a firm and its sources of funds. The first argument against the traditional approach was based in its emphasis

on issues relating to procedural of funds by corporate enterprises.

MODERN APPROACH:

The modern approach views the term financial management is a broad sense and provides a conceptual and analytical framework for financial decision making Accounting to it the finance functions covers both acquisitions of funds as well as their allocation. Thus apart from the issues involving in acquiring external funds, the main concern of financial management is the efficient and wise allocation funds to various as a defined in a broad sense, it is viewed as an integral part of overall management. Financial management in the modern sense of the term can be broken down into three major decisions as functions of finance.

INTRODUCTION OF WORKING CAPITAL MANAGEMENT

Working capital management is one of the financial management. An organizations success wholly depends on the operating efficiency and optimum utilization of the scarce capital and other resources. In this process financial management plays a crucial role in channeling the funds in proper direction and in reducing the wastages within the firm. As the public sector undertakings plays a crucial role in the economy, its financial management matters a lot for the diverse interests associated with it. Balance sheet and profit and loss accounts at the end of the year does not give the strengths and weakness of the company. So an estimation of working capital management is used to determine the financial statement and data. so that a forecast may be made for the purpose of future earnings and ability of the company.

MEANING AND DEFINITION OF WORKING CAPITAL: MEANING:


Every enterprises has to arrange for adequate funds for meeting day to day operations and expenses to keep it as a going concern so ordinary speaking working capital refers to the flow of ready funds necessary for working of enterprise.

DEFINITION:
Working capital refers to a firms Investment in short-term assets, cash, short-term securities, accounts Receivables Inventories According to Hoagland: capital is description of that capital which is not fixed. But the more common use of working capital to consider it as the different between the work value of current assets and current liabilities. .. Weston & Brigham Every Business needs funds for 2 purposes: For its establishment and to carryout the day to day operations the funds needed. For short term purchase of Raw materials, payment of wages & other day-to-day expense etc, these funds are known as working capital.

CONCEPTS OF WORKING CAPITAL:


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There are two concepts in working capital:

1 .GROSS WORKING CAPITAL:


Gross working capital simply called as working capital .Refers to the firms Investments in current assets. Current assets are the assets, which can convert into cash with in an accounting year (or operating cycle includes cash, short term securities, debtors, bill receivables and Inventories. Gross working capital concepts focus Attention on 2 aspects of current assets management. 1. Optimum investment in current assets 2. Financing of current assets management.

2. NET WORKING CAPITAL:


Net concepts is also called as net working capital it refers to the difference between current Assets and Current Liabilities are those clines of outsiders that are expected to nature for the payment within an accounting year. Net working capital being the difference between current assets. And current liabilities are a quantitative concept. It indicates the liquidity position of the firm and suggests extents to which working capital is needed.

NEED FOR THE STUDY


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The study is conducted for the following needs. 1. Management of funds, particularly working capital decides not only liquidity and solvency but also operating efficiency of the organization. 2. RASHTRIYA ISPAT NIGAM LIMITED needs more working capital and its management to keep the pace of its financial growth. 3. To study the working capital needs and strengths of the organization in meeting and managing working capital of the organization. 4. To review the element of working capital and importance in operating the activities in the organization.

OBJECTIVES OF THE STUDY

To know procurement and inspection procedure in Visakhapatnam steel plant. To know the frequency of procuring inventory in Visakhapatnam steel plant. To study how working capital management is maintained at Visakhapatnam steel plant. To study working capital management techniques that is applied in Visakhapatnam steel plant.

To offer suggestion for better management of working capital management in Visakhapatnam steel plant.

METHODOLOGY OF THE STUDY

The analysis of the project was based on the available information. Any information about the topic is called the data. The data was gathered from various sources i.e., Primary and secondary sources Types of data: 1. Data Primary Data 2. Secondary 1. PRIMARY DATA: Any information which is collected afresh and for the first time is called primary data .The primary data happen to be original in character. The information is gathered from concerned employees .The employees and manager of the financial department have provided the information needed for the study.

2. SECONDARY DATA: Information which has already been collected by somebody else or some other agency with definite purpose and which has already been proposed is called secondary data .The secondary data for the study have been gathered from the balance sheets, profit and loss accounts, annual reports and other books and manuals of the RASHTRIYA ISPAT NIGAM LTD.

LIMITATIONS OF THE STUDY


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Though the project is completed successfully a few limitations may be Limitation. Although every effort has been made to study the working capital management in detail, in an organization of VSP size, it is not possible to make an exhaustive study in a limited duration of 6weeks. Apart from the above constraint, one serious limitation of the study is that it is not possible to reveal some of the financial data owing to the policies and procedures laid down by VSP. However the available data is analyzed with great effort to get an insight into Working Capital Management in VSP.

INDUSTRY PROFILE
INTRODUCTION:
Steel is a versatile, constantly developing material that underpins all manufacturing activity. If a product is not made from steel, then it is certainly made using steel at some point in the manufacturing process.

OVERVIEW OF IRON AND STEEL INDUSTRY: HISTORICAL PERSPECTIVE:


The finished steel production in India has grown from a mere 1.1 million tonnes in 1951 to 29.27 million tonnes in 2000-2001. During the first two decades of planned economic development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel production exceeded 8%. However, this growth rate could not be maintained in the following decades. During 1970-80, the growth rate in steel production came down to 5.7% per annum and picked up marginally to 6.4% per annum during 1980-90, which increased to 6.65% per annum during 1990-2000. Though India started steel production in 1911, steel exports from India began only in 1964. Exports in the first five years were mainly due to recession in the domestic iron and steel market. Once domestic demand revived, exports declined. India once again started exporting steel only in 1975 touching a figure of 1 million tonnes of pig iron export and 1.4 million tonnes of steel export in 1976-77. Thereafter, exports again declined to pick up only in 1991-92, when the main producers exported 3.87 lakhs tonnes, which rose to 2.79 million tonnes in 1995-96. The steel exports in 1999-2000 were 2.36 million tonnes and in 2000-01 it was 2.57 million tonnes. The growth in the steel sector in the earlier decades since Independence was mainly in the public sector units set up during this period. The situation has changed dramatically in the decade 1990-2000 with most of the growth originating in the private sector. The share of public sector and private sector in the production of steel during 1990-91 was 46% and 54% respectively, while during 2000-01 the same was 32% and 68% respectively. This change was brought about by deregulation and decontrol of the Indian iron and steel sector in 1991. A number of policy measures have been taken since 1991 for the growth and development of the Indian iron & steel sector. Some of the important steps are

THE INDIAN STEEL SECTOR AFTER LIBERALISATION


The Indian steel sector was the first core sector to be completely freed from the licensing regime and the pricing and distribution controls. This was done primarily because of the inherent strengths and capabilities demonstrated by the Indian iron and steel industry. During 1996-97, finished steel production shot up to a record 22.72 million tonnes with a growth rate of 6.2%, while in 1997-98, the finished steel production increased to 23.37 million tonnes, which was 2.8% more than the previous year. The growth rate has drastically decreased 10

in 1997-98 and 1998-99 being 2.8% and 1.9% respectively as compared to 20% in 1995-96 and 6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy 9.60% with the total production touching 29.27 million tonnes. The production of finished steel during 2001-02 has been 30.61 million tonnes, which means a lower growth rate of about 4.5% compared to the previous year. This fall in the growth rate of steel production has been brought about by several factors that, inter-alia, include general slow down in the industrial production and construction activities in the country coupled with lack of growth in major steel consuming sectors.

APPARENT CONSUMPTION OF STEEL:


Apparent consumption of steel is arrived at by subtracting export of steel from the total of domestic production and import of steel in the country. Change in stock is also adjusted in arriving at the consumption figures. It is also treated as the actual domestic demand of steel in the country. The year-wise apparent consumption of finished steel since 1990-91, is given in the table in the annexure.

PROJECTIONS OF FINISHED STEEL:


In order to have a long-term perspective and planning, a Sub-Group on Steel and Ferro Alloys was constituted for steel sector under the aegis of Planning Commission. The iron and steel sector has experienced slow down from the year 1997 to 2001.

The growth of the steel sector is dependent upon the growth of the economy in general and the growth of industrial production and infrastructure sectors in particular. The major reasons for the slow growth in the steel sector during the last few years include: (a) Sluggish demand in the steel consuming sectors Steel being the basic raw material for the construction industry, the capital goods and engineering goods industry, as also the auto sector and white goods sector, its growth is dependent upon the demand for steel by these segments of the industry. Since no major infrastructure or construction projects have been implemented in the last few years, demand for steel has remained low. No major projects in the oil sector, power sector, fertilizer sector, where intensity of steel consumption is high, have come up in the recent past. 11

(b)

Overall economic slowdown in the country. All major core sectors of the economy have been facing an economic slowdown. These include, power, coal, cement, industry, mining and steel. The slow down phenomenon is not restricted to the steel sector alone. Only when the overall economy of the country picks up, the steel sector would also show signs of revival.

(c )

Lack of investment by Government/private sector in major infrastructure projects Due to budgetary constraints, no major construction activity in mega projects including fertilizer, power, coal, railways etc. have been planned by the Government. Despite liberalization of the economy and relaxation in the investment norms, private sector investment is yet to materialize in the core sectors of the economy. This has also contributed to slowing down demand for steel.

(d)

Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal prices etc. have been under the administered price regime. These rates have been frequently enhanced, thereby contributing to the rise in input costs for steel making.

MARKET SCENARIO:
After liberalization, with huge scale addition to steelmaking capacity, there is no shortage of iron and steel materials in the country. Apparent consumption of steel increased from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-02. During 2001-2002, due to economic slowdown, certain sector like power and fertilizer projects, auto sector and white goods sector have shown a slump in demand for steel. Steel Industry has been facing a slowdown in the level of demand due to slow down of the domestic economy and that of the major steel-consuming sector. Efforts are being made to boost demand particularly in rural areas and also to increase exports. Prices of iron and steel have declined in 2001-02 in tune with global trends, while input cost have gone up. However, of late, there has been resurgence in the price level mainly of flats and demand has also witnessed an upward trend. In 2003-2004 steel sector market demand increased mainly because of massive construction activity taken up in China.

PRODUCTION:

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Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India is 8th largest producer of steel in the world. In 2001-02, finished steel production was 30.61 million tonnes. Pig iron production in 2001-02 was 3.95 million tonnes. Sponge iron production was 5.66 million tonnes in 1999-2000. In 2001-02, nearly 51% of crude steel production was by public sector the remaining 49% was by private sector. In 2001-02, the integrated steel plants produced 42% of finished steel and the remaining 58% was by the secondary producers. Interface with consumers by way of Steel Consumer Council exists, which is conducted on regular basis. Interface helps in redressing availability problems, complaints related to quality.

PRICING & DISTRIBUTION :


Price regulation of iron & steel was abolished on 16.1.1992. Distribution controls on iron & steel removed except 5 priority sectors, viz. Defense, Railways, Small Scale Industries Corporations, Exporters of Engineering Goods and North Eastern Region. Development Commissioner for Iron & Steel makes allocation to priority sectors. Government has no control over prices of iron & steel. Open Market Prices have been generally stable, though fluctuations have been noticed. Price increases of late have taken place mostly in long products than flat products. In the current financial year the long product prices have increased by about 20% because of raise in demand internationally.

IMPORT AND EXPORT OF IRON AND STEEL:


India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a rise in domestic demand, the import of saleable steel in 1996-97 reached a level of 1.80 million tonnes. The incidence of import was mainly in hot rolled coils, cold rolled coils and semis. Import of carbon steel during 2000-01 was about 1.41 million tonnes, which was about 12% less than the import in 1999-2000. The total imports of carbon steel during six years up to 2001-02 are given in enclosed chart.

MEASURES ON IMPORTS OF IRON & STEEL:


Iron & Steel are freely importable as per the Exim Policy. India has been annually importing around 1.5 Million Tonnes of steel. Imports have largely dropped, partly an indication of greater self-sufficiency and partly the ability to control inflow of seconds and 13

defectives. To check unbridled imports of cheap/seconds & defective steel, several measures have been put in place, like; The Government has fixed floor prices for seven items of finished steel viz. HR coils, HR sheets, CR coils, Tinplates. The other notable measure in this regard is that imports of certain types of steel have been subject to mandatory compliance of quality standards as specified by the Bureau of Indian Standards (BIS). Adherence to BIS norms imply supplying information like name and address of the importer, generic or common name of the commodity, net quantity in terms of standard units of weights and measures, month and year of packaging and maximum retail sale price. Moreover all manufacturers/exporters of the listed products shall be required to register themselves with the BIS.

MEASURES FOR EXPORT OF IRON & STEEL:


Iron & Steel are freely exportable and India is a net exporter of steel. Advance Licensing Scheme allows duty free import of raw materials for exports. Duty Exemption Pass Book Scheme also facilitates exports. Indian steel exports have been subject to antidumping/anti-subsidy duties actions by the stronger economies over the last few years. These include: Canada has covered pipes, hot rolled, cold rolled and galvanized products in the AD/CVD actions. China has recently imposed a safeguard duty on the import of steel, which ranges from 7-26%. The country-wise details are yet to be worked out. The rising trend in Indian steel exports that was being witnessed in the last couple of years was halted due to these anti dumping actions initiated by the advanced, developed nations of the world, which led to the loss of major markets for the Indian steel exporters.

GLOBAL SCENARIO:
The global production of crude steel increased from 777 million tonnes in 1998 to 785 in 1999. The world steel consumption has also increased by 1%. The international steel trade constituted around 279.6 million tonnes or 39.8% of the production. World steel industry witnessed major ups and downs in the last two decades and especially over the past five years. The pattern of trade has been upset by two important developments. These are the collapse of the Soviet Union and the severe financial crisis in most South East Asian countries as well as in Korea and Japan. After the Asian crisis, the region got transformed into a net exporter of steel. The world steel industry is today characterized by excess capacity and poor demand. It is in this 14

global context that the Indian steel industry will have to cast its future role. World production of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest monthly total in over a decade. The total of the 3 months to date was 226.8 million tonnes, 8.8% higher than the January to March period in 2002. Crude steel production in the USA is still rising, up by 5.4% in March 2003, bringing the first quarter total up by 6.5% to 23.1 million tonnes. Mexican production is also improving with March production up 21.4% and the 3 months total up 29.6% to 3.8 million tonnes, almost equal to the Spanish first quarter total. Canadian steel production, on the other hand, fell by 3.6% in March and by 3.5% in the year to date to 4.0 million tonnes. In the first two months and there was a very large tonnage exported to both China and Singapore in February 2003. Net shipments of steel reported by the AISI were 7.5% up in the two months at almost 16.5 million tonnes, with most of the increase going to the home market. In March 2002 the US President announced imposition of temporary safeguard measures on import of key steel products into USA. In retaliation to the US action EU has also imposed provisional safeguard measures against import certain steel products. China, Canada and Thailand are some of the other countries that have initiated safeguard investigations against import of steel products into their countries. On the pricing front the steel prices have been spiraling up especially since mid 2002 mainly due to the shortfall in supply. This can be attributed to the facts. Cessation of gas supply in Venezuela stopped about 6 million tonnes of annualized production of steel. Ukraine has imposed export duty on scrap steel, which is a raw material.

THE GROWTH PROFILE AFTER LIBERALISATION:


The liberalization of industrial policy and other initiatives taken by the Government have given a definite impetus for entry, participation and growth of the private sector in the steel industry. While the existing units are being modernized/expanded, a large number of new/Greenfield steel plants have also come up in different parts of the country based on modern, cost effective, state of-the-art technologies. In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit in the secondary sector. Post liberalization, the AIFIs have sanctioned 21 new projects with a 15

total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned. The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 3.94 million tonnes in 2001-02. The share of Private/secondary sector has increased over time and is currently around 74% of total production.

COMPANY PROFILE
INTRODUCTION:
Steel occupies the foremost place among the materials in use today and pervades all walks of life. All the key discoveries of the human genesis, for instance, steam engine, railway, means of communication, automobile, aero plane and computers are in one way or other, fastened together with steel and with its sagacious and multifarious application steel is a versatile material with multitude of useful properties, making its indispensable for furthering and achieving continual growth of the economy be it construction, manufacturing, 16

infrastructure or consumables. The level of steel consumption has long been regarded as an index on industrialization and economic maturity attained by a country. At the time of independence India had only three integrated Steel Plants-Iron $ Steel Company at Burnout, Tata Iron And Steel Company at Jamshedpur, Iron $ Steel Company in the erstwhile princely state of Mysore. Keeping in view the importance of steel, the following integrated steel plants with foreign collaborations were set up in the public sector in the post-independence era. 1 2 3 4 Durgapur Steel Plant Bhili Steel Plant Bokhara Steel Plant Rourkela Steel Plant British Erstwhile USSR Erstwhile USSR German

BACKGROUND To meet the 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 cooperation in setting up 3.4 MT integrated steel plant at Visakhapatnam. The foundation stone for the plant was laid by the then Prime Minister on 20th January 1971. The project was estimated to cost Rs. 3897.22 Crores based on prices as on 4 th quarter of 1981. However on completion of construction and commissioning of the whole plant in 1992, the cost escalated to around 8500 Cores. Visakhapatnam Steel Plant is one of the most modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992 by the then Prime Minister Sri P.V. Narasimha Rao. The consultant, m/s M.N. Dastur and company ltd., submitted a techno-economic feasibility report for the plant, with an annual capacity of about 3.4 million tones of liquid steel, in October 1977. The erstwhile Ussr government examined the detailed project report prepared by Dastur & company and offered technical and economic co-operation for the same. The govt. of India and erstwhile Ussr signed an agreement on June 12th 1979, for co-operation in setting up a 3.4 million tones integrated steel plant at Visakhapatnam. The u.s.s.r agreed to provide financial assistance of 3.4 million ruble credit to GOI specifically for setting up the steel plant. In terms of this agreement, soviets and Indian design organization revised the earlier detailed project report of Dastur co., jointly and a comprehensive revised detailed project report for vsp 17

was submitted in November 1980. A new company i.e. Rashtriya spat enigma ltd. (RINL) was incorporated for faster implementation of the project.

MAJOR SOURCE OF RAW MATERIALS:


Iron ore lumps and fines BF lime stone SMS lime stone BF Dolomite SMS Dolomite Manganese Ore Boiler coal Coking coal Bailadilla, MP Jagayyapeta, AP Jaisalmer, Rajasthan Dubai Madharam, AP Chipurupalli, AP Talc her, Orissa Australia

POWER SUPPLY:
operational power requirement of 180 to 200 MW is being met through Captive Power Plant. The capacity of the Power plant is 286.5 MW. VSP is exporting 60 MW power to APTRANSCO.

MAJOR UNITS:
Department Coke ovens Sinter Plant Blast furnace Steel melt shop LMMM Annual cap 000 T 2261 5256 3400 3000 710 Units (3.0 MT stage) 3 Batteries each of 67 ovens and 7 Meter height 2 Sinter machines of 213 m2 grate area each 2 Furnaces of 3200 m3 volume each 3 LD converters each of 150 m3 volume and strand bloom casters 3 Stand finishing mill

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WRM MMSM

850 860

2 x 10 stand finishing mill 6 stand finishing mill

MAIN PRODUCTS OF RINL:


Steel Products Angles Billets Channels Beams Squares Flats Round Rebars Wire rods By products Granulate slag Lime fines Coal tar Anthracite acid HP Naphthalene Benzene Toluene Byline Wash oil

RINL TECHNOLOGY:
o 7Metre tall Coke oven batteries with coke dry quenching o Biggest Blast furnaces in the country o Bell less top charging system in Blast furnace o 100% slag granulation at the BF cast house. o Suppressed combustion LD gas recovery system. o 100% continuous casting of liquid steel. o Tempcore and Stelmor cooling process in LMMM & WRM. o Extensive waste heat recovery systems. o Comprehensive pollution control measures. 19

CORPORATE PLAN OF RINL:


VISION:
To establish as an excellent corporate citizen and ensure optimal return on investment. Harness our growth potential and sustain profitable growth Deliver high quality and cost competitive products and be the first choice of customers Create an inspiring work environment to unleash the creative energy of people. Achieve excellence in enterprise management. Be respected corporate citizen, ensure clean and green environment and develop vibrant communities around us. MISSION: To attain 16 (MT) million tones liquid steel capacity through technological up gradation, operational efficiency and expansion; augmentation of assured supply of raw materials to produce steel at international standards of cost and quality; and to meet the aspirations of the stakeholders. OBJECTIVES: Towards growth Expand the plant capacity to 6 MT by 2009-10, 8 MT by 2014-15 and 10 MT by 2018-19. Towards Profitability Achieve net profits continuously from 2002-03.

Towards Stakeholders Make VSP the company of choice.

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Towards Technology Continuously upgrade technology to operate at international efficiency levels.

Towards Safety, Environment and Society Continue efforts towards safety of employees, conservation of environment and be socially responsive. Expand plant capacity to 6.3 Mt by 2011-12 with the mission to expand further in subsequent phases as per Corporate Plan.

Revamping existing Blast Furnaces to make them energy efficient to contemporary levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity to 7.5 Mt. Achieve higher levels of customer satisfaction.

Vibrant work culture in the organization. Be proactive in conserving environment, maintaining high levels of safety & addressing social concerns.

CORE VALUES:
Value foresight is crucial in todays competitive businesses climate VSP values Commitment Customer satisfaction Continuous improvement Concern for environment

VSP POLICES:
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HR POLICY: In Visakhapatnam Steel Plant, believe that employees are the most important resources. To realize the full potential of employees, the company is committed to:

Provide work environment that makes the employees committed and motivated for maximizing productivity Establish systems for maintaining transparency, fairness and equality in dealing the employees Empower employees for enhancing commitment, responsibility and accountability Encourage teamwork, creativity, innovativeness and high achievement orientation Provide growth and opportunities for developing skill and knowledge Ensure functioning of effective communication channels with employees.

HRD POLICY: In Visakhapatnam Steel Plant, are committed to create an organizational culture which nurtures employees potential for the prosperity of the organization. To accomplish this:

Identify development needs of the employees on a regular basis, provide the necessary training and continually evaluate and monitor the effectiveness of the training so that the quality of the training also gets upgraded

Provide inputs to the employees for developing their attitude towards work and for matching their competencies with the organizational requirements Create an environment of learning and knowledge sharing by providing the means and facilities and also access to the relevant information and literature Facilitate the employees for continuous development of their knowledge base, skills, efficiency, innovativeness, self-expression and behavior so that they contribute positively with commitment for the growth and prosperity of the organization while maintaining a high level of motivation and satisfaction

Prepare employees through appropriate development programs for taking up higher responsibilities in the organization Fulfill social obligations by providing training to the students of educational institutions and to the trainees of other organizations 22

CUSTOMER POLICY:

VSP will endeavor to adopt a Customer-focused approach at all times with transparency VSP will strive to meet more than the Customer needs and expectations pertaining to Products, Quality, Value for Money and Satisfaction VSP greatly values its relationships with Customers and would make efforts at strengthening these relations for mutual benefit

ENERGY POLICY: In Visakhapatnam Steel Plant, are committed to optimally utilize various forms of energy in a cost-effective manner to effect conservation of energy resources. To accomplish this: Monitor closely and control consumption of various forms of energy through an effective Energy Management System Adopt appropriate energy conservation technologies Maximize the use of cheaper and easily available forms of energy

I.T POLICY:
RINL/VSP is committed to leverage Information Technology as the vital enabler in improving the customer-satisfaction, organizational efficiency, productivity, decision-making, transparency and cost effectiveness, and thus adding value to the business of steel making. Towards this, RINL shall

Follow best practices in Process Automation & Business Processes through IT by inhouse efforts / outsourcing and collaborative efforts with other organizations / expert groups / institutions of higher learning, etc, thus ensuring the quality of product and services at least cost

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Follow scientific and structured methodology in the software development processes with total user-involvement, and thus delivering integrated and quality products to the satisfaction of internal and external customers

Install, maintain and upgrade suitable cost-effective IT hardware, software and other IT infrastructure and ensure high levels of data and information security Enrich the skill-set and knowledge base of all related personnel at regular intervals to make employees knowledge-employees Periodically monitor the IT investments made and achievements accrued to review their cost effectiveness

CARE FOR SOCIETY:

The Company has committed Rs.12.75 Crores for the year 2009-10, as against Rs. 38.83 Crores in the previous year, towards Corporate Social Responsibility activities. The reduction is largely due to the reduced PAT for the year.

CORPORATE GOVERNANCE:

Company is committed to conforming to the highest standards of corporate governance by ensuring transparency, disclosures, and reporting as required under the Corporate Governance Guidelines issued by the Department of Public Enterprises.

HUMAN RESOURCE MANAGEMENT:


Human resource initiatives at VSP are clearly linked to the corporate strategy of the organization. VSP has exemplary industrial relations where the entire workforce works as a well knit team for the progress of the Company. The productive environment prevailing in the Company fosters an atmosphere of growth, both for the employees and for the Company. VSP has introduced multi skilling concept since inception and the employees are trained as per this concept. VSP has adopted a system of overlapping shifts, the first of its kind, in the industry.

TRAINING AND HUMAN RESOURCE DEVELOPMENT:

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Training and HRD are given due emphasis at VSP. Each year, a minimum of 1/3rd of the employees undergo various training sessions either at Training and Development Centre or at Centre for HRD for sharpening their skills on the technical and management related issues. Training is also given in the area of safety, fire prevention, and occupational health besides on the job at the shop floor.

SWOT ANALYSIS:

SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be avoided, opportunities that should be banked, and threats that should be faced & yet survive in the business.

STRENGTHS: State of the art technology: VSP was built with the co-operation of USSR and claims to be one of the most modern steel plants in the country. VSP employs highly sophisticated technology, large-scale computerization & automation in the production.

Location advantages: VSP was rendered with additional advantages due to its location. The location aspect has helped the VSP in easy procurement of raw materials as most of the raw materials are imported from Andhra itself, apart from Orissa & M.P which are located nearby. More over the existence of Visakhapatnam port makes it easy in procurement of raw materials like cooking coal from Australia. Also exports to various countries can be made directly from Visakhapatnam port. Self-Sufficiency in power: VSP has its own power generation unit with a total capacity of 286.5 MW. VSP requires power of 180 MW to 200 MW. VSP, after meeting its requirement exports power to APSEB. 25

High commitment on part of employees: The productive environment prevailing in the company fosters an atmosphere of growth both for employees & for the company. The labour productivity is currently262 tonnes/man/year unparallel in the public sector steel industry. Strong commitment to conserve environment: VSP is forefront of Indian industry in area of pollution control, equipment & measures. The total cost of these measures works out at Rs.4600 million which forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified company (certificate for environment protection & pollution control measures). ISO 9002 Certification: VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO certification gives an edge for VSP over other companies & depicts the competency of Vizag steel to compete with the global steel producers. Land and layout for expansion up to 16mt with proximity to port. Quality producer image. High standing for customer service. Committed workforce. Ability to raise fund. WEAKNESS: High intake of employees: VSP employs 17,500 employees including both administrative and plant. When compared to international standard companies like POSCO and other major steel producers, VSP employs 50% more for the same capacity. Hence the salaries of these employees, medical & other facilities will raise cost further which may disturb the cost effectiveness achieved in the production front. Low return product mix: The product mix of VSP is small. VSPs long products like billets, wire rods, structural are facing less demand due to the crisis in South East Asian nations.

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Inadequate port facilities: The berthing facilities at VSP are not adequate relative to the requirements of VSP. No in-house key raw materials-iron ore/coal. Lack of level playing field. Single location company-Only long products, exposed to cyclic market. Major capital repairs and modernization- New overdue. High cost of servicing huge equity. Consumption of coking coal contracted at higher cost in 2008-09.

OPPORTUNITIES: Sizeable export markets: China is the biggest importer of Indian steel. China is going to have huge requirements of steel in next 5 years due to Olympics (in 2008), shanghai expo (in 2010).Reconstruction work in Iraq requires huge amounts of steel where RINL can play a significant role. Other promising factors are Proximity to southern market. Strong economy. Possibility of new markets. A slow but steady increase in domestic steel demand. Potential for growth in domestic steel demand- Low per capita consumption in India. Huge investment planned in infrastructure in 11th plan. THREATS: Global steel majors like POSCO & Mittal steel are venturing into steel production very soon (in Orissa). This may pose a problem to VSP in the procurement of raw materials as it is dependent on Orissa for these materials. Input costs are increasing due to the increasing cost of raw material. Also the demand for coal & coke is escalating. 27

High raw material prices & shift of value chain towards raw materials. Oligopolistic coal supply side. Single Iron ore supplier Located in disturbance prone areas. Predominant secondary sector in long products. VSP High earning island.

MARKETING NETWORK:
The Company markets its products through headquarters marketing office and a network of regional offices, branch offices and stockyards located all over the country. It also takes the help of consignment agents and consignment sales agents for the marketing of its products. The exports are carried out by the export wing of marketing division with the help of different agencies. The Company is recognized as Star Trading House by the Director General of Foreign Trade, Ministry of commerce, Government of India. The end users of the steel products manufactured at the plant include amongst other construction industry, automobile industry, engineering industry, re-rolling industry, forging industry, cable industry, wire drawing industry, fastener industry, electrode manufacturers and railways. The Company is ideally located to serve the southern Indian market. Regional SMangers/Branch managers meet at Head quarters regularly to assess the market situation and decide market strategies.

RECENT TRENDS:
RINL BECOMES NAVARATNA COMPANY: Considering the turn around and the excellent physical and financial performance in the last 4 years vsp has been awarded NavaRatna status by the GOI in the year 2010. This confers more autonomy to vsp management in financial and policy matters. The B.O.D also will be strengthened with more independent non-executive directors.

28

VSP EXPANDING ITS CAPACITY: Vsp has undertaken expansion of capacity from 3-million tone liquid steel to 6.3 million tone liquid steel at a cost of rs.8692cr. Their entire expansion is scheduled to be completed within a period of 4 years from October 2006. The honorable prime minister of india has inaugurated the expansion project by laying foundation stone on 20th may 2006. Vsp will be producing special grade long products required for automobile, railways and other special applications in the new mills which are going to be installed. Due to some un avoidable reasons this project is getting delayed by around 2 years resulting cost escalation to more than Rs14000 Crores.

JOINT VENTURES:
Vsp does not own any mines for extracting much required iron ore and low ash metallurgical coal for its production. Vsp depends on m/s. National mineral development corporation for meeting its iron ore requirements and import sources (Australia) for low ash metallurgical coal. These sources have been increasing their prices disproportionately in recent times due to very high demand because of capacity additions taking place in large scale. In order to have raw material security and control over prices vsp has embarked upon acquiring interest in coal mines and iron ore mines through joint ventures in India and abroad.

IMPLEMENTATION OF ADDITION MODIFICATION AND REPLACEMENT:


In order to improve productivity, constantly upgrade the technology and reduce the cost of production to become one of the worlds lowest cost producers vsp is implementing number of arm schemes on a continuous basis since last 5 years. Vsp is spending substantial amount of funds in the arm schemes which are yielding incremental benefits year after year.

CONSERVATION OF WATER:
29

Vsp has taken up a number of projects for conservation of precious water. This is carried out in three methods. Reduce the consumption of water in the process. Treat the drainage and sewerage water and reuse where ever possible. To construct check dams for diverting rainwater to underground.

FINANCIAL PERFORMANCE OF VSP:


HISTORY: In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP), Visakhapatnam Steel Plant (VSP) stands as a monument of advanced technology. VSP is the first shore based integrated Steel Plant in the country. The decision of Government of India to set up an integrated steel plant at Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in Parliament on 17 th April, 1970 followed by foundation stone laying by her. The initial project cost was sanctioned at Rs. 2256 Crores with an Internal Rate of Return (IRR) 4.20%. The Indian government and USSR signed an agreement on 12th June 1979 for cooperation in setting up the 3.4 million tonne integrated steel plant at Visakhapatnam.

Thereafter the project has undergone three revisions as detailed below. First revision Date of sanction by GOI Capital asset. Financial IRR 30.07.1982 Rs.3897.28 Cr. 5.40% Second revision 24.06.1988 Rs. 6849.70 Cr. 6.56% 3.00 Third revision 12.07.1995 Rs.8593.29 Cr. 5.30% 3.00

Liquid steel capacity (in MT 3.40 per annum) The broad reasons for revisions were: (1) Non-availability of funds on time 30

(2) (3) (4) (5)

Price escalation Enhanced currency exchange rates Revision in taxes and duties Change in ocean freight.

REASONS FOR TIME OVER RUN:


(1) (2) (3) (4) (5) Inadequate fund flow & its delay Midway revision of project concept Dislocation of Soviet equipment suppliers Delay in supplies made by major PSUs. Delay in providing water by AP Government

RATIONALISED CONCEPT:
The construction of the plant started in 1981 and scheduled to be completed in 4 to 6 years in two stages. However, due to inadequate funds availability, there was a threat to project continuance. In order to contain project cost, a Rationalised Project Concept was evolved where while retaining the Hot Metal capacity, the liquid steel capacity was brought down to 3.0 MT from 3.4 MT by dropping one SMS converter and uprating the capacity of other converter. Further on the finishing line, Universal Beam Mill was dropped. The Rationalised Concept helped in reducing the project cost by Rs. 1497 Crores. Details of major production facilities under original concept and revised concept are given at annexure. The plant was commissioned in two stages. The 1 st BF viz., Godavari was commissioned in March 1990. The 2nd BF viz Krishna was commissioned in March 1992 and finally the plant was dedicated to the Nation by the then Honourable Prime Minister Sri PV Narasimha Rao in August 1992.

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CAPITAL RESTRUCTURING:
FIRST CAPITAL RESTRUCTURE: Long gestation period in commissioning the plant and escalation of the project cost to Rs. 8593.29 crores (3.8 times over the original estimate) necessitated capital restructuring, in order to ensure viability and to prevent from becoming potentially sick under Sick Industrial Company (Special Provisions) Act 1985. Action was taken for restructuring the capital base even before the Company became totally commercially operational. restructuring took place in July 1993. BENEFITS FROM CAPITAL RESTRUCTURING: Reduction of loss by Rs. 432.47 crores annually on account of interest saving due to conversion of loans to equity capital, Preference Capital and Interest free loan. Reduction of loss by Rs. 149.40 crores on account of interest saving due to waiver of penal interest. SECOND CAPITAL RESTRUCTURE: The second capital restructuring was approved in May 1998, whereby Rs. 542.47 crores of Government loan was converted into 7% non-cumulative preference share capital redeemable after ten years from the date of release of these loans. Further, conversion of Rs. 791 crores interest free loan to 7% non-cumulative preference capital was also agreed to. Benefits from this capital restructuring was a reduction of loss by Rs. 235.85 crores on account of interest saving and an annual interest saving of Rs. 88.47 crores. While approving second capital restructure, government of India-Inter-alia desired to appoint a financial consultant of repute to suggest a turnaround strategy for the organisation. The first capital

FINANCIAL AND PHYSICAL PERFORMANCE :


FINANCIAL PERFORMANCE:
The financial performance of the organisation against the set targets right from 1990-91 to 2002-03 is placed at Annexure. From this table it can be seen that the Company was gaining 32

considerable gross margin which reflects the satisfactory performance of the plant for all the years except during the year 1998-99 and 1999-2000 when there was a major set back to Coke ovens. Further it had also secured reasonable cash profits barring those two years and initial period up to 1992-94. The Company had again gained its momentum during 2000-01 when it made a cash profit of Rs. 153 crores and turned around during the year 2002-03 making a Net Profit of around Rs. 520crores for the first time. During the last few years, the Company had taken a number of steps like major capital repairs to Coke ovens, BF capital repairs, austerity measures to cut down the cost, restrictions on capital expenditure etc. It may need a special mention that a special drive took place to cut down the interest cost on term loans and working capital arrangements.

PHYSICAL PERFORMANCE:
The details of physical performance as against the targets set right from 1990-91 to 2002-03 are placed at annexure. From the table it can be seen that the targets set were reasonably met by the organization, up to 1999-2000 and far exceeded the targets from the year 2000-01 onwards.

PRESENT PERFORMANCE:
The Company turned around during the year 2002-03, making for first time Net Profit of Rs. 520 crores, achieving Gross sales/turnover of Rs. 5059 Crores. The financial year 200203 is a happy note in VSPs diary because of its remarkable performance in all fronts. On the production front, the Company far exceeded the targets set. The performance of the Company for the year 2002-03 is placed at Annexure. At the beginning of the financial year 2002-03, the Company was having total term loans to the tune of Rs. 1373.98 crores. UTI (Rs. 590.29 Crores, LIC Rs. 580.80 crores and Bonds Rs. 175 crores) are the major outstanding. Apart from this the utilization of working capital limits from the banks were Rs. 600 crores (CC Rs. 96 crores, WODL Rs. 395 Crores in the form of FCNR (B) DL Rs. 267 cores, DCDL Rs. 128 crores and EPC Rs. 109 corers).

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STEPS TAKEN TO REDUCE DEBT BURDEN:


The significant steps taken by the Company to reduce debt burden include restructuring of dept through prepayment of high interest loans out of internal resources, swapping of high cost loans with borrowings from banks at lower interest rates, swapping off high cost working capital demand loans with FCNR borrowings and commercial paper at cheaper rates of interest. The Company due to the above initiatives could prepay the entire term loan of Rs. 590 crores from UTI during the year 2002-03 from out of internal resources and by swapping with bank loans. 15% working capital demand loan of Rs. 400 crores was also substituted with commercial paper with an average interest rate of 7% and FCNR demand loan at an average interest rate of 3.4% to 10.09T. The above steps resulted in brining down outstanding term loans to Rs. 773.37 crores as at the end of the year 2002-03 (debt free on date) and utilization of working capital to the extent of only Rs. 368 crores. The above steps resulted in containing the interest expenditure to Rs. 135 crores for the year 2002-03 as against the previous year level of Rs. 290 crores as shown in Annexure.

PRODUCTION PERFORMANCE (000 TONNES):

YEAR

HOT METAL

LIQUID SALEABLE STEEL 3,606 3,322 3,145 34 STEEL 3,290 3,074 2,701

2006-2007 2007-2008 2008-2009

4,046 3,913 3,546

2009-2010

3,900

3,399

3,167

COMMERCIAL PERFORMANCE (RS. CORS):


YEAR 2006-2007 2007-2008 2008-2009 2009-2010 SALES TURNOVER 9131 10433 10411 10662 DOMESTIC SALES 8487 9878 10333 10444 EXPORTS 424 555 78 68

FINANCIAL PERFORMANCE
Year 2006-07 2007-08 2008-2009 2009-2010 Gross margin 2632 3001 2355 1603

(Rs. In Crores)
Cash profit 2584 2977 2267 1525 Net profit 2222 2686 1336 797

WORKING CAPITAL MANAGEMENT


INTRODUCTION:
Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the inter relationship that exists between them .The term current assets refer to those assets which in the ordinary course of business can be, or will be, converted into cash within one year without undergoing a diminution in value and without disrupting the operations of firm. The major current assets are cash, marketable securities, accounts receivable and inventory. Current liabilities are those liabilities which are intended, at their inception, to be paid in the ordinary course of business, within a year, out of the current assets 35

or earning of the concern. The basic current liabilities are account payable, bills payable; bank over draft, and outstanding expenses, the goal of working capital management is to manage the firms current assets and liabilities in such way that a satisfactory level of working capital is maintained. Working Capital is the Life-Blood and Controlling Nerve Center of a business Definition: Working capital is the amount of funds necessary to cover the operating the enterprise. SHUBIN Working capital means current assets of a company that are changed in the ordinary course of business from one form to another as for example, from cash to inventories, inventories to receivable, into cash. GENE STENBERG

OPERATING / WORKING CAPITAL CYCLE OF MANUFACTURING FORM:

36

CLASSIFICATION OF WORKING CAPITAL:

37

Working capital can be classified into two ways. On the basis of concept On the basis of time.

1.ON THE BASIS OF CONCEPT:


Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period. Net operating cycle = Gross operating cycle - Creditors deferral period NOC = GOC - CDP

2 .ON THE BASIS OF TIME:


On the basis of time, it may be classified as a) Permanent working capital b) Temporary working capital

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PARMANENT WORKING CAPITAL:

Permanent working capital is the amount invested in all current assets which is required at all times to carry out minimum level of business activities. It grows with the size of the size of the business. It is permanently needed for the business and therefore be financed out of long term funds.

VARIABLE WORKING CAPITAL:


Variable working capital is the excessive amount over permanent working capital.

This keeps on fluctuating from time on the business activities. It is further divided into Seasonal working capital Special working capital Seasonal working capital is required to meet the seasonal demands of busy periods occurring at stated intervals. Whereas special working capital is 5required to meet extraordinary needs for contingencies.

FOCUSING ON MANAGEMENT OF CURRENT ASSETS:


The gross working capital concept focuses attention on two aspects of current assets management: (1) how to optimize investment in current assets? (2)How should current assets be financed? The consideration of the level of investment in current assets should avoid two danger points- excessive or inadequate investment in current assets. Investment in current asset should be just adequate to the needs of the business firm. Excessive investment in current asset should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can threaten solvency of the firm because of its inability to meet its current obligations. It should be realized that the working capital needs of the firm may be fluctuating with changing business activity. This may cause excess or

39

shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalances.

OPERATING AND CASH CONVERSION CYCLE:


Operating cycle is the time duration required to convert into sales, after the conversion of resources into inventories and cash. The operating cycle of a manufacturing company involves three phases: Acquisition of resources such as raw material, labour power and fuel etc., Manufacture of the product which includes conversion of raw material into work-inprogress into finished goods. Sale of the product either for cash or on credit, Credit sales create account receivable for collect The length of operating cycle of a manufacturing firm is the sum of inventory conversion period (ICP), and debtors (receivable) conversion period (DCP). The inventory conversion period is the total time needed for producing and selling the product. It includes raw material conversion period (RMCP), work-inprogress conversion period (WIPCP) and finished goods conversion period (FGCP). The debtor conversion period is the time required to collect the outstanding amount from the customers. The net operating cycle also represents the cash conversion cycle (CCL). It is the net time interval between cash collection from sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations.

40

GROSS OPERATING CYCLE (GOC):


The firms gross operating cycle can be determined as inventory conversion period (ICP) plus debtor conversion period (DCP). Thus GOC is given as follows:

Gross operating cycle = Inventory conversion period + debtor conversion period GOC = ICP + DCP
Inventory conversion period (ICP) is the sum of raw material conversion period (RMCP), work-in-progress conversion period (WICP), and finished good conversion period (FGCP).

ICP = RMCP + WICP + FGCP


1. RAWMATERIAL CONVERSION PERIOD (RMCP): It is the average time period taken to convert raw material in to work-in-progress. RMCP depends on raw material consumption per day and raw material inventory. Raw material consumption per day is given by the total raw material consumption divided by the number of days in the year (say 360). The raw material conversion period is obtained when raw material inventory is divided by raw material consumption per day. Rawmaterial conversion period (RMCP) = (Raw material consumption)/360 RMCP = RMI360 RMC 2. WORK IN PROGRESS CONVERSION PERIOD (WIPCP): It is the average time taken to complete the semi-finished or work-in-progress. Work-in-progress conversion period = Work-in-progress inventory 41

(Cost of production)/360 3. FINISHED GOODS CONVERSION PERIOD (FGCP): It is the average time taken sell the finished goods. Finished goods conversion period = Finished goods inventory (Cost of goods sold)/360 FGCP = FGI360 CGS 3. DEBTOR CONVERTION PERIOD (DCP): It is the average time taken to convert debtors in to cash. DCP represents the average collection period. DCP = debtors 360 Credit sales

CASH CONVERSION OR NET OPERATING CYCLE (NOC):


Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period. Net operating cycle = Gross operating cycle - Creditors deferral period NOC = GOC - CDP5. CREDITORS DEFERRAL PERIOD (CDP): it is the average time taken by the firm in paying its suppliers (creditors). CDP = Creditors360 Credit purchases

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DETERMINANTS OF WORKING CAPITAL IN RINL:


It is understood that working capital is the vital component for future growth of the firm. Financial manager has to maintain adequate level of working capital. There are several factors influence the determinants of working capital. It is necessary to know those factors which identifying the optimum size of working capital. In RINL working capital is generally deter mind by these factors. They are: 1. Market Coverage 2. Manufacturing Cycle 3. Advances 4. Growth of the firm 5. Seasonal fluctuations 6. Global Market boom 7. Expansion Chances 8. Credit Policy The Management of working capital in RINL encompasses the following problems:1. To decide upon the optimal level of investment in various current assets. 2. To decide upon the optimal mix of short-term funds high relation to long term capital. 3. To locate the appropriate means of short-term financing.

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THE DANGERS OF EXCESSIVE WORKING CAPITAL:


It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affect profit. Excessive working capital makes management complacent which degenerates in to managerial efficiency. Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

THE DANGERS OF INADEQUATE WORKING CAPITAL:


It becomes difficult for the firm to undertake profitable projects for non availability of working capital funds.It becomes difficult to implement operating plans and achieve the firms profit target. Operating in inefficiencies creep in when it becomes difficult even to meet day to day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus the firms profitability would deteriorate. Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc.

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DIFFERENT WORKING CAPITAL RATIOS:


Although working capital management particularly its receivable component, apparently takes on a short term approach, commitment to a particular receivables policy and the customer relation ship that emanates from it are long term in nature. Hence, the credit manager must take a long term as well as short term view of the business to which he is going to commit him self. It is not important to have a strong accounting background to make intelligent use of financial statements. A credit manager is required to calculate and interpret certain key ratios which will tell him where his account receivables are in danger or not. Classification of ratio: Liquidity ratio Solvency ratio Profitability ratio

LIQUIDITY RATIO:
This ratio measures the ability of a business organization to pay short term obligations in time. The liquidity ratio can be sub classified into two groups. Liquidity study Efficiency study LIQUIDITY STUDY: The liquidity study can be further classified in to three categories. Current ratio Quick ratio(acid test ratio) Absolute liquid ratio

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EFFICIENCY STUDY: The efficiency study can be further classified in to three categories. Inventory turn over ratio(ITR) Debtor turn over ratio(DTR) Creditors turn over ratio(CTR)

CURRENT RATIO:
It establishes the relationship between the current assets and current liabilities. Mathematically,

Current ratio=current assets/ current liabilities


Rule of thumb: The standard fixed for current ratio is 2:1 The current ratio is a crude measure of liquidity.

QUICK RATIO:
It establishes the relationship between liquid asset and current liability. Mathematically,

Quick ratio=liquid assets /current liabilities


It is the absolute measure of liquidity. Rule of thumb: The normal standard fixed for the quick ratio is 1:1 It is a rigorous measure of examining the liquidity of a business concern. Its other name is also acid test ratio.

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ABSOLUTE LIQUID RATIO:


It establishes the relationship between absolute liquid assets and current liabilities. Mathematically,

Absolute liquid ratio=absolute liquid assets/current liability


Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2 A rare measure of liquidity used under certain special circumstances.

INVENTORY TURN OVER RATIO:


ITR measures the relationship between cost of goods sold and the average inventory during the period. Mathematically,

ITR=cost of goods sold/average inventory


Or

Sales / average inventory


Its main objective is to measure the movement of stock. It is an absolute measure of movement of stock or inventory.

DEBTOR TURNOVER RATIO (DTR):


It measures or establishes a relationship between the net sales and the average debtor. Mathematically, DTR=net sales/average debtors

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It measures the conversion of debtors in to the cash. It is an absolute measure of measuring the turn over or conversion of debtors. There is a relative measure also namely average collection period. Average collection period=365/DTR (days)

CREDITORS TURNOVER RATIO (CTR):


While receivables turn over ratio of the customer organization measures the vulnerability of the sources from which payables of the vendor-organizations are satisfied, the creditors turn over ratio indicates the actual payment behavior of the customer organization. CTR=purchases/trade creditors (payables) Conversion of this ratio in number of days = 365/CTR

CONSTITUENTS OF CURRENT ASSETS:


1) Cash in hand and bank balances 2) Bills receivable 3) Sundry debtors(less provision for bad debts) 4) Short term loans and advances 5) Inventories of stock as: a. Raw materials b. Work-in-progress c. Stores and spares d. Finished goods 6) Temporary investments of surplus funds 7) Prepaid expenses 8) Accrued income

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In narrow sense the term working capital refers to the net working capital. Net working capital is the excess of currents assets over current liabilities Gross working capital= Current assets total Net working capital=Current assets-Current liabilities Current Liabilities are those, which are expected to fall due or nature of payment in short period of one year, and they represent short-term sources of funds they include 1. Short-term borrowings: include bank borrowings other than those against own debentures and other mortgages. 2. Trade creditors and other liabilities Sundry creditors, outstanding expenses and advances received. Provisions for taxation, dividends and other current provisions

CONSTITUENTS OF CURRENT LIABLITIES:


1. Bills payable 2. Sundry creditors (or) Accounts payable 3. Accrued or outstanding expenses 4. Short-term loans, advances and deposits 5. Dividends payable 6. Bank overdrafts 7. Provision for taxation.

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THE NEED FOR WORKING CAPITAL:


A firm has to make profit to maintain its image in the capital market the investors will also be looking forward to the continuous growth of profitability gradual increase in profit will result in capital growth of the firm. To earn substantial profit, sales volume has to be increased. It is observed that sale of goods will not immediately be converted in to cash. When the sale transactions are more credit in nature to have uninterrupted business operations the amount will be looked up in the current assets like accounts receivables, stock, etc., This actually happens due to the cash cycle by the time the cash is converted back to the cash. The firm needs extra funds and hence the need for working capital. If this is not provided the business operations will be effected to a greater extent and hence this past of finance has to be managed well.

THE

WORKING

CAPITAL

NEED

FOR

THE

FOLLOWING

PURPOSES:
1. The purchase of raw materials, components and spares 2. To pay wages and salaries. 3. To incur day-to-day expenses and overhead cost such as fuel, power and office expenses, etc., 4. To meet the selling costs as packing, advertising etc,. 5. To provide credit to the customers. 6. To maintain the inventories of raw material, work-in-progress, stores and spares and finished stock.

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IMPORTANCE OF WORKING CAPITAL:


Working capital is the life blood and nerve center of a business, just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows: Solvency of the business. Goodwill. Easy loans. Cash discounts. Regular supply of raw material.

APPROACHES FOR FINANCING WORKING CAPITAL:


There are two sources of financing working capital requirements: LONG TERM SOUECES: Long term sources such as share capital, debentures, public deposits, Pouching back of profits, loans from financial institutions. SHORT TERM SOUECES: Short term sources such as commercial banks, indigenous bankers, traders creditors, and installment credit, advances, and accounts receivables and so on. There are three basic approaches for determining an appropriate Working capital financing mix. Hedging approached Conservative approach Aggressive approach

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1. HEDGING APPROACH:
The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source of funds raised to finance assets. The firm follows matching approach. It suggests that the permanent financed with funds from short term funds working capital requirements should be financed with funds from long term sources while temporary working capital requirements should be

2. CONSERVATIVE APPROACH:
This approach suggests that the entire estimated investments in current assets should be financed from long term sources and the short term sources should be used only for emergency requirements. The distinct features of this approach are: Liquidity is severally greater Risk is minimized The cost of financing is relatively more as interest has to be paid even on seasonal requirements for the entire period.

3. AGGRESSIVE APPROACH:
The aggressive approach suggests that the entire estimated requirements of current asset should be financed from short term sources and even a part of fixed asset investments be financed from short term sources. This approach makes the finance mix more risky, less costly and more profitable.

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ADVANTAGES OF ADEQUATE WORKING CAPITAL:


Working capital is the life blood and center of a business. Working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital .Some of the advantages of working capital management is as follows. SOLVENCY OF THE BUSINESS: Adequate working capital enables helps in maintaining solvency of the business by providing the uninterrupted flow of production. GOODWILL: Sufficient working capital enables a business concern to make prompt payments and hence help in creating and maintaining goodwill. EASY LOANS: A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms. CASH DISCOUNTS: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. REGULAR SUPPLY OF RAW MATERIALS: Sufficient working capital ensures regular supply of raw materials and continuous production. REGULAR PAYMENTS: Regular payment of salaries, wages and other day to day commitments. A company which has sample working can make regular payment of salaries, wages and other day to day commitments which raises the moral of its employees, efficiency and enhances production and profits. 53

DETERMINANTS OF WORKING CAPITAL:


The need for working capital is not always the same; it varies from year to year or even month to month depending upon a number of factors. There is no set of rules or formulate to determine the working capital needs of the firm. Each factor has its own importance and the importance of the factors changes for a firm over a time. In order to determine the proper amount of working capital of a concern, the following factors should be considered carefully. NATURE OF THE BUSINESS: The amount of working capital is basically related to the nature and volume of the business concern where the cost of the raw materials to be used in the manufacturing of a product is very large in proportion to its total cost of manufacturing the requirements of working capital will be very large. SIZE OF THE BUSINESS UNIT: The size of the business unit has an important impact on its working capital needs. Size may be measured in terms of operations. A firm with large scale of operation will need more working capital then a small firm. SEASONAL VARIATION: Seasonal industries require more working capital to stock the raw materials during the season. In peak season TIME CONSUMED IN MANUFACTURING: The average time taken in the process of manufacturing is also an important factor in The process of manufacturing is also an important factor in determining the amount of working capital .The longer the period of manufacturing the larger the inventory required.

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TURN OVER OF CIRCULATING CAPITAL: Rapidly of turnover determines the amount of working capital .The faster the sales the larger the turnover hence less working capital. MANUFACTURING/PRODUCTION POLICY: Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of demand based production in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. OPERATIONS: The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winter the sales are negligible. MARKET CONDITION: If there ids high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. For which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. AVAILABILITY OF RAW MATERIAL: If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large amount of working capital is required. TERMS OF PURCHASE AND SALE: Terms of purchase and sales affect the amount of working capital .The practice of cash purchases with credit sales requires more working capital. INVENTORY TURNOVER: 55

With a better inventory control, a form is able to reduce its working capital requirements. If the inventory turnover is high the working capital requirements will be low. GROWTH AND EXPANSION: Growing concerns requires more working capital than the forms that are static. It is logical to expect larger amount of working capital in a growing concern to mean its growing needs of funds.

LEVELS OF WORKING CAPITAL INVESTEMENT:


The overall policy considers both the level of working capital investment and its financing. In practice, the firm has to determine the joint impact of these two decisions upon its probability and risk. The size and nature of a firms investment in current assets is a function of a number of different factors, including the following:

The type of products manufactured. The length of the operating cycle. The sales levels. Inventory polices. Credit policies. How efficiently the firm manages current assets.

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INVENTORY MANAGEMENT:
Every enterprise needs inventory for smooth running of its activities. It serves as a link between production and distribution process. There is, generally a time lag between the recognition of a need and its fulfillment. Greater the time lag the higher the requirements for inventory. The unforeseen fluctuations in the demand and supply of goods also necessitate the need for inventory. It also provides a cushion for future price fluctuations. The investment in inventories constitutes the most significant part of current assets/working capital in most of the undertakings. Thus it is very essential to have proper control and management of inventories. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories. Inventories include all types of stocks. For effective working capital management, inventory needs to manage effectively. The level of inventory should be such that the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs should also be minimized. Business, therefore, should fix the minimum safety stock level, reorder level and ordering quantity so that the inventory cost is reduced and its management becomes efficient. The meaning of inventory is Stock of goods or a list of goods. In accounting language it may mean Stock of finished goods only. In a manufacturing concern it may include raw materials, work in process and stores etc.

PURPOSE OF INVENTORY MANGEMENT:


Every firm needs to maintain inventories To facilitate continuous production and timely execution of sales orders To meet the unpredictable changes in demand and supplies of material To reduce ordering costs and avail quantity discounts etc. For taking advantages of price fluctuations, saving in reordering costs.

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NEED TO HOLD INVENTORIES:


There are three general motives for holding inventories. 1. The Transaction Motive: Which emphasis the need to maintain inventories to facilitate smooth production and sales operation. 2. The Precaution Motive: This necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. 3. The Speculative Motive: This influences the decision to increase or reduce inventory level to take advantage of price fluctuation.

OBJECTIVIES OF INVENTORY MANAGEMENT:


The main objectives of inventory management are operational and financial. The operational objectives mean that the materials and spears should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The objectives of inventory management are as follows. To ensure continuous supply of materials spares and finished goods so that product should not suffer at any time and the customers demand should also be meeting. To avoid both overstocking and under stocking of inventory.

To maintain investment in inventories at the optimum level as required by the operational and sales activities.

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To keep material cost under control so that they contribute in reducing cost of production and overall costs. To minimize losses through deterioration, wastages and damages.

To facilitate furnishing of data for short term and long term planning and control of inventory.

TOOLS AND TECHNIQUES OF INVENTORY MANGEMENT:


In managing inventories, the firms objective should be in consonance with shareholder wealth maximization principle. To achieve this, the firm should determine the optimum level of inventory. Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility the firm may sometimes run out of stock and sometimes may pile up necessary stocks. This increases the level of investment and makes the firm unprofitable. To manage inventories efficiency, answers should be sought to the following two questions: How must should be ordered? When should it be ordered? The first question, how much to order, relates to the problem of determining economic order quantity (EOQ), and is answered with an analysis of cost maintaining certain level of inventories. The second question, when to order, arises because of uncertainty and is a problem of determining the re-order point.

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ECONOMIC ORDER QUANTITY (EOQ):


One of the major inventory management problems to be resolved is how much inventory should be added when inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it has to be purchased on replenishment. If the firm is planning a production run, the issue is how much production to schedule (or how much to make). These problems are called order quantity problems, and the task of the firm is to determine the optimum or economic order quantity (or economic lot size). Determining an optimum inventory level involves two types of costs: Ordering cost Carrying cost. The Economic Order Quantity is that inventory level that minimizes the total of ordering and carrying costs.

ORDERING COST:
The term ordering costs is used in case of raw materials (or supplies) and includes the entire costs of acquiring raw materials. They include costs incurred in the following activities: Requisitioning, purchase ordering, transporting, receiving, inspecting and storing (store placement). Ordering costs increase in proportion to the number of orders placed. The clerical and staff costs, however, do not have to vary in proportion to the number of orders placed, and one view is that so long as they are committed costs, they need not be reckoned in computing ordering cost.

CARRYING COST:
Cost incurred for maintaining a given level of inventory are called carrying costs. They include storage, insurance, taxes, deterioration and obsolescence. The storage costs comprise cost of storage space (warehousing cost), stores handling costs and clerical and staff service cost (administrative costs) incurred in recording and providing special facilities such as fencing, lines, races etc.

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INVENTORY CONTROL SYSTEMS: A firm needs an inventory control system to effectively manage its inventory. There are several inventory control systems in vogue in practice. They range from simple systems to very complicated systems. The nature of business and the size dictate the choice of an inventory control system. For example, a small firm may operate a two-bin system. Under this system, the company maintains two bins. Once inventory in one bin is used, an order is placed, and meanwhile the firm uses inventory in the second bin. For a large departmental store that sells hundreds of items, this system is quite unsatisfactory. The departmental store will have to maintain a self-operating, automatic computer system for tracking the inventory position of various items and placing order.

ABC INVENTORY CONTROL SYSTEM:


Large numbers of firms have to maintain several types of inventories. It is not desirable to keep the same degree of control on all the items. The firm should pay maximum attention to those items whose value is the highest. The firm should, therefore, classify inventories to identify which items should receive the most effort in controlling. The ABC Analysis Concentrates on important items and is also known as control by importance and exception (CIE). As the items are classified in the importance of their relative value, this approach is also known as proportional value analysis (PVA). The following steps are involved in implementing the ABC analysis: Classify the items of inventories, determining the expected use in units and the price per unit for each item. Determine the total value of each item by multiplying the expected units by its units price. Rank the items in accordance with the total value, giving first rank to the item with highest total value and so on. Compute the ratios (percentage) of number of units of each item to total units of all items and the ratio of total value of each item to total value of all items. Combine items on the basis of their relative value to form three categories-A, B and C.

CASH MANAGEMENT
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INTRODUCTION: The term cash is used in two senses. In a narrower sense it includes currency notes, cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In a broader sense it also includes near cash assets such as marketable securities and time deposits with bank. The main reason for a firm to hold cash is to meet the needs of day-to-day transactions and to protect the firm against uncertainties characterizing its cash flows. While cash serves these functions, it is an idle resource which has an opportunity cost. The liquidity provided by cash holding is at the expense of profits sacrificed foregoing alternative opportunities. Hence, the finance manager should carefully plan and control cash. Cash is the one of the current assets of a business. It is needed at all times to keep the business going. A business concern should always keep sufficient cash for meeting its obligations. Any shortage of cash will hamper the operations of a concern and any excess of it will be unproductive. Cash is the most unproductive of all the assets. While fixed assets like machinery, plant etc and current assets such as inventory will help the business in increasing its earning capacity, cash in hand will not add anything to the concern. It is in this context that cash management has assumed much important. There remains gap between cash inflows and outflows. Sometimes cash receipts are more than cash payments. It is called surplus. Sometimes cash payments are more than cash receipts. This is called as deficiency. A financial manager tries to synchronies cash inflows and cash outflows. Perfect synchronization of receipts and payments of cash is only an ideal situation.

Cash management has assured importance because it is the most significant of all the 62

current assets. It is required to meet business obligations and it is unproductive when not used. It is deals with the following. Cash inflows and out flows. Cash flows within the firm. Cash balances held by the firm at a point of time. Cash management needs strategies to deal with various facets of cash. Following are some of the facets.

CASH PLANNING:
Cash planning is a technique to plan and control the use of cash. A projected cash flow statement may be prepared, based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated & cash outflows will determine the possible uses of cash.

CASH FORESTING AND BUDGETING:


A cash budget is the most important device for the control of receipts and payment of cash. A cash budget is an estimate of cash receipts. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay. The short-term forecasts can be made with the help of cash flow projections. The longterm cash forecasts are also essential for proper cash planning. These estimates may be for three, four, five or more years. A long term forecast indicates company's future financial needs for working capital. Both short term and long term forecasts may be made with the help of following methods. a) Receipts and disbursements method. b) A adjusted net income method.

OBJECTIVES:
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To meet cash disbursement need as per the payment schedule.


Utilization of cash effectively. To minimize amount locked up as cash balances.

MOTIVE FOR HOLDING CASH:There are four motives for holding cash; Transaction motive Speculative motive Compensation motive Precautionary motive

TRNSACTION MOTIVE: A firm enters into a variety of business transactions resulting in both inflows and outflows. SPECULATIVE MOTIVE: A firm keeps cash balance to take advantage of unexpected opportunities, typically outside the normal course of the business such motive is therefore is purely speculative motive.

COMPENSATION MOTIVE: 64

Banks provide certain services to their clients free of charge. They therefore, usually require clients to keep to minimum cash balance with them which keep them to earn interest and they compensate them for the free services so provided.

PRECAUTIONARY MOTIVE:A firm keeps cash balance to meet unexpected cash needs arising out of unexpected contingencies.

WORKING CAPITAL STATEMENT OF RINL 20062007 (Figures in cores)


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Particulars CURRENT ASSETS Inventories Sundry debtors Cash and bank bal Other current assets Loans and advances Total current assets (a) CURRENT LIABILITIES Liabilities Provision Total current liabilities (b) Net Working capital (a-b) Net Increase in Working Capital Total

2006 March

2007 March

Increase

Decrease

1218.35 166.27 5621.7 184.36 1061.32 8252

1203.24 216.8 7194.68 314.48 1518.9 10448.1 50.53 1572.98 130.12 457.58

15.11

785.77 716.37 1502.14 6749.86 1593.94 8343.8

1011.53 1092.77 2104.3 8343.8

225.76 376.4

1593.94 8343.8 2211.21 2211.21

Source: Annual report 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 1572.98 crores. A positive growth is observed in loan & 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.

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WORKING CAPITAL STATEMENT OF RINL 20072008 (Figures in cores)


2008 March 1761.15 93.41 7699.11 292.43 1958.49 11804.59 439.59 504.43 22.05

Particulars CURRENT ASSETS Inventories Sundry debtors Cash and bank bal Other current assets Loans and advances Total current assets (a) CURRENT LIABILITIES Liabilities Provision Total current liabilities (b) Net Working capital (a-b) Net Increase in Working Capital Total

2007 March

Increase

Decrease

1203.24 216.8 7194.68 314.48 1518.9 10448.1

557.91 123.39

1011.53 1092.77 2104.3 8343.8 269.17 8612.97

1610.15 1581.47 3191.62 8612.97

598.62 488.7

269.17 8612.97 1501.93 1501.93

Source: Annual report of RINL

INTERPRETATION:
There is a significant increase in net working capital, which amounts to 269.17crores. There noticeable increase in net working capital is due to increase in inventories, cash & bank balances. The increase in cash is 504.43crores. A positive growth is observed in loan & advances. 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. 67

WORKING CAPITAL STATEMENT OF RINL 20082009 (Figures in cores)


2008 March 1761.15 93.41 7699.11 292.43 1958.49 11804.59 2009 March

Particulars CURRENT ASSETS Inventories Sundry debtors Cash and bank bal Other current assets Loans and advances Total current assets (a) CURRENT LIABILITIES Liabilities Provision Total current liabilities (b) Net Working capital (a-b) Net decrease in Working Capital Total

Increase

Decrease

3215.28 191.27 6624.17 258.91 1569.69 11859.32

1454.13 97.86 1074.94 33.52 388.8

1610.15 1581.47 3191.62 8612.97

2560.79 1620.53 4181.32 7678 934.97 934.97 2486.96

950.64 39.06

8612.97 8612.97

2486.96

Source: Annual report of RINL

INTERPRETATION:
There is a significant decrease in net working capital, which amounts to 934.97 crores. There noticeable decrease in net working capital is due to decrease in cash & bank balances. The decrease in cash is 1074.94crores. A negative growth is observed in loan & advances and other current assets. The net effect of the above changes has brought about the decreased working capital.

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WORKING CAPITAL STATEMENT OF RINL 20092010 (Figures in cores)


2010 March

Particulars Current Assets Inventories Sundry debtors Cash and bank bal Other current assets Loans and advances Total current assets (a) Current Liabilities Liabilities Provision Total current liabilities (b) Net Working capital (a-b) Net decrease in Working Capital Total Source: Annual report of RINL

2009 March 3215.28 191.27 6624.17 258.91 1569.69 11859.32

Increase

Decrease

2451.52 181.18 5415.54 137.40 1365.02 9550.66

763.76 10.09 1208.63 121.51 204.67

2560.79 1620.53 4181.32 7678

2871.95 1435.89 4307.84 5242.82 2435.18 2435.18 2619.82 184.64

311.16

7678

7678

2619.82

INTERPRETATION:
There is a significant decrease in net working capital, which amounts to 2435.18 crores. There noticeable decrease in net working capital is due to decrease in cash & bank balances and inventories. The decrease in cash is 1208.63crores and inventories are 763.28crores. A negative

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growth is observed in loan & advances and other current assets. The net effect of the above changes has brought about the decreased working capital.

GROSS WORKING CAPITAL (Figures in cores)

Year 2006-2007 2007-2008 2008-2009 2009-2010

Gross Working Capital ( Rs in crores) 10448.10 11804.59 11859.32 9550.66

18 000 16 000 14 000 12 000 10 000 8000 6000 4000 2000 0 2006-2007 20 07-2008 2008-2 009 2009-2010

INTERPRETATION:
It shows the changes in working capital during the year from 20062007 to 2007-2008 here is a significant increase in net working capital, which amounts to 11084.59 crores. There noticeable decrease in net working capital is due to decrease in cash & 70

bank balances and inventoriesThe net effect of the above changes has brought about the decreased working capital.

NET WORKING CAPITAL

Year 2006-2007 2007-2008 2008-2009 2009-2010

Net Working Capital (Rs. in crores) 8343.80 8612.97 7678.00 5242.82

14 000 12 000 10 000 8000 6000 4000 2000 0 2006-2007 20 07-2008 2008-2 009 2009-2010

INTERPRETATION:
It shows the changes in working capital during the year from 20062007 to 2009-2010. During the year 2009-2010 the working capital decreased to Rs.5142.82. during the year 2006-2007 the working capital increase to Rs.8612.97.

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SOME RATIOS PERTAINING TO WORKING CAPITAL CURRENT RATIO:


Current ratio= current assets Current liabilities

YEAR 2006-2007

CURRENT ASSETS 10448.10

CURRENT LIABILITIES 2104.30

CURRENT RATIO 5.0

2007-2008

11804.59

3191.62

3.69

2008-2009

11859.32

4181.32

2.83

2009-2010

9550.66

4307.84

2.21

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BAR DIAGRAM SHOWING CURRENT RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

12000 10000 8000 6000 4000 2000 0

C URRE AS E S NT S T C URRE L NT IABIL IE IT S C URRE RAT NT IO

2006-2007

2007-2008

2008-2009

2009-2010

INTERPRETATION:
Current ratio increased by twice almost from 2006-2007. Then onwards it increased gradually because of decrease in current liabilities. The decrease in current liabilities is less than the increase in current assets. In the year 2009-2010 current assets decreased and current liabilities remains constant. This implies that the companys short term solvency position is good.

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WORKING CAPITAL TURNOVER RATIO:


. Working capital turnover ratio=

net sales Average working capital

YEAR

Net Sales (In Crores)

Working Capital (In Crores)

Working Capital Turnover Ratio

2006-2007

7932.66

8343.80

0.95

2007-2008

9088.37

8612.97

1.06

2008-2009

9128.38

7678.00

1.18

2009-2010

9809.15

5242.82

1.87

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BAR DIAGRAM SHOWING WORKING CAPITAL TURNOVER RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2006-2007 2007-2008 2008-2009 2009-2010

NE S E T AL S AV ORK GW ING C IT AP AL W ORK INGC IT AP AL T URNOVE RAT R IO

INTERPRETATION:
The plant sales levels increased from 2006-2007 to 2009-2010. The working capital increased from 2006-2007 to 2007-2008. Then it decreased gradually from 2007-2008 to 2009-2010.

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INVENTORY TURNOVER RATIO:


. Inventory Turnover ratio=

Cost of goods sold Average Stock

YEAR

Cost of goods sold

Average stock

Inv.Turnover ratio

2006-07

9150.57

1210.79

7.56

2007-08

10433.07

1228.88

8.49

2008-09

10410.63

3215.28

3.23

2009-10 .

10634.63

2451.52

4.33

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BAR DIAGRAM SHOWING INVENTORY TURNOVER RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

12000 10000 8000 6000 4000 2000 0

C TOFGOODS OS S D OL AVG.S OC T K INV UR .T NOVE R RAT IO

2006-2007

2007-2008

2008-2009

2009-2010

INTERPRETATION:

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The inventory turnover ratio indicates good inventory management. It may be indicates under investment is very low level of inventory also .In the RINL the inventory turnover ratio increased from 2006-2007 to 2007-2008 because of increased in the cost of goods. But the ratio decreased from 2007-2008 to 2008-2009 because of increase in average stock.

ABSOLUTE LIQUIDITY RATIO:

. Absolute liquidity ratio=

Cash Current liabilities

YEAR

Cash

Current liabilities

Absolute current ratio

2006-07

7194.68

2104.30

3.42

2007-08

7699.11

3191.62

2.41

2008-09

6624.17

4181.32

1.58

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2009-10

5415.54

4307.84

1.26

BAR DIAGRAM SHOWING ABSOLUTE LIQUIDITY RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

8 0 00 7 0 00 6 0 00 5 0 00 4 0 00 3 0 00 2 0 00 1 0 00 0 20 6 07 0 -20 2 7-2 0 00 0 8 2 8-2 9 00 00 2 9-2 0 00 01

C H AS C R NT UR E L IABIL IE IT S ABS UT C R NT OL E UR E R IO AT

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INTERPRETATION:

The ideal absolute liquid ratio is 0.5:1. The RINL maintenance decrease in absolute liquid ratio from 2006-2007 to 2009-2010. It indicates the RINL is in a position not to meet its obligations.

PROFITABILITY RATIO:
.Profitability Ratio=

Gross profit Net sales

YEAR 2006-07

Gross profit 2271.00

Net sales 7933.00

Profitability ratio 0.281

2007-08

3027.00

9088.00

0.333

2008-09

2115.00

9125.00

0.232

80

2009-10

1326.00

9809.00

0.136

BAR DIAGRAM SHOWING PROFITABILITY RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2006-2007 2007-2008 2008-2009 2009-2010

GROS P S ROF IT NE S E T AL S P ROF ABIL YRAT IT IT IO

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INTERPRETATION:
The companys sales levels increase from 2006-2007 to 2009-2010 and the profitability ratio decreased from 2006-2007 to 2009-2010 due to decrease in net sales.

NET PROFIT RATIO:


Net profit Ratio= Net profit Sales

YEAR 2006-07

Net profit 1363.43

Sales 7932.66

Net profit ratio 1.718

2007-08

1942.74

9088.37

2.100

2008-09

1335.57

9128.38 82

1.463

2009-10

796.67

9809.15

0.812

BAR DIAGRAM SHOWING NET PROFIT RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

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10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2006-2007 2007-2008 2008-2009 2009-2010

NE P OF T R IT S E AL S NE P OF R IO T R IT AT

INTERPRETATION:

The net profit levels as well as sales levels are showing decling trends because of more operational and selling expenses.

QUICK RATIO:

Quick Ratio=

Quick Assets Current Liabilities

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YEAR 2006-07

Quick Assets 9244.86

Current 2104.30

Liabilities

Quick ratio 4.49

2007-08

10043.44

3191.62

3.14

2008-09

8644.04

4181.32

2.06

2009-10

7099.14

4207.84

1.65

BAR DIAGRAM SHOWING QUICK RATIO OF RINL FOR THE LAST 4 YEARS 2006-2010

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12000

10000

8000

QUICKAS ETS S CUR EN R T L IL IAB ITIES QUICKR ATIO

6000

4000

2000

0 2006-2007 2007-2008 2008-2009 2009-2010

INTERPRETATION:

Quick ratio is showing a favorable performance, which is over the ideal ratio 1:1 this indicates that the quantum of in total current cash is just satisfactory hence the company can easily meet its short term obligations. Improvement of average stock is more than cost of goods sold.

FINDINGS
In finance, working capital is synonymous with current assets; VSP 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. 86

Monitoring the duration of the operating cycle is an important aspect of current assets management and control.

Definite shift in the product mix towards value added steel and continuous performance at above the rated capacities helped VSP in maintaining margins in tough market conditions.

The company has recently acquired Eastern Investments ltd 51% stake which holds 50% stake in Orissa Mineral & Development Corporation (OMDC), Basra Lime Stone Ltd for Rs362 Crores during December 2010.

SUGGESTIONS
Total current asset has decreased due to reduction in current assets like cash & bank balances, other current assets and loans & advances. As major funds i.e. internal

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generations, maturities from fixed deposits are used for funding ongoing capital expenditure of Expansion Project. The important part of the project i.e. Cash Management at RINL, RINL has all controls to collect, monitor and utilize cash for their working Capital needs. The major objective of Corporate Treasury is to avoid delays between the time of deposition of funds in the banks at collection centers and the time at which the same are received at headquarters. To achieve this is need continuous liaison between the banks, collection centers and headquarters are a must. I. Funds are transferred by way of RTGS/NEFT and e-transfer facility provided by the banks. 90% of the transactions are done through these facilities.

CONCLUSION

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Company working capital management has being done very effectively. The return on investment is very high when compared to loans, which are being sourced at very cheaper rate of interest. Sincere efforts should be made by the company to acquire mines/ companies of mutual interest for better future of the organization.

BIBLOGRAPHY:

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1 2 3 4 5 6

Essentials of Financial Management Financial Management Financial Management Theory & Problems of Financial Management Financial Management Annual Reports

I.M.Pandey Prasanna Chandra R.K.Sharma, sheshi k. Gupta Khanm.Y &Jain P.K Kulkarni Search Engine Google

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