wcm final

Anugrah P.Roll No. CB.BU.P2MBA10006

A PROJECT REPORT

TATA STEEL LTD. (WIRE DIVISION)

WORKING CAPITAL MANAGEMENT

WORKING CAPITAL MANAGEMENT 2011

ACKNOWLEDGEMENT

I am grateful to TATA Steel, Wire Division for giving me this great opportunity to do my Summer

Internship Project with them. I take the privilege to sincerely thank Mr. Sunil Bhaskaran, EIC,

Global Wires Business, TATA steel, in creating the opportunity for a summer project in the

finance department of this division. I would like to thank Mr. Sanjiv Verma, Financial Controller,

Wires Division, TATA steel, for making everything possible for me during the entire course of

the project. I am also thankful to my Company Guide, Mrs. Minal Udani, Senior Manager -

Finance, Banking department, Wires Division, TATA Steel, for her guidance and support during

the entire course of the project. I am thankful to Mr. Pradeep Poojari and Mr. Sanjay

Nagotanekar for their guidance and support throughout the course of the project. I also take

great pleasure in thanking my faculty guide, Prof. R. K. Murthy, Professor, Finance, Amrita

School of Business, for giving me the moral support and inspiration to perform well and make

the Summer Internship Project successful. I specially thank all the Managers, Officers and the

Staff members with whom I interacted during the course of my project for their support and

cooperation.

SUMMER PROJECT AT TATA STEEL WIRE DIVISION


TABLE OF CONTENTS

1. EXECUTIVE SUMMARY 5

1.1 INDUSTRY PROFILE…………………………....…………………………………………….…………………....51.2 ORGANIZATIONAL PROFILE…………………..………………………………….……………………………..6

1.2.1 Global Wires Business……………….….....……………………………………………………………..…...61.2.2 Tata Steel Wire Division (TSWD)…….………………..…………………………………………….........61.2.3 Lanka Special Steels Ltd. (LSSL)………….………………………………………………………………..141.2.4 Siam Industrial Wires (SIW)………………….……….…………………………………………………….141.2.5 Wuxi Jinyong Metal Products (WJMP)………..……………………………………………………....151.2.6 Indian Steel & Wire Products (ISWP)……………….…………………………………………………..16

2. INTRODUCTION TO WORKING CAPITAL MANAGEMENT 18

2.1 WORKING CAPITAL……………………………………………………………………………………….………..18

2.2 OPERATING CYCLE…………………………………………………………………………………………………20

3. CREDIT MANAGEMENT 22

3.1 INTRODUCTION………………………………………………………………………………………………………22

3.2 IMPORTANT TERMS....................................................................................................24

4. ANALYSIS OF WORKING CAPITAL 35

4.1 ANALYZING THE FINANCIAL RATIOS..........................................……………………………...35

4.1.1 Global Wires India.........…………………………………………………………………………………………36

4.1.2 Lanka Special Steels Ltd………………………………………………………………………………………….37

4.1.3 Siam Industrial Wires……………………………………………………………………………………………..38

4.1.4 Wuxi Jinyong Metal Products…………………………………………………………………………………39



4.2 ANALYZING THE COMPONENTS OF WORKING CAPITAL..........................……………....40

4.2.1 Global Wires India......……………………………………………………………………………………………40

4.2.2 Lanka Special Steels Ltd.…......………………………………………………………………………………..42

4.2.3 Siam Industrial Wires.................................................................................................45

4.2.4 Wuxi Jinyong Metal Products.....................................................................................48

4.3 ANALYZING THE TRENDS FOR INVENTORIES & RECEIVABELS - GLOBAL WIRES INDIA……....49

4.3.1 Trends for Inventories................................................................................................49

4.3.2 Trends for Receivables...............................................................................................54

4.4 COMPARISON AMONGST GLOBAL WIRES ENTITIES...................................................57

5. CREDIT POLICY AT GLOBAL WIRES 60

6. RECEIVABLES MANAGEMENT AT GLOBAL WIRES INDIA 69

7. ANALYSIS OF OUTSTANDING & OVERDUES 74

8. LIMITATIONS TO MY STUDY 78

9. RECOMMENDATIONS TO THE COMPANY 79

10. BIBLIOGRAPHY 84



1. EXECUTIVE SUMMARY

1.1 INDUSTRY PROFILE

Steel wire manufacturing is a fragmented industry with many small and medium sized

manufacturers. Most of the steel wire manufacturers are privately owned and owner driven. In

India only Tata Steel, Usha Martin, Rajratan Global Wires and Ramsarup Industries are in public

domain, rest all units are privately owned.

Tata Steel Wire Division (TSWD) was one of the founder members of the trade association

named “The Steel Wire Manufacturers Association of India” (SWMAI). SWMAI ensures that

there is a platform for sharing concerns and as a single body representative with regulatory

authorities and customer/supplier associations. Today, around 50% of the wire manufacturing

capacity is registered under the SWMAI.

A key point about the wires industry is that the product changes are few and far in between.

The wires supplied by TSWD are intermediate products which are converted or assembled into

products which in turn touch the end consumers. TSWD customers in the institutional business

are the original equipment manufacturers such as tyre manufacturers like MRF, JK Tyres, Apollo

tyres etc. These customers have clearly defined technical specifications and thus any changes in

the wires specifications require formal approvals and long drawn laboratory and field

approvals. Hence new product development in steel wire industry can either be achieved by

introducing newer wires in a market which has yet to develop or by making subtle changes in

product specifications and making process improvements which will enhance usage for

customer applications.



1.2 ORGANIZATIONAL PROFILE

1.2.1 GLOBAL WIRES BUSINESS

The Global Wires Business of The Tata Steel Group is amongst the largest steel wire

manufacturers in the world (largest in India, Thailand & Sri Lanka), with eight manufacturing

facilities in India, China, Thailand and Sri Lanka. It has a combined annual manufacturing

capacity of 670,000 MT and includes 1900 employees worldwide.

Tata Steel Global Wires Business (TSGWB) caters to the construction, automotive, power and

retail (galvanized wires) segments. With its multiple manufacturing global facilities, it is the

world’s leading producer of PC strands and its wires are used in the construction of bridges,

high rise buildings, LNG tanks, nuclear reactors, metro rail projects etc. Its products have

received quality approvals from certifying agencies across the world – from Europe to Japan

and Australia.

Many of the iconic structures built using TSWD’s PC strands include Bandra Worli Sea Link

(India), Suvarnabhumi Airport (Thailand), Changi Airport Terminal 3 (Singapore), Delhi Metro

Rail (India), Dubai Ski Dome (UAE), Darwin LNG Tanks (Australia), Melbourne Cricket Ground

(Australia), Cross Sea Bridge (Japan), Cross Ring Expressway (Macau) and Shenzheng Bay Great

Bridge (China).

Tata launched its brand “Tata Wiron” in 2004 and built a channel from scratch to support its

efforts. Tata Steel Wire Division is the market leader and pioneer in wire manufacturing in India

over the past 50 years, Established in 1958 as steel wire manufacturing company it was taken

over by Tata Steel in 1984. In 2002 wire division became a separate profit centre under long

product division (Tata Steel). Year 2008 saw the wire division become a part of global wire

business (Tata Steel). The global wires business was created to bring about integration in Tata

Steel group’s various businesses and also for developing the wire business globally. The global

wires business of Tata steel group consists of Wire division (India), The Siam Industrial Wire Co.



Ltd. (Thailand), Wuxi Jinyang Metal Products Co. Ltd. (China) and Lanka Special Steel Ltd (Sri

Lanka) and Indian Steel & Wire Products (ISWP).

FIG 1.1: TATA STEEL GLOBAL WIRES BUSINESS ENTITIES

1.2.2 TATA STEEL WIRE DIVISION (TSWD)

Tata Steel Wire Division was setup in 1958 as “Special Steels Limited” to manufacture steel

wires for making umbrella ribs. Setting up of these manufacturing facilities was one of first

steps that the company took in bringing new steel wires for the Indian markets, where after,

many wires were introduced which resulted in development of the markets and also growth

and consolidation of the company.

Today, TSWD is the pioneer of steel wire industry in India and is the largest manufacturer and

market leader in India. TSWD is the only manufacture of steel wires in India which has a pan

India presence catering to the needs of all four industry sectors namely Auto, Construction,

Power and Retail. TSWD has been constantly striving to create customer value by offering

differentiated products. TSWD made a radical change and changed the rules of Indian wire

manufacturers by creating a retail segment portfolio.


GLOBAL WIRES

TATA STEEL WIRE

DIVISION

LANKA SPECIAL STEELS LTD., SRI LANKA

WUXI JINYANG METAL

PRODUCTS, CHINA

SIAM INDUSTRIAL WIRE CO. LTD.,

THAILAND

INDIAN STEEL & WIRE

PRODUCTS LTD.


The wire division (India) has an annual capacity of 335,000 MT of steel wires across 4 plants

(self - owned), 8 plants (outsourced) and one subsidiary. WD also has a Wire Rod Mill (West)

whose operations are under control of the Chief-WD and the sale of wire rods is controlled by

Long Products Division of Tata Steel. WRM West has an annual capacity of 295,000 MT. The

products rolled include Mild Steel and various grades of High Carbon Wire Rods. WD has 8 sales

offices, 19 stockyards and 27 Galvanized Wire Distributors (GWD).

Table 1.1: Key differences in WD Plants

OWNERSHIP Owned &

Managed by WD

Owned &

Managed by

Managing Agency

100%

Subsidiary

Outsourced

TWP1 TWP2 INDORE DWP ISWP EPA

Assets Wire Division Partly by

ISWP and

partly by

WD

EPA

Raw

Materials

Arranged by Wire Division

People On rolls of WD

and some non

core activities

outsourced

On rolls of

Managing Agency

except very few

key personnel

from WD

On rolls of

ISWP

On rolls of

EPA



Products & Delivery MechanismsThe Wire Division caters to the needs of institutional as well as retail segments of the market.

The institutional segment consists of Automobile industry, Infrastructure and Power. The

products used by the automobile sector are Tyre Beads and Springs. PC Strands and PC wires

are used by the infrastructure sector whereas the power sector uses ACSR (Aluminium

Conductor Steel Reinforced). The products for the retail segment of the market include

Galvanized wire for Farming, Poultry and Fencing. The institutional segment contributes to the

maximum part of revenues and profits of the wire division. About 96% of the sales volume is

sold domestically and about 4% exported.

The Wire Division has adopted ‘Theory of Constraints’ (ToC) approach which has led to major

improvements in the delivery mechanism. Stock buffers have been introduced at plant

warehouses, select stockyards, distributors and customers’ premises to enable Vendor

Managed Inventory (VMI) for enterprise customer’s replenishment model for key distributors.

Further Simplified Drum-Buffer-Rope (SDBR) concept has been implemented to improve Supply

chain reliability. As a result of these mechanisms the supply chain is reliable and is a key

differentiator as compared to the competitors of WD.

Wire Division has a workforce of 1037 full time employees. All three plants at Tarapur have

unions and collective bargaining is done with respective unions of each plant. At Tarapur all the

core operations are performed by the employees whereas support services like packing and

material handling are outsourced to agencies having expertise in those areas.

At Doddaballapur and Indore the operations are handled by Managing Agencies in order to

manage the labour costs



FIG 1.1: PRODUCTS

67%

33%

Business Segments by Revenue (FY10)

Institutional Retail

70%

30%

Business Segments by Profit(FY10)

Institutional Retail

FIG 1.2: BUSINESS SEGMENTS


PRODUCTS

AUTOMOTIVE

(i) Tyre Bead Wire

(ii) Spring Wire

INFRASTRUCTURE

(i) PC Strands WIres

(ii) PC Wire

POWER

(i) Aluminium Conductor

Steel Reinforced

(ACSR)(ii) Cable Armoure

Wires

RETAIL

(i) GI Wires(ii) MIG Wires

(iii) Mesh Wires


TABLE 1.2: PLANT WISE PRODUCTION

Type of

Wire

Self – owned Subsidiary Outsourced Total

CapacityTWP1 TWP2 Indore

Operations

Doddabalapur

Operations

ISWP EPAs

(All India)

Motor Tyre

Bead

X X

LRPC X X

Galvanized Wire X X X

Spring Steel

Wire

X X

Single PC Wire X X X

ACSR X X

Current

Production

Capacities (MT)

86000 84000 47000 12000 60000 46000 335000

Flow Of Raw MaterialsThe Wire business is downstream to steel and various stages in the wire making process are

shown in the figure.

The steel billets are supplied by Long Products Division (Jamshedpur). The billets are then hot

rolled to wire rods at WRM West, ISWP and ISIM and these wire rods are finally converted into

wires at wire plants. The technology used by the Wire Division is highly effective and provides

them a competitive edge over other wire manufacturers.

WD’s purchases are approximately 66% of the sales turnover. Major value in purchase is of

billets from Tata Steel’s Long Product Division. The division has a supplier base of 1600, of

which 50 suppliers account for more than 70% of the value purchases for raw materials and

critical production consumables. These suppliers are known as MOU suppliers and play a key

role in the supply chain at WD.



FIG 1.3: WIRE PRODUCTION PROCESS

SWOT Analysis


Steel

Making

Continuous Cast

Billets

Hot Rolle

d Wire Rods

Wires


Strengths1. More than 50 years of experience in the industry.

2. Market leader in the industry.

3. The products are well accepted in the market.

4. Successfully completed the shifting of operations from its plant in Borivali to a new and

bigger plant in Tarapur.

5. A very good organizational setup with experienced and well qualified employees.

6. Best practice sharing with Global Wires International units on process improvements.

Weaknesses1. High cost to serve including conversion cost.

2. Less hold in the markets of north and east parts of India.

3. High overhead costs leading to higher price of products for eastern regions.

Opportunities1. Being solution provider (especially for construction & auto industry).

2. Capturing greater value by down streaming into wire products.

3. Entry into high end technology products (such as OHT wire, Tyre cord etc.)

4. Leveraging Tata Steel’s strengths in technology, R&D, marketing & distribution for

increasing width & depth of operations.

5. Tapping the (currently untapped) GI wire markets of North/East India.

Threats1. Competition is catching up in technology.

2. Nimble footed localized competition which replicates WD’s product/process offerings.

3. Unorganized sector with tax evasion (especially in wire products).

4. Retention of talent & tacit knowledge.



5. Increasing intensity of competition due to easy availability of quality RM to other

players.

6. Anticipated stricter environment norms.

1.2.3 LANKA SPECIAL STEELS LTD. (LSSL)

Lanka Special Steels Limited, located in Sri Lanka is part of Tata Steel’s Global Wires Business. It

was incorporated in November 2003 out of Tata Steel’s first overseas acquisition.

Lanka SSL is the sole manufacturer of GI wires in Sri Lanka and caters to the commercial

galvanized wires market for end users like barbed wires, wire meshes and chain links. LSSL’s

current product mix of GI wires range from 1.6mm to 4.0mm in thickness and zinc coating of 40

- 100 gms.

The Company enjoys a market leadership position in the segments that it serves and its future

plans include getting into value added wires of medium and heavy coating. It also plans to get

into downstream products like barbed wires.

As part of Global Wires - LSSL is committed to improve its business processes, learn and adopt

business practices from The Tata Steel Group and instill and practice the Group’s culture of

safety.

Lanka SSL is well poised to reap the benefits of the expected economic growth in Sri Lanka and,

therefore, will be in a position to consolidate its market share in Sri Lanka and significantly

contribute to the Global Wires Business.

1.2.4 WUXI JINYANG METAL PRODUCTS (WJMP)

Wuxi Jinyang Metal Products (WJMP) is a proud member of the Global Wires Business of the

Tata Steel Group. Established in 1992, the company became a part of the Tata Steel family as a

NatSteel Asia subsidiary company in 2005.



Situated in Wuxi, in the Jiangsu province in China, the Company has a total capacity to

manufacture 120,000 tonnes of wire products annually. The product repertoire at WJMP

consists of Pre-stressed Concrete Strands, Pre-stressed Concrete Wires and Pre-stressed

Concrete Bars. The company is a leading exporter out of China with products being exported to

more than 20 countries across five continents. WJMP caters to the customers in the

infrastructure construction segments of municipal projects, high-rise buildings, overpass and

bridges, highways, tunnels, LNG terminals and nuclear power stations.

WJMP currently has a turnover of RMB 574 million and employs 285 people at its premises in

Wuxi. The Company prides itself on its quality practices and is recognized by International

Quality certification bodies like CARES (UK), ACRS (Australia), TUV (Germany), DCL (Dubai), PSI

Homologation (Israel) and CQC and CNAS (China). It has also been recognized by ISO9000

(Quality System), ISO 14001 (Environment system) and JIS (Japan). The Company is also in the

process for BIS (India) certification.

WJMP has been involved in a number of prestigious projects in China as well as internationally.

Internationally it has supplied wires for the Redevelopment of Eden Park Stadium (New

Zealand), Bellagio Hotel and Marriott Grand Chateau Hotel (USA), Kallang Leisure Park

(Singapore) and LRT project (Dubai). Domestically it has been supplying to a number of bridge

and highway projects throughout China. This year, due to the slowdown in the export demand,

the Company concentrated on the domestic market to sustain sales performance.

WJMP has initiated and implemented numerous systems and processes to integrate itself with

the Tata Steel Group. The Company began on the Safety Excellence journey earlier this year.

The Company has actively imbibed the Tata Code of Conduct in its functioning, by appointing an

ethics counselor and initiating ethics trainings. WJMP has also progressively adopted the Tata

Business Excellence Model and has applied for the JNT assessment in the year 2010. The

Company has also trained its employees on Daily Management practices this year and is in the

process of implementing the model.



1.2.5 SIAM INDUSTRIAL WIRE CO. LTD. (SIW)

Established in 1974, The Siam Industrial Wire Co. Ltd. (SIW) is today a part of Tata Steel Global

Wires Business and one of the world’s leading manufacturers of steel wire. Located on a 25-

acre site in Rayong, Thailand with an annual production of 200,000 metric tonnes, SIW is one of

Asia’s largest manufacturers of pre-stressed concrete products and is a member of both

NatSteel Holdings and The Tata Steel Group. Its sophisticated wire manufacturing technology

allows SIW to create high-quality steel wire products for a large customer base. SIW combines

strength and skill leading to creation of high standards that have been recognized by leading

international quality accreditation agencies. SIW manufactures pre-stressed concrete stands,

pre-stressed concrete wires, cold drawn wires, hard drawn wires and welded wire meshes and

distributes these quality products throughout Europe, Oceania, Middle East, America, Africa

and Asia.

SIW products are manufactured in accordance with international standards and are tested and

approved by international accreditation institutes and laboratories. All of its products can be

manufactured in special grade production to meet customer’s specifications. Siam Industrial Wire is a

vital strand in the overall strength of many construction masterworks.

1.2.6 INDIAN STEEL & WIRE PRODUCTS LTD. (ISWP)

Established in 1920 by a German Technocrat, The Indian Steel & Wire Products Limited (ISWP),

Jamshedpur is one of the first Wire Drawing Plants in India.

ISWP has two Units – a Wire Unit and a Steel Roll Manufacturing Unit named Jamshedpur Engg.

& Machine Manufacturing Company (JEMCO).

The Wire Unit comprises of Wire Rod Mill and Wire Mill. ISWP, accredited with ISO 9001-2000

Certification is continuously implementing other related activities to improve customer

satisfaction. The wire mill has recently been upgraded with a galvanizing line having an annual

capacity of 54,000 MT.



JEMCO is a Division of ISWP and the pioneer roll foundry in the Indian subcontinent, being

established in 1939 in collaboration with Belgium (SAFAK). It is equipped with suitable Melting

Furnaces, Modern Roll Foundry, sophisticated Machine Shop and a well-equipped Laboratory.

The Company (JEMCO) produces iron & steel rolls for Integrated Steel Plants and Engineering

Castings for Steel Plants, the Automobile Industry, Power Plants etc. The Plant at present has an

installed annual capacity of 4500 tonnes.

2. INTRODUCTION TO WORKING CAPITAL MANAGEMENT



2.1 WORKING CAPITAL

Working Capital is defined as the firm’s investment in current assets. Current assets are

comprised of all the assets that the firm can convert into cash within the year, including cash,

marketable securities, accounts receivables, and inventories. Managing the firm’s working

capital, however, has come to mean more than simply managing the firm’s investment in

current assets.

Net working capital refers to the difference in the firm’s current assets and its current liabilities.

Thus, in managing the firm’s net working capital we are concerned with managing the firm’s

liquidity. This entails considering two related processes:

1. Managing the firm’s investment.

2. Managing the firm’s use of short-term or current liabilities.

As a means of increasing its liquidity, the firm may choose to invest additional funds in cash

and/or marketable securities. Such an action involves a tradeoff however, since such assets

earn little or no return. So there’s a decrease in profits. The firm thus finds it can reduce its risk

if illiquidity only by reducing its overall returns on invested funds, and vice versa.

To understand working capital management better we should have basic knowledge about the

various aspects of working capital. To start with, there are two concepts of working capital:

Gross working capital

New working capital

Gross working capital: Gross working capital which is also sample known as working capital

refers to the firm’s investment in current assets. Another aspect of gross working capital points

out the need of arranging funds to finance the current assets. The gross working capital concept

focuses attention on two aspects of current assets management, firstly optimum investment in



current assets and secondly in financing the current assets. These two aspects will help in

remaining away from the two danger points - excessive or inadequate investment in current

assets. Whenever a need of working capital funds arises due to increase in level of business

activity or for any other reason on the arrangement should be made quickly and similarly if

some surpluses are available, they should not be allowed to lie ideal but should be put to some

effective use.

Net working capital: The term net working capital refers to the difference between current

assets and current liabilities. No working capital can be positive as well as negative. Positive

working capital refers to the situation where current assets exceed current liabilities and

negative working capital refers to the situation where current liabilities exceed current assets.

The net working capital helps in comparing the liquidity of the same firm over time. For purpose

of the working capital management, therefore, working capital can be said to measure the

liquidity of the firm. In 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 net working capital is

maintained

Hedging PrincipleHedging principle involves matching the cash flow generating characteristics of an asset with

the maturity of the source of financing used to finance its acquisition. The rationale behind this

rule is straightforward. Funds are needed for a limited period of time, and when that time has

passed, the cash needed to repay the loan will be generated by the sale of the extra inventory

items. Obtaining the needed funds from a long term source (longer than one year) would mean

that the firm would still have funds after the inventories they helped finance, had been sold. In

this case the firm would have excess liquidity, which it either holds in cash or invests in low-

yield marketable securities until the seasonal increase in inventories occurs again and the funds

are needed.



The notion of maturity matching in the hedging principle can be most easily understood when

we think in terms of the distinction between permanent and temporary investments in assets

as opposed to the more traditional fixed and current asset categories. A permanent investment

in an asset is one that the firm expects to hold for a period longer than one year. Temporary

investments are comprised of current assets that will be liquidated and not replaced within the

current year. Thus, some part of the firm’s current assets is permanent and the remainder is

temporary.

Temporary sources of financing consist of current liabilities. Short-term notes payable

constitute the most common example of a temporary source of financing. Permanent sources

of financing include intermediate-term loans, long-term debt, preferred stock, and common

equity. Spontaneous sources of financing consist of trade credit and other accounts payable

that arise spontaneously in the firm’s day to day operations.

Working Capital PolicyOn analyzing a balance sheet of a company and finding that it has a current ratio (the ratio of

current asses to current liabilities) of 3 or 4, it means that the company has huge current assets

like cash and cash equivalents in hand, or at bank, trade debtors, inventories etc, and not

utilizing it effectively by investing these assets thus loosing the opportunity of the company to

make higher profits. Higher current ratio of the company signifies the inefficiency of the

organization in managing its working capital and requires improvements in it. On the other

hand if the company has a negative working capital, then it may not always be a negative sign

for the company. It is the efficiency of the company that it is able to manage with low level of

inventories, cash and debtors and it signifies that current liabilities of the company is able to

finance all the current assets and there is no requirement of any short term borrowings, in fact

some part of the company’s current liabilities are in the form of investments which yields high

profits. Such a type of policy aiming at higher profitability and lower liquidity is known as

conservative policy. The normal ideal current ratio is defined to 2:1 but this rule does hold true

for all organizations and differs from one organization to the other organization.



For a manufacturing industry like steel, textile or such other industries the ratio tends to be

higher than the service industries like technologies and finance industry. It is for the reason that

the manufacturing industries should store the raw material, it also has conversion period and

finished goods are also stored whereas the service organization does have any such

requirements.

2.2 OPERATING CYCLE

The operating cycle is a cycle that starts with the purchase of raw materials and is completed

with the collection of cash from debtors. In between there are various activities undergone like

conversion process, storage of finished goods inventory sales of finished goods on both cash

and credit and collection of cash from debtors. Thus if this cycle involves a longer period, the

need for working capital would be more.

There are two elements in business cycle that absorb cash – Inventory (stocks and work-in-

progress) and Accounts Receivables (debtors). The main sources of cash are Accounts Payables

(creditors).



3. CREDIT MANAGEMENT

3.1 INTRODUCTION

While business firms would like to sell on cash, the pressure of competition and the force of

custom persuade them to sell on credit. Firms grant credit to facilitate sales. It is valuable to

customers as it augments their resourced – it is particularly appealing to those customers who

cannot borrow from other sources or find it very expensive or inconvenient.

The credit period extended by business firms usually ranges from 15 days to 60 days. When

goods are sold on credit, finished goods get converted into accounts receivable (trade debtors)

in the books of the seller. In the books of the buyer, the obligation arising from credit purchase

is represented as accounts payable (trade creditors). A firm’s investment in accounts receivable

depends on how much it sells on credit and how much it takes to collect receivables.

Terms of Payment

Terms of payment vary widely in practice. At one end, if the seller has financial sinews it may

extend liberal credit to the buyer till it converts goods bought into cash. At the other end, the

buyer may pay cash in advance to the seller and finance the entire trade cycle. Most commonly,

however, some in-between arrangement is chosen wherein the trade cycle is financed partly by

the seller, partly by the buyer, and partly by some financial intermediary.

Cash Terms: When goods are sold on cash terms, the payment is received either before the

goods are shipped (cash in advance) or when the goods are delivered (cash on delivery). Cash in

advance is generally insisted upon when the goods are made to order. Cash on delivery is often

demanded by the seller if it is in a strong bargaining position and /or the customer is perceived

to be risky.

Open Account: Credit sales are generally on open account. This means that the seller first ships

the goods and then sends the invoice. The credit terms are stated in the invoice which is

acknowledged by the buyer. There is no formal acknowledgment of indebtedness by the buyer.



Consignment: When goods are sent on consignment, they are merely shipped but not sold to

the consignee. The consignee acts as the agent of the seller. The title of the goods is retained by

the seller till they are sold by the consignee to a third party.

Bill of Exchange: Whether goods are shipped on open account or consignment, the seller does

not have strong evidence of the buyer’s obligation. A draft represents an unconditional order

issued by the seller asking the buyer to pay on demand (demand draft) or at a certain time in

the future date (time draft), the amount specified on it. It is typically accompanied by shipping

documents that are delivered to the drawee when he pays or accepts the draft. When the

drawee accepts a time draft, it becomes a trade acceptance.

Letter of Credit: Commonly used in international trade, the letter of credit is now used in

domestic trade as well. A letter of credit, or L/C, is issued by a bank on behalf of its customer

(buyer) to the seller. As per the document, the bank agrees to honor drafts drawn on it for the

supplies made to the customer if the seller fulfills the conditions laid down in the L/C.

Need for Analysis: All industrial and business people would normally prefer to sell their goods

on cash basis. It is for the reason to avoid the default risk and the loss of interest on the blocked

funds. Besides the liquidity of the company will also be high and productivity, profitability,

prosperity and growth therewith. But such conditions cannot be possible in a normal course of

business except in case of those monopoly companies whose products are in the buyers’

market they have to give some trade credit as per the prevailing market conditions, and policies

adopted by their competitors to stay for different periods generally ranging from 15 days to 60

days.

As described earlier, a large proportion of the current assets is in the form of inventories and

debtors. Thus because of their large proportion, any changes in the level will affect the

profitability of the company. An increase in debtors, i.e., additional extensions of the trade

credit will not only result in higher sales but also requires additional financing which

subsequently increases the cost of such financing. Apart from the cost of financing, the cost of



the credit investigation, collection efforts and the occurrence of the bad debts will also

increase.

3.2 IMPORTANT TERMS

Credit PolicyThe size of the investment in accounts receivables is determined by many factors like the level

of sales, percentage of credit sales to total sales, credit policies and collection policies etc. the

nature of the business tends to determine the proportion of credit sales. The accounts

receivable cycle begins with the company’s decision to extend credit and ends when settlement

is received in payment for the goods and/or services rendered. The effective management of

the credit function can maximize sales, which directly can affect a company’s bottom line, while

the skilful collection of accounts receivable can lower the company’s cost of financing.

The important dimensions of a firm’s credit policy are:

Credit quality standards

Credit period

Cash discount

Collection effort

Credit Quality Standards: Credit quality standards have been incorporated to control the

receivable risk by determining the possibility that a given customer will pay slowly or not at all.

The standards determine the minimum financial strength required for a customer to be an

acceptable credit purchaser. Some factors used in determining customer credit potential can be

quantified to determine a likelihood of default. The following are some of the standards:



Capacity: Measures the customer’s ability to pay obligations when due, and is based on

the buyer’s payment record. Ability to pay may be quantified by calculating the quick

and current ratios, and the firm’s net working capital.

Capital: Represents the long-term financial means available if additional liquidity is

required. The debt/asset ratio is considered because, by its nature, it is the relationship

between what the customer owes and owns.

Condition: Refers to general economic tendencies and estimates, specific industry,

political and technological conditions that may affect the customer’s ability to pay its

debts.

Character: Refers to the buyer’s soundness to pay the owing amount. This is a subjective

judgment and may involve a visit to the customer’s place of business in order to have a

better opportunity to appraise the company.

In general, liberal credit standards tend to push sales by attracting more customers. This is

however accompanied by a higher incidence of bad debt loss, a larger investment in receivables

and a higher cost of collection. On the other hand, stiff credit standards have opposite effects.

They tend to depress sasles, reduce the incidence of bad debt loss, decrese the investment in

receivables, and lower the cost of collection.

Credit Period: The credit period is the length of time credit is granted from the invoice date to

due date, usually expressed in days. It has a direct impact on the cost of financing receivables

and also on collection risk. The credit period extended by the business firms usually ranges from

15 to 60 days. Credit period determines a firm’s investment in accounts receivables.

Lengthening the period of credit pushes sales by inducing existing customers to purchase more

and attracting additional customers. This is however accompanied by a larger investment in

debtors and a higher incidence of bad debt loss. Shortening the credit period would however

tend to lower sales, decrease investment in debtors and reduce the incidence of bad debt loss.



Cash Discount: Firms generally offer cash discounts to induce customers to make prompt

payments. The percentage discount and the period during which it is available are reflected in

credit terms. Liberalizing the cash discount policy may mean that the discount percentage is

increased and/or the discount period is increased. Such an action tends to enhance sales,

reduce the average collection period and increase the cost of discount.

Collection Effort: The collection program of the firm, aimed at timely collection of receivables.

The key to maintaining control over collection of accounts receivable is that the probability of

default increases over the age of account. A rigorous collection program tends to decrease the

sales, shorten the average collection period, reduce bad debts percentage and increase the

collection expense. A relaxed program on the other hand would push sales up, lengthen the

average collection period, increase the bad debt percentage and perhaps reduce the collection

expense.

Managing Credit RisksA very important decision involves determining the type of customer who can qualify for trade

credit. There are several costs associated with extending of credit to lower quality customers,

like the probability of default increases with the extension of credit to lower quality customers.

Thus, it becomes more important to identity which of the possibility new customers would be a

poor risk and so more time is spent in investigating the lower quality customers.

Default costs vary directly with the quality of the customer. Collection costs also increases as

the quality of customer. In determining whether or not to grant credit evaluation of the credit

worthiness of both the individual and the company is very important. In order to reduce the

defaults of the borrowers proper assessment of the financial position of the borrower is to be

made. The following are some of the methods to determine the credit worthiness of a

borrower.



Credit Rating SystemA credit rating system estimates the credit worthiness of an individual, or a corporation. It is an

evaluation made of a borrower’s overall credit history. Credit ratings are calculated from

financial history, current assets and liabilities of a firm. Typically, a credit rating tells a lender or

an investor the probability of the debtor being able to pay back a loan.

A poor credit rating indicates a high risk of defaulting on a loan, and thus leads to high interest

rates or the refusal of a loan by the creditor.

Earlier, credit rating system used by many companies , banks and other financial institutions

based upon certain objective parameters, scientific scoring pattern, based upon the range of

credit worthiness and financial strength and stability, as revealed by their past performance and

the prospects and potentials of the borrowers. This system was to find an estimate of the

amount of credit that can be extended to a company or person without undue risk. During the

course of the application of CRS, it was found that it was not serving the full purpose of

assessing and managing credit risks on all the related parameters. It did not take sufficient care

for assessment and management of credit risks like profitability, repayment capacity,

effectiveness and efficiency of management.

Credit Risk Assessment (CRA) System: In order to take into account all relevant factors and

parameters into account this system was introduced. As per this system, while in the first stage

the risk rating has to be compiled, at the second stage of the credit process, an assessment has

to be made on the industry and management factors and a judgmental scoring has to be given.

Credit Risks Assessments (CRA) Model: The various factors which go for appraising credit risks

have been broadly classified under three main heads:

Financial Risks

Industrial Risks



Managerial Risks

Financial Risk Assessment:

Quantitative Assessment

Qualitative Assessment

Quantitative Assessment: The quantitative assessment comprises the appraisal of the financial

strength of the company. The standard measures are

Liquidity ratios

Profitability ratios

Gearing ratios

Turnover ratios

While analyzing the ratios both, intra-firm and inter-firm comparisons are to be made.

Quantitative Parameters: Under this six financial ratios may be analyzed, on the basis of latest

financial results. On the basis of the figures of the various ratios arrived at, specific scores are

assigned to each of the ratios, depending upon the specific scoring rate. Then we should allot

specific weightage to each of these six ratios depending upon the degree of the importance and

ramifications of each ratio.

The six ratios are

Current ratio

Debt/Equity ratio

(Inventory + Accounts receivable)/Sales

PBDIT/Interest

PAT/Sales

ROCE

Then the second step is to calculate the below four ratios and should be compared for the past

period based upon the figures latest available in the company.



Current ratio

Debt/Equity ratio

PAT/Sales

(Inventory + Accounts receivables)/Sales

After comparing the past data, comparison should be made with the overall industrial

performance.

Qualitative Assessment: Besides quantitative assessment certain qualitative factors are also

assessed and analyzed. The factors are as follows:

Accounting policies

Policy and provision of bad debts

Arrears of depreciation

Contingent liabilities and claims

Auditor’s remarks from the annual reports

Industrial Risks: Industry risk can be broadly classified as under:

Market competition

Cyclicity of Industry

Regulatory risk

Management Risks: The various sets of parameters that can be gainfully used to assess the

management risk have been listed below:

Integrity and honesty

Track record

Organizational structure and system expertise, competence and level of commitment

Perception in the capital market

The risk could be computed by assigning a score to the above parameters and calculating the

overall score.



Credit Assessment: Another way of analyzing accounts is only to calculate ratios. Ratios give a

set of figures to match against industry and company standards. The required ratios are

Current ratio

Acid test ratio

R.O.C.E.

Debt/Equity ratio

Profit margin

Debtors sales outstanding

Creditors sales outstanding

If we use ratios in the assessment of our customers, we need to fully understand what the

relevance of each individual ratio:

Particulars Low Risk Average Risk High Risk

Current Ratio Over 1.5 1.0 – 1.5 Under 1.0

Acid Test Over 1.25 0.75 – 1.25 Under 0.75

Debt/Equity Under 50% 50 – 90% Over 90%

Profit/Sales Over 10% 3 – 10% Under 3%

Debtor Days Sales Under 55 days 55 – 85 days Over 85 days

Creditors Days Sales Under 45 days 45 – 60 days Over 60 days

Considering all the above ratios decisions can be made on the financial strength of the

company.



MDA (Multiple Discriminant Analysis) – The Z score Model: Z – score model is a statistical

technique evaluating the appropriate importance to be given to various parameters used in

rating applicant. This technique is used to identify businesses that might go bankrupt. In this

study, few ratios are used and weights are given to each ratio according to the importance and

relevance in the businesses. It is used primarily to classify and make predictions in problems

where the dependent variable appears in qualitative form, for example, bankrupt or non

bankrupt. The ratios are classified into five standard categories, including liquidity, profitability,

leverage, solvency, activity.

Z-Test: The Edward Altman Z score: This method uses the following combination of a set of 5

financial ratios. This score uses statistical techniques to predict a company’s probability of

failure using the following variables from a company’s financial statements.

The items to that are required from the firms’ balance sheet are as follows:

Earnings before Interest & Taxes (EBIT)

Total assets

Net sales

Total liabilities

Current assets

Current liabilities

Retained earnings

The five financial ratios and their respective weights to calculate the Z – score are as follows:

Ratio Weightage

EBIT/Total Assets 3.3

Net Sales/Total Assets 0.999

Market Value of Equity/Total Liabilities 0.6

Working Capital/Total Assets 1.2

Retained Earnings/Total Assets 1.4



EBIT/Total Assets: This ratio measures operating efficiency leaving apart the tax and other

factors. It recognizes operating earnings as being important to long-term viability. This ratio is a

measure of a true productivity of a firm’s assets.

Net Sales/Total Assets: This ratio finds out that in a particular period how many times the assets

are turned over. It is otherwise known as capital-turnover ratio. It is a standard financial ratio

illustrating the sales generating ability of the firm’s assets.

Market Value of Equity/Total Liabilities: Equity is measured by the combined value of all shares

of stock, both preferred and common, while liabilities include both the current and long term.

The debt equity ratio explains the financial leverage of a firm taking only book values into

consideration. But, the market values may not be the same. The market value is the actual

worth of the firm discounting all the factors affecting the firm. It can also be sometimes called

as intrinsic value of the firm. The measure shows how much the firm’s assets can decline in

value before the liabilities exceed the assets and the firm becomes insolvent.

Working Capital/Total Assets: Working capital is defined as the difference between current

assets and current liabilities. This ratio explains what proportion of total assets is employed in

the working capital of a company. It is a measure of the net liquid assets of the company to the

total capitalization.

Retained Earnings/Total Assets: After subtracting the manufacturing, selling & administration,

and other financing expenses from the revenues of a company for a particular period, we arrive

at the profits for the company. On such profits the company pays taxes, dividends to the

preference share holders and then any remaining amount is for the equity share holders. These

equity earnings are not totally distributed to the equity share holders, but some part of these

earnings are retained in the firm in order to reinvest into the firm. This is done with the

intention of further growth of the company or due to lack of cash available to distribute

dividends to the share holders. These retained earnings when reinvested should lead to some

growth of the company. Thus, this ratio calculates that what proportion of the total assets is

retained in the firm for further investment. It is a measurement of the leverage of a firm. Those



firms with high retained earnings have financed their assets through the retention of profits

and not utilized much of debt capital.

The above ratios calculated are then multiplied by their weights and the results are added

together as follows;

Z Score = A x 3.3 + B x 0.999 + C x 0.6 + D x 1.2 + E x 1.4

Where A, B, C, D, E are the results of five ratios calculated.

The interpretation of Z score:

Z SCORE INTERPRETATION

Above 3.0 On the basis of financial figures, the company is safe.

Between 2.7 & 2.99 This is the range where one should be cautious.

Between 1.8 & 2.7 This is a range where there are good chances for the company going

bankrupt within 2 years of operations from the date on which the

financial figures were given.

Below 1.80 There is a very high probability of financial embarrassment.

This is useful for valuation of the financial soundness of a company and based on such

variations can be taken to offer credit to such companies.

Conclusion: The Z score model is the most appropriate technique used in credit rating an

individual of a company. It was found that 94% had Z scores of less than 2.7 one year prior to

bankruptcy and only 6% had scores above 2.7. On the other hand, 97% of the firms that did not

go to bankrupt had a Z score above 2.7 and only 3% had a Z-score below 2.7. There are several

advantages of credit scoring technique like it is less costly and easy to implement, and also the

advantages of credit scorer needs a little training with simple calculations can easily spot those

credit risk that needs more attention before extending credit to them. Determining the credit

worthiness of an individual or a company for granting goods on credit the Z-score model is



sufficient. While formulating the credit policies, the quantum and the period of credit would

vary party wise depending on the credit worthiness of an individual.



4. ANALYSIS OF WORKING CAPITAL

4.1 ANALYZING THE FINANCIAL RATIOS

Current Ratio & Quick Ratio: The current ratio is an indication of a company’s ability to meet its

short-term debt obligation. The higher the ratio, the more liquid the company is. Current ratio

is equal to current assets divided by current liabilities. If current liabilities exceed current assets,

then the company may have problems meeting its short term obligations. In simple words, it

refers to the ability of a firm to meet its obligations in short-term.

The current ratio is based on the assumption that all the constituent items of current assets are

homogeneous in respect to liquidity. But in practice its not true. A rupee cash or bank balance is

more liquid than a rupee inventory. To overcome this, a more realistic form of liquidity ratio

called the quick ratio is obtained. It is obtained by subtracting the inventory from the current

assets, so that only quick assets are left.

Inventory Turnover Ratio: It shows how many times a company’s inventory is sold and replaced

over a period, usually a year. It is generally calculated by dividing sales by inventory. However,

it may also be calculated by dividing COGS by average inventory. Greater the inventory

turnover ratio value, the better it is.

Inventory Holding Period: The average inventory period is also referred to as Days Inventory

and Inventory Holding Period. This ratio calculates the average time that inventory is held.

Individual inventories should be looked at to find areas where the inventory, and inventory

holding period, can be reduced.

Debtor’s Turnover Ratio: Debtors turnover ratio or accounts receivable turnover ratio indicates

the velocity of debt collection of a firm. In simple words it indicates the number of times

average debtors (receivable) are turned over during a year.



Average Collection Period (days): It is defined as the approximate amount of time that it takes

for a business to receive payments owed, in terms of receivables, from its customers and

clients.

4.1.1 GLOBAL WIRES INDIA

The various significant financial ratios for Global Wires India are shown in the following table:

Table 4.1

Global Wires India

March '11 March '10Current Ratio 1.38 0.97

Quick Ratio 0.51 0.39

Inventory Turnover Ratio 17.07 17.29

Inventory Holding Period (days) 21.38 21.11

Debtor's Turnover Ratio 40.20 43.41

Average Collection Period (days) 9.08 8.41

Analysis: The current ratio has increased to a very good level as compared to the last fiscal

year. But it’s still short of the 1.5 mark which the firm aims at, on the account of ever increasing

competition. The quick ratio has also increased but it is still at very low levels showing the large

dependence on inventories and receivables for the financing of working capital, which is quite

common in a manufacturing firm. Moreover, the Global Wires Business India is a profit centre

for Tata Steel Ltd. So, all the proceeds from sales and profits are not kept as cash in bank by the

firm. It’s transferred to the Tata Steel’s accounts. This further explains the low levels of quick

ratio for the firm.

The inventory turnover ratio has decreased marginally and also the inventory holding period

has increased marginally. This has been due to the larger inventory levels kept by the firm

during FY2011 as compared to FY2010.



The debtor’s turnover ratio has decreased and the average collection period has increased over

the same period. This is not a very good sign as this shows that debtors are turned over less

frequently and more time is being taken in collecting the receivables from debtors.

4.1.2 Lanka Special Steel Ltd (LSSL)

The significant financial ratios for LSSL are given in the following table:

Table 4.2

LSSL March '11 March '10Current Ratio 1.50 1.24Quick Ratio 1.01 0.61Inventory Turnover Ratio 7.11 6.58Inventory Holding Period (days) 51.33 54.68Debtors Turnover Ratio 24.47 31.83Average Collection Period (days) 14.91 11.47

Analysis: The current ratio has increased to reach 1.5 which is a very good value. Also the quick

ratio is slightly above 1. So, this shows that the firm has enough funds for financing its current

obligations and there are no issues with the liquidity.

Inventory turnover ratio has increased which illustrates that there is better inventory

management, also illustrated by reduction in inventory holding period nearly 3 days.

The debtors turnover ratio has however, decreased. This shows that the debtors are turned

over less frequently which points to a problem in receivables management at the firm and a

large increase in the amount of sundry debtors. As a result, the average collection period has

also increased by more than 3 days which should be a cause for concern.



4.1.3 SIAM INDUSTRIAL WIRES (SIW)

The significant financial rations for SIW are as follows:

Table 4.3

SIW

Mar ‘11 Mar ‘10

Current Ratio 5.44 11.02

Quick Ratio 4.06 8.19

Inventory Turnover Ratio 9.12 9.03

Inventory Holding Days 40.01 40.42

Debtors Turnover Ratio 5.07 5.23

Average Collection Period (days) 71.93 69.79

Analysis: The current ratio for SIW in Mar’10 was extremely high, over 11. For Mar ’11, the

current ratio has come down to 5 but it’s still at very large levels. Also the quick ratio has nearly

halved, following the trends for current ratio, but again it’s still very much higher than the

accepted levels. The firm has kept a large amount of cash & bank balances in FY11. There’s not

much change in the inventory turnover ratio and the inventory holding days, although there’s a

marginal increase in the inventory holding days. The debtors turnover ratio has decreased, but

only marginally. The average collection period has increased by more than 1 day. There can be

a slight concern here.



4.1.4 WUXI JINYONG METAL PRODUCTS (WJMP)

The various significant financial ratios for WJMP are shown in the following table:

WJMP Mar '11 Mar'10Current Ratio 2.34 2.24Quick Ratio 1.63 1.45Inventory Turnover Ratio 5.68 6.82Inventory Holding Days 64.28 53.53Debtors' Turnover Ratio 4.83 5.48Average Collection Period (days) 75.64 66.65

Analysis: The current ratio has increased slightly and the quick ratio has also increase. The

current ratio is 2.34 for March ’11, which is a little higher than acceptable level, which is

assumed to be 2. This shows a good amount of funds being tied up which can be otherwise

used for investments. The large accumulation in inventory is also visible in small value of

inventory turnover ratio and a significantly larger value of inventory holding days, and in fact,

they have deteriorated further with a decrease in inventory holding days and an increase in

inventory holding period. Also, the debtor’s turnover ratio is very small and average collection

period is pretty large, again pointing to the fact that a large amount of funds are tied up in

debtors and a large amount of time is being taken in recovering the receivables from debtors.

In fact, the situation has got worse during the last one year. The high values of inventory

holding days and average collection period again point to the same fact, of substantial funds

being tied up.



4.2 ANALYZING THE COMPONENTS OF WORKING CAPITAL

4.2.1 GLOBAL WIRES INDIA

The levels of inventories, cash and bank balances and receivables are shown in the following

table along with their percentage increase from 31st March’10 to 31st March’11.

Table 4.5

(in ` Crores) Global Wires India Mar '11 Mar '10 % changeInventories 84.43 53.63 +57.42% Raw Material & Stores Inventory 20.94 21.04 -0.46% Finished & semi-finished/traded goods 63.49 32.59 +94.78%Cash and bank balances (0.21) (0.86) +75.77%Receivables 48.88 36.65 +33.38% Sundry debtors 37.22 21.39 +74.00% Loans & Advances 11.66 15.26 +23.58%CURRENT ASSETS 133.10 89.42 +48.85%

Table 4.6

(in ` Crores) Global Wires India

Mar '11 Mar '10 Net Increase

Current Assets 133.10 89.42 43.68

Current Liabilities 96.16 91.88 4.28

Net Working Capital 36.94 (2.45) 39.40



Inventories Cash and bank balances

Receivables CURRENT ASSETS (20.00)

-

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

Working Capital Components

Mar '11Mar '10

` (

in c

rore

s)

Fig 4.1

Analysis: By analyzing the components of the current assets as on 31 st March 2011 with the

levels as on 31st March 2010, it is observed that there has been as increase in the levels of

current assets by nearly 49%. Although Cash and bank balances have increased by 75.77%, the

increase is insignificant because the net increase is marginal. The biggest increase in significant

terms has been in inventory levels. The inventory levels have increased by more than 57%. Also,

the receivables have increased by more than 33%. Thus, there is a significant increase in current

ratio but not much increase in quick ratio as compared to the current ratio. Thus, TSWD

depends heavily on inventories for financing its working capital, which is quite common in

manufacturing firms.

There is also a small increase in current liabilities from March ’10 to March ’11. As a result there

is a large increase in the working capital from March ’10 to March ’11. The net working capital

has increased from ` -2.45 crores to ` 36.94 crores.



Proportion of the elements of current assets

63%

0%

37%

Current Assets(March '11)

Inventory Cash & Bank Balances Receivables

59%

1%

40%

Current Assets (March '10)

Inventories Cash & Bank Bal. Receivables

Fig 4.2

Analysis: On studying the proportion of the elements of current assets, it is seen that the share

of inventories in current assets has increased from 59% to 63%. Also the share of receivables

has decreased from 40% to 37%. Thus, TSWD is now dependent heavily on inventories for

making up their working capital. Cash and bank balances are always maintained at near-zero

levels. This is due to the fact that TSWD is a profit-centre for Tata Steels. So, they do not keep

any significant cash in bank. Whatever business purchases or spending they have to do, is done

by various types of bank assisted financing techniques like channel financing, RP financing, OEM

financing and Export financing using sundry debtors and inventories. So, they need not keep a

large amount of cash of bank balances.



4.2.2 LANKA SPECIAL STEELS LTD.


table along with their percentage increase from 31st March 2010 to 31st March 2011.

Table 4.7

(in SLR millions) LSSL March '11 March '10 % change Inventory 147.32 194.14 -24.12 Sundry Debtors 74.31 24.89 198.51Loans & Advances 31.14 38.83 -19.80 Cash and Bank balances 198.77 127.73 55.61Current Assets 451.53 385.59 17.10Current Liabilities 300.51 311.33 -3.47Net Working Capital 151.02 74.26 103.36

Inventory

Sundry

Debtors

Loan

s & Adva

nces

Cash an

d Bank b

alances

Current A

ssets

Current L

iabiliti

es

Net W

orking C

apita

l -

50.00 100.00 150.00 200.00 250.00 300.00 350.00 400.00 450.00 500.00


March '11March '10

(in S

LR

millions)

Fig 4.3



Analysis: There has been a significant decrease in the inventory levels from FY2010 to FY2011,

more than 24%. Also the loans and advances have decreased by nearly 20%. But there has been

a substantial increase in the cash and bank balances element, more than 55%. Also sundry

debtors have increased nearly more than 3 times. Hence, overall there has been a net increase

in the total current assets. The current assets have increased by nearly 17%. There has been a

marginal decrease in the current liabilities, by about 3.4%. Therefore, the net working capital

has increased, and in fact, it has more than doubled its previous year’s levels. This points to a

shift in policy of LSSL of not keeping a large inventory and use more of sundry debtors to make

up its working capital.

Proportion of the elements of current assets

33%

16%7%

44%


Inventory Sundry Debtors Loans & Advances Cash and Bank balances

50%

6%

10%

33%


Inventory Sundry Debtors Loans & Advances Cash and Bank balances

Fig 4.4



Analysis: On analysis of the proportion of the various elements of current assets, it can be

seen that whereas in FY2010, the inventory contributed for nearly 50% of the total current

assets, it contributed to only 33% in FY2011. Also the contribution of loans and advances has

decreased by 3%. But there has been a substantial increase in the contribution of cash and bank

balances. It rose up by nearly 9% to 44%. Also the contribution of sundry debtors has increased

by nearly 9% to reach 16%. Keeping such a large amount of cash and bank balances is not

advisable for a firm, unless they are planning some sort of expansion or acquisition.

4.2.3 SIAM INDUSTRIAL WIRE

Table 4.8

(in US$ millions) SIWMar ‘11 Mar ‘10 % Change

Inventory 20.71 15.04 +37.74%Sundry Debtors 26.05 38.22 -31.85%Cash & Bank Balances 34.47 3.82 +803.47%Current Assets 81.23 57.07 +42.32%Current Liabilities 14.92 53.32 -72.02%Net Working Capital 66.31 3.76 +1664.96%



Inve

ntory

Sundry

Debtors

Cash an

d Bank b

alances

Current A

ssets

Current L

iabiliti

es

Net W

orking C

apita

l -

10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 90.00

Components of WC

Mar '11Mar '10

)in U

S$ m

illio

ns)

Fig 4.5

Analysis: There’s been an increase in the inventory levels by nearly 38% in March ‘11 as

compared to the levels in March ’10. The levels of sundry debtors have decreased by nearly

32% during the same period. The cash & bank balances have increased by nearly 800%, to reach

nearly 35US$ million. As a result, current assets have also increased by nearly 42% and there

has been a decrease in current liabilities by nearly 72%. The net working capital, which was

pretty low in March ’10 has increased to an extremely impressive levels of more than 66.31US$

million. The levels of the current assets are very good, taking into consideration the impressive

level of current ratio.



Proportion of the Elements of Current Assets

25%

32%

42%

Current AssetsMar '11

Inventory Sundry Debtors Cash and Bank balances

26%

67%

7%

Current AssetsMar'10

Inventory Sundry Debtors Cash and Bank balances

Fig 4.6

Analysis: It can be seen that the proportion of inventory making up the current assets remains

nearly the same. Whereas, in 2010 a large amount of current assets was contributed to by

sundry debtors (67%), in 2011 it contributed to only 32% of the current assets. The proportion

of cash & bank balances increased from 7% to 42%. So, there’s a large increase in cash reserves

of the company as compared to the previous year.



4.2.4 WUXI JINYANG METAL PRODUCTS


table along with the percentage changes from 31st March 2010 to 31st March 2011.

Table 4.9

(in US$ million) WJMP Mar '11 Mar'10 % changeInventory 9.20 11.07 -16.85%Sundry Debtors 12.06 11.79 +2.25%Loans & Advances 0.99 4.03 -75.41%Cash & Bank Bal. 7.99 4.66 +71.21%Current Assets 30.24 31.55 -4.17%Current Liabilities 12.94 14.08 -8.07%Net Working Capital 17.29 17.47 -1.02%

Inve

ntory

Sundry

Deb

tors

Loan

s & A

dvance

s

Cash &

Ban

k Bal.

Curren

t Ass

ets

Curren

t Liab

ilities

Net W

orkin

g Cap

ital0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00


Mar '11Mar'10

(in

US$

mill

ion

s)

Fig 4.7

Analysis: On studying the changes in various working capital components, it can be seen that

there is a decrease in inventory levels by nearly 17%. Loans & Advances has decreased

drastically by more than 75%. Whereas on month ending March ’10 it was more than 4 million



US$, on 31st March ’11, it was just under 1 million US$. Sundry debtors have increased

marginally by 2.25%. Also cash and bank balances have increased by more than 71%. There has

been a decrease in current assets by nearly 4% and current liabilities by nearly 8% leading to a

small decrease in the net working capital of the firm. The working capital has decreased

marginally by a little over 1%.

30%

40%

3%

26%

Current AssetsMar '11

Inventory Sundry Debtors Loans & Advances Cash & Bank Bal.

35%

37%

13%

15%

Current AssetsMar'10

Inventory Sundry Debtors Loans & Advances Cash & Bank Bal.

Fig 4.8

Anlaysis: The share of cash and bank balances towards making up of current assets has

increased by 11%. As on 31st March ’10, it accounted for 15% of the total assets. But on month

ending March ’10, it accounted for about 26% of the current assets. The share of sundry

debtors has increased by nearly 3% and it maintains its status of being the biggest contributor

towards current assets. The share of loans and advances has decreasd from 13% to 3%. The

share of inventory has decreased by about 4%.



4.3 ANALYZING THE TRENDS OF INVENTORIES & RECEIVABLES – GLOBAL WIRES INDIA

4.2.1 TRENDS FOR INVENTORIES

In a manufacturing firm, inventory forms a big chunk of current assets. In case of Global

Wires India, if we study the trends of inventories for the last 2 years, it can be seen that

inventories account for nearly 55% to 63% of the current assets with finished goods

inventory accounting for more than 45% of the current assets for the same period.

The target levels of inventory are planned in the beginning of the fiscal year according to

the past trends and the expected demand, and are tried to be maintained throughout

the period. The target for the levels of finished goods inventory are revised monthly

taking into considerations the change in demand for the products, the changes in the

price of steel and other raw materials, initiation of new projects, and other macro and

micro environmental factors.

The deviation in the inventory levels is closely tied to the gross sales for the same

period. The variation in gross sales in turn depends on the price of steel and speculation

in its future prices which lead to people waiting to buy at times when the price comes

down.

There are no seasonal products. But the sale normally decreases during monsoon

period, especially those of GI wires. However, the decrease is not substantial.

WAC method is used for inventory evaluation.



Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar -

5.00

10.00

15.00

20.00

25.00

Raw Materals & Stores Inventory

FY 2010FY 2011

Fig 4.9

Fig 4.10



10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Finished Goods & Semi Finished Goods/Traded Goods

FY 2010FY 2011



10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

Inventory

FY 2010FY 2011

Fig 4.11

Observations:

In general, there was much more volatility in inventory levels in FY 2010 and it varied

according to the sales. Whenever, the sales went up, the inventory came down and

decrease in sales lead to accumulation of inventory.

There is a sudden rise in raw material inventory levels from Feb ’10 onwards. It is

attributed to the grouping problem. Earlier Zinc, which is used for coating of wires, was

included in finished and semi finished goods inventory. Later the management decided

to take it as a part of raw material inventory, hence the increase.

During Oct 2010, the process of relocation from Borivali to Tarapur was at its final

stages. But, it didn’t affect the production levels as other plants produced more to

compensate for the decrease.

In the FY 2011, Tata Steel Wire Division managed inventory much better as compared to

the previous years when taking into consideration, the variation in its levels.

During the first half of the fiscal year, there was quite less variation in sales and hence

not much variation in inventory levels was witnessed.



The sales picked up later in the year and, in fact, it increased by 33% in the second half

of the fiscal year as compared to the first half. Even then the total inventory levels didn’t

show much variation. This can be attributed to better inventory management by TSWD,

especially the finished goods/unfinished goods inventory.

There is some variation in the budgeted levels of raw material inventory and the actual

levels. This is due to the difference in the actual steel price and the price of the steel

that was taken into account while preparation of budgeted levels.

Analysis: During the FY2010, there was much more volatility in inventory levels as compared to

the FY2011. However, the inventory levels in FY2011 were much higher as compared to FY2010.

This is not a good sign as the inventory turnover ratio has decreased and this points to the fact

that substantial amount of funds are tied up in maintaining higher inventory levels than

needed, which otherwise could be utilized to increase profits. One significant reason for the

higher inventory levels is the opening of new plant in Tarapur. As, a new plant requires one and

a half years for stabilization of its activities, there are instances when the inventory gets

accumulated, especially the work-in-process inventory and is more than the required and

budgeted levels. Another reason is that the sales in 2010 were much better as the market was

pretty good for the wires business. The dip in sales as opposed to the levels expected lead to a

much higher levels of inventory.

4.2.2 TRENDS FOR RECEIVABLES



The receivables form a significant portion of current assets for Global Wires India.

As much as the firm would like to do its business in cash, it’s just not practical. A big

part of the sales would be in the form of credit given to customers resulting in sundry

debtors.

The receivables comprise of sundry debtors and loans & advances given by the firm.

The trends for receivables for the last 2 years are shown.


10.00

20.00

30.00

40.00

50.00

60.00

70.00 Sundry Debtors

FY 2010FY 2011

Fig 4.12




5.00

10.00

15.00

20.00

25.00

30.00 Loans & Advances

FY 2010FY 2011

Fig 4.13


10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

100.00

Receivables

FY 2010FY 2011

Fig 4.14

Observations:

For FY 2010, the receivables fluctuated a lot as compared to the levels in FY 2011. Also

the levels of receivables are lower than the previous year’s levels.

The trends for loans and advances for FY2010 and FY2011 are nearly the same with not

much variation.



There was a huge increase in the levels of sundry debtors in Oct and Nov for FY2010.

That was the time when the shifting of operations from the Borivali plant to the new

plant in Tarapur was at its final stages which affected the operations and hence,

increase in the sundry debtors’ levels.

There is a close to 44% increase in sundry debtors’ levels in May’10 as compared to

previous the previous month. Similarly, there was another 11% increase in June and

nearly 19% increase in Oct.

Analysis: The main reason for the increase in debtors for May’11 was the comparatively

lower level of sundry debtors in April, due to lower sales. For Jun’11, the reason was an

increase in over dues and also the increase in outstanding for various firms. In Oct’11, again

there was an increase in over dues and outstanding leading to an increase. The major

customers who were given more credit than the limit specified for them for the month of

Jun’11 and Oct’11 were:

S. No. Jun ‘11 Oct ‘11

1. Enercon (India) Ltd. Enercon (India) Pvt. Ltd.

2. Gloster Cables Patel Spun Pipes

3. DA Chauhan & Co. Laxmi Steels

4. Vallabh Vidyanagar Concrete Factory

Enercon (India) Pvt. Ltd. features regularly on the list of customers having over dues for

FY2011. The reason for giving more credit to them even while not getting paid for the

previous ones was their good history and relations with the firm and also the fear of losing a

big customer to the competitors. In past they had paid their dues on time, but due to some

problems, were not able to lately.



4.4 COMPARISON AMONGST GLOBAL WIRES ENTITIES

The current ratio for Global Wires India is the lowest compared to other partners of Global

Wires. The levels of current ratio for SIW and WLMP are very impressive. The current ratio is

too high for SIW. Similarly, the quick ratio for India operations is very small, primarily due to low

levels of cash & bank balances kept by the firm because it being a profit centre for Tata Steel.

Again, quick ratio is very impressive for SIW and WJMP and extremely high for SIW.

Current Ratio0

1

2

3

4

5

6

TISCOLSSLSIWWJMP

Quick Ratio0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

TISCOLSSLSIWWJMP

Fig 4.15

The inventory holding period and average collection period for Global Wires India is the lowest

in comparison to the other partners. So, as compared to the other partners, India operations is

the most efficient among the firms when it comes to inventory and debtors management.

WJMP’s inventory holding period and debtors collection period is very high which is not good

sign for the firm and points towards a problem in inventory and debtors management and work

needs to be done towards bringing this down. LSSL has a pretty low average collection period,

very close to the levels of Global Wires India but their inventory holding period is high.



0

10

20

30

40

50

60

70

Inventory Holding Days

TISCOLSSLSIWWJMPDa

ys

0

10

20

30

40

50

60

70

80

Average Collection Period (days)

TISCOLSSLSIWWJMPDay

sFig 4.16

Among the partners, Global Wires India keeps the highest stock of inventory as a fraction of

current assets, nearly 60%. SIW keeps a high stock of cash & bank balances, one fact being the

lesser opportunities for investment in Thailand. For LSSL, it’s the loans & advances that makes

up the biggest fraction of current assets and for WJMP, receivables makes up the largest

portion of it.

InventoryCash & Bank

Bal. ReceivablesLoans &

Advances

0

10

20

30

40

50

60

70

TISCO

SIW

LSSL

WJMP

TISCOSIWLSSLWJMP

(per

cent

ages

)

Fig 4.17



Analysis: While analyzing the proportion of the working capital components that make up the

current assets for the four business entities of Global Wires for the month ending March ‘11, it

was noticed that every entity had a different way of managing their working capital. For TSWD,

a large proportion was made up by inventories – more than 63%. Receivables comprised of

more than 36% of the current assets. Cash and bank balances were negligible. This is because

TSWD uses channel financing, RP/OEM financing, and export financing to provide for funds in

case of cash requirements and doesn’t keep a big amount of cash in banks.

The high proportion of inventories that make up the current assets for TSWD is quite opposite

to the proportion that it makes up for other entities. For LSSL, it makes up only 35% of the

current assets. For SIW, it makes up nearly 25.5% of the current assets. In case of WJMP, it

accounts for 31.45% of the current assets. So, it can be seen that TSWD keeps larger stock of

inventories as compared to the other business entities of Global Wires.

It can be concluded that Global Wires India and LSSL are the most efficient in working capital

management. Global Wires India has a big fraction of inventory making up current assets. But

this is largely due to the fact that there’s negligible amount of cash & bank balances to form a

part of current assets, which is hence shared by inventory and receivables. Because the

inventory is turned over very frequently, it should not be a big cause for concern, although it

could be brought down to lower levels. WJMP’s inventory and debtors management is an area

of concern with their values being too high when compared to other partners of Global Wires

Business. SIW are keeping too much in current assets thereby, decreasing their profits through

investments. LSSL needs to work on better inventory management from bringing their

inventory holding period down, which not only leads to a greater holding costs but also loss of

profits for the firm with funds being tied up in the inventories.



5. CREDIT POLICY AT GLOBAL WIRES INDIA

With a view to have efficient working capital management, it is important that the exposure on

Accounts Receivables is understood correctly and the risk is contained and minimized within

the overall risk appetite of the business unit. For this, an in depth understanding of the market,

product, customer and the competitor would be essential to formulate and design an effective

and agile credit policy which would minimize the risk without adversely affecting the business

transaction. Hence, the steps to be followed in this regard to achieve the above objective have

been explained under the following heads.

1) Assessment of Risk AppetiteEach business unit is structurally different and is operating in different geographically locations.

Hence, the perception of risk for each of them would be different. Following points help

determine the overall risk appetite of the unit with regard to Working Capital.

Current assets and current liability of the unit should be balanced. Ideally ratio of

current assets and current liability may be kept 2:1.

In case of competitive scenario, current ratios lower than 2:1 may be considered based

on judgment – but not below 1.5:1.

Accounts receivable is part of current assets and therefore once the level of other

assets, like inventory, deposits and advances are known, limit of accounts receivable can

be assessed without disturbing the overall current ratio.

Based on the market situation, if there is any requirement of higher limit, the same

should be carried out by reducing the exposure on inventory or other assets.

Based on the above, each unit should ascertain the overall exposure on the Accounts

Receivable. The same should be put up for approval of the management.



2) Allocation of Credit ExposureOnce the overall credit limit for the unit is decided, the same needs to be allocated between

Domestic and Export and further to be bifurcated amongst various products and customers,

depending on the business requirement. Following points are to be kept in mind for the above

allocation:

Long term strategy of domestic and export business as per 5 year plan along with

Annual Business Plan to form the basis for allocation of exposure between Domestic &

Export Markets.

Credit requirement for the segment > product > customer needs to be firmed up based

on prevailing Market conditions & credit being extended by the competitors.

For products sold in different segments, like Auto, Infrastructure, Power, Annealed and

Retail, segment wise customer profile to be compiled.

3) Credit Appraisal Process

a) Ascertain Customer TypeThe customer may fall under any of the following categories

Government agency

Group Company/Subsidiary

Public Limited Company

Private Limited Company

Trader

Pattern of appraisal would differ based on the type of the customer.

Government companies are generally considered as low risk and do not provide any

security. Their financial are also not available. Hence, credit can be extended to them

depending upon the business requirement. As payments are generally delayed by them

adequate cost of credit for extended period should be factored into the sale.



For Group Companies/Subsidiaries, credit assessment is not mandatory.

In case of Public & Private Ltd companies, financials and other points as elaborated in

the subsequent paragraph under Credit Management Process is to be followed.

In the absence of reliable financial statements from small traders & sole proprietorship

firms, credit is to be decided based on the assessment of the business manager.

Avenues to scrutinize the exposure are to be explored. Ensure legal compliance while drawing

up the sale contract and any other related documents to enable legal assistance in the event of

any default. Certificate from the bank o the credit worthiness of the customer may be obtained

if any other means are not available.

b) Analysis of Non-financial Information: Total purchase volume of the product and the share of purchase to be catered by us to

be seen. A higher share of spend of the customer implies a strategic long term

relationship with us which is a positive point in the credit assessment. It is essential to

also compare the total market of the product vs the customer’s share in the market in

order to differentiate between customers.

Parameters like Technical Leadership, supplier-customer relationship, relationship with

our unit and management quality to be assessed encompassing:

Technical sustainability of the organization.

Details of the promoters and the quality of management in meeting their

commitments based on the past records

Growth potential of the industry

Growth potential of the customer

Security available to cover the exposure



c) Analysis of financial information:Based on the published annual reports of last 3 years, compilation of financial data in the

format enclosed as per annex II to be carried out to get an insight into the following areas:

Growth in the business

Increase in the profit

Management of working capital

Liquidity position and capacity to pay

Solvency test

Financial viability can be assessed from the following ratios:

Structural

Debt-equity ratio indicates the level of borrowing in comparison with the equity

contribution.

Debt service coverage ratio (DSCR) is imperative in understanding the capacity of

servicing debt of the organization.

Investors

Dividend payout ratio indicates the surplus distributable profit the company had over

the years.

PE ratio shows the perception of the investors for the company. Higher ratio indicates

that the company has good image.

ROIC indiacates the efficiency of capital utilization.

Liquidity

Current ratio indicates management of working capital

Quick ratio indicates the capacity of the company to meet its immediate commitments

Receivable & inventory turnover ratios also reflect efficiency of the working capital

management.



Growth

EBIDTA to Turn Over indicates the profitable growth of the company.

Asset turnover ratio shows the efficiency in utilization of Fixed Assets. Higher the ratio,

better it is.

Solvency

Corporate bankruptcy prediction can be done through Z score which is obtained by

compiling the ratios as per annex II.

Z score measures the overall financial solvency of the business. Higher the ratio, the

safer it is to extend the credit to the company.

In addition to the above ratios, a close scrutiny of the balance sheet to be done with regard to

the contingent liabilities or any other qualifications of the statutory auditors.

4) Approval Process

The overall credit exposure with break – up between Domestic & Export sales to be sent

for approval to EIC (Global wires) duly signed by Business Head, Chief of Marketing &

Sales and Finance Head on annual basis.

Based on the overall approval business head to decide sanction to the various segments.

Head sales would then complete the allocation up to customer level. Therefore,

customer wise/product wise credit proposals to be put up to EIC (GW) on quarterly basis

for formal approval. This would be the base for transation. Board approval to be taken

for the overall credit limit sanction and the compliance of the same to be reported to

the board by each unit. However, this should be put up for review by each unit to

EIC(GW) with a copy to FC – Wires, India on a monthly basis.



5) Credit Management

On completion of the credit assessment and approval of the credit exposure is required to be

managed by Credit Management Group (CMG) of each unit.

Updating & maintaining customer wise sanctioned limits in the credit master.

Ensuring system controls to be put in place to stop invoicing beyond the approved credit

limit.

Any deviation should have prior approval of the appropriate authority.

Report, analyze and review at regular intervals the overdue and sticky account

receivables.

Periodic assessment at customer level to be carried out to revalidate the credit limits

extended.

Based on credit assessment and time to time guidelines issued by the group, scrutiny of

accounts receivables t be effected through financial products like bank guarantee, LC,

post dated cheques, insurance backed receivables purchase, channel & OE financing etc.



The credit limits as per the credit policy and is framed for every year for different products and

different segments.

For Domestic Sales

1) Institutional Sale (OE customers)

AUTOMOTIVE SEGMENT

Product Max. credit days Avg. credit days

MTB 120 60

CTB 60 30

Spoke 30 15

Spring 60 30

Laid Clothing 45 45

INFRASTRUCTURE

Products Max. credit days Avg. credit days

LRPC 90 30

PC 60 10

3x3 15 3

POWER & ANNEALED


ACSR 30 30

RCA 45 30

FCA 45 30

Ball Bearings 45 45



MS Bright Annealed 0 0

2) Institutional Sales (Channel Customers)

GI SEGMENT


TW 01 – Poultry 30 30

TW 02 - Barbed & Chain Link 30 30

3) Retail Sales (Channel Customers)


HB 30 4

Steel Wool 30 4

For International Sales:

1) Institutional Sales (OE Customers)


MTB 90 60

CTB 90 30

PC 90 10

ACSR 60 30



2) Institutional Sales (Channel Customers)

GI SEGMENT


TW 01 – Poultry 30 30

TW 02 - Barbed & Chain Link 30 30

3) Retail Sales (Channel Customers)

GI SEGMENT


TW01 – Poultry 90 60

TW02 – Barbed Wire & Chain Link 90 60

TW03 – Redraw 90 60

TW05 – Farming 90 60

OTHERS

HB 30 30

Steel Wool 30 30



6. RECEIVABLES MANAGEMENT AT GLOBAL WIRES INDIA

The Receivables Management can be bifurcated into four components:

Sales & Stock Transfers

Collection

Credit Control

Debtors

1. Sales & Stock Transfers

Fig 6.1


Despatches

Sales

Domestic

Export

Stock Transfers


SalesSales may be of two types – domestic and export. A domestic sale is either done by institutional

selling or through distributors. Export sales’ transactions are done with the help of LCs and

collections takes place by discounting of invoices.

The components of sales are:

(i) Pricing

The price list of the various products of the firm are finalized and updated on a monthly basis.

Also in some extra ordinary situations, the price list may be revised. The price list needs to be

approved by COMS & Chief (WD).

(ii) Sales Order (SO)

A sales order confirms the proposed sale transaction with the customer specifying various

terms and conditions. Based on the sales order, the sales planning and execution is started. So,

accuracy and completeness of SO is very important.

(iii) Invoicing

It is sent to the customer along with the goods to be sold. It is the main document in the sales

transaction which denotes the details of the sales made to the customers.

(iv) Debit Note/Credit Note

There are some occasions when the actual amount payable by the customer is different than

the amount in the invoice due to various reasons for rejections. The reasons may be variation in

price & quantity, rebate & discount, rejection of material, compensation for quality, etc. So

debit note/credit notes are generated to account for corrections.

Stock TransfersThere are various stock points of the firm where stock gets transferred for subsequent sale to

the regional customers of that stock point. The amount of stock transferred is based on

projection of sales in that region and various tax implications.



2. Collection

Fig 6.2

(a) CMS HDFC Module

There’s a special arrangement of the firm with HDFC bank where in there are designated

branches / collection boxes for immediate receipt of funds and to dispense with the delivering

of cheques to the office.

(b) Discounting

(i) OEM


Collection

CMS HDFC

Discounting

OE/RP

Export LC/Bills

Direct

RTGS

Cheque deposit by customers

Channel Finance


It stands for ‘Original Equipment Manufacturers. It is an arrangement between the bank,

customer and the seller wherein money is drawn against debtor’s invoices. However, the

company retains control over the sales invoices. It provides a cost-effective way for profitable

businesses to improve company’s cash flow. In this method of financing bank makes payment

on behalf of customer to the company and the bank collects money from the customer on due

date.

(ii) Receivables Purchase

R. P. financing is the purchasing of receivables arising from deliveries of goods and services to

debtors on credit. It is a package of financial services which is provided by bank. In this, the

bank prepares credit limit for each customer. Then bank accepts invoice discounting and

credited amount to Tata Steel account. On the due date, customer makes payments to the firm.

For this, the bank charges interest which has to paid periodically.

(iii) Letter of Credit (LC)

A letter of credit is a document issued by a financial institution (bank0 which usually provides

an irrevocable payment undertaking to a beneficiary against credit sales to debtors. The LC can

also be the source of payment for a transaction, meaning that the seller will get paid by

redeeming the letter of credit or presenting it in the bank within due date. LCs are used in

international trade.

(c) Direct Collection

(i) RTGS/Cheque deposit by customers

RTGS stands for Real Time Gross Settlement. The direct collection can be done by asking the

customer to deposit a cheque or pay the required amount electronically.



(ii) Channel Financing Scheme

Channel financing is an innovative option for extending working capital finance to

dealers/whole sellers who have business relationships with large companies. Channel financing

is the mechanism through which a bank/financial institution meets the various funds related

requirements of dealers/wholesalers. This thereby helps the dealers in sustaining a seamless

business flow and avoiding shortage of working capital related difficulties.

3. Credit ControlThe firm periodically analyses the credit exposure. The assessment of risk appetite of the

business based upon the financial health and the market situation is done. Credit worthiness of

the customers within the segment for respective products is analysed by way of a credit

appraisal process.

4. Receivables/ DebtorsAs much as the company would like to do its business in terms of cash, it’s highly impractical.

The sales in credit terms lead to the rise of debtors. The company follows stringent measures to

recover the receivables and has been following strict rules while granting credit to the

customers. The retailers are not offered credit and sales to them are mostly done on cash

terms. Proper credit assessment is done before granting credit to any customer.



7) ANALYSIS OF OUTSTANDING & OVERDUES

The levels of outstanding and overdues as on Mar ’11 and Mar’10 are shown in the table.

Table 7.1

( `. In Crs)

MAR '10 MAR '11 % change

Sales 109.9 144.93 31.87

Collection 112.7 146.73 30.20

Outstanding (Gross) 22.93 37.98 65.63Outstanding (Net of Claim Prov.) 21.39 37.22 74.01Overdues (Gross) 3.49 2.56 -26.65

OD > 6 Months 1.46 0.35 -76.03

Analysis: There’s been a rise in sales by nearly 32%. The collection should always be more than

the sales for good debtors management. The outstanding amount has increased by more than

65% to reach nearly Rs. 40 crores. The overdues have decreased by more than 26% which is

quite impressive. This is down to the strict measures taken by the company to recover the

outstanding and tightening of its credit policies. In fact, the overdues for FY2011 have

decreased drastically from high levels in the early half of the year. It has consistently decreased

throughout the year to reach the low levels of Rs. 2.56 crores on 31st March 2011.



The trends for overdues to outstanding ratio are shown.

30th Apr '10

30th May '10

30th Jun '10

31st Jul '10

31st Aug '10

30th Sep '10

31st Oct '10

30th Nov '10

31st Dec '10

31st Jan '11

28th Feb '11

31st Mar '11

-

5.00

10.00

15.00

20.00

25.00

30.00

OD to OS %

OD to OS %

Fig 7.1

Studying the overdues to outstanding ratio is a very important. It gives an indication as to how

effective the company’s debtor management process is. High values are not a healthy

indication for the company. If we see the trends for Global Wires India, the ratio has been

consistently decreasing for the past one year. During the early half of the fiscal year, it was at

higher levels due to high levels of overdues held by some customers like Enercon (India) Pvt.

Ltd., Maharashtra State Electricity Board etc, but later on, with an increased focus on collection



process, the situation improved and the values started coming down to much satisfactory

levels.

Fig 7.2

Analysis: There are 181 debtors for the month ending March 2011 with an outstanding amount

of Rs 37.77 crores. The total debtors are classified into 4 main segments:

Bank financed

Exports

Retailers

Others

Bank financed: Of the total debtors, there are 25 customers who are bank financed owing

around Rs 11.35 crores or about 30% of the total outstanding with debtors.


Debtors (181)

Bank Financed (30%) Export (4.5%) Retailers (5%) Others (60.5%)


Exporters: As described the company also sells its goods in the international market also. There

are 16 customers in this category owing about 4.5% of the total outstanding amounting Rs 1.71

crores.

Retailers: According to the credit policy of the company the company does not sell its goods on

credit to the retailers. But under some exceptional cases discussed above the company sells its

goods to the retailers on credit. For the month ending 31st March, there were 20 retailers to

whom the goods were sold on credit. These debtors owe around 1.91 crores and make up

about 5% of the total debtors.

Others: This category of customers account for all those customers which does not come under

any of the above categories. Of the total 181 customers there are 120 customers. These

customers are not bank financed and are offered open credit by the company. They are offered

open credit but only after they satisfy the credit criteria of the company. These customers pay

the amounts directly to the company on its due date. These customers account for around 60%

of the total outstanding which amounts to Rs 23.01 crores. There are a few Government

customers also like Maharashtra State Electricity Board, Assistant engineer to whom the

company sells its goods. The Government customers under this category owe only about Rs 20

lakhs to the company. These receivables are not discounted by the company because the

maturity period of such receivables is more than 90 days. And the company with its agreement

to the bank has only a tie up of the receivables of maturity period of less than 90 days. It is

purely open credit offered to these customers but they are fully secured as they are

Government customers. This is the decision of the management to sell goods to such

customers. It is so because it becomes a compulsion of social status and also a moral

responsibility of the company in order to survive.



8) LIMITATIONS TO MY STUDY

Credit policies of rival companies: For an effective study of any subject, comparison is

very important. Thus to know the effectiveness of the credit policies of the Wires

Division, comparison of credit policies of Wires Division should be done with its

competitive companies. But, the credit policy of other companies is unavailable for

making comparison.

Time: I have interacted with maximum possible members in the company to gather as

much information as possible. But as there is a shortage of time I was unable to interact

with some of the members and get more information on the credit policies of the

company. Also due to shortage of time, I mainly concentrated on the items of the assets

side of the balance sheet during the project. Change in the items like Debtors, Inventory,

Loans & Advances were more into focus than the liabilities.



9) RECOMMENDATIONS

Conversion of open credit customers to bank financed customers: The Company has a

policy to optimize number of customers under the bank finance - RP backed by Insurance

scheme. Under this scheme the company discounts its receivables with the bank and obtains

funds immediately from the bank to ensure continuous flow of operations and sufficient

working capital in the company. This financing is without recourse to the company and hence

fully secured.

Of the total 181 debtors on 31st Mar ’11, there are around 120 debtors who are offered open

credit and they are neither under the receivable purchase scheme of bank finance nor provided

any security like the letter of credit, a bank guarantee or a post dated cheque etc. These

customers constitute more than 60% of the total outstanding amount. The insurance company

and the banks have only accepted the customers who have strong financial background and

very low default risk. On that basis the bank selected to finance only a few customers of the

whole client database.

So, the finance department of the company should make its financing & discounting contracts

with the banks and insurance companies which could cover maximum number of debtors under

this receivable purchase scheme which would reduce the default risk and also the degree of

financial leverage of the company. As the customers with strong financials will however not

default, and pay to the company on maturity. Thus, to effectively utilize this bank finance

scheme the company should try and negotiate with the insurance company and banks to

finance other customers also to reduce the default risk the company. Then, secondly the



company should try to decrease outstanding amount with the open credit customers to reduce

its exposure to risk.



Sales to Government customers: The company, apart from the selling its goods to the

manufacturers and retailers on credit, sells its goods to Government Organization on credit.

These customers are not covered under the bank finance scheme because the maturity period

of these receivables is greater than 90 days. And the company has a contract of discounting its

receivables with the bank for a maturity period up to a maximum of 90 days.

There are only 15 customers under this category but owe only around 1% of the total

outstanding amount. Every company has its own compliance to sell goods to the Government

and cannot deny from such sales. It also becomes a social responsibility for the company to sell

its goods to such customers. Though the amount outstanding from such customers are fully

secured, the company should try to do business with the Government agencies only if it is

profitable enough as a lot of expenses and energy is spent in recovering the outstanding from

these companies and agencies.

Credit sales to retailers: According to the credit policies of the company, the company

sells its goods wholly on cash to the retailers through the distributors and on credit only to the

manufacturers. But there are a few retail customers to whom the goods are sold on credit. The

company’s credit policy does not provide any such clauses. But under some circumstances, as

described by the CMG group the company sells goods on credit to retail customers. While these

are rare cases such deviations must be discouraged.

There were 20 customers as on 31th March, 2011 with a share of around 5% of the total

outstanding balance. It is very risky as the company is dealing with these customers without any

security back up. The company can also revise its credit policies by including the circumstances

as clauses under which the sale of goods to retailers is permissible. Also it could add on more

details by specifying the credit limit to be offered, on the basis of customer and the credit

period to be granted under both basis - customer and product specific.



Inventory Management: The new plant in Tarapur required 1.5 years for stabilization in

processes which is nearing completion. The inventory levels were higher during this period,

especially work-in-process inventory, as compared to the previous years. The inventory levels

could be brought down to lower levels once the stabilization is complete by using the best

possible inventory management techniques.

Credit Assessment: There are a large number of customers to whom the company sells

goods on open credit. The company uses a few parameters and also the Z-Score model to

determine the financial health of its customer. This assessment may be possible only with the

public limited companies and a few others whose accounts are fairly audited and published

publicly. But the company also sells its goods to private companies and others. The financial

numbers of private companies may not be reliable. Thus the company should use other

parameters also to determine the credit scoring of a debtor. The parameters often used for

credit rating are customer’s profile, its market share, technology standards, capital investment,

credit history and ability to pay debts on time. The company can provide appropriate weightage

to each parameter and use it to determine the credit limit of a customer. The company can

come out with such assessment in its credit policy.

Currently assessments is done by both the marketing department & the finance department in

determining the credit worthiness of the customer only when a credit limit is to be extended to

a new customer or an existing customer, but the company does not have a practice to review it

regularly. The company only reviews its debtors by the ageing schedules in the working capital

reviews. And in case of delayed payments as depicted by the ageing schedule the customer

would further not be allowed to purchase goods from the company on credit.

The current pattern which the company follows takes action only after the customer gets

delayed in payments. This may also have a great chance of default of the payments by the

customer if the supplies are stopped. Thus as a preventive measure the company should make

assessments of the customers and be cautious earlier rather than taking late steps. The

assessments can be done using the latest financial information and other market information



on regular intervals at least annually and make it a practice and a part of the credit policy so as

to predict the financial soundness of the customer well in advance and to avoid the late

payments or default risk.

The company should also make a part of the credit policy to block the credit lines of the

customer on expiry of the credit assessment. It should also keep revising the total credit

exposure of the company and also the individual credit limit from time to time.

Securitization from open credit customers: Though the company tries to finance all its

customers through bank, it becomes necessary under some circumstances for the company to

sell its goods to customers who are not under the bank finance scheme. Thus converting such

customers under the financing scheme may not also be possible. So, the company can make

provisions for circumstances under which such sale will take place and review it regularly.

Cash Credit Ratio: The Company should continuously make efforts to sell its goods on

cash basis to many of its customers. On an average, the cash sales for the financial year was

42%, and the remaining on credit. Thus, on providing various discount offers and other

promotional schemes the company can increase cash sales which would enhance effective

operations, avoid risks and also deleverage the company.

Reduction in Overdues: Although there has been a constant decline in the overdues

during FY2011, but there were times during the year when overdues were very high. Overdues

can be reduced by a number of ways like reduction in pricing disputes, timely settlement of

claims, stringent review of customer claims, and rigorous follow up for old non-moving overdue

with strategic plan for collection of old dues.

Conclusion: On comparison of the financial information of the Wires division for the year ended

March 2011 & March 2010, it can be concluded the performance of the company is improving.



Although the profit and sales levels are yet to match the past levels of FY2009, the sales are

increasing during this ever increasing competitive business scenario for wires. Especially the

second half of the FY2011 saw a tremendous rise in gross sales. The management of current

assets, current liabilities and the working capital is also satisfactory. It is so because the

company recorded an increase in sales and increase in the working capital taking its levels to

much satisfactory values, thus, deleveraging by efficient management of its assets. However,

the above mentioned are some of the recommendations that could improve the financial

position of the company if implemented.



10) BIBLIOGRAPHY


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