RICHA RAI

INDIAN INSTITUTE OF PLANNING & MANAGEMENT

New Delhi, Satbari

AKNOWLAGEMENT
This project has been prepared as a part of an internship required during the
completion of PGDBM programme at INDIAN FARMERS FERTILIZERS
ASSOCIATION COOPEARTIVE LIMITED, HEAD OFFICE, and NEW
DELHI.
With an overwhelming sense of genuine obligation, I express my deep sense of
gratitude to Mr S.B RINDANI, EXECUTIVE DIRECTOR (FINANCE), and
HEAD OFFICE for allowing me to carry out my dissertation work in the
department.
I feel very opportune in presenting my thanks to my project guide
respected Mr. Suresh Goyal, Chief Manager (Finance and Accounts) whose
constant support, patience, positive attitude, able guidance and blessing were
responsible for the accomplishment of the work.
I also extend my conceded regards to Mr Ram Niwas Rathi, Senior
Manager for rendering knowledge about working capital management of
IFFCO.
I also express my earnest gratitude to Mr Sukant Sharma, Assistant
Manager and Mr.J.D Chandra, Manager Accounts for their constant support
during the entire tenure.
At this junction, I also owe my regards to my faculty members of M.S
RAMAIAH INSTITUTE OF MANAGEMENT.
I express my sincere thanks to all friends and person who helped directly
or indirectly with his or her labour and advice for the successful completion of
the dissertation report.
These past 2 months were of utmost importance as they added value
towards my path of knowledge.
At the nib but not at the neep, I bow down my head before my beloved
parents with all Sthe reverence whose blessing has solely contributed to reach
the point.

Executive Summary
IFFCO (Indian Farmers and Fertilizers Cooperative Limited) is the largest
producer and distributor of fertilizers in India. The project is primarily focused
on the Working Capital Management of the company. Some other areas like
foreign payment management, Buyers Credit, Hedging, Derivative etc are also
taken into consideration for the study during the training period.
The Working capital consists of four broad sub- topics:

Cash Management,
Debtors Management,
Inventory Management , and
Short Term Financing.

Working Capital Assessment of the company is done by preparing statement

called cash Monitoring Authorization, which calculates the working capital Gap
of the company and the same is submitted with the Bank for availing the Loan.
Bank finances the 75% of the Working Capital Gap and the rest is to be
financed by the company. The mode of loan is Cash Credit Loan. Now it
depends on the company, the amount of loan it wants to avail. The loan amount
cannot exceed the limit financed by the Bank.
The Working Capital requirement of the company has been considerably
increased from Rs. 950 crore in the year 2005-06 to Rs. 1450 crore in the year
2006-07 and to Rs. 2000 crores in the year 2007-08 to Rs.5000 crores in the
year 2008-2009. The primary reason for the increase in the Working capital of
the company is because of the increase in the demand of the fertilizers and the
company has to increase its production, increase in the price of the raw
materials and delay in the disbursement of the subsidy by FICC.
There is an efficient Cash Management system in the company. As the entire
fund requirement of the company is financed by the Bank. The cash in hand of
3

the company is very less. The company manages its cash at bank in such a way
that no balance in any account is kept idle even for one day.
All the favorable balances of the sales Collection account and the current
account is transferred to the Cash Credit account at the end of every day in
order to save the interest on the overdraft balances for the day. All the major
cash requirements are fulfilled from the cash credit account. Any cash received
by IFFCO is immediately transferred to the cash credit account in order to
decrease the overdraft balances.
The major sources of the company are the sales of the fertilizers, Other revenues
received from the investment in the subsidiary companies and the subsidy
received from the FICC and the application of the Cash is for making the
payment to the suppliers both national and the international.
There are supply chains through which the finished products of IFFCO reach to
the final consumers. There are Marketing Federations in every state which
purchases the fertilizers from IFFCO and the same is sold to the cooperatives
and from the cooperatives it reaches to the farmers. IFFCO generally does not
sell the fertilizers directly to the cooperatives and if it does no credit is allowed
to them, the cooperatives have to purchase the fertilizers in Cash. Federations
and the Agro Industrial Development Corporations are the debtors of IFFCO
because the fertilizers are sold to these agencies on credit. A credit of 30 45
days is provided to the federations and a cash discount is provided to the
federations if the payment is made within the credit period. The government is
the major debtor of IFFCO because the major portion of the cost of production
in the form of subsidy is due with the government.
The subsidy becomes due when the fertilizers are dispatched from the
warehouses of IFFCO and it is expected to be received within the period of 45
days but the same does not happens. Sometimes due to lack of the budget with
4

the government, the government issues fixed bonds for 15 to 20 years and the
fund of the company is blocked and thus the requirement of the Working Capital
increases.
The major source of the short term financing for the company is Cash Credit
which fulfills the entire Working Capital requirement, the interest is charged by
the bank on the amount withdrawn from the bank by the company. The
company also takes short term loans, these loans are taken for a period of 4
months. As the rate of interest on these loans are cheaper than that of the Cash
Credit Loans, sometimes the company take the Short Term Loans and deposit in
the cash credit account in order to decrease the overdraft balance of the Cash
credit Account.
The inventory conversion period cannot be determined as the production is
continuous in the Urea manufacturing plants. The major inventory is gas which
is supplied by the gas companies through pipelines. In the plants producing the
complex fertilizers the raw material are not easily available in the national as
well as the international market. The company is ready to purchase any amount
of raw materials if the same is available in the market.
The raw materials for the complex fertilizers are imported from other countries
and the payment is also made in the foreign currencies. These foreign payments
are managed by using different exchange rate options such as spot rate, tom rate
and the cash rate. The company also protects itself from the losses, by hedging
the exchange rate and through the derivatives. Moreover the company also avail
the finance facility from banks.

TABLE OF CONTENTS
1) Acknowledgement........01
2) Executive Summary..04
3) Introduction............................................................................
4) Objectives..........08
5) Methodology.........10
a) Limitations....11
6) Organization Profile....12
7) Chapter 1
WORKING CAPITAL MANAGEMENT.........35
8) Chapter 2
Financial Ratio Analysis ..86
9) Findings....148
10) Conclusion.....149
11) Bibliography......152

INTRODUCTION TO THE TASK

6

Our summer training helps us to get our theoretical concepts more clear. We can
actually link our theoretical concepts with the actual practices followed in the
organizations. I had talked to my seniors, faculties, supervisors and other
trainees in my organization. Everybody told me that I should select such a topic
on which I can get the full information, support, and guidance from my
supervisors. I had talked to my supervisor about the same and he suggested to
me take Working Capital Management as the title of my Summer Training
Project Report. There is altogether a different section which takes care of all the
aspects of working capital.
Working capital refers to the amount required for meeting day-to-day expenses
and for the regular trading activities. That is why; working capital is a very
sensitive issue. It is very important to take care of working capital very
carefully. No company can survive and perform effectively without managing it
efficiently. If the working capital is not managed efficiently then is can spoil the
image of the company because it would not be able to run its day-to-day
activities smoothly.
I always wanted to take such a topic which suits my interest. Being good in
numbers and accounts, I wanted to take a topic which is related to accounts or
which involves numbers. Working capital involves both the things. It is very
interesting. This is the section where you feel a very significant part of your
organization. I have chosen this topic because it involves the arrangement and
application of funds. It involves a lot of activities that are very important to
understand from the point of view of a finance manager. That is why, I have
chosen this topic.

Rationale of the study

The Working Capital Management is a very good subject to work upon. If you
work on this subject, you will come to know about the various aspects related to
it. You will get to know how sensitive it is. It serves as the backbone of any
enterprise.Every department is directly or indirectly related to it. If the Working
Capital is managed efficiently then the whole organization gets benefited.
Therefore, in order to ensure the smooth functioning of your organization
Working Capital Management has to be done in a proper and effective manner.

This project will help us to know:

Concepts of Working Capital
How Working Capital Management is done.

What needs to consider while calculating the Working Capital

Requirements.

SCOPE OF THE STUDY

The scope of the study refers to the extent to which the other concepts are
included in the study. The scope of Working Capital Management includes:-

Cash Management: - Identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.

Debtors 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); see Discounts and allowances

 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; see
Supply chain management; Just In Time (JIT); Economic order quantity
(EOQ); Economic production quantity (EPQ).
Short term financing: - Identify the appropriate source of financing,
given the cash conversion cycle: the inventory is ideally financed by
credit granted by the supplier; however, it may be necessary to utilize a
bank loan (or overdraft), or to "convert debtors to cash" through
"factoring".

FINANCIAL PERFORMANCE
In spite of constraints in availability of raw materials, and inordinate delays in
receipt of large subsidy amounts from Government of India, IFFCO has yet
again delivered an impressive financial performance in all its major parameters,
namely, Revenue Growth, Operating Margins and Resource Utilisation
testifying to robustness of its Corporate Strategy of creating multiple drivers of
growth. This was possible due to higher production, sales volume and
improvement in operating efficiencies. The Society achieved the highest ever
sales of Urea of 63.35 Lakh MT and Fertilizers 118.27 Lakh MT. This
represents an increase of 8% for Urea and 5 per cent in case of Fertilizers over
the previous best.

OBJECTIVES OF THE STUDY:This Research Project covers the two most important aspects or features of the functioning of
the FINANCE DEPARTMENT of Indian Farmers Fertilizers Cooperative Limited
(IFFCO).
The First Part is both, an analytical as well as an academic study that involves an analysis of
the Working Capital and Working Capital Management Policies of the OrganizationIFFCO.
The main objectives of this study are: -

To understand the Working Capital Management policies of the organization.

To understand the importance of Working Capital Management.

To analyze the liquidity position of the organization.

To analyze the short term financing policies and patterns, which affect the working
capital of the organization.

To study the factors that affects the Working Capital Management at IFFCO.

To find out the profitability and operational efficiency of the organization.

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.

10

 To estimate the working capital requirements of the organization in the near future.
METHODOLOGY OF THE STUDY:The training is basically an in house training which intimated me with various aspects of the
project.
Here, while conducting the study I have relied on two types of data, viz. primary data and
secondary data.. Based on the outcome of primary and secondary data, various statistics were
prepared.
Primary Data: The data collected through meetings with various managers & employees of
Finance and accounts department. I worked under guidance of Mr. Suresh Goyal, who gave
me his valuable time and information. He sent me to various sections of Finance & Accounts
Dept. and other departments for collection of data.
Sources of collection of secondary data:

Balance Sheet
Profit & Loss Account
Annual Reports
Budget
Accounting Reports
Financial Year Book

Research Design
The research will be both descriptive and conclusive.
Descriptive research is a kind of research where the description of the topic is given.
Conclusive research is the kind of research in which the conclusion is given at the end of the
report.
Other sources of information
Web site

11

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 2006-07 to 2010-11.

The data used in this study has been taken from the Balance sheet & their related
schedules of IFFCO Ltd., New

Delhi as per the requirement. Some data are grouped and sub-grouped.Since this
study is being done for academic purpose the time available does not allow the
student to go in depth.

Information or the secondary data required for the study is also limited (in relation to
Indian Fertiliser Industry).

Some of the information that was essential for this study cannot however be given in
this report due to companys confidentiality.

The scope and area of the study was limited to corporate office of IFFCO (Finance
Division) New Delhi only.

12

SECTOR
OVERVIEW

13

COMPANYs 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 civilities to improve their welfare"
Emerging as a dynamic organization, focusing on strategic strengths, seizing opportunities for
generating and building upon past success, enhancing earnings to

To provide to farmers high quality fertilizers in right time and in adequate

quantities with an objective to increase crop productivity. .

Commitment to health, safety, environment and forestry development to

enrich the quality of community life.

To acquire, assimilate and adopt reliable, efficient and cost effective

technologies.

A true Cooperative Society committed for fostering cooperative movement in

the country.

To ensure growth in core and non-core sectors. .

Sourcing raw materials for production of phosphoric fertilizers at economical

cost by entering into Joint Ventures outside India.

14

15

Companys Vision
IFFCOs vision is "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.

To retain dominant position in Indian fertilizer sector and cost effective technologies.

Sourcing raw materials for production of Phosphate Fertilizers at low cost with joint
ventures outside India.

Emerging as a dynamic organization, focusing on strategies maximizing the

shareholders value.

To build a culture of trust, openness & mutual concern.

Implement diversification in information technologies.

Committed to cooperate social responsibilities for sustainable development.

Commitment to health, safety, environment & forestry development to enhance

quality of community life.

A true cooperative society committed to foster cooperative movement in the country.

16

SHARE CAPITAL (AS ON 31ST MARCH, 2011)

(Rs in Crore)

Authorized Share Capital

1000.00

Subscribed and Paid up Capital

425.95

(All Share Capital by Cooperatives only)

GROWTH IN NUMBER OF MEMBER

SOCIETIES
(As on 31st March)

45000
40000
35072

35000
30000
25000
20000

26960

25528
Column2

28134

37381

39877

30200

Linear (Column2)

Linear (Column2)

15000
10000
5000
0

1974-75

1980-81

1986-87

1992-93

1998-99

2004-05

2010-11

Chart 1: Increase in Share Capital Of no. of Societies in IFFCO

17

PRODUCT WISE PRODUCTION

PERFORMANCE:90

85.83

81.98

80

70.12
64.35

70

71.68

68.47

60
50
40
30

37.18
27.17

37.86
32.26

40.68

39.63

43.24
38.74

41.8144.02

31

28.84

20
10
0

2005-06

2006-07

2007-08
DAP

UREA

2008-09

2009-10

2010-11

TOTAL

Chart 2 : PRODUCTWISE PRODUCTION PERFORMANCE

MARKETING CHANNELS:Distribution of fertilizers mainly through the Cooperative System: State level Apex Cooperative Marketing Federation Acts as wholesaler
Direct supplies to Societies in some States
IFFCO-NCDC Cooperative Societies

Small quantities to institutional agencies like Agro Industries Corporation et

157 IFFCO Farmers Service Centers

DISTRIBUTION AND WAREHOUSING:

TRANSPORTATION
Both by Rail (91%) and Road (09%)
18

 WAREHOUSING

Federations & Cooperative Godowns

Central Warehousing Corporation (CWC) and
State Warehousing Corporation (SWC

Distribution of fertilizers mainly through the Cooperative System: State level Apex Cooperative Marketing Federation Acts as wholesaler

Direct supplies to Societies in some States

IFFCO-NCDC Cooperative Societies

Small quantities to institutional agencies like Agro Industries Corporation etc
158 IFFCO Farmers Service Centers.

IFFCO PLANTS

PLANTS

LOCATION

COMMISSIONE

EXPANDED IN

D IN

ANNUAL PRODUCTION
CAPACITY ( In Lakh MT)

KALOL

GUJARAT

1975

1997

UREA

5.45

KANDLA

GUJARAT

1975

1981&1999

DAP/NPK

24.15

PHULPUR

U.P.

1981

1997

UREA

14.16

AONLA

U.P.

1988

1996

UREA

17.29

PARADEEP

ORISSA

SEPT. 2005

DAP/NPK

19.20
19

Table 1 : Details Of Plants

PLANT LOCATIONS

20

KANDALA UNITS

Paradeep Unit

21

FINANCIAL PERFORMANCE:(Rs.
Crore)
YEARS

2006-07

2007-08

2008-09

2009-10

TURNOVER

10330

12163

32933.30

16808.57

PROFIT BEFORE TAX

251.25

380.52

441.95

567.28

INCOME TAX

76.23

122.93

81.94

90.34

PROFIT AFTER TAX

175.02

257.59

360.01

401.10

SHARE CAPITAL

422.92

423.93

426.28

426.24

RESERVES AND SURPLUS

3218.9

3264.7

3532.59

3844.26

NETWORTH

3301.2

3555.4

3641.8

4968.04

22

NET ASSETS EMPLOYED

4369.5

9049.2

10662

16737.31

INVESTMENTS

690.73

776.16

740.46

1169.91

Table 2 : Last Five Year Financial Performance of IFFCO

PROFIT BEFORE TAX (PBT)

(Rs. Crore)
1200
1025.78
1000
800
600

Column2
441.95

481.9

567.28

380.52

400
251.25
200
0

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Chart 5 : Five Year Profit Before Tax details

TURNOVER:-

23

35000

32933.3

30000
25000

21195

20000

16809

15000
10000

10330.11

12162.82

5000
0

2006-07

2007-08

2008-09

2009-10

2010-11

Column2

Chart 6 : Five Year turnover Performance of IFFCO

SERVICE TO FARMERS:-

24

Agricultural Extension and fertilizer use Promotion Programmes that are an integral part of
the marketing activity. Programmes are conducted at Area/State/Zonal offices under the
guidance of agricultural scientists.

Programmes undertaken are:

Balanced Fertilization Programmes.
Adoption of villages for all round socio-economic development.
Farmers visit to various agricultural institutes and research farms.
Farmers Meetings, Field Days and Crop Seminars.
Static/Mobile Soil Testing Laboratories with Audiovisual.
Other Social Activities/Development Programmes include: Supply of fodder in draught prone areas
Veterinary Checkup and Distribution of Medicines
Human Health Checkup and Distribution of Medicines
Providing drinking water facilities
Assistance to School / School children
Watershed development projects

25

COOPERATIVE RURAL DEVELOPMENT

TRUST

(CORDET)

PROMOTED BY IFFCO
LOCATIONS: KALOL (GUJARAT),
PHULPUR (U.P.),
KANDLA(GUJARAT).

ACTIVITIES OF CORDET

Farmers Training
Soil Testing
Bio Fertiliser Production
Demonstration Farming
Seed Multiplication

26

INVESTMENTS OUTSIDE IFFCO:Indian Potash Ltd (IPL)

IFFCOs Equity
Percentage of Equity held

:
:

Activity

Rs. 2.68 Crore

34%
:

Marketing of Potash and

imported fertilizers

Industries Chimiques du Senegal (ICS) I & II

IFFCOs Equity
Percentage of Equity held

:
:

Rs 161.53 Crore

19.47 %

Plant Site

Darou, Senegal

Product

Phosphoric Acid, NPK

Fertilizers

IFFCO - TOKIO General Insurance Company Ltd.(ITGI)

IFFCOs Equity
Percentage of Equity held

:
:

Activity

Rs. 193.91 Crore

72.6%
:

General Insurance

Oman India Fertiliser Company (OMIFCO)

IFFCOs Equity

Rs. 329.08 Crore

Percentage of Equity held

25%

Plant Site

Sur, Oman

Product

Ammonia, Urea

National Commodity and Derivative Exchange (NCDEX)

IFFCOs Equity
Percentage of Equity held
Activity

:
:

Rs. 3.60 Crore

12%

On Line Trading in
Commodity Futures

27

National Collateral Management Services Ltd. (NCMSL)

IFFCOs Equity
Present percentage of

:
:

Rs. 4 Crore
13.33%

Equity held
Activity

Collateral Risk
Management Solutions

OTHERS
Indian farm forestry development corporation (IFFDC) : Rs 8.60 crore
Maharashtra State Coop. Bank Ltd.
IFFCO Kisan Bazaar
Indian Tourism Coop. Ltd.

: Rs. 10 Lakhs
: Rs. 5 Lakhs
: Rs. 1 Lakh

DIVERSIFICATION:1) IFFCO-TOKIO GENERAL INSURANCE CO. LTD.

Diversified into General Insurance due to : Tremendous potential available
To serve the insurance needs of farmers
IFFCOs Rural Brand Equity
Low gestation period
The scope includes a mix of following:
Rural Insurance Business
Fire Insurance Business
Marine Insurance Business
Miscellaneous Insurance Business.
28

IFFCO KISAN BAZAR LTD.:IFFCO Kisan Bazar Ltd. was incorporated on 26.02.2004 with an Authorised Equity Capital
of Rs. 1 Crore with the objective to set up a chain of Super Stores across the Country .
Negotiations are in progress for strategic alliance with the prospective Foreign partner for
operations of large format Retail Outlets in India.

OTHER PROGRAMS BY IFFCO:SANKAT HARAN BIMA YOJANA: With the purchase of each bag of IFFCO/IPL
fertilizer from Cooperative Society/FSC, the buyer is automatically covered against accident
up to an amount of Rs. 4000/- for one year. Maximum liability limited to Rs. 0.1 Million
irrespective of the number of bags purchased. Respective manufacturer pays premium @ Rs.
1/- per bag. Cash receipt is evidence of insurer cover.

OMAN INDIA FERTILIZER PROJECT: Grassroots ammonia/urea complex has

been set up at Aloha near Sur, Oman. The project comprises two ammonia and two urea
plants of 2*1750 MTPD and 2*2530 MTPD respectively. Entire urea production of 1.65
MILLION MT is being purchased by GOI under off take Agreement. Surplus Ammonia is
being purchased by IFFCO.
NELLORE FERTILIZER PROJECT: Environment clearance, Rail transport clearance,
Allocation of Naphtha, Water and Power are accorded for the project. Project is kept in
abeyance till finalization of long term fertilizer policy. Plant capacities of Urea are 2328
MTPD and Ammonia is 1350 MTPD.

29

VISION 2010 OF IFFCO

The Society has embarked upon another growth plan titled VISION 2010
to achieve annual turnover of Rs. 15,000 crore (USD 3400 Million) by the
year 2010.
Society is exploring avenues for diversification into other profitable business
areas, apart from fertiliser sector, for sustained growth and adequate return to
member shareholders.
Vision 2010 would mainly focus on farmer oriented schemes and
strengthening of cooperative infrastructure.

o Broadly identified business activities under the VISION 2010

are : Installation of Ammonia/Urea plants including acquisition of fertilizer units
Generation of Power
Production and Marketing of micro-nutrients, seeds, biofertilisers, pesticides
etc.
Value addition to agri-products and marketing
Banking and Financial Services
Information Technology and IT enabled services
Establishments of Retail Chain in urban and semi-urban locations

30

WORKING CAPITAL MANAGEMENT:AN ANALYTICAL RESEARCH

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 inventories, accounts receivable and
payable, and cash.
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.
31

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 sought 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?
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.
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.

32

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.
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.

33

34

MEANING OF WORKING CAPITAL:Capital required for business can be classified under two main categories: 1) FIXED CAPITAL
2) WORKING CAPITAL
Every business needs funds for two purposes for its establishment to carry out its day-to-day
operations.

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.
The term Working Capital refers to the amount of capital, which is readily available to an
organization. That is, working capital is the difference between resources in cash or readily
convertible into cash (Current Assets) and organizational commitments for which cash will
soon be required (Current Liabilities).
Current Assets are resources, which are in cash or will soon be converted into cash in "the
ordinary course of business. Current assets like Liquid Assets (cash and bank deposits),
Inventory, Debtors and Receivables, etc.
Current Liabilities are commitments, which will soon require cash settlement in "the
ordinary course of business". Current Liabilities like Bank Overdraft, Creditors and
Payables, Other Short -Term Liabilities.
Thus:

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

35

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

1) Permanent or Fixed working capital

Permanent or Fixed working capital is the minimum amount which is
required to ensure effective utilization of fixed facilities and for
maintaining the circulation to the current assets, for example: every firm
has to maintain a minimum level of raw material, work-in-progress,
finished goods and cash balance. This minimum level of current assets is
called permanent or fixed working capital. As the business grows, the
requirements of permanent working capital also increase due to the
increases in current assets.
2) Temporary or Variable 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..

36

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.
Debtors, creditors, cash and in some cases inventories are the areas most
likely to be relevant to departments.

Objectives of Working Capital Management: Liquidity vs. Profitability

o The basic objective of working capital is to provide adequate
support for the smooth functioning of the normal business
operations of the company.
o 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.
o 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.
37

 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
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.

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

38

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.
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.

39

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.
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.

40

 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

Factors Affecting 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 are 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.
41

 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.

Dangers Of Inadequate Working Capital

A concern, which has inadequate working capital, can pay its short-term
liabilities in time. Thus, it will loss 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.

42

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
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:-

43

 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; favorable results mean little,
whereas unfavorable 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

Working Capital is the day to day requirement of the company. The

company requires Capital for the procurement of raw materials, conversion
process and for the time taken to recover cash from the debtors. All these
process takes time and money.

44

A company estimates its inventory conversion period and debtors collection

period and subtract the average payment period to determine its Cash
Conversion Cycle. It is the period for which the company requires the cash.
Inventory conversion period + debtors collection period is the gross working capit

ASSESSMENT OF WORKING CAPITAL

REQUIREMENTS
( FORM- I )
Particulars of the existing /proposed limits from the Banking System
(Limits from all Banks and Financial Institutions as on date of application)
Sl. Name of the bank/

Nature Existing Extent to which Balance as Balance as Limits now

of

No Financial Institutions
(1)

(2)

facility

Limit

limits were

on

utilized during

31/3/2009 31/3/2009

last 12 month.

(3)
(4)

on

requested for
the year 200709

(7)

(8)

Max(5) Min(6)
(9)

Working capital
Limits
Indian Overseas Bank

1. State Bank of India

Standard Chartered
2.

Bank

45

Bank Of Baroda
3.
The Maharashtra State
Cooperative Bank
4.

The West Bengal State

Cooperative Bank
Madhya Pradesh State

5. Cooperative Bank
The Karnataka State
6.

Coop. Bank
The Punjab State
Coop. Bank

7.

ICICI Bank Ltd.

IDBI Bank Ltd.
HSBC Bank Ltd.

8.

9.

10.

11.

12.
46

Total
Form -1 consists of existing limits from all the banks and financial institutions as on date of
application of cash credit. It Contains following items:-

Name of the banks there are all together 14 banks with different existing
limits who together has sanctioned a limit of 1450crs for the year 2006-07 in
the lieu of working capital requirement of the company
Existing limits: the share of each bank in providing the existing limit of 1450crs
to the company.
Balance outstanding as on the end of previous financial year i.e.31/3 2006:This column displays the amount currently being used by the company of the
limits sanctioned by each banks. The amount outstanding to each bank is
displayed in the column at the end of previous financial year.
Balance outstanding as on end of current financial year i.e.31/03/2007:- this
column displays the amount outstanding to each bank at the end of financial
year 2006-07. The difference in the amount of out standing between the year
end 2005-06 and 2006-07 is repaid or withdrawn by the company.
Limits requested for upcoming year i.e. 2007-08:- the amount requested by the
company for the upcoming year i.e. 2000crs is displayed in this column.
This statement is prepared to inform the bankers about the limits sanctioned
by the consortium in the previous year, credit status, and to request for new
cash credit limit.

Form II: Operating statement

47

SI.n

Particulars

o.

2008-09 Actual

2009-10 Projections

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1..

Gross Sales
(i)Domestic sales
(ii)Export sales
Total sales

2.

Less: Excise duty

3.

a)Net Sales(1-2)
b)Subsidy from
FICC
C)Net sales
including
Subsidy[a+b]

4.

% age rise or fall in

net sales as
compared to
previous year

Cost of Sales
5.

i)Raw materials
(including stores and
other items used in
the process of
manufacture)

48

Total

a)Imported
b)Indigenous

ia)Purchase of
finished goods
a)Imported
b)indigenous

ii) Other spares

a)Imported
b)Indigenous

iii)Power and fuel

iv)Direct Labour

v)Other
Manufacturing
Expenses

vi)Depreciation

vii) sub-Total( i to vi )

viii)Add: opening

49

stock in process

sub total

ix)
a)Less; closing
stock
b)Less: stock Trf.
For self
consumption

x)cost of production

xi)Add: opening
stock of finished
goods

sub total

xii)Deduct: closing
stock of finished
goods

xiii) Sub-Total(Total
cost of sales)

Selling and General

50

Administration
6.

Expenses

Sub total (5+6)

7.

Operating profit
before interest (3-7)
Interest

8.
Operating profit after
9.

interest(8-9)

10.

i)Add:other nonoperating income

a)Misc.income

11.

b)Interest on
Deposits with Banks
c)Dividend income
d)Handling
remuneration from
GoI on imp.
Fertilizer
e)others

sub total(income)

ii) Deduct other non51

operating expenses
a)Prior period
Expenditure/icome
b)Provision for taxes
c)Handling
Expenses on
imported fertilizer
d)Others

sub total (expenses)

iii)Net of other nonoperating income/

expenses(net
of[11(i)+11(ii)]

Profit before
tax/loss[10 +11(iii)]

Provision for taxes

12.

Net
profit/loss(12+13)

a)contribution to co13.

operative edu. Fund

b)Donations

52

14.

c)Equity dividend
paid

15.

d)dividend rate

Retained profit(1415)

Retained Profit/ Net

Profit (%)
16.

FORM-II
It is the operating statement of the company for two previous year i.e. 2005-06 and
2006-07 and the current year i.e.2007-08.
First of all the net sales is calculated, secondly the calculation of cost of sales is
done, which contains total cost of production and selling, general and administrative
expense.
The operating profit or loss is calculated by subtracting the total cost of production
and selling, general and administrative expense from net sales. After then the
operating profit or loss after interest is calculated by subtracting interest from the
operating profit. To get the PBT i.e. profit before tax other non operating income like
interest, rent, lease rent on machine, and miscellaneous interest are added and
other non operating expenses like other expenses and donation is subtracted.
Net profit or loss is derived by subtracting the provision for taxes. Again by subtracting the
dividend paid and partners salary, retained profit can be derived.

53

This statement is submitted to the bank in order to display all the operations profit and loss
and retained profit to the consortium of banks providing cash credit

Form III: Analysis of Balance sheet

SL.

Particulars

No.

31-March-

31-March-

31-March-

31-March-

07

08

09

10

Actual

Actual

Actual

Projection

(1)

(2)

(3)

(4)

CURRENT LIABILITIES
1.

Short-term borrowings from banks(including

bills purchased, discounted excess
borrowings placed on repayment basis)
i)From applicant bank-WCD
From applicant bank-CC/Bills
ii)From other banks
iii) Of which BP&BD
Sub total [A]
Short term borrowings from others

2.
3.
4.

Sundry Creditors[ Trade]

Advance Payments from
Customers/Deposits from Dealers
Provision for Taxation

5.
6.
7.

Dividend payable
Other statutory Liabilities[Due within one
year]
Deposits/Installment of Term loans/DPGs
54

8.

Debentures etc.[Due with one year]

Other Current Liabilities & provisions [Due

9.

within one year]

Total Current Liabilities[total of 1 to 9 ]

10.

TERM LIABILITIES

Debentures [Not maturing within one year]

11.
12

Preference Shares [Redeemable after one

year]
Term loans [Excluding installments payable

13.

within one year]

Deferred payment credits [Excluding

14.

installments due within one year]

Other term loans[ unsecured]

15.
16.
17.
18.

Other term liabilities

TOTAL TERM LIABILITIES [Total of 11 to 16]
TOTAL OUTSIDE LIABILITIES [total of
10+17]

NET WORTH
19.

Other share capital

20.

General Reserve

21.

Revaluation Reserve

22.

Other Reserves [Excluding Provisions]

23.

Surplus [+] or Deficit[-] in Profit & Loss

Account

55

24.

NET WORTH

25.

TOTAL LIABILITIES[18+24]
CURRENT ASSETS
Cash& Bank Balances
Investments [other than ling term
investments ]
i)Government &Other Trusted Securities
ii)Fixed Deposits with banks

28.

i)Receivables other than deferred& exports

[including Bills purchased and Discounted by
banks]
ii) Export receivables [including bills
purchased/Discounted by bands ]

29.

30.

Installment of Deferred receivables[ Due

within on year]
Inventory
i)Raw Materials [including stores and other
items used in the process of manufacture ]
a)Imported
b)Indigenous
ii)Stocks-in-process
iii)Finished Goods
iv) Other consumable Spares
a)Imported
b) Indigenous
Advances to suppliers of Raw Material

56

31.

Stores/Spares
Advances payment of Taxes

32.
33.

Other Current Assets [including subsidy

Recoverable]
TOTAL CURRENT ASSETS[Total of 26 to

34.

33]
FIXED ASSETS
Gross Block [Land&Building, Machinery,

35.

capital work-in-progress]
Depreciation to date

36.
37.

NET BLOCK[35-36]
OTHER NON-CURRENT ASSETS
Investments /book debts/advances/deposits

38.

which are not current Assets

[i]a)Investments in subsidiary companies/
affiliates
b)Others
[ii]Advances to suppliers of capital Goods &
Contractors
[iii] Deferred receivables maturity exceeding
on year
[Iv]Others
Non-consumable stores &spares

39.
40.

Other non-current assets including dues

from directors
TOTAL OTHER NON-CURRENT ASSETS
[Total o f 38 to 40]

57

41.

Intangible Assets
[Patents, goodwill, preliminary expenses,

42.

bad/doubtful debts not provided for, etc.]

TOTAL ASSETS [Total of 34,37,41&42]
TANGIBLE NET WORTH [24-42]

43.

NET WORKING CAPITAL [(17+24)-(37+41-

44.

42)] To tally with [34-10]

45.

Current Ratio[ item 34/10]

Total Outside Liabilities/ Tangible Net

46.

Worth[18/44]

47.

ADDITIONAL INFORMATION
[I] Arrears of cumulative Dividend
[ii]Gratuity liability not provided for
[iii]Disputed excise /customs /tax liabilities
[iii]Other Liabilities not provided fo

FORM - III
Form III is the analysis of balance sheet of the company.
First of all the total outside liabilities are calculated by adding total current liabilities
which includes short term borrowings from bank, short term borrowing from others,
sundry creditors, advances provision for taxation dividend payable, other statutory
liabilities, deposits, debentures (redeemable within one year) and term liabilities
which includes debentures preference shares (redeemable after one year), term
loans, deferred payments credits, term deposits, other term liabilities.
Secondly total liabilities are calculated by adding total outside liabilities and Net
Worth.

58

Thirdly the calculation of total asset is done by adding total current assets, net block,
total other non current assets and intangible assets.
Fourthly tangible Net Worth is calculated by subtracting intangible assets from Net
Worth.
Net working capital is calculated by adding total term liabilities with Net Worth and
subtracting Net Block, totals other current asset and intangible asset to tally with total
current assets less total current liabilities. The sole purpose of this form is to bring
out the excess of total current assets over current liabilities i.e. the net working
capital and tally the same with the total term liabilities + Net Worth Net Block, total
other current assets and intangible assets.

Form IV: Comparative Statement of current Assets & current Liabilities

SI.n

Particulars

2008-09 Actual

o.

2009-10 Projections

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A.
A. Current
Assets

Raw

Materials( including
1.

stores and other

items used in the
process of
manufacture )

a)Indigenous
Months
59

Total

consumption

Other consumable
spares, excluding
those included in
2.

1above
a)Imported
months consumption

b)Indigenous
Months,
consumption

Stock in progress
months consumption
Finished Goods
3.

Months, cost of
sales

4.
Receivables other
than exported
&deferred
5.

receivables
Export receivables
Advances to
suppliers of raw

6.
7.

materials &
stores/spares,

60

consumables

Other current assets

including cash bank
balances& deferred
8.

receivables due
within one year
Total Current Assets

B.

9.

Current
liabilities( other than
bank borrowing for
working capital)

Creditors for
purchase of raw
materials, stores
and consumable
spares
10.

Advances from
customers
Statutory liabilities

11.

Other current
liabilities[ specify
major items ] short

12.

term borrowing,
unsecured loans ,
dividend payable,
61

13.

instalment of term
loan, deffered
payment credit,
public deposits ,
debentures etc.
Total [ to agree with
sub-total B Form
iii]

14.

Form IV

Form IV is the comparative statement of current assets and the current liabilities
where all the items of current assets and current liabilities are shown in details.
Form v: Computation of Maximum permissible bank finance for working capital

SI.n
o.

Particulars

2008-09 Actual

2009-10 Projections

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62

Total

1.

Total current Assets

( 9 in form iv)

2.

Total other current

Liablities ( other
than bank
borrowing)

3.

Working Capital Gap

WCG (1-)
Actual/ Projected net

4.

working capital (45

in form iii)

Item 3 minus item 4

5.
Assessed Bank
Finance
6.

a)
b)

ii)

63

Form V
Form V is the computation of maximum permissible Bank Finance for the Working
Capital.
Items content
Current Assets
Current Liabilities
The working capital Gap is calculated by subtracting the current liabilities from

the current Assets.

Minimum stipulated Net Working Capital 25% of the Working Capital Gap.
Actual Net Working Capital

The bank finances the minimum of the above two, i.e. the minimum of stipulated Net
Working Capital and the Actual Net Working Capital
SL
NO

PARTICULARS

31-MARCH07

31-MARCH08

09
ACTUAL

ACTUALS
(1)

31-MARCH-

(2)

FOLLOWING
YR.
PROJECTION
(3)

64

1.

SOURCES
a)Net profit (after tax)
b)Depreciation
c)Increase in capital
d) Increase in Term Loans
(incl.Public deposits)
e) Decrease in
i) Fixed assets
ii) Other non current assets
f) Others
g)Total

USES

2.
a)Net Loss

b)Decrease in share capital

c)Decrease in Term Loans (Including
public deposits)
d)Increase in
i)Fixed assets
ii)Other non-current assets
e) Dividend payments
f)Others
g)TOTAL
3.

Long Term Surplus(+)/Deficit(-)(1-2)

Increase / decrease in current
65

4.

assets

(As per details given

below)
5.

Increase /decrease in current

liabilities other than bank borrowings
( as per details given below)

6.
7.

Increase / decrease in working

capital gap
Net surplus (+)/deficit(-)

8.

Difference of 3 and 6
Increase /Decrease in bank
borrowings
INCREASE / DECREASE IN NET
SALES [Including subsidy]

The Bank sanction the 75% of the working capital Gap i.e. the amount excess of the
current asset over the current liability. For instance the Working Capital Gap of
IFFCO is Rs. 2670 crore then the company will be eligible for a loan of 2000 crore
only.
The reason behind this evaluation is because the Current Assets that is the Stock of
Finished Goods, Book debts and the Subsidy receivable remains hypothecated with
the Consortium (consortium is the group of banks that together provide the Cash
Credit to the company of the agreed limit). This is done because if the company fails
to repay the banks loan then the bank can liquidate its current assets and recover its
money. The original value of current assets cannot be recovered if it is liquidated
instantly. Thus to be in the safer side the 75% of the total amount of working capital
gap is provided as cash credit.

66

CHAPTER - 3

67

The Financial Performance has been analyzed by grouping the Financial

Ratios in four broad categories:

1. Liquidity Ratio
2. Leverage Ratio
3. Profitability Ratios
4. Activity Ratios
1. Liquidity Ratio: - Liquidity ratio measures the firms ability to meet
current obligations.
Current Ratio:For 2007-08
= Current asset/ Current liabilities
= 5575.74/1371.57
= 4.21
=4.21:1

i.e.
For 2008-09

=7672.99/3782.89
=2.41

Objective:Current ratio shows the short term financial position of the business.
This ratio measures the ability of the firm to pay its current liabilities. The ideal
current ratio is supposed to be 2:1 i.e. current assets must be twice the current
liabilities. In case this ratio is less than 2:1 the short term financial position is not
supposed to be very sound and in case, it is more than 2:1, it indicates idleness of
working capital.
Regarding IFFCO, the current ratio is above the standard yardstick that shows the
firms ability to pay its current liabilities. Company has 4.21 Rs. Current assets for
1Rs. Current liabilities in financial year 2007-08. But it decreased in 2008-09 but still
yet it is up to the standard yardstick.

68

Year

Current

2003-04
2004-05
2005-06
2006-07
2007-08
2008-08

Current Liabilities Current Ratio

Assets
(Rs.In

(Rs. In Lakhs)

Lakhs)
2564.02
2603.98
4748.98
6071.97
5775.74
7672.99

902.44
1104.84
1361.59
1201.23
1371.57
3782.89

=Current

Assets / Current Liabilities

2.84
2.36
3.49
5.05
4.21
2.41

9000
8000
7000
6000
5000
Current Assets

4000

Current Liabilities

3000
2000
1000
0
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Current Ratio
6
5
4

Current Ratio

3
2
1
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

69

Quick ratio:For 2007-08,

= Current asset Inventory /Current
Liabilities
= 5775.74-1577.10/1371.57
= 3.06
i.e.

= 3.06:1

For 2008-09
=7672.99-1731.36/3182.89
= 1.87

Objective: - Quick ratio is calculated to work out the liquidity of a business.

This ratio measures the ability of the business to pay its current liabilities in a real
way. The ideal quick ratio is supposed to be 1:1 i.e. quick assets must be equal to
the current liabilities. In case, the ratio is less than 1:1 it shows a very weak short
term financial position and in case it is more than 1:1 it shows a better short-term
financial position.

70

Quick ratio
3.5
3
2.5
quick ratio

2
1.5
1
0.5
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

2. Leverage Ratio:Judge the long term financial position of the firm .

a) Total Debt Equity Ratio := Total debt/ net worth

= 6775.64/3688.66
= 1.84
i.e.

=1.84:1

For 2008-09
= 12802.78/ 3958.87
=3.23

Objective: - Debt to total funds (net worth) ratio shows the proportion of long
term funds. Which have been raised by way of loans. This ratio measures the long
term financial position and soundness of long term financial policies. The debt to
71

total fund ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not
considered good and treated an indicator of risky long term financial position of the
business. It indicates that the business depends too much upon outsiders loan.
Regarding IFFCO, the total debt equity ratio is 3.23:1 which shows that company is
using more debt from outside to meet its working capital requirements, which is not a
good indicator.

b) Coverage Ratio:Interest coverage ratio or the times interest earned is used to test the firms debt
servicing capacity.

For 2007-08,
Interest coverage

= EBIDT/ Interest
= 1180.82/389.37
= 3.03

For 2008-09
= 1935.55/1023.20
=1.89

Objective:-

The interest coverage ratio shows the number of times the interest

charges are covered by funds that are ordinary available for their payment. A higher
ratio is desirable, but too high a ratio indicates that the firm is very conservative in
using debt, and that it is not using credit to the best advantage of shareholders. A
lower ratio indicates excessive use of debt, or inefficient operations. The firm should
make efforts to improve the operating efficiency, or to retire debt to have a
comfortable coverage ratio.
In case of IFFCO the interest coverage ratio 1.89 shows that the firm is earning
sufficient profit to meet its interest obligations on the short term and long term
borrowings.
72

3. Profitability Ratio:It measures the overall performance and effectiveness of the firm.

A) EPS (Earning per share) :For 2007-08,

= PAT (profit after tax) /no. of

Shares

= 258 cr. /4239 lakhs

= 6.08

For 2008-09,
= 360/42.39
= 8.43

Objective: - Earning per share helps in determines the market price of the
equity share of the company. It also helps to know whether the company is able to
use its equity share capital effectively with compare to other companies. It also tells
about the capacity of the company to pay dividends to its equity share holders.
Regarding IFFCO the earning per share has increased in year 2008 -09 which shows
that the company is able to use its equity share capital effectively.

b) Return on Capital Employed :For 2007-08

= PBT (profit before tax)/
Capital employed
73

= 380.52/10830.235
= 3.51
For 2008-09,
= 441.95/14151.13
= 3.12

Objective: Return on capital employed measures the profit, which a firm earns on investing a
unit of capital. The profit being the net result of all operations, the return on capital
expresses all efficiencies and inefficiencies of a business. This ratio has a great
importance to the share holders and investors and also to management. To
shareholders it indicates how much their capital is earning and to the management
as to how efficiently it has been working. This ratio influences the market price of the
shares. The higher the ratio, the better it is.
Regarding IFFCO the return on capital has decreased in the year 2008-09 which is
now 3.12%. Due to the higher cost of production it decreased. This ratio influences
the market prices of the shares.

5. Activity Ratio:Activity ratios are employed to evaluate the efficiency with which the firm
manages and utilizes its assets.

a) Debtors turnover ratio := Sales/ Avg. debtors

= 12162.82/ 3194.69
= 3.81

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Objective: - This ratio indicates the efficiency of the concern to collect the
amount due from debtors. It determines the efficiency with which the trade debtors
are managed higher the ratio, better it is as it proves that the debts are being
collected very quickly.

Regarding IFFCO the debtors turnover ratio is 3.81:1 which shows the efficiency of
the company to collect the amount due from debtors is excellent.

b) Working capital turnover ratio :For 2007-08,

= Sales / Avg. working
Capital
= 12162.82/4642.11
= 2.62
For 2008-09,
= 339.33/4447.135
= 7.63

Objective: This ratio indicates the number of times the utilization of working capital in the
process of doing business. The higher is the ratio, the lower is the investment in
working capital and the greater are the profits. However, a very high turnover
indicates a sign of over trading and puts the firm in financial difficulties. A low working
capital turnover ratio indicates that the working capital has not been used efficiently.
In case of IFFCO, there is big change in working capital ratio that is 2.62:1 to 7.63:1.
That shows that the requirement of working capital management of society is
excellent with minimum collection period of debtors and cash realization.

75

35000
30000
25000
20000
Net Sales

15000

Working Capital

10000
5000
0
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

9
8
7
6
5

working capital ratio

4
3
2
1
0
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

c) Fixed assets turnover ratio:For 2007-08,

= Net sales /Net fixed assets
76

= 12162.82/ 5099.75
= 2.38
For 2008-09
= 33933/5213
= 6.32

Objective: -

This ratio expresses the number to times the fixed assets are

being turned over in a stated period. It measures the efficiency with which fixed
assets are employed. A high ratio means a high rate of efficiency of utilization of
fixed asset and low ratio means improper use of the assets .
Regarding IFFCO the fixed assets turnover ratio in year 2008-09 is 6.32:1 that
shows the optimum utilization of fixed assets. In comparison of previous year the
ratio has increased from 2.38:1 to 6.32:1.

Subject:Analysis of Financial Performance of IFFCO viz-a-viz other companies in the

fertilizer sector for the year ended 31st March, 2008. The salient features brought
enclosed statement is given as under:

1. Physical Performance:
During the Financial year2007-08, IFFCO has produced 68.48 lakh MT
fertilizer which is highest amongst the all other fertilizer companies. However, the
total fertilizer production of top three companies in the fertilizer sector for the
financial year 2007-08 is as under:

Name of the
UREA

Production (LMTs)
COMPLEX
TOTAL
77

company
IFFCO
NFL
RCF

39.64
32.68
18.32

28.84
00.00
04.68

68.48
32.68
23.00

Similarly IFFCO has achieved highest sales of 68.48 lakh MT, which is also highest
amongst all companies in the Fertilizer sector. However, other than IFFCO Rankwise other two companies are NFL and RCF, which have achieved sales of 32.68
lakh MT
and 23.00 Lakh MT respectively.
80
70
60
50
40

UREA

COMPLEX FER.

TOTAL

30
20
10
0
2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

Financial Performance:Since IFFCO has achieved highest sales of 68.48 lakh MT fertilizers amongst all
fertilizer companies during the year 2007-08, the performance of the society is also
highest in terms of all financial parameters i.e. Turnover, operating Profit, Profit
before Tax and Profit after Tax. However, the ranking of top three companies in each
of these financial parameters is given as under:

1.

NAME OF THE COMPANY

Turnover( Amount Rs. Crore )

IFFCO

12162.82
78

2.
3.

RCF
NFL

5137.27
4141.00

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.

Cash & Bank Balances have decreased sharply, which indicates proper utilization of
funds at IFFCO.
Position of inventory is Very Good in current assets (31.99%). Inventory Turnover
Ratio increases consistently, which shows greater degree of utilization of inventory
during the study period.
Position of Debtors To Current Assets is average (14.760 %). This ratio had increased
from the year 2001-02 to 2003-04 showing a liberal credit policy followed by the
company.
Large part of working capital is involved in maintaining inventory.
Working capital of the company increases from 149914 in 2004-05 to 33873 in 200506.
Inventory as a component of current assets is high (35.78%) as compared to the other
components.

79

80

CONCLUSIONS & SUGGESTIONS

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 & 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 also, there are two most important factors that are 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 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.It can be observed that there is
though large sum of current assets than the ideal ratio 2:1, however it is
because of the selling of government special Bonds.
The current percentage of cash is too high which means there is a need to
route this idle cash inorder to increase the profitability of the firm.

81

BIBLIOGRAPHY
Book
Pandey,I.M.(IIMA),Fanancial management(theory practices)
Khan,M.Y. and Jain,P.K.Fanancial Management (text problems),second

edition, Tata Mc-Grawhill Publishing company Ltd.

Dr.S.N.Maheshwari,Management Accounting and Financial control Thirteen
edition, Sultan Chand & Sons.

JOURNALS

The Management Accountant,vol.39,no.7,july 2007

The Management Accountant,vol.39,no.5,july 2007
Revenue Budget IFFCO
Account Manual IFFCO
Statement Of F&A Section IFFCO
Annual Reports of IFFCO

WEB SITES
www.iffco.nic.in
www.google.com
www.indiatimes.com
www.investopedia.com

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