Professional Documents
Culture Documents
To
Director (PGDM)
In the partial fulfillment of the requirement of
July 2010
Signature
(JYOTI and ANNIE)
Date:
Place:
Acknowledgement i.
5 Current Ratio 56
6 Quick Ratio 58
9 Proprietary Ratio 63
2 Current ratio 56
3 Quick ratio 58
4 Absolute liquid ratio 60
5 Debt equity ratio 62
6 Working capital turnover 65
ratio
7 Return on capital 67
employed
8 Return on share holders 68
fund
First of all, we are grateful to Mr. S.K.Singh, Chief Manager (Training), and Mr.
H.H.Chauhan, Sr Manager (Training) who gave us opportunity to undertake this
project at IFFCO-Kandla, and also for his help and tips whenever needed.
We would like to thank Mr. V.J.Mankodi, Joint General Manager- (F&A), for
allowing us to carry out this project study and his guidance and support during
training period and also Mr. Dushyant Chauhan Assistant Manager, Shri V Srinivasan
Manager (A/Cs) and Shri HT Bhambhani Manager (A/Cs)for sharing their ideas with
us.
In addition, of course, how can we forget the guidance and help from our Project
Guide Mr.D.C.MAHESHWARI, DGM (F&A) right from the beginning till the end,
without which we hardly would have been able to complete this report. We thank all
of them for their valuable time, which, in spite of being extremely busy.
We also appreciate the supportive attitude of all the head of departments and the staff
of IFFCO.
By minimizing the amount of funds tied up in current assets, firms are able to reduce
financing costs and\or increase the funds available for expansion. The importance of
efficient Working Capital Management is indisputable. Business viability relies on its
ability to effectively manage receivables, inventory, and payables. By minimizing the
amount of funds tied up in current assets and liabilities back towards their optimal
levels. The definition of working capital is fairly simple; it is the difference between
an organization’s current assets and its current liabilities.
Thus our project concentrates on the important aspects of the Working Capital
Management in the organization life. There are many private as well as government
companies. The company we have selected for our project is the Cooperative Society
which is IFFCO – KANDLA.
In simple words working capital is the excess of current Assets over current liabilities.
Working capital has ordinarily been defined as the excess of current assets over
current liabilities. Working capital is the heart of the business. If it is weak, business
cannot prosper and survives. It is therefore said the fate of large scale investment in
fixed assets is often determined by a relatively small amount of current assets. It is
important to keep adequate working capital with the company.
Cash is the lifeline of company. If this lifeline deteriorates so does the company’s
ability to fund operation, reinvest do meet capital requirements and payment.
Understanding Company’s cash flow health is essential to making investment
decision. A good way to judge a company’s cash flow prospects is to look at its
working capital management. The company must have adequate working capital as
much as needed by the company. It should neither be excessive or nor inadequate.
Excessive working capital causes for idle funds laying with the firm without earning
any profit, where as inadequate working capital shows the company doesn’t have
sufficient funds for financing its daily needs working capital management involves
study of the relationship between firm’s current assets and current liabilities. The goal
of working capital management is to ensure that a firm is able to continue its
operation. And that it has sufficient ability to satisfy both maturing short term debt
and upcoming operational expenses.
The prime objective of the company is to obtain maximum profit thought the
business. The amount of profit largely depends upon the magnitude of sales. However
the sale does not convert into cash instantaneously. There is always a time gap
between sale of goods and receipt of cash. The time gap between the sales and their
actual realization in cash is technically termed as operating cycle. Additional capital
required to have uninterrupted business operations, and the amount will be locked up
in the current assets. Regular availability of adequate working capital is inevitable for
sustained business operations. If the proper fund is not provided for the purpose, the
business operations will be effected. And hence this part of finance is to be managed
well.
Working capital
Current Assets-
1. A balance sheet account that represents the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of business.
2. In personal finance, current assets are all assets that a person can readily convert to
cash to pay outstanding debts and cover liabilities without having to sell fixed assets.
In the United Kingdom, current assets are also known as "current accounts".
1. Current assets are important to businesses because they are the assets that are used
to fund day-to-day operations and pay ongoing expenses. Depending on the nature of
the business, current assets can range from barrels of crude oil, to baked goods, to
foreign currency.
2. In personal finance, current assets include cash on hand and in the bank, and
marketable securities that are not tied up in long-term investments. In other words,
current assets are anything of value that is highly liquid.
Current Liabilities-
A company's debts or obligations those are due within one year. Current liabilities
appear on the company's balance sheet and include short term debt, accounts payable,
accrued liabilities and other debts.
Essentially, these are bills that are due to creditors and suppliers within a short period
of time. Normally, companies withdraw or cash current assets in order to pay their
liabilities.
Analysts and creditors will often use the current ratio, (which divides current assets by
liabilities), or the quick ratio, (which divides current assets minus inventories by
current liabilities), to determine whether a company has the ability to pay off its
current liabilities.
With limited access to the long-term capital markets, these firms tend to rely more
heavily on owner financing, trade credit and short-term bank loans to finance their
needed investment in cash, accounts receivable and inventory.
Some companies are inherently better placed than others. Insurance companies, for
instance, receive premium payments up front before having to make any payments;
however, insurance companies do have unpredictable outflow as claims
Normally, a big retailer like Wal-Mart (NYSE:WMT) has little to worry about when
it comes to accounts receivable: customers pay for goods on the spot. Inventories
represent the biggest problem for retailers; as such, they must perform rigorous
inventory forecasting or they risk being out of business in a short time.
Working capital starvation is generally credited as a major cause if not the major
cause of small business failure in many developed and developing countries.
The success of a firm depends ultimately, on its ability to generate cash receipts in
excess of disbursements. The cash flow problems of many small businesses are
exacerbated by poor financial management and in particular the lack of planning cash
requirements.
During mid- sixties the Co-operative sector in India was responsible for distribution
of 70 per cent of fertilizers consumed in the country. This Sector had adequate
infrastructure to distribute fertilizers but had no production facilities of its own and
hence dependent on public/private Sectors for supplies. To overcome this lacuna and
to bridge the demand supply gap in the country, a new cooperative society was
conceived to specifically cater to the requirements of farmers. It was a unique venture
in which the farmers of the country through their own Co-operative Societies created
this new institution to safeguard their interests. The number of co-operative societies
associated with IFFCO has risen from 57 in 1967 to 38,155 at present.
In 1993, IFFCO had drawn up a major expansion program of all the four
plants under overall aegis of IFFCO VISION 2000. The expansion projects at Aonla,
Kalol, Phulpur and Kandla have been completed on schedule. Thus all the projects
conceived as part of Vision 2000 have been realized without time or cost overruns.
All the production units of IFFCO have established a reputation for excellence and
quality. As part of the new vision, IFFCO has acquired fertilizer unit at Paradeep in
Orissa in September 2005.
Phulpur
Kalol l
Aonla
Paradeep
IFFCO’s NPK plant is located on the water front adjacent to Kandla Port Trust Oil
Jetty. The plant was built at a cost of about Rs. 30 crores with two streams (called
train A and train B) and with the licensed capacity of 127000 tones of P2O5. This
plant was designed by the M/s Door Oliver-Inc., to produced three grade ok NPK
based on DAP, the plant was commissioned on 26th November, 1974 and its
commercial production started on 1st January, 1975.
With increase in demand for complex fertilizers, the capacity of NPK has been
doubled at a cost of about Rs. 28.6 crores. Two more streams (train C and train D) had
been added with the increased licensed capacity from 127000 MT P2O5 to 260000
MT P2O5 per annum. The new two streams are called Kandla Phase 2 was completed
one month ahead of the projected schedule. This is a rare phenomenon not only in
India but in entire South East Asian region. Kandla Phase 2 commissioned on4th
June, 1981 with the production record for IFFCO. The production of Kandla Phase 2
was started from 6th September, 1981.
IFFCO went for expansion of their unit at Kandla in 1996-97. Kandla phase-II
NPK/DAP project conceptualized the setting up of two additional streams (train E and
train F) for manufacture of the same grades of NPK/DAP fertilizers with an annual
production capacity of 2,10,700 MTPA thus increasing the total capacity from
3,09,000 MTPA of P2O5 to 5,19,700 MTPA of P2O5. The actual cost of the project
was Rs. 205.30 crores against a budgeted cost of Rs. 212.20 crores.
The total annual production of the Kandla unit was 127000 MTPA as on 26 th
November, 1974 with two streams (train A and train B), which was increased by
182000 MTPA as on 6th September, 1981 by starting two more stream (train C and
train D), which was further increase to 210700 MTPA as on 1999 by introducing two
1) Production
2) Technical
3) Finance and accounts
4) Personnel and Administration
5) Materials
6) Maintenance
7) Systems
Introduction to F&A
Finance is the life blood of business. According to Howard and Upton “Finance is that
administrative function in an organization which relate with the arrangements of cash
and credit so that the organization may have the means to carry out its objectives as
satisfactory as possible.”
o RAW MATERIALS
o FINANCIAL CONCURRENCE
Pay roll Section takes care of all financial issues of employees in coordination with
Administrative and personal Department. Its function includes management of
Salaries, TA/ DA, Loans and Advances, Misc. payment related to employees, perk
allowance payments, etc.
Here records of each employee are maintained regarding basic pay, leave encashment,
medicals, salary, increments, promotion based perks, etc.
1. P2O5- Imported
2. Ammonia- Imported & Indigenous
3. Potash- Imported
4. MAP- Imported
5. Urea- Kalol
6. Filler
MISCELLANEOUS ACCOUNTS:
Miscellaneous Bills includes rates contracts for service contract for air-
conditioners, water coolers, weighing machines, franking machines,
typewriters, computers, personal computers, calculating machines, knitting of
chairs, etc. Other miscellaneous bills includes telephone rentals, STD calls,
local calls, teleprinters, fax, service bills, advertisement bills, electricity bills,
printing and block making bills, bills of travel agents, bills of canteen
purchases, etc. Annual contacts and hiring of taxi, motors, etc is also included
in this account.
Work Bills Section is entrusted with the task of checking and authentication
of AFP (authorized for payment) received from various departments such as
Civil, Plant, and Township, etc. They have to keep record and maintain
account. They have to verify measurements, Tax provisions like TDS and
other deductions like EMD, security and penalty, etc.
PURCHASE BILLS
FINANCIAL CONCURRENCE
Books and budget deal with revenue budget compilation, monitoring and
control, reconciliation of inter unit accounts, maintenance of books of
accounts and submission of monthly/ quarterly/ annual reports. COP
processing and attending internal/ statutory/ tax auditors.
State offices State offices State offices State offices State offices
Area offices Area offices Area offices Area offices Area offices
Field officer Field officer Field officer Field officer Field officer
Apart from selling fertilizers through network of more than 37000 cooperative
societies, IFFCO has its own 158 farmers service centers (FSCs) spread across
10 states. These FSCs apart from supply of fertilizers, seeds , agrochemicals
etc. under one roof also serve as the contact point for providing technical
knowhow to farmers. Need based promotional programmes such as farmers
meeting, soil test campaigns were organized in villages surrounding FSCs.
Literature relating to crop production, balanced use of fertilizers was
distributed through these FSCs.
2. MISSION
METHODOLOGY
Primary data:
1) Informal interview through different officers of IFFCO
2) Through Personal Observation
Secondary data:
1) Annual reports manual 2008-2009, 2009-2010
2) Through Internet
Nature of business
Need for working capital is highly depends on what type of business, the firm in.
there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid
cash etc. public utilities like railways, electricity, etc., need much less inventories and
cash. Manufacturing concerns stands in between these two extends. Working capital
requirement for manufacturing concerns depends on various factor like the products,
technologies, marketing policies.
It follows continuous production policy. The plants are operated 24 hours in different
shifts. Demand factor is not considered here as the fertilizers are sold by its marketing
department. As production continuous for 24 hours, the investment in raw materials
invested is high as interruption in production causes increase in cost of production
because of high set up cost of plant.
Operations:-
Market condition:-
It does not have to depend on market condition as the fertilizer are always considered
essential for agriculture so there is not much competition in this industry. Secondly, it
only manufactures fertilizer while sales are handled by its marketing department.
Availability of Raw-Materials:-
TOLANI INSTITUTE OF MANAGEMENT STUDIES
If raw-material is readily available then it need not maintain a large stock of same,
thereby reducing the working capital investment in raw material stock. On the other
hand if raw material is not readily available then a large inventory/stock needs to be
maintained thereby calling for substantial investment in the same raw material are
very important aspect for arriving at working capital requirements at IFFCO-
KANDLA because of two reasons only. 1st it follows continuous production policy so
the raw materials are used in very large quantum and 2nd the raw material like
Ammonia, Potash, Urea, Phosphoric Acid and many others and the most of the raw
material are imported from foreign countries which takes around 3 months as lead
time. Thus it requires a large amount of working capital.
IFFCO-KANDLA has grown incredibly since its inception because of high growth it
needs large amount of working capital as the operations are handled at very large
scale. It has expanded its operations through investing in many other important
projects which compel them to invest immensely in working capital.
The price level changes in raw material hits very hard to IFFCO-KANDLA as the
major investments are being done in raw materials. Most of the materials are imported
for outside India which involve risk of exchange rate fluctuations thus it needs high
amount of working capital.
TOLANI INSTITUTE OF MANAGEMENT STUDIES
Manufacturing cycle:-
It starts with the purchase of raw material and is completed with the production of
finished goods. If the manufacturing cycle involves longer period the need for
working capital would be more. At times business needs to estimate the requirement
of working capital.
There are two thoughts that are currently accepted about working capital.
They are
This thought says that total investment in current assets is the working capital of the
company. This concept does not consider current liabilities at all. Reasons given for
the concept.
1) When we consider fixed capital as the amount invested in fixed assets. Then the
amount invested in current assets should be considered as working capital.
2) Current asset whatever might be the sources of acquisition, are used in activities
related to day to day operations and their forms keep on changing. Therefore they
should be considered as working capital.
It is narrow concept of working capital and according to this, current assets minus
current liabilities forms working capital. The excess of current asset over current
liabilities is called as working capital. This concept lays emphasis on qualitative
aspect which indicates the liquidity position of the concern/enterprise. The reasons for
the net working capital method are:
2) Financial health can easily be judged by with this concept particularly from the
view point of creditors and investors.
3) Excess of current assets over current liabilities represents’ the amount which is not
liable to be returned and which can be relied upon to meet any contingency
If the current assets are higher than current liability it is considered the financial
position of the company is sound. If both current assets and liabilities are equal, the
company has resorted to short term funds for financing the working capital and long
term sources of funds have been used to finance the acquisition of fixed assets.
It doesn’t not indicate the financial soundness for the company. If the current assets
are lesser than current liabilities there is negative working capital which indicates
financial crisis.
Net working capital concept is more reasonable than the gross working capital
concepts. The balance sheet of the company includes group of liabilities such as bank
overdraft, creditors, bills payables, outstanding expenses etc.
If it is not deducted from current assets, the concern may consider itself quite
secured: while the reality is may be that the concern has very little working capital or
has no working capital. Therefore it is reasonable to define working capital as the
excess of current assets over current liabilities
The volume of investment in current assets and change over a period of time. But
always there is minimum level of current assets that must be kept in order to carry on
the business. This is the irreducible minimum amount needed for maintaining the
operating cycle. It is the investment in current assets, which is permanently locked up
in the business, and therefore known as permanent working capital.
It is the volume of working capital which is needed over and above the fixed working
capital in order to meet the unforced market changes and contingencies. In other
words any amount over and about the permanent level of working capital is variable
or fluctuating working capital. This type of working capital is generally financed from
shorter souse of finance such as bank credit because this amount is not permanently
required and is usually paid back during off season or after the contingency.
Long term sources of permanent working capital include equity and preference shares,
retained earnings, debentures and other long term debts from public deposits and
financial institution. The long term working capital needs should meet through long
term means of financing. Financing through long term means provides stability,
reduces risk or payment and increases liquidity of the business concern. Various types
of long term sources of working capital are summarized as follow
Issue of shares
It is the primary and most important sources of regular or permanent working capital.
Issuing equity shares as it does not create and burden on the income of the concern.
Nor the concern is obliged to refund capital should preferably raise permanent
working capital.
Retained earnings
Issue of debentures
Company can raise fund from accepting public deposits, debts from financial
institution like banks, corporations etc. the cost is higher than the other financial tools.
Other sources sale of idle fixed assets, securities received from employees and
customers are examples of other sources of finance.
Temporary working capital is required to meet the day to day business expenditures.
The variable working capital would finance from short term sources of funds. And
only the period needed. It has the benefits of, low cost and establishes closer
relationships with banker.
Public deposits
Most of the companies in recent years depend on this sources to meet their short term
working capital requirements ranging from six month to three years.
Trade credit, business credit papers and customer credit are other sources of short
term working capital. Credit from suppliers, advances from customers, bills of
exchanges, promissory notes, etc helps to raise temporary working capital.
Various funds of the company like depreciation fund. Provision for tax and other
provisions kept with the company can be used as temporary working capital.
There are many aspects of working capital management which make it an important
function of financial manager.
4) GROWTH; - The need for working capital is directly related to the firm’s
growth.
Receivables are direct result of credit sale. Credit sale is resorted to by a firm to
push up its sales, which ultimately results in pushing up the profits earned by a firm.
At the same time, selling goods on credit results in blocking of funds in account
receivable.
Additional funds are, therefore required for the operation needs of the
business, which involves extra cost in terms of interest. Moreover, increase in
receivables also increase chance of bad debts. Thus creation of accounts receivables is
beneficial as well as dangerous. So a firm needs to continuously monitor and control
its receivable to ensure the success of collection efforts.
A firm sells goods on cash and credit is used as a marketing tool credits to its
customers, debtors are expected to be converted into cash over a short period and
therefore are included current asset. The liquidity position of the firm depends on the
quality of debtors to the great extent.
At IFFCO receivables do not have any share in current asset. Current asset shown
in books of IFFCO most of the time represent negative or very low balance as the
main component of current asset is not dealt here. But that does not posses enough
liquidity.
2) Cash management
Here cash and bank aspects of cash management have been discussed separately.
CASH SECTION:-
Cash is the most important asset for any organization but at the same time a least
productive one. At IFFCO – KANDLA very few transactions are made in cash, value
of which is not more than RS 20000
1) Insurance has been taken up to Rs.50, 000 to insure its hard cash from its
subsidy company called IFFCO- TOKIO general insurance ltd.
5) The cash entries are recorded in FAS that is financial accounting system used
at IFFCO – KANDLA by cashier.
7) The authorized officers verify hard cash with cash balance of regular interval
of 15 days.
Statutory dues
Custom duties
Freight
The above all payments are done through cheques. Regular payments for those
transactions are very essential as the legal implications are involved with some of the
above transaction.
Inventory Management;-
The raw material includes potash, urea, ammonia, p2o5, phosphoric acid. These all
raw materials are mainly imported so the decision about how much basic raw material
is to be purchased for the budgeted production is taken at head office level. The
purchased raw material is sent according to their respective budgeted requirement to
all other units.
At IFFCO – KANDLA the consumable item includes various catalysts require during
the process of making fertilizers, they are LSHS, marinate of potash, filler etc. these
items are purchased based on the budgeted production and are properly stored so that
they don’t affect the quality of fertilizer. The management is always cautious about
the amount to be invested in this part of inventory and they always try to control over
investment in this part of inventory.
Work – in – progress/process:-
At IFFCO – KANDLA all the plants operate for almost more than 320 days in a year
for 24 hours so the work in progress inventory is almost negligible, even if there is
some work in progress they try to convert it into finished goods and then properly
pack it and send the same to the warehouse for dispatch.
After the goods are produced i.e. fertilizer produced is sent to bagging plant for
packing in either gunny bags or (HDFC) plastic bags and then the packed fertilizer is
sent to the warehouse for further distribution to the end users i.e. farmers. IFFCO –
KANDLA supplies its fertilizers material mostly through co-operative channels.
However the co-operative societies have no obligation to purchase from IFFCO –
KANDLA. This necessitates a competitive approach to nurture brand loyalty. The
marketing strategy of IFFCO – KANDLA is designed to ensure timely availability of
reasonably priced quality products right at the door step of the farmers through the
nationwide co-operative network. The fertilizer is distributed through Apex co-
operative marketing federation in many states of the country. Direct supplies to the
village level co-operative societies are also undertaken in some states. In some states
small quantities are provided to other institutional agencies like Agro industries co-
TOLANI INSTITUTE OF MANAGEMENT STUDIES
operation in some states. IFFCO – KANDLA NCDC and IFFCO’S farmers service
centers (FSCS) are also used as outlets for retail sale of fertilizer.
The usual level of inventory varies widely into two categories viz. imported and
indigenous items. The level in case of imported items varies from 18 to 24 months
this is due to the fact that it compromise of both lead time for imported formalities as
well as suppliers lead time to deliver the material at users point. For finding
indigenous goods, we have two sub categories of items:-
A) Non – Stock items: - The non-stock items are tailor mode and hence
their procurement time is long. These items are generally costly and
difficult to stock. Users themselves generally procure these items.
1) Raw material is valued at lower of weighted average cost or not realizable value.
2) Stores and spares, packaging material and construction material are valued at
weighted average cost. Items of stores and spares which are slow or non moving are
valued at lower of cost or realizable value based on technical estimation.
3) Finished goods and stock in process are valued at lower of cost or not realizable
value damaged goods are identified by the management are valued at their estimate
realizable valued closing stock of finished goods is net of standardization looses.
a) The cost of stock lying at plant is derived taking attributable expressed incurred at
factory in to consideration.
d) Imported urea at procurement cost plus handling cost changes less remuneration
received from the government of India.
1) For stock of urea lying at plant group concession price fixed by FICE
2) For stock of urea lying at warehouse, selling price fixed by government of
India
3) For fertilizer whose prices have been decontrolled by the government of India
and for imported fertilizer, the price prevalent on the balance sheet date.
3) The raw material like urea is exported from foreign country because of which
the investment in inventories is quite high which ultimately leads to high
amount of u/s payable.
Payable are paid by the head office while the liabilities are recorded at IFFCO.
The average collection period for creditors at IFFCO is approx 56 days which
represent its proper management of payables.
The working capital cycle starts when stock is purchased on credit from suppliers and
is sold for cash and credit. When cash is received from debtors it is used to pay
suppliers, wages and any other expenses. In general a business will want to minimize
the length of its working capital cycle thereby reducing its exposure to liquidity
problems. Obviously, the longer that a business holds its stock and the longer it takes
for cash to be collected from credit sales, the greater cash flow difficulties and
organization will face.
In managing its working capital a business must therefore consider the following
question. 'If goods are received into stock today, on average how long does it take
before those goods are sold and the cash received and profit realized from that sale?'
The answer will depend upon a number of factors that we will consider later in this
article. For now we will turn our attention to calculating the length of a business's
working capital cycle.
Cash flows in a cycle into, around and out of a business. It is the business's life blood
and every manager's primary task is to help keep it flowing and to use the cash flow to
generate profits. If a business is operating profitably, then it should, in theory,
generate cash surpluses. If it doesn't generate surpluses, the business will eventually
run out of cash and expire. The faster a business expands the more cash it will need
for working capital and investment. The cheapest and best sources of cash exist as
working capital right within business. Good management of working capital will
There are two elements in the business cycle that absorb cash - Inventory (stocks and
work-in-progress) and Receivables (debtors owing you money). The main sources of
cash are Payables (your creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has
two dimensions ........TIME ......... and MONEY. When it comes to managing working
capital - TIME IS MONEY. If money can be moved faster around the cycle (e.g.
collect monies due from debtors more quickly) or reduced the amount of money tied
up (e.g. reduce inventory levels relative to sales), the business will generate more cash
or it will need to borrow less money or have additional free money available to
support additional sales growth or investment. Similarly, negotiating improved terms
with suppliers e.g. get longer credit or an increased credit limit will effectively create
free finance to help fund future sales.
TOTAL 11535.57
As IFFCO is a cost centre where only production procedure taken place and the
sale is done by its marketing department. So operating cycle at IFFCO doesn’t
involve debtor’s conversion period.
Here at IFFCO – KANDLA the net operating cycle shows –ve result this implies that
IFFCO – KANDLA manages its funds required for converting raw materials into
finished products from its supplier’s credit.
IFFCO – KANDLA manages its payables in a very different way. The creditor’s
deferral period is around 74 days which makes it possible for them to finance its
working capital which is involved in production procedure from its suppliers.
The kind of operating cycle is very beneficial from point of view of finance as the
funds which are being financed from suppliers credit would have led to another
expenditure that is interest. Interest would have been paid on the amount of working
Fund flow statement reveals the sources of funds to the company during the period
and as to how they were utilized during the period and as the company during the
same period. It is an important tool to analyze the movement of funds in a business in
a period of a year, 3 year or even 10 years. In each case, sources of funds and their
end use will be depicted for the corresponding periods. It is also called as a source a
uses statement. Fund flow statement. Whereas the income statement represents the net
result of operation for the year, the Fund flow statement is a report of financial
operation of business undertaking. It discloses the result of the financial policies of
the corporate management and hence is of great relevance to the financial analyst and
credit institution. A Fund flow statement is a flow concept and represents net changes
in the financial position of a company between two different balance sheet dates.
Since the published balance sheet normally provides the comparative balance sheet it
becomes easy the fund flow stamen by noting changes in the different balance sheet
items during the period covered by the statement. The Fund flow statement is
prepared with the help of comparative balance sheet and also with the help of profit
and loss statement for the particular year. The net changes in the balance sheet items
between the two balance sheets are calculated and further refinements are affected
with the help of profit and loss account for the year.
In the balance sheet, all the liabilities and owners equity are sources. And all assets
are uses of funds. Hence the following rule of thumb is used to classify the change in
the balance sheet items either as a source or use of funds.
source uses
At this stage, to indicate that impact of profit/loss and few other factors, the following
refinements are to be effected by combining profit/loss account and balance sheet.
The management information system for working capital helps monitoring not only
the individual components of working capital such as receivables ,payables , raw
material, stores and spares, finished goods etc. but also helps in the review of the
operating cycle and the velocity of overall funds turnover.
The management information system not only helps in the efficient allocation of
resources to different organization of resources to different organization sub system
such as production, marketing, material etc but also elevates their resources-use
efficiency. The cost of working capital as well as procuring through minimizing the
investment in working capital as sound financial health for enterprise as also to
enhance the image of the company with short term financiries as bankers.
Inventory-
- Consumption
- Stocks
- Receipts
- Movements
- Turnover Ratios
- Item Wise
- Category Wise
- Location Wise
- Total -Unit
-Value
Debtors
- Sales
- Collections
- Outstanding
- Age wise position
- Customer wise/ category wise
- Turnover ratios
Cash
- Receipt
- Disbursement
- Balance
- Purchase
- Supplier Wise And Total
All the activities are not the responsibility of one function of the organization material
management department is response for all aspects and activities relating to inventory
management; sales and finance will have to provide adequate timely and controlled
information to all segments of working capital.
Ratios are relationships expressed in mathematical terms between figures which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures which are not at all connected with other.
A. LIQUIDITY RATIO
1. CURRENT RATIO
A relatively high current ratio is an indication that the firm is liquid and has the ability
to pay its current obligations in time as and when they become due. On the other
hand, a relatively low current ratio represents that the liquidity position of the firm is
not good and the firm shall not be able to pay its current liabilities in time without
facing difficulties.
Current assets
Current ratio =_____________________
Current liabilities
CURRENT RATIO
Years Current assets Current liabilities Current ratio
(in crore) (in crore) (in times)
2005 2604 1104 2.36
2006 4749 1362 3.49
2007 6072 1201 5.06
2008 5776 1372 4.21
2009 7673 3183 2.41
2010 5822 2192 2.66
Quick ratio is a more rigorous test of liquidity than the current ratio.
The term liquidity refers to the ability of a firm ton pay its short term obligations as
and when they become due.
A firm having a high quick ratio may not have a satisfactory liquidity
position of it has slow paying debtors
QUICK RATIO
Debtors and bills receivables are generally more liquid than inventories. Yet
there may be doubts regarding their realization into cash immediately or in time.
Hence there is opinion that the absolute liquid ratio should also e calculated together
with current ratio and acid test ratio so as to exclude even receivables from the current
assets and find out the absolute liquid assets.
The table shows the absolute liquid ratio which helps to know
whether absolute assets are adequate to pay the current liabilities.
TOLANI INSTITUTE OF MANAGEMENT STUDIES
B. TURNOVER RATIO
A firm sells goods for cash and credit debtors are created in final accounts.
Debtors are expressed to be converted into cash over a short period and they are
included in current assets.
The above table shows the debtors turnover ratio. The ratio decreased in 2006
because of high debtors. The ratio was increased during 2007 to 2009 due to reduced
debtors.
Profitability ratios:
A company should earn profit to survive and grow over long period of time. Basically
profit is difference between revenue and expenses over a period of time as profit is
ultimate output of company. Profitability ratios are calculated to measure the
operating efficiency of the company which helps the creditors and owners to know the
profitability of the firm.
In current assets also, there are two most important factors, which are
Debtors and Inventory, which affect working capital. In IFFCO Ltd.
Inventory and Debtors are efficiently managed to strengthen the
position of the organization both in short term and long terms.
The present status and levels of current assets is extremely good and therefore it
requires proper maintenance.
The current percentage of inventory is too high which is not good for operational
efficiency and sound working capital and thus, it need to be controlled by
using various inventory management techniques such as JIT of Kanban.
Another alternative would be to have varying stock or inventory levels during
the different seasons or even months and, thereby, altering the production to
suit such needs.
To meet the need of the nutrients essential for plant growth and good
productions use of fertilizer is a must as we know inorganic fertilizer
has its limitation use of organic fertilizer such as FYM composer green
manure etc is most essential for the sustainable agriculture fallowed by
use of inorganic fertilizers and the other agriculture practices and good
product. So IFFCO is always been the major part of the Indian
agricultural and fertilizer industries part and it promises with his work
to enhance the development and has always been given awards for his
contribution to the development of India.
Summary
Too little working capital is known as over-trading, and is common when a business
is starting up or is experiencing a period of rapid growth. As we saw in our William
Miller example, the level of sales might grow very quickly, but inadequate working
capital is available to support this growth. The situation will then arise whereby a
business may be profitable on paper but has insufficient funds available to pay debts
as they become due. In the short term this situation can be solved through a
combination of measures including:
However, in the long term a business is unlikely to survive without a combination of:
new capital from shareholders/proprietor;
better control of working capital;
The building up of an adequate capital base through retained profits.
BIBLIOGRAPHY:
Websites
www.iffco.nic.in
www.investopedia.com
www.fert.nic.