Working Capital MGT
Working Capital MGT
Working Capital MGT
WITH REFERNCE TO
PROJECT REPORT
Submitted by
K.KUSUMA
Registration No. : 1509907025
B.PRAKASH BABU
ETCHERLA 2015-2017
DEPARTMENT OF COMMERCE AND MANAGEMENT STUDIES
DR.B.R.AMBEDKAR UNIVERSITY, SRIKAKULAM
DECLARATION
Place:
Date:
KOLUPURU KUSUMA
Reg No (1509907025)
CERTIFICATE
This is to certify that the project work entitled “A Study on “working capital
management” With the special reference to Rashtriya Ispat Nigam Limited,
Visakhapatnam, is a bonified work done by kolupuru kusuma, is a student of
M.B.A, under my guidance and supervision to submitted in the department of
commerce and management studies, DR.B.R.AMBEDKAR UNIVERSITY,
srikakulam is partial fulfilment of the requirement for the award of degree of
master of business administration
Place:
Date:
B.PRAKASH BABU
Assistant professor
Dr.B.R.Ambedkar University,
Srikakulam, Etcherla.
ACKNOWLEDGEMENT
PLACE:
DATE:
K.KUSUMA
REG NO.1509907025
CONTENTS
CHAPTER I INTRODUCTION
Introduction
Scope of the study
Objective of the study
Methodology of the study
Limitation of the study
Mission
Vision
Objectives
Core values
Policies in RINL
Welfare measures in RINL
Achievements & awards
Major units & major sources
Main products of RINL
Performance of RINL
Major departments of RINL
CHAPTER IV CONCEPTUAL FRAME WORK
OF WORKING CAPITAL
CHAPTER-I
INTRODUCTION
The focus of the study is an analysis of the financial performance of Rashtriya
Ispat Nigam ltd. By using working capital management, which is widely used
technique of management. This evokes the interest and need for the study.
Financial instruments are through which funds are raised from the capital market
and the related aspects of capital market.
The data required for the study inventory management and its impact on working
capital is collected from the past eleven year’s published annual reports of the
company.
Keeping in the view of above facts and figures, the following are
the objectives of the study.
1. Primary data
2. Secondary data
The entire study is based on only financial data i.e. provided by the company
financial statements.
The smaller time i.e. ten weeks are available for understanding this study is
one of the significant limitations of the study.
These calculations may not be future indicators.
The study is purely based on the date available in the form of annual reports.
As VSP is multi product manufacturing unit the cycle time of each product
varies and it could be a problem to study the working capital management in a
limited period.
Since the procedures and policies of the company do not allow disclosing of
all financial information the project has to be completed with the available
data collected with maximum effort.
Some aspects of financial information were not available because of the
confidentiality of VSP.
CHAPTER-II
INDUSTRIAL PROFILE
The global industry has witnessed several revolutionary changes during the last
century. The changes have been in realms of both technology and business
strategy. The ultimate object of all these changes is to remain competitive and
open global market. The Indian steel industry is growing very rigorously with the
major producers like SAIL, RINL, TISCO, JVL and many others. Our steel
industry has amply demonstrated its ability of adopt to the changing scenario and
to survive in the global market that is becoming increasingly competitive. This has
been possible to a large extent due to the adoption of innovation operating
practices and modern technologies. Industrial development in India has reached a
high degree of self-reliance and the steel industry occupies a primary place in the
strategy for future development .At present the production of steel industry
country is 34 Mt. the public sector steel industry has been restructured to meet
challenges and a separate fund has been established for modernization and future
development of the industry. It is now being proposed that Indian steel industry
should gear up to achieve a production level of about 100 Mt. by the year 2000.
CORE VALUES
Commitment
Customer satisfaction
Continuous improvement
Concern for environment
Creativity & Innovation
MISSION
VISION
QUALITY POLICY:
Visakhapatnam steel plant is committed to meet the needs and
expectations of their customers and other interested parties. To accomplish
this, they will
Supply quality goods and services to customers delight
Achieve quality of the products by following systematic approach through
planning, document procedures and timely review of quality objectives
Continuously improve the quality of all materials, processes and products
Maintain an enabling environment of all employees with their involvement.
ENVIRONMENT POLICY
Visakhapatnam steel plant, while carrying out its operations reaffirms its
commitment to preserve the environment to accomplish this, they will
Document, implement, maintain and continuously review the environment
management system
Comply with all the relevant environmental legislations, regulations and other
requirements
Ensure continual improvement in the environmental performance and
prevention of pollution by minimizing the emissions and discharges
ENERGY POLICY:
Visakhapatnam Steel Plant is committed to optimally utilize various forms of
energy in a cost effective manner to effect conservation of energy resources to
accomplish this they will be following
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 for energy
HR POLICY:
Visakhapatnam steel plant, believe that its employees are the most important
resources to realize the full potential of employees, the company is committed to:
and motivated for maximizing productivity
Establish systems for maintaining transparency fairness and equality in
dealing with employees
Provide work environment that makes the employees committed Empower
employees for enhancing commitment, responsibility and accountability
Encourage teamwork, creativity, innovativeness and high achievement
orientation
Ensure functioning of effective communication channels with employees
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 and value for money and satisfaction
VSP greatly values its relationship with customers and would make efforts
at strengthening these relations for mutual benefit
IT 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.
Follow best practices in process automation & business processes through IT
by in house efforts/ outsourcing and collaborative efforts with other
organization/ expert groups/ institutions of higher learning etc. thus ensuring
the quality of product and services at least cost.
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 skill-set and knowledge based of all related personnel at regular
intervals to make employees as knowledge-employees.
Canteen facilities
Baby crèche
First aid facilities
Water coolers
Leave facilities
Maternity Leave
Factories Act
Gratuity facilities
Workmen’s compensation
Contract Labor welfare
2016 "Best enterprise award" Under For outstanding contribution for the
maharatna & navratna category by betterment of women employees.
scope_ 2nd prize
Financial performance:
Commercial performance:
Manpower as on 01-03-2016
Non - executives Executives
Commercial 106 546
Crop office 8 46
Finance 14 256
HR 479 501
Operation(mines,IT 213 221
&R&D )
Projects 47 368
Vigilance 4 28
Works 10678 4119
Grand total 11549 6085
Coal is converted into coke by heating the prepared coal blend charge in the
coke ovens in the absence of air at a temperature of 10000C-10500C for a period
of 16/19 hours. The volatile matter of coal liberated during carbonization is
collected in gas collecting mains in the form of raw coke oven gas passing through
stand pipes and direct contact cooling with ammonia liquor spray. The main by-
product in the process of coke making is crude coke oven gas and this has lot of
valuable chemical.
2. Sinter plant:
3. Blast furnace:
Iron is made in the blast furnace by smelting iron bearing materials with the help
of coke and air. The solid charge materials like sinter, sized iron ore, coke etc. are
charged in the vertical shaft of blast furnace at top and hot air blast is blown
through the tuyeres located at the bottom. The oxygen from the hot air combines
with the carbon of coke and generates heat and carbon monoxide. The gases,
while ascending upwards react with the descending charge materials. Eventually,
the charge melts hot metal and slag are produced and tapped out. The cooled gas
is also used as fuel in the plant. The paulwurth, bell less top system is installed for
furnace charging.
Steel is made in steel melting shop in the refractory lined vessels called LD
converters by blowing oxygen through the hot metal bath. While iron making is a
reduction process, steel making is an oxidation process. The oxygen reacts with
the carbon in the hot metal and this reaction releases large quantities of gas rich in
carbon monoxide along with huge amount of dust. The gases released from the
converter are collected, cooled, cleaned and recovered for use as fuel in steel
plant. The entire molten steel at vsp is continuously cast at the radial type
continuous casting machines resulting in significant energy conservation and
better quality steel. 100% continuous casting on such a large scale has been
conceived for the first time in India.
The cast blooms from continuous casting departments are heated and rolled in
the two high speed and fully automated rolling mills namely light & medium
merchant mill (LMMM) and medium merchant & structure mill (MMSM). The
billets produced in LMMM are further rolled in bar mill / wire rod mill. (WRM).
The finished products include wire rods & long products like reinforcement bars,
rounds, squares, flats, angles, channels, billets etc. blooms from continuous
casting division are rolled into billets, some of which are sold and rest are sent to
bar mill/WRM. The continuous two bar mill comprise of stand double strand
roughing train, 2nos. of 4stand single strand intermediate train & 2 nos. of 4
strand single strand finishing train. Loopers are provided in between the finishing
stands for tension free rolling in order to obtain good surface quality and
tolerances. Housing are of closed top type. Roll necks are mounted in anti-friction
bearings.
WRM-1
The mill is high speed 4 strand no-twist continuous mill designed to produce
850000 t of wire rod coils. Rolled billets of 125 mm x 125mm square cross
section, length ranging from 9.8 m to 10.4 m and weighting approximately 1250
kgs re used as input material. The mill is designed to roll steel stock of 0.9% max.
Carbons content.
WRM-2
The mill is designed to produce 600000 tons per year of rounds in coil form.
The mill is designed to roll low, medium and high carbon steel, case hardening
steel, cold heading quality steel, electrode steel, spring steel, bearing steel and free
cutting steel. The mill shall use continuous cast billets of 150mm square size, 12m
length and weighing approx. 2100 kgs are used as input material.
Medium merchant and structured mill is one of the modern rolling mills in
Visakhapatnam steel plant. This is a single strand continuous mil having
production capacity of 850000 t/year. The important feature of this mill is that
universal beams (both parallel and wide flange) have been rolled first time in
India using universal stands. Parallel flange beams as, for the same weigh, the
section is stronger and stiffer due to greater moment of inertia and higher radius of
gyration.
The mill is designed to produce 750000 t of plain rounds in straight length and in
coil form from an input of continuous cast billets of 150 mm x 150 mm x12m and
weighing approximately 2050 kgs. The mill is designed to roll medium and high
carbon steel, case hardening steel, old heading quality stele, electrode steel, spring
steel, bearing steel and free cutting steel.
ORGANISATIONAL PROFILE
Rashtriya ispat nigam limited, a navaratna PSE with 100% ownership held by
GOI, is the corporate entity of Visakhapatnam steel plant.
DIRECTORS FUNCTIONS
INTRODUCTION:
Capital required for a business can be classified under two main categories
viz.
2. Working capital
Every business needs funds for two purposes for its establishment and to
carry out its day operations. Long-term funds are required to create production
facilities trough purchases of fixed assets such as plant and machinery, land,
building, furniture etc., Investments in these assets represent that part of firm’s
capital which is blocked on a permanent or fixed basis and is called fixed capital.
Funds are also needed for short-term purposes for the purchased or for the
purchase of raw material, payment of wages and other day–to-day expenses etc..,
these funds are known as working capital.
Definition:
(a) The liquidity position of the firm, and (b) suggests the extent to which working
needs maybe financed by permanent sources of funds. An alternative definition of
networking capital is that portion of firm’s current assets financed with long term
funds.
These two concepts of working capital are not mutually exclusive rather have
equal significance from the management point of view and represent two
important factors of the working capital management.
The individual composite items of working capital are:
Current assets comprise items that would get converted into cash in short term,
with in a year, through the business operations. Current assets include,
2. Loans and advances and other Balances: Include Sundry Debtors, Bills
receivable and others including loans and advances, prepaid expenses etc.,
2) Bills receivable
a. Raw materials
b.Work-in-progress
d. Finished goods
7) Prepaid expenses
8) Accrued income
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(or)
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. Bills payable
5. Dividends payable
6. Bank overdrafts
A firm has to make profit to maintain its image in the capital market
where 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.
3. To incur day-to-day expenses and overhead cost such as fuel, power and
office expenses, etc.,
2. Goodwill.
3. Easy loans.
4. Cash discounts
Classified as:
Production policy
Seasonal variations
Credit policy
Business cycles
SEASONAL VARIATIONS:
In certain industries raw material is not available through out the year.
They have to buy raw materials in bulk during the season to ensure blocked in the
form of material inventories during such season, which gives rise to more working
capital requirements, generally during he busy season, a firm requires larger
working capital than in the slack season.
In manufacturing concern, the working capital cycle starts with the purchase
of raw materials and ends with the realization of cash from the scale of finished
products. This cycle involves purchase of raw materials and stores its conversation
into stocks of finishing goods through work-in-progress.
CREDIT POLICY:
The working capital requirements of a concern increase with the growth and
expansion of its business activities although it is difficult to determine the
relationship between the growth in the volume of business and the growth in the
working capital of business.
OTHER FACTORS:
3. Bonds
4. Loans from banks & financial institutions
5. Retained earnings
6. Venture capital fund for innovative projects
B. Short term sources
1. Bank credit
2. Transaction credit
3. Advances from customers
4. Bank advances
5. Loans
6. Overdraft
7. Bills purchase and discounted
8. Advance against documents of title of goods
9. Term loans by bank
10. Commercial paper
11. Bank deposits
In other words, they have been extending credit to industry & trade on the basis
of security.
2. TONDON COMMITTE
In July 1974, RBI constituted a study group under the chairpersonship of
Mr. P.L Tondon. The study group was asked to give its recommendations
on the following matter:
What constitutes the working capital requirement of industry and what is
end use of credit?
How is the quantum of bank advanced to be decided?
Can norms be involved of current assets & for debt equity ratio to ensure
minimum dependents on bank finance?
Can the current manner & stage of lending be imposed?
Can an adequate planning assessment & implementation system be involved to
ensure a discipline flow of credit to meet genuine production needs & its
proper supervision?
First step is to use required fund deposit your money in term deposit, never
purchase excessive inventory.
The borrower will have to provide a minimum 25% of total current assets from
the term fund.
To decide the limit as per current assets & current liabilities.
E. Style of credit
F. Information system for banks
STEPS INVOLVED IN WORKING CAPITAL MANAGEMENT
There are two steps involved in working capital management. They are
Forecasting the amount of working capital.
Forecasting the amount of working capital.
Determining the sources of working capital.
Scope of working capital:
Maintain the adequate level of working capital, always to meet the rising
turnover, this way peak needs can be taken
Sufficient liquidity to meet short-term obligation & when they arise also to
avail market opportunities like purchase of raw material at low prices or at
attractive discount.
Proper interdepartmental co-ordination to minimize working capital
investment. I.e. co-ordination between the marketing department & production
department.
Selection of appropriate sources of working capital viz trades credit, bank
finance, or other short-term finance as well as long term finance.
It becomes easy to avail finance for the working capital if the firm banker
relationship are good and built on strong good faith.
For the purposes of optimizing working capital, the most important factors are
Trade credit creates account receivable. The customers from whom receivables or
book debt have to be collected in near future are called as trade debtors or simply
as debtors and represent the firm’s claim or asset. The credit sales have three
characteristics:-
It involves an element of risk that should be carefully analysed
Inventory includes all types of stocks. For effective working capital management,
inventory needs to be managed 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, re-order level and ordering quantity so that the
inventory cost is reduced and its management becomes efficient.
The basic responsibility of the finance manager is to make sure the firm’s cash
flows are managed efficiently. Efficient management of inventory should
ultimately result in the maximization of the owner’s wealth. In order to minimize
cash requirements, inventory should be turned over as quickly as possible,
avoiding stock-outs that might result in closing down the production line or lead
to loss of sales.
3.1.5 Liquidity and Cash Management
Cash is the lifeline of an organization. A sustained growth of an organization
depends on the cash ability of the profit, not the profit per se as reflected in the
income statement. The rising profit curve of an organization may mislead
managers into high rates of growth, which are unsustainable due to the actual cash
position of the company. This leads to continuous erosion of liquidity and may
even make a company sick.
There has not been much of cash management in Indian enterprises due to easy
availability of working capital finance from banks. However, recently, cash
management as a discipline is emerging in the country.
Three main activities contribute to the cash flow:
Operating activities cover cash flows relating to all revenue generating
activities of the organisation.
Investing activities cover cash flows arising from investments.
Financing activities cover cash flows arising out of all capital and debt
issues of the organisation.
working capital therefore, is concerned with the problems that arrive in attempting
to manage the current assets, the current liabilities and the inter-relationship that
ii. Dimensions II is concerned with the decision about the composition and
level of current Liabilities.
iii. Dimension III is concerned with the decision about the composition and
level of current assets.
1. Principle of risk variation: Risk here refers to the inability of a firm to meet its
obligations as and when they become due for payment. Larger investment in
current assets with less dependence on short term borrowings increases
liquidityand reduces risk and there by decreases the opportunity for gain or loss.
On the other hand less investment in current assets with greater dependence on
short term borrowings increases risk, liquidity and increases profitability .In other
words, there is a definite direct relationship between the degree of risk and
profitability.
3. Principle of equity position: The principle is concerned with planning the total
investment in current assets. According to this principle, the amount of working
capital invested in each component should be adequately justified by a firm’s
equity position. Every rupee invested in the current assets should contribute to the
net worth of the firm. The level of current assets may be measured with the help
of two ratios (I) current assets as a percentage of total assets and (II) current assets
as a percentage of total sales while deciding about the composition of current
assets, the financial manager may consider the relevant industrial averages.
INTRODUCTION:-
The ratio analysis is one of the most powerful tools of financial analysis. It is the
process of establishing and interpreting various ratios (quantitative relationship
between figures and groups of figures). It is with the help of ratios that the
financial statements can be analyzed more clearly and decisions are made from
such analysis.
MEANING OF RATIO:
The following are the four steps involved in the ratio analysis:
1. Selection of relevant data from the financial statements depending upon the
objective of the analysis.
3. Comparison of the calculated ratios with the ratios of the same firm in the
past, or the ratios developed from projected financial statements or the ratios
of the some other firms or the comparison with ratios of the industry to which
the firm belongs.
5. Window dressing
6. Personal bias.
7. Un comparable
10.Ratios no substitutes
I. Limited use of a single ratio: A single ratio, usually, does not convey much
of sense. To make a better interpretation a number of ratios have to be
calculated which is likely to confuse the analyst than help him in making any
meaningful conclusion.
II. Lack of Adequate Standards: There are no well accepted standards or rules
of thumb for all ratios which can be accepted as norms. It renders
interpretation of the ratios difficult.
VII. Incomparable: Not only industries differ in their nature but also the firms of
the similar business widely differ in their sixes and account ion procedures,
etc. It makes comparison of ratios difficult and misleading. Moreover,
comparisons are made difficult due to differences in definitions of various
financial terms used in the ratio analysis.
VIII. Absolute figure Distortive: Ratios devoid of absolute figures may prove
distortive as ratio analysis is primarily a quantitative analysis and not a
qualitative analysis.
IX. Price Level Changes: While making ratio analysis, no consideration is made
to the changes in price levels and this makes the interpretation of ratios
invalid.
CLASSIFICATION OF RATIOS:
1. Liquidity Ratios
2. Leverage Ratios
3. Activity Ratios
4. Profitability Ratios
LIQUIDITY RATIOS:
1. Current ratio
2. Quick ratio
TURNOVER RATIOS:
Working capital means the excess of current assets over current liabilities.
Statement of changes in working capital is prepared to show the working capital
between the two balance sheet dates. This statement is prepared with the help of
current assets and current liabilities derived from the two balance sheets.
A. CURRENT ASSETS:
Inventory
Cash & Bank balance
Sundry debtors
Loans & Advances
Other current
B. CURRENT LIABILITIES:
Sundry Creditors
Advances from customers
Other advances
Earnest money, security & other
deposits
Interest accrued but not due
Other liabilities
Provisions
CURRENT
ASSETS:
CURRENT
LIABILITIES:
There is a significant decrease in net working capital over past 3 years however in
the previous year there was a drastic decrease in working capital which was
because of decrease in current assets and increase in short term debts.
2011-2012 8492.11
2012-2013 9977.75
2013-2014 8400.60
2014-2015 9637.46
9500
9000
7500
Interpretation:
The main reason for the decreasing trend in the years is due to the
increasing creditors year after year. If also indicates a weak cash balance to meet
the liabilities.
The increase in working capital is due to better sales and full capacity
utilization. This has resulted in reduction of cost of production. The net working
capital of RINL for the past 4 years is depicted in the table.
2011-2012 1270.50
2012-2013 (206.92)
2013-2014 (1810.89)
2014-2015 (5421.92)
2011-2012
2012-2013
2013-2014
2014-2015
LIQUIDITY RATIOS
It is extremely essential for a firm to be able to meet its obligations as they
become due. Liquidity ratios measure the ability of the firm to meet its current
obligations. In fact, analysis of liquidity needs the preparation of cash budgets and
cash and fund flow statements but liquidity ratios by establishing a relationship
between cash and other current assets to current obligations provide a quick
measure of liquidity. A firm should ensure that it does not suffer from lack of
liquidity and also that it does not have excess liquidity. The failure of a company
to meet its obligations due to lack of sufficient liquidity will result in poor credit
worthiness, loss of creditors confidence and even in legal tangles. A very high
degree of liquidity is also bad, idle assets earn nothing. The firm’s funds will be
unnecessarily tied up in current assets. There fore it is necessary to strike a proper
balance between high liquidity and lack of it. The most common ratios are
CURRENT RATIO
QUICK RATIO
NET WORKING CAPITAL RATIO.
CURRENT RATIO
The current ratio is the ratio of total current assets to current liabilities. It is
calculated by dividing current assets by current liabilities. A current ratio of 2:1 is
considered to do ideal. The ration is an indicator of the firm’s commitment to
meet its short-term liabilities. It indicates the rupees of current assets available for
each rupee of current liability. The higher the current ratio is higher the funds
available for every rupee of current liabilities. As a convention rule a current ratio
of 2:1 or more is considered satisfactory. The higher the current ratio is higher the
funds available for a firm.
Current ratio = Current Assets / Current liabilities
Table 4.3 showing current ratio
Interpretation:
The ratio has started decreasing from there on and is at 1.17 in 2011-12.
Further there is a little decrease in the year 2013-14 & 2014-15.The current ratio
is a crude measure of the liquidity of a firm. The limitation of the current arises
from the fact that it is a quantitative and not a qualitative index of liquidity, In
spite of having high current ratio yet to be illiquid.
Working capital turnover ratio is the ratio of sales to net working capital. It
is indicator of efficiency of working capital management. Higher the ratio greater
is the efficiency.
The working capital turnover ratio has constantly decreased from 2011-12
to 2013-14. It is mainly due to decreased sales.
15000
10000
Net Sales
5000
Working Capital
0 Working Capital
2011- 2012- 2013- 2014- Turnover Ratio
2012 2013 2014 2015
-5000
-10000
RINL is multi-product, integrated steel plant with 3.0 M.T capacities. This
makes RINL to store, handle and process of huge quantity of material. Also RINL
is a process industry running 365 days throughout the year 24 hrs a day it material.
This calls form efficient inventory management o the part of RINL. RINL holds
three types of inventory, they are:
1. Raw materials
2. Stores, spares and scrap
3. Semi/finished goods.
Different sections carry out the procurement, storage and control of these
inventories.
Raw materials:
The raw materials are produced and stored by raw materials department.
The basic principle followed by RINL in holding raw material inventory is to hold
indigenous raw material for 10 days.
Stores and spears:
The stores and spares are procured and stored by central stores department
(a part of purchase department).
A.R items are those, which are general consumables with standard
specification and are required by more than one department. The main
objective of stock control is to make available vital items all time.
The AR items are classified as a class, b class and c class as per value given
below.
Inventory control:
and conducts analysis of it. The same is circulated to all departments once
in a quarter.
2. XYZ analysis of all items is carried out and circulated to all departments.
stock.
5. Standardization of general store material and spares and reduce the number
of items.
ACTIVITY RATIOS
The inventory turnover ratio of RINL for the past 4 accounting periods is
shown in the table.
Table 4.5 showing inventory turnover ratio
Interpretation:
The higher the Inventory turnover ratio. The grater ability to meet
itscurrent obligations.
The measure of liquidity is a relationship rather than the differences
between current assets and current liabilities.
The working capital however measure the firm's potential.
The ratio highest in the year 2011-12.
Inventory turnover ratio
2011-12
2012-13
2013-14
2014-15
All the working capital decisions place at cash section. In RINL cash
section is working very well. Everyday information about all payments and
receipts from all the branches, sections, departments are collected latest by 11 am
on daily basis.
Procedure of Cash Management:-
They gathering the information regarding to the cash inflows like cash from
customers, export incentive, export credit etc., cash outflows like purchase of raw
materials, spares, excise duty, sales tax, payment of wages and salaries, railway
fright etc.
OBJECTIVE:
The Sales are affected by way of DD/ Pay Orders and Cheques payable at
respective Branches.
a) The Collections of each day at the Branches of RINL will be deposited in the
Bank before 11.00 AM of the next working day.
b) The Bank will provide pick up facility for collection of cheques from the
respective RINL branches at their risk and responsibility.
c) The funds so deposited at various branches will be pooled and credited to the
account of RINL held at Visakhapatnam on the same day by 3.00 PM, as long
as Cash Management System is in vogue.
d) Banks must be capable to switch over immediately to Real Time Gross
Settlement (RTGS) at those RINLs locations once RBI enables and the credit
to the account of RINL at Visakhapatnam must be as per the system in vogue
at that time.
e) The bank at Visakhapatnam should honor the cheques received in the clearing
or Transfers issued by RINL against the anticipated funds for the day.
Cash ratio:
Cash ratio is ratio of cash held by a firm to current liabilities. VSP is maintaining
almost an average cash of around 1.2 except for the past three accounting periods.
This is because as mentioned earlier cash holding is kept at minimum except for
some petty cash needs. The increase in cash ratio indicates the significance
increase in cash and bank balances in the total current assets.
Cash ratio=cash in hand (or bank)/current liabilities.
Interpretation:
The cash ratio of RINL has been decreasing and ranges between0.28 -0.004there
is a gradual decrease in the cash ratio. The levels of cash management is quite
optimum and needs much concentration.
VSP sells its products to its customers. It has 27 marketing officers spread
through, out the country. The marketing and the finance department and top
management at the lead quarter formalize the price of different products. The
sales and billing are done at the individual branches and the record of the daily
transactions is maintained.
VSP follows two types of credit sales of its products. They are:
Secured credit sales are primarily done with private customers. Cheque facility is
extended to the customer based on the credit worthiness of the party. The average
collection, period of VSP is30 days. Cheque honor and dishonor, and claims
against the parties are taken provided in the prospectus. Cheque facility to such
customers is cancelled for all further sales.
Unsecured sales are made mostly to the government agencies. Credit period varies
from 15=16 days. Generally, VSP cannot compel government agencies for prompt
release of payment due to unlink private parties since they are also part of the
government agencies.
Receivable turnover ratio:
16000
14000
12000
10000
SALES
8000
NET RECEIVABLES
6000 REC.TURNOVER RATIO
4000
2000
0
2011-12 2012-13 2013-14 2014-15
INTERPRETATION:
SWOT analysis of RINL depicts the strengths of RINL, weakness that are
to be avoided, opportunities that should be banked, and threats that should be
faced & yet survive in the business.
Strengths:
Location advantages:
RINL was rendered with additional advantages due to its location. The
location aspect has helped the RINL 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 near by, 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:
RINL has its own power generation unit with a total capacity of 286.5
MW. RINL requires power of 180 MW to 200 MW. RINL, after meeting
its requirement exports power to APSEB.
Weakness:
Opportunities:
Sizeable export markets: China is the biggest importer of Indian steel. China is
going to have huge requirements of steel.
Global steel majors like POSCO & Mittal steel are venturing into steel production
very soon. This may pose a problem to RINL 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.
RINL is the only steel major in the country without a captive iron ore
mine. This may present a difficult situation when the demand supplies equation
for the iron ore changes.
(In Crores)
2011-2012 -1747.22
2012-2013 -1477.42
2013-2014 2017.81
2014-2015 3611.03
5. Working capital turnover ratio is decreasing year by year. It is very
low (-1.71) in the year 2014-15.
SUGGESTIONS
VSP is a multi product manufacturer unit with varying cycle time for each
product.
The company has already accumulated funds excess of Rs. 6400 Crores & can
look forward to bigger investment in building up capacities compared to the
proposed 6.3 million tons.
The company is getting all its funds i.e. day zero (0) when the rates are
compared; the company is investing surplus funds at 8-8.5% & paying at 3-5%
to get the funds on zero (0). The spread should be maintained during the time
of expansion also.
Unlikely any other steel company VSP is not having its own sources of raw
material i.e. coal mine, Suppliers for its raw materials. Had the company
utilized its 2-3% half % of its working capital limit for acquisition of mines
purchasing of mines, etc. It could have been a favorable situation.
In the 20014.15 the cash & Bank balance is 63.94 crores. This amount is very
low amount.
CONCLUSION
Though the working capital is decreasing year by year and the ideal cash is
also decreasing. So, the company has to exercise a lot of proper control and proper
profitable way.
Books referred: