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INTRODUCTION

Capital is essential for the setting up and smooth running of any

business. Investments made on fixed assets will yield excess cash inflows

apart from the payback amount and is spread over a longer period of

time. Hence the cash inflows (or) benefits associated are not immediate

but are expected in the future. Cash inflows & outflows occur on a

continuous basis in case of current assets. Credit forms an essential

feature in the business (credit given to customers & credit from suppliers).

Since there is some time lag from the time of sales & sales realization

current assets & current liabilities, which together constitute the net

working capital, supports the business in its normal of operations. This

calls for an efficient management of working capital.

The policies, procedures and measures taken for managing of

working capital gain further importance in an Banks like State Bank of

India where the working capital requirements runs in crores of rupees.

Any mismanagement on the part of authority will not just cause loss but

may even impair business operations. It is in this context working capital

has gained importance.

Industry Banking introduction

The Indian Banking industry, which is governed by the Banking Regulation Act of

India, 1949 can be broadly classified into two major categories, non-scheduled

banks and scheduled banks. Scheduled banks comprise commercial banks and

the co-operative banks. In terms of ownership, commercial banks can be further

grouped into nationalized banks, the State Bank of India and its group banks,

regional rural banks and private sector banks (the old/ new domestic and

foreign). These banks have over 67,000 branches spread across the country in

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every city and villages of all nook and corners of the land.

The first phase of financial reforms resulted in the nationalization of 14 major

banks in 1969 and resulted in a shift from Class banking to Mass banking. This in

turn resulted in a significant growth in the geographical coverage of banks. Every

bank had to earmark a minimum percentage of their loan portfolio to sectors

identified as “priority sectors”. The manufacturing sector also grew during the

1970s in protected environs and the banking sector was a critical source. The

next wave of reforms saw the nationalization of 6 more commercial banks in

1980. Since then the number of scheduled commercial banks increased four-fold

and the number of bank branches increased eight-fold. And that was not the limit

of growth.

After the second phase of financial sector reforms and liberalization of the

sector in the early nineties, the Public Sector Banks (PSB) s found it extremely

difficult to compete with the new private sector banks and the foreign banks. The

new private sector banks first made their appearance after the guidelines

permitting them were issued in January 1993. Eight new private sector banks are

presently in operation. These banks due to their late start have access to state-

of-the-art technology, which in turn helps them to save on manpower costs.

During the year 2000, the State Bank Of India (SBI) and its 7 associates

accounted for a 25 percent share in deposits and 28.1 percent share in credit.

The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5

percent of credit during the same period. The share of foreign banks (numbering

42), regional rural banks and other scheduled commercial banks accounted for

5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41

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percent, 3.14 percent and 12.85 percent respectively in credit during the year

2000.about the detail of the current scenario we will go through the trends in

modern economy of the country.

Current Scenario:

The industry is currently in a transition phase. On the one hand, the PSBs, which

are the mainstay of the Indian Banking system are in the process of shedding

their flab in terms of excessive manpower, excessive non Performing Assets

(Npas) and excessive governmental equity, while on the other hand the private

sector banks are consolidating themselves through mergers and acquisitions.

PSBs, which currently account for more than 78 percent of total banking industry

assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling

revenues from traditional sources, lack of modern technology and a massive

workforce while the new private sector banks are forging ahead and rewriting

the traditional banking business model by way of their sheer innovation and

service. The PSBs are of course currently working out challenging strategies even

as 20 percent of their massive employee strength has dwindled in the wake of

the successful Voluntary Retirement Schemes (VRS) schemes.

The private players however cannot match the PSB’s great reach, great size and

access to low cost deposits. Therefore one of the means for them to combat the

PSBs has been through the merger and acquisition (M& A) route. Over the last

two years, the industry has witnessed several such instances. For instance, HDFC

Bank’s merger with Times Bank Icici Bank’s acquisition of ITC Classic, Anagram

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Finance and Bank of Madurai. Centurion Bank, Indusind Bank, Bank of Punjab,

Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank

merger however opened a pandora’s box and brought about the realization that

all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere

banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and

combined various other services and integrated them into the mainstream

banking arena, while the PSBs are still grappling with disgruntled employees in

the aftermath of successful VRS schemes. Also, following India’s commitment to

the W To agreement in respect of the services sector, foreign banks, including

both new and the existing ones, have been permitted to open up to 12 branches

a year with effect from 1998-99 as against the earlier stipulation of 8 branches.

Tasks of government diluting their equity from 51 percent to 33 percent in

November 2000 has also opened up a new opportunity for the takeover of even

the PSBs. The FDI rules being more

rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A

route to acquire willing Indian partners.

Meanwhile the economic and corporate sector slowdown has led to an increasing

number of banks focusing on the retail segment. Many of them are also entering

the new vistas of Insurance. Banks with their phenomenal reach and a regular

interface with the retail investor are the best placed to enter into the insurance

sector. Banks in India have been allowed to provide fee-based insurance services

without risk participation, invest in an insurance company for providing

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infrastructure and services support and set up of a separate joint-venture

insurance company with risk participation.

Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded

annual average growth rate (Cagr) of 17.8 percent during 1969-99, while bank

credit expanded at a Cagr of 16.3 percent per annum. Banks’ investments in

government and other approved securities recorded a Cagr of 18.8 percent per

annum during the same period.

In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP)

growth of only 6.0 percent as against the previous year’s 6.4 percent. The WPI

Index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in

FY00. Similarly, money supply (M3) grew by around 16.2 percent as against 14.6

percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4

percent in FY01 percent was lower than that of 19.3 percent in the previous year,

while the growth in credit by

SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago.

The industrial slowdown also affected the earnings of listed banks. The net

profits of 20 listed banks dropped by 34.43 percent in the quarter ended March

2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but

dropped to 4.56 percent in the fourth quarter of 2000-2001.

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On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill

the norms, it was a feat achieved with its own share of difficulties. The CAR,

which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year

2004 based on the Basle Committee recommendations. Any bank that wishes to

grow its assets needs to also shore up its capital at the same time so that its

capital as a percentage of the risk-weighted assets is maintained at the

stipulated rate. While the IPO route was a much-fancied one in the early ‘90s, the

current scenario doesn’t look too attractive for bank majors.

Consequently, banks have been forced to explore other avenues to shore up

their capital base. While some are wooing foreign partners to add to the capital

others are employing the M& A route. Many are also going in for right issues at

prices considerably lower than the market prices to woo the investors.

Chapter- 2

Company Profile

State Bank of India (Hindi: भा�रती�य स्टेटे बैं�क) (SBI) (BSE: 500112, LSE: SBID) is the largest state-owned banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking

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branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans.[2]

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks.

The State bank of India is the 29th most reputed company in the world according to Forbes.[3]

State Bank of India is the largest of the Big Four Banks of India, along with ICICI Bank, Punjab National Bank and Canara Bank — its main competitors.[4]

Background of State Bank of India

State Bank of India (Hindi: भा�रती�य स्टेटे बैं�क) (SBI) (BSE: 500112, LSE: SBID) is the largest state-owned banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans.[2]

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks.

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The State bank of India is the 29th most reputed company in the world according to Forbes.[3]

State Bank of India is the largest of the Big Four Banks of India, along with ICICI Bank, Punjab National Bank and Canara Bank — its main competitors.[4]

State Bank of India (Hindi: भा�रती�य स्टेटे बैं�क) (SBI) (BSE: 500112, LSE: SBID) is the largest state-owned banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India.

SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans.[2]

SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks.

The State bank of India is the 29th most reputed company in the world according to Forbes.[3]

State Bank of India is the largest of the Big Four Banks of India, along with ICICI Bank, Punjab National Bank and Canara Bank — its main competitors.[4]

Product Mix

Vision, Mission & Technology

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o To retain the banks position as the premier Indian financial services.

o Group with world class standards and significant global business commitment to excellence in customer, shareholder and employee satisfaction and to play a leading role in the expanding and diversifying financial services sector while continuing emphasis on its development banking role.

Future projects

Production Performance

Financial Performance

Steel Industry

BACKGROUND OF State Bank of India:

he bank has 131 overseas offices spread over 32 countries as on 31st Dec 2009. It has branches of the parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles, Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape Town

SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank, State Bank of India (Mauritius).

In 1982, the bank established a subsidiary, State Bank of India (California), which now has eight branches - seven branches in the state of California and one in Washington DC that it opened on 23 November 2009. The seven branches in California are located in Los Angeles, Artesia, San Jose, Canoga Park, Fresno, San Diego and Bakersfield.

The Israeli branch of the "State Bank of India" located in Ramat Gan.

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The Canadian subsidiary, State Bank of India (Canada) too dates to 1982. It has seven branches, four in the greater Toronto area and three in British Columbia.

In Nigeria SBI operates as INMB Bank. This bank began in 1981 as the Indo-Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria.

In Nepal, SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo Monex.

State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin

The roots of the State Bank of India rest in the first decade of 19th century, when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were incorporated as joint stock companies, and were the result of the royal charters. These three banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act, a right they retained until the formation of the Reserve Bank of India. The Presidency banks amalgamated on 27 January 1921, and the reorganized banking entity took as its name Imperial Bank of India. The Imperial Bank of India continued to remain a joint stock company.

Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India, which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30 April 1955 the Imperial Bank of India became the State Bank of India. The Govt. of India recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the RBI is the country's banking regulatory authority.

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Offices of the Bank of Bengal

In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries. On September 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank of India.

SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore, already had an extensive network in Kerala.

[edit] Associate banks

PRODUCT MIX:

Investment Banking

An investment bank is a financial institution that assists corporations and

governments in raising capital by underwriting and acting as the agent in the

issuance of securities. An investment bank also assists companies involved in

mergers and acquisitions, derivatives, etc. Further it provides ancillary services

such as market making and the trading of derivatives, fixed income instruments,

foreign exchange, commodity, and equity securities

Consumer banking

Commercial Banking

Commercial bank has two meanings: o Commercial bank is the term used for a normal bank to distinguish

it from an investment bank. (After the great depression, the U.S. Congress required that banks only engage in banking activities, whereas investment banks were limited to capital markets activities. This separation is no longer mandatory.)

o Commercial bank can also refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses, as opposed to normal individual members of the public (retail banking). It is the most successful department of banking.

Community development bank are regulated banks that provide financial services and credit to underserved markets or populations.

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Private banks manage the assets of high net worth individuals.

o Offshore banks are banks located in jurisdictions with low taxation and regulation. Many offshore banks are essentially private banks.

Savings banks accept savings deposits.

o Postal savings banks are savings banks associated with national postal systems.

Retail Banking

Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts, mortgages, personal loans, debit cards, credit cards, and so forth.

Private Banking

Private banking is a term for banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a non-incorporated banking institution.

Historically private banking has been viewed as very exclusive, only catering for high net worth individuals with liquidity over $2 million, although it is now possible to open some private bank accounts with as little as $250,000 for private investors. An institution's private banking division will provide various services such as wealth management, savings, inheritance and tax planning for their clients. A high-level form of private banking (for the especially affluent) is often referred to as wealth management.

The word "private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion. Although tax fraud is a criminal offense in Switzerland, tax evasion is only a civil offense, not requiring banks to notify taxing authorities

Asset Management

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Investment management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds) .

The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".

The provision of 'investment management services' includes elements of financial statement analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Investment management is the professional management of various securities (shares, bonds and other securities) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchange-traded funds) .

The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".

The provision of 'investment management services' includes elements of financial statement analysis, asset selection, stock selection, plan

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implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Pensions

In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment.[1] Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.

The terms retirement plan or superannuation refer to a pension granted upon retirement.[2] Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Called retirement plans in the USA, they are more commonly known as pension schemes in the UK and Ireland and superannuation plans in Australia and New Zealand. Retirement pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity.

A pension created by an employer for the benefit of an employee is commonly referred to as an occupational or employer pension. Labor unions, the government, or other organizations may also fund pensions. Occupational pensions are a form of deferred compensation, usually advantageous to employee and employer for tax reasons. Many pensions also contain an additional insurance aspect, since they often will pay benefits to survivors or disabled beneficiaries. Other vehicles (certain lottery payouts, for example, or an annuity) may provide a similar stream of payments.

Mortgages

A mortgage loan is a loan secured by real property through the use of a

mortgage note which evidences the existence of the loan and the encumbrance

of that realty through the granting of a mortgage which secures the loan.

However, the word mortgage alone, in everyday usage, is most often used to

mean mortgage loan.

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A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.

In many countries, though not all (Iran and Bali, Indonesia are two exceptions[1]), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed

Credit cards

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.[1] The issuer of the card grants a line of credit to the consumer (or the user) from which the user can borrow money for payment to a merchant or as a cash advance to the user. Usage of the term "credit card" to imply a credit card account is a metonym.

A credit card is different from a charge card: a charge card requires the balance to be paid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, subject to interest being charged. Most credit cards are issued by banks or credit unions, and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as an oblong measuring 85.60 × 53.98 mm (3.370 × 2.125 in) (33/8 × 21/8 in) in size

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VISION, MISSSION & OBJECTIVES:

THE VISION:

o Premier Indian financial services group with

global perspective, world class standards of the efficiency and professionalism and core institutional values.

o Retain its position in the country as a pioneer in developing countries. o Maximize shareholder value through high sustained earnings per share.

o An institution with a culture of mutual care and commitment a satisfying and exciting.

o Work environment and continuous learning opportunity.

THE MISSION:

o To retain the banks position as the premier Indian financial services. o Group with world class standards and significant global business commitment to

excellence in customer, shareholder and employee satisfaction and to play a leading role in

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the expanding and diversifying financial services sector while continuing emphasis on its development banking role.

ACHIEVEMENTS:

ISO 9001:2000

ISO/TS 16949:2002

PRODUCTION PERFORMANCE:

The production performance of SISCO in the last five years is as follows:

(Figures

In MT)

FINANCIAL PERFORMANCE:

The financial performance of SISCO for the past five years is as follows

(In

Rs.’000)

YEAR SALES Profit Before

D.N.C Nagpur

YEARDirect Reduced Iron

Mild & Alloy Steel rolled products

Hot metal/ Pig Iron

2003-04 1,23,565 1,96,941 -

2004-05 1,34,192 2,45,821 -

2005-06 1,27,067 2,33,130 -

2006-07 1,36,004 2,42,982 5,725

2007-08 1,29,350 2,40,847 1,63,284

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Taxation (PBT)

2003-04 5,203,716 97,968

2004-05 8,797,894 487,232

2005-06 9,242,179 506,933

2006-07 9,495,878 488,366

2007-08 11,264,991 535,536

BANKING INDUSTRY

Chapter - 3

Research Methodology

Objective of the study

Project study which is being conducted by me for the last two month is not only a

formality for the fulfillment of the two year full time Post Graduate Diploma in

Business Management. But being a management student and a good employee I

tried my best to extract best of the information available in the market for the

use of society and people. The objectives have been classified by me in this

project form personal to professional, but here I am not disclosing my personal

objective which have been achieved by me while doing the project. Only

professional objectives which are being covered by me in this project are as

following-

- To know about environmental factors affecting IDBI Bank’s

performance.

- To analyze the role of advertisement for bank performance.

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- To know the perception and conception of customers towards

banking products and specially focused for IDBI Bank’s product.

- To explore the potential areas for the new bank branches which

will provide both price and people to the bank with constant

promotion and placing strategy.

Scope of the Study

Each and every project study along with its certain objectives also have scope for

future. And this scope in future gives to new researches a new need to research

a new project with a new scope. Scope of the study not only consist one or two

future business plan but sometime it also gives idea about a new business which

becomes much more profitable for the researches then the older one.

Scope of the study could give the projected scenario for a new successful

strategy with a proper implementation plan. Whatever scope I observed in my

project are not exactly having all the features of the scope which I described

above but also not lacking all the features.

- Research study could give an idea of network expansion for

capturing more market and customer with better services and

lower cost, with out compromising with quality.

- In future customer requirements could be added with the product

and services for getting an edge over competitors.

- Consumer behavior could also be used for the purpose of

launching a new product with extra benefits which are required

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by customers for their account (saving or current ) and/or for

their investments.

- Factors which are responsible for the performance for bank can

also be used for the modification of the strategy and product for

being more profitable.

- Factors which I observed while doing project study are following-

Competitors

Customer Behaviour

Advertisement/promotional activities

Attitude of manpower and

Economic conditions

These all could also be interchanged with each other for each

other in banks strategies for making a final business plan to

effect the market with a positive way without disturbing a lot to

market, customers and competitors with disturbance in market

shares.

Tools and Techniques

As no study could be successfully completed without proper tools and

techniques, same with my project. For the better presentation and right

explanation I used tools of statistics and computer very frequently. And I am very

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thankful to all those tools for helping me a lot. Basic tools which I used for project

from statistics are-

- Bar Charts

- Pie charts

- Tables

bar charts and pie charts are really useful tools for every research to show the

result in a well clear, ease and simple way. Because I used bar charts and pie

cahrts in project for showing data in a systematic way, so it need not necessary

for any observer to read all the theoretical detail, simple on seeing the charts

any body could know that what is being said.

Technological Tools

Ms- Excel

Ms-Access

Ms-Word

Above application software of Microsoft helped me a lot in making project more

interactive and productive.

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Microsoft-Excel had a great role in my project, it created for me a situation of

“you sit and get”. I provided it simply all the detail of data and in return it given

me all the relevant information..

Microsoft-Access did the performance of my personal assistant who organizes my

all the details of document without disturbing them even a single time in all the

project duration.

And in last Microsoft-Word did help me for the documentation of the project in a

presentable form.

Applied Principles and Concepts

While I started to do the project the main thing which was the matter of concern

was that around what principles I have to revolve my project. Because with out

having any hypothesis and objective we can not determine that what output or

result we are expecting form the project.

And second thing is that having only tools and techniques for the purpose of

project is not relevant until unless we have the principals for which we have to

use those tools and techniques.

Mathematical Averages

Standard Deviation

Correlation

Sources of Primary and Secondary data:

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For the purpose of project data is very much required which works as a food for

process which will ultimately give output in the form of information. So before

mentioning the source of data for the project I would like to mention that what

type of data I have collected for the purpose of project and what it is exactly.

1. Primary Data:

Primary data is basically the live data which I collected on field while doing

cold calls with the customers and I shown them list of question for which I had

required their responses. In some cases I got no response form their side and

than on the basis of my previous experiences I filled those fields.

Source: Main source for the primary data for the project was questionnaires

which I got filled by the customers or some times filled myself on the basis of

discussion with the customers.

2. Secondary Data:

Secondary data for the base of the project I collected from intranet of the

Bank and from internet, RBI Bulletin, Journal by ICFAI University.

Statistical Analysis

In this segment I will show my findings in the form of graphs and charts. All the

data which I got form the market will not be disclosed over here but extract of

that in the form of information will definitely be here.

Chapter - 4

WORKING CAPITAL MANAGEMENT

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Operating cycle

Financial working capital

Approaches for financial working capital

Importance of working capital

Determinants of working capital

Principle of working capital management

Inventory management

Cash management

Receivable management

Payables Management

Working Capital:

Working capital is the firm’s holdings of current assets such as

cash, receivables, inventory & marketable securities. Every firm requires

working capital for its day to day transactions such as purchasing raw

material, for meeting salaries, wages, rents, rates, advertising etc.

Significance of working capital:

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The world in which real firms function is not perfect. It is characterized

by the firms considerable uncertainty regarding the demand, market

price, quality & availability of its own products and those suppliers. While

the firm has many strategies available to address these circumstances,

strategies that utilize investment or financing with working capital

accounts often offer a substantial advantage over the other techniques.

The importance of working capital management is reflected in the fact

that financial managers spend a great deal of time in managing current

assets and current liabilities like-

Arranging short term financing.

Negotiating favorable credit terms.

Controlling the movement of cash.

Administering accounts receivables.

Monitoring investment in receivables.

Decision concerning the above areas play a vital role in maximizing the

overall value of the firm. Once decisions concerning these areas are

reached, the level of working capital is also determined in active decision

sense, but falls out as residual from the decision just made.

The management of working capital plays an important role in

maintaining the financial health during the normal course of business. This

critical role can be enunciated by examining the flow of resources through

the firm. By far the major flow is the working capital cycle.

Concept and Definition of Working Capital

There are two concept of Working Capital: gross and net.

a) The term gross working capital, also referred to as working capital, means

the total current assets.

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b) The net working capital can be defined in two ways :

1. the most common definition of net working capital (NWC) is the difference

between current assets and current liabilities; and

2. Alternate definition of NWC is that portion of current assets which is financed

with long term funds.

The task of financing manager in managing working capital efficiently is to

ensure sufficient liquidity in the operations of the enterprise. Net working capital,

as a measure of liquidity is not very useful for comparing the performance of

different firms , but it is quite useful for internal control . The NWC helps in

comparing the liquidity of the same firm over time . For the purpose of working

capital management, therefore, NWC can be said to measure the liquidity of the

firm. In the other words, the goal of working capital management is to manage

the current assets and liabilities in such a way that an acceptable level of NWC is

maintained.

Net working capital:

Net working capital refers to the difference between the current

assets and current liabilities. Current liabilities are those claims of

outsiders, which are accepted, to measure for payment with an

accounting year and include creditors, bills payable and outstanding

expenses.

Net Working Capital = Current Assets – Current Liabilities

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Net working capital can be positive or negative. A positive net working

capital will arise when current assets exceeds current liabilities. It is a

quantitative concept, which indicates the liquidity position of the firm and

suggests the extent to which working capital needs may be financed by

permanent sources of funds.

Working capital can be classified into two categories i.e,

1. Permanent working capital.

2. Temporary or variable working capital.

Permanent working capital:

It is the minimum amount of investment in all current assets which

is required at all times to carry out minimum level of business activities.

Tandon committee has reserved to this type of working capital as “Core

Current Assets”.

Amount of permanent working capital remains in the business in

one form or another. It also grows with the size of the business. It is

permanently needed for the business, and therefore be financed out of

long-term funds.

Variable working capital:

The amount of working capital over permanent working capital is

known as variable working capital. The amount of such working capital

keeps on fluctuating from time on the business activities. It may further

be divided into seasonal working capital and special working capital.

Seasonal working capital is required to meet the seasonal demands of

busy periods occurring at stated intervals. On the other hand, special

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working capital is required to meet extraordinary needs for contingencies.

Events like strikes, fire, unexpected competition, rising price tendencies or

initiating a big advertisement campaign require such capital.

COMPONENTS OF WORKING CAPITAL

The basic components of working capital are ,

Current Assets:

a) Inventories

i) Raw Materials and Components

ii) Work in Progress

iii) Finished Goods

iv) Others

b) Trade Debtors

c) Loans And Advances

d) Investments

e) Cash And Bank Balance

Current Liabilities:

a) Sundry Creditors

b) Trade Advances

c) Borrowings

d) Commercial Banks

e) Provisions

FACTORS AFFECTING WORKING CAPITAL

The working capital needs of a firm are influenced by numerous factors . The

important ones are

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i) Nature of business: The working capital requirement of a firm is

closely related to the nature of business. A service firm, like electricity

undertaking or a transport corporation which has a short operating

cycle and which sells predominantly on cash basis, has a modest

working capital requirement. On the other hand ,

ii) Seasonality of Operation: Firms which have marked seasonality in

there operations usually have highly fluctuating working capital

requirement. For example, consider firm manufacturing air

conditioners. The sale of air conditioners reaches the peak during

summer months and drops sharply during winter season.

iii) Production Policy: A firm marked by pronounced seasonal

fluctuation in its sale may pursue a production policy which may

reduce the sharp variations in working capital requirements. For

example a manufacturer of air conditioners may maintain steady

production through out the year rather than intensify the production

activity during the peak business season .

iv) Market Conditions: When competition is keen, larger inventory of

finished goods is required to promptly serve the customers who may

not be inclined to wait because other manufacturers are ready to meet

their needs. Further generous credit terms may have to be offered to

attract customers in highly competitive market. Thus, working capital

needs tend to be high because of greater investment in finished goods

inventory and accounts receivable.

If the market is strong and competition is weak, a firm can manage

with smaller inventory of finished goods because customers can be

served with delay. Further in such situation the firm can insist on cash

payment and avoid lock up of funds in accounts receivables – it can

even ask for advance payment, partial or total .

v) Conditions of Supply: The inventory of raw material, spares and

stores depends on the conditions of supply. If supply is prompt and

adequate, the firm can manage with small inventories .

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OPERATING CYCLE:

The Operating cycle of the firm begins with the acquisition of raw materials and

ends with the collection of receivables. It may be divided into four stages a) raw

material and stores storage stage , b) work-in-progress stage , c) finished goods

inventory stage and d) debtors collection stage .

Duration of operating cycle: The duration of operating cycle is equal to the sum

of the duration of each of these stages less the credit period allowed by the

suppliers to the firms. It can be given as

O = R + W + F + D – C

Where O = Duration of operating cycle

R = Raw material and stores storage period

W = Work-in-progress period

F = Finished goods storage period

D = debtors collection period

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C = Creditors payment period

The components of Operating cycle may be calculated as follows ;

R = Average stock of raw materials and stores

Average raw material and stores consumption per day

W = Average Work-in-progress inventory

Average cost of production per day

F = Average Finished Goods Inventory

Average cost of goods sold per day

D = Average books debts

Average credit sales pert day

C = Average trade creditors

Average credit purchase per day

Working capital turnover ratio:

It measures the efficiency of the employment of working capital.

Generally higher the turnover, greater is the efficiency and larger the sale

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of profits. Working capital turnover ratio can be calculating with help of

the following formula.

Working capital turnover ratio = Sales .

Net working capital

APPROACHES FOR FINANCING WORKING CAPITAL

There are three approaches to financing the working capital:

1. Hedging approach

2. Conservation approach

3. Aggressive approach

Hedging approach:

A firm is said to be following Hedging approach if it matches the

maturity of the debt with the maturity of assets. For the firm following

hedging approach, long term financing will be used to finance fixed assets

and permanent current assets and short term financing for temporary or

variable current assets. As the level of these assets increases, the long

financing level also increases.

However, it should be realized that exact matching is not possible

because of the uncertainty about the expected lives of assets.

Conservative approach:

A firm in practice may adopt a conservative approach in financing

its current and fixed assets. The financing policy of the firm is said to be

conservative when it depends more on long term funds for financing

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needs. Under a conservative plan, the firm finances its permanent assets

and also a part of temporary current assets, the idle long-term funds can

be invested in the tradable securities to conserve liquidity. The

conservative plan relies heavily on long term financing.

Aggressive approach:

A firm may be aggressive in financing its assets. A firm follows

aggressive policy when it uses more short-term financing than warranted

by the matching plan. Under an aggressive policy, the firm financing a

part of its permanent current assets with short term financing.

Importance of working capital:

A business firm must maintain an adequate level of working capital

in order to run its business smoothly. It is worthy to note that both

excessive and inadequate working capital positions are harmful. Out of

two, inadequacy of working capital is more dangerous for a firm.

Excessive working capital results in idle funds on which no profits are

earned. Similarly insufficiency of working capital results in interruption of

production. This will lead to inefficiencies, increase in costs and reduction

in profits. Working capital is like the lifeblood of business. If it becomes

weak, the business can hardly prosper and survive. No business can run

successfully with out and adequate amount of working capital.

The following are the few advantages of adequate working capital in the

business:

Cash Discount: Adequate working capital enables a firm to avail

cash discount facilitates offered to it by the suppliers. The amount of

cash discount reduces the cost of purchase.

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Goodwill: Adequate working capital enables a firm to make prompt

payment. Making prompt payment is a base to create and maintain

goodwill.

Ability to face crisis: The provision of adequate working capital

facilities to meet situations of crisis and emergencies. It enables a

business to with stand periods of depression smoothly.

Credit-worthiness: It enables a firm to operate its business more

efficiently because there is not delay in getting loans from banks

and others on easy and favorable terms.

Regular supply of raw materials: It permits the carrying of

inventories at a level that would enable a business to serve

satisfactory the needs of its customers. That is it ensures regular

supply of raw materials and continuous production.

Expansion of markets: A firm which has adequate working capital

can create favorable market condition i.e., purchasing its

requirements in bulk when prices are lower and holding its

inventories for higher. Thus profits are increased.

Increased productivity.

Research programs.

High Morale.

Danger of excessive working capital:

A firm may be tempted to over trade and lose heavily.

Unable to extract benefits of customer’s credit.

The situation may lead to unnecessary purchases and accumulation

of inventories. This cause more chances of theft, waste, losses etc.

There arises an imbalance between liquidity and profitability.

Excessive working capital means funds are idle.

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The situation leads to greater production, which may not be having

matching demand.

The excess of working capital leads to carelessness about cost of

production.

Determinants of Working Capital:

1) Nature or character of Business:

The working capital requirement of a firm basically depends upon he

nature of its business. Public utility undertaking like Electricity, Water

Supply, and Railways need very limited working capital because they offer

cash sales only and supply services, not products and as such no funds

are tied up in inventories and receivables.

On the other hand trading and financial firms require less investment in

fixed assets but they have to invest large amount in current assets like

inventories, receivables and cash. So they need large amount of working

capital.

2) Production cycle:

Another factor, which has a bearing on the quantum of working

capital, is the production cycle. The term ‘production or manufacturing

cycle’ refers to the time involved in the manufacturing of goods. It covers

the time span between the procurement of raw material and the

completion of the manufacturing process leading to the production of

finished goods.

In other words, there is sometime gap before raw material becomes

finished goods. To sustain such activities that need for working capital is

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obvious. The longer time span (production cycle) the large will be the tied

up funds and therefore, larger is working capital need and vise versa.

3) Production Policy:

In certain industry the demand is subject to wide fluctuations due to

seasonal variations. The requirement of working capital in such case,

depend upon the production policy. The production can be either kept

steady by accumulating inventories during slack period with a view to

meet high demand during peak season of the production could be

curtailed during the slack season and increased during the peak season. If

policy is to keep production steady by accumulating inventories it will

require higher working capital.

4) Credit Policy:

The credit terms granted to customers have a bearing in the

magnitude of working capital by determining the level of book debts. The

credit sales result in higher book debs. Higher book debts mean more

working capital. On the other hand, if liberal credit terms are available

from the supplies of goods trade needs less working capital.

The working capital requirement of a business are thus, affected by

term of purchase and sale, and the ole given to credit by a company in its

dealing with creditors and debtors.

5) Growth and Expansion:

The working capital requirement of 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 a business, yet it may be

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concluded that for normal rate of expansion in the volume of business. We

may have retained profits to provide for me working capital but in fast

growing concern, we shall require lager amount of working capital.

6) Seasonal Variation:

In certain industry raw material is no available throughout the year.

They have to buy raw material in bulk during the season to ensure

uninterrupted flow and process them during the entire year. So a huge

amount is blocked in form of row material during the peak season, which

gives more requirements for working capital and less requirement during

the slack season.

7) Earning Capacity:

Some firm have more earning capacity than others due to quality of

the products, monopoly condition etc. Such firms with high earning

capacity may generate cash profits from operations and contribute to

their working capital.

Principles of Working Capital Management:

There are some principles of sound working capital management

policy.

They are as follows:

1) Principle of Risk Variation:

Risk here refers to inability of a firm to meet its obligation when

they become due for payment. Large investment in current assets with

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less dependence on a short term borrowing increase liquidity, reduces

dependence on short term borrowing increases liquidity, reduces risk.

On the other hand less investment in current assets and greater

dependence on debt increase the risk reduces liquidity and increases

profitability. In other word these is a definite inverse relationship between

he degree of risk and profitability.

2) Principle of Cost of Capital:

The various sources of rising of working capital finance have

different cost of capital and the degree of risk involved. Generally higher

the risk lower is the cost and lower the risk higher is the cost. A sound

working capital management should always try to achieve a proper

balance between these two.

3) Principle of Equity position:

According 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 he net

worth of he firm.

4) Principle of Maturity of Payment:

This principle is concerned with planning he sources of finance for

working capital. According to this principle, a firm should make every

efforts o related maturity of payment to its flow of internally generated

funds. Maturity pattern of various current obligations is an impotent factor

in risk assumptions and risk assessment.

Ratio to measure the efficiency of working capital:

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Current Ratio : Current assets/Current liabilities

Quick Ratio : (current assets – Inventories) /Current liabilities

Sales to cash: Sales during a period / Average cash balance.

Average collection period: Debtors dividend by annual credit sales

and the resulting figure multiplied by 365. This ratio indicates how

many days of credit is being obtained from the suppliers.

Average payment Period: Creditors divided by annual credit

purchase and the resultant figure is multiplied by 365. This ratio

indicates how many days of credit are being obtained from the

suppliers.

Inventory turnover ratio: Sales /Average inventory.

Working capital policy:

Working capital management policies have a great effect on firm`s

profitability, liquidity and its structural health. A finance manager should

therefore, chalk out appropriate working capital policies in respect of each

competent of working capital so as to ensure high profitability, proper

liquidity and sound structural health of the organization.

In order to achieve this objective the financial manager has to perform

basically following two functions.

1. Estimating the amount of working capital.

2. Sources from which these funds have to be raised.

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Inventory management

A) Objectives

The basic responsibility of the financial manager is to make sure the firms cash

flows are managed efficiently. Efficient management of inventory should

ultimately result in the

maximization of the owner’s wealth. As we know that in order to minimise 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 a loss

of sales. It implies that while the management should try to pursue the financial

objective of turning inventory as quickly as possible, it should at the same time

ensure sufficient inventories to satisfy production and sales demands. The

objective of inventory management consists of two counterbalancing parts: (I) to

minimize investment in inventory, and (ii) meet a demand for the product by

efficiently organizing the production and sales operations. These two conflicting

objectives of inventory management can also be expressed in terms of cost and

benefit associated with inventory. That the firm should minimize investment in

inventory implies that maintaining inventory involves costs, such that the smaller

the inventory, the lower is the cost to the firm. But inventories also provide

benefits to the extent that they facilitate the smooth functioning of the firm: the

larger the inventory, the better it is from the viewpoint. Obviously, the financial

managers should aim at a level of inventory which will reconcile these conflicting

elements. That is to say, an optimum level of inventory should be determined on

the basis of the trade-off between costs and benefits associated with the levels

of inventory.

B) Costs of Holding Inventory

One operating objective of inventory management is to minimize cost. Excluding

the cost of merchandise, the cost associated with inventory fall into two basic

categories:

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(i) Ordering or Acquisition or Set-up costs: This category of cost is

associated with the acquisition or ordering of inventory. Firms have to

place orders with suppliers to replenish inventory of raw materials. The

expense involved is referred to as ordering costs. The ordering costs

consist of (a) preparing the purchase order or requisition form and (b)

receiving, inspection, and recording the goods received to ensure both

quantity and quality. The cost of acquiring materials consists of clerical

costs and costs of stationery. It is therefore, called, a set-up cost. They

are generally fixed per order placed, irrespective of the amount of the

order. The acquisition costs are inversely related to the size of inventory:

they decline with the inventory. Thus, such costs can be minimized by

placing fewer orders for a large amount. But acquisition of a large

quantity would increase the cost associated with the maintenance of

inventory, that is, carrying cost.

(ii) Carrying costs: The second broad category of costs associated with

inventory is the carrying costs. They are involved in maintaining or

carrying inventory. The cost of holding inventory may be divided into two

categories:

(a) Those that arise due to the storing of inventory: The main

components of this category of carrying costs are (1).

Storage costs, that is, tax, depreciation, insurance,

maintenance of the building, utilities and janitorial

services; (2). insurance of inventory against fire and theft;

(3). Deterioration in inventory because of pilferage, fire,

technical obsolescence, style obsolescence and price

decline; (4). Serving costs, such as, labor for handling

inventory, clerical and accounting costs.

(b) The opportunity cost of funds: This consists of expenses in

raising funds (interest on capital) to finance the acquisition

of inventory. If funds are not locked in inventory, they

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would have earned a return. This is the opportunity cost of

funds or financial cost component of the cost.

The carrying costs and the inventory size are positively

related and move in the same direction. If the level of

inventory increases, the carrying costs also increase and

vice versa.

The sum of the order and carrying costs represents the

total cost of inventory. This is compared with the benefits

arising out of inventory to determine the optimum level of

inventory.

C) Benefits of Holding Inventory

The second element in the optimum inventory decision deals with the benefits

associated with holding inventory. The three types of inventory, raw materials,

work-in-progress and finished goods perform certain useful functions. The rigid

tying (coupling) of purchase and production to sales schedules is undesirable in

the short run as it will deprive the firms certain benefits. The effect of uncoupling

(maintaining inventory) is as follows

(i) Benefits in Purchasing: If the purchasing of raw materials and other

goods is not tied to production/sales, that is, a firm can purchase

independently to ensure the most efficient purchase, several

advantages would become available. In the first place, a firm can

purchase larger quantities than is warranted by usage in production or

the sales level. This will enable it to avail of discounts that are available

on bulk purchases. Moreover, it will lower the ordering cost as fewer

acquisitions would be made. There will, thus, be a significant saving in

the costs. Secondly, firms can purchase goods before anticipated or

announced price increases. This will lead to a decline in the cost of

production. Inventory, thus, serves as a hedge against price increases

as well as shortages of raw materials. This is highly desirable inventory

strategy.

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(ii) Benefits in Production: Finished goods inventory serves to uncouple

production and sale. This enables production at rate different from that

of sales. That is, production can be carried on at a rate higher or lower

than the sales rate. This would be a special advantage to firms with

seasonal sales pattern. In their case, the sales rate will be higher than

the production rate during the part of the year (peak season) and lower

during the off season. The choice before the firm is either to produce at

a level to meet the actual demand, that is, higher production during

peak season and lower (or nil) production during off-season, or,

produce continuously throughout the year and build up inventory which

will be sold during the period of seasonal demand. The former involves

discontinuity in the production schedule while the later ensures level

production. The level production is more economical as it allows the

firm to reduce the cost of discontinuities in the production process. This

is possible because excess production is kept as inventory to meet

future demands. Thus, inventory helps a firm to coordinate its

production scheduling so as to avoid disruption and the accompanying

expenses. In brief, since inventory permits least cost production

scheduling, production can be carried on more efficiently.

(iii) Benefits in Work-in-Progress: The inventory in Work-in-Progress

performs two functions. In the first place, it is necessary because

production processes are not instantaneous. The amount of such

inventory depends upon technology and efficiency of production. The

larger the steps involved in the production process, the larger the WIP

and vice versa. By shortening the production time, efficiency of the

production process can be improved and the size of this type of

inventory reduced. In a multi-stage production process, the WIP serves

a second purpose also. It uncouples the various stages of production so

that all of them do not have to be performed at the same time rate.

The stages involving higher set-up costs may be most efficiently

performed in batches with WIP inventory accumulated during a

production run.

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(iv) Benefits in Sales: The maintenance in inventory also helps a firm to

enhance its sales efforts. For on thing, if there are no inventories of

finished goods, the level of sales will depend upon the level of current

production. A firm will not be able to meet demand instantaneously.

The inventory serves to bridge the gap between current production and

actual sales. A basic requirement in a firms competitive position is its

ability vis-à-vis its competitor to supply goods rapidly. If it is not able to

do so, the customer is likely to switch to suppliers who can supply

goods at short notice. Moreover, in the case of firm having a seasonal

pattern of sales, there should be a substantial finished goods inventory

prior to the peak sales season. Failure to do so may mean loss of sales

during the peak season.

D) Techniques

There are many sophisticated mathematical techniques available to handle

inventory management problems. We will discuss some of the simple production-

oriented methods of inventory control to indicate a broad framework for

managing inventories efficiently in conformity with the goal of wealth

maximization. The major problem – areas that comprise the heart of inventory

control are

(i) Order Quantity Problem : Economic Order Quantity ( EOQ ) Model

After determining the type of controls for each categories of items ( A B and

C ), question arises regarding the appropriate quantity to be purchased in

each lot to replenish the stock. Buying a large quantity implies a higher

average inventory level which will assure (a) smooth production/sales

operations, and (b) lower ordering or setup costs. But it will involve higher

carrying costs. On the other hand, if the order quantity is small then the

carrying cost is reduced but it will increase the ordering costs. On the basis

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of the trade-off between the both the optimum level of order to be placed

should be determined. The optimum level of inventory is called as economic

order quantity (EOQ). The economic order quantity can be defined as that

level of inventory order that minimizes the total cost associated with

inventory management.

Assumptions: EOQ model is based on following assumptions:

- the firm knows with certainty the annual consumption of a

particular item of inventory.

- The rate at which the firm uses inventory is steady over time.

- The order placed to replenish inventory stocks are received at

exactly that point in time when inventories reach zero.

- There are two distinguishable costs associated with inventories:

cost of ordering and cost o carrying.

- Cost of order is constant regardless of the size of the order.

- The cost of carrying is fixed percentage of the average value of

inventory.

EOQ Formula :

EOQ = I 2FU

PC

where

U = annual sales

F = fixed cost per order

P = purchase price per unit

C = Carrying cost

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Limitations:

- The assumption of constant consumption and the instantaneous

replenishment of inventories are of doubtful validity. It is

possible that deliveries from suppliers may be slower than

expected for reasons beyond control. It is also possible that

there may be an unusual and unexpected demand for stocks. To

meet such contingencies additional stock called as safety stock

is kept.

- Another weakness of EOQ model is that the assumption of a

known annual demand for inventories is open to question. There

is likelihood of discrepancy between the actual and the expected

demand, leading to a wrong estimate of the economic ordering

quantity.

Cash management

Cash is the most important factor in financial management. It is also

the most important current asset for the operation of the business. Every

activity in an enterprise revolves round the cash. Cash is limited in every

enterprise and it cannot be raised as and when required which calls for an

efficient management of funds available.

Cash is the most liquid asset and is of vital importance to the daily

operations of the business. While the proportion of corporate assets held

in the form of cash is very small (often in between 1% to 3%) its efficient

management is crucial to the business because cash is the focal point in

business.

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Meaning of cash:

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.

OBJECTIVES OF CASH MANAGEMENT:

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

To minimize the amount locked up as cash balances.

Advantages of sample cash funds:

a) A shield for technical inefficiency.

b) Maintenance of goodwill.

c) Availing of cash discount.

d) Good bank-relations.

e) Exploitation of business opportunities.

f) Encouragement to new investment.

g) Increase in efficiency.

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Working Capital Management P a g e | 48

h) Overcoming abnormal financial situations.

Receivable management

A) Objectives

The term receivables are defined as debt owed to the firm by the

customers arising from sale of goods or services in the ordinary course of

business. When a firm makes an ordinary sale of goods or services and does not

receive payment, the firm grants trade credit and creates accounts receivables

which could be collected in the future. Receivables management is also called

trade credit management. Thus accounts receivable represent an extension of

credit to customers, allowing them a reasonable period of time in which to pay

for the goods received.

The sale of goods on credit is an essential part of the modern competitive

economic systems. In fact, the credit sale and, therefore, the receivables, are

treated as a marketing tool to aid the sale of goods. As a marketing tool, they

are intended to promote sales and obligations through a financial instrument.

Management should weigh the benefits as well as cost to determine the goal of

receivables management.

a) Costs : The major categories of costs associated with the extension of

credit and accounts receivable are

(i) Collection Cost: Collection costs are administrative

costs incurred in collecting the receivables from the

customers to whom credit sales have been made.

(ii) Capital Cost: The increased level of accounts

receivable is an investment in assets. They have to be

financed thereby involving a cost. It includes the

additional funds required to meet its own obligation

while waiting for payment from its customer and also

the cost on the use of additional capital to support credit

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sales, which alternatively could be profitably employed

elsewhere.

(iii) Delinquency Cost: This cost arises out of the failure of

the customers to meet their obligations where payment

on credit sales become due after the expiry of the credit

period. Such costs are called delinquency costs.

(iv) Default Costs: Finally, the firm may not be able to

recover the over dues because of the inability of the

customers. Such debts are treated as bad debts and

have to be written off as they cannot be realized. Such

costs are treated as default costs associated with credit

sales and accounts receivables.

b) Benefits: Apart from the costs, another factor that has a bearing on

accounts receivable management is the benefit emanating from credit

sales. The benefits are the increased sales and anticipated profits because

of the more liberal policy. The impact of the liberal trade credit policy is

likely to take two forms. Firstly, it is oriented to sales expansion. Secondly,

the firm may extend credit to protect its current sales against emerging

competition.

While it is true that general economic conditions and industry

practices have a strong impact on the level of receivables, a firm’s

investment in this type of current assets is also greatly affected by its

internal policy. A firm has little or no control over environmental factors,

such as economic conditions and industry practices. But it can improve its

profitability through a properly conceived trade credit policy or receivables

management.

B) Credit Policies

In the preceding discussion it has been clearly shown that the firm’s objective

with respect to receivables management is not merely to collect receivables

quickly but attention should also be given to the benefit-cost trade-off involved in

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the various areas of accounts receivable management. The first decision area is

Credit Policies.

The credit policy of the firm provides the framework to determine (a) whether or

not to extend credit to a customer and (b) how much credit to extend. The credit

policy decision of firm has two broad dimensions:

(i) Credit Standards: The term credit standards represent the basic

criteria for the extension of credit to customers. The quantitative basis

of establishing credit standards are factors such as credit ratings,

credit references, average payment period and certain financial ratios.

Since we are interested in illustrating the trade-off between benefit and

cost to the firm as a whole, we do not consider here these individual

components of credit standards. To illustrate the effect, we have

divided the overall standards into (a) tight or restrictive, and (b) liberal

or non-restrictive. The trade-off with reference to credit standards

covers

(a) Collection Costs: The implications of the relaxed credit standards

are (i) more credit, (b) a large credit department to service

accounts receivable and related matters, (iii) increase in collection

costs. The effect of tightening of credit standards will be exactly the

opposite. These costs are likely to be semi-variable.

(b) Investments in Receivables or the Average Collection

Period: The investment in accounts receivable involves a capital

cost as funds have to be arranged by the firm to finance them till

customer makes payment. Moreover higher the average accounts

receivables; the higher is the capital or carrying cost. A change in

credit standards-relaxation or tightening-leads to a change in the

level of accounts receivable either (i) through a change in sales, or

(ii) through a change in collections.

A relaxation in credit standards, as already stated, implies an

increase in sales which, in turn, would lead to higher average

accounts receivable. Further relaxed standards would mean that

D.N.C Nagpur

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credit is extended liberally so that it is available to even less credit-

worthy customers who will take a longer period to pay over dues.

(c) Bad Debt Expenses: Another factor which is expected to be

affected by changes in credit standards is bad debt expenses. They

can be expected to increase with relaxation in credit standards and

decrease if credit standards become more restrictive.

(d) Sales Volume: Changing credit standards can also be expected to

change the volume of sales. As standards are relaxed, sales are

expected to increase; conversely, a tightening is expected to cause

a decline in sales.

A) Credit Analysis

Besides establishing credit standards, a firm should develop procedures for

evaluating credit applicants. The second aspect of credit policies of a firm is

credit analysis and investigation. Two basic steps are involved in the credit

investigation process:

(a) Obtaining Credit information: The first step in credit analysis is

obtaining credit information on which to base the evaluation of a

customer. The sources of information, broadly speaking, are

(ii) Internal: Usually, firms require their customers to fill various forms

and documents giving details about financial operations. They are

also required to furnish trade references with whom the firms can

have contacts to judge the suitability of the customer for credit.

This type of information is obtained from internal sources of credit

information. Another internal source of credit information is derived

from the records of the firms contemplating an extension of credit.

(iii) External: The availability of information from external sources to

assess the credit-worthiness of customers depends upon the

development of institutional facilities and industry practices. In

India, the external sources of credit information are not as

developed as in the industrially advanced countries of the world.

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Depending upon the availability, the following external sources may

be employed o collect information.

- Bank References: Another useful source of credit information

is the bank of the firm which is contemplating the extension of

credit. The modus operandi here is that the firm’s banker

collects the necessary information from the applicant’s bank.

Alternatively, the applicant may be required to ask his banker to

provide the necessary information either directly to the firm or

to its bank.

- Trade References: These refer to the collection of information

from firms with whom the applicant has dealings and who on the

basis of their experience would vouch for the applicant.

- Credit Bureau Report: Finally, specialist credit bureau reports

from organizations specializing in supplying credit information

can also be utilized.

(b) Analysis of Credit Information: Once the credit information has been

collected from different sources, it should be analyzed to determine the

credit-worthiness of the applicant. The analysis should cover two

aspects:

(i) Quantitative: The assessment of the quantitative aspects is

based on the factual information available from the financial

statements, the past records of the firm, and so on. The first step

involved in this type of assessment is to prepare an Aging

Schedule of the accounts payable of the applicant as well as

calculate the average age of accounts payable. This exercise will

give an insight into the past payment pattern of the customer.

Another step in analyzing the credit information is through a ratio

analysis of the liquidity, profitability and debt capacity of the

applicant. These ratios should be compared with the industry

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average. Moreover, trend analysis over a period of time would

reveal the financial strength of the customer.

(ii) Qualitative: The quantitative assessment should be

supplemented by a qualitative/subjective interpretation of the

applicant’s credit-worthiness. The subjective judgment would cover

aspects relating to the quality of management. Here, the reference

from other suppliers, bank references and specialist bureau reports

would form the basis for the conclusion to be drawn. In the

ultimate analysis, therefore, the decision whether to extend credit

to the applicant and what amount to extend will depend upon the

subjective interpretation of his credit standing.

B) Credit Terms

The second decision area in accounts receivables management is the

credit terms. After the credit standards have been established and the credit-

worthiness of the customer has been assessed, the management of a firm must

determine the terms and conditions on which the trade credit will be made

available. The stipulations under which goods are sold on credit are referred to

as credit terms. The credit terms specifies the repayment terms of receivables.

The credit terms have three components: (i) credit period, in terms of duration of

time for which trade credit is extended-during this period the overdue amount

must be paid by the customer; (ii) cash discount, if any, which the customer

can take advantage of, that is, the overdue amount will be reduced by this

amount; and (iii) cash discount period, which refers to the duration during which

the discount can be availed of.

(a) Cash Discount: The cash discount has implications for the sales volume,

average collection period/average investment receivables, bad debt expenses

and profit per unit. In taking a decision regarding the grant of cash discount the

management has to se what happens to these factors if it initiates increase, or

decrease in the discount rate. The changes in the discount rate would have both

D.N.C Nagpur

Working Capital Management P a g e | 54

positive and negative effects. The implications of increasing or initiating cash

discount are as follows:

i. The sales volume will increase. The grant of discount implies reduced

prices. If the demand for the products is elastic, reduction in prices will

result in higher sales volume.

ii. Since the customers, to take advantage of the discount, would like to

pay within the discount period, the average collection period would be

reduced. The reduction in the collection period would lead to a

reduction in the investment in receivables as also the cost. The

decrease in the average collection period would also cause a fall in bad

debt expenses. As a result, profits would increase.

iii. The discount would have a negative effect on the profits. This is

because the decrease in prices would affect the profit margins per unit

of sale.

C) Collection Policies

The third area involved in accounts receivable management is collection

policies. They refer to the procedures followed to collect the accounts receivable

when, after the expiry o the credit period, they become due. These policies cover

two aspects:

(i) Degree of Collection Effort: To illustrate the effect of the collection effort,

the credit policies of a firm may be categorized into (i) strict / light, and (ii)

lenient. The collection policy would be tight if very rigorous procedures are

followed. A tight collection policy has implications which involve benefits as well

as costs. The management has to consider a trade-off between them. Likewise, a

lenient collection effort also affects the cost-benefits trade-off. The effect of

tightening the collection is discussed below :

- Bad debt expenses would decline.

- The average collection period will be reduced.

- As a result profit will increase.

- Increased collection costs.

- Decline in sales volume.

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Working Capital Management P a g e | 55

The effect of lenient policy will just be the opposite.

(ii) Type of Collection Efforts: The second aspect of collection policies relates

to the steps that should be taken to collect over dues from the customers. A well

established collection policy should have clear-cut guidelines as to the sequence

of collection efforts. After the credit period is over and payment remains due, the

firm should initiate measures to collect them. The effort should in the beginning

be polite, but, with the passage of time, it should gradually become strict. The

steps usually taken are (i) letters, including reminders, to expedite payment; (ii)

telephone calls for personal contact; (iii) personal visits; (iv) help of collection

agencies; and finally,(v) legal action. The firm should take recourse to very

stringent measures, like legal actions, only after all other avenues have been

fully exhausted.

Payables management:

Management of accounts payable is as much important as the

management of accounts receivable. However there is a basic difference

between the approaches adopted by the Finance Manager in both the

cases. The underlying objective in case of accounts receivables is to

maximize the acceleration of collection process while incase of accounts

payable it is to slow down the payments process as much as possible. The

delay in payments of accounts payable may result in saving of some

interests costs but proves very costly to the firm in the form of loss of

credit in the market. The Finance Manager therefore has to ensure that

the payments to the credits are made at the stipulated time period after

obtaining the best credit term possible.

Control of accounts payable:

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Working Capital Management P a g e | 56

Computing the average age of payable can be calculated by any of

the following methods.

Months or days in the period / Accounts payable turnover accounts

payable turnover = Credit purchase in the period / Average accounts

payable.

Average accounts payable / average month / daily credit purchase.

Sources of funds:

Sunflag steel plant raises its working capital by multiple banking

arrangements with 5 Banks. The following are the five banks, from where

funds for working capital are raised:

1. State bank of India

2. Bank of India

3. Canara Bank

4. Indian Bank

5. State Bank of Bikaner & Jaipur (SBBJ)

6. IDBI Bank Limited

Limits:

Sunflag steel plant is having Non-fund based limits not exceeding Rs. 10

crores.

Types of working capital source:

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Working Capital Management P a g e | 57

1. Fund based limits: Under this source, Sunflag steel Plant can obtain

working capital finance by bank borrowing in the form of term loan

and additional financial assistance.

2. Non-fund based limits: Sunflag Steel Plant receives non-fund based

working capital not exceeding 10 crores.

Chapter-5:

Quantification

WORKING CAPITAL MANAGEMENT IN SISCO

Borrowings from banks for working capital:

Year Borrowings for working capital (Rs. In ’000)

2003-04 309,460

2004-05 281,787

2005-06 169,952

2006-07 105,499

2007-08 252,011

Borrowings for working capital from banks are secured by way of

hypothecation of inventories and book debts and further secured by way

of second charge both present and future ranking par passes over the

fixed assets subject to prior charges created by the company in favor of

financial institutions and Banks for securing term loan. Working

D.N.C Nagpur

Working Capital Management P a g e | 58

Capital borrowings are also secured by personal guarantee of Mr. Ravi

Bhushan Bhardwaj, Vice Chairman & Managing Director.

Year wise changes in working capital

Year

Gross working

capital (In

Rs.’000)

Change

percentag

e

Net working

capital (In

Rs.’000)

Change

percentag

e

2003-04 1544088.00 -16.43 1,009,053 3.31

2004-05 2623639.00 69.92 1,701,568 68.63

2005-06 2820375.00 7.50 1,631,678 -4.11

2006-07 4000510.00 41.84 2,051,445 25.73

2007-08 4548787.00 13.71 2,883,855 40.58

Interpretation:

The above table indicates that working capital is highest for

the year 2007-08. Statement of changes in working capital is done in the

pages that follow to give the complete picture of variations in working

capital.

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Year wise changes in gross & net working capital

D.N.C Nagpur

Working Capital Management P a g e | 60

Statement of changes in working capital for the year 2003-04 & 2004-05

(figures in Rs.’000)

Particulars 2003-04 2004-05 Increase Decrease

Current Assets

Inventories 788,020 1,340,813 552,793

Sundry Debtors 433,688 540,162 106,474

Cash & Bank Balances

98,528 136,708 38,180

Loans & Advances

223,852 605,956 382,106

Current Liabilities

Current Liabilities

522,911 859,706 336,795

Provisions 12,124 62,365 50,241

Net increase in Working Capital 692,515

Source: Annual reports of SISCO

Interpretation :

The increase in net working capital in 2004-05 over 2003-04 is very

large (Rs.69.2515 crores). All the current assets & current liabilities

increased during the year but the increase in current assets is much more

than current liabilities specially inventories. The net result is the increased

amount of working capital.

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Statement of changes in working capital for the year 2004-05 & 2005-06

(figures in Rs.’000)

Particulars 2004-05 2005-06 Increase Decrease

Current Assets

Inventories 1,340,813 1,307,863 32,950

Sundry Debtors 540,162 590,841 50,679

Cash & Bank Balances

136,708 131,501 5,207

Loans & Advances

605,956 790,170 184,214

Current Liabilities

Current Liabilities

859,706 904,144 44,438

Provisions 62,365 284,553 222,188

Net decrease in Working Capital 69,890

Source: Annual reports of SISCO

Interpretation:

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Net working capital decreased by Rs.6.989 crores. This is because

provisions (a proposed dividend forms the major part of provisions for

2005-06) are increased by Rs.22.218 crores.

Statement of changes in working capital for the year 2005-06 & 2006-07

(Figures in Rs.’000)

Particulars 2005-06 2006-07 Increase Decrease

Current Assets

Inventories 1,307,863 1,834,948 527,085

Sundry Debtors 590,841 600,953 10,112

Cash & Bank Balances

131,501 182,034 50,533

Loans & Advances

802,424 1,382,575 580,151

Current Liabilities

Current Liabilities

916,398 1,617,847 701,449

Provisions 284,553 331,218 46,665

Net increase in Working Capital 419,767

Source: Annual reports of SISCO

Interpretation:

The increase in net working capital in 2006-07 over 2005-06 is

Rs.41.9767 crores. All current assets (Mainly inventories & loans-

advances) & current liabilities (Mainly acceptances & sundry creditors) are

D.N.C Nagpur

Working Capital Management P a g e | 63

increased. All these changes have brought about an increase in net

working capital

Statement of changes in working capital for the year 2006-07 & 2007-08

(figures in Rs.’000)

Particulars 2006-07 2007-08 Increase Decrease

Current Assets

Inventories 1,834,948 2,247,489 412,541

Sundry Debtors 600,953 704,595 103,642

Cash & Bank Balances

182,034 188,950 6,916

Loans & Advances

1,382,575 1,407,753 25,178

Current Liabilities

Current Liabilities

1,617,847 1,165,507 452,340

Provisions 331,218 499,425 168,207

Net increase in Working Capital 832,410

Source: Annual reports of SISCO

Interpretation:

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Working Capital Management P a g e | 64

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

Rs.83.241 crores. This increase in net working capital is due to increase in

inventories & sundry debtors.

Chapter- 6

Data Analysis:

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Working Capital Management P a g e | 65

Operating cycle analysis:

The level of current assets needed for a business significantly depends

upon the length of the operating cycle. The longer the operating cycle,

larger will be the working capital requirement of the firm for funds needed

at different stages of operating cycle and vice-versa.

Time series analysis of operating cycle in SISCO

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Raw Material stage

i)Consumption of R.M & consumables

2,676,768 4,616,022 4,881,450 4,806,371 6,414,413

ii) Per dayconsumptio

7333.6 12646.6 13373.84 13168.14 17573.73

D.N.C Nagpur

Working Capital Management P a g e | 66

n

iii) Average stock of R.M. & consumables

236008 408837 460125 590950 955922.5

Duration of R.M (iii/ii) [In Days]

32.2 32.3 34.4 44.9 54.4

Work in process stage

i) Cost of production

3,750,401 5,992,151 6,425,423 6,668,778 8,106,791

ii) Per day cost of production

10275.07 16416.85 17603.90 18270.62 22210.39

iii) Average stock of WIP

120882 172537.5 202171.5 208943.5 292611

Duration of WIP stage [In days]

11.76 10.51 11.48 11.44 13.17

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Finished goods stage period

i) Cost of goods sold

4,315,713 6,900,265 7,640,196 7,885,704 9,476,960

ii) Per day cost of goods sold

11823.87 18904.83 20932.04 21604.67 25964.27

iii) Average stock of F/G

394744 483042 662041.5 777687.5 792685

Duration of F/G stage

33.4 25.6 31.6 35.9 30.5

D.N.C Nagpur

Working Capital Management P a g e | 67

[In days]

Debtors collection period

i) Sales 5203716 8797894 9242179 9495878 11264991

ii) Per day sales

14256.75 24103.82 25321.04 26016.10 30862.98

iii) Average debtors

568736 486925 565501.5 595897 652774

Debtors Coll. Period [In days]

39.9 20.2 22.33 22.9 21.15

(Creditors payment period)

i) Credit purchases

2,756,876 4,862,728 4,718,476 5,230,995 6,719,734

ii) Credit purchases/Day

7553.08 13322.5 12927.3 14331.5 18410.2

iii) Average Creditors

219777 194965.5 314464 507775.5 425849

Creditors payment Period [In days]

29.1 14.63 24.3 35.4 23.1

Total [In days]

88.1 73.9 75.4 79.7 96.12

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Working Capital Management P a g e | 68

Interpretation:

Operating cycle of SISCO is varying from 74-97 days. Company is able to

maintain a debtor’s collection period around 21 days during recent years.

Duration of semi-finished goods is nearly constant during the last five

years.

Gross working capital

Year

Gross working capital (In

Rs.’000)

2003-04 1,544,088

2004-05 2,623,639

2005- 2,820,375

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Working Capital Management P a g e | 69

06

2006-07 4,000,510

2007-08 4,548,787

Net working capital:

The net working capital of Sun flag steel plant shows an uneven trend

from 2003-08. The main reason for the increasing trend in the years is due

to the increasing inventories & creditors year after year. It also indicates a

weak cash balance to meet the liabilities. The current liabilities of the

company are increasing almost every year. The operating cycle period has

reduced during 2004-05 & 2005-06. The increase in working capital is due

to better sales and higher capacity utilization. The cost of production has

D.N.C Nagpur

Working Capital Management P a g e | 70

increased over the years. The net working capital of SISCO for the past six

years is depicted in the table.

Year

Net working capital (In

Rs.’000)

2003-04 1,009,053

2004-05 1,701,568

2005-06 1,631,678

2006-07 2,051,445

2007-08 2,883,855

Current ratio:

A current ratio of 2:1 is considered to do ideal. The ratio 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 higher the funds available for a rupee of current

liabilities. As a convention rule a current ratio of 2:1 or more is considered

satisfactory.

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Working Capital Management P a g e | 71

The higher the current ratio higher the funds available for a firm.

Current ratio=current assets/current liabilities.

YearCurrent Assets Current

Liabilities Current ratio

2003-04 1,544,088 535,035 2.89

2004-05 2,623,639 922,071 2.85

2005-06 2,820,375 1,188,697 2.37

2006-07 4,000,510 1,949,065 2.05

2007-08 4,548,787 1,664,932 2.73

Interpretation:

The current ratio is maintained around 2 from 2003-08 which is ideal

current ratio. The current ratio is decreased continuously from 2003-04 to

2006-07. The ratio has increased during 2007-08 this is mainly because of

increase in raw materials, debtors & loans & advances.

Working capital turnover ratio:

Working capital turnover ratio is 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 decreased from 2005-06 to till date.

This is mainly due to increased net working capital.

Working capital turnover ratio= Sales / Net working capital.

D.N.C Nagpur

Working Capital Management P a g e | 72

The turnover ratio for the last five accounting periods is as shown:

Inventory management is SISCO:

SISCO is multi-product, integrated steel plant with 150,000 MT capacity

Direct Reduced iron Plant, 200,000 MT capacity Mild & Alloy steel rolled

products, 240,000 MT capacity Hot metal/Pig iron. This makes SISCO to

D.N.C Nagpur

YearWorking capital turnover ratio

2003-04 5.16

2004-05 5.17

2005-06 5.66

2006-07 4.63

2007-08 3.91

Working Capital Management P a g e | 73

store, handle and process of huge quantity of material. Also SISCO being

a process industry running 365 days throughout the year 24 hrs a day.

This calls for efficient inventory management on the part of SISCO. SISCO

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 stores department. The

basic principle followed by SISCO in holding raw material inventory is to

maintain a safety stock of 15 days.

Stores and spares:

The stores and spares are procured and stored by central stores

department.

Semi/finished goods:

The semi-finished goods comprise blooms and billets and finished goods

are the various products mentioned in product mix of SISCO. The semi

finished goods are stocked and controlled by production planning

department. They generally hold stock for 15 days production, the

finished goods stocks are held at central stockyard within plant & also at

other stockyards located across India.

The split of raw material, spares and stores and semi & finished goods

inventory, their percentage and total inventory are given in the table.

D.N.C Nagpur

Working Capital Management P a g e | 74

(Rs. In ‘000)

Year

Finished Goods

Semi finished Goods

Raw materials

Spares & stores

Total Inv.Value

Value

% of total

Value

% of total

Value

% of total

Value

% of total

2003-04

374,707

47.5137,251

17.4 201,832 25.6 74,230 9.4788,020

2004-05

591,377

44.1207,824

15.5 458,261 34.2 83,351 6.21,340,813

2005-06

732,706

56.0196,519

15.0 222,452 17.0156,186

11.91,307,863

2006-07

822,669

44.8209,017

11.4 714,008 38.9 89,254 4.91,834,948

2007-08

762,701

33.9376,205

16.71,016,161

45.2 92,422 4.12,247,489

D.N.C Nagpur

Working Capital Management P a g e | 75

The above table clearly shows that the contribution of each item of

inventory to the total inventory is changing constantly over the past five

years. The contribution of Stores & spares is around 4% of the total

inventory during the last two years. SISCO is maintaining Stores & spares

between 7-9 crores (Excluding 2005-06). This is one of the strongest areas

of SISCO’s management i.e. in controlling inventory. Also the contribution

of semi-finished goods is between 11-17%. The major change in the

contribution of inventory is observed in raw materials & finished goods.

Inventory turnover ratio:

Inventory turnover ratio is ratio of sales to average finished goods

inventory, the inventory turnover ratio of SISCO is between 12 and 18.

This is an ideal value, indicating stock converting quickly into funds.

The inventory turnover ratio of SISCO for the past five accounting periods is

shown in the table.

YearTotal Sales

Average finished goods Inventory

Inventory Turnover ratio

2003-04

5203716 394744 13.18

2004-05 8797894 483042 18.21

2005-06 9242179 662041.5 13.96

2006-07 9495878 777687.5 12.21

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2007-08 11264991 792685 14.21

Cash management

Cash requirements can be forecasted depending on monthly and

weekly requirements of cash. The forecast of information regarding cash

inflows which include the cash from customers, export incentive export

credit, etc), cash outflows which include purchase of row materials,

spares, excise duty, sales tax, personnel payments customs duty, railway

freight etc.

Cash ratio:

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

maintaining almost an average cash of around 0.1. This is because cash

holding is kept at minimum except for some petty cash needs.

Cash ratio = Cash in hand (or bank)/Current liabilities.

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Cash ratio for the past five years is as shown.

YearCash in hand/bank

Current liabilities Cash Ratio

2003-04 98528 522911 0.19

2004-05 136708 859706 0.16

2005-06 131501 904144 0.15

2006-07 182034 1617847 0.11

2007-08 188950 1165507 0.16

Payable turnover ratio:

Payables turnover ratio is ratio of total purchases to average payable. It

indicates the number of times management is able to convert accounts

payables into purchase.

Payable turnover ratio = Purchases/Average payables.

Year PurchasesAverage Payables

Payables turnover ratio

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2003-04 2756876 219777 12.54

2004-05 4862728 194965.5 27.94

2005-06 4718476 314464 15

2006-07 5230995 507775.5 10.3

2007-08 6719734 425849 15.78

Interpretation:

The turnover ratio is maintained between 10 and 15 except for the year

2002-03: this is because of lower purchase value & 2004-05; this was

mainly because of increase in purchase value and better cash position.

Suggestions

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Scope of enhancing: During the year 2007-08 the turnover is Rs 1126.49

crores and profit is Rs.43.62 crores, during the year 2006-07 turnover is

Rs.949.58 crores and profit is Rs.37.05 crores. It indicates that the net

profit forms nearly 4% of the total sales turnover. Company should try to

go for expansion, such as production enhancement system, so that the

company comes to a position for further increasing its profits.

The steel industries are having very good time but SISCO could not able to

take full of its advantage due to the constraints, primarily raw materials.

Unlike any other steel companies, SISCO is not having its own sources of

raw material i.e. coal mine & iron ore. These are very basic needs as the

company always depends on its supplier for its raw material. Had the

company always depends on its supplier for its raw material. However in

the recent years SISCO is procuring coal from its Belgaon coal mine &

because of which its dependence on supply from outside is now 50%.

The ratio of net working capital to sales for the last five accounting years

are as follows:

Year

Net working

capital (In

Rs.’000)

Sales (In Rs.’000) Ratio [In %]

2003-04 1,009,0535203716 19.39

2004-05 1,701,568 8797894 19.34

2005-06 1,631,678 9242179 17.65

2006-07 2,051,445 949587821.60

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2007-08 2,883,855 11264991 25.60

From the above ratios it can be observed that SISCO’s net working

capital to sales ratio is around 20 over the years (excluding 2007-08

where it is 25%), so I can suggest that in the future SISCO can

predict the net working capital requirement of the upcoming

accounting year based on the sales forecast i.e. SISCO’s

management can assume the net working capital for the upcoming

accounting year to be 23-25% of the forecasted sales value, this can

be used as a guide in raising funds for working capital.

Conclusions:

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1) The non moving inventory is one of the gray areas in SISCO’s

working capital management. They account for 1/10 th of value total

inventory. This is an area where SISCO’s management should focus

to bring down the level of non moving inventory. SISCO should

identify obsolete or non-usable items & dispose them if required.

Also identification of such items will help in preventing procurement

of such items on future. In some cases company needs to maintain

sufficient level of spares even though they are not required for

months or years because absence of these spares in case of

emergency situations may lead to a huge loss in terms of

production.

2) The export sales of SISCO are only 5.7% of total sales during 2007-

08. Present scenario of steel industry indicates the need for more

steel even with the cause of lower production facilities. The

company should now give more importance to exports because it

provides good net sales realization but also export benefits.

The following table the contribution of export sales to sales and the

justification for the above suggestions.

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(Rs. In ‘000)

Year 2003-04 2004-05 2005-06 2006-07 2007-08

Export sales

680,436 1,043,340 834,844 860,525 650,110

Total sales

5,203,716 8,797,894 9,242,179 9,495,878 11,264,991

% exportsales to totalsales

13.07 11.86 9.03 9.06 5.77

Considering the fact that the margins in the export sales are low, but have

the potential to rise in the near future, the company can maintain a

minimum level of presence in the global market.

Bibliography:

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Books:

Financial Management by I.M.Pandey

Financial Management by Prasanna Chandra

Financial Management by M.Y.Khan & P.K.Jain

Annual Reports of Sunflag Iron & Steel Co. Ltd. from 2002-03 to 2007-08.

Websites:

www.economictimes.com

www.sunflagsteel.com

www.edifar.com

www.indiainfoline.com

www.indianexpress.com

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PROJECT REPORT ON

“WORKING CAPITAL MANAGEMENT” AT

SUBMITTED TO PARTIAL FULFILLMENT OF REQUIREMENT

FOR THE AWARD OF DIPLOMA IN BUSINESS MANAGEMENT

TO RASHTRASANT TUKDOJI MAHARAJ NAGPUR UNIVERSITY, NAGPUR

FOR THE ACADEMIC YEAR 2009-10

SUBMITTED BY

Mr.Sachin K.Karemore

SUPERVISOR

Prof.Amol Armarkar

SUBMITTED THROUGH

DR. PANJABRAO DESHMUKH INSTITUTE OF MANAGEMENT TECHNOLOGY & RESEARCH,

DEPT. OF DHANWATE NATIONAL COLLEGE, NAGPUR

D.N.C Nagpur

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DECLARATIONDECLARATION

I hereby declare that the Project Report entitled “Working Capital

Management at Sun Flag” or any part thereof has not been

submitted earlier to any Institution or University for the award of any

other Diploma or Degree, not the data has been derived from any

thesis of any University.

The sources of material, data used in this study have been duly

acknowledged.

Mr.Sachin K.Karemore

Researcher

Place: Nagpur

Date:

D.N.C Nagpur

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SHRI SHIVAJI EDUCATION SOCIETY AMRAVATI’S

DR.PANJABRAO DESHMUKH INSTITUTE OF MANAGEMENT TECHNOLOGY & RESEARCH

D.N.C. campus, Congress Nagar, Nagpur-440 012 Phone: 91-712-22430464, 22445356

e-mail: pdimtr@rediffmail.com / Website :http:\\www.pdimtr.com

CERTIFICATE

I hereby certify that this Project Report entitled “Working Capital Management at Sun Flag Iron & Steel Co.Ltd” submitted by Mr.Sachin K.Karemore to Rashrasant Tukdoji Maharaj Nagpur University, Nagpur for the award of Diploma in Business Management, is a bonafide and original research work carried out under my guidance and supervision. It is piece of research of a sufficiently high standard to warrant its submission to the University for the Award of the said degree.No part of the thesis has been submitted for any Degree or Diploma, or published in any other form.The assistance and the help rendered to the researchers during the course of his investigation in the form of basic source material and information have been duly acknowledged.

Dr.M.A.Burghate Prof.Amol Armarkar

Coordinator Supervisor

Dr.B.B.Taywade

Principal

APPROVED BY AICTE, NEW DELHI AFFILIATED TO NAGPUR UNIVERSITY

D.N.C Nagpur

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FOUNDER PRESIDENT : Late Dr.Panjabrao Deshmukh PRESIDENT : Hon. Shri Adv.Arunkumar B. Shelke

DIRECTOR : Dr.B.B.Taywade CO-ORDINATOR : Dr.M.A.Burghate

CERTIFICATE

This is to certify that Mr. Sachin

K.Karemore of Danwate National College, Nagpur

has completed his project on working capital

management, here at Sunflag Iron & Steel Co. Ltd.,

Bhandara. The information submitted is true and

original to the best of my knowledge.

Mr. T.S. Chandrabose

Assistant General Manager,

Fin A/C Dept.

Sunflag Iron & Steel Co. Ltd. Bhandara.

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ACKNOWLEGEMENT

Project whether it is small or large can’t be completed until it is

assisted by a group of individuals fulfilling every criteria of its process.

Throughout this project I would like to acknowledge the precious help of

Prof. Amol Armarkar who helped me to choose the project title.

I Would Like to express my gratitude to the Director Of P.D.I.M.T.R.Nagpur

,Dr.B.B.Taywade and Co-ordinator Dr.Mukul Burghate for giving me

opportunity to do the project in order to enhance my knowledge & skills

and abilities.

At the onset I would like to thank Mr.N.K.Shil & Mr.T.S. Chandrabose

without whose guidance & feedback it would not been possible for me to

complete this project successfully.

I especially thankful to all departments who provide me valuable

guidance, which is helpful in fulfillment of my Project Report. I am also

thankful to my friends who directly or indirectly helped me lot.

Mr. Sachin K.KaremoreMr. Sachin K.Karemore

DBMDBM

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CONTENT

Particulars Page No.

Executive summary

Chapter 1 - Introduction

Introduction of Project 1

Chapter 2 – Company profile

Background

SISCO Technology

Product Mix

Product Applications

Vision, Mission & Technology

Future projects

Production Performance

Financial Performance

Steel Industry

2

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Chapter 3 - Research Methodology: 13

Research Methodology

Data Collection

Primary Data

Secondary Data

Objectives of the study

Hypothesis

Chapter 4 - Working Capital Management 16

Operating cycle 23

Approaches for financial working capital 25

Importance of working capital 26

Determinants of working capital 28

Principle of working capital management 30

Inventory management 33

Cash management 39

Receivable management 40

Payables Management 47

Chapter 5-Quantification 50

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Working capital management in SISCO

Chapter 6- Data Analysis

Operating cycle analysis:

Gross working capital

Net working capital:

Current ratio

Working capital turnover ratio

Inventory management is SISCO:

Cash management

Payable turnover ratio

suggestions

58

Chapter – 7: Conclusion 74

Bibliography 76

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Executive Summary

The concept of working capital is used in two ways i.e., gross and net.

Gross working capital refers to the firms investments in current assets.

Net working capital means the difference between current assets and

current liabilities, and therefore represents the position of current assets,

which is financed either from long term funds or banks borrowings.

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

firm needs cash to make payments for acquisitions of resources and

services for normal conduct of business. Cash is also held to meet

emergency situations. Some firms hold cash to take advantage of

speculative changes in prices of input and output. Management of cash

involves three things.

a) Managing cash flows in and out of a firm

b) Managing cash flows within a firm

c) Financing deficit or investing surplus cash

And thus, controlling cash balance at any point of time. Firms prepare

cash budget to plan and control and cash flows. Cash budget can serve its

purpose only when firm can manage its collection and payments within

the allowed limits. A firm should hold optimum amount of cash at any time

and invest the temporary excess amount in short term securities.

Trade credit creates book debts accounts receivable. It issued as a

marketing tool to expand or maintain the firm’s sales. A firm’s investment

on account receivable depends on volume of credit sales and collection

period through credit policy. Credit policy includes credit terms and

collection efforts the firm’s credit policy will be considered optimum at the

three methods monitor book debts. They are:

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a) Average collection period

b) Ageing schedule

c) Collection experience matrix

The first two methods are based on the showing payments patterns and

hence do not provide meaningful information for collecting book debts.

The third approach uses the desegregated data and it is better method

than first two methods.

Inventories constitute about 60% of current assets to public limited

companies of India. The manufacturing companies hold inventories in the

form of raw materials, work in process and finished goods. They are three

motives for holding inventories. They are transaction motive,

precautionary motive and speculative motive.

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

multi product large organization with huge capital turnover where the

working capital requirement depends on the level of operation and the

length of operation cycle. Monitoring the duration of the operating cycle is

an important aspect of current assets management and control.

D.N.C Nagpur