TABLE OF CONTENTS

Executive Summary Objectives of the Study Methodology of the Study Limitations of the Study IFFCO The Organization Chapter 1 Working Capital Management Data Analysis Findings Conclusion and Suggestions Chapter 2 Cash Management Cash Management at IFFCO Observations Conclusion Suggestions References Appendix

EXECUTIVE SUMMARY
Indian Farmers Fertiliser Co-operative Limited (IFFCO) is a Multistate Co-operative Society. It was a unique venture in which the farmers of the country through their own Cooperative Societies created this new institution to safeguard their interests. IFFCO manufactures Urea and NPK/ DAP fertilizers and sells them to the co-operative societies. The project is Working Capital Management of IFFCO. The objectives of the project are: To analyse the working capital and working capital management policies at IFFCO To analyse the cash management practices at IFFCO The study is mainly based on the secondary data which refers to that form of information that has already been collected and is available. The analysis of working capital is based on ratio analysis to monitor overall trends in working capital and to identify areas requiring closer management. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital. From the analysis of the components of working capital, it was found that the organization is utilizing its funds properly, the inventory is managed efficiently and the organization is able to get sufficient short term financing. It is clear that the working capital of IFFCO is in sound position. The suggestions can be made in the management of inventory by implementation of JIT or Kanban and management of liquid assets including the subsidy provided by the government. The Cash Management System at IFFCO is very sound and efficient. It has enabled the organization to manage its funds in a proper manner resulting in better utilization and availability of funds in cash deficit periods. IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are providing IFFCO with facilities such as cash management services, personalized financial MIS to enable IFFCO to accelerate the collection and payment of funds, debit sweep option, Anywhere banking facility, etc. The suggestion that can be given to the organization is the implementation of RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer) facilities which will improve the cash transfer at IFFCO.

OBJECTIVES OF THE STUDY

To analyse the Working Capital and Working Capital Management policies at IFFCO To understand Working Capital Management of the organization To analyze Liquidity position of the organization To find out the Profitability and operating efficiency of the organization To understand the importance of Working Capital Management To analyze the short term financing patterns, which affect the working capital of the organization To study the factors that affects the Working Capital Management at IFFCO To analyze the data and information of the previous years to know the actual position of funds, investments and liabilities of the organization To identify some broad policy measures to improve the working capital position of the organization To estimate the working capital requirements of the organization in the near future

To analyse the Cash Management Practices at IFFCO To understand the cash management process followed at the organization To study the factors both intrinsic and extrinsic that influences the cash management at the organization To study and analyze the changes being brought about the existing cash management system To study the salient features, methodology and advantages of the new cash management system being implemented at the organization To suggest some recommendations to the organizations for the improvement of the cash management practices and the new cash management MIS

METHODOLOGY OF THE STUDY

The basic type of research used to prepare this report is Descriptive. The study is mainly based on the secondary data which refers to that form of information that has already been collected and is available. These include some internal sources within the company and externally these sources include books and periodicals, published reports and data of IFFCO and the annual reports of the company. Interaction with the various employees of the marketing accounts department has also been a major source of information. No primary data has been used as a part of this study. The analysis of working capital is based on ratio analysis to monitor overall trends in working capital and to identify areas requiring closer management.

LIMITATIONS OF THE STUDY

The following are the limitations of this summer project training: The study is limited to five financial years i.e. from 2008-2009. The data used in this study has been taken from the Financial Statements & their related schedules of IFFCO Ltd., New Delhi as per the requirement. Some of the information that was essential for this study cannot however be given in this report due to their confidential nature. The scope and area of the study was limited to corporate office of IFFCO, New Delhi only.

IFFCO THE ORGANIZATION

Indian Farmers Fertiliser Co-operative Limited (IFFCO) was registered on November 3, 1967 as a Multi-unit Co-operative Society. 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 numbers of co-operative societies associated with IFFCO have risen from 57 in 1967 to 38, 155 at present. On the enactment of the Multistate Cooperative Societies act 1984 & 2002, the Society is deemed to be registered as a Multistate Cooperative Society. The byelaws of the Society provide a broad frame work for the activities of IFFCO as a Cooperative Society. IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAP plant at Kandla both in the state of Gujarat in 1975. Another Ammonia - urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981. The ammonia - urea unit at Aonla was commissioned in 1988. In 1993, IFFCO had drawn up a major expansion programme 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 realised without time or cost overruns. All the production units of IFFCO have established a reputation for excellence and quality. A new growth path has been chalked out to realise newer dreams and greater heights through Vision 2010 which is presently under implementation. As part of the new vision, IFFCO has acquired fertiliser unit at Paradeep in Orissa in September 2008. As a result of

6 these expansion projects and acquisition, IFFCO's annual capacity has been increased to 3.69 million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes of P2O5.

MISSION
IFFCO's mission is "to enable Indian farmers to prosper through timely supply of reliable, high quality agricultural inputs and services in an environmentally sustainable manner and to undertake other activities to improve their welfare."

To provide to farmers high quality fertilizers in right time and in adequate quantities with an objective to increase crop productivity. To make plants energy efficient and continually review various schemes to conserve energy. Commitment to health, safety, environment and forestry development to enrich the quality of community life. Commitment to social responsibilities for a strong social fabric. To institutionalise core values and create a culture of team building, empowerment and innovation which would help in incremental growth of employees and enable achievement of strategic objectives. Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for stake holders. Building a value driven organisation with an improved and responsive customer focus. A true commitment to transparency, accountability and integrity in principle and practice. To acquire, assimilate and adopt reliable, efficient and cost effective technologies. Sourcing raw materials for production of phosphatic fertilisers at economical cost by entering into Joint Ventures outside India. To ensure growth in core and non-core sectors.

A true Cooperative Society committed for fostering cooperative movement in the country.

7 IFFCO is emerging as a dynamic organisation, focussing on strategic strengths, seizing opportunities for generating and building upon past success, enhancing earnings to maximise the shareholders' value.

Vision
To augment the incremental incomes of farmers by helping them to increase their crop productivity through balanced use of energy efficient fertilizers, maintain the environmental health and to make cooperative societies economically & democratically strong for professionalized services to the farming community to ensure an empowered rural India. Vision 2010 Encouraged by the success of Vision 2000, IFFCO has charted on a new course of action to realise a fresh set of dreams. A high powered committee has been constituted to steer the organisation through this Road Map. Activities being actively pursued through the strategy are: Phosphoric Acid plant Foray into Power Sector to set up a 500 MW power project Ammonia Plant for supplies to Kandla Unit IFFCO Kisan Bazar IFFCO Bank Multi Commodity Exchange Acquisition of Fertilizer Plants Nellore Fertilizer Project Agri business

The Approach
To achieve their mission, IFFCO as a cooperative society, undertakes several activities covering a broad spectrum of areas to promote welfare of member cooperatives and farmers. The activities envisaged to be covered are exhaustively defined in IFFCOs Bye-laws.

The Commitment
The thirst for ever improving the services to farmers and member co-operatives is insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty to drive hunger away from India in an ecologically sustainable manner is the prime mission.

Plants owned by IFFCO

Kalol Unit (Ammonia - Urea complex) P. O. Kasturinagar, District Gandhinagar, Gujarat - 382423 Kandla Unit (NPK/DAP plant) P. O. Kandla, Gandhidham, Kandla (Kachchh), Gujarat - 370201 Phulpur Unit (Ammonia - urea complex) P. O. Ghiyanagar, District Allahabad, Uttar Pradesh - 212404 Aonla Unit (Ammonia - Urea unit) P. O. IFFCO Township, Paul Pothen Nagar, Bareilly, Uttar Pradesh - 243403 Paradeep Unit (NPK/DAP and Phosphoric Acid Fertiliser unit) Village Musadia, P. O. Paradeep, District Jagatsinghpur, Orissa - 754142

Production and Sales

During the year 2012-13 IFFCO produced 71.68 Lakh (7.168 million) MT (Metric Tonnes) of fertiliser material, consisting of 40.68 lakh MT of Urea and 31.00 lakh MT NPK/DAP. It contributes 21.4% of countrys total nitrogenous fertiliser production and 27% of total phosphatic fertiliser production in the same period. PRODUCTION (in LAKH MT) YEAR 2010-11 2011-12 2012-13 UREA 37.87 39.63 40.68 NPK / DAP 32.26 28.84 31 TOTAL 70.13 68.47 71.68

2010-11

2011-12

2012-13

Material UREA NPK/ DAP TOTAL

SALES OF FERTILIZER MATERIAL (in Lakh MT) 2010-11 2011-12 58.69 54.29 53.89 38.95 112.58 93.24

2012-13 52.41 33.69 86.10

2010-11

2011-12

2012-13

PLANT WISE PRODUCTION Unit 2012-13 Production (Lakh MT) UREA Kalol 5.60 Capacity Utilization (percent) 102.80 2011-12 Production (Lakh MT) 5.45 Capacity Utilization (percent) 100.00

10 Phulpur I Phulpur II Aonla I Aonla II SUB TOTAL UREA NPK / DAP Kandla Paradeep SUB TOTAL NPK / DAP TOTAL PRODUCTION 6.63 8.40 9.87 10.18 40.68 17.94 13.06 31.00 71.68 120.30 97.20 114.10 117.80 110.30 74.30 68.00 71.40 89.20 6.30 9.24 8.76 9.89 39.63 20.18 8.66 28.84 68.47 114.30 106.90 101.30 114.40 107.40 83.50 45.10 66.50 85.30

All India Capacity, Production and Capacity Utilization of Fertilizer Industry Year N P2O5 Capacity Capacity Capacit Capacit Production Utilization Production Utilization y y (%) (%) 2008-09 12208 11304.9 93.4 5480.4 4038.4 75.5 2009-10 12288.4 11332.9 94.5 5459.6 4202.6 78.5 2010-11 12290.4 11524.9 95.6 5736.3 4440 78.5 2011-12 12290.4 10902.8 95.2 5874.6 3714.3 64.7 2012-13 12290.4 10900.2 95.2 5892.3 3417.3 58.5

Sector Wise Capacity and Production of N and P2O5 (capacity: As on 1.11.2013) (production: 2012-13 April-March) (Figures in '000 tonne nutrient) P2O5 Capacity NP/NPKs SSP Total 386.7 386.7 122 5 4085. 1 1712. 8 6184. 6 Production NP/NPKs SSP Total 191.7 191.7 405. 4

Sector Capacit y Public 3591.5

Production 2973.2

Private

6030.3

4829.9

2860.1

1903.9

2309.3

Cooperative

3423.4

3133.1

1712.8

122 5

916.3

405. 4

916.3

Total

13045.2

10900.2

4959.6

3011.9

3417.3

11 Capacity and Investment in the Fertilizer Industry Year / Period Capacity During the Period (in '000 tonnes) N P2O5 62 39 12229 5427 -21 1 12208 5428 52 243 12260 5671 30 204 12290 5875 17 12290 5892 755 293 13045
Investments During the Period ( in Rs. Crore )

2007-2008 (as on 1.11.2008) 2008-2009 (as on 1.11.2009) 2009-2010 (as on 1.11.2010) 2010-2011 (as on 1.11.2011) 2011-2012 (as on 1.11.2012) 2012-2013 (as on 1.11.2013)

Sectors Public Cooperative Private 10 7474.5 4231.5 14227.9 3 7474.5 4231.5 14230.9 350 35 7824.5 4231.5 14265.9 15 7824.5 4231.5 14280.9 55 7824.5 4231.5 14335.9 350 470 7824. 6185 5 4581.5 14805.9

Total 10 25933.9 3 25936.9 385 26321.9 15 26336.9 55 26391.9 820 27211.9

BIO FERTILISERS
Bio-fertilisers are capable of fixing atmospheric nitrogen when suitable crops are inoculated with them. Bio-fertilisers are low cost, effective, environmental friendly and renewable source of plant nutrients to supplement fertilisers. Integration of chemical, organic and biological sources of plant nutrients and their management is necessary for maintaining soil health for sustainable agriculture. The bacterial organisms present in the bio-fertiliser either fix atmospheric nitrogen or solubilise insoluble forms of soil phosphate. The range of nitrogen fixed per ha/year varies from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg for groundnut, 60 - 80 kg for soybean and 50 - 55 kg for moongbean.

All India Production and Dispatches of Bio Fertilizers ( in tonnes) Year Production Dispatches 2008-09 10479 10427.6 2009-10 11752.4 11357.6 2010-11 15871 15745 2011-12 20111.1 20100 2012-13 24455 24400

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PRICES OF IFFCO'S FERTILISERS

(Applicable only within India) UREA N-46% M.R.P. 4830 7197 NPK 10-26-26 12-32-16 7637 20:20:00 6295 DAP 18-46-0 9350 MOP K-60% 4455

Local Taxes Extra, where ever applicable.

JOINT VENTURES OF IFFCO

Indian Potash Limited (IPL) The Society holds an investment of Rs. 2.68 Crore (2012-13) in Indian Potash Limited (IPL) with equity share holding of 34 per cent in the paid up equity share capital of IPL. IPL is primarily engaged in trading of imported Potassic and NonPotassic Fertilisers. Industries Chimiques Du Senegal (ICS) The Society holds 18.54 per cent equity (2012-13) in ICS, which manufactures Phosphoric Acid for exports and Phosphatic Fertilisers for domestic consumption. ICS has the capacity to produce 660000 MT of Phosphoric Acid (as P2O5) per year. The Government of Senegal and IFFCO signed an Agreement on 16th July, 2011 and Amendment on 14th January, 2012, for the debt restructuring and recapitalisation of ICS. Post restructuring and recapitalisation, the new Board has been reconstituted and the IFFCO Consortium has taken over the management control of ICS. Indo Egyptian Fertilisers Company, SAE (IEFC) The Society promoted a joint venture in Egypt, namely Indo Egyptian Fertilisers Company SAE (IEFC) along with El Nasr Mining Company of Egypt to set up a Phosphoric Acid plant with a capacity of 1500 tonnes P2O5 per day. IEFC was

13 incorporated in Egypt as a Joint Stock Company on 15 th November, 20 with shareholding of IFFCO and its affiliates at 76 percent and El Nasr Mining Co. Egypt holding 24 per cent equity. Oman India Fertiliser Company (OMIFCO) Oman India Fertiliser Company (OMIFCO) is a Joint Venture Company in Oman in which the Society has invested an amount of Rs. 329.08 Crore (2012-13) to acquire 25 percent equity in OMIFCO, which has an installed capacity of 16.52 lakh tonne Urea and 2.5 lakh tonne surplus Ammonia. OMIFCO commenced commercial production at its plant at Sur (Oman) with effect from 14th July, 2008. Jordan India Fertilizer Company (JIFCO) IFFCO and Jordan Phosphate Mines Company (JPMC), Jordan have formed a Limited Liability Joint Venture Company, namely Jordan India Fertilizer Company (JIFCO) on 6th March, 2008 in Amman, Jordan under the Free Zone system to set up a phosphoric acid plant of capacity 1500 tonnes per day P2O5 at Eshidiya in Jordan. In this company, IFFCO holds 52 per cent equity, while JPMC holds 48 per cent equity. Aria Chemicals (Orissa) Limited Aria Chemicals (Orissa) Ltd. is a joint venture between IFFCO and Aria Chemicals Private Limited, Chennai wherein IFFCO holds 40 percent equity in this project. This Company will set up an Aluminium Fluoride facility at Paradeep.

Sector Diversification of IFFCO

IFFCO-TOKIO General Insurance Company Limited (ITGI) IFFCO TOKIO General Insurance Company Limited (ITGI) was formed as a Joint Venture Company in the year 2000 for underwriting general insurance business in India. Out of total equity capital of Rs. 247 Crore in ITGI, the Society and its associates hold 74 percent equity and Tokio Marine Asia holds 26 percent. ITGI had launched products like, Barish Bima Yojna, Mausam Bima Yojna and Kisan Suvidha Bima Yojna to cater to the insurance requirements of the farmers. During the year ITGI has launched various micro insurance policies like Janta Bima

14 Yojna, Jansuraksha Bima Yojna, Janswasthya Bima Yojna and Mahila Suraksha Bima Yojna to provide protection to the farmers and their families and also poorer sections for their household goods, personal accident and health.

IFFCO Chhattisgarh Power limited (ICPL) The Society has diversified into the Power Sector by incorporating a Joint Venture Company namely IFFCO Chhattisgarh Power Limited (ICPL) with Chhattisgarh State Electricity Board (CSEB) to set up a 1320 MW coal-based Mega Power Plant in District Surguja of Chhattisgarh. The Society will hold 74 per cent equity in ICPL. National Commodity and Derivatives Exchange Ltd. (NCDEX) The Society holds 12 percent equity in the Paid-up Share Capital (Rs. 30 Crore) and the entire preference capital of Rs. 10 Crore in the National Commodity and Derivative Exchange Limited (NCDEX). NCDEX is a demutualised, on-line national level commodity exchange providing a trading platform for futures trading in commodities in the country and offers its market participants opportunity at price discovery and price risk hedging. Currently, NCDEX offers contracts in 56 commodities, that is, 42 agricultural commodities, 2 bullion, 6 metals, 2 energy and 3 polymers and 1 environment (carbon credit). National Collateral Management Services Ltd. (NCMSL) Along with other reputed institutions, IFFCO co-promoted National Collateral Management Services Limited (NCMSL) in the year 2004. The Society holds 13.56 per cent of the paid up equity capital in NCMSL. NCMSL is engaged in providing various risk management services related to commodities like Storage and Preservation services, Collateral Management services, Procurement services, Quality Testing and Certification services and Information services. Freeplay Energy India Pvt. Ltd. During the year 2012-13, the Society made an investment of Rs. 4.83 Crore to acquire 30 percent shareholding in Freeplay Energy India Pvt. Ltd. (FPEI), which is engaged in the field of non-conventional energy products and devices suitable for

15 rural India. These products are being marketed to co-operative societies through Societys another subsidiary company, that is, IFFCO Kisan Sanchar Ltd. The utility of these products has been greatly appreciated by the rural farmers.

ORGANIZATIONS PROMOTED BY IFFCO

IFFCO has promoted several institutions and organisations to work for the welfare of farmers, strengthening cooperative movement, improve Indian agriculture. Indian Farm Forestry Development Cooperative (IFFDC) Indian Farm Forestry Development Cooperative, a multi-state cooperative society promoted by IFFCO, has been implementing afforestation projects in Uttar Pradesh, Rajasthan & Madhya Pradesh. The Society has been floated under contribution agreement signed between IFFCO and India - Canada Environment Facility (ICEF). Development of Primary Farm Forestry Cooperative Societies (PFFCS) is an important activity undertaken towards afforestation of waste lands. High participation of women is an important feature of the IFFDC. Cooperative Rural Development Trust (CORDET) IFFCO promoted Cooperative Rural Development Trust (CORDET) in the year 1979 to provide education and training to farmers on various aspects of crop production, horticulture, animal husbandry, farm machinery etc. IFFCO Kisan Sewa Trust (IKST) Objective: A Relief Trust for the Welfare of the Victims of Natural Calamities Kisan Sewa Trust Fund was created out of contributions from: IFFCO Employees of IFFCO Cooperative Societies and others TOTAL Rs 100 million Rs 10 million Rs 90 million Rs 200 million

IFFCO had always been in the forefront of activities for the rescue of victims of natural calamities. Every year significant contributions, both monetary as well as in kind, are made by IFFCO along with separate contributions by the employees.

16

IFFCO Kisan Sanchar Limited (IKSL) IFFCO Kisan Sanchar Limited was incorporated in April, 2007 with the objective to use the information technology to empower farmers in rural areas and to strengthen the cooperative network in the country. The highlight of IKSLs services in the rural telecom domain continues to be Valued Added Services (VAS) extended to the subscribers. Five free voice messages of immediate relevance to people living in rural areas, a Help Line with experts to provide information inputs to the farmers and several other innovative activities for subscribers constitute a major source of knowledge transfer. An ambitious project 'ICT Initiatives for Farmers and Cooperatives' is launched to promote e-culture in rural India. IFFCO obsessively nurtures its relations with farmers and undertakes a large number of agricultural extension activities for their benefit every year. At IFFCO, the thirst for ever improving the services to farmers and member co-operatives is insatiable, commitment to quality is insurmountable and harnessing of mother earths' bounty to drive hunger away from India in an ecologically sustainable manner is the prime mission. All that IFFCO cherishes in exchange is an everlasting smile on the face of Indian Farmer who forms the moving spirit behind this mission. IFFCO, to day, is a leading player in India's fertiliser industry and is making substantial contribution to the efforts of Indian Government to increase food grain production in the country. IFFCO is also behind several other companies with the sole intention of benefitting farmers. The distribution of IFFCO's fertiliser is undertaken through over 38155 co-operative societies. The entire activities of Distribution, Sales and Promotion are co-ordinated by Marketing Central Office (MKCO) at New Delhi assisted by the Marketing offices in the field. In addition, essential agro-inputs for crop production are made available to the farmers through a chain of 158 Farmers Service Centre (FSC).

SUBSIDIARIES OF IFFCO

17 Kisan International Trading FZE (KIT) Kisan International Trading FZE (KIT) was set up as a wholly owned subsidiary of the Society in Dubai in April 2008. KIT has become a leading international trading organisation, which handles the import and export of various fertilisers and fertiliser Raw Materials and Intermediates. IFFCO Kisan Bazar Ltd. IFFCO Kisan Bazar Ltd. (IKBL) was incorporated on 26th February, 2007 as IFFCOs wholly owned subsidiary company for inter-alia undertaking business in agri-inputs and consumer goods for the benefit of farmers/cooperatives.

Business and Financial Review of Subsidiaries and Associates

Even in the year of global economic meltdown, the business portfolio has been steadily growing in tandem with the high growth aspirations. The organization have stepped up investments in related businesses through various Joint Ventures and Associate Companies in order to strengthen themselves further by looking at new opportunities that are unfolding and create value addition in the core fertiliser sector. On 31st March 2009, the total investments were Rs. 914 Crore in comparison to Rs.770.57 Crore on 31st March 2008 as per the following break-up: (Rs. In Crore) As March 2013 Investment in Jt. Ventures/Subsidiaries Investment in Business Associates Total 888.27 25.73 914.00 2012 750.13 20.44 770.57 on 31st

FINANCIAL PERFORMANCE
As per its tradition, the Society has again exhibited an impressive financial performance in all its major parameters, namely, Revenue Growth and Resource Utilisation, testifying to the robustness of its Corporate Strategy of creating multiple drivers of growth in spite of constraints in the availability of raw materials, the Global Economic Meltdown and

18 inordinate delays in receipt of large subsidy amounts from the Government of India. This was possible due to higher production, sales volume and improvement in operating efficiencies. The Society achieved the highest ever sales turnover of Rs 32,933 Crore. This represents an increase of 170 per cent over the previous year. While, the sales volume of fertiliser material increased by 20 per cent to 112.58 lakh MT fertiliser during 2012-13, as against 93.24 lakh MT in the previous year, the major increase in the sales turnover was on account of substantial increase in the commodity prices. The performance is even more satisfying when viewed in the light of the challenging business environment of the fertiliser industry.

SOURCES AND USES OF FUNDS

The Cash Flow from Operating, Investing and Financing activities as reflected in the Cash Flow Statement is summarised in the following table: (Rs. In Crore) 2012-13 Cash provided by operating activities Cash Used in Investing activities Cash provided by financing activities Decrease in cash and cash equivalents 1560 (6578) 4844 (174) 2011-12 1072 (970) (190) (88)

CORPORATE GOVERNANCE
The Society has consistently followed transparent, democratic and professional practices in Corporate Governance since its inception. We have carved out a strong Cooperative Identity and are making sincere efforts to uphold the Cooperative Values by cherishing Cooperative Principles. The Societys endeavour has been to achieve the highest levels of transparency, accountability and full disclosure to its shareholders in a bid to uphold the spirit of Cooperative Principles and Cooperative Values by following the charter as lay down by International Cooperative Alliance (ICA). The activities of the Society have been conducted within the provisions of the Multi State Cooperative Societies Act/Rules and

19 IFFCO Bye-laws. A separate detailed report on Corporate Governance is given along with the Annual Report.

FINANCIAL RATINGS
The Societys excellent credit ratings with bankers and rating agencies allows access to short term funds including foreign currency borrowings at competitive rates. Ratings assigned by different Rating Agencies to the Society were as under: CRISIL Ratings Rating for Governance and Value Creation (GVC) Practices of IFFCO CRISIL has, assigned a GVC Level 2 rating to IFFCO. This rating indicates that the capability of the Society with respect to wealth creation for all its stakeholders, while adopting sound corporate governance practices, is high. Rating for the Rs. 100 crore Commercial Paper Programme of IFFCO CRISIL has assigned a P1+ (pronounced P One Plus) rating to IFFCOs Rs.100 Crore Commercial Paper Programme. This rating indicates that the degree of safety with regard to timely payment of interest and principal on the instrument is Very Strong. Rating for the Rs. 400 crore Bonds Programme of IFFCO CRISIL has assigned the rating on IFFCOs Long Term Borrowing Programme to AA/Stable. The rating indicates high degree of safety with regard to timely payment of interest and principal on the instrument. FITCH Ratings Rating for the Rs. 100 crore Commercial Paper Programmes of IFFCO FITCH Ratings has assigned a National Short Term Rating of F1+ (Ind)to IFFCOs Rs. 100 crore Commercial Paper Programme. This rating indicates that the degree of safety with regard to timely payment of interest and principal on the instrument is Very Strong. Rating for Long Term Borrowing Programme of IFFCO FITCH Ratings assigned National Long - Term Rating of AA+ (Ind) to the Long Term Debt Programme of IFFCO. The outlook on the Long Term Rating is Stable. This rating indicates high degree of safety with regard to timely payment of interest and principal on the instrument.

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CARE Ratings PR 1+ (P One Plus) rating to IFFCOs Working Capital facilities/Short Term Loans having tenure of up to one year. CARE AA (Double A) rating to External Commercial Borrowings and other existing long term borrowings having tenure of over one year.

Value Added
Value Added is the wealth which an enterprise has been able to create through the collective effort of capital, management and employees. In economic terms, value added is the market price of the output of an enterprise less the price of the goods and services acquired by transfer. Value Added can provide a useful measure in gauging performance and activity of the company.

Figure: Allocation of Value Added

SIGNIFICANT ACCOUNTING POLICIES

1. Basis of Preparation of Financial Statements The Financial Statements are prepared on accrual basis of accounting under the historical cost convention in accordance with the generally accepted accounting principles in India, the Accounting Standards issued by the Institute of Chartered

21 Accountants of India and the relevant provisions of Multi State Co-operative Societies Act, 2002. 2. Use of Estimates The preparation of financial statements, in conformity with the generally accepted accounting principles, require estimates and assumptions to be made that affect the reported amount of assets and liabilities as of the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Difference between the actual results and estimates are recognized in the period in which the results materialise. 3. Fixed Assets (i). Fixed Assets are stated at historical cost less accumulated depreciation. Cost comprises of the purchase price and any attributable cost of bringing the asset to its working condition for its intended use. (ii). Assets retired from active use and held for disposal are shown separately under Fixed Assets at lower of net book value and estimated realisable value. 4. Expenditure incurred during Construction Period In respect of new/major expansion of units, the indirect expenditure incurred during construction period up to the date of the commencement of commercial production, which is attributable to the construction of the project, is capitalised on proportionate basis. 5. Intangible Assets An intangible asset is recognised where it is probable that the future economic benefits attributable to the asset will flow to the Society and the cost of the asset can be measured reliably. Such assets are stated at cost less accumulated amortisation. 6. Impairment of Assets At each balance sheet date an assessment is made whether any indication exists that an asset has been impaired. If any such indication exists, an impairment loss i.e. the amount by which the carrying amount of an asset exceeds its recoverable amount, is provided in the books of account. 7. Investments i) Long Term Investments are carried at cost. Provision for diminution in the value of such investments is made to recognise a decline, other than temporary, in the value of the investments.

22 ii) Current Investments are valued at lower of cost and fair value determined on an individual investment basis. 8. Depreciation / Amortisation (a) Depreciation on Fixed Assets is provided on Straight Line Method as follows: (i) In respect of assets acquired up to 31st March, 1990 at the rates prescribed under Income tax Act, 1961 and rules framed there under. (ii) In respect of assets acquired after 31st March,1990 at the rates based on schedule XIV to the Companies Act,1956 except for fixed assets taken over at Paradeep Unit which are depreciated based on useful life of such assets. (b) Assets are depreciated to the extent of 95% of the original cost except assets individually costing up to Rs.5000/- which are fully depreciated in the year of acquisition. (c) Railway wagons under "Own Your Wagon Scheme" are depreciated over a period of ten years. (d) Machinery Spares which can be used only in connection with an item of Plant & Machinery and its use is expected to be irregular, are fully depreciated over the remaining useful life of the related asset. (e) Premium paid for acquisition of leasehold land, other than those acquired under perpetual lease basis, is amortised over the period of lease. (f) Leasehold Buildings are fully depreciated over the period of lease in case period of lease is less than the useful life derived from the rates as per Schedule- XIV of Companies Act. (g) Additions to assets are depreciated for the full year irrespective of the date of addition and no depreciation is provided on assets sold/ discarded during the year. However, in the case of capitalisation of project, depreciation is provided on a pro-rata basis from the date of commencement of commercial production. (h) Intangible assets are amortised over their estimated useful lives but not exceeding ten years when the asset is available for use. 9. Provisions, Contingent Liabilities and Contingent Assets

23 (a) Provisions are recognised for liabilities that can be measured by using a substantial degree of estimation, if: i) ii) The Company has a present obligation as a result of a past event; A probable outflow of resources embodying economic benefits is expected to settle the obligation; and iii) The amount of the obligation can be reliably estimated. (b) Contingent liability is disclosed in case of : i) Present obligation arising from a past event when it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation. ii) Possible obligation, unless the probability of outflow in settlement is remote. (c) Reimbursement expected in respect of expenditure required to settle a provision is recognised only when it is virtually certain that the reimbursement will be received. (d) Contingent assets are neither recognised nor disclosed in the financial statements. 10. Operating Leases Assets acquired on leases wherein a significant portion of the risks and rewards of ownership are retained by the lessors are classified as operating leases. Lease rentals paid for such leases are recognised as an expense on straight line basis over the term of lease. 11. Prior Period Income / Expenditure Income/Expenditure items relating to prior period(s) not exceeding Rs.2,00,000/each is treated as Income/ Expenditure for the current year. 12. Pre-Paid Expenses Expenditure up to Rs.50000/- in each case except Insurance Premium is accounted for in the year in which the same is incurred.

24

CHAPTER 1

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Working Capital Management

WORKING CAPITAL MANAGEMENT

Working Capital Management is the interaction between current assets and current liabilities. The current assets refer to those assets, which in ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. Decisions relating to working capital and short term financing are referred to as Working Capital Management. This involves managing the relationship between a firm's short-term assets and its short-term liabilities. The major thrust is on managing the current assets because a current liability arises in context of current assets. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing of: Accounts receivable (current asset) Inventory (current assets),

26 Accounts payable (current liability), and Cash (current asset) The management of current assets is similar to that of fixed assets in the sense that in both cases the firm analyses their effects on its return and risk. However, the management of fixed and current assets differs in THREE ways: 1. In the management of fixed assets, time is very important consequently, discounting and compounding aspects of time element play a significant role in capital budgeting and a minor one in the management of current assets. 2. Large holdings of current assets especially cash strengthen times liquidity (and reduces riskiness) but also reduces overall profitability. 3. The levels of fixed as well as current assets depend upon the expected sales, but it is only the current assets, which can be adjusted with sales fluctuations in short runs. In examining the management of current assets, answers will be sou ght to the following
questions:

What is the need to invest funds in the current assets?

How much funds should be invested in each type of current assets? What should be the proportion of long term and short term funds to finance current assets? What appropriate sources of funds should be there to finance current assets?

A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. Working Capital Management is a significant part of financial management. Its importance arises from two reasons: Investment in current represents assets a substantial portion of total management. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed assets investment and long term financing are also responsive to variations in sales. However this relationship is not as close and direct as it is in the case of Working Capital Management.

27 Hence in this study an attempt has been made to analyze the size and composition of working capital and whether such an investment has increased or declined over a period of time. Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is involved in the most vital decision of the allocation of capital. There is a need to have a broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in the most efficient manner .One of the most important task of financial manager is to select an assortment of appropriate sources of finance for the current assets. Normally the excess of current assets over current liabilities should be financed by long-term sources. Precisely it is not possible to find out which long term sources has been used to finance current assets, but it can be examined as to what proportion of current assets has been financed by long term funds. Therefore, an attempt has been made in this regard. In working capital analysis the direction of change over a period of time is of crucial importance. Not only that, analysis of working capital trends provides a base to judge whether the practice and prevailing policy of the management with regards to the working capital is good enough or an improvement is to be made in managing the working capital funds.

28

Hence in this study, an attempt is made about the trends of the working capital management of selected enterprise. In addition, to have higher profitability the firms may sacrifice solvency and maintained a relatively low of current assets. When the firms do so their profitability will improve and less are tied up in the idle current assets, but their solvency will be threatened. Hence, an attempt is made to study the association of profitability with the working capital ratios. With this view, an effort has been made in this project report to make an in-depth study of IFFCO in respect of its performance and its working capital management.

TYPES OF CAPITAL
Every business needs funds for two purposes for its establishment to carry out its day-to-day operations. Capital required for business can be classified under two main categories: 1) Fixed Capital 2) Working Capital Fixed Capital Long term funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land, buildings, furniture, etc. investments in these assets represents that part of firms capital, which is blocked on a permanent or fixed basis and is called fixed capital. Working Capital Funds are also needed for short-term purpose for the purchase of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as Working Capital. There are two concepts of working capital: 1. Gross working Capital 2. Net working Capital Gross Working Capital Gross working capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year or within an operating cycle. The items comprising of current assets are: Cash

29 Marketable securities Accounts receivable Notes or bills receivable Prepaid expenses Merchandise inventory Manufacturing inventory Net Working Capital Net Working Capital refers to the difference between the current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year or the operating cycle of the business. The items comprising of current liabilities are: Accounts Payable Acceptance Promissory Notes Payable Accrued Liabilities Estimated Liabilities or Provisions Bank Overdraft Contingent Liabilities Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES An increase in working capital indicates that the business has either increased current assets (that is received cash, or other current assets) or has decreased current liabilities.

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Types of Working Capital

Working Capital can be further divided into two types namely: 1) Permanent or fixed working capital 2) Variable or temporary working capital Permanent or Fixed working capital There is always a minimum level of current assets which is continuously required by a firm to carry on its business operations. Permanent or Fixed working capital is the minimum level of current asset. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in production and sales, the need for working capital, over and above permanent working capital will fluctuate. For example: every firm has to maintain a minimum level of raw material, work-in-progress, finished goods and cash balance. As the business grows, the requirements of permanent working capital also increase due to the increases in current assets. Temporary or Variable Working Capital Variable working capital is the extra working capital needed to support the changing production and sales activities of the firm. Both kinds of working capital permanent and temporary are necessary to facilitate production and sale through the operating cycle. But the firm to meet liquidity requirements that will last only temporarily creates a temporary working capital. Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part which is required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research etc. Temporary working capital differs from Permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in the business.

Worki ng

Temporary

31 Working Capital

Capital (in Rs.)

Permanent Working Capital

Time

Good Management of Working Capital

Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies are available for managing specific working capital items. The areas of working capital management are as follows: Cash management: Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs. Inventory management: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow Debtor management: Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); Short term financing: Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted

32 by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

OBJECTIVES OF WORKING CAPITAL MANAGEMENT

Liquidity vs. Profitability The basic objective of working capital is to provide adequate support for the smooth functioning of the normal business operations of the company. The quantum of investment in current assets has to be made in such a manner that it not only meets the needs of the forecasted sales but also provides a built in cushion in form of safety stocks to meet unforeseen contingencies. Based on this the companies can follow any of the two approaches or even a combination of both. A company opting for high investment in current assets follows the Conservative Approach i.e. subjected to lower degree of risk. This approach imparts greater LIQUIDITY to the company. The other approach is the Aggressive Approach in which the firm goes for fewer investments in current assets, thus leaving more amounts of funds for investment in more profitable ventures. This approach imparts greater PROFITABILITY to the company. An ideal policy would be the moderate policy, which strikes a balance between the two approaches. Choosing the pattern of financing The management of financing the chosen level of current assets once again takes into consideration the attitude of management towards risk.

DETERMINANTS OF WORKING CAPITAL

The working capital requirements of a concern depend upon a large number of factors. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However the following are the factors generally influencing the working capital requirements: Nature or character of business

33 The working capital requirements of a firm basically depend upon the nature of the business. Public undertakings like electricity, water supply, and railways need very limited working capital because they offer cash sales only and supply services. Trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets, as they need large amount of working capital. The manufacturing undertakings also require sizable working capital along with fixed investments. Size of business The working capital requirements of a concern are directly influenced by the size of the business. Greater the size of a business unit, generally larger will be the requirements of working capital. Manufacturing process In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Larger the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw material and other supplies have to be carried far a longer period in the process with progressive increment of labor and service costs the finished product is finally obtained.

34 Seasonal variations In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure the uninterrupted flow and process them during the entire year. A huge amount is thus blocked in the form of material inventories during such seasons, which gives rise to more working capital requirements. Rate of stock turnover There is a high degree of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having low rate of turnover. Firms credit policy A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand the concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital.

ADVANTAGES OF ADEQUATE WORKING CAPITAL

The main advantages of maintaining adequate amount of working capital are as follows: Solvency of the business Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Goodwill Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Quick and regular return on investments Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors, as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds in the future.

35 Ability to face crises Adequate working capital enables a concern to face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital. Regular payments of salaries, wages and other day-to-day commitments A company which has ample working capital can make regular payments of salaries, wages and other day-to-day commitments which raise the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. Easy loans A concern having adequate working capital, high solvency and good credit standing can arrange loans from the banks and others on easy and favorable terms. Regular supply of raw materials Sufficient working capital ensures regular supply of raw materials and continuous production.

BALANCED WORKING CAPITAL

Every business concern should have adequate working capital to run its business operations. It should have neither redundant for excess working capital nor inadequate or shortage of working capital. Both Excess, as well as short Working capital positions is bad for any business. Disadvantages of Redundant or Excessive Working Capital Excessive working capital means idle funds, which earn no profit for the business, and hence the business cannot earn proper rate of return on investments. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more changes of theft, losses and waste. Excessive working capital implies excessive debtors and defective credit policy, which may cause higher incidents of bad debts. When there is excessive working capital, relations with the bank and other financial institutions may not be maintained. It may result into overall inefficiency in the organization and also due to low rate of return on investments the value of shares may also falls.

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Dangers of Inadequate Working Capital A concern, which has inadequate working capital, can pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credits facilities. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. The firm cannot pay day-to-day expenses of its operations and creates inefficiencies, increase costs and reduces the profits if the business. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. It cannot buy its requirements in bulk and cannot avail of discounts, etc. and also the rate of return on investments also falls with the falls with the shortage of working capital.

ISSUES IN WORKING CAPITAL

The financial manager must determine levels and composition of current assets. He must see that right sources are tapped to finance current assets, and that current liabilities are paid in time. There are many aspects of working capital management which make it an important function of the financial manager: Time Working capital management requires much of the financial managers time. Investment Working Capital represents a large portion of the total investment in assets. Critically working Capital management has great significance for all firms but it is very critical for small firms. Growth The need for working capital is directly related to the firms growth. It is necessary for a financial manager to manage working capital in the best possible way to get the maximum benefit. Financial manager should pay special attention to the management of current assets on a continuing basis. Actions should be taken to curtail unnecessary investment in current assets.

37 There is a direct relationship between a firms growth and its working capital needs. As sales grow, the firm needs to invest more in inventories and debtors. These needs become very frequent and fast when sales grow continuously. The financial manager should be aware of such needs and finance them quickly. Continuous growth in sales may also require additional investment in fixed assets. The finance manager should pay particular attention to levels of current assets and the financing of current assets.

Policies for Financing Current Assets

A firm can adopt different financing policies vis--vis current assets. Three types of financing may be distinguished: Long-term financing The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserve and surplus (retained earnings). Short-term financing The short-term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short-term finance in the money market. Short-term finances include working capital funds from banks, public deposits, commercial paper, factoring of receivable etc. Spontaneous financing Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of business. Trade (suppliers) credit and outstanding expenses are examples of spontaneous financing. There is no explicit cost of spontaneous financing. A firm is expected to utilize these sources of finances to the fullest extent. The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long-term and short-term sources of finances. Depending on the mix of short-term and long-term financing, the approach followed by a company may be referred to as: Matching approach Conservative approach Aggressive approach

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Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Working Capital Management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management The individual components of working capital can be effectively managed by using various techniques and strategies

When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance. The main purposes of Working Capital Ratio Analysis are: To indicate working capital management performance; and To assist in identifying areas requiring closer management Three key points need to be taken into account when analyzing financial ratios. These key points are as follows:

39 The results are based on highly summarized information. Consequently, situations, which require control, might not be apparent, or situations, which do not warrant significant effort, might be unnecessarily highlighted. Different departments face very different situations. Comparisons between them, or with global ideal ratio values, can be misleading. Ratio analysis is somewhat one-sided; favourable results mean little, whereas unfavourable results are usually significant.

However, financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation.

Sources of Cash
The various sources of cash that provide the money to fund the working capital include the following: Existing cash reserves Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long term loans Profit or net income

Inventory Management
Inventories constitute the most significant part of current assets. Inventories are stock of the product, a company is manufacturing for sale and components to make that product. The various forms of inventory in a fertilizer manufacturing company are:
Raw Materials are those basic inputs that are converted into the finished products through the process of manufacturing. Work-In-Progress inventories are semi-manufactured products. Finished Goods inventories are completely manufactured products. Stores & Spares, loose tools, chemical catalysts, packing & Construction materials

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OBJECTIVES OF INVENTORY MANAGEMENT

The problems faced by an organization in the context of inventory management are:

To maintain a large size of inventory for efficient and smooth production & sales To maintain minimum investment in inventories to maximize profitability To ensure continuous supply of materials, spares & finished goods. To avoid both overstocking & under stocking of inventory To eliminate duplicate stock orders. This is possible with the help of a centralized To design proper organization for inventory management

operation

purchasing system.

41 Both Excessive & Inadequate Inventories are not desirable. The objective of Inventory Management is to determine & maintain the optimum level of inventory investment. The optimum level of inventory will lie between two danger points of excessive & inadequate inventories. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly the stocks are moving or how long each item of stock sits on shelves before being sold. Average stock holding periods are influenced by the nature of the business. The key issue for a business is to identify the fast and slow stock movers with the objective of establishing optimum stock levels for each category and thereby minimize the cash tied up in the stocks. Factors to be considered when determining the optimum stock levels include: What are the projected sales of each product? How widely available are each component, raw materials, etc.? How long does it take for delivery by the suppliers? Can one remove the slow movers from ones product range without compromising on the best- sellers? For better stock control, following measures can be adopted: Review the effectiveness of existing purchasing & inventory systems. Know the stock turnover for all major items of inventory. Apply tight controls to the significant few items & supply control for the remaining. Sell off outdated or slow moving merchandise. Consider the idea of outsourcing the manufacturing of the product to another manufacturer. Review security procedures to minimize losses through deterioration, pilferage, wastage & damages.

42 To facilitate furnishing of data for short-term & long-term planning & control of inventory

Receivable Management
Accounts Receivable refers to the amount owed by the debtors to the business. They are usually created because of trade credit that is given to the customers of the business. These receivables have three characteristics: It involves an element of risk, which should be carefully analyzed. It is based on economic value It implies futurity. To maintain a proper flow of funds in the business in order to make timely payments to the creditors, to buy raw materials & to run the day-to-day activities of the business, it is essential that the debtors make their payments on time. The interval between the date of sale & the date of payment has to be financed out of the working capital. Thus, trade debtors represent investment. Objectives of Receivable Management The objective of Receivable Management is to promote sales & profits until that point is reached where the returns that the company gets from funding receivables is less than the cost that the company has to incur in order to fund these receivables . However, to maintain these receivables the company has to incur certain costs such as: Additional fund requirements for the company When a firm maintains receivables, some of its resources remain blocked in them so to finance the activities during that time gap the firm requires funds. Administrative Costs Collecting Costs Defaulting Costs

43 The size of receivables or investment in Receivable Management is determined by the firms credit policy & level of sales. Receivable management invested or to whom money can be given. Receivable management involves the careful consideration of the following aspects: Forming the credit policy Executing the credit policy Formulating & executing the collection policy The Credit Policy is the policy followed by the company with respect to the credit standards adopted, any incentive in the form of cash discount offered, and also the period over which the discount can be utilized by the customers & the collection effort made by the company. All these variables underlying a companys credit policy influence the volume of sales and hence the profits of the company. is the process of making the decision of selection of trade debtors in which the funds could be

Cash Management
Cash, the most liquid asset and also referred to as the life blood of a business enterprise and is of vital importance to the daily operations of the business firms. Its efficient management is crucial to the solvency of the business because cash is the focal point of the fund flows in a business. If a business has no cash and no way of getting any cash, it will have to close down. Cash Management is concerned with the managing of: Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash. Cash Management refers to management of cash balance and the bank balance and also short term deposits. The term cash may be used in two different ways:

44 1) It may include currency, cheques, drafts, demand deposits held by the firm i.e. pure cash or generally accepted cash equivalents. 2) In a broader sense, it also includes near cash assets such as marketable securities and short term deposits with banks. For cash management purposes, the term cash is used in this broader sense i.e. it covers cash, cash equivalents and those assets which are immediately convertible to cash.

Objectives of Cash Management The cash management strategies are generally built around two goals: To provide cash needed to meet the obligations, and To minimize the idle cash held by the firm The risk return trade-off of any firm can be reduced to two prime objectives for the firms Cash Management System: 1) Meeting the Cash Outflows: This will help the firm in avoiding the chance to default in meeting financial obligations otherwise the goodwill of the firm is adversely affected. Also this will further help in availing the opportunities of getting cash discounts by making early or prompt payments and meeting unexpected cash outflows without much problem. 2) Minimizing the Cash Balance

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Loans and Advances

Loans and Advances are one of the important factors of working capital. In current assets loans and advances play a significant role. When we talk about the working capital management it is necessary to consider Loans & Advances, as they are a major component of Current assets and along with the equity of the company for a source of generating cash in the organization. While analyzing the loans & advances position of IFFCO the following ratios have to be calculated for better understanding i.e. Loans and advances to Current Assets ratio Loans and advances to Working capital ratio

Operating Cycle
Operating Cycle is the times duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of a manufacturing company involves three phases: Acquisition of resources such as raw material, labour, power and fuel etc. Manufacture of the product which includes conversion of raw material into workin-progress into finished goods. Sale of the product either for cash or on credit. Credit sales create account receivable for collection.

Purchases Inventory Period

Credit Sales

Collection

46 Accounts Receivable Period

Accounts Payable Period Payments

Cash Conversion Cycle

Operating Cycle The operating cycles are of two types: 1. Gross Operating Cycle 2. Net Operating Cycle or Cash Conversion Cycle Gross Operating Cycle Gross operating cycle is a tool which measures the total number of days from the day the purchases are made or the stock arrives to the day all the collections are made. Cash is said to be blocked till the collections have been collected. So the sooner the cash is received from the consumers the better is for the company as they get cash for further production. Gross Operating Cycle is given as follows: Operating cycle (OC) Cash Conversion Cycle The cash conversion cycle (also referred to as CCC or the net operating cycle) is the analytical tool of choice for determining the investment quality of two critical assets inventory and accounts receivable. The CCC tells us the time (number of days) it takes to convert these two important assets into cash. A fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables. The cash conversion cycle is comprised of three standard, so-called activity ratios relating to the turnover of inventory, trade receivables and trade payables. These components of the CCC can be expressed as a number of times per year or as a number of days. CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) - Days Payable Outstanding (DPO) = Days Inventory Outstanding(DIO) + Days Sales Outstanding(DSO)

47 The cash conversion cycle (CCC) measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. Generally, the lower this number is the better for the company. The components of CCC are calculated as follows: Days Inventory Outstanding (DIO) This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is the better. Days Inventory = Average Inventory

Outstanding (DIO) Cost of Goods sold (COGS) / 365 Broadly, the smaller number of days, the more efficient a company - inventory is held for less time and less money is tied up in inventory. Instead, money is freed up for things like research and development, marketing or even share buybacks and dividend payments. If the number of days is high, that could mean that sales are poor and inventories are piling up in warehouses. If inventory days are increasing, thats not necessarily a bad thing. Companies normally let inventories build up when they are introducing a new product in the market or ahead of a busy sales period. However, if you dont foresee an obvious pickup in demand coming, the increase could mean that unsold goods will simply collecting dust in the stockroom. Days Sales Outstanding (DSO) This looks at the number of days needed to collect on sales and involves Accounts Receivables. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Again, smaller is better. Average Accounts Receivable Net Sales / 365 Outstanding (DSO) If a company's collection period is growing longer, it could mean problems ahead. = The company may be letting customers stretch their credit in order to recognize greater top-line sales and that can spell trouble later on especially if customers face a cash crunch. Getting money right away is preferable to waiting for it - especially Days Sales

48 since some of what is owed may never get paid. The quicker a company gets its customers to make payments, the sooner it has cash to pay for salaries, merchandise and equipment, loans and, best of all, dividends and growth opportunities. Days Payables Outstanding (DPO) This involves the company's payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a longer DPO is better. Days Payable Outstanding (DPO) = Average Accounts Payable Cost of Goods sold (COGS) / 365

Key Ratios
The ratios can be divided into following categories according to financial activity or functions to be evaluated: Ratios related to Inventory Management Ratios related to Receivables Management Ratios related to Cash Management Profitability Ratios Ratios related to Inventory Management 1. Inventory Turnover Ratio 2. Inventory to Working Capital Ratio 3. Inventory to Current Assets Ratio 4. Inventory to Sales Ratio

49 1. Inventory Turnover Ratio The inventory turnover measures that how well the company can manage to sell its inventory. Another way of saying is how efficiently the company turns inventory into sales. The purpose is to ensure the blocking of only required minimum funds in inventory. Importance of Inventory Turnover If the company can quickly sell its inventory, the inventory turnover will be higher. Conversely, if the company cannot sell its inventory well, then the inventory turnover will be low. One has to watch this figure closely if the inventory ratio climbs too high, then the company may be keeping too little inventory. This could cause lost profits due to customer orders that had to wait until inventory arrived.
Inventory Turnover Ratio = Cost of Goods sold (COGS) Average Inventory

2. Inventory to Working Capital ratio The inventory to working capital ratio measures how well the company is able to generate cash using working capital at its current inventory level. This ratio shows the relationship between investments made in inventory & the total net investment in working capital. Inventory is an important part of working because of its direct impact on the profits of the organization. The value of inventory is susceptible to changing price levels, fluctuation in business activities, variation in consumer demand, obsolescence & other unpredictable factors that determine the market conditions. Therefore, working capital should be sufficient to provide a cover for the possible losses in inventory value. Importance of Inventory to Working Capital An increasing Inventory to Working Capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much Working Capital invested in Inventory, they may have difficulty having enough Working Capital to make payments on Short-Term Liabilities and Accounts Payable. This is a great ratio to be used with several others to really pick apart the inner workings of a company.
Inventory to = Inventory Working Capital

X 100

50

Working Capital

3. Inventory to Current Assets Ratio Ratio Inventory is one of the largest components of the current assets. The position of inventory indicates operational efficiency of organization. The inventory to current assets ratio measures how much percentage of current assets is formed by the inventories. This ratio is essential as inventories are the most illiquid of all current assets as sometimes it becomes difficult to convert inventory ( raw materials, workin-progress and finished products ) into cash on a short notice. Importance of inventory to current assets An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent & it may be difficult to convert them into cash immediately. On the other hand, if the position of inventory is lower in current assets, it indicates higher operational efficiency of the organization. Normally, less than 50 % of current assets are treated as average position of inventory.
Inventory to Current Assets Ratio = Inventory Current Assets

X 100

4. Inventory to Sales Ratio The Inventory to Sales ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. Importance of Inventory to Sales An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. Viewing this ratio over several periods reveals the important aspect of the company's ability to manage inventory while attempting to increase sales. It is also important to compare this ratio among several companies to gauge how well each one performs, and to compare their ratios to industry averages.
Inventory to = Inventory

X 100

51
Sales

Sales Ratio

Ratios related to Receivable Management 1. Debtors turnover ratio 2. Average collection period 3. Debtors to current assets ratio 4. Debtors to working capital ratio 5. Debt to Equity Ratio 1. Debtors Turnover Ratio This ratio is also known as Accounts Receivable Turnover Ratio. Accounts Receivable is the amount that customers owe the company. The Accounts Receivable Turnover measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers, just as Average Collection Period measures this in days. Importance of Accounts Receivable Turnover A high or increasing Accounts Receivable Turnover is usually a positive sign showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A possible negative aspect to an increasing Accounts Receivable Turnover is that the company may be too strict in its credit policies and missing out on potential sales.
Debtor Turnover Ratio = Net Sales Average Accounts Receivable

52 2. Average Collection Period The Average Collection Period measures the average number of days it takes for the company to collect revenue from its credit sales. The Average Daily Sales is the Net Sales divided by 365 days in the year. The company will usually state its credit policies in its financial statement, so the Average Collection Period can be easily gauged as to whether or not it is indicating positive or negative information. Importance of Average Collection Period This ratio reflects how easily the company can collect on its customers. It also can be used as a gauge of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. This could be an indicator that the company's customers are in trouble, which could spell trouble ahead. This could also indicate the company has loosened its credit policies with customers, meaning that they may have been extending credit to companies where they normally would not have. This could temporarily boost sales, but could also result in an increase in sales revenue that cannot be recovered, as shown in the Allowance for Doubtful Accounts.
Average Collection Period = 360 Debtor Turnover Ratio

3. Debtors to Current Assets Ratio Debtor to current assets ratio indicates the position of debtors in total current assets. This ratio is calculated by debtors with current assets. Debtors are one of the largest components of current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy on respect of other current assets, it indicates poor recovery of the company.
Debtors to Current Assets Ratio = Debtors Current Assets

X 100

53

4. Debtors to Working Capital Ratio Debtor to working capital ratio is one of the important ratios for analysis of working capital management. Working capital is directly related with the position of debtors. If debtors are lower as compared to working capital, it indicates proper and smooth utilization of working capital. But on the other hand, the amount of debtor is very large in that condition, working capital blocked and operational efficiency is directly affected.
Debtors to Working Capital Ratio = Debtors Working Capital

X 100

5. Debt to Equity Ratio Debt to Equity ratio describes the lenders contribution for each rupee of the owners contribution. The ratio is directly computed by dividing total debt by equity or net worth.
Debt to Equity Ratio = Debt Equity

Importance of Debt to Equity Ratio The ratio shows the extent to which debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firms operations due to the increasing interference and pressure from creditors. A low debt-equity ratio implies a greater claim of owners than capital. Ratios Related to Cash Management 1. Working capital ratio or current ratio 2. Liquid ratio or Acid-test ratio 3. Cash to current assets ratio 4. Sales to current assets ratio 5. Working capital turnover ratio 6. Sales to working capital ratio

54 1. Working Capital Ratio or Current Ratio The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is, the level of safety provided by the excess of current assets over current liabilities. The current ratio compares all the Current Assets of a company to all the Current Liabilities. What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt? Importance of Working capital ratio or current ratio At a minimum, you would hope the company whose financial performance you are analyzing could meet to pay its Current Liabilities if it were to liquidate all its Current Assets. This would translate to a Current Ratio of 1:1 - the point where the Current Assets equal the Current Liabilities. As with all the other performance ratios, the Current Ratio value depends on the industry in which the company is operating. It is also important to know what assets make up most of the Current Assets. Inventory and Accounts Receivable, which are part of the Current Assets, cannot always be counted on as easily transferred to cash. Cash and Marketable Securities comprising the majority of the Current Assets would definitely be favorable. Knowing this, would the company you are analyzing truly be able to meet its financial obligations is it in fact had to sell its Current Assets? The Current Ratio rising over time will be favorable.
Current Ratio = Current Assets Current Liabilities

55 2. Liquid Ratio or Acid-Test Ratio or Quick Ratio Liquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio is a more vigorous test of liquidity than current ratio. The term liquidity refers to the ability of the firm to pay its short term obligations as & when they become due. Current assets include inventories and prepaid expenses, which are not easily converted into cash within a short span of time. So, quick ratio may be referred to as the relationship between quick assets i.e. (current assets inventories) & current liabilities. An asset is said to be liquid if it can be converted into cash within a short span of period without loss of value. Importance of Liquid Ratio If a company one is analyzing looks good while testing it against the Current Ratio, then the Quick Ratio should be your next test to apply. Companies with steadily rising Inventories may look good with the Current Ratio, but will have a deteriorating effect on the Quick Ratio, since we subtract the Inventory out. The Quick Ratio rising over time is favorable.

Quick Ratio =

Current Assets Inventories Current Liabilities

3. Cash to Current Assets Ratio This ratio basically measures what percentage of the current assets is formed by the cash component. This is a more stringent measure of liquidity as it considers the most liquid current asset. Importance of Cash to Current Assets Ratio High or increasing Cash to Current Assets ratio is generally a positive sign, showing the company's liquid assets represent a larger portion of its Total Current Assets. It also indicates the company may be better able to convert its non-liquid assets, such as inventory, into cash.
Cash to Current Asset Ratio = Cash Current Assets X 100

56 4. Sales to Current Assets Ratio The Sales to Current Assets ratio measures how well a company is making use of its assets in generating sales. This ratio is most valid in industries where companies hold the majority of their own inventories in-house, as opposed to having their customers hold their inventory for them. Importance of Sales to Current Assets The Sales to Current Assets ratio is best measured over several periods compared to industry averages, as the amount of Current Assets varies widely among companies and industries. Decreasing Sales to Current Assets ratio is generally a negative sign, indicating the company may have slowed production, decreasing the amount of inventory and resultantly the Current Assets.
Sales to Current Asset Ratio = Sales Current Assets

5. Working Capital Turnover Ratio The Working Capital Turnover ratio measures the company's Net Sales from the Working Capital generated. Note that another ratio exists, the Sales to Working Capital Ratio also measures Net Sales to Working Capital. We chose to interchange the usual components of Working Capital (Total Current Assets - Total Current Liabilities) with an alternate method (shown above). With two similar ratios using slightly different methods to compute Working Capital, plotting both of these ratios together to see their differences would be wise. Importance of Working Capital Turnover A high or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio.

Working Capital Turnover Ratio

Sales Average Working Capital

57 6. Sales to Working Capital Ratio The Sales to Working Capital ratio measures how well the company's cash is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Importance of Sales to Working Capital An increasing Sale to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods. This ratio can help uncover questionable management decisions such as relaxing credit requirements to potential customers to increase sales, increasing inventory levels to reduce order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold on to its cash.
Working Capital Turnover Ratio = Sales Average Working Capital

Profitability Ratios 1. Return on Assets (ROA) 2. Return on Equity (ROE) 3. Return on Capital Employed (ROCE) 4. Net Profit Margin 1. Return on Assets (ROA) ROA is an indicator of how profitable a company is relative to its total assets. ROA tells how efficient management is at using its assets to generate earnings. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment.
Return on Assets (ROA) = Profit After Tax Average Total Assets

2. Return on Equity (ROE)

58 The return on equity is net profit after taxes divided by average equity. It measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity. ROE shows how well a company uses investment funds to generate earnings growth.
Return on Equity (ROE) = Profit After Tax Average Equity

3. Return on Capital Employed (ROCE) ROCE is used to prove the value the business gains from its assets and liabilities, a business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.
Return on Capital Employed (ROCE) = Profit Before Tax Average Capital Employed

4. Net Profit Margin Net Profit Margin ratio is measured by dividing profit after tax by sales:
Net Profit Margin = Profit After Tax Sales

Importance of Net Profit Margin Net profit margin ratio establishes a relationship between net profit and sales and indicates managements efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firms ability to turn each rupee sales into net profit.

59

Appendix B: Cash Management

Cash, the most liquid asset and also referred to as the life blood of a business enterprise and is of vital importance to the daily operations of the business firms. Its efficient management is crucial to the solvency of the business because cash is the focal point of the fund flows in a business. If a business has no cash and no way of getting any cash, it will have to close down. Cash Management refers to management of cash balance and the bank balance and also short term deposits. A Cash Management System is essential for a company for the following two reasons: Uncertainty of cash flows Lack of synchronization of inflows and outflows Cash Management is concerned with the managing of: Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash.

Goals of Cash Management

The Cash Management Strategies are generally built around Two Goals: To provide cash needed to meet the obligations, and To minimize the idle cash held by the firm In order to resolve the uncertainty about cash flow prediction and the lack of synchronization between cash receipts and payments, the firm should develop appropriate strategies for cash management. The firm should evolve strategies regarding the following four facets of Cash Management: Cash Budgeting/ forecasting: Cash inflows and Cash Outflows should be planned to protect cash surplus or deficit for each period of planning. Cash Budget should be prepared for this purpose.

60 Manage the Cash Flows: The flow of cash should be managed properly. The cash inflows should be accelerated, while, as far as possible, decelerating the cash outflows. Managing of cash is done through: Organized collection management Proper disbursement management Optimum Cash Level: The firm should decide about the optimum level of cash balances. The cost of excess cash and danger of cash deficiency should be matched to determine the optimum level of cash balances.

61 Investment of Surplus Cash: The surplus cash balances should be properly invested to earn profits. The firm should decide about the division of such cash balance between bank deposits, marketable securities and inter-corporate lending.

Motives for Holding Cash

There are four primary motives for holding cash. 1. Transaction Motive Business firms as well as individuals keep cash because they require it for meeting demand for cash flow arising out of day-to-day transactions. The firm needs cash primarily to make payments for purchases, wages & salaries, other operating expenses, taxes, dividends, etc. The need to hold cash would not arise if there were perfect synchronization between cash payments and cash receipts, i.e. enough cash is received when the payment has to be made. For those periods, when cash payments exceeds the cash receipts, the firm should maintain some cash balance to be able to make required payments. For transaction purpose, a firm may invest its funds in marketable securities. The Transaction Motive mainly refers to holding cash to meet anticipated payments whose timing is not perfectly matched with cash receipts. In other words, the necessity of keeping minimum cash balance to meet payment obligations arising out of expected transactions is known as Transaction Motive for holding cash. 2. Precautionary Motive

62 A firm should maintain larger cash balance that required for day-to-day transactions in order to avoid any unforeseen situation arising because of insufficient cash. The necessity of keeping cash balance to meet any unforeseen situation or unpredictable obligation is known as Precautionary motive for holding cash. The Precautionary motive for holding cash depends on the predictability of cash flows. The amount of precautionary cash is also influenced by the firms ability to borrow at short notice when the need arises. Stronger the ability of the firm to borrow at short notice less is the need for precautionary balance. The precautionary balance may be kept in the form of cash or marketable securities. Marketable securities play an important role here. The amount of cash set aside for precautionary reasons may not earn anything, but if these funds are invested in high liquid marketable securities, then they can give a lot of profits. Hence, the amount of cash, a firm holds for transaction and precautionary depends upon: The expected cash inflows and cash outflows based on the cash budget and forecasts, encompassing long and short range cash needs of the firm i.e. Degree of Predictability of its cash flows The degree of deviation between the expected and actual cash flows Efficient planning and control of cash The firms ability to borrow at short notice in the event of any emergency The willingness and the capacity of the firm to take risk of running short of cash 3. Speculative Motive The firms desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is known as Speculative Motive for holding cash. The Speculative Motive provides affirm with sufficient liquidity to take advantage of unexpected profitable opportunities that may suddenly appear (And just as suddenly disappear if not capitalize immediately). However, not many firms engage their funds in speculative motives to a great extent. Thus, the primary motives to hold cash and marketable securities are: Transaction Motive and Precautionary Motive.

63 Cash Management, thus, deals with optimization of cash as an asset and for this purpose the financial manager has to take various decisions from time to time. He has to deal as the cash flows in the direction of the firm. Even if a firm is highly profitable, its cash inflows may not exactly match the cash outflows. He has to manipulate and synchronize the two for the advantage of the firm by investing excess cash if any as well as arranging funds to cover the deficiency.

Factors affecting the Cash Needs

Intrinsic factors influencing the cash management Cash Cycle: The term cash cycle refers to the length of the time between the payment for the purchase of raw materials and the receipts of the sales revenue. Cash Inflows and Cash Outflows Cost of Cash Balance Other Consideration: There may be several subjective considerations such as uncertainties of a particular trade, staff required for cash management etc., which will have a bearing on determining the cash balance required by a firm. Extrinsic factors influencing the cash management Management Information System (MIS) of the banks: They provide full details of the payments received. The details provided by them contain information of the payment of the Field Representative (FR), Area Office (AO) and State Office (SO). The report is made such that it can be used by the Marketing Central office (Mkco), State Office, Area Office and Field Representative for verification of payments received and to find out any discrepancies, if there any. Innovative Schemes: Banks generates various new schemes time to time which changes the cash flow of the organization. Interest Lost: If any payment gets delayed even by one day, there is a loss of investment over that income. So banks are bound by the agreement by which they pay interest for any delay on their part.

64 Bank Charges: Banks arrange their representatives for pick up of demand drafts from the Field Representatives, Area Offices and State Offices and deposit them in the banks. For this service they charges transportation cost and transaction cost, which vary depending on the banks.

DATA ANALYSIS OPERATING CYCLES

1. Days Inventory Outstanding (DIO) Days Inventory Outstanding (DIO) = Average Inventory Cost of Goods sold (COGS) / 365 (in Rs. Crores) Year 2008-09 2009-10 2010-11 2011-12 2012-13 Average Inventory 976.03 1225.57 1901.79 1930.52 1654.23 COGS 6809.48 9166.48 9578.09 11336.77 31496.75 DIO (number of days) 52.317 48.801 72.473 62.155 19.170

65

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The smaller the number of days of inventory outstanding, the more efficient a company is. IFFCO day inventory outstanding is around 19 days for the year 2012-13 which is very good. Inventory is held for less time and less money is tied up in inventory. Instead, money is freed up for things like research and development, marketing or even share buybacks and dividend payments. The DIO had always been showing a decreasing trend apart from the period of 2010-11 in which inventory was build up due to the purchase of Paradeep plant. 2. Days Sales Outstanding

Days Sales Outstanding (DSO)

Average Accounts Receivable Net Sales / 365

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Avg. A/c Receivables (in crores) 397.025 399.495 418.04 387.72 410.495

Net Sales (in Crores) 7396.87 9942.93 10330.11 12162.82 32933.30

DSO (number of days) 19.591 14.665 14.771 11.635 4.550

66

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Days Sales Outstanding (DSO) looks at the number of days needed to collect on sales and involves Accounts Receivables. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Most of sales of IFFCO are on cash basis and sales to large institutions only are on credit basis. The DSO for the year 2012-13 is 4.550, which is very good for the company. The DSO is showing a decreasing trend meaning that the days to collect on sales are decreasing every year. 3. Days Payable Outstanding Days Payable Outstanding (DPO) = Average Accounts Payable Cost of Goods sold (COGS) / 365 (in Rs. Crores) Year 2008-09 2009-10 2010-11 2011-12 2012-13 Average Accounts Payable 728.425 934.165 913.425 833.87 1664.225 COGS 6809.48 9166.48 9578.09 11336.77 31496.75 DPO (number of days) 39.045 37.198 34.809 26.847 19.286

67

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
This involves the company's payment of its own bills or Accounts Payables. If this can be maximized, the company holds onto cash longer, maximizing its investment potential. The DPO of IFFCO is around 19 days for the year 2012-13. It is also observed that DPO is decreasing every year. From the data provided, it is found out that IFFCO had sufficient funds to make payments of its own bills and make investments in various activities.

4. Gross Operating Cycle Gross Operating cycle (GOC) = DIO + DSO

Year 2008-09 2009-10 2010-11 2011-12 2012-13

DIO 52.317 48.801 72.473 62.155 19.170

DSO 19.591 14.665 14.771 11.635 4.550

(in Days) GOC 71.908 63.466 87.244 73.791 23.720

68

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Gross operating cycle is a tool which measures the total number of days from the day the purchases are made or the stock arrives to the day all the collections are made. Cash is said to be blocked till the collections have been collected. So the sooner the cash is received from the consumers the better is for the company as they get cash for further production. IFFCO gross operating cycle is around 24 days. This is very good for the company as a fast turnover rate of these assets is what creates real liquidity and is a positive indication of the quality and the efficient management of inventory and receivables.

5. Cash Conversion Cycle (CCC)

Cash Conversion Cycle (CCC)

DIO + DSO

DPO

Year 2008-09 2009-10 2010-11

DIO 52.317 48.801 72.473

DSO 19.591 14.665 14.771

DPO 39.045 37.198 34.809

(in Days) CCC 32.863 26.269 52.435

69 2011-12 2012-13 62.155 19.170 11.635 4.550 26.847 19.286 46.943 4.434

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The cash conversion cycle (CCC) measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. IFFCO CCC is of around 4.4 days in the year 2012-13. This means that the company is able to generate the cash within this period after making it payments of its own bills. Since it is very low, it is good for the company.

Ratios related to Inventory Management

1. Inventory Turnover Ratio Inventory Turnover Ratio = Cost of Goods sold (COGS) Average Inventory

(in Rs. Crores) Year 2008-09 2009-10 2010-11 2011-12 COGS 6809.48 9166.48 9578.09 11336.77 Average Inventory 976.03 1225.57 1901.79 1930.52 Inventory Turnover Ratio 6.977 7.479 5.036 5.872

70 2012-13 31496.75 1654.23 19.040

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The inventory turnover ratio at IFFCO is 19.040 in 2012-13 . It means that that the company is turning its inventory of finished goods into sales 19.040 times in a year and is in good position. There had been a decrease in the inventory turnover ratio from 7.479 in 201210 to 5.036 in 2010-11. During this period, there was a large amount of inventory in the company because of the purchase of the Paradeep production plant. During all other period, the turnover is always increasing.

2.

Inventory to Working Capital Ratio Inventory to Working Capital Ratio = Inventory Working Capital X 100

Year 2008-09 2009-10 2010-11 2011-12

Inventory (in Crores) 931.50 1519.64 2283.94 1577.10

Working Capital (in Crores) 1499.14 3387.39 4880.05 4404.17

Inventory to Working Capital Ratio 62.136 44.862 46.802 35.809

71 2012-13 1731.36 4490.10 38.559

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Inventory to Working Capital Ratio measures how well the company is able to generate cash using working capital at its current inventory level. An increasing inventory to working capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much working capital invested in inventory, they may have difficulty having enough working capital to make payments on short term liabilities and accounts payable. Inventory to working capital ratio for IFFCO has been decreasing consistently with increasing very marginally in the year 2011-12 and in 2012-13. 3. Inventory to Current Assets Ratio Inventory to Current Assets Ratio = Inventory Current Assets X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Inventory (in Crores) 931.50 1519.64 2283.94 1577.10 1731.36

Current Assets (in Crores) 2603.98 4748.98 6081.28 5775.74 7672.99

Inventory to Current Assets Ratio 35.772 31.999 37.557 27.306 22.564

72

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Inventory to Current Assets Ratio measures that how much percentage of current assets is formed by the inventories. An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent and it may be difficult to convert them into cash immediately. Normally, less than 50 % of current assets are treated as average position of inventory. IFFCO has shown a decrease in this ratio over the past years, which indicates a GOOD inventory position for IFFCO and, the ratio was never been above 38%. 4. Inventory to Sales Ratio Inventory to Sales Ratio = Inventory Sales X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Inventory (in Crores) 931.50 1519.64 2283.94 1577.10 1731.36

Sales (in Crores) 7396.87 9942.93 10330.11 12162.82 32933.30

Inventory to Sales Ratio 12.593 15.284 22.110 12.967 5.257

73

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Inventory to Sales Ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. As per the data of IFFCO, this ratio had increased initially till the year 2010-11but is falling down consistently after that time, which is a POSITIVE sign indicating good movement of inventory.

RATIOS RELATED TO RECEIVABLE MANAGEMENT

1. Debtors turnover ratio Debtor Turnover Ratio = Net Sales Average Accounts Receivable

Year 2008-09 2009-10 2010-11 2011-12

Net Sales (in Crores) 7396.87 9942.93 10330.11 12162.82

Avg. A/c Receivables (in Crores) 397.03 399.50 418.04 387.72

Debtor Turnover Ratio 18.631 24.888 24.711 31.370

74 2012-13 32933.30 410.50 80.227

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
This ratio is also known as Accounts Receivable Turnover Ratio and measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers. IFFCO have a high and increasing Accounts Receivable Turnover which is a Positive Sign. The company is able to turnover its debtors 80.227 times in a year.

2.

Average collection period Average Collection Period Sales (in Crores) 7396.87 9942.93 10330.11 12162.82 32933.30 = 360 Debtor Turnover Ratio Debtor Turnover Ratio 18.631 24.888 24.711 31.370 80.227 Average Collection Period 19.323 14.465 14.569 11.476 4.487

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Average Debtors (in Crores) 397.03 399.50 418.04 387.72 410.50

75

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Average Collection Period represents the average number of days for which a firm takes to collect accounts receivables. It measures the quantity of debtors. The Average Collection Period for IFFCO was around 4.5 days in 2012-13. This is extremely good considering the fact that IFFCO is a fertilizer company, and functions as a cooperative. The maximum collection period during this five year period is around 17 days in the year 2009-10 and is decreasing since then.

3. Debtors to current assets ratio Debtors to Current Assets Ratio = Debtors Current Assets X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Debtors (in Crores) 324.59 474.40 361.68 413.76 407.23

Current Assets (in Crores) 2603.98 4748.98 6081.28 5775.74 7672.99

Debtors to Current Assets Ratio 12.465 9.990 5.947 7.164 5.307

76

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Debtors to Current Assets Ratio indicates the position of debtors in total current assets. This ratio is calculated by debtors with current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect of other current assets, it indicates poor recovery of the company. As Per the table, the Debtors to Current Assets Ratio for IFFCO decreased from 2008-09 to 2009-10 and then increased in the year 2011-12 and then decreasing onwards. The decrease is a healthy sign showing proper realization of debts in 2012-13.

4. Debtors to working capital ratio Debtors to Working Capital Ratio = Debtors Working Capital X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Debtors (in Crores) 324.59 474.40 361.68 413.76 407.23

Working Capital (in Crores) 1499.14 3387.39 4880.05 4404.17 4490.10

Debtors to Working Capital Ratio 21.652 14.005 7.411 9.395 9.070

77

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Working capital is directly related with the position of debtors. If debtors are lower as compared to Working Capital, then it indicates proper and smooth utilization of working capital. But on the other hand, the amount of debtor is very large in that condition, Working capital blocked and operational efficiency is directly affected. From the data, it can be seen that this ratio for IFFCO has been decreasing which is good for the company. There was a increment in the year 2011-12 due to increase in the debtors but again it continued to decrease.

5. Debt to Equity Ratio Debt to Equity Ratio Debt (in Crores) 647.09 5035.39 6486.12 6775.64 12802.78 = Debt Total Equity Equity (in Crores) 3301.15 3555.38 3641.84 3688.66 3958.87

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Debt to Equity Ratio 0.196 1.416 1.781 1.837 3.234

78

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The ratio shows the extent to which debt financing has been used in the business. A high ratio means that claims of creditors are greater than those of owners. A high level of debt introduces inflexibility in the firms operations due to the increasing interference and pressure from creditors. A low debt-equity ratio implies a greater claim of owners than capital. At IFFCO, this ratio is increasing every year. It means that increase in debt of the company is more than the increase in the equity. In the year 2012-13, it increased to 3.234 from 1.837 in the year 2011-12 because of the major increase in the short term loans from the banks.

RATIOS RELATED TO CASH MANAGEMENT

1. Working capital ratio or current ratio Current Ratio = Current Assets Current Liabilities

Year 2008-09

Current Assets (in Crores) 2603.98

Current Liabilities (in Crores) 1104.84

Current Ratio 2.357

79 2009-10 2010-11 2011-12 2012-13 4748.98 6081.28 5775.74 7672.99 1361.58 1201.23 1371.57 3182.89 3.488 5.063 4.211 2.411

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Working Capital Ratio is used to analyze the short term solvency of the company. Usually a ratio of 2:1 is considered to be the best current ratio. Higher the ratio, greater is the ability of the firm to meet its short term obligations. Current Ratio at IFFCO is always greater than 2 in all five years for which data has been analyzed indicating that IFFCO never really face a major problem in meeting its short-term liabilities.

2. Liquid ratio or Acid-test ratio or Quick ratio Quick Ratio = Current Assets - Inventories Current Liabilities

Year 2008-09 2009-10 2010-11

Current Assets (in Crores) 2603.98 4748.98 6081.28

Inventories (in Crores) 931.50 1519.64 2283.94

Quick Assets (in Crores) 1672.48 3229.34 3797.34

Current Liabilities (in Crores) 1104.84 1361.58 1201.23

Quick Ratio 1.514 2.372 3.161

80 2011-12 2012-13 5775.74 7672.99 1577.10 1731.36 4198.64 5941.63 1371.57 3182.89 3.061 1.867

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be satisfactory. This is so because if the quick assets are equal to the current liabilities then the company may be able to meet its entire short-term obligations pretty conveniently. The quick ratio of the company is above 1 for all the five years. The quick ratio was 3.161 and 3.061 during the year 2010-11and 2011-12 respectively. This is due to large amount of inventory at IFFCO during that period. However, the reason for this is the purchase of Paradeep production plant during that period.

3. Cash to current assets ratio Cash to Current Asset Ratio Cash Current Assets

X 100

Year 2008-09

Cash (in Crores) 199.10

Current Assets (in Crores) 2603.98

Cash to Current Asset Ratio (%) 7.646

81 2009-10 2010-11 2011-12 2012-13 98.22 330.84 243.32 69.63 4748.98 6081.28 5775.74 7672.99 2.068 5.440 4.213 0.907

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of cash at hand and cash at bank. Upon analyzing the data of the past 5 years for IFFCO it was observed that the cash balances formed only a very small percentage of the current assets. In the last 5 years, the highest was 7.65% in the year 2008-09 after which it is decreasing. The ratio had variations in this period an in the year 2012-13, it was 0.91%. This is a POSITIVE SIGN as it shows effective utilization of the funds of the organization and there is not much of idle cash with the organization. 4. Sales to current assets ratio
Sales to Current Asset Ratio = Sales Current Assets

Year 2008-09 2009-10

Sales (in Crores) 7396.87 9942.93

Current Assets (in Crores) 2603.98 4748.98

Sales to Current Asset Ratio 2.841 2.094

82 2010-11 2011-12 2012-13 10330.11 12162.82 32933.30 6081.28 5775.74 7672.99 1.699 2.106 4.292

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Sales to Current Assets Ratio basically measures how well a company is making use of its assets in generating sales. An increasing sale to current assets ratio is a POSITIVE SIGN as it indicates that the company has a healthy production scenario because of which most of inventory is being converted into sales for the company. IFFCO has shown a decrease in its sales to current assets ratio from 2009-10 to 2011-12 after which it is constantly increasing which implies that the company is doing well and inventory is not being held up at any stage in the production process.

5. Working capital turnover ratio Working Capital = Current Assets - Current Liabilities Working Capital Turnover Ratio = Sales Average Working Capital

Year

Sales (in Crores)

Working Capital (in Crores)

Working Capital Turnover Ratio

83 2008-09 2009-10 2010-11 2011-12 2012-13 7396.87 9942.93 10330.11 12162.82 32933.30 1580.36 2443.27 4133.72 4642.11 4447.14 4.680 4.070 2.499 2.620 7.406

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
IFFCO has a high working capital turnover ratio. A high or increasing Working Capital Turnover is usually a Positive Sign, showing the company is better able to generate sales from its Working Capital. The company has been able to gain more Net Sales with the smaller amount of Working Capital in 2012-13 as compared to that in 2011-12. The working capital turnover had been decreasing from 4.860 in the year 2008-09 to 2.499 in 2010-11 but it increasing since then to 7.406 in the year 2012-13.

6. Sales to working capital ratio Working Capital = Current Assets - Current Liabilities Sales to Working Capital Ratio = Sales Average Working Capital

Year

Sales (in Crores)

Working Capital (in Crores)

Sales to Working Capital Ratio

84 2008-09 2009-10 2010-11 2011-12 2012-13 7396.87 9942.93 10330.11 12162.82 32933.30 1580.36 2443.27 4133.72 4642.11 4447.14 4.680 4.070 2.499 2.620 7.406

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
The Sales to Working Capital ratio measures how well the company's working capital is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. The sales to working capital ratio has been increasing from 2011-12 for IFFCO which is good as it implies that the company is generating more & more sales and is able to utilize its working capital more efficiently with the passing years. The decrease of the ratio in the
previous years was due to the increase in inventory holding which was required for the Paradeep production plant.

PROFITABILITY RATIOS
1. Return on Assets Return on Assets (ROA) Profit After Tax Average Total Assets

85

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Profit After Tax (in Crores) 319.64 341.35 175.02 257.59 360.01

Average Total Assets (in crores) 4449.22 6709.33 9855.58 10830.24 14151.13

ROA 0.072 0.051 0.018 0.024 0.025

86

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
ROA is an indicator of how profitable a company is relative to its total assets. The ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. At IFFCO, the ROA is increasing from the year 2010-11 which is good for the company. Earlier it was decreasing as there was increase in the assets due to purchase of the production plants. 2. Return on Equity Return on Equity (ROE) = Profit After Tax Average Equity

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Profit After Tax (in Crores) 319.64 341.35 175.02 257.59 360.01

Average Equity (in crores) 3205.37 3428.27 3598.61 3665.25 3823.77

ROE 0.100 0.100 0.049 0.070 0.094

87

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Return on Equity measures the rate of return on the ownership interest of the common stock owners. It measures a firm's efficiency at generating profits from every unit of shareholders' equity. ROE shows how well a company uses investment funds to generate earnings growth. From the data, IFFCO ROE had always been good. There was a decrease in the year 2010-11due to the purchase of Paradeep plant which increased the purchases of the organization.

3. Return on Capital Employed Return on Capital Employed (ROCE) Profit Before Tax Average Capital Employed

88

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Profit Before Tax (in Crores) 470.92 481.90 251.25 380.52 441.95

Average Capital Employed (in crores) 4449.22 6709.33 9855.58 10830.24 14151.13

ROCE 0.1058 0.0718 0.0255 0.0351 0.0312

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
ROCE is used to prove the value the business gains from its assets and liabilities. It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities. At IFFCO, ROCE had shown variable changes. This is due to the variable increments in the capital employed (majorly the loan funds) as compared to the profit before tax.

4. Net Profit Margin Net Profit Margin = Profit After Tax Sales

89

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Profit After Tax (in Crores) 319.64 341.35 175.02 257.59 360.01

Sales (in Crores) 7396.87 9942.93 10330.11 12162.82 32933.30

Net Profit Margin 0.043 0.034 0.017 0.021 0.011

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Net profit margin ratio establishes a relationship between net profit and sales and indicates managements efficiency in manufacturing, administering and selling the products. This ratio is the overall measure of the firms ability to turn each rupee sales into net profit. From the data, IFFCO have a variable net profit margin. The sales turnover depend upon the element of subsidy which is decided by the government from time - to - time depending on the condition of international market. During the year 2012-13, the component of subsidy increased tremendously due to high international fertilizer price. Looking at the turnover of 2012-13, the subsidy amounted to Rs. 25545.60 crores vis--vis to subsidy amounted to Rs. 6194.35 crores for the year 2011-12.

90

LOANS AND ADVANCES TO CURRENT ASSETS

Loans and Advances to Current Assets Ratio = Loans and Advances Current Assets X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Loans and Advances (in Crores) 1148.77 2656.70 3104.82 3541.56 5464.77

Current Assets (in Crores) 2603.98 4748.98 6081.28 5775.74 7672.99

Loans and Advances to Current Assets Ratio 44.116 55.943 51.055 61.318 71.221

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
As per the data, it can be clearly said that the position of the Loans & Advances with respect to current assets is increasing every year (a marginal decrease in the year 2010-11) which is very Good for IFFCO. The ratio was around 44.116% in 201112 which had increased to 71.221% in 2012-13.

91

LOANS AND ADVANCES TO WORKING CAPITAL

Loans and Advances to Working Capital Ratio = Loans and Advances Working Capital X 100

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Loans and Advances (in Crores) 1148.77 2656.70 3104.82 3541.56 5464.77

Working Capital (in Crores) 1499.14 3387.39 4880.05 4404.17 4490.10

Loans and Advances to Working Capital Ratio (%) 76.629 78.429 63.623 80.414 121.707

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
This ratio shows how significant Loans & Advances Are to Working Capital and that Loans & Advances plays an important role in working capital management of IFFCO. This ratio shows that the company has more cash in hand and can utilize these funds as per the company requirement. At IFFCO, this ratio has always been increasing which is good for the organization. This means that company is having enough cash and utilizing it effectively.

92 Working Capital Position Working Capital = Current Assets - Current Liabilities

Year 2008-09 2009-10 2010-11 2011-12 2012-13

Current Assets (in Crores) 2603.98 4748.98 6081.28 5775.74 7672.99

Current Liabilities (in Crores) 1104.84 1361.58 1201.23 1371.57 3182.89

Working Capital (in Crores) 1499.14 3387.40 4880.05 4404.17 4490.10

2008-09

2009-10

2010-11

2011-12

2012-13

Analysis
Working Capital Position indicates changes in Current Assets and Current Liabilities over the study period and also during a particular year. Working capital position shows operational efficiency & proper utilization of short term resources in an organization. The trend of working capital with respect to Current Assets and Current Liabilities for IFFCO is increasing. This shows a GOOD GROWTH of the company. The Working Capital is managed properly & efficiently by the organization. However, there was decrease in the year 2011-12 due to decrease in the level of inventory.

93

COMPARISON WITH SOME COMPETITORS IN THE INDUSTRY

IFFCO

Coromandel National International Fertilizers

Fertilizers and Chambal Chemicals Fertilizers Travancore 647.94 706.89 42.95 412.60 823.53 392.21 431.32 1457.77 0.610 0.957 2.10 1.97 0.501 0.584 0.061 1234.35 4595.53 230.56 316.82 1566.28 1288.58 277.70 3982.04 0.060 1.141 1.22 9.63 0.202 0.069 0.050

Net Worth Sales Turnover Net Profit Inventory Total Current Assets Total Current Liability Working Capital Total Assets Working Capital to Sales Turnover Inventory to Working Capital Working Capital Ratio Working Capital Turnover Inventory to Current Assets Inventory to Sales Net Profit Margin

3958.87 32933.3 0 360.01 1731.36 7672.99 3182.89 4490.10 17303.7 7 0.136 0.386 2.41 7.41 0.226 0.053 0.011

1127.14 9374.98 496.38 1347.51 3726.38 1755.02 1971.36 2926.50 0.210 0.684 2.12 6.21 0.362 0.144 0.053

1470.70 5127.10 97.46 348.68 1525.51 886.65 638.86 1851.19 0.125 0.546 1.72 7.06 0.229 0.068 0.019

94

FINDINGS
After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that Current assets are increasing more than current liabilities. But the current ratio has decreased as the percentage increase in current liabilities is more than the current assets. Cash and Bank Balances have decreased during this period which indicates proper utilization of funds at IFFCO. Position of inventory is Very Good in current assets (22.564%). Inventory Turnover Ratio increases consistently, which shows greater degree of utilization of inventory during the study period. Position of Debtors to Current Assets is 5.307%. This ratio had decreased during this period with an increase in the year 2011-12. This increase was due to the significant increase in the debts of the company. Loans and Advances are increasing every year and contribute majorly to current assets. This means that the company is not facing any problem to get the required short term financing. Large part of working capital is involved in maintaining inventory and it depends on the level of inventory every year. Working capital of the company had increased till 2010-11after which it has remain constant with small changes. Debt to equity ratio increased during the year 2012-13 as the debt increased due to increase in short term borrowings. Inventory as a component of current assets was high during the beginning of the period after which it has continuously decreasing.
Net profit margin decreased in the year 2012-13 because of the significant increase

in the raw material prices and consequent increase in subsidy. Looking on the trends, IFFCO has been able to manage the profits.

95 The major variation in the ratios during this period is due to the purchase of Paradeep production plant.

CONCLUSIONS AND SUGGESTIONS

96 Working capital is one of the most important aspects of operational efficiency of business. Working Capital plays a very important role in the functioning of any organization. Both the current assets and current liabilities are very much influencing factors on the working capital of an organization. After the discussion and analysis of the financial position of IFFCO Ltd., it is clear that the working capital of IFFCO is in sound position. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital. In current assets, there are two most important factors, Debtors and Inventory that 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. After analyzing and interpreting the financial data of INDIAN FARMERS FERTILIZER COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis, the following suggestions were given to the organization for further betterment & improvement in the working capital: The present status and levels of current assets is extremely good and therefore it requires proper maintenance. The current percentage of inventory is 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 or 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. Cash balances have a lower percentage in current assets. This requires some concern as cash and bank balances are the most liquid of all current assets. As the sales turnover majorly consists of subsidiary, the company shall also depend less on subsidy which is dependent on the annual budget fixed by the government of India, i.e., when the total outflow of any financial year is more than the budgeted subsidiary, the manufacturers/ importers have to wait for additional budget or their subsidiary get realized in the next financial year.

97 As the Government of India wants the fertilizers to be supplied at minimum price, they are compensating manufacturers/ importers by means of subsidy. The government should device a method whereby the price of fertilizers should increase every year to some extent. This will reduce the subsidy burden on the government and companies will be able to realize cash against their sales.

98

CHAPTER 2
Cash Management

99

CASH MANAGEMENT AT IFFCO

IFFCO, a large co-operative society, has been generating large amount of profits over the years from the date of its commercial production. Its internal sources generation has been adequate enough to finance the working capital need besides its other long term commitments though to meet its working capital requirements. The main objective of Cash Management of IFFCO is not different from the basic objective of cash.

Figure: Cash flow at the Organization

The cash is collected by Marketing Central Office (Mkco) and is transferred to the Head Office (HO). From the Head Office, the cash is provided to the plants depending on their requirements. The plants produce fertilizers and the sale of products provides cash which is collected by Marketing Central Office. Sales are often termed as Release Order (RO). The fertilizers are sold to corporate societies and most of the payments are made on prepaid basis. The payments are done through the means of demand drafts/ pay orders. The system of payment through cheques is not used further. There are very few service centres which transacts in cash. There is very small amount of credit for a defined credit period, only to large federations. The Field Representatives (FR) takes Demand Drafts/ pay orders from the corporate societies before the Release Order.

100 IFFCO has been effectively managing the cash in the following ways: To measure the cash flow time line and assess the magnitude of savings that could result from the alternative management strategies. To compare the length of timeline with that of other companies in the industry or standard set by the company. To not permit cash to stand idle for as much as a day To know the requirements of funds at various units at different periods of time Repayment of loans and debt has been one of the prime objectives To make every effort to speed up the flow

Bankers of IFFCO
Indian Overseas Bank State Bank of India Bank of Baroda Standard Chartered Bank The Maharashtra State Cooperative Bank Ltd. The West Bengal State Cooperative Bank Ltd. Madhya Pradesh State Cooperative Bank Ltd. The Karnataka State Cooperative Bank Ltd. The Punjab State Cooperative Bank Ltd. The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC) ICICI Bank Ltd. IDBI Bank Ltd. HDFC Bank Ltd. Punjab National Bank Axis Bank BNP Paribas

Implementation of Cash Management at IFFCO

101 In order to effectively manage its cash, so as to sustain liquidity and profitability, IFFCO has chosen to go for a Centralized Cash Management System. The Centralized Cash Management System means that the cash of IFFCO is basically managed from the Head Office situated at New Delhi. In order to smoothly manage the cash, IFFCO takes the service of IOB, its main bank from the consortium of bank. IOB plays the part of maintaining the daily fund position of IFFCO i.e. on a daily basis the cash inflows and outflows are recorded in computer and are daily analyzed by the cash and bank section of IFFCO, which also carries out its daily position on the fund statement book. This Centralized Cash Management at IFFCO also helps in to check the idle cash, which would otherwise have a cost structure attaches to it. Through this system, the cash is not allowed to remain idle at various branches and is used by the co-operative giant to pay its short term liabilities, which may arise. This system of centralized cash management gives an added advantage to IFFCO to effectively implement a policy of cash flow timeline management. IFFCO maintains a strict vigil on the movement of funds for collection and payments both. Although manufacturing units are independent enough to issue cheques, but they still have to inform the head office. It also prepares the budgets and forecasts and matches the actual with that, so as to have a proper control over transaction. A very efficient Management Information System has been introduced at IFFCO which facilitates: Forecasting of cash flows on monthly basis or weekly or daily basis, Helps in cash planning A Consolidated Statement is prepared at the corporate office which forms the main basis for planning of funds flow for the continuing month.

SALES PROCEDURE IN IFFCO

In IFFCO, there are three systems of sales: 1. Sales through Societies In the case of Sales through societies, Demand Drafts are received in advance by IFFCO, i.e. no credit sales are allowed to them. The Demand Drafts are collected

102 from them and then they are either deposited with the concern district bank or are sent to state office for deposit with the respective bank.

2. Sales through Federation In the case of Sales through Federation, the sales are normally made on credit basis with a defined credit period. The payments are normally received by IFFCOs State Office and are deposited with the respective bank. 3. Sales through IFFCOs Own Service Centre The sales through IFFCOs own outlets are made on cash basis. These outlets are called as Farmers Service Outlet (FSC). The funds are deposited with the bank on daily basis and are transferred by the bank to IFFCOs state office. In IFFCO, all the realization of sale proceeds is centralized to IFFCOs Delhi Office i.e. the funds are ultimately reaching Delhi for utilization, for IFFCOs manufacturing units. The funds that are sent to Delhi are then again redistributed to the manufacturing units and all the other offices, farmer service centers, cooperative societies etc. for meeting their expenses.

COLLECTION PROCEDURE
In earlier times, Field Representatives takes the Demand Drafts/ pay orders and deposits into Area Office. From Area Office it goes to State Office. From State Office, Demand Draft goes to Marketing Central Office and in the end, to the Head Office. This process takes around six days. Due to this delay, the transaction cost was high and there was a loss of interest on the payments received. After the implementation of CMS, bank services are hired for better management of cash. The Field Representatives collects the Demand Drafts from the societies. The bank agent collects these Demand Drafts and deposits them into the State offices, either in person or through courier. From State Offices, the drafts get deposited into the banks through bank agents only. The bank then transfers the money to the Head Office. This process takes one day or a maximum of two days. Thus, it saves at least four days and cash of the

103 organization. There are different banks for different state offices. For the service provided by the banks, different banks charge the organization differently. Cash savings can be classified as follows: Direct savings Direst Savings are the savings on the interest of the days for which the organisation has received its cash earlier. Indirect savings It includes administrative cost reduction (transaction and transportation cost). Since the bank is agreement bound, in case of delays, it covers up some of the losses of the organisation. The savings can be explained as following. The collection through CMS in the year 2012-13 was approximately Rs. 5250 crores. As there is more than one bank in the CMS, an approximate interest rate of 8 % p.a. is taken for calculations. Also, a difference of four days is taken. On calculating, the interest comes out to be Rs. 4.6 crores. This means that IFFCO saves around Rs. 4.6 crores in the year 2012-13 due to implementation of CMS.

Cash Management Services (CMS)

The Cash Management Services (CMS) is a technology driven system in which bank is under contractual obligation to make payment at the designated branch on the stipulated date as agreed in the agreement. Under this system, the banks pick up the Demand Drafts from IFFCOs designated locations and pool the same with them. A High Value Demand Draft of the consolidated amount is deposited by the collecting bankers in IFFCOs central account for which IFFCO receives the credit the same day. Thus, the amounts which are collected on day zero are received on IFFCOs Central Account on day one. Salient features of Cash Management Services (CMS)

104 Cash Management is the stewardship or proper use of an entitys cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. At the same time, the organization has the responsibility to use timely, reliable and comprehensive financial information systems. Cash Management helps the organization in: Eliminating idle cash balances Monitoring exposure and reducing risks Ensuring timely deposit of collections Properly timing the disbursements Reducing the interest costs Improving the liquidity as it reduces the transit time enabling the firm to realize drafts earlier. Better accounting and Reconciliations as detailed information on drafts deposited are made available on a daily, weekly/periodically basis, thus simplifying accounting, reconciliation and query resolution. Customized Management Information System (MIS) as per requirements of the firm can also be made available. Interconnectivity with the branch offices increases as these banks provide a host of internet software on the CMS account that allows the firm to view current account balances, download statements, view CMS collections, effect payments/receive payments online, plus a host of other activities. Collection Services by these banks ensure quick realization of local and outstation drafts on day zero and provide the funds in a central collection account on day one.

105 Costs and Benefits of CMS Before the introduction of cash management services, various branches of banks at area offices used to take 2-3 days in transferring the funds to IFFCOs Central Account. But with the coming of the CMS, the amount which are collected (as a high value drafts) on day zero, are received on IFFCOs Central Account on day one. Due to late transfer of funds, late payments were made due to which IFFCO was losing a lot of amount of money in the form of interests and penalties. But now, since the transfer of funds is done through CMS, IFFCO is saving a lot of interest as the cash credit utilization has been reduced to the extent of amount received in that account. With the introduction of CMS, there is a timely remittance of funds and in the case the bank with whom the CMS agreement has been made fails to make timely remittance, then they are bound to pay interest on late transfer of funds.

DETAILS OF STATE WISE EXISTING CMS BANKS

NAME OF BANK HSBC STATE Punjab Haryana Rajasthan West Bengal Maharashtra PICK UP LOCATION Chandigarh Chandigarh Jaipur Kolkata Mumbai Pune Nagpur Aurangabad SERVICE CHARGES NIL NIL NIL NIL NIL NIL NIL NIL PAY OUT DAY Day 1 Day 1 Day 1 Day 0 (HV) Day 1 Day 0 (HV) Day 1 Day 1 Day 1 Day 2

106
Other Districts BNP PARIBAS Nasik Kholapur Other Districts Assam A. P. Karnataka Tamil Nadu Orissa Kerala HP J&K Bihar Assam A. P. Karnataka Tamil Nadu Orissa Kerala NIL 0.15/1000 0.15/1000 0.15/1000 NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL NIL 0.02/1000 NIL NIL NIL NIL NIL Day 2 Day 2 Day 2 Day 2 Day 1 Day 1 Day 1 Day 1 Day 1 Day 1 Day 2 Day 1 Day 1 Day 2 Day 2 Day 2 Day 2 Day 2 Day 2 Day 2 Day 0 (HV) Day 1 Day 1 Day 1 Day 1 Day 1 Day 1 Day 1

Standard Chartered Bank

HDFC Bank

Jharkhand Uttaranchal

Patna Gaya Bhagalpur Muzzafarpur Ranchi Dehradoon Haldwani Rudraprayag Lucknow All 13 Area Offices

ICICI Bank

Uttar Pradesh

IOB

Gujrat Chhatisgarh MP Uttar Pradesh Uttar Pradesh

Ahemdabad Raipur Bhopal FSC 38 Districts

SBI Axis Bank

HV: High Value

FSC: Farmers Service Centre

Cash Management Services (CMS) Agreement through the HSBC Bank

107 Introduction of Cash Management Services (CMS) IFFCO is availing the cash management services of m/s HSBC bank for remittances of sale proceeds in the states of Punjab, Haryana, Rajasthan, West Bengal and Maharashtra. Collection services agreement was made on 28th December2001 between IFFCO and HSBC. The bank will be providing its services known as Collection Services in the manner and subject to terms and conditions set out hereunder: 1. These services shall cover instruments (demand drafts/ pay orders) favouring IFFCO and marked A/c Payee only, that are Locally payable at specified HSBC branch locations Locally payable at other specified locations Outstation instruments payable at specified locations Outstation instruments payable at all other locations 2. Demand drafts etc., pickups by courier services shall be arranged at IFFCOs offices in Mumbai, Pune, Aurangabad, Nagpur, at 1000 hrs and 1430 hrs by HSBC free of charge. This will aid HSBC in maintaining their service levels of Day 1 credits for Mumbai, Day 1 credit for Pune, Day 1 credit for Nagpur and Day 2 credit for Aurangabad for all cheques picked up on Day 0. (Day 0 being the date of collection in the clearing locations.) 3. HSBC shall refund interest @ HSBC PLR 15.50% - 4 % to IFFCO in case of delayed credits to IFFCOs account. IFFCO will be required to pay interest @ HSBC PLR 15.50% - 4% to HSBC in case of demand draft returns for the period during which the bank will be out of funds. 4. In the unlikely event of an instrument being misplaced whilst in transit after being picked up/ acknowledged by HSBCs courier and credit not made available to IFFCO as per the contracted agreement, HSBC shall pay interest to IFFCO @ HSBC PLR 15.50% - 4% for the delayed period to a maximum period of 30 days. HSBC shall provide all assistance to IFFCO to procure a duplicate demand draft to put a stop payment in order that a duplicate instrument is issued at the earliest.

108 5. In the event drafts are lost in transit, HSBC shall debit IFFCO for the same, and HSBCs statement intimating the non-payment of the instrument(s) will be final and binding on IFFCO. 6. HSBC can make MIS available at the check pickup points, the State Offices as well as Marketing Head office in New Delhi to aid reconciliation and to help IFFCO exercised greater control on the collections. The MIS can be amended to contained draft wise or deposit slip wise details as per IFFCOs requirements. Management information system (MIS) report MIS report contains the demand draft number, amount collected and the cheques deposit slip number. Marketing Central Office checks the amount collected by different State Offices and verifies it to that collected by banks. A customized MIS provided by HSBC bank can include: Daily report of deposits made at various locations Location wise report Credit Forecast report Monthly cumulative report-date wise/location wise Monthly charging statement Monthly draft return statement Customized reports as per mutual agreement HSBC has a large pool account which has a dummy account of IFFCO. The bank takes one day for realization of money and deposits it directly in the account of Head Office at New Delhi. The bank provides details to Marketing Central Office (Mkco) and other offices (SO, AO, FR) through Management Information System (MIS) report. If there is any mismatch in the value of MIS report or any other problem/ query, the department contacts it immediate lower department only.

109

In CMS, the banks used are as follows:

The HSBC Bank BNP Paribas Indian Overseas Bank Standard Chartered Bank The ICICI Bank State Bank of India, HDFC Bank Axis Bank The collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFC Bank and Axis Bank are deposited into the centralized account of IOB whereas the collection of HSBC bank is deposited into centralized account of SBI. SBI manages the collection of 5 states only out of total of 20 states. As the money comes into these banks, it is transferred to the Head Office by the evening. Through Head Office, the money is distributed into various departments as per the requirements.

FOR COLLECTING PAYMENT

Current Features

110 1. DDs collected by the state/area offices are picked up by an authorized agent of the banks and sent for collection. 2. Banks also pick up the high value instruments from the pickup location before the high value cut off time, present for clearing and effect the pooling on the same day at the nodal account. 3. Banks gives credit to the main pooling account on a pre agreed day. 4. The collections are transferred the same day to the cash credit account of IFFCO as per the standing instructions through a high value instrument. 5. Banks gives detailed management information system report as per the requirements of IFFCO. 6. This collection account is used for funding the disbursement of manufacturing units. Reporting The month wise projections of collections for the year are made in advance. Daily reports of collection against sales proceeds are made and are submitted in the higher departments for comparison with the projections.

DISBURSEMENT OF FUNDS
In addition to CMS, IFFCO has an innovative disbursement scheme known as Anywhere Banking Overdraft Account facility with IDBI and HDFC Bank. Under this scheme, the balances of all the state offices maintain are transferred to the Central Account having overdraft facilities whereby the balances with the state offices remain zero. Anywhere banking (ANB) Facility ANB facility offers IFFCO the flexibility of making at par payments across multiple locations by using a single current account maintained at Delhi. All the payments are made through IDBI and HDFC banks. IDBI is used in 17 states and HDFC in 3 states (Jammu, Assam, HP). Overdraft limit of IDBI is Rs. 229 crores whereas

111 that of HDFC bank is Rs. 20 crores. Till the overdraft amount is being paid, interest is debited by the bank to Head Office through Marketing Central Office. For all transactions within the local region (within the New Delhi offices), IOB is used. It also transacts all the local expenses of the Marketing Central Office. All payments are made through cheques only. But, all employee payments and reimbursements are made through cash. Advantages of ANB Facility Better Fund Management by Reducing Idle Balances: ANB obviates the need to maintain idle funds at multiple locations leading to better funds management. Minimum Multiple Bank Account: ANB obviates the need for having multiple accounts at different locations. It, thus, reduces the number of bank accounts at different locations leading to lower administrative load and reduces bank reconciliation. No service charges: As there is no need of transfer of funds under anywhere banking system, the organization saves service charges which they used to pay earlier under the traditional system.

Observations
70 % of Sales activity in the business of fertilizers is in Monsoons and the balance 30% is spread throughout the rest of the year. The month from April to September is known as Kharif Season and from October to March is known as Rabi Season. The GOI is estimating the demand based on Kharif and Rabi season and is allocating the supply plans accordingly. Investments made by IFFCO As on 31st March 2013, the Society holds Government of India Fertilizer Bonds amounting to Rs. 6,638.95 Crores (previous year Rs. 646.16 Crores) bearing different rates of interest as per details hereunder:

INVESTMENTS
(in Rs. Crores)

112 As at 31.03.2013 7.95% Fertilizer Companies GOI Special Bonds, 2026 7.00% Fertilizer Companies GOI Special Bonds, 2022 6.20% Fertilizer Companies GOI Special Bonds, 2022 6.65% Fertilizer Companies GOI Special Bonds, 2023 TOTAL 2900.97 2106.33 1631.65 6638.95 As at 31.03.2012 646.16

646.16

Since the GOI was short of funds, they have issued the above bonds which have disturbed the cash position of the society. Subsidies from government The entire fertilizer industry gets subsidy from the government of India. In IFFCO, since the society is dealing in Urea and Phosphate Fertilizer, there are two system of claiming subsidy. The subsidy on urea is received on the retention price fixed for the group of companies. That is, under this the subsidy is given as a difference between the sales price and the retention price. Retention Price includes cost of production (i.e. cost of raw materials, utilities, fixed cost, freight cost, marketing & selling & distribution expenses). Norms are set in by GOI for fixing retention price from time to time. The basic intention of following the retention price scheme is to give fertilizers to the farmers at a subsidized rate. In addition to the retention price subsidy, GOI is also reimbursing Freight towards primary and secondary freights to the manufacturers of controlled fertilizers (Urea) to cover the cost of transportation from the production plants to the consumption centres. Nitrogenous Fertilisers are under the Concession Scheme as notified by Government of India (GOI) from time to time. The subsidy on Nitrogenous Fertilisers is decided on month to month basis depending upon the input price escalation/ de-escalation based on the norms prescribed or notified under the subsidy scheme. The GOI is also reimbursing the actual fright on primary transportation and fixed amount on secondary transportation. The Phosphatic Fertilizer has been decontrolled and Concession on Phosphatic Fertilisers has been accounted for based on monthly concession rate as notified by Government of India. Pending notification of monthly concession rate

113 applicable for the period January, 2009 to March, 2009, the same has been accounted for on an estimated basis in line with the known policy parameters. However, in order to make available the fertilizer at a low rate to the farmers, the government is allowing subsidy to the manufacturers. This amount is notified by the government for every month on the basis of the raw material prices of fertilizer.

Year

2008-09 2009-10 2010-11 2011-12 2012-13

Central Subsidy on Fertilizers Urea Decontrolled Imported Indigenous Total P & K Fertilizers 1073 494 10243 7 5142 1186 1211 10653 4 6596 1592 3274 12650 4 10298 2305 6606 16450 6 16934 3049 10981 19517 8 65351

Total Subsidy on all Fertilizers 15879 18460 26222 39990 95849

*budgeted In the year 2012-13, there was a large increase in the subsidy. This was due to the increase in the prices of the imported raw materials and finished goods (for resale). The price for these goods is usually US$370 per metric tonne but during 2012-13 it was US$1200 per metric tonne.

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CONCLUSION
The organization IFFCO is basically a Farmers Organization. It functions in the cooperative sector of India and is owned by the Government of India along with the cooperative societies. IFFCO is one of the most profitable and financially secure fertilizer companies in India. The generation of funds through sale is a seasonal factor. 70% of Sales activity in the business of fertilizers is in Monsoons and the balance 30% is spread throughout the rest of the year. The month from April to September is known as Kharif Season and from October to March is known as Rabi Season. Thus, it becomes imperative for the organization to have such cash management system in place that would enable the organization to plan the excess cash obtained during surplus periods and ploughs them back into the operations of the organization during deficit periods. The Cash Management System at IFFCO is very sound and efficient. It has enabled the organization to manage its funds in a proper manner resulting in better utilization and availability of funds in cash deficit periods. Today IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI Bank that are providing IFFCO with facilities such as cash management services, personalized financial MIS to enable IFFCO to accelerate the collection and payment of funds, debit sweep option, Anywhere banking facility, etc. All these facilities have helped IFFCO in having faster, more secure and more reliable collection and payments of funds and cheques from its various Area/State Offices. However, despite all the advantages of this New Cash Management System such as receiving the proceeds from the sale of fertilizers within First day of sale, reduction in the amount of interest loss suffered by IFFCO due to late arrival of payments, daily report of deposits made at various locations, location wise report, credit forecast report, monthly cumulative report date wise/ location wise, monthly charging statement, monthly cheque return statement, customized reports as per mutual agreement etc. the cash management system can be further improved.

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Suggestions to Improve the Cash Management System

By making an analysis of all the collection at other locations and implementing the same at state offices also. At present, the banks with whom the CMS agreements have been made are not the consortium members of IFFCOs Lead bank. In case, these banks are also included as consortium members, IFFCO shall have an additional advantage as they shall be in the position to utilize their payments directly from their Cash Credit Accounts. IFFCO should focus on implementation of RTGS (Real Time Gross Settlement) and NEFT (National Electronic Fund Transfer) facilities which will improve the cash transfer at IFFCO.

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References
Books Brealey, R A, Myers, S C, Alan, F and Mohanty, P 2008. Principles of Corporate Finance. Tata McGraw-Hill Publications, New Delhi, 8 th SIE Edition. Chandra, T K, Seti, Kuldeep and Robertson, C 2010. Fertilizers Statistics 2012-13. Fertilizers Association of India (FAI), New Delhi. Ramachandran, N and Kakani, Ram 2008. Financial Accounting for Management. Tata McGraw-Hill Publications, 2nd Edition. Pandey, I M 2008. Financial Management. Vikas Publishing House, 9th Edition Reports Annual reports of IFFCO Agreement files of IFFCO Websites and Internet www.iffco.nic.in www.wikipedia.com www.investopedia.com www.fert.nic.in www.faidelhi.org www.moneycontrol.com

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Appendix Financial Statements

BALANCE SHEET

(Rs. in Crores)
Schedule As At 31.03.2013
SOURCES OF FUNDS Shareholders' funds: Share capital Share Application Money Reserve and Surplus Loan Funds: Secured Loans Unsecured Loans Deferred Tax Liability ( Net ) TOTAL APPLICATION OF FUNDS Fixed Assets: Gross block Less: Accumulated Depreciation Net Block Capital Work-In-Progress Investments Current Assets, Loans and Advances Inventories Sundry Debtors Cash and Bank Balances Loans and Advances Less: Current Liabilities and Provisions Current Liabilities Provisions Net Current Assets Miscellaneous Expenditure (to the extent not written off)
Voluntary Retirement Scheme Expenses

As At 31.03.2012

1 2 3 4

426.28 3532.59 7373.18 5429.6 3958.87

423.93 3264.73 2404.67 4370.97 3688.66

12802.78 542.12 17303.77

6775.64 534.19 10998.49

5 8808 3842.16 4965.84 290.98 8138.98 3400.04 4738.94 430.85

6 7

5256.82 7552.95

5169.79 1416.73

8 9 10 11

1731.36 407.23 69.63 5464.77 7672.99

1577.1 413.76 243.32 3541.56 5775.74

12 13

2860.18 322.71 3182.89 4490.10

1048.49 323.08 1371.57 4404.17

3.9 17303.77

7.8 10998.49

TOTAL

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PROFIT AND LOSS ACCOUNT

Schedule INCOME FROM OPERATIONS Turnover Sales Less: Excise Duty Subsidy on Fertilizers Other Revenue Increase/ (Decrease) in Stocks LESS: COST OF OPERATIONS
Consumption of Raw Materials, Stores etc.

For yr 31.03.2013

(Rs. in Crores) For yr 31.03.2012

7387.70 7387.70 25545.60 14 15 32933.30 499.00 280.51 33712.81

5968.47 5968.47 6194.35 12162.82 345.77 (1136.21) 11381.38

Raw Materials Stores and Spares Chemicals and Catalysts Packing Materials Power, Fuel and Water Less: Stock Transfer for Self Consumption Purchase of products for resale Employees' Remuneration & Benefits Manufacturing, Administration, Distribution and Other Expenses Interest Depreciation/ Amortisation Prior Period Adjustments (Net) Deferred Revenue Exp. Written-off (Voluntary Retirement Scheme Expenses) Profit Before Tax Provision for Taxation

13997.22 108.34 41.38 200.39 981.80 15329.13 159.41 16 17 18 19

15169.72 14539.23 595.96 1481.91 1023.20 470.40 (13.46) 3.90 33270.86 441.95

6646.44 96.26 38.22 170.43 756.48 7707.83 118.81

7589.02 1245.44 405.75 959.49 389.37 410.93 (3.00) 3.86 11000.86 380.52

Current Tax
Fringe Benefit Tax

Deferred Tax Earlier Years Profit After Tax Profit transferred to: Capital Repatriation Fund Dividend Equalisation Fund
Contribution towards Approved Donations

92.80 8.02 7.93 (26.81)

81.94 360.01

61.80 6.50 56.14 (1.51)

122.93 257.59

0.47 1.00 1.47

0.46 0.46

(Under Income Tax Act, 1961) Net Profit as per Multi state

119
Cooperative Societies Act, 2002 358.54 257.13

CASH FLOW STATEMENT

Year Ended 31.3.2013 (A) Cash Flow from Operating Activities: Net Profit before Tax Adjustment for: Depreciation Interest (Net) Provision for Doubtful Debts Loss on Damaged Goods Write down of Value of Goods-in-Transit Amount charged off / adjusted Assets Written-off Loss on Sale of Investments (Net) Exchange Rate Variations (Net) Loss on Sale of Fixed Assets (Net) Dividend Income Profit on sale of Investments Deferred Revenue Exp. Written off - VRS
Diminution in value of Long Term Investments

(Rs. In Crores) Year Ended 31.3.2012

441.95 470.40 857.19 0.01 17.60 107.68 0.04 13.41 83.16 148.84 4.29 (274.4 2) 3.90 81.16 (3.88) (0.12) 410.93 362.71 0.31 0.20 2.27 15.47 5.10 2.75 (132.54) (115.22) 3.97 (14.12) 2.95

380.52

Liabilities / Provision written back Prior Period Depreciation Operating Profit before Working Capital Changes Adjustment for: Inventories Trade and Other Receivables Trade Payable and Provisions Cash Generated from Operations Direct Taxes Paid (Net of Refunds)
Payment towards Cooperative Education Fund

1509.26 1951.21

544.78 925.30

(279.54)
(1717.19)

1747.04

(249.69) 1701.52

706.83 (487.06) 3.43

223.20 1148.50

Payment to Cooperative Welfare Fund Donations Paid Net Cash From Operating Activities (A): (B) Cash Flow from Investing Activities: Purchase of fixed Assets including C.W.I.P. Proceeds from Sale of Fixed Assets Purchase of Investments (Net)

(135.23) (2.57) (1.90) (1.87)

(141.57) 1559.95

(72.07) (1.75) (1.60) (0.67)

(76.09) 1072.41

(590.82) 11.50
(6300.54)

(594.93) 31.89 (691.73)

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Dividend Received Profit on Sale of Investments Interest received Net Cash used in Investing Activities (B): (C) Cash Flow from Financing Activities: Proceeds from issue of Share Capital Repayment of Term Loans
Repayment of Deferred Trade Tax Loan (Net)

246.61 55.66
(6577.59)

132.74 115.22 26.26 (970.55)

Increase in Cash Credit Increase in Short Term Loans Interest Paid Dividend Paid Exchange Rate Variation (Net) Net Cash used in Financing Activities (C): NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS (A+B+C) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE CLOSE OF THE YEAR NET INCREASE/ (DECREASE) IN CASH AND CASH EQUIVALENTS

2.35 (362.67) (9.21) 589.37 5809.65

(1008.14)

(84.53) (92.87) 4843.95

0.01 (153.97) (4.10) 160.88 286.72 (389.37) (84.45) (5.10) (189.38)

(173.69) 243.32 69.63 (173.69)

(87.52) 330.84 243.32 (87.52)

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APPENDIX D: SIGNIFICANT FINANCIAL INDICATORS

2008-09 FINANCIAL RATIOS : Operating Profit to Sales (%) Profit before Tax to Sales (%) Return on Capital Employed (%) Profit before Tax to Net Worth (%) Profit After Tax to Net Worth (%) Fixed Assets Turnover (Times) Working Capital Turnover (Times) Inventory of Finished Goods (Months Sales) Inventory of Raw Material & Packing Material (Months Consumption) Sundry Debtors (Months Sales) Current Ratio Quick Ratio Debt Equity Ratio Employees Productivity No. of Employees Sales per Employee (Rs. Crore) 6.5 1.34 3.12 11.16 9.09 6.32 7.41 0.12 0.74 0.67 2.41:1 1.87:1 3.23:1 6757 4.87 2009-10 7.8 3.13 3.5 10.31 6.99 2.38 2.62 0.76 1.25 0.78 4.21:1 3.06:1 1.84:1 6743 1.8 2010-11 6.69 2.43 2.53 6.9 4.81 2.2 2.5 1.48 1.01 0.9 5.06:1 3.15:1 1.78:1 6826 1.51 2011-12 6.92 4.85 7.18 13.55 9.6 3.01 4.07 0.74 0.86 0.89 3.49:1 2.37:1 1.42:1 6506 1.77 2012-13 6.52 6.37 10.58 14.27 9.68 3.57 4.58 0.9 0.79 1.17 2.36:1 1.51:1 2.20:1 5752 1.29

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Appendix E: Provisional highlights of IFFCO performance during 2012-13

Highest Production of Fertilisers (Previous Best 70.12 lakh MT in 2006-07) Highest Production of Urea (Previous Best 39.63 lakh MT in 2011-12) Production of NPK/DAP/NP (Best 32.26 lakh MT in 2006-07) Highest Sales of Fertilisers (Previous best 93.24 lakh MT in 2011-12) Highest Sales of Urea (Previous best 54.29 lakh MT in 2011-12) Highest Sales of NPK/DAP (Previous best 38.95 lakh MT in 2011-12) Profit Before Tax (Best PBT 807.1 crore in 2002-03) Profit After Tax (Best PAT 557.2 crore in 2002-03) Highest Turnover (Previous best Rs.12163 crore in 2011-12) Plant Productivity (Best 1669 MT in 2008-06) Highest Marketing Productivity (Previous best 6158 MT in 2011-12) Composite Energy Consumption (Lowest 5.907Gcal / MT in 2011-12) 71.68 lakh MT 40.68 lakh MT 31.00 lakh MT 112.58 lakh MT 58.69 lakh MT 53.89 lakh MT Rs.441.95 crore Rs.360.01 crore Rs 32933 crore 1376 MT per employee 7397 MT per employee 5.941 Gcal/ MT

Appendix F: VALUE ADDED STATEMENT

123 (Rs. In Crore) Year ended 31.3.2012 12162.82 354.77 12517.59

Particulars Income from Sales Dividend and Other Income

Year ended 31.3.2013 32933.30 499.00 33432.30

Less: Cost of Materials Manufacturing, Admn., Distribution & Other Expenses Total Value Added Applied to meet: Employee Cost Interest Payment Income Tax (Net) Dividend Donations Cooperative Education Fund Retained Cash Profit Total Utilisation of Value Added Ratios Value added to Total Income (%) Value added to Capital Employed (%) Value added to Net Worth (%) Value added per Employee (Rs. Lakh)

29418.89 1481.91

9971.54 959.49

2531.50

1586.56

595.96 1023.20 74.00 85.10 1.75 3.59 747.90 2531.50

405.75 389.37 66.79 84.53 0.75 2.57 636.80 1586.56

7.57 17.89 63.95 37.46

12.67 14.65 43.01 23.53

Appendix G: Some of the well known fertilisers used in India

Nitrogenous Fertilisers

124 Urea Ammonium Sulphate (As) Ammonium Chloride (ACl) Calcium Ammonium Nitrate (CAN) Phosphatic & Potassic Fertilisers Single Super Phosphate (SSP) Muriate of Potash (MOP) Sulphate of Potash (SOP) Di-ammonium Phosphate (DAP) Rock Phosphate (RP) NPK Grades 46%N 21%N 26%N 25%N 16% P2O5 60%K2O 48%K2O 18 46 16 - 20% P2O5 10:26:26 12:32:16 14:35:14 15:15:15 16:20:00 17:17:17 19:19:19 20:20:00 23:23:00 28:28:00

Appendix H: Some Calculations

125 Calculation of Cost of Goods Sold (COGS) (in Rs. Crores) Year 2008-09 2009-10 2010-11 2011-12 2012-13 Opening Stock 495.27 353.65 593.33 1347.34 211.13 Closing Stock 353.65 593.33 1347.34 211.13 491.64 Purchases 6667.86 9406.16 10332.1 10200.56 31777.26 COGS 6809.48 9166.48 9578.09 11336.77 31496.75

CALCULATION OF AVERAGE INVENTORY

(in Rs. Crores) Year 2008-09 2009-10 2010-11 2011-12 2012-13 Opening Inventory 1020.56 931.50 1519.64 2283.94 1577.10 Closing Inventory 931.50 1519.64 2283.94 1577.10 1731.36 Average Inventory 976.03 1225.57 1901.79 1930.52 1654.23