INTRODUCTION

Working capital is very important for the successful operation of every business organization. The goal of working capital management is to manage a firms current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. It has emphasized that a firm should maintain a sound working capital. It aims at protecting the purchasing power of assets and maximizing return on investment. Working capital is the excess of current assets over current liabilities. There are two concepts of working capital: (a) Gross working capital (b) Net working capital. Gross working capital is the total of all the current assets. Net working capital is the difference between current assets and current liabilities. The study of working capital management constitutes the following: 1. Working capital Policy 2. Cash Management 3. Inventory Management 4. Credit Management 5. Working Capital Financing. The importance of working capital is emphasized by the fact that the manner of administration of working capital determines to a great extent the success (or) failure of the overall operations of an organization.

Therefore financial manager spends a great deal of time on working capital management. Therefore, I have taken up a case study of HMWSSB (Hyderabad Metropolitan Water Supply and Sewerage Board) Hyderabad for analysis of working capital.

NEED OF THE STUDY:

Working capital management is one of the key areas of financial decision-making. It is significant because, the management must see that an excessive investment in current assets should protect the company from the problems of stock-out. position of the firm. The goal of working capital management is to manage the firm current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. If the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may be even forced into bankruptcy. Current assets will also determine the liquidity

OBJECTIVES OF THE STUDY:

To evaluate the Working capital performance of the company using Working capital ratios over a Five year period. To study the components of working capital in detail i.e. o Cash Management o Receivable Management o Management of Inventory To study the existing system of working capital management. To determine the flow of revenue from operations by taking into considerations on working capital related ratios.
To examine feasibility of present system of managing working capital.

To appraise the reason for the change in working capital position with help of statement of changes in working capital. To analyze the financial performance of the company with reference to working capital. To give some suggestions to the management based on the information studied.

SCOPE OF THE STUDY:

The scope of the study is to know the working capital position in Hyderabad Metropolitan Water Supply and Sewerage Board (HMWSSB). Simultaneously it is also proposed to study the strength and weakness in the working capital management.

METHODOLOGY AND DATABASE:

The present study is based on primary and secondary data collection method using
The Balance Sheet and Income & Expenditure account of

HMWSSB for last five years.

Annual Reports of HMWSSB.

Other information available in connection with the management of working capital.

Publications

& Text books in connection with financial

management written by different authors.

PERIOD OF THE STUDY:

Period of study confined for Five Years, 2000-01, 2001-02, 2002-03, 2003-04 & 2004-05 for the present study.

LIMITATIONS:
Due to time constraint, a comprehensive and meticulous study was not possible. As a result, there might be chances of errors creeping in. Owing to the busy schedule of the executives and the staff in the company, exhaustive primary data could not be collected, which might affect the results of the study. Recommendations of the study are only personal options. Hence judgments may not be considered as ultimate and standard solutions.

PROFILE OF HMWSSB
BACKGROUND
The water supply in Hyderabad was earlier managed by Hyderabad Metropolitan water works (HMWW). While water supply is usually within the municipal corporation mandate in Andhra Pradesh, HMWW was constituted as a Board under the Andhra Pradesh Hyderabad Metropolitan Water Supply and sewerage Act of 1982.That part of the act giving HMWW sanitary and sewerage responsibility was never declared effective and this responsibility remained with municipal corporation of Hyderabad (MCH).This act was repealed, following a change of government in 1983. HMWW was reconstructed by Government of Andhra Pradesh as a Board with a corporate status to be known as HMWSSB on November 1,1989 under the provisions of the Hyderabad Metropolitan water supply and sewerage Board Act,1989 (Act No.15 of 1989)of the Andhra Pradesh legislative Assembly. The new board assumed the responsibility for the management, Planning, Design, Construction, Operation and maintenance of water supply and sewerage.

Vision
Water Provide water of the highest quality. Round the clock.
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 At an affordable cost. Sewerage Total coverage of sewage disposal and treatment.

Mission
Seeks to provide its customers with a regular supply of wholesome water and a reliable service for the disposal of domestic sewage at reasonable costs. Recognizes the contribution made by its committed work force and undertakes to provide a safe working environment and to offer competitive remuneration packages. Recognizes its responsibility to protect the environment and undertakes to minimize any damage to flora and fauna and to take an active role in making redressal for any unavoidable damage.

CONSTITUTION
The Board was constituted on 1.11.1989 under the provisions of Hyderabad Metropolitan Water Supply and Sewerage Act 1989 (Act No.15 of 1989), with the following Functions & Responsibilities in the Hyderabad Metropolitan Area. The Supply of potable water including planning, design, construction, maintenance, operation & management of water supply system.

Sewerage, Sewerage Disposal and sewerage treatment works including planning, design, construction, maintenance, operation & management of all sewerage and sewerage treatment works.

The Board Honble Chief Minister of Andhra Pradesh Hon`ble Minister for Municipal Administration & Urban development Chairman A.P Pollution Control Board Principal Secretary, Irrigation Dept., Govt. of A.P Principal Secretary, Municipal Admin & Urban Development Govt. of A.P Secretary Finance (IF) Govt. of A.P Special Officer & Commissioner, Municipal Corporation of Hyderabad Director, Health, Govt. of A.P Director (Technical ), HMWSSB Director (Finance), HMWSSB Managing Director, HMWSSB

Chairman Vice Chairman Ex-Officio Director Ex-Officio Director Ex-Officio Director Ex-Officio Director Ex-Officio Director Ex-Officio Director Director Director Managing Director

It is the objective of HMWSSB to establish and operate the service delivery system to ensure adequate level of service to meet consumer requirement and confirm the established standards and norms in respect of service quality.

SAILENT FEATURES OF HMWSSB ACT

The salient features of the HMWSSB Act pertaining to the finance, operation, and collection of tariffs are as follows: General Principals of HMWSSBS Finances (Chapter III Section 8) HMWSSB can levy rates, fees, tariffs, rentals and other charges and may vary such charges from time in order to provide sufficient revenues for: 1. To cover operating expenses, taxes, interest payments, to provide for adequate maintenance and depreciation. 2. To meet repayments of loans and other borrowings 3. To provide for further capital works Powers of Board to borrow (chapter III section 12) HMWSSB may, with the previous sanction of the government and subject to the provisions of the Act and to such conditions as may be prescribed by rule made in this behalf, borrow any sum required for the purpose of the Act. The Government may empower HMWSSB to borrow by the issue of bonds or stocks and to make arrangements with bankers.
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The maximum amount, which HMWSSB may raise at any time as loans, shall be Rs. 10 crore, unless the Government, by notification, fixes a higher maximum amount. Guarantee of loans (chapter III section 13) The government may guarantee, in a manner as they think fit, the payment of principal and interest of any loan proposed to be raised by HMWSSB. Vesting of Works on Board (chapter IV section 17) All public reservoirs, tanks, wells, bore wells, pumps, pipes, and other works connected with the supply of water to the Hyderabad Metropolitan area, including the head works reservoirs and raising mains, and all bridges, buildings, machinery, works materials and other things connected therewith and all land not being private property) adjacent and appertaining to the same, shall vest in HMWSSB and be subject to its control. Construction of water works (chapter IV section 18) HMWSSB may construct, lay, or erect filtration plants, reservoirs, machinery, pipes or other works in any place in the state for supplying Hyderabad Metropolitan area with water.

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Payments to be made for water supplied (chapter IV- section 22) Notwithstanding any thing contained in the Act or any law, contract or other instrument, payment shall be made for all water supplied under this Act as such rates as prescribed by regulations. Water supply for Domestic consumption (chapter IV- section 23) The Public Health Engineer in charge of water supply may, on application by the owner or occupier of any building arrange, in accordance with rules and regulations, to supply water thereto for domestic consumption and use. Water supply for Non-Domestic Consumption (Chapter IV- section 26) The chief Engineer may supply water, for any purpose other than a domestic purpose on such terms and conditions consistent with this Act and the regulations made there under. Supply of water in bulk to the government, corporation and other local authorities (chapter IV-section 27) HMWSSB may, by agreement, supply water in bulk to the government including the central government, the corporation of any other local authority or any other public or private undertaking on such terms as to payment and as to the period and conditions of supply as may be agreed upon HMWSSB and such authority.

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Regulations regarding water supply (chapter IV- section 50) HMWSSB may, with the previous approval of the Government, make regulations to carry out the purposes specified in the chapter IV of the Act. HMWSSB may as per chapter IV among other things construct, lay, or erect filtration plant, reservoirs, machinery, conduits, pipes, or other works in any place in the state for supplying the Hyderabad Metropolitan area with water. Vesting of Sewerage and sewerage treatment works (chapter V-section 53) All public sewers and other sewerage disposals works and other sewerage works, materials and things appertaining thereto within or outside the Hyderabad Metropolitan area, shall vest in HMWSSB, and be subject to its control. Charges towards the use of sewerage cess (chapter V-section 55) Every occupier of both domestic and non-domestic premises shall pay to HMWSSB at the as may be prescribed by the rules, to defray the capital cost of sewerage and sewage treatment works undertaken by HMWSSB.

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ORGANISATION
The Managing Director is the Chief Executive of the HMWSSB. Each principal functions viz operations and maintenance (Technical), projects, Finance and Accounts and personnel and Administration is headed by a director, who in turns report to the managing Director. The Director (Technical) and Director (Finance and Accounts) are nominated to the Board of Directors of HMWSSB. Finance and Accounts Department The Director is assisted by two Chief General Managers One each for Finance and Accounts. Operations and maintenance Department Next top the level of Directors (Tech.) are Chief General Managers (Engg.), who are placed in charge of circles. The operations and maintenance group is split into following circles viz, Operations and Maintenance 4 Circles Construction ( Other than World Bank Assisted Project ) 1 circle The circles are divided into divisions based on the criteria of either the area for service distribution or grouping of subjects or activities such as quality Assurance and Testing and EDP- placed under the charge of a General Manager. A General Manager may either be a head of a group of Maintenance service delivery units in a specific geographic area or a support service activity unit such as material control/quality assurance or a specific function such as Survey and Investigation.

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The Division under the Operation and Maintenance and other projects groups are further split into sub-divisions each under the charge of a Deputy General Manager. The term sub-divisions connotes a group of service delivery sections within a contagious area or group of activities relate to project implementation. The sub-divisions are finally split into sections placed under the charge of managers. The section constitutes the first level service node in respect of water supply and sanitation. Projects Department The project Groups is split into 3 circles: Project Construction Circle I, which is headed by two General Managers, which looks after project like Mega City, etc. Project Construction Circle II, Which is headed by two General Managers, is looking after a part of Krishna Water Supply Project more specifically pipelines and water treatment plants. Project Construction Circle III also looks after Krishna Water Supply Project and manages packages which are not covered by Project Construction Circle II In addition to this General Manager (Quality Control) reports directly to director (Projects). For managing the bidding process, General Managers (Bids) assist Director (Projects). Personnel and Administration The Director (Personnel) is assisted by a chief General Manager.

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The Organization Chart of HMWSSB is as follows:

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 All the consumer needs are addressed at single point, Empowerment of first level manager A reduced lead time for decision making and Greater diversification at the top level function specialization leading to professionalization and online control of Operations & Management, Personnel and Revenue management.

OPERATIONS OF HMWSSB
HMWSSB at present covers an area of 1547 Sq.Km, of which the present water supply service area is 688.2 Sq.Km. The service area includes Municipal Corporation of Hyderabad (MCH) 172.6 Sq.Km., surrounding municipalities 418.56 Sq.Km, Osmania University and Cantonment 43.02 Sq.Km. And balance small panchayath areas. According to the census of 2001, the population in the service area is about 55.33 lakh.

MANPOWER
HMWSSB has at present adequate manpower employed that is capable of managing the operations and maintenance of existing system as additional system under the new project. The staff strength of HMWSSB as on June 2003 is as follows:

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S. No Designation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Strength Sanctioned Incumbency 4 10 27 74 180 38 21 45 38 202 559 252 415 674 2690 2 6 2 1 1 5241

Directors 4 Chief General Managers 10 General Managers 29 Dy. General Managers 94 Managers 300 Technical Officers 40 Senior Officers 25 Officers 52 Sr. Gr. Technicians 50 Technicians Gr.1 237 Technicians Gr.2 665 Sr. Gr. Assistants 318 Assistants 463 Special Purpose Employee 805 General Purpose Employee 2939 Forest Department 7 Police Department 6 Medical department 4 Others * Asst. Labor Comm. 1 * Estate Officer 1 Total: 6050 *As per sanction of State Government of Andhra Pradesh

HMWSSB has also set up a Metro Staff Training College at a cost of Rs. 10 Million at Hydernagar, 15 km away from Hyderabad on Hyderabad-Bombay NH9 on 31st October 1998. The objectives of training programmes provided by the college are: i. ii. To upgrade the skills of the employees at all levels. Creating awareness among the employees about the changing technologies.

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iii. iv. v. vi.

Inculcate involvement and collective participation of the staff. Improving the productivity and getting the very best out of the employees. Exploring practical solutions to the problems affecting employees performance. Equipping the employees to meet the changing needs and aspirations of the customers.

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FINANCIAL PERFORMANCE OF HMWSSB Income and Expenditure Account: A brief summary of income and expenditure account of HMWSSB from financial year 2000-2001 to 2004-2005 is given below: (Rs. in Crore)
PARTICULARS INCOME Water Cess Sewerage Cess New Connection Charges Sub total: Interest Others Sub total: TOTAL: EXPENDITURE Operating Expenses Staff Cost Administration TOTAL: Operating Profit(PBDIT) Finance Charges PBDT Depreciation PBT Less: Transfer to Reserve Adj: Upto the end of PreYear Carried to Balance Sheet 2000-2001 2001-2002 2002-2003 92.35 19.37 24.62 136.34 0.08 2.27 2.35 138.69 92 17.11 26.85 135.96 0.19 5.8 5.99 141.95 130.1 23.18 52.37 205.65 0.23 6.66 6.89 212.54 2003-2004 138.9 24.9 43.12 206.92 1.14 8.68 9.82 216.74 2004-2005 156.21 27.49 67.4 251.1 4.82 3.48 8.3 259.4

68.15 55.78 14.12 138.05 0.64 0.28 0.36 13.41 -13.05 0 -18.17 -31.22

88.14 60.78 13.02 161.94 -19.99 13.52 -33.51 14.44 -47.95 0 -31.22 -17.52

106.9 60.46 14.9 182.26 30.28 17.66 12.62 15.7 -3.08 0 -17.52 5.29

126.6 63.95 15.24 205.79 10.95 36.31 -25.36 16.13 -41.49 0 5.29 2.64

145.78 69.34 15.23 230.35 29.05 44.65 -15.6 30.9 -46.5 0 2.64 21.34

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INCOME: The following gives the break up of the income of HMWSSB for last 5 years: (Rs. in crore)
2000-2001 INCOME Water Cess Sewerage Cess New Connection Charges Interest Others TOTAL: YOY Increase in income Water Cess Sewerage Cess New Connection charges TOTAL Income: 92.35 19.37 24.62 0.08 2.27 138.69 2001-2002 92 17.11 26.85 0.19 5.8 141.95 2002-2003 130.1 23.18 52.37 0.23 6.66 212.54 2003-2004 2004-2005 138.9 24.9 43.12 1.14 8.68 216.74 156.21 27.49 67.4 4.82 3.48 259.4

-0.38% -11.67% 9.06% 2.35%

41.41% 35.48% 95.05% 49.73%

6.76% 7.42% -17.66% 1.98%

12.46% 10.40% 56.31% 19.68%

* Sewerage cess is assumed as 17% of the water cess.

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EXPENDITURE: The following gives the break up of the expenditure of HMWSSB for last 5 years: (Rs. in crore)
PARTICULARS Expenses Operating Expenses Staff Cost Administration Expenses Depreciation Finance Charges YOY increase in expenses Operating Expenses Staff Cost Administration Expenses Depreciation Expenses as % of Turnover Operating Expenses Staff Cost Administration Expenses Depreciation 2000-2001 68.15 55.78 14.12 13.41 0.28 2001-2002 88.14 60.78 13.02 14.44 13.52 2002-2003 106.9 60.46 14.9 15.7 17.66 2003-2004 126.6 63.95 15.24 16.13 36.31 2004-2005 145.78 69.34 15.23 30.9 44.65

29.33% 8.96% -7.79% 7.68%

21.28% -0.53% 14.44% 8.73%

18.42% 5.77% 2.28% 2.74%

15.15% 8.43% -0.07% 91.57%

49.14% 40.22% 10.18% 9.67%

62.09% 42.82% 9.17% 10.17%

50.30% 28.45% 7.01% 7.39%

58.41% 29.51% 7.03% 7.44%

56.20% 26.73% 5.87% 11.91%

# The figures are un Audited and Provisional Operating Expenses:

Operating Expenses Power Chemicals Operations & Maintenance TOTAL: 2000-2001 46.96 2.15 0.84 49.95 2001-2002 49.52 2.07 9.32 60.91 2002-2003 54.98 2.25 12.7 69.93 2003-2004 51.47 2.72 17.54 71.73 2004-2005 85.44 2.85 11.36 99.65
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# Power accounts for around 60% of the total operating Expenses.

Government Aid and Grant

The Government grant is received on the basis of the proposal submitted by the HMWSSB and as determined by the Government depending upon the fund allocated for the purpose. HMWSSB sends the proposal on a yearly basis and the State Government on the basis of availability of funds grants the funds.

Profitability
The tariff was revised in June 2004, after a gap of 2 years. During these 2 years there has been substantial increase in the operation and maintenance costs such as cost of power, fuel, chemicals, implementation of salary revision, periodical dearness allowance increases, etc. Consequently the revenue fell short of the increased cost, which resulted in poor performance of HMWSSB in the past. However with the increase in the tariff from June 2002 the revenues have improved in the year 2004-2005. This can be verified from the fact that the water and sewerage cess billed for the year 2004-05 is Rs 184 Crore. as against Rs 160 Crore Billed for the year 20032004.

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Analysis of the Balance Sheet for a period of 5 years:

PARTICULARS Net Worth: Contribution from GoAP Towards net value of assets In Cash by way of Grants-in-aid Improvement Reserve Capital Reserve Sub-total Less/Add: Cumulative Balance of Income and Expenditure TOTAL Represented By Fixed Assets At Cost Less: Depreciation Net Depreciated Value Capital work-in-Progress Sub-Total Investments Shares of AP Gas Power Corp. ltd Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Balances Loans & Advances Sub-total Less: Current 2001-2002 1,443,992,37 9 5,028,283,43 5 312,757 6,472,588,57 1 -175,285,581 6,297,302,99 0 6,079,614,34 5 797,006,286 5,282,608,05 9 1,492,402,89 1 6,775,010,95 0 22,500,000 83,779,116 1,338,068,72 6 245,553,923 116,004,555 1,783,406,32 0 1,184,770,91 2002-2003 1,443,992,37 9 5,444,224,43 5 312,757 6,888,529,57 1 52,895,220 6,941,424,79 1 6,544,509,22 3 954,073,860 5,590,435,36 3 1,399,580,06 2 6,990,015,42 5 22,500,000 101,026,474 1,534,104,22 1 1,755,649,03 7 244,275,373 3,635,055,10 5 1,525,575,92 2003-2004 2004-2005

1,443,992,379 6,484,954,185 312,757

1,695,003,379 8,685,390,195 312,757 59,000,000

7,929,259,321 10,439,706,331 26,389,836 213,353,226

7,955,649,157 10,653,059,557

6,760,423,991 13,150,061,884 1,115,440,101 1,424,472,698 5,644,983,890 11,725,589,186 5,556,591,704 2,882,975,507 11,201,575,59 4 14,608,564,693 261,000,000 55,226,675 1,694,972,543 2,906,083,349 201,284,912 4,857,567,479 1,322,902,366 261,000,000 106,042,502 1,801,812,546 2,216,303,530 328,465,038 4,452,623,616 2,744,628,747

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Liabilities & Provisions Net Current Assets TOTAL

9 598,635,401 7,396,146,35 1

3 2,109,479,18 2 9,121,994,60 7 3,534,665,113 1,707,994,869

14,997,240,70 7 16,577,559,562

Less: Liabilities Loan from Govt. of A.P Loan from LIC Loan from HUDCO Loan from BANKS Bonds for Krishna Project Sub-total TOTAL

10,000,000 25,963,640 1,062,879,721

267,600,000 24,109,095 1,888,860,72 1

519,337,000 22,254,550 1,000,000,000 5,200,000,000 300,000,000

467,600,000 20,400,005 ------5,135,500,000 300,000,000 5,923,500,005

1,098,843,361 6,297,302,990

2,180,569,81 6 6,941,424,79 1

7,041,591,550

7,955,649,157 10,654,059,557

Current Assets:
The Current Assets of HMWSSB show a high amount of Debtors. According to HMWSSB, of the total amount of customers billing in a year, approximately 10% billing remains out-standing (Debtors). However, of these 10%, the board is not able to recover the Dues from all the Debtors even in the subsequent year leading to increase in the total outstanding due from the debtors. However, the board has initiated recovery proceedings to reduce the amount due from the debtors. Since the outstanding Dues are recoverable as arrears of land revenues, no provisions are envisaged.

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WORKING CAPITAL MANAGEMENT THEORITICAL FRAME WORK

This chapter mainly discuss about the different concepts involved in the Working Capital Management. The emphasis has been given to theoretical back ground of related items of working capital management viz., Meaning of working capital, Determinants of working capital, Importance of working capital, Kinds of working capital, working capital cycle, components of working capital, Concepts of working capital management, Importance of working capital management, means to improve working capital management, Inventory management, Receivables management and possible problems with improved working capital management.

Introduction:
Most companies concentrate their managerial effort on controlling profit. They try to increase sales revenue, reduce their production cost and control their overheads. Operational budgets are drawn up, standard costs
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are set and considerable effort is expended on identifying and rectifying variances of actual results against these budgets and standards. Managing the area of working capital can make the difference between business survival and business failure.

Working Capital:
Working Capital is the name given to the "short-term" area of the balance sheet. Working Capital includes the following items:

Stock - stocks of raw materials, partly completed production and finished goods awaiting sale

Debtors - amounts owed to the company, mainly from customers in respect of sales made on credit

Creditors - amounts owed by the company, mainly to suppliers of raw materials, services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax demands, unpaid dividends and other items

Cash - bank balances, cash holdings and short term investments

Working Capital includes the current assets and current liabilities areas of the balance sheet. Working Capital can be called by its alternative name "Net Current Assets".

Determinants of Working Capital:

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There are no set rules (or) formulae to determine the working requirements of a firm. The corporate management has to consider a number of factors to determine the level of working capital. The amount of working capital that a firm would need is affected not only by the factors associated with the firm itself but also by economic, monetary and general business environment. Among the various factors, the following are the important ones.

Importance of Working Capital:

As discussed earlier, the net working capital of a business is its current assets less its current liabilities. Current Assets include: - Stocks of raw materials - Work-in-progress - Finished goods - Trade debtors - Prepayments - Cash balances Current Liabilities include: - Trade creditors - Accruals - Taxation payable

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- Dividends payable - Short-term loans

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is to keep its workforce and ensure its supplies. Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity must be maintained in order to ensure the survival of the business in the long-term as well. Even a profitable business may fail if it does not have adequate cash flow to meet its liabilities as they fall due. Therefore, when businesses make investment decisions they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc, but must also take account of the additional current assets that are usually involved with any expansion of activity. Increased production tends to engender a need to hold additional stocks of raw materials and work in progress. Increased sales usually mean that the level of debtors will increase. A general increase in the firms scale of operations tends to imply a need for greater levels of cash.

WORKING CAPITAL MANAGEMENT IN HMWSSB:-

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Working capital management as said N.J. Yasasway is not a one shot affair like purchasing a piece of capital equipment. It is a daily problem requiring continues attention. Working capital management in HMWSSB is the collective responsibility of various personnel. The table 1 below indicates the trend analysis of gross working capital. The components of gross working capital along with their respective percentage to total current assets have been calculated for the years 2001-2005 is as follows.

GROSS WORKING CAPITAL TREND OF HMWSSB FROM 2000-01 TO 2004-05 is as follows:

PARTICULARS 2000-2001 2001-2002 2002-2003

(in Rupees)
2003-2004 2004-2005

Components of Gross Working Capital

CURRENT ASSETS * Inventories * Sundry Debtors *Cash and Bank Balances *Loans and Advances Gross Working Capital 47,094,557 886,446,140 83,779,116 1,338,068,726 101,026,474 1,534,104,221 55,226,675 1,694,972,543 106,042,502 1,801,812,546

89,810,912

245,553,923

1,755,649,037

2,906,083,349

2,216,030,530

99,791,122

116,004,555

244,275,373

201,284,912

328,465,038

1,123,142,731

1,783,406,320

3,635,055,105

4,857,567,479

4,452,350,616

Funds flow analysis show how they have been employed. The statement of variations in working capital is based fundamentally on the same approach used for the preparation of funds flow statement. This technique helps to
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analyze change sin working capital components between two dates. The comparison of current assets and current liabilities as shown in balance sheet at the beginning and end of a specified period, shows changes in each type of current assets, as well as the sources from which working capital has been obtained. The funds flow technique of working capital does not clarify the significance of movements in the working capital structure. Further, only the internal management in its control of working capital can use this. Moreover, it does not throw on the questions weather the working capital is being used most effectively; weather the current financial position of the enterprise has improved. The ratio technique of working capital analysis is the most commonly used technique, which deals with the circulation and liquidity aspects of working capital analysis. In this technique, for these aspects of working capital analysis certain ratios are computed and then results are drawn on the basis of the trends shown by them against those fixed as quite posts. An attempt has been made below to indicate the various ratios, which are included in analyzing the circulation and liquidity aspects of working capital position of an enterprise. CALCULATIONS OF NET WORKING CAPITAL:(in Rupees)
PARTICULARS CURRENT ASSETS * Inventories * Sundry Debtors 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

47,094,557 886,446,140

83,779,116 1,338,068,726

101,026,474 1,534,104,221

55,226,675 1,694,972,543

106,042,502 1,801,812,546

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*Cash and Bank Balances *Loans and Advances Total CURRENT ASSETS CURRENT LIABILITIES *Creditors *Un spent Grants *Deposits for Workers *Other Liabilities Total CURRENT LIABILITIES Net working Capital

89,810,912 99,791,122

245,553,923 116,004,555

1,755,649,037 244,275,373

2,906,083,349 201,284,912

2,216,030,530 328,465,038

1,123,142,731

1,783,406,320

3,635,055,105

4,857,567,479

4,452,350,616

33,825,295 13,747,000 359,352,341 486,218,423

32,575,184 9,673,000 662,913,477 479,609,258

20,724,806 129,944,085 782,965,924 591,941,108

22,370,083 164,702,000 858,884,307 276,945,976

1,260,000,000 234,158,665 907,392,069 343,078,013

893,143,059 229,999,692

1,184,770,919 598,635,401

1,525,575,923 2,109,479,182

1,322,902,366 3,534,665,113

2,744,628,747 1,707,721,869

INTERPRETATION:From the above table, it can be observed that the working capital of HMWSSB has increased from Rs. 229,999,692 in the year 200001 to 1,707,721,869 in the year 2004-05, indicating an increase in the funds available to the company for day to day operations of the board. The increase in the working capital of the Board can be attributed to the following reasons:
The total loans and advances given by the Board have increased from

Rs. 99791122 to Rs. 328465038.

The cash & bank balances of the Board however have increased from

Rs. 89810912 to Rs. 2216030530.

The total current assets of the Board have increased from Rs.

1,123,142,731 to Rs. 4,452,350,616.

The Board has reduced the amount of credit outstanding from

33,825,295 to 22,370,083 in the years 2000-01 and 2003-04

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respectively but in the year 2004-05 the creditors increased to 1,260,000,000 due to the implementation of the Krishna Drinking Water Supply Project for which it has borrowed loans. These were some of the factors attributing to the increase in the Boards working capital during the financial years 2000-01 to 2004-05.

WORKING CAPITAL RATIOS OF HMWSSB

Ratio analysis is a widely used tool of financial analysis. It is defined as the systematic use of ratio to interpret the financial statement so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined.

TYPES OF RATIOS:
Ratios can be classified, for the purpose of exposition, into four broad groups: Liquidity ratios Turnover ratio

33

 Profitability ratios

LIQUIDITY RATIOS:
The liquidity ratios measure the ability of a firm to meet its short-term obligations and reflect the short-term financial strength/solvency of a firm. The ratios, which indicate the liquidity of a firm, are: Current Ratio Acid Test / Quick Ratio

1. CURRENT RATIO:
The current ratio is the ratio of total current assets to total current liabilities. It is obtained by dividing current assets by current liabilities.

34

Current assets Current Ratio = -----------------------Current liabilities The higher the current ratio, the larger the amount of rupees available per rupee of current liability, the more the firms ability to meet current obligations and greater the safety of funds of short- term creditors. Thus current ratio, in a way is a measure of margin of safety to the creditors. Although there is no hard and fast rule, conventionally, current ratio of 2:1 i.e., for every one rupee of current liabilities, there should be two rupees of current assets, is considered satisfactory. CURRENT RATIO
(Rs. in lakh)

YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

CURRENT ASSETS 11231 17834 36351 48576 44524

CURRENT LIABILITIES 8931 11848 15256 13229 27446

RATIO 1.26 1.51 2.38 3.67 1.62

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CURRENT RATIO
4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 3.67 2.38 1.26 1.51 1.62

RATIO

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 YEAR

Interpretation:
The current ratio of HMWSSB is fluctuating between 1.26 and 1.62 from the years 2001 to 2005. It was highest in the fiscal year 2003-04 at 3.67. In all the years considered for the study the current ratio is above the standards i.e., 1.2. Therefore the liquidity position of the company is very good.

2. ACID TEST OF QUICK RATIO:

The acid test ratio is the ratio between quick current assets and current liabilities and is calculated by dividing the quick assets by the current liabilities. The term quick assets refer to the can be converted into cash immediately. By exclusion of inventory and pre-paid expenses from current assets we get quick current assets.

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Quick assets Acid test ratio = ------------------Current liabilities Conventionally, a quick ratio of 1:1 i.e., for every rupee of current Asset there should be a rupee of current liability is considered satisfactory.

QUICK RATIO
(Rs. in lakh)
YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 QUICK ASSETS 10760 16996 35340 48023 43463 CURRENT LIABILITIES 8931 11848 15256 13229 27446 RATIO 1.20 1.43 2.32 3.63 1.58

A CID TEST O RQ UICK RA TIO

4.00 3.50 3.00 RATIO 2.50 2.00 1.50 1.00 0.50 0.00 20002001 20012002 20022003 Y E A R 20032004 20042005 1.20 1.43 2.32 1.58 3.63

37

Interpretation:
Quick ratio is referred to as a measurement of a firms ability to convert its current assets quickly into cash in order to meet its current liabilities. Thus, it is a measure of quick liquidity. The quick ratio is a rigorous measure of a firms ability to service short term liabilities. Generally a quick ratio of 1:1 is considered satisfactory as a firm can easily meet all current claims. In context of HMWSSB the quick ratio is above the satisfactory level in all the years from 2000-2005. It is a good sign to the company that the liquid assets are quickly converted in to cash and thereby meet the current liabilities. But in the year 2004-2005 the ratio has decreased from 3.63 to 1.58 due to the increase in the liabilities.

TURNOVER RATIOS:
Another way of examining the liquidity is to determine how quickly certain current assets are converted into cash. The ratios to measure these are referred to as turn over ratio. Relevant turnover Ratios are: INVENTORY TURNOVER RATIO DEBTORS TURNOVER RATIO TOTAL ASSET TURNOVER RATIO
38

1. INVENTORY TURNOVER RATIO:

It is computed by dividing the cost of goods sold by the average inventory. Sales Inventory turn over ratio = _____________________ Inventory This ratio indicates how fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast and stays on the shelf or in the warehouse for a long time.

INVENTORY TURNOVER RATIO

(Rs. in lakh)

YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

TURN OVER 11172 10911 15329 16381 18370

INVENTORY 470 837 1010 552 1060

RATIO 23.77 13.04 15.18 29.68 17.33

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INVENTORY TURNOVER RATIO

35.00 30.00 25.00 RATIO 20.00 15.00 10.00 5.00 0.00 20002001 20012002 20022003 YEAR 20032004 20042005 13.04 23.77 15.18 17.33 29.68

Interpretation:
The inventory turnover ratio measures how quickly the inventory is sold. It is a test of efficient inventory management. In general, a high inventory ratio is better than a low ratio. A high ratio implies good inventory management. Similarly a very low inventory turnover ratio is dangerous. It signifies excessive inventory or over investment in inventory. Thus, a firm should have neither too high nor too low inventory turnover ratio so as to avoid both stock out costs associated with a high ratio and the cost of carrying excessive inventory with a low ratio. The inventory turnover ratio is very good, as it is high in all the years. This shows how effectively the inventory is managed and how quickly it is sold. The inventory turnover shows gradual and constant conversion of inventory in to cash. The ratio is very high in the year 2003-04.

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2. DEBTORS TURNOVER RATIO:

It is determined by dividing the net credit sales by average debtors out standing during the year. Thus, Net Credit sales Debtors turnover ratio = ______________________ Average Debtors This ratio measures how rapidly debts are collected a high ratio is indicative of shorter time lag between credit sales and cash collections. A low ratio shows that debts are not being collected rapidly.

DEBTORS TURNOVER RATIO

(in rupee)
YEAR 2001-2002 2002-2003 2003-2004 2004-2005 SALES 1091116512 1532923527 1638104777 1837007922 AVERAGE DEBTORS 1112257433 1436086474 1614538382 1748392545 RATIO 0.98 1.07 1.01 1.05

41

DEBT O RS T URNO VER RAT IO

1.10 RATIO 1.05 1.00 0.95 0.90 2001-2002 2002-2003 2003-2004 2004-2005 YE AR 0.98 1.07 1.01 1.05

Interpretation:
This ratio indicates the speed with which accounts receivable are being collected. The higher the turnover ratio and the shorter the average collection period, the better is the trade credit management and the better is the liquidity of the debtors, as short collection period and high turnover ratio imply prompt payment on the part of debtors. On the other hand, low turnover ratio and long collection period reflect delay payment by debtors. Receivables of HMWSSB was high in the year 2003-04 but there is sudden fall in the successive years due to debtors are not able to pay the amount back so proper care should be taken in case of debtors. In the projected year it is decreased where compared to preceding years.

3. TOTAL ASSET TURNOVER RATIO:

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The total asset turnover ratio is defined as net sales divided by average total assets. This ratio measures how efficiency assets are employed overall. This ratio shows the firms ability of generating sales from all the financial resources committed to the firm.

Sales Total asset turnover ratio = ----------------------Total Assets TOTAL ASSET TURNOVER RATIO (in rupee)
years Sales Total assets Total asset turnover ratio 2001 1117249980 7441156475 0.15 2002 1091116512 8580917270 0.13 2003 1532923527 10647570530 0.14 2004 1638104777 16320143070 0.10 2005 1837007922 19321915310 0.10

ASSET TURNOVER RATIO

0.20 VALUE 0.15 0.10 0.05 0.00 2000-01 2001-02 2002-03 2003-04 2004-05 0.15 0.14 0.10 0.10

0.13

Interpretation:
The total asset turnover ratio of the company in the year 2001 is 0.15% and 0.10% in the year 2005, as the ratio decreased there will be

43

less revenue generated per rupee of total investment in assets. The ratio shows how the assets are used ineffectively.

PROFITABILITY RATIOS:
The term profitability may be defined as the ability of a given investments to earn a return from its use. The profitability ratios are calculated to measure the operating efficiency of the Boards, creditors and owners are also interested in the profitability of the firm. Creditors want to get interest and repayment of principal and owners want to get a reasonable return on their investment. This is possible when the company earns enough profits.

1. GROSS PROFIT MARGIN:

Gross profit margin or the operating profit ratio is the first profitability ratio in relation to sales. It is defined as operating profit or EBIT to Sales.

Operating profit ratio =

Earnings before interest taxes (EBIT) __________________________________ Sales

OPERATING PROFIT RATIO

(in rupee)

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YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005

EBIT -130486455 -213267488 228180801 105779366 186963390

SALES 1117249980 1091116512 1532923527 1638104777 1837007922

RATIO -0.12 -0.20 0.15 0.06 0.10

OPERATING PROFIT RATIOS

0.20 0.10 RATIOS 0.00 -0.10 -0.20 -0.30 -0.12 -0.20
00-01 01-02 02-03 03-04 04-05

0.15

0.06

0.10

INTERPRETATION:
The operating profit ratio of HMWSSB has decreased from the year 2000-01 to the next year i.e. 2001-02. It was at -0.12 in the year 2000-2001 and has decreased to -0.20 in the year 2001-2002. The operating profit increased in the year 2002-03 and in the years 2003-04 & 2004-05 it was positive but they were less compared to the given year 2002-03 because in the year 2003-04 it implemented KDWSP to meet the growing demand of public.

2. NET PROFIT MARGIN

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Net profit is obtained when the operating expenses, interest and tax are subtracted from the gross profit. The net profit margin ratio is measured by dividing profit after tax by sales. This ratio measures the overall firms ability to turn each rupee sales in to net profit. This ratio also indicates the firms capacity to with stand adverse economic conditions. Earnings after interest and taxes (EAT) ___________________________________ Sales

2. Net profit ratio

NET PROFIT RATIO

(in rupee)
YEAR 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 EAT -233607340 -344571309 64931619 -233602747 -257879780 SALES 1117249980 1091116512 1532923527 1638104777 1837007922 RATIO -0.21 -0.32 0.04 -0.14 -0.14

NET PROFIT MARGIN

0.10 0.00 RATIO -0.10 -0.20 -0.30 -0.40 -0.21 -0.32 00-01 01-02 02-03 03-04 04-05 -0.14 -0.14 0.04

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INTERPRETATION:
The net profit ratio of HMWSSB has been negative in all the years of study from 2001-05 except in the year 2002-03. Though HMWSSB has done well to reduce their losses and convert them into profit by the year 2002-03, it has to implement KDWSP project in the year 2003-04 so the net profit ratio decreased subsequently.

3. NET INCOME TO ASSET RATIO:

The net income to asset ratio is the ratio of profit after tax to total assets. Profit after tax Net income to asset ratio = ------------------------------Total Assets (in rupee)
Years PAT Total assets Net income ratio 2001 -233607340 7441156475 -0.03 2002 -344571309 8580917270 -0.04 2003 64931619 10647570530 0.01 2004 -233602747 16320143070 -0.01 2005 -257879780 19321915310 -0.01

NET INCOME TO ASSET RATIO

0.01 0.00 VALUE -0.01 -0.02 -0.03 -0.04 -0.05 -0.03 -0.04 2000-01 2001-02 2002-03 2003-04 2004-05 -0.01 -0.01 0.01

47

INTERPRETATION:
The net income to asset ratio of HMWSSB has been negative in all the years of study from 2001-05 except in the year 2002-03 i.e. -0.03 and -0.04 in the years 2000-01 to 2001-02 respectively, then it increased to 0.01 in the year 2002-03 and again it decreased to -0.01 in both the years 2003-04 and 2004-05.

4. RETURN ON INVESTMENT:
ROI is the multiple to net profit ratio and capital employed turnover ratio. The net profit ratio shows the efficiency to earn profits and capital employed turnover ratio is a measure of operating efficiency. ROI examines the relationship between the net profits and the capital employed.

Return on investment =

PBIT ------------------Total Assets

RETURN ON INVESTMENT (in rupee)

Year PBIT Total assets Return on investment 2001 -130486455 7441156475 -0.02 2002 -213267488 8580917270 -0.02 2003 228180801 10647570530 0.02 2004 105779366 16320143070 0.01 2005 186963390 19321915310 0.01

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RETURN ON INVESTMENT
0.03 0.02 VALUE 0.01 0.00 -0.01 -0.02 -0.03 2000-01 2001-02 2002-03 2003-04 2004-05 -0.02 -0.02 0.02 0.01 0.01

INTERPRETATION: The return on investment of the Board is -0.02 in the years 2000-01 and 2001-02 and then increased to 0.02 in the year 2002-03 and again decreased to 0.01 in the years 2003-04 and 2004-05.

CASH MANAGEMENT
Importance of Cash Management:
Cash, the most liquid asset, is of vital importance to the daily operation of business firms. Crucial for the solvency of the business, it is referred to as
49

the life blood of a business firm. Cash management has to be organized into three specific areas: 1. Planning, policies and decisions 2. Funds management 3. Control information All three functions of cash management are closely inter linked. Planning sets the organizational goals and objectives. Funds have then to be mobilized to satisfy these goals. Subsequently the utilization of funds has to be closely monitored and controlled so that actual performance is in line with what has been planned. Cash reports, providing a comparison of actual developments with forecast figures are helpful in controlling and revising cash forecasts on a continuous basis. The important cash reports are: The daily cash report The daily treasury report The monthly cash report

MANAGEMENT OF CASH IN HMWSSB:

They determine the amount of cash they would like to hold by means of cash budget. They ascertain the cumulative position of cash at all

50

locations on monthly basis, if any cash balance is available with them for more than period of a month then they deposit the cash in the bank. Components of cash:
Particulars Cash & Bank Balances a) Cash in Hand b) Cash balance with banks In Current account In Deposit account Total 2002 2003 2004 2005

1230890 242718360 1604673 245553923

340826 623962525 1131345686 1755649037

350998 2116044529 789687822 2906083349

376826 1102670215 1112983489 2216030530

Trend analysis of Cash to Net Working Capital:

Particulars Cash Net working Capital Cash to Net Working Capital 2002 245553923 598,635,401 2.44 2003 1755649037 623,962,525 0.36 2004 2906083349 2,116,044,529 0.73 2005 2216030530 1,102,670,215 0.50

Cash as a percentage of net working capital has decreased from 2.44% in the year 2002 to 0.50% in the year 2005.

Trend analysis of Cash Turnover Ratio:

Particulars Sales Cash Cash Turnover Ratio 2002 1091116512 245553923 4.44 2003 1532893527 1755649037 0.87 2004 1638104777 2906083349 0.56 2005 1837007922 2216030530 0.83

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Cash turnover ratio and cash in terms of days operational requirement judged inadequacy of cash to meet the operational activities. Cash turnover ratio was favorable in the year 2002 at 4.44 times and it decreased to 0.56 in the year 2004. The low cash turnover ratio indicates the ineffective cash management.

RECEIVABLES MANAGEMENT Introduction:

Business firms often sell on credit to facilitate sales. It is valuable to customers as it augments their resources. The credit period extended by
52

business firms usually ranges from 15 to 60 days. When goods are sold on credit, finished goods get converted into accounts receivables. The term receivable is defined as debt owed to the firm by the customers arising from sales of goods (Or) services in the ordinary course of business. Accounts receivable is the major and second most important component of working capital. Receivables management deals with the formulation and implementation of credit and collection policy. The three important decision variables of credit are as under: 1. Credit terms 2. Credit Standards 3. Collection Policy Credit Term: An agreement under which a firm sells on credit to its customers is known as credit term. It has two components: (a) Credit Period (b) Cash Discount Credit Standard: The term credit standard represents the basic criteria for extension of credit to the customers. Collection Policy: It refers to the procedures a firm follows to collect payment of past due accounts. The collection policy should therefore aim at accelerating collections from slow payers and reducing and bad debts.

53

The major terms of payment in practice are cash terms, open account, consignment, draft & letter of credit. Proper assessment of credit risks is an important element of credit management. Three broad approaches are used for credit evaluation. Traditional credit analysis, numerical credit scoring & discriminate analysis. Objectives of Receivables management: To maintain an optimum level of investment in receivables. To maintain optimum volume of sales. To control the cost of credit allowed & to keep it at the minimum possible level. To keep down the average collection period. To obtain benefit from the investment in debtors at optimum level.

CREDIT MANAGEMENT IN HMWSSB:

Sales policy: Most of the sales are on credit basis. The board allows credit to its consumers, and the time lag for the payment is for about 30 to 45 days. The board provides their services to the public of Hyderabad and secunderabad.

54

Credit period: The credit period is for about 30 to 45 days.

PARTICULARS * Sundry Debtors sub Total: * Loans & Advances Loans and Adv to staff Advances to others Deposits sub Total: 2000-2001 886,446,140 886,446,140 2001-2002 1,338,068,726 1,338,068,726 2002-2003 1,534,104,221 1,534,104,221 2003-2004 1,694,972,543 1,694,972,543 2004-2005 1,801,812,546 1,801,812,546

29250524 35359023 35181575 99791122

27154447 48367300 40482808 116004555

27704746 172367902 44202725 244275373

20622562 91151742 89510608 201284912

21621294 159766704 147077040 328465038

TOTAL :
986,237,262 1,454,073,281 1,778,379,594 1,896,257,455 2,130,277,584

Receivables in the annual reports of the company under study are shown in to two categories and also analyzed in two parts, viz book debts/ accounts receivable/ sundry debtors and loans & advances. The management of HMWSSB was not successful in reducing the quantum of sundry debtors from Rs. 886,446,140 in 2000-01 to cess and sewerage cess. The second part of the analysis of receivables relating to loans and advances reveals that the board could increase the quantum to 99791122 in 2000-01 to Rs 328465038 in the year 2004-05. Rs. 1,801,812,546 in the year 2004-05 due to ineffective collection of the water

55

INVENTORY MANAGEMENT;The management and control of inventory is a problem common to all organizations in any sector of the economy. The problems of inventory do to confine are themselves to profit making of the business firms. The same type of problems is encountered by social non-profit organizations too. Inventories are common to decide industries-agriculture wholesalers, retailers, hospitals, temples, zoos and national state and local governments.

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INVENTORY DECISIONS:Executives decide two basic issues while dealing with inventories. These two decisions are made for every item in the inventory. How much of an item to order when the inventory of them is to be replenished. When to replenish the inventory of that item. Under the present study an attempt is made study the implementation of the inventory management of HMWSSB.

INVENTORY MEANING:The term inventory includes materials raw, in process, finished, packing, spare and other stocked in order to meet an un expected demand or distribution in future. Inventory is that can be used to refer to the stock on hand at a particular time of raw materials, goods-in-progress of manufacture, finished products merchandise purchased for resale. And the like tangible assets with any

57

connection with the financial statements and accounting records. The reference may be to the amount assigned to the stock of goods owned by an enterprise at a particular time.

Inventory includes the following categories of items:Production inventories: Raw materials, parts and components which enter the firms product in the production process. These may consist of two general types: a) Special items manufacture to company specifications, and b) Standard industrial items purchased off the self.

MRO inventories: maintenance, repair, and operating supplies which are

consumed in the production process, but which do not become a part of the product. In-process inventories: semi-finished products found at various stages in the production operation.

Finished goods inventories: completed products ready for shipment. INVENTORY MANAGEMENT:Inventory management involves the development and administration of policies, systems and procedures, which will minimize total costs relative to inventory decisions and related functions such as customer service requirements, production scheduling, purchasing and traffic. Inventory management is board scope effects a interrelationships, inventory management stresses the need for integrated information flow and decision making, as it relates to inventory policies and overall systems.

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Inventory control, on the other hand, is defined in a narrower sense than inventory management and pertains primarily to the administration of established policies, systems and procedures. Factors influencing inventory management: Several factors influence inventory management and control. The principal effects of these factors are reflected most strongly in the levels of inventory and the degree of control, planned in the inventory control system. The factors type of product, type of manufacture, volume of out put and others. Type of product Type of manufacture, and Volume

PROCESS OF INVENTORY MANAGEMENT:As mentioned earlier, inventory management and control refers to the planning for optimum quantities of materials at all stage sin the production cycle and evolving techniques which would ensure the availability of planned inventories. Four steps are involved in the process, 1. Determinations of optimum inventory levels and procedures of the review and adjustments. 2. Determination of the degree of controls that is required for best results. 3. Planning and design of the inventory control system and 4. Planning of the inventory control organizations. INVENTORY CONTROL TECHNIQUES:-

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Inventory control techniques represent the operational aspect so inventory management and help realize the objective s of inventory management and control. Several techniques of inventory control are in use and it depends on the convenience of the firm to adopt any of the techniques. The techniques most commonly used are the following: Always better control (ABC) classification. High, medium and low (HML) classification. Vital, essential and desirable (VED) classification. Economic order quantity (EOQ). Max-minimum system. Two bin system. Materials requirement planning (MRP). Just-in-time (JIT).

ABC analysis:ABC analysis is a basic analytical management tool which enables top management to place the efforts where the results will be greatest. This technique popularly known as Always Better Control, has universal applications in many areas of human endeavor. The technique tries to
60

analyze the distribution of nay characteristic by money value of importance in order to determine priority. In material management, this technique has been applied in areas needing selective control, such as inventory, critically of items, obsolete stocks, purchasing order, inspection.

ABC analysis for selective control:

ABC analysis underlines a very important principle VITAL

FEWTRIVL MANY. Statistics reveal that just a handful of items account for bulk of the annual expenditure on materials. These few items called A items, therefore, hold the key to business. The other items, known B items and C items are numerous in number, but their contribution is less significant. ABC analysis thus tend to segregate all items into 3 categories: A,B, and C on the basis of their annual usage. The categorization so made enables one to pay the right amount of attention and minimum of effort and expenditure as merited by the item.

The annual consumption analysis of an organization would indicate that a handful of top high value items less than 10% of the total number will count for a substantial portion of about 75% of the total consumption value and such few items are called A items which need careful attention of the materials managers. Similarly, a large number of Bottom items-over 70% of the total consumption of units, are called trivial items. Many account only for about 10% of the consumption
61

value, are known as C class items. The items which lie between the top and bottom are called B category items.

Application of ABC analysis:

This approach helps the material manager exercise the selective control and focuses his attention only on a few items when he is confronted with lakhs of store items. Any sound stock system should ensure that every item gets right amount of attention at the right time. ABC analysis makes it possible with considerably less effort by its selective approach. The following are the applications of ABC analysis. a) Degree of control b) Ordering procedure c) Stock records d) Priority treatment e) Safety stock f) Stores layout g) Value analysis Advantages of ABC analysis:This approach helps the materials manager to exercise selective control and focus his attention only on a few items when he is confronted with lakhs of store items. By concentrating on A category the materials manager is able to control inventories and show visible results in a shot span of time. By controlling the A items and doing a proper analysis, obsolete stocks are

62

automatically pinpointed. Many organizations have claimed that ABC analysis has helped in reducing the clerical costs and resulted in better planning and improved inventory turnover. ABC analysis has to be resorted to because equal attention to A, B, and C items will not be worthwhile and on all the items irrespective of the priorities. Limitations of ABC analysis:ABC analysis, in order to be fully effective, should be carried out with standardization and codification. ABC analysis is based on grading the items according to the importance of performance of an item that is by vital, essential and desirable analysis. Some items, though negligible in monetary value may be vital for running the plant, and constant attention is needed. The results of ABC analysis have to be reviewed periodically and up to dated. It is common experience that a C item , like diesel oil in of firm, will become the most highest value item during power crisis. ABC analysis is a powerful approach in the direction of costs reduction as it helps to control items with a selective approach. ABC ANALYSIS:
Description of Items S.No 1 2 3 4 5 6 7 8 SWG pipes of 200 mm dia .6 m length SWG pipes of 250 mm dia .6 m length SWG pipes of 300 mm dia .6 m length SWG Y of 200*100 mm dia SWG Y of 250*100 mm dia SWG Y of 300*100 mm dia FRC Manhole covers and Frames MD 10 FRC Manhole covers and Frames HD 20 Annual Consumption in Units 9030 2992 1100 1295 986 512 147 188 Unit No's No's No's No's No's No's No's No's Rate/Unit in Rs 103.05 151.1 302.98 136 216.11 285 704.85 907.76

63

9 10 11 12 13 14 15 16 17 18 19 20 21 22

SW FRC Manhole covers and Frames HD 20 WS FRC Manhole covers and Frames EHD 35 DI pipes 100 dia DI pipes 150 dia DI pipes 200 dia DI pipes 250 dia DI pipes 300 dia Slvice Valves 100 mm dia Slvice Valves 150 mm dia Slvice Valves 100 mm dia Slvice Valves 250 mm dia Slvice Valves 300 mm dia Hydraulic Hose Pipe 20 for Air Tech Machine Hromoflex Sewer Cleaning Steel Rods

89 72 6558 5263 4925 782 1615 655 862 360 50 28 20 1192

No's No's m m m m m m m m m m No's No's

996.26 1009.64 604.3 764.44 1094.95 1474.45 1905.45 2330.65 3481.05 2330.65 16600 19300 21855.9 107.44

Ranking:
Rank S.No 1 2 3 4 5 6 7 8 Description of Items SWG pipes of 200 mm dia .6 m length SWG pipes of 250 mm dia .6 m length SWG pipes of 300 mm dia .6 m length SWG Y of 200*100 mm dia SWG Y of 250*100 mm dia SWG Y of 300*100 mm dia FRC Manhole covers and Frames MD 10 FRC Manhole covers and Frames HD 20 SW Total Value in Rs 930542 452091 333278 176120 213084 145920 103613 170659 s 8 12 14 16 15 18 20 17

64

9 10 11 12 13 14 15 16 17 18 19 20 21 22

FRC Manhole covers and Frames HD 20 WS FRC Manhole covers and Frames EHD 35 DI pipes 100 dia DI pipes 150 dia DI pipes 200 dia DI pipes 250 dia DI pipes 300 dia Slvice Valves 100 mm dia Slvice Valves 150 mm dia Slvice Valves 100 mm dia Slvice Valves 250 mm dia Slvice Valves 300 mm dia Hydraulic Hose Pipe 20 for Air Tech Machine Hromoflex Sewer Cleaning Steel Rods

88667 72694 3962999.4 4023248 5392629 1153020 3077302 1526576 3000665 839034 830000 540400 437118 128068

21 22 3 2 1 7 4 6 5 9 10 11 13 19

Cumulative Percentage:
Total Value in Rs 5392629 4023248 3962999 3077302 3000665 1526576 1153020 930542 839034 Cumulative total value 5392629 9415876 13378876 16456178 19456843 20983418 22136438 23066980 23906014

S.No 13 12 11 15 17 16 14 1 18

Description of Items DI pipes 200 dia DI pipes 150 dia DI pipes 100 dia DI pipes 300 dia Slvice Valves 150 mm dia Slvice Valves 100 mm dia DI pipes 250 dia SWG pipes of 200 mm dia .6 m length Slvice Valves 100 mm dia

percentage 19.54 34.12 48.48 59.63 70.50 76.03 80.21 83.58 86.62

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19 20 2 21 3 5 4 8 6 22 7 9 10

Slvice Valves 250 mm dia Slvice Valves 300 mm dia SWG pipes of 250 mm dia .6 m length Hydraulic Hose Pipe 20 for Air Tech Machine SWG pipes of 300 mm dia .6 m length SWG Y of 250*100 mm dia SWG Y of 200*100 mm dia FRC Manhole covers and Frames HD 20 SW SWG Y of 300*100 mm dia Hromoflex Sewer Cleaning Steel Rods FRC Manhole covers and Frames MD 10 FRC Manhole covers and Frames HD 20 WS FRC Manhole covers and Frames EHD 35

830000 540400 452091 437118 333278 213084 176120 170659 145920 128068 103613 88667 72694

24736014 25276414 25728505 26165623 26498901 26711986 26888106 27058764 27204684 27332753 27436366 27525033 27597727

89.63 91.59 93.23 94.81 96.02 96.79 97.43 98.05 98.58 99.04 99.42 99.74 100

Graph:

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AB C AN ALYS IS 120.00 100.00 Cumulative % 80.00 60.00 40.00 20.00 0.00 1 3 5 7 9 11 13 15 17 19 21 S .N o

67