NFCL Project

INTRODUCTION
Finance is regarded as “THE LIFE BLOOD OF BUSINESS
ENTERPRISE”. Finance function has become so important that it has given birth to
financial management as a separate subject. So, this subject is acquiring universal
applicability. Financial Management is that managerial activity which is concerned with the
planning and controlling and of the firm’s financial resources. As a separate activity or
discipline is of recent origin it was a branch of economics till 1890. Still today it has no
unique today of knowledge of its own, and it draws heavily on economy for its theoretical
concepts.
The subject of financial management is of immense interest to both academicians and
practicing managers. It is of great interest to academicians because the subject is still
developing, and there are still certain areas where controversies exist for which no unanimous
solutions have been reached as yet. Practicing Managers are interested in this subject
because among the most crucial decisions of the firm are those which relate to finance and an
understanding of the theory of financial management provides them with conceptual and
analytical insights.
Scope of Finance Management:
Firms create manufacturing capacities for production for goods; some provide
services to customers. They sell their goods or services to earn profits. They raise funds to
acquire manufacturing and other facilities. Thus, the three most important activities of a
business firm are:
 Production
 Marketing
 Finance
K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 1

A firm secures whatever capital it needs and employees it (finance activity) in activities
that generate returns on invested capital (production and marketing activities). A business
firm thus is an entity that engages in activities to perform the functions of finance, production
and marketing. The raising of capital funds and using them for generating returns to the
supplies of funds is called the finance function of the firm.
FUNCTION OF FINANCIAL MANAGEMENT
Two significant contribution to the development of modern theory of financial
management are:
 Theory of Portfolio Management developed by Harry Markowitz in 1950, which deals
with portfolio selection with risky investment. This theory uses statistical concepts to
quantify the risk-return characteristics of holding a group/portfolio of securities,
investment or assets.
 The theory of Leverage and Valuation of Fire developed by Modigliani and Miller in
1958. They have shown by introducing analytical approach as to how the financial
decision making in any firm be oriented towards maximization of the value of the
firm and the maximization of the shareholders wealth.

Type of Financial Actions:
1. The Financial Management of trading or manufacturing firms

2. Financial Management of Financial Institutions.
3. Financial activities relating to investment activities.
International Finance:
Public Finance:
Functions are broadly classified into three groups. Those relating to resource
allocation, those covering the financing of these investments and theses determining how
much cash are taken out and how much reinvested.
 Investment decision
 Financing decision
 Dividend decision
 Liquidity decision
I) Investment Decision:
Firms have scarce resources that must be allocated among competitive uses. The
financial management provides a frame work for firms to take these decisions wisely. The
investment decisions include not only those that create revenues and profits (e.g. introducing
a new product line) but also those that save money.

So, the investment decisions are the decisions relating to assets composition of the
firm. Assets can be classified into fixed assets and current assets, and therefore the
investment decisions can also be bifurcated into Capital Budgeting decisions and the Working
Capital Management.
The Capital Budgeting decisions are more crucial for any firm. A finance manager
may be asked to decide about.
1. Which asset should be purchased out of different alternative options;
2. To buy an asset or to get it on lease;
3. To produce a part of the final product or to procure it from some other supplier;
4. To by or not an other firm as a running concern;
5. Proposal of merger of other group firms to avail the synergies of consolidation.
Working Capital Management, on the other hand, deals with the Management of
current assets of the firm. Though the current assets do not contribute directly to the earnings,
yet their existence is necessitated for the proper, efficient and optimum utilization of fixed
assets. There are dangers of both the excessive working capital as well as the shortage of
working capital. A finance manager has to ensure sufficient and adequate working capital to
the firm.
II Financing Decisions:
As firms make decisions concerning where to invest these resources, they have also to
decide two they should raise resources. There are two main sources of finance for nay firm,
the shareholders funds and the borrowed funds. The borrowed funds are always repayable
and require payment of a committed cost in the form of interest on a periodic basis. The
borrowed funds are relatively cheaper but always entail risk.

The risk is known as the financial risk i.e., the risk of insolvency due to non-payment
of interest or non-repayment of capital amount. The shareholders fund is the main source of
funds to any firm. This may comprise of the equity share capital, preference share capital and
the accumulated profits. Firms usually adopt a policy of employing both the borrowed funds
as well as the shareholders funds to finance their activities. The employment of these sources
in combination is also known as financial management.
III) Dividend Decisions:
Another major area of the decision marking by a finance manager is known as the
Dividend decisions which deal with the appropriation of after tax profits. These profits are
available to be distributed among the shareholders or can be retained by the firm for
reinvestment with in the firm. The profits which are not distributed are impliedly retained in
the firm. Al firms whether small or big, have to decide how much of the profits should be
reinvested back in the business and how much should be taken out in form of dividends i.e.,
return on capital. On one hand, paying out more to the owners may help satisfying their
expectations; on the other hand, doing so has other implications as a business that reinvests
less will tend to grow slower.
 Reinvestment opportunities available to the firm,
 The opportunity rate of the shareholders.

INDUSTRY PROFILE
India has been predominantly considered as an agricultural dependent economy.

Agriculture plays a very dominant role as more than one-fourth of our GDP come from this
sector. Nearly 70% of population depends on the agriculture for their lively-hood. The basic
need for an agricultural dependant economy is fertilizers and urea is one of the main
fertilizers. India is the second largest manufacturing country in the world.
All fertilizers consist if three main ingredients.
Nitrogen—(N) -- which promotes general plant growth
Phosphorous—(P) -- which promotes flowering
Potassium – (K) – which promotes strong roots.
The ingredients are mixed in various combinations because plants have different needs.
The combinations are indicated by a three number code:
The first number is the percent of nitrogen (N)

The second number is the percent of phosphorus (P)
The third number is the percent of potassium (K)
About Fertilizer:
Fertilizer is simply, plant food. Just like the human body needs vitamins and
minerals, plants need nutrients in order to grow. Plants need large amounts of three nutrients
– nitrogen, phosphorus, and potassium. These are commonly referred to as macronutrients.
Fertilizer makers take those three nutrients from nature and put them into soluble forms that
plants can easily use.
There are a number of other nutrients plants need in small amounts. These are
referred to as the minor nutrients, or micronutrients. These many nutrients are typically
produced separately, but end up being mixed together in varying amounts to match the needs
of a particular crop. The analysis found on each bag or bulk shipment of fertilizer tells the
farmer or consumer the amount of nutrients being supplied. States have a system of laws and
regulations that ensure the fertilizer is properly labeled and delivers the amount for nutrients
stated on the bag.

Our world would be vastly different without commercial fertilizers. Following world
war II, new technologies allowed for the rapid expansion of fertilizer production. Coupled
with growing food demand and the development of higher-yielding crop varieties, fertilizer
helped fuel the Green Revolution. Today, the abundance of food we enjoy is just one way
fertilizers help enrich the world around us.
While fertilizers provide many important benefits that are necessary for our way of
life, the improper use of fertilizers can harm our environment. We’ve used the most recent
developments in science to study our products and make sure safety comes first.
FERTILIZER:
Fuel for growing plants just like humans and animals, plants need adequate water,
sufficient food, and protection from diseases and pests to be healthy. Commercially produced
fertilizers give growing plants the nutrients they crave in the form they can most readily
absorb and use: nitrogen (N), available phosphate (P) and soluble potash (K), Elements
needed in smaller amounts, or micronutrients, include iron (Fe), zinc (Zn), copper (Cu) and
boron (B).
Each crop year, certain amounts of these nutrients are depleted and must be returned
to the soil to maintain fertility and ensure continued, healthy future crops. Scientists project
that the earth’s soil contains less than 20 percent of the organic plant nutrients needed to meet
our current food production needs. Therefore, through the scientific application of
manufactured fertilizers, farmers are meeting the challenge of the future, today.
Another component of plant DNA is phosphate, which helps plants to use water
efficiently. It also helps to promote root growth and improves the quality of grain and
accelerates its ripening. And potassium, commonly called potash, is important because it is
necessary for photosynthesis, which is the production, transportation and accumulation of
sugars in the plant. Potash makes plants hardy and helps them to withstand the stress of
drought and fight off disease.

Fertilizer Types:
Because every crop is different and the soils and weather conditions crops are grown
in vary dramatically around the world, commercial fertilizers, which are manufactured from
natural sources, come in many formulations.
Combining air with hydrogen using natural gas as the feedstock makes ammonia, the
building block for nitrogen fertilizers. Ammoniated phosphates, which include mono
ammonium phosphate (MAP) and diammonium phosphate (DAP), are made by reacting
ammonia with phosphoric acid. Muriate of potash, also called potassium chloride, is made
from mine ores that have been processed to remove naturally occurring salts.
Ammonium nitrate is a solid fertilizer containing approximately 34 percent nitrogen
that is water soluble and used in various fertilizer solutions. Aqua ammonia is another
nitrogen-based fertilizer made by combining ammonia with water. It contains up to 25
percent nitrogen and is either applied directly to the soil or is used to manufacture phosphate
fertilizers.
Nitrogen solutions are water solutions of ammonia, ammonium nitrate and,
sometimes, urea, a solid fertilizer containing approximately 45 percent nitrogen, and other
soluble compounds of nitrogen. Nitrogen solutions are used in ammoniating super phosphate,
the manufacture of complete fertilizer and for direct injection into the soil. They vary in
composition and nitrogen content and are sometimes applied under pressure.
NITROGEN (N):
Nitrogen is a part of all plant proteins and is a component of DNA and RNA – the
“blueprints” for genetic characteristics. It is necessary for plant growth and chlorophyll
production. Nitrogen is the building b lock for many fertilizers. Where does N come from?
Nitrogen is present in vast quantities in the air, making up about 78 percent of the
atmosphere. Nitrogen from the air is combined with natural gas in a complex chemical
process to make ammonia.
PHOSPHOURUS/PHOSPHATE (P):
Phosphorus as a nutrient is sometimes most valuable to plants when put near the seed
for early plant health and root growth. Plant root uptake is dependent on an adequate supply

of soil P. Phosphorus is relatively insoluble in water. The water in most soils must replace all
of the P in the soil water 2 to 3 times each day to meet the crop’s demand for P. Phosphorus
compounds help in directing where energy will be used. Phosphorus compounds are needed
in plant photosynthesis to “repackage” and transfer energy. Phosphate is also a component of
DNA, so it is one of the building blocks of genes and chromosomes. Phosphorus is involved
in seed germination and helps plants to use water efficiently. Where does P come from?
Phosphorus occurs in natural geological deposits. Deposits can be found in the U.S. and
other parts of the world.
Potassium/Potash (K):
Potassium protects plants against stresses. Potassium protects plants from cold winter
temperatures and helps them to resist invasion by pests such as weeds and insects. Potassium
stops wilting, helps roots stay in one place and assists in transferring food. Potassium is a
regulator. It activates plant enzymes and ensures the plant uses water efficiently. Potassium
is also responsible for making sure the food you buy is fresh. Where does K come from? The
element potassium is seventh in order of abundance in the Earth’s crust.
Through long-term natural processes K filters into the oceans and seas. Over time,
these bodies of water evaporate, leaving behind mineral deposits. Although some of these
deposits are covered with several thousands of feet of earth, it is mined as potash or
potassium chloride. Potash ore may be used without complex chemical conversion; just some
processing is necessary to remove impurities such as common salt.

FOOD FOR THE GROWING WORLD
Industry at a glance:
Since 1883 the industry has worked to promote the advances in the development and
application of fertilizers that have helped to feed a hungry world. The revolutionary concept
of plant nutrition was born from the discovery of the biological role of chemical elements in
plant nutrition and the need to feed a growing population concentrated away from the farm in
the rising industrial centers of the world.
Because of modern fertilizers, world food production since 1960 has more than
doubled, keeping pace with the population explosion. Today, the fertilizer industry is poised
to help produce the food that will be needed to feed the world’s projected 9 billion people in
2025.
The fertilizer industry is essentially concerned with the provision of three major plant
nutrients – nitrogen (N), phosphorous (P) and potassium (K) – in plant available form. Each
nutrient is responsible for different aspects of plant growth and health.
Fertilizers:
Regulated for quality and safety like other manufactured goods, fertilizers are
regulated for quality and safety at the federal and state levels. Every state in the country, plus
Puerto Rico, has its own fertilizer regulatory program, usually administered by the state
department of agriculture.
State Regulation:
State regulation is concerned with consumer protection, labeling, the protection of
human health and the environment, and the proper handling and application of fertilizers.
Fertilizers are regulated at the state level because soil conditions vary dramatically from state
to state across the country. For example, the rocky, thin soils of New England are vastly
different from the deep, rich black soils of the Midwest Corn Belt. A different level of
fertilizer nutrients in the soil, different crops (potatoes versus corn, for instance) and different
weather and cropping patterns require state-specific regulation.
Where Science and safety come first the modern commercial fertilizer industry was
founded on the revolutionary scientific discovery in the last part of the 18 th century that

chemical elements play a direct role in plant nutrition. This initial concept was supported by
direct scientific experiment and opened the way for industrial-scale manufacturing of
fertilizers of all types in the 19 th century, beginning with superphosphate in 1843. this was
followed by ammonium sulphate, sodium nitrate and, finally, in the first two decades of the
20th century, the manufacturing of synthetic nitrogen fertilizers directly from atmospheric
nitrogen.
Assessing Fertilizer Safety:

Fertilizer research and development historically have been focused on maximizing
economic crop yields from given rates of nutrient application. Since the advent of the
modern environmental movement in the 1960s, research has also been concerned with
minimizing potentially adverse human health and environmental effects from fertilizer
manufacture and application.
As part of its continuing commitment to safety, in 1996. the Fertilizer Institute
initiated a comprehensive safety assessment project to determine the risks, if any, of metals in
fertilizer. Small amounts of metals are found in phosphate and potash fertilizers due to their
presence in the mined ore bodies. In addition to phosphate and potash products, some
micronutrient fertilizers. Which come from both mined ores and recycled wastes, also
contain metals.
Fertilizers Enrich our World:

Improvements in agricultural efficiency through research and technology increase
food output while protecting the environment and enriching our world in numerous ways.
Fertilizers feed the growing world. As the world’s population continues to climb
toward an estimated 8.5 billion in 2040, experts estimate that food production must increase
more than two percent annually to even maintain current diets. Commercial fertilizers will be
key in the fight to feed the growing world.
Fertilizers protect the environment. The efficient use of fertilizer also helps to
conserve the natural environment. With fertilizers and modern high yield farming practices,
more food is produced per acre each year, so land may be conserved. Fertilizers, used

properly, help to prevent the widespread loss of habitat that results from wasteful “slash and
burn” low-yield farming, which is a major global environmental threat.
Fertilizers at work in industry:
Aside from their benefits to agriculture, fertilizer components are central to such
industrial process as semiconductor chip making, resin manufacture, cattle feed production,
metal finishing, the manufacture of detergents, fiberglass insulation and more, even rocket
fuel.
Global Fertilizer Consumption

COMPANY PROFILE
THE NAGARJUNA GROUP
Our founder Sri K.V.K. Raju (28.11.1928 – 16.06.1993) laid the foundation of the
Nagarjuna Group in 1974 with an investment of Rs. 50 millions. He was a visionary and a
professional technocrat entrepreneur who realized the importance of Core Sectors to an
economy like ours. He has guided the group with his philosophy
SERVING SOCIETY THROUGH INDUSTRY

Nagarjuna Fertilizers and Chemicals Limited (NFCL) is the first gas based fertilizer
factory in South India. The plant is based on the latest fertilizer technology from M/s.
Snamprogetti, Italy for Urea process with an installed capacity of 1500 Mt/day for each unit.
The ammonia process is based on technology from M/s. Haldor Topsoe, Denmark with an
installed capacity of 900 MT/day per each unit.
The feed stock for unit – I is natural gas and feed stock for Unit – II is NG/Naphtha.
The current consumption of natural gas is 2.15 million standard cubic meters per day and 500
MT of Naphtha per day. The natural gas is being received through pipe lines from Tatipaka
situated 92 Kms away from the factory and is marketed by M/s Gas Authority of India
Limited. Napththa is being supplied by M/s HPCL. The water requirement of 6.0 Million
Gallons/day is received from Samalkot Summer Reservoir through two pipeline.
Finance:
The total cost of the existing complex is Rs. 2156 crores (Rs. 1186 crores for Unit-I
and Rs. 970 crores for Unit – II). This consists of loan of Rs. 1,162 crores (Rs. 515 crores for
Unit-I and Rs. 647 crores for Unit – II) sanctioned by IDBI, IFCI, ICICI, UTI, LIC, GIC and
also Banks. The foreign exchange component of Rs. 781.07 cores was met by the Indian
Financial Institutions like IDBI, IFCI & ICICI and also by Italian Buyers credit. The public
and promoters subscribed the equity portion of Rs. 332.12 crores. The internal reserves of
Rs. 323 crores were utilized for construction of Unit – II.

LIVING IN HARMONY WITH NATURE – NFCL’S CONTRIBUTION
TO ECOLOGY
Environmental protection is an avowed corporate philosophy and the plant is built on
the principle of zero-effluent discharge and is totally eco-friendly. NFCL’s aim is to maintain
ecological harmony, which is NATURE’S INVALUABLE AND BEAUTIFUL GIFT TO
MANKIND.
Man can live in harmony with the environment only when mankind is guided by
respect for the Mother Earth and all living things. Nagarjuna Fertilizers and Chemicals
Limited believe that Industry should exist in harmony with nature. In pursuance of the
corporate vision, and as a humble contribution to the Mother Nature, the complete ecological
system in and around the factory has been changed by establishing a K.V.K.RAJU
SUNDARAVANAMU in an area of 747 acres surrounding the Complex.
The entire area has been covered with 4,50,000 plants consisting of 170 species,
transforming a once highly saline marshy area devoid of any vegetation into a lush green
arboreal park. The establishment of 1 KM wide KVK Sundaravanam is an integral part of
overall natural ecological system consisting of eleven water bodies for fish, habitat for animal
life and sanctuary for both indigenous as well as migratory birds with the factory nestled in
the most natural and idyllic surroundings created with dedication.
An integrated Environmental Management Plan (EMP) has been incorporated in the
basic design itself to ensure strict adherence to International Standards. The investment on
pollution control equipment in the Plant is close to Rs. 110 crores of capital investment and
recurring expenditure of Rs. 6 crores being spent annually for operating and maintaining the
equipment.
MAIN FEATURES OF ECO-SYSTEM:

A forestation:
740 acres of area has been planted with 4.5 lakh saplings of 170 species. Weak areas
have been planted with selected species based on criteria like tolerance to salinity, availability
from local sources and their ability survive with least maintenance. A full-fledged nursery
with mist chamber and sprinkler irrigation system has been developed for supply of plants to
a forestation programme.

Animal Enclosures:
A deer park with spotted deer has been set up in an area of six hectares with chain-
link fence on all sides. Separate enclosures for birds, rabbits and certain other animals are
made available. Some of these animals like jungle cat, fox, jackals, mongooses, squirrels,
bats, snakes, and turtles are also being let out freely in this eco-system as a part of our animal
conservation programme.
Use of Treated Effluent:

The total treated effluent generated from the factory is being utilized through a
network of over 17 KM of PVC pipeline for sustenance of the eco-system to show the purity
levels of the effluents and the technological efficiency of the plant equipment.
Awareness Programme:
As a part of NFCL’s sincere endeavor to bring awareness about the benefits of cleaner
environment on the general standards of life, company has started “GREENING THE
ROADS” of Kakinada in Phases. As a part of this programme, flowering trees were planted
on either side of the 4 km length of roads from Bhanugudi Junction to Nagamallithota and
from Nagamallithota to NFCL. This programme is being extended to further areas in phases.

NEED & SCOPE OF THE STUDY
Need for the Study
 In India of plenty human and nature resources are available but the capital
resources are highly restricted. A understanding of financial management
practices. Is necessary to utilize limited capital resources efficiently and
effectively in order to norms, for sound financial management in various
organization it is necessary to study the financial management practices in
auto parts industry particular reference to NFCL LTD., KAKINADA.
 It is useful for the owners who are interested in the Return on investment
earnings per share by comparing the details for different periods to assess
the period of the firm.
 It is useful for the employees and consumers in their own field of interest.
 It is useful for the students like me, to make an analysis for enhancing our
knowledge and skills in the filed of financial management.
Scope of the Study

This study is carried in the months of may-June. The data for the study are
collected from the balance sheet, profit and loss account and various schedules
relating to it for six years from
This study covers analysis like ratio analysis; funds flow statement, comparative
financial statements, common size financial statements and Trend analysis and also
include SWOT analysis.
It covers the various activities in the organization and measures the profitability,
solvency and efficiency for six successive years of he firm. Based on the analysis a
trend is to be drawn for a further period of five years.

OBJECTIVES OF THE STUDY
This project work is aimed to attain the following major objectives.
The objectives are:
1. To know about the fertilizer industry and business activities of M/s. Nagarjuna
Fertilizers and Chemicals Limited, Kakinada
2. To study the ability of the firm to meet its current requirements.
3. To study the extent to which the firm has used its long-term solvency by borrowing
funds.
4. To study the overall operating efficiency in performance of M/s. Nagarjuna Fertilizers
and Chemicals Limited, Kakinada.
5. To study the efficiency with which the firm is utilizing its various assets in generating
sales.
6. To suggest guidelines to the company for improving its financial position.
RESEARCH METHODOLOGY
The required for this study would be collected through two sources i.e.,
METHODS

PRIMARY DATA SECONDARY DATA
1. Primary Data:
The primary data comprises information obtained by the candidate during discussions
with Heads of Departments and from the meeting with officials and staff.
2. Secondary Data:
The secondary data has been collected from information through Annual Reports,
Public Report, Bulleting and other Printed Materials supplied by the Company.
In the present study 1/4th of the total information of time is from primary data and the
rest is from the secondary data.
LIMITATIONS OF STUDY
1. The study is limited to NFCL, Kakinada; it does not relate to any other company of
Nagarjuna Group or other firm’s of Fertilizer Industry.

2. The smaller time frame for understanding this study is also a significant limitation.
3. The ratios are calculated on the basis of past data; these are not future indicators.
4. The scope of study is limited to the last five years balance sheets.
5. The analysis is made basing only on the Annual Reports of NFCL.
THEORETICAL BACKGROUND OF PROJECT

CONCEPTS OF WORKING CAPITAL
Finance is the life blood of every business activity without which the wheels of
modern organization back bone system cannot be greased. Working capital management is
one of the important facets of a firm’s overall financial management. It is concerned with the
management of firm’s current accounts, which include current assets into optimal use by

speeding up their flow to ensure that money does not stagnate any way in any form. The
management of working capital is becoming increasingly important as firms realize that
approximately half of the investments are in working capital. Working capital sphere,
therefore, throws open a welcome challenge and an opportunity for the finance mange to play
a key role for effective planning, controlling, directing and utilizing the working funds in
NFCL.
According to SCHLLER HALEY managing current assets require more attention
them managing plant equipment expenditure too large an investment in current asset’s means
typing up capital than can be used providently else where on the other hand too little.
Investment can also be expensive.
CONCEPT OF WORKING CAPITAL:

To understand the concept of working capital it is important to know the precise
meaning of current assets and current liabilities. Current assets are those assets, which are
used in the production and selling operations of the business and can be converted into cash
with in a year. They comprise inventory, debtors, bills receivable, marketable securities, cash
and bank balances. Current liabilities are those which are intended to be paid during the

accounting period out of current assets or the income of the business. They include bank
loans, loan other than bank, bills payable and sundry creditors. Two concepts of working
capital now in vague are found useful in the management of working capital viz., gross and
net. The former concept concerns with the quantitative approach whilst the latter deals with
qualitative approach. The project is mainly based on study on working capital management
in NFCL.
GROSS WORKING CAPITAL CONCEPT:

Working capital employed in business concern is equal to the total current assets
employed. This is known as circulating capital or operating capital as these rotate
continuously as long as the firm exits. The gross working capital concept focuses attention
on two aspects of current assets management. They are :
a. Optimum investment in current assets and
b. financing of current assets. To quote Westion and Brigham, gross working capital refers to
firms investment in short term assets such as cash, short term securities, accounts receivable
and inventors. The supporters of this concept like Field, Baker and Mallot, Mead argued that
the management is more concerned with total current assets as they constitute the total funds
for operating purpose.
NET WORKING CAPITAL CONCEPT:

The qualitative concept examine working capital as excess of current assets over
current liabilities. Working capital deficit excess if current liabilities exceed current assets.
Similar views are express by Guthmann and Doughal and McMullan Accounts Hand Book
also completely endorses this view Gerstenberg Supports it the following way:
“Any comprehensive discussion on the working capital included the excess of current
assets over current liabilities”.
Famous economists like Lincoln, Stevens and sailors fully endorsed this concept and
expressed that it helps creditors and inventors judge the financial soundness of an enterprise.
Another alternative definition of net working capital is that portion of firm’s current assets
which is financed with long term funds. Net working capital, thus indicates the liquidity of

the business while gross working capital indicates the quantum of working capital with which
the business has to operate.
NEED FOR WORKING CAPITAL:

The need for working capital in a business undertaking cannot be over emphasized.
The objective of financial decision making is to maximize the shareholders wealth. To
achieve this it is necessary to generate sufficient profits. The extent to which profits can be
earned will naturally depend upon the magnitude of the sales among other things. A
successful sales programme is in other words necessary for earning profits by any business
enterprise. However, sales do not convert into cash instantly. There is invariably a time lag
between the sale of goods and the receipt of cash. There is, therefore, a need for working
capital in the form of current assets to deal with the problem arising out of the lack of
immediate realization of cash against goods sold. Sufficient working capital is thus,
necessary to sustain sales activity.
FACTORS INFLUENCING WORKING CAPITAL:

The business undertaking should plan its operations in such a way it should have
neither too much nor too little working capital. The total working capital requirements are
determined by a variety of factors. The factors which determine the quantum of working
capital in a business undertaking are as follows.
1. General nature of the business-companies which sell a service and the too for
immediate cash, require little working capital. But for a manufacturing firm which
produces a product and sells it on credit basis, working capital requires is high
2. Production cycle if the production process is lengthy working capital required is more
and vice-versa.
3. Speed of operating cycle if the speed of operating cycle is slow working capital
needed is high.
4. Credit terms if the company purchase raw materials on credit basis and sells finished
goods o cash basis, working capital requirements will be low.

5. Growth and expansion – Firms with larger growth prospects demand greater working
capital.
6. Dividend policy – firms pursuing a liberal dividend policy require more working
capital.
7. Other factors
(a) Production policies
(b) Unpredictability in the availability of raw materials.
(c) Depreciation Policies
(d) Impact of business cycles
(e) Operating efficiency and
(f) Absence of Coordination between production and distribution policies.
WORKING CAPITAL CYCLE AND ITS MANAGEMENT – AN

EXPLANATORY NOTE
The general factors as explained above that too those factors which are uncontrollable
due to external reasons of nature, lead-time of manufacture and existence of market
conditions would limit ones effort of meticulous management by the controllable constituents

of Working Capital requiring judicious management by the controllable constituents of
working capital requiring judicious options of applicability should consume almost all the
time for efficient management. In order to understand the management of working capital in
all its faces, I deal with the constituents of working capital, its management, so also the
financing forms available in the following paragraphs.
For the purpose of analysis of following working capital cycle is framed. The cycle
shown below is a typical working capital cycle. Its change in shape, reduction in length
could be, where products are sold on cash, fully or partially, materials purchased on cash or
credit, which have been dealt-with in the “Management” part of it in a narrative form.
The working capital operating cycle normally confines to a year to year with
reference to which various factors affecting working capital are evaluated. Working capital
cycle is the period within which either raw material converts itself to cash or commences
with cash and ends with cash.
RAW MATERIALS

The component of the raw material in a working capital cycle assumes vary
significant role. Generally more than 50% of the year turnover are spent on raw materials
undue accumulation of raw material tells upon a profitability due to costs of its carrying.
The maintenance of optimum level of inventories of Ra- Materials maximizes with
lower working capital requirement and shortage of Raw Materials lead to disruption in
production, non-utilization of capacities of production and consequent adverse impact on
profitability (since larger generation from higher profitability directly leads to lesser cost on
working capital). There have been scientific methods established not only for procurement
but also for storing. Working capital cycle is the period within which either raw material
converts itself to cash or commences with cash and ends with cash necessitate certain
inevitable volume to be stored, in case of finished goods many factors to keep at optimum
level would be controllable. There can be host of measures that could be taken for
maintaining minimum quantity in the form of finished goods.
RECEIVABLES:
The sale of the products against cash would be an ideal situation to eliminate a stage
in the working capital cycle thus achieving the objective of drastic reduction in its length and
the requirement of working capital. The existence of numerous competitors in the era of
globalization and liberalized economy, such sales on cash could only be next to impossible if
growth of the organization is any aspiration. In the present complex market scenario one lead
the other, in offering more value for money to their customers and extending credit has been
one such major step. This encounters the organization with substantial blockage of working
capital. Indiscriminate extension of credits in the name of growth could erase the entire
profitability and as stated above non-extending of credit would keep the organization out of
business. A great deal of planning and efficiency is warranted to keep receivables at the
optimum level. I would choose to little elaborate on two measures in this regard.
1. LAYING DOWN CREDIT POLICY:

The organization specifying applicability of general credit policy i.e., the period of
credit extendable as a thumb rule would fall short of its effort in controlling receivables. The
credit policy requires to be more selective and should bear, the growth, recoverability, the

product strength, distribution network etc., in its upper most mind. The variation in credit
policy could also customer based. As we would observe there would be two sets of
organizations, one looking for a lower margin with high growth through a liberal credit
policy, the other one, higher margin with reasonable growth through a conservative credit
policy.
The credit policy should not lay-down the period of credit but also a well through out
procedures for extending credit in order to prevent or minimize the debts going bad. A
systematic evaluation of customers credibility, financial strength and their usefulness to the
organization in terms of quantum of sale etc. would fetch desired results. The credit policy
should specify the level of management authorized to extend general credit and instead of
decentralizing the power of extending any further dispensation such decisions could be taken
by fairly senior personnel, few in number. Depending upon the market conditions the policy
could also specify incentives for early payments like cash discounts, so also interest on
delayed payments.
2. MONITORING RECEIVABLES:
Monitoring receivables are as important, if not more, as laying down a credit policy. It
has to be constant and continuous in order to bring down the level of receivables to an
optimum level in conformity with the laid down credit policy of the organization. When we
talk of monitoring receivables two ready indicators are remembered. The collection period
and the age of the book debts.
a. Collection period
The collection period would be in terms of number of days average credit sales. Such a
calculation area-wise, marketing personnel wise at frequent intervals would provide
information for selective credit control. An application of incentive for faster collection in
certain selective areas also would render possible, the collection faster.
b. Aging to Book Debts:

The collection efforts could be intensified on greater analysis of receivables from the
point of view of the number of days it is outstanding. Higher the number of days, the debt is
outstanding, the probability of it becoming doubtful of recovery is higher. Earlier detection
of such outstanding from customers would facilitate taking hard decisions of stoppage of

further sales, in order to minimize bad debts. Collection of book debts just as per the credit
policy would enable the organization to achieve planned profitability.
It would be an art and efficiency of the marketing personnel in an organization which
enables overall monitoring of receivables effective and to keep at an optimum level.
CASH AND ITS MANAGEMENT

Cash is the starting point and the end point of a working capital cycle. I have
explained the foregoing paragraphs about each of the stages in the working capital and its
management. The management necessarily means, ways and means of maintaining as low
level in each stage possible, without hampering the laid down objectives of the organization
of growth and profitability. While explaining these the efforts were only to reduce the
conversation period at each stage and to reach to the cash stage as early as possible. Cash
management therefore includes efficiency of inventory management, work-in-process
management, receivables management etc., having dealt with these, I would opt to deal with
other prominent factors affecting cash management.
Cash management as such, of course, depends on the nature of the organization,
market conditions for the products deals with by the organization policies perused, other
external factors affecting etc.,
The management of cash mainly should serve the following objectives.
a. The cost of capital being a major component in the determinates of profitability, the
optimum level of its maintenance is so essential that any shortage even temporarily
would disrupt the whole activity of the organization. It would fail to meet its
commitments to employees statutory authorities etc. the suppliers would loose
confidence in the organization and there would be lack of competitiveness in
supplying the materials ultimately leading to substantial higher in-puts costs. On
the other hand indiscriminate holding of cash, higher than necessary, would result in
loss of interest apart from stagnation in growth and profitability. It would be the
Endeavour of the organization to rotate cash as fast as possible maintaining cash in
its form at the minimum.
b. The inflow and the outflow of cash should be nearly matched in order to enable
meeting of all its commitments on time at minimum cost.

c. The cash should be available even at the time of an unexpected deviation in the plan
of production and sale.
d. Maintaining lower cash position would also lead to demoralization, lower
productivity, unfavorable bargaining power, strained industrial relations, affecting
good will etc., maintaining higher cash position would lead to complacency, higher
doubtful debts, higher non-moving item of inventory, obsolescence etc., since it
tends to take the operations with less diligence.
Management of cash is an important as any other component of working

capital. It involves, planning zero based budgeting, exercising economy in
spending making short-term and long-term forecasts etc.
The inflows and outflows are required to be monitored continuously with
reference to the plan, for identifying the deviations for corrective action.
1. Efficient Debt Collection System:

While dealing with monitoring receivables I have touched upon the need for Reducing
book debts and also control of book debts through aging analysis. In addition, the system
could build in the following for accelerating debt collection even within the overall credit
policy of the organization.
a. Extending cash discounts for early payment by the customers. As long as margin on
the products sold in higher than the cost of borrowed capital, faster collection by this
system resulting in quicker rotation of cash could result in higher profitability.
b. Collection through demand drafts in place of cheques, particularly that from
outstations.
c. Opening up of as many collection bank accounts as required near to the sales point for
quicker realization.
d. Adopting faster mode of transfer of funds from collection accounts at various
locations to the overdraft account of the organization, say, by money transfer,
telegraphic/tele transfers, quick collection system introduced by the banks etc.
2. Economy in Disbursement:

Better management of cash could be achieved through exercise of economy on
disbursements. The following measures would be useful.
a. Collection bank account should be as many but the disbursement bank accounts
should be as few as possible. The authority to disburse should be centralized with few
senior level personnel to render monitoring easy and effective.
b. Proper assessment of man power to restrict expenses on labour.
c. Exploring possibilities of exercising economy in all major operating costs.
d. Availing maximum credit form the suppliers, at the same time not leading to higher
prices for material. A larger period of credit could be availed by extending non-fund
based guarantees either letter of credits or bank guarantees.
3. Temporary Investment in Marketable Securities:

There can not be a perfect match between inflow and outflow of cash. In view of
necessity to provide for contingencies, temporary surplus cash situation might exist.
FINANCING THE WORKING CAPITAL NEEDS:

Financing working capital needs of a business enterprise is yet another key area
wherein the finance manager can play an active role. He can employ different sources in
financing of current assets. There exist three distinct sources of financing current assets.
1. Long Term Financing: It consists equity and preference shares retained earnings
debentures and borrowed funds from financial institutions.
2. Short Term Financing: It includes short term bank loans, commercial papers,
and factoring bills receivables.
3. Spontaneous Financing: It acts as an instantaneous source which includes trade
credit and accruals. Every firm tries its best for the maximum use of the spontaneous
sources which are cost free.
In financing current assets the choice is exclusively between short term and long term
sources since the spontaneous sources were exploited on routine lines. The finance
manager has to decide the extent of long terms and short term sources to finance his

concerns working capital requirements depending upon the conditions under which the
company operates, the type of product it manufactures, its earning power, the interest
charges on different sources of funds and their availability. The short sources of funds
involves less cost and have more flexibility but more risky than the long term source of
funds. Therefore, the firm should use both the sources intelligently to finance its current
assets. Financing current assets through a right source assumes a greater significance in
the management of working capital.
Data Collection:
Personal interview were held with key personnel of finance department.
Secondary data from published annual reports for 5 years (2003 to 2006)
and few other relevant data were availed from NFCL. Kakinada.
RESEARCH TOOL:
1. Operating Cycle Method
a. Raw Material Conversion period
b. Work-in-Process Conversion Period
c. Finished goods Conversion Period
d. Receivables Conversion Period
e. Payment deferral Conversion Period
2. Statement of Changes in working capital
3. Trend Analysis
a. Capital Trend
b. Sales Trend
c. PBT Trend
4. Ratio Analysis
a. Liquidity Ratios
b. Activity Ratios
c. Assets Turnover Ratios.
1. OPERATING CYCLE METHOD:

The operating cycle of a firm begins with the acquisition of raw materials and ends with
the collection of receivable. It may be divided into 4 stages.
 Purchase of Raw materials Stage.

 Work-in-Process Stage
 Finished goods inventory stage
 Debtors collection Stage
The firm beings with the purchase of raw materials which are paid after a delay which
represents the accounts payable period. The firm converts the raw materials into finished
goods and then sells the same. The time lay between the purchase of raw materials and the
sale of finished goods is the inventory period. Customers pay their bills some time after the
sales. The period that elapses between the data of the sales and the data of collection of
receivable is the accounts payable.
The duration of the operating cycle is equal to the sum of the duration of each of these
stages less the credit period allowed by the suppliers of the firm. In symbols.
O=R+W+F+D+C
Where,
O = Duration of operating cycle
R = Raw material storage period
W = Work in process period
F = Finished goods storage period
D = Debtors collection period
L = Creditors collection period
The time that elapses between the purchase of raw materials and the collection of cash
for sales in referred to as the operating cycle. It can be represented as follows.
2. Statement of changes in working capital:

This technique helps to analyze changes in working capital components between two
dates. The comparison of current assets and current liabilities are shown in the table at the
beginning and end of the specific period. By this statement we can know the difference of
individual components in Current Assets + Current Liabilities for the two years respectively.
RATIO ANALYSIS
Several ratios, calculated from the accounting date, can be grouped into various classes
according to financial activity or function to be evaluated. As stated earlier, the parties
interested in financial analysis are short and long-term creditors, owners and management.
“Short-term creditors” main interest is in the liquidity position or the short-term
solvency of the firm. Long-term creditors, on the other hand, and more interested in the long-
term solvency and profitability of the firm. Similarly, owners concentrate on the firms
profitability and financial condition. Management is interested on in evaluating every aspect
of the firms performance. They have to protect the interests of all parties and see that the
firm grows profitably. In view of the requirements of the various users of ratios, we may
classify them into the following four important categories.
Types of Ratio:
 Liquidity Ratios
 Leverage Ratios
 Activity Ratios
 Profitability Ratios
I) Liquidity Ratio:

The liquidity refers to the maintenance of cash, bank balance and those assets, which
are easily convertible into cash in order to meet the liabilities as and when arising. So, the
liquidity ratios study the firm’s short-term solvency and its ability to pay off the liabilities.
Current Ratio:
Current ratio is the ratio of current assets and current liabilities. Current
Assets are assets which can be covered into cash within one year and include
cash in hand and at bank, bills receivable, net sundry debtors, stock of raw
materials, finished goods and work in progress, prepaid expenses,
outstanding and occurred incomes, and short term or temporary investments.
Current liabilities are liabilities, which are to be repaid within a period of 1 year and include
Bills payable, Sundry Creditors, Bank Overdraft, Outstanding
Expenses, Incomes received in advanced, proposed dividend, provision for taxation,
unclaimed dividends and short term loans and advances repayable within 1 year.
Current Assets
Current Ratio= -------------------
Current Liabilities
A Current ratio of 2:1 is considered as ideal: if a business has an undertaking with its bankers
to meet its working capital requirements short notices, a current ratio of is adequate.
2. Quick Ratio :
Quick Assets
Quick Ratio = ------------------------
Quick Liabilities
A quick ratio of 1 is considered as ideal. A quick ratio of less than 1 is indicative of
inadequate liquidity of the business. A very high quick ratio is also not available, as funds can
be more profitably employed.

3. Absolute Liquid Ratio
It is the ratio of Absolute Liquid Assets to Quick Liabilities. However, for calculation
purposes, it is taken as ratio of Absolute Liquid Assets of Current Liabilities. Trade
investment or Marketable securities are equivalent of cash therefore, they may be included in
the computation of absolute liquid ratio.
Absolute Liquid Assets

Absolute Quick Ratio = -------------------------------------
Current Liabilities
II) Leverage Ratios:
Leverage ratios indicate the relative interest of owners and creditors in a business. It
shows the proportions of debt and equity in financing the firm’s assets the long-term solvency
of a firm can be examined by using leverage ratios. The long-term creditors like debenture
holders, financial institutions etc., are more concerned with the firms long-term financial
strength.
There are two aspects of the long-term solvency of a firm
1) Ability to repay the principal when due, and
2) Regular payment of the interest they leverage ratio are calculated to measure the
financial rest and firms abilities of using debt.
1) TOTAL DEBT RATIO:
Total debt will include short and long-term borrowings from financial institutions
debentures bonds. Capital employed will include total debt and net worth.

The firm may be interested in knowing the proportion of the interest bearing debt in
the capital structure by calculating total debt ratio. A highly debt burdened firm will find
difficulty in raising funds from creditors and owners in future. Creditors treat the owner’s
equities as a margin of safety.
Total Debt
Total Ratio = --------------------
Capital Employed
2) DEBT-EQUITY RATIO:
It reflects the relative claims of creditors and shareholders against the assets of the
business. Debt, usually, refers to long-term liabilities. Equity includes preference share
capital and reserves.
The relationship describing the lenders contribution for each refers of the owner’s
contribution is called debt equity ratio. A high ratio shows a large share of financing by the
creditors relatively to the owners and therefore, larger claim against the assets of the firm. A
low ratio implies a smaller claim of creditors. The debt equity indicates the margin of satisfy
to the creditors so, there is no doubt the Beth High and Low debt equity ratios are not
desirable. What is needed is a ratio, which strikes a proper balance between debt and equity.
Total Debt
Debt-Equity Ratio = ----------------------
Net worth
Some financial experts opine that ‘debt’ should include current liabilities also.
However, this is not a popular practice. In case of preference share capital, it is treated as a
part of shareholders funds, but if the preference shares are redeemable, they are taken as a

part of long-term debt shareholder funds are also known as proprietor funds and it includes
items equity share capital, reserves, and surplus. A debt equity ratio of 3:1 is considered
ideal.
2. PROPRIETORY RATIOS:
It expresses the relationship between net worth and total assets.
Net worth
Property ratio = ----------------------------
Total Assets
Net worth = Equity share capital + Preference share capital + reserves – Fictitious assets.
Total Assets = Fixed assets + current assets (excluding fictitious assets)
Reserves earmarked specifically for a particular purpose should not be included in calculation
of net worth.
A high proprietor’s ratio is indicative of strong financial position of the business. The higher
the ratio, the better it is.
4. FIXED ASSETS RATIO:
Fixed Assets
Fixed Assets = -------------------------
Capital employed
Capital employed – Equity share capital + preference share capital + Reserves + long term
liabilities – Fictitious assets.
This ratio indicates the mode of financing the fixed assets. A financially well-
managed company will have its fixed assets financed by long-term funds. Therefore, the
fixed assets ratio should never be more than

1. A ratio of 0.67 is considered idea
6. INTEREST COVERAGE RATIOS:
This interest coverage ratio is computed by dividing earnings before interests and
taxed by interest charges.
Debt
Interest Coverage Ratio = ------------------
Interest
The interest coverage ratio shows the number of times the interest charges are covered
by funds that are or demurely available for their payment. A high ratio is desirable but too
high ratio indicates that the firm is very conservative in using debt and that is not using credit
to the debt advantage of shareholder. A lower ratio indicates excessive use of debt or
inefficiency operations. The firm should make efforts to improve the operating efficiency or
to retire debt to have a comfortable coverage ratio.
III. ACTIVITY RATIOS:
Activity ratios measure the efficiency or effectiveness with which a firm manages its
resources or assets. They calculate the speed with which various assets, in which funds are
blocked up, get converted into sales.
1) TOTAL ASSETS TURNOVER RATIOS:
The assets turnover ratio, measures the efficiency of a firm in managing and utilizing
its assets. The higher the turnover ratio, the more efficiency the management and utilization
of the assets while low turnover ratio is indicative of under-utilization of available resources
and presence idle capacity. The total assets turnover ratio is computed by dividing sales by
total assets.

Sales
Total assets turn over ratio = ------------------
Total Assets
2) WORKING CAPITAL TURNOVER RATIOS:
Cost of goods sold

Working capital turnover ratio = -----------------------------
Working Capital
Where if cost of goods sold is known. Net sales can be taken in the numerator.
Working capital = Current Assets – Current liabilities.
A high working capital turnover ratio indicates efficiency utilization of the firm’s
funds. However, it should not result in overtrading.
3) DEBTORS TURNOER RATIO:
Debtor’s turnover ratio expresses the relationship between debtors and sales. It is
calculated.
Net credit sales

Debtors Turnover Ratio = -------------------------
Average debtors
Net credit sales inspire credit sales after adjusting for sales returns. In case
information no credit sale is not available. “Sales” can be taken in the numerator. Debtors
include bills receivable. Debtors should be taken at Gross Value, without adjusting
provisions for bad debts. In case, average debtors can’t be found; closing balance of debtors
should be taken in the denominator. A high debtors turnover ratio or a low debt collection

period is indicative of a sound credit management policy. A debtors turnover collection
period of 30-36 days is considered ideal.
4. DEBT COLLECTION PERIOD:
The debt collection period measures the quality of debtors since it indicates the speed
of the collection. The shorter the average collection period implies the prompt payment by
debtors.
No. of days year

Debt collection period = ---------------------------
Debt collection Period
An excessively long collection period implies a very liberal and inefficient credit and
collection performance. This certainly delays the collection of each and impairs the firm’s
liquidity. The average no. of days for which debtors remain outstanding is called debt
collection period or average collection period.
5. CREDITORS TURNOVER RATIO:
Creditors turnover ratio expresses the relationship between creditors and purchases.
Net Credit Purchase

Creditors turnover Ratio = -------------------------------
Average Creditors
Net credit purchases imply credit purchases after adjusting for purchases returns. In
case information on credit purchases is not available purchase may be taken in the numerator.
Creditors include bills payable. In case avenue creditors can’t be found, closing balance of
creditors should be taken in the denominator.
The creditors turnover ratio is 12 or more. However, very less creditors turnover
ratio, or a high debt payment period, may indicate the firm’s inability in meeting its
obligations in time.

6. PAYMENT PERIOD RATIO:
Credit turnover rate can also be expressed in terms of number of days taken by the
business to pay off its debts. It is termed as debt payment period which is calculated as:
Number of days in a year

Payment Period Ratio= --------------------------------
Creditors turnover ratio
7. FIXED ASSETS TURNOVER RATIO : It is defined as
Net Sales
Fixed Assets Turnover Ratio= -----------------
Fixed Assets
Fixed assets imply net fixed assets i.e. after depreciation. A high fixed assets turnover
ratio indicates better utilization of the firm’s fixed assets. A ratio around 5 is considered
ideal.
8. INVENTORY TURNOVER RATIO :
Stock turnover ratio indicates the number of times the stock has turned over into sale
sin the year. It is calculated as
Cost of good sold

Inventory Turnover Ratio= --------------------------------
Average Inventory
Cost of goods sold = Sales Gross Profit
Average Stock = (Opening stock and closing stock ½)
In case, information regarding cost of goods sold is not known. Sales may be taken in
the numerator. Similarly, if average stock can’t be calculated, closing stock should be taken
in the denominator.
A stock turnover ratio of ‘8’ is considered ideal. A high stock turnover ratio indicates
that the stocks are fast moving and get converted into sales quickly. However, it may also be

on account of holding low amount of stocks and replenishing stocks in larger number of
installments.
IV. PROFITABILITY RATIO:
It measures the overall performance and effectiveness of the firm. Poor operational
performance may indicate poor sales and hence poor profits. A lower profitability may arise
due to the lack of control over the expenses. Bankers, financial institutions and other
creditors look at the profitability’s. Ratio as an indicator whether or not the firm earns
substantially more than it pays interest for the use of borrowed funds and whether the
ultimate repayment of their debt appear reasonably certain owner are interested to know the
profitability as it indicates the return which they can get on this instruments.
Profitability ratios measure the profitability of a concern generally. They are
calculated either in relation to sales or in relation to investment.
1). NET PROFIT RATIO:
It indicates the result of the overall operation of the firm.
The higher the ratio, per profitable is the business. The net profit ratio is reassured by
dividing net profit buy sales. The net profit ratio indicates management efficiency in
manufacturing administrating and selling the products. This ratio is the overall firm’s ability
to turn each rupee of sale into net profit. If the net profit margin is inadequate, the firm fails
to achieve satisfactory return on shareholder’s funds.
Profit After Tax

Net Profit Ratio = --------------------------
Net Sales

A firm with high net profit margin can make better use of favorable conditions. Such
as rising selling prices, falling cost of products or increasing demand for the product. Such a
firm will be able to accelerate its profits at a faster rate than a firm with a low net profit
margin. This ratio also indicates the firm capacity to withstand adverse economic conditions.
2). RETURN ON NET WORTH RATIO:
It indicates the return, which the shareholders are earning on their resources invested
in the business.
Profit after tax

Return on net worth ratio = ----------------------------
Net Wroth
Net worth = Shareholders funds = Equity share capital + Preference share capital + Reserves
– Factious Assets.
The higher the ratio, the better it is for the shareholders. However, inter firm
comparisons should be made to ascertain if the returns from the company are adequate. A
trend analysis of the ratio over the past few years much is done to find out the growth or
deterioration in the profitability of the business.
3). RETURN ON ASSETS RATIO: It is calculated as:
Profit after tax

Return on assets ratio = --------------------------
Total Assets

Total assets do not include fictitious assets. The higher the ratio, the better it is.
4). EARNINGS PER SHARE RATIO:
Earnings per share are the net profit after tax and preferences dividend, which is
earned on the capital representative of one equity share. It calculated as:
Profit after tax available to equity holders

Earning per share ratio = --------------------------------------------------------------
Number of ordinary share
The higher the EPS, the better is the performance of the company. The EPS is one of
the diving factors in investment analysis and perhaps the most widely calculated ratio
amongst all ratios used for financial analysis.

DATA ANALAYSIS & INTERPRETATION
CHANGES IN WORKING CAPITAL STATEMENT
For the year ended 31st March 2001

Rs. LAKHS
PARTICULARS 2000 2001 Increase Decrease
Current Assets
Inventories 18054.29 17765.50 - 188.79
Sundry Debtors 53232.07 39797.99 6565.92 -
Cash & Bank 4246.65 4880.31 633.66 -
Loans &
41147.20 45547.83 4400.63 -
Advances
Total (A) 96680.21 107991.63 11600.21 288079
Current
Liabilities
Creditors 11483.81 13863.48 - 1879.67
Unclaimed
644.18 871.06 - 226.88
dividend
Deposits 4149.11 4498.28 - 349.17
Interest accrued
but not due on 2268.17 4369.79 - 2101.62
loans
Provision per
4202.15 - 4202.15 -
dividend
Provision for tax 3461.80 3854.06 - 392.26
Total (B) 26209.22 26956.67 4202.15 4949.60
A – B working
70470.99 81034.96 15802.36 5238.39
capital
Increase in
- 10563.97
Working capital
TOTAL 81034.96 81034.96 15802.36 15802.36

Rs. LAKHS
PARTICULARS 2001 2002 INCREASE DECREASE

Current Assets:
Inventories 17765.50 18198.78 433.28 -
Sundry Debtors 39797.99 51608.54 11810.55 -
Cash & Bank 4880.31 5851.53 971.22 -
Loans &
45547.83 46522.47 974.64 -
Advance
Total (A) 107991.63 122181.32 14189.69 -
Current
Liabilities:
Creditors 13363.48 9784.48 3579.00 -
Unclaimed
871.06 699.14 191.92 -
dividend
Deposits 4498.28 4394.61 103.67 -
Interest
occurred but not 4369.79 1278.33 3091.46 -
due on loans
Provision per
3854.06 179.28 3674.78 -
income tax
Total (B) 26956.67 16335.84 10620.83 -
A – B (Working
81034.96 105845.48 24810.52 -
Capital)
Increase in
24810.52 24810.52
Working Capital
TOTAL 105845.48 105845 24810.52 24810.52

For the year ended 31st March, 2003
Rs. LAKHS
PARTICULARS 2002 2003 INCREASE DECREAES
Current Assets:
Inventories 18198.78 18342.69 143.91 -
Sundry Debtors 51608.54 36945.10 - 14663.38
Cash & Bank 5351.53 1932.37 - 2129.75
Loan & 46522.47 44392.72 3919.16 2129.75

advances
Total (A) 122181.32 101612.94 143.91 20712.29
Current
Liabilities:
Creditors 9784.48 6995.84 2788.64 -
Unclaimed
699.14 692.26 6.88 -
dividend
Deposits 4394.61 1196.25 3198.36 -
Interest
occurred but not 1278.33 3503.19 - 2224.86
due on loans
Provision for tax 179.28 - 179.28 -
Total 16335.84 12387.54 6173.16 2234.86
A.B. (WC) 105845.48 89225.40 6317.07 22937.15
Increase in
- 16620.08 16620.08 -
Working capital
Total 105845.88 105845.88 22937.15 22937.15
CHANGES IN THE WORKING CAPITAL STATEMENT

FOR THE YEAR ENDED 31st MARCH 2004
Rs. Lakhs
Current assets
Inventories 18342.69 6157.47 - 12185.22

Debtors 36945.16 35383.91 - 1561.25
Cash & Bank 1932.37 1463.99 - 468.38
Loans & Advances 44392.72 44816.83 424.11 -
Total Current Assets
(A) 101612.94 87822.20 424.11 14214.85
Current Liabilities
Sundry Creditors 3.12 2.91 0.21 -

Small scale
industries 5929.73 4867.78 1062.95 -
undertakings
Others 692.26 575.33 116.93 -
Unclaimed dividend 241.79 139.05 102.74 -
Unclaimed fixed
deposits 378.36 365.20 13.16 -
Debentures 72.96 54.80 18.16 -

Interest occurred on
above deposits 1196.25 807.21 389.04 -
Interest occurred but

not due on loans 3503.19 234.84 3268.35 -
Other liabilities 402.52 511.18 - 108.66

Provisions 238.74 224.21 14.53 -
Total Current
Liabilities (B) 12658.92 7782.51 4986.07 108.66
Working capital (A-

88954.02 80039.69 5410.29 14323.51
B)
Decrease in working
capital - 8914.33 8913.22 -
Total
88954.02 88954.02 14323.51 14323.51

Rs. Lakhs
PARTICULARS 2004 2005 INCREAE DECREASE
Current Assets
Inventories 6157.47 7620.13 1462.66 -
Sundry Debtors 3538.91 22170.64 - 13213.27
Cash & Bank 1463.99 1922.16 458.17 -
Loans &
62111.27 18163.62 - 43947.65
Advances
Total (A) 105116.64 49876.55 1920.83 57160.92
Current
Liabilities
Sundry
2.91 40.41 - 37.50
Creditors
Small scale
industrial under 4867.78 7086.42 - 2218.64
takings
others 575.33 441.83 133.5 -
Unclaimed 139.05 59.98 79.07 -
Unclaimed fixed
365.20 359.15 6.05 -
deposits
Unclaimed
54.80 30.86 23.94 -
debentures
Interest
occurred above 807.21 898.39 - 91.18
deposits
Other liabilities 511.18 195.78 315.4 -
Interest occurred
but not due on 234.84 262.87 - 28.03
loans & Deposits
Total (B) 7558.30 9375.30 557.96 2375.35
WC (A-B) 97558.34 40501.25 2478.79 59536.27
Decreased in
57087.09 57087.09 -
Working capital
TOTAL 97558.34 97558.34 59536.27 59536.27

For the year ended 31st March 2006 Rs. Lakhs
Current Assets
Investors 7620.13 5776.20 - 1843.98
Sundry Debtors 22170.64 31124.31 8953.67 -
Cash & Bank 1922.16 6084.00 4161.84 -
Loans & Advance 18163.62 24529.91 6366.29 -
Total (A) 49876.55 67514.42 194818 1843.93
Current Liabilities
Sundry Creditors 40.41 2.99 37.42 -
Small Scale 7086.42 12898.27 - 5811.85
industrial
undertakings
Others 441.83 280.75 161.08 -
Unclaimed 59.98 46.80 13.18 -
dividend
Unclaimed fixed 359.15 - - -
deposits
Unclaimed 30.86 7.19 23.67 -
debentures
Interest occurred 898.39 1133.90 - 235.51
on above deposits
Other liabilities 195.78 180.98 14.8 -
Interest occurred 262.87 251.69 11.18 -
but not due on
loans/deposits
Total (B) 9375.69 14802.57 261.33 6047.36
40500.86 52711.85 19220.47 7891.29
WC (A-B)
Increase in WC 12210.99 - - 12210.99
TOTAL 52711.85 52711.57 19220.47 4220.47
1. LIQUIDITY RATIO:
Liquidity ratio measures the firm-ability to meant current obligations.
1. Current Ratio

The current ratio is the measure of the firm short term solvency – it indicates the
availability of current assets in rupees every one rupees of current liability
Rs. Lakhs
Years Current assets (Rs) Current Liabilities (Rs) Current Ratio
2001-2002 122189.32 16174.32 7.55
2002-2003 101612.94 12387.54 8.20
2003-2004 87822.00 7782.51 11.28
2004-2005 49876.00 10070.92 4.95
2005-2006 6751.42 20151.82 3.35
INTERPRETATION:
The ideal current ratio of current assets and current liabilities is 2:1
It is tremendous increase in current ratio from the year 2001-2002 to 2003-2004.
There is a decrease in the last two financial years 2004-2005, 2005-2006, which is good for
the organization.

QUICK RATIO:
2. Quick Ratio Establishes a relationship between quick or liquid or assets and current
liabilities.
Rs. Lakhs
Year Liquid (Rs) Current Liabilities (Rs) Ratio
2001-02 103982.54 16174.32 6.43
2002-03 83270.25 12387.54 6.72
2003-04 81664.73 7782.51 10.49
2004-05 42256.42 10070.92 4.20
2005-06 61738.22 20151.82 3.06
INTERPRETATION
The quick ratio of the company is above idle norm i.e. 1:1
This ratio is in increasing trend its tremendous increase in quick ratio from the year
2001-2002 to 2003-2004 there is a drastic decrease from the year 2004-2005 to 2005-2006
there is no stability in maintaining the quick assets and quick liabilities. But the company is
maintaining the norm and in a good position to meet its obligations.

3. ABSOLUTE LIQUID RATIO
Since cash it the most liquid asset, a financial analyst may examine cash ratio and its
equivalent to current liabilities Rs. Lakhs
Years Absolute liquid Current Current
Assets (Cash & Investment (Rs) Liabilities (Rs) Ratio
2001-03 76609.43 16174.32 4.74
2002-03 73420.47 12387.54 5.93
2003-04 72482.15 7782.51 9.31
2004-05 68366.05 10070.92 6.79
2005-06 73996.27 20151.82 3.07
INTERPRETATION
The ideal absolute liquid ratio of absolute liquid assets and current liabilities is 05:1
The company maintains increase in absolute liquid ratio in 2001-2002 to 2003-2004.
From the last two years 2004-2005, 2005-2006 it has been a down fall trend. It indicates that
the company is in a position to meet its obligations

LEVERAGE RATIO
1. Debt equity ratio
This ratio shows the relationship between borrowed funds and owners capital which is
the popular measure of the long term financial solvency of the firm.
Rs. Lakhs
Years Total Debt (Rs) Net Worth (Rs) Ratio
2001-02 192966.82 88865.63 2.18
2002-03 184336.88 84145.42 2.19
2003-04 166411.79 85889.27 1.94
2004-05 149393.93 186697.26 0.80
2005-06 145327.45 184469.96 0.79
INTERPRETATION
A debt-equity ratio of 2:1 is considered as ideal. Previously company used to
maintaining a good debts equity.
From 2001-02 to 2003-04 the lenders contribution is more than the owners as well as
creditors to have faith on each other. Company used to maintain good debt equity, now it has
been slightly reduced, from the years 2004-05 to 2005-06,

3. PROPRIETORY RATIO
The proportion of total assets collected through proprietors fund can be understood
from the ratio.
Rs. Lakhs
Years Net worth Total Assets Proprietary Ratio
(Rs) (Rs)
2001-02 88565.63 334592.07 0.26
2002-03 84145.42 313417.50 0.27
2003-04 85889.27 288065.30 0.30
2004-05 186697.26 377244.71 0.49
2005-06 184469.96 375385.13 0.49
INTERPRETATION
The proprietor ratio is not around ideal norm 1:3 from the year 2001-2002 to 2006 it
is an improvement from year by year. It indicates that less use of proprietary fund use of debt
funds in increasing asset structure of the firm. This situation shows good solvency and
suitable financial position of the company

III ACTIVITY RATIO
Activity ratios are employed evaluate the efficiency with which the firm managers
and utilizes it is assets. These ratios are also called turnover ratio because they indicates the
speed with which assets are being converted or turned into sales.
1. Total assets turnover Ratio
The assets turnover ratio shows the firms efficiency of utilizing firm’s assets to
maximize its sales Rs. Lakhs
Year Sales (Rs) Total Assets (Rs) Ratio
2001-02 104367.71 334592.07 0.31
2002-03 89985.09 313417.50 0.29
2003-04 107262.11 288065.30 0.37
2004-05 126638.97 377244.71 0.34
2005-06 145294.74 375385.13 0.39
INTERPRETATION
The increase in total assets may not be an indicator in ratio. But sales help in the
increase of the financial conditions of the organization. The assets turnover ratio shows the
firms efficiency of utilizing the assets to maximize its sales.
There is an increased position in the assets ratio’s from the years 2001-2002 to 2005-
2006. It shows the effective utilization of assets according to the requirement. The
organization’s financial position is good overall. It is maintaining stability in the ratio of total
assets.

2. Working Capital Turnover Ratio
A firm may also like to relate net current (or) networking capital to sales. Working
capital determines the liquidity positions of the firm and measures the ability of the firm to
meet its current obligations.
Rs. Lakhs
Years Sales Working Capital Ratio
(Rs) (CA – CL)(Rs)
2001-02 104867.71 106007.00 0.98
2002-03 89985.09 89225.40 1.01
2003-04 107262.11 80039.69 1.34
2004-05 126638.97 39805.63 3.18
2005-06 145294.74 47362.60 3.07
INTERPRETATION
The working capital ideal norm is 0.75.
The ratios are good as per standard norm when we compared above years. The trend
indicates that the company is able to generate its finances with out side borrowings

3. Fixed assets turn over ratio
It is used to measure the marginal efficiency which the firm has utilized its
investments in fixed assets and its overall activities. It indicates the generation of the sales
for per rupee invested in fixed assets. Rs. Lakhs
Year Sales Net Fixed Assets Fixed Asset
(Rs) ( Rs) Turnover Ratio
2001-02 104367.71 141496.69 0.74
2002-03 89985.09 140816.46 0.64
2003-04 107262.11 129224.94 0.83
2004-05 126688.97 260924.27 0.49
2005-06 145294.74 239958.44 0.61
INTERPRETATION
The fixed assets turnover ratio of around 0.5 is considered ideal.
From the year 2001-2002 to 2004-2005, the ratio was improved and in 2005-2006 the
fixed assets turnover ratio slightly reduced when compared to previous years. The fixed
assets turnover ratio has increased in 2005-2006
A high assets turnover ratio indicates better utilization of the firm’s fixed assets.

IV Profitability ratio
The profitability ratio measures the profitability or the operational efficiency of the
firm. These ratios reflect the finance result of business operations. The result of the firm can
be evaluated in terms of its earnings with reference to given level of assets or owners interest
etc.
Net Profit Ratio
The net profit ratio indicates the overall measure of the firm’s ability to turn each
rupee sales in to net profit.
Rs. Lakhs
Year Profit after tax sales Net profit ratio
(Rs) (Rs)
2001-02 969.78 10268.81 0.01
2002-03 Nil 89985.09 Nil
2003-04 Nil 107262.11 Nil
2004-05 2952.70 107262.11 0.02
2005-06 6685.20 145294.74 0.04
INTERPRETATION
The higher the ratio, the more profitable is the business. A high net profit margin
would ensure adequate return to the owners of an organization.
From the year 2001-02 has increased position and 2002-03 and 2003-04 the net profit
ratio decreased to nil. From the year 2004-05 has increased position in net profit ratio. In
2005-06, the net profit ratio has increased with regard to net profit.

II. EARNINGS PER SHARE
The profitability of the common share holders investment can also be measured many
other ways earning per share shows the profitability of the firm per share. Share basis it
measures the profit available to the equity shares holders on a share base the amount that they
can get on every share held. Rs. Lakhs
Year Profit after Tax No of ordinary earning per
(Rs) Shares (Rs) share ratio
2001-02 969.78 4170.20 0.23
2002-03 Nil 4170.20 Nil
2003-04 Nil 4170.20 Nil
2004-05 2952.70 4281.81 0.70
2005-06 6685.20 4281.81 1.56
INTEPRETATRION
The earnings per share was zero the year 2002-03 to 2003-04. From the year 2004-05, 2005-
06 has been increasing position.

FINDINGS
1. During the all years, the current ratio of the company is above the standard norm of
2:1 the highest current ratio is raised in 3.69 in 1999-2000 to 11.28 in 2004-2006
2. The quick ratio of the company is also above the standard norm of 1:1 the highest
quick ratio 6:72 in the year raised in 2003-04 to 10.49
3. In the company lenders have contributed more funds than owners. This is the reason
that the company has paid high interest to the borrowers.
4. The company has a high number of equity shares and its E P S is less even through
the company obtained higher profits.
5. The decrease in the value of earnings per share may tend to decrease in the share
holders equity.
6. The NFCL has so far under the marketing seed programming successfully distributed
more than 1.5 million tonne of Urea.
7. Fertilizer product comes under Essential Commodities Act. Hence the Government of
India fixes the market price.
8. Delayed payment from debtors and large inventory conversion period adversely affect
the company
9. Company is providing sufficient welfare facilities to their employees like
transportation, canteen, housing loan facilities and school.
10. NFCL obtained cheaper financial resources than previous years.
11. The Indian Fertilizer industry stands 4th Rank in the world not only in terms of
production but also in consumption of nitrogen and phosphate nutrients.
12. NFCL contains 700 Acres of green belt .

SUGGESTIONS
1. The company has to take measures like decreasing the cost of production utilizing its
assets effectively in order to increase return on investment and utilize the plant and
machinery efficiently
2. The company should sell Urea on the basis of cash due to high demand in market also
reduce the collection period.
3. Proper measures should be taken to decrease the inventory conversion period.
4. The company can gain more profits if it can get cheaper source of finance by
decreasing its interest component. Financing Source of the Company: IDBI, IFCI,
IFCI, ICICI, UTI, LIC AND GIC etc..,
5. The company should change its pesticides credit policy to increase the pesticides
sales. Thereby collection form debtors will be vary fast.
6. The company has to liberalize the credit sales policy to increase the sales of the
company particularly in un-season.
7. The company should manage its investments effectively. The company is not getting
good return on unquoted and quoted investments.
8. The inventory Turnover Ratio, Average Collection period has been increasing from
previous year.
9. The Debtors Turnover Ratio, payment Period Ratio decreased from previous year. It is
not good sign to the company.

BIBLIOGRAPHY
Financial Management I.M. Ponday
Financial Management M.Y.Khan & P.K. Jain
Financial Management Prasanna Chandra
Company annual Reports 2002 to 2006 (5 years)

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INTRODUCTION

Finance is regarded as “THE LIFE BLOOD OF BUSINESS

financial management as a separate subject. So, this subject is acquiring universal

The subject of financial management is of immense interest to both academicians and

practicing managers. It is of great interest to academicians because the subject is still

Scope of Finance Management:

business firm are:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 1

supplies of funds is called the finance function of the firm.

FUNCTION OF FINANCIAL MANAGEMENT

Two significant contribution to the development of modern theory of financial

 Theory of Portfolio Management developed by Harry Markowitz in 1950, which deals

quantify the risk-return characteristics of holding a group/portfolio of securities,

firm and the maximization of the shareholders wealth.

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 2

1. The Financial Management of trading or manufacturing firms

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 3

borrowed funds are relatively cheaper but always entail risk.

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 4

in combination is also known as financial management.

III) Dividend Decisions:

less will tend to grow slower.

 Reinvestment opportunities available to the firm,

 The opportunity rate of the shareholders.

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 5

India has been predominantly considered as an agricultural dependent economy.

The first number is the percent of nitrogen (N)

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 6

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 7

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 8

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 9

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 10

Assessing Fertilizer Safety:

Fertilizers Enrich our World:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 11

Global Fertilizer Consumption

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 12

SERVING SOCIETY THROUGH INDUSTRY

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 13

MAIN FEATURES OF ECO-SYSTEM:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 14

Use of Treated Effluent:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 15

Scope of the Study

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 16

The objectives are:

Fertilizers and Chemicals Limited, Kakinada

2. To study the ability of the firm to meet its current requirements.

4. To study the overall operating efficiency in performance of M/s. Nagarjuna Fertilizers

and Chemicals Limited, Kakinada.

6. To suggest guidelines to the company for improving its financial position.

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 17

rest is from the secondary data.

Nagarjuna Group or other firm’s of Fertilizer Industry.

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 18

5. The analysis is made basing only on the Annual Reports of NFCL.

THEORETICAL BACKGROUND OF PROJECT

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 19

CONCEPT OF WORKING CAPITAL:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 20

GROSS WORKING CAPITAL CONCEPT:

NET WORKING CAPITAL CONCEPT:

K.K.C.INSTITUTE OFPG STUDIES, PUTTUR 21