DBM PROJECT COPY - Sachin Kaermore

Working Capital Management
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INTRODUCTION
Capital is essential for the setting up and smooth running of any

business. Investments made on fixed assets will yield excess cash inflows
apart from the payback amount and is spread over a longer period of
time. Hence the cash inflows (or) benefits associated are not immediate
but are expected in the future. Cash inflows & outflows occur on a
continuous basis in case of current assets. Credit forms an essential
feature in the business (credit given to customers & credit from suppliers).
Since there is some time lag from the time of sales & sales realization
current assets & current liabilities, which together constitute the net
working capital, supports the business in its normal of operations. This
calls for an efficient management of working capital.
The policies, procedures and measures taken for managing of

working capital gain further importance in an Banks like State Bank of
India where the working capital requirements runs in crores of rupees.
Any mismanagement on the part of authority will not just cause loss but
may even impair business operations. It is in this context working capital
has gained importance.
Industry Banking introduction
The Indian Banking industry, which is governed by the Banking Regulation Act of
India, 1949 can be broadly classified into two major categories, non-scheduled
banks and scheduled banks. Scheduled banks comprise commercial banks and
the co-operative banks. In terms of ownership, commercial banks can be further
grouped into nationalized banks, the State Bank of India and its group banks,
regional rural banks and private sector banks (the old/ new domestic and
foreign). These banks have over 67,000 branches spread across the country in
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every city and villages of all nook and corners of the land.
The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from Class banking to Mass banking. This in
turn resulted in a significant growth in the geographical coverage of banks. Every
bank had to earmark a minimum percentage of their loan portfolio to sectors
identified as “priority sectors”. The manufacturing sector also grew during the
1970s in protected environs and the banking sector was a critical source. The
next wave of reforms saw the nationalization of 6 more commercial banks in
1980. Since then the number of scheduled commercial banks increased four-fold
and the number of bank branches increased eight-fold. And that was not the limit
of growth.
After the second phase of financial sector reforms and liberalization of the
sector in the early nineties, the Public Sector Banks (PSB) s found it extremely
difficult to compete with the new private sector banks and the foreign banks. The
new private sector banks first made their appearance after the guidelines
permitting them were issued in January 1993. Eight new private sector banks are
presently in operation. These banks due to their late start have access to state-
of-the-art technology, which in turn helps them to save on manpower costs.
During the year 2000, the State Bank Of India (SBI) and its 7 associates
accounted for a 25 percent share in deposits and 28.1 percent share in credit.
The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5
percent of credit during the same period. The share of foreign banks (numbering
42), regional rural banks and other scheduled commercial banks accounted for
5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41
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percent, 3.14 percent and 12.85 percent respectively in credit during the year
2000.about the detail of the current scenario we will go through the trends in
modern economy of the country.
Current Scenario:
The industry is currently in a transition phase. On the one hand, the PSBs, which
are the mainstay of the Indian Banking system are in the process of shedding
their flab in terms of excessive manpower, excessive non Performing Assets
(Npas) and excessive governmental equity, while on the other hand the private
sector banks are consolidating themselves through mergers and acquisitions.
PSBs, which currently account for more than 78 percent of total banking industry
assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling
revenues from traditional sources, lack of modern technology and a massive
workforce while the new private sector banks are forging ahead and rewriting
the traditional banking business model by way of their sheer innovation and
service. The PSBs are of course currently working out challenging strategies even
as 20 percent of their massive employee strength has dwindled in the wake of
the successful Voluntary Retirement Schemes (VRS) schemes.
The private players however cannot match the PSB’s great reach, great size and
access to low cost deposits. Therefore one of the means for them to combat the
PSBs has been through the merger and acquisition (M& A) route. Over the last
two years, the industry has witnessed several such instances. For instance, HDFC
Bank’s merger with Times Bank Icici Bank’s acquisition of ITC Classic, Anagram
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Finance and Bank of Madurai. Centurion Bank, Indusind Bank, Bank of Punjab,
Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank
merger however opened a pandora’s box and brought about the realization that
all was not well in the functioning of many of the private sector banks.
Private sector Banks have pioneered internet banking, phone banking, anywhere
banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and
combined various other services and integrated them into the mainstream
banking arena, while the PSBs are still grappling with disgruntled employees in
the aftermath of successful VRS schemes. Also, following India’s commitment to
the W To agreement in respect of the services sector, foreign banks, including
both new and the existing ones, have been permitted to open up to 12 branches
a year with effect from 1998-99 as against the earlier stipulation of 8 branches.
Tasks of government diluting their equity from 51 percent to 33 percent in
November 2000 has also opened up a new opportunity for the takeover of even
the PSBs. The FDI rules being more
rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A
route to acquire willing Indian partners.
Meanwhile the economic and corporate sector slowdown has led to an increasing
number of banks focusing on the retail segment. Many of them are also entering
the new vistas of Insurance. Banks with their phenomenal reach and a regular
interface with the retail investor are the best placed to enter into the insurance
sector. Banks in India have been allowed to provide fee-based insurance services
without risk participation, invest in an insurance company for providing
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infrastructure and services support and set up of a separate joint-venture
insurance company with risk participation.
Aggregate Performance of the Banking Industry
Aggregate deposits of scheduled commercial banks increased at a compounded
annual average growth rate (Cagr) of 17.8 percent during 1969-99, while bank
credit expanded at a Cagr of 16.3 percent per annum. Banks’ investments in
government and other approved securities recorded a Cagr of 18.8 percent per
annum during the same period.
In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP)
growth of only 6.0 percent as against the previous year’s 6.4 percent. The WPI
Index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in
FY00. Similarly, money supply (M3) grew by around 16.2 percent as against 14.6
percent a year ago.
The growth in aggregate deposits of the scheduled commercial banks at 15.4
percent in FY01 percent was lower than that of 19.3 percent in the previous year,
while the growth in credit by
SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago.
The industrial slowdown also affected the earnings of listed banks. The net
profits of 20 listed banks dropped by 34.43 percent in the quarter ended March
2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but
dropped to 4.56 percent in the fourth quarter of 2000-2001.
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On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill
the norms, it was a feat achieved with its own share of difficulties. The CAR,
which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year
2004 based on the Basle Committee recommendations. Any bank that wishes to
grow its assets needs to also shore up its capital at the same time so that its
capital as a percentage of the risk-weighted assets is maintained at the
stipulated rate. While the IPO route was a much-fancied one in the early ‘90s, the
current scenario doesn’t look too attractive for bank majors.
Consequently, banks have been forced to explore other avenues to shore up
their capital base. While some are wooing foreign partners to add to the capital
others are employing the M& A route. Many are also going in for right issues at
prices considerably lower than the market prices to woo the investors.
Chapter- 2
Company Profile
State Bank of India (Hindi: भारतीय सटेट बैक) (SBI) (BSE: 500112, LSE: SBID)
is the largest state-owned banking and financial services company in
India, by almost every parameter - revenues, profits, assets, market
capitalization, etc. The bank traces its ancestry to British India, through
the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta,
making it the oldest commercial bank in the Indian Subcontinent. The
Government of India nationalized the Imperial Bank of India in 1955, with
the Reserve Bank of India taking a 60% stake, and renamed it the State
Bank of India. In 2008, the Government took over the stake held by the
Reserve Bank of India.
SBI provides a range of banking products through its vast network of

branches in India and overseas, including products aimed at NRIs. The
State Bank Group, with over 16,000 branches, has the largest banking
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branch network in India. With an asset base of $260 billion and $195
billion in deposits, it is a regional banking behemoth. It has a market share
among Indian commercial banks of about 20% in deposits and advances,
and SBI accounts for almost one-fifth of the nation's loans.[2]
SBI has tried to reduce over-staffing by computerizing operations and

"golden handshake" schemes that led to a flight of its best and brightest
managers. These managers took the retirement allowances and then went
on to become senior managers in new private sector banks.
The State bank of India is the 29th most reputed company in the world
according to Forbes.[3]
State Bank of India is the largest of the Big Four Banks of India, along with
ICICI Bank, Punjab National Bank and Canara Bank — its main
competitors.[4]
Background of State Bank of India


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competitors.[4]


competitors.[4]
• Product Mix
• Vision, Mission & Technology

o To retain the banks position as the premier Indian financial
services.
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o Group with world class standards and significant global business

commitment to excellence in customer, shareholder and employee
satisfaction and to play a leading role in the expanding and diversifying
financial services sector while continuing emphasis on its development
banking role.
•
• Future projects
• Production Performance
• Financial Performance
• Steel Industry
BACKGROUND OF State Bank of India:
he bank has 131 overseas offices spread over 32 countries as on 31st Dec
2009. It has branches of the parent in Colombo, Dhaka, Frankfurt, Hong
Kong, Johannesburg, London and environs, Los Angeles, Male in the
Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore
banking units in the Bahamas, Bahrain, and Singapore, and representative
offices in Bhutan and Cape Town
SBI operates several foreign subsidiaries or affiliates. In 1990 it

established an offshore bank, State Bank of India (Mauritius).
In 1982, the bank established a subsidiary, State Bank of India

(California), which now has eight branches - seven branches in the state of
California and one in Washington DC that it opened on 23 November
2009. The seven branches in California are located in Los Angeles, Artesia,
San Jose, Canoga Park, Fresno, San Diego and Bakersfield.
The Israeli branch of the "State Bank of India" located in Ramat Gan.
The Canadian subsidiary, State Bank of India (Canada) too dates to 1982.
It has seven branches, four in the greater Toronto area and three in British
Columbia.
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In Nigeria SBI operates as INMB Bank. This bank began in 1981 as the
Indo-Nigerian Merchant Bank and received permission in 2002 to
commence retail banking. It now has five branches in Nigeria.
In Nepal, SBI owns 50% of Nepal SBI Bank, which has branches throughout
the country. In Moscow SBI owns 60% of Commercial Bank of India, with
Canara Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo
Monex.
State Bank of India already has a branch in Shanghai and plans to open
one up in Tianjin
The roots of the State Bank of India rest in the first decade of 19th
century, when the Bank of Calcutta, later renamed the Bank of Bengal,
was established on 2 June 1806. The Bank of Bengal and two other
Presidency banks, namely, the Bank of Bombay (incorporated on 15 April
1840) and the Bank of Madras (incorporated on 1 July 1843). All three
Presidency banks were incorporated as joint stock companies, and were
the result of the royal charters. These three banks received the exclusive
right to issue paper currency in 1861 with the Paper Currency Act, a right
they retained until the formation of the Reserve Bank of India. The
Presidency banks amalgamated on 27 January 1921, and the reorganized
banking entity took as its name Imperial Bank of India. The Imperial Bank
of India continued to remain a joint stock company.
Pursuant to the provisions of the State Bank of India Act (1955), the
Reserve Bank of India, which is India's central bank, acquired a controlling
interest in the Imperial Bank of India. On 30 April 1955 the Imperial Bank
of India became the State Bank of India. The Govt. of India recently
acquired the Reserve Bank of India's stake in SBI so as to remove any
conflict of interest because the RBI is the country's banking regulatory
authority.
Offices of the Bank of Bengal
In 1959 the Government passed the State Bank of India (Subsidiary

Banks) Act, enabling the State Bank of India to take over eight former
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State-associated banks as its subsidiaries. On September 13, 2008, State

Bank of Saurashtra, one of its Associate Banks, merged with State Bank of
India.
SBI has acquired local banks in rescues. For instance, in 1985, it acquired
Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as
its affiliate, State Bank of Travancore, already had an extensive network in
Kerala.
[edit] Associate banks
PRODUCT MIX:
Investment Banking
An investment bank is a financial institution that assists corporations and
governments in raising capital by underwriting and acting as the agent in the
issuance of securities. An investment bank also assists companies involved in
mergers and acquisitions, derivatives, etc. Further it provides ancillary services
such as market making and the trading of derivatives, fixed income instruments,
foreign exchange, commodity, and equity securities
Consumer banking
Commercial Banking
• Commercial bank has two meanings:

o Commercial bank is the term used for a normal bank to distinguish
it from an investment bank. (After the great depression, the U.S.
Congress required that banks only engage in banking activities,
whereas investment banks were limited to capital markets
activities. This separation is no longer mandatory.)
o Commercial bank can also refer to a bank or a division of a bank
that mostly deals with deposits and loans from corporations or large
businesses, as opposed to normal individual members of the public
(retail banking). It is the most successful department of banking.
• Community development bank are regulated banks that provide financial
services and credit to underserved markets or populations.
• Private banks manage the assets of high net worth individuals.
o Offshore banks are banks located in jurisdictions with low taxation
and regulation. Many offshore banks are essentially private banks.
• Savings banks accept savings deposits.
o Postal savings banks are savings banks associated with national
postal systems.
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Retail Banking
Retail banking refers to banking in which banking institutions execute

transactions directly with consumers, rather than corporations or other
banks. Services offered include: savings and checking accounts,
mortgages, personal loans, debit cards, credit cards, and so forth.
Private Banking
Private banking is a term for banking, investment and other financial

services provided by banks to private individuals investing sizable assets.
The term "private" refers to the customer service being rendered on a
more personal basis than in mass-market retail banking, usually via
dedicated bank advisers. It should not be confused with a private bank,
which is simply a non-incorporated banking institution.
Historically private banking has been viewed as very exclusive, only

catering for high net worth individuals with liquidity over $2 million,
although it is now possible to open some private bank accounts with as
little as $250,000 for private investors. An institution's private banking
division will provide various services such as wealth management,
savings, inheritance and tax planning for their clients. A high-level form of
private banking (for the especially affluent) is often referred to as wealth
management.
The word "private" also alludes to bank secrecy and minimizing taxes
through careful allocation of assets or by hiding assets from the taxing
authorities. Swiss and certain offshore banks have been criticized for such
cooperation with individuals practicing tax evasion. Although tax fraud is a
criminal offense in Switzerland, tax evasion is only a civil offense, not
requiring banks to notify taxing authorities
Asset Management
Investment management is the professional management of various

securities (shares, bonds and other securities) and assets (e.g., real
estate), to meet specified investment goals for the benefit of the
investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment
contracts and more commonly via collective investment schemes e.g.
mutual funds or exchange-traded funds) .
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The term asset management is often used to refer to the investment

management of collective investments, (not necessarily) whilst the more
generic fund management may refer to all forms of institutional
investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often
refer to their services as wealth management or portfolio management
often within the context of so-called "private banking".
The provision of 'investment management services' includes elements of

financial statement analysis, asset selection, stock selection, plan
implementation and ongoing monitoring of investments. Investment
management is a large and important global industry in its own right
responsible for caretaking of trillions of dollars, euro, pounds and yen.
Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions
of staff and create billions in revenue.
Investment management is the professional management of various

securities (shares, bonds and other securities) and assets (e.g., real
estate), to meet specified investment goals for the benefit of the
investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment
contracts and more commonly via collective investment schemes e.g.
mutual funds or exchange-traded funds) .
The term asset management is often used to refer to the investment

management of collective investments, (not necessarily) whilst the more
generic fund management may refer to all forms of institutional
investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often
refer to their services as wealth management or portfolio management
often within the context of so-called "private banking".
The provision of 'investment management services' includes elements of

financial statement analysis, asset selection, stock selection, plan
implementation and ongoing monitoring of investments. Investment
management is a large and important global industry in its own right
responsible for caretaking of trillions of dollars, euro, pounds and yen.
Coming under the remit of financial services many of the world's largest
companies are at least in part investment managers and employ millions
of staff and create billions in revenue.
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Pensions
In general, a pension is an arrangement to provide people with an

income when they are no longer earning a regular income from
employment.[1] Pensions should not be confused with severance pay; the
former is paid in regular installments, while the latter is paid in one lump
sum.
The terms retirement plan or superannuation refer to a pension

granted upon retirement.[2] Retirement plans may be set up by employers,
insurance companies, the government or other institutions such as
employer associations or trade unions. Called retirement plans in the USA,
they are more commonly known as pension schemes in the UK and Ireland
and superannuation plans in Australia and New Zealand. Retirement
pensions are typically in the form of a guaranteed life annuity, thus
insuring against the risk of longevity.
A pension created by an employer for the benefit of an employee is

commonly referred to as an occupational or employer pension. Labor
unions, the government, or other organizations may also fund pensions.
Occupational pensions are a form of deferred compensation, usually
advantageous to employee and employer for tax reasons. Many pensions
also contain an additional insurance aspect, since they often will pay
benefits to survivors or disabled beneficiaries. Other vehicles (certain
lottery payouts, for example, or an annuity) may provide a similar stream
of payments.
Mortgages
A mortgage loan is a loan secured by real property through the use of a
mortgage note which evidences the existence of the loan and the encumbrance
of that realty through the granting of a mortgage which secures the loan.
However, the word mortgage alone, in everyday usage, is most often used to
mean mortgage loan.
A home buyer or builder can obtain financing (a loan) either to purchase

or secure against the property from a financial institution, such as a bank,
either directly or indirectly through intermediaries. Features of mortgage
loans such as the size of the loan, maturity of the loan, interest rate,
method of paying off the loan, and other characteristics can vary
considerably.
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In many countries, though not all (Iran and Bali, Indonesia are two
exceptions[1]), it is normal for home purchases to be funded by a
mortgage loan. Few individuals have enough savings or liquid funds to
enable them to purchase property outright. In countries where the
demand for home ownership is highest, strong domestic markets have
developed
Credit cards
A credit card is a small plastic card issued to users as a system of

payment. It allows its holder to buy goods and services based on the
holder's promise to pay for these goods and services.[1] The issuer of the
card grants a line of credit to the consumer (or the user) from which the
user can borrow money for payment to a merchant or as a cash advance
to the user. Usage of the term "credit card" to imply a credit card account
is a metonym.
A credit card is different from a charge card: a charge card requires the
balance to be paid in full each month. In contrast, credit cards allow the
consumers a continuing balance of debt, subject to interest being
charged. Most credit cards are issued by banks or credit unions, and are
the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is
defined as an oblong measuring 85.60 × 53.98 mm (3.370 × 2.125 in)
(33/8 × 21/8 in) in size
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VISION, MISSSION & OBJECTIVES:
THE VISION:
o Premier Indian financial services group with
global perspective, world class standards of

the efficiency and professionalism and core
institutional values.
o Retain its position in the country as a pioneer in developing countries.

o Maximize shareholder value through high sustained earnings per share.
o An institution with a culture of mutual care and commitment a satisfying and
exciting.
o Work environment and continuous learning opportunity.
THE MISSION:
o To retain the banks position as the premier Indian financial services.

o Group with world class standards and significant global business commitment to
excellence in customer, shareholder and employee satisfaction and to play a leading role in
the expanding and diversifying financial services sector while continuing emphasis on its
development banking role.
ACHIEVEMENTS:
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• ISO 9001:2000
• ISO/TS 16949:2002
PRODUCTION PERFORMANCE:
The production performance of SISCO in the last five years is as follows:
(Figures
In MT)
Mild &
Direct Alloy Steel
YEAR
Reduced rolled Hot metal/
Iron products Pig Iron
2003-04 1,23,565 1,96,941 -
2004-05 1,34,192 2,45,821 -
2005-06 1,27,067 2,33,130 -
2006-07 1,36,004 2,42,982 5,725
2007-08 1,29,350 2,40,847 1,63,284
FINANCIAL PERFORMANCE:
The financial performance of SISCO for the past five years is as follows
(In
Rs.’000)
Profit Before
YEAR SALES Taxation (PBT)
2003-04 5,203,716 97,968
2004-05 8,797,894 487,232
2005-06 9,242,179 506,933
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2006-07 9,495,878 488,366
2007-08 11,264,991 535,536
BANKING INDUSTRY
Chapter - 3
Research Methodology
Objective of the study
Project study which is being conducted by me for the last two month is not only a
formality for the fulfillment of the two year full time Post Graduate Diploma in
Business Management. But being a management student and a good employee I
tried my best to extract best of the information available in the market for the
use of society and people. The objectives have been classified by me in this
project form personal to professional, but here I am not disclosing my personal
objective which have been achieved by me while doing the project. Only
professional objectives which are being covered by me in this project are as
following-
- To know about environmental factors affecting IDBI Bank’s
performance.
- To analyze the role of advertisement for bank performance.
- To know the perception and conception of customers towards
banking products and specially focused for IDBI Bank’s product.
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- To explore the potential areas for the new bank branches which
will provide both price and people to the bank with constant
promotion and placing strategy.
Scope of the Study
Each and every project study along with its certain objectives also have scope for
future. And this scope in future gives to new researches a new need to research
a new project with a new scope. Scope of the study not only consist one or two
future business plan but sometime it also gives idea about a new business which
becomes much more profitable for the researches then the older one.
Scope of the study could give the projected scenario for a new successful
strategy with a proper implementation plan. Whatever scope I observed in my
project are not exactly having all the features of the scope which I described
above but also not lacking all the features.
- Research study could give an idea of network expansion for
capturing more market and customer with better services and
lower cost, with out compromising with quality.
- In future customer requirements could be added with the product
and services for getting an edge over competitors.
- Consumer behavior could also be used for the purpose of
launching a new product with extra benefits which are required
by customers for their account (saving or current ) and/or for
their investments.
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- Factors which are responsible for the performance for bank can
also be used for the modification of the strategy and product for
being more profitable.
- Factors which I observed while doing project study are following-
Competitors
Customer Behaviour
Advertisement/promotional activities
Attitude of manpower and
Economic conditions
These all could also be interchanged with each other for each
other in banks strategies for making a final business plan to
effect the market with a positive way without disturbing a lot to
market, customers and competitors with disturbance in market
shares.
Tools and Techniques
As no study could be successfully completed without proper tools and
techniques, same with my project. For the better presentation and right
explanation I used tools of statistics and computer very frequently. And I am very
thankful to all those tools for helping me a lot. Basic tools which I used for project
from statistics are-
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- Bar Charts
- Pie charts
- Tables
bar charts and pie charts are really useful tools for every research to show the
result in a well clear, ease and simple way. Because I used bar charts and pie
cahrts in project for showing data in a systematic way, so it need not necessary
for any observer to read all the theoretical detail, simple on seeing the charts
any body could know that what is being said.
Technological Tools
Ms- Excel
Ms-Access
Ms-Word
Above application software of Microsoft helped me a lot in making project more
interactive and productive.
Microsoft-Excel had a great role in my project, it created for me a situation of
“you sit and get”. I provided it simply all the detail of data and in return it given
me all the relevant information..
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Microsoft-Access did the performance of my personal assistant who organizes my
all the details of document without disturbing them even a single time in all the
project duration.
And in last Microsoft-Word did help me for the documentation of the project in a
presentable form.
Applied Principles and Concepts
While I started to do the project the main thing which was the matter of concern
was that around what principles I have to revolve my project. Because with out
having any hypothesis and objective we can not determine that what output or
result we are expecting form the project.
And second thing is that having only tools and techniques for the purpose of
project is not relevant until unless we have the principals for which we have to
use those tools and techniques.
Mathematical Averages
Standard Deviation
Correlation
Sources of Primary and Secondary data:
For the purpose of project data is very much required which works as a food for
process which will ultimately give output in the form of information. So before
mentioning the source of data for the project I would like to mention that what
type of data I have collected for the purpose of project and what it is exactly.
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1. Primary Data:
Primary data is basically the live data which I collected on field while doing
cold calls with the customers and I shown them list of question for which I had
required their responses. In some cases I got no response form their side and
than on the basis of my previous experiences I filled those fields.
Source: Main source for the primary data for the project was questionnaires
which I got filled by the customers or some times filled myself on the basis of
discussion with the customers.
2. Secondary Data:
Secondary data for the base of the project I collected from intranet of the
Bank and from internet, RBI Bulletin, Journal by ICFAI University.
Statistical Analysis
In this segment I will show my findings in the form of graphs and charts. All the
data which I got form the market will not be disclosed over here but extract of
that in the form of information will definitely be here.
Chapter - 4
WORKING CAPITAL MANAGEMENT
• Operating cycle
• Financial working capital
• Approaches for financial working capital
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• Importance of working capital
• Determinants of working capital
• Principle of working capital management
• Inventory management
• Cash management
• Receivable management
• Payables Management
Working Capital:
Working capital is the firm’s holdings of current assets such as

cash, receivables, inventory & marketable securities. Every firm requires
working capital for its day to day transactions such as purchasing raw
material, for meeting salaries, wages, rents, rates, advertising etc.
Significance of working capital:
The world in which real firms function is not perfect. It is characterized

by the firms considerable uncertainty regarding the demand, market
price, quality & availability of its own products and those suppliers. While
the firm has many strategies available to address these circumstances,
strategies that utilize investment or financing with working capital
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accounts often offer a substantial advantage over the other techniques.

The importance of working capital management is reflected in the fact
that financial managers spend a great deal of time in managing current
assets and current liabilities like-
• Arranging short term financing.

• Negotiating favorable credit terms.
• Controlling the movement of cash.
• Administering accounts receivables.
• Monitoring investment in receivables.
Decision concerning the above areas play a vital role in maximizing the
overall value of the firm. Once decisions concerning these areas are
reached, the level of working capital is also determined in active decision
sense, but falls out as residual from the decision just made.
The management of working capital plays an important role in

maintaining the financial health during the normal course of business. This
critical role can be enunciated by examining the flow of resources through
the firm. By far the major flow is the working capital cycle.
Concept and Definition of Working Capital

There are two concept of Working Capital: gross and net.
a) The term gross working capital, also referred to as working capital, means
the total current assets.
b) The net working capital can be defined in two ways :
1. the most common definition of net working capital (NWC) is the difference
between current assets and current liabilities; and
2. Alternate definition of NWC is that portion of current assets which is financed
with long term funds.
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The task of financing manager in managing working capital efficiently is to

ensure sufficient liquidity in the operations of the enterprise. Net working capital,
as a measure of liquidity is not very useful for comparing the performance of
different firms , but it is quite useful for internal control . The NWC helps in
comparing the liquidity of the same firm over time . For the purpose of working
capital management, therefore, NWC can be said to measure the liquidity of the
firm. In the other words, the goal of working capital management is to manage
the current assets and liabilities in such a way that an acceptable level of NWC is
maintained.
Net working capital:
Net working capital refers to the difference between the current

assets and current liabilities. Current liabilities are those claims of
outsiders, which are accepted, to measure for payment with an
accounting year and include creditors, bills payable and outstanding
expenses.
Net Working Capital = Current Assets – Current Liabilities
Net working capital can be positive or negative. A positive net working

capital will arise when current assets exceeds current liabilities. It is a
quantitative concept, which indicates the liquidity position of the firm and
suggests the extent to which working capital needs may be financed by
permanent sources of funds.
Working capital can be classified into two categories i.e,
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1. Permanent working capital.

2. Temporary or variable working capital.
Permanent working capital:
It is the minimum amount of investment in all current assets which

is required at all times to carry out minimum level of business activities.
Tandon committee has reserved to this type of working capital as “Core
Current Assets”.
Amount of permanent working capital remains in the business in

one form or another. It also grows with the size of the business. It is
permanently needed for the business, and therefore be financed out of
long-term funds.
Variable working capital:
The amount of working capital over permanent working capital is

known as variable working capital. The amount of such working capital
keeps on fluctuating from time on the business activities. It may further
be divided into seasonal working capital and special working capital.
Seasonal working capital is required to meet the seasonal demands of
busy periods occurring at stated intervals. On the other hand, special
working capital is required to meet extraordinary needs for contingencies.
Events like strikes, fire, unexpected competition, rising price tendencies or
initiating a big advertisement campaign require such capital.
COMPONENTS OF WORKING CAPITAL
The basic components of working capital are ,
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Current Assets:
a) Inventories
i) Raw Materials and Components
ii) Work in Progress
iii) Finished Goods
iv) Others
b) Trade Debtors
c) Loans And Advances
d) Investments
e) Cash And Bank Balance
Current Liabilities:
a) Sundry Creditors
b) Trade Advances
c) Borrowings
d) Commercial Banks
e) Provisions
FACTORS AFFECTING WORKING CAPITAL
The working capital needs of a firm are influenced by numerous factors . The
important ones are
i) Nature of business: The working capital requirement of a firm is

closely related to the nature of business. A service firm, like electricity
undertaking or a transport corporation which has a short operating
cycle and which sells predominantly on cash basis, has a modest
working capital requirement. On the other hand ,
ii) Seasonality of Operation: Firms which have marked seasonality in
there operations usually have highly fluctuating working capital
requirement. For example, consider firm manufacturing air
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conditioners. The sale of air conditioners reaches the peak during

summer months and drops sharply during winter season.
iii) Production Policy: A firm marked by pronounced seasonal
fluctuation in its sale may pursue a production policy which may
reduce the sharp variations in working capital requirements. For
example a manufacturer of air conditioners may maintain steady
production through out the year rather than intensify the production
activity during the peak business season .
iv) Market Conditions: When competition is keen, larger inventory of
finished goods is required to promptly serve the customers who may
not be inclined to wait because other manufacturers are ready to meet
their needs. Further generous credit terms may have to be offered to
attract customers in highly competitive market. Thus, working capital
needs tend to be high because of greater investment in finished goods
inventory and accounts receivable.
If the market is strong and competition is weak, a firm can manage
with smaller inventory of finished goods because customers can be
served with delay. Further in such situation the firm can insist on cash
payment and avoid lock up of funds in accounts receivables – it can
even ask for advance payment, partial or total .
v) Conditions of Supply: The inventory of raw material, spares and

stores depends on the conditions of supply. If supply is prompt and
adequate, the firm can manage with small inventories .
OPERATING CYCLE:
The Operating cycle of the firm begins with the acquisition of raw materials and
ends with the collection of receivables. It may be divided into four stages a) raw
material and stores storage stage , b) work-in-progress stage , c) finished goods
inventory stage and d) debtors collection stage .
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Duration of operating cycle: The duration of operating cycle is equal to the sum
of the duration of each of these stages less the credit period allowed by the
suppliers to the firms. It can be given as
O=R+W+F+D–C
Where O = Duration of operating cycle
R = Raw material and stores storage period
W = Work-in-progress period
F = Finished goods storage period
D = debtors collection period
C = Creditors payment period
The components of Operating cycle may be calculated as follows ;
R = Average stock of raw materials and stores
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Average raw material and stores consumption per day
W = Average Work-in-progress inventory
Average cost of production per day
F = Average Finished Goods Inventory
Average cost of goods sold per day
D = Average books debts
Average credit sales pert day
C = Average trade creditors
Average credit purchase per day
Working capital turnover ratio:
It measures the efficiency of the employment of working capital.

Generally higher the turnover, greater is the efficiency and larger the sale
of profits. Working capital turnover ratio can be calculating with help of
the following formula.
Working capital turnover ratio = Sales .

Net working capital
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APPROACHES FOR FINANCING WORKING CAPITAL
There are three approaches to financing the working capital:
1. Hedging approach
2. Conservation approach
3. Aggressive approach
Hedging approach:
A firm is said to be following Hedging approach if it matches the

maturity of the debt with the maturity of assets. For the firm following
hedging approach, long term financing will be used to finance fixed assets
and permanent current assets and short term financing for temporary or
variable current assets. As the level of these assets increases, the long
financing level also increases.
However, it should be realized that exact matching is not possible

because of the uncertainty about the expected lives of assets.
Conservative approach:
A firm in practice may adopt a conservative approach in financing

its current and fixed assets. The financing policy of the firm is said to be
conservative when it depends more on long term funds for financing
needs. Under a conservative plan, the firm finances its permanent assets
and also a part of temporary current assets, the idle long-term funds can
be invested in the tradable securities to conserve liquidity. The
conservative plan relies heavily on long term financing.
Aggressive approach:
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A firm may be aggressive in financing its assets. A firm follows

aggressive policy when it uses more short-term financing than warranted
by the matching plan. Under an aggressive policy, the firm financing a
part of its permanent current assets with short term financing.
Importance of working capital:
A business firm must maintain an adequate level of working capital

in order to run its business smoothly. It is worthy to note that both
excessive and inadequate working capital positions are harmful. Out of
two, inadequacy of working capital is more dangerous for a firm.
Excessive working capital results in idle funds on which no profits are
earned. Similarly insufficiency of working capital results in interruption of
production. This will lead to inefficiencies, increase in costs and reduction
in profits. Working capital is like the lifeblood of business. If it becomes
weak, the business can hardly prosper and survive. No business can run
successfully with out and adequate amount of working capital.
The following are the few advantages of adequate working capital in the
business:
• Cash Discount: Adequate working capital enables a firm to avail

cash discount facilitates offered to it by the suppliers. The amount
of cash discount reduces the cost of purchase.
• Goodwill: Adequate working capital enables a firm to make prompt
payment. Making prompt payment is a base to create and maintain
goodwill.
• Ability to face crisis: The provision of adequate working capital
facilities to meet situations of crisis and emergencies. It enables a
business to with stand periods of depression smoothly.
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• Credit-worthiness: It enables a firm to operate its business more

efficiently because there is not delay in getting loans from banks
and others on easy and favorable terms.
• Regular supply of raw materials: It permits the carrying of
inventories at a level that would enable a business to serve
satisfactory the needs of its customers. That is it ensures regular
supply of raw materials and continuous production.
• Expansion of markets: A firm which has adequate working capital
can create favorable market condition i.e., purchasing its
requirements in bulk when prices are lower and holding its
inventories for higher. Thus profits are increased.
• Increased productivity.
• Research programs.
• High Morale.
Danger of excessive working capital:
• A firm may be tempted to over trade and lose heavily.

• Unable to extract benefits of customer’s credit.
• The situation may lead to unnecessary purchases and accumulation
of inventories. This cause more chances of theft, waste, losses etc.
• There arises an imbalance between liquidity and profitability.
• Excessive working capital means funds are idle.
• The situation leads to greater production, which may not be having
matching demand.
• The excess of working capital leads to carelessness about cost of
production.
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Determinants of Working Capital:
1) Nature or character of Business:
The working capital requirement of a firm basically depends upon he

nature of its business. Public utility undertaking like Electricity, Water
Supply, and Railways need very limited working capital because they offer
cash sales only and supply services, not products and as such no funds
are tied up in inventories and receivables.
On the other hand trading and financial firms require less investment in
fixed assets but they have to invest large amount in current assets like
inventories, receivables and cash. So they need large amount of working
capital.
2) Production cycle:
Another factor, which has a bearing on the quantum of working

capital, is the production cycle. The term ‘production or manufacturing
cycle’ refers to the time involved in the manufacturing of goods. It covers
the time span between the procurement of raw material and the
completion of the manufacturing process leading to the production of
finished goods.
In other words, there is sometime gap before raw material becomes

finished goods. To sustain such activities that need for working capital is
obvious. The longer time span (production cycle) the large will be the tied
up funds and therefore, larger is working capital need and vise versa.
3) Production Policy:
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In certain industry the demand is subject to wide fluctuations due to

seasonal variations. The requirement of working capital in such case,
depend upon the production policy. The production can be either kept
steady by accumulating inventories during slack period with a view to
meet high demand during peak season of the production could be
curtailed during the slack season and increased during the peak season. If
policy is to keep production steady by accumulating inventories it will
require higher working capital.
4) Credit Policy:
The credit terms granted to customers have a bearing in the

magnitude of working capital by determining the level of book debts. The
credit sales result in higher book debs. Higher book debts mean more
working capital. On the other hand, if liberal credit terms are available
from the supplies of goods trade needs less working capital.
The working capital requirement of a business are thus, affected by

term of purchase and sale, and the ole given to credit by a company in its
dealing with creditors and debtors.
5) Growth and Expansion:
The working capital requirement of concern increase with the

growth and expansion of its business activities. Although, it is difficult to
determine the relationship between the growth in the volume of business
and the growth in the working capital of a business, yet it may be
concluded that for normal rate of expansion in the volume of business. We
may have retained profits to provide for me working capital but in fast
growing concern, we shall require lager amount of working capital.
6) Seasonal Variation:
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In certain industry raw material is no available throughout the year.

They have to buy raw material in bulk during the season to ensure
uninterrupted flow and process them during the entire year. So a huge
amount is blocked in form of row material during the peak season, which
gives more requirements for working capital and less requirement during
the slack season.
7) Earning Capacity:
Some firm have more earning capacity than others due to quality of
the products, monopoly condition etc. Such firms with high earning
capacity may generate cash profits from operations and contribute to
their working capital.
Principles of Working Capital Management:
There are some principles of sound working capital management

policy.
They are as follows:
1) Principle of Risk Variation:
Risk here refers to inability of a firm to meet its obligation when

they become due for payment. Large investment in current assets with
less dependence on a short term borrowing increase liquidity, reduces
dependence on short term borrowing increases liquidity, reduces risk.
On the other hand less investment in current assets and greater

dependence on debt increase the risk reduces liquidity and increases
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profitability. In other word these is a definite inverse relationship between

he degree of risk and profitability.
2) Principle of Cost of Capital:
The various sources of rising of working capital finance have

different cost of capital and the degree of risk involved. Generally higher
the risk lower is the cost and lower the risk higher is the cost. A sound
working capital management should always try to achieve a proper
balance between these two.
3) Principle of Equity position:
According this principle, the amount of working capital invested in

each component should be adequately justified by a firm’s equity position.
Every rupee invested in the current assets should contribute to he net
worth of he firm.
4) Principle of Maturity of Payment:
This principle is concerned with planning he sources of finance for

working capital. According to this principle, a firm should make every
efforts o related maturity of payment to its flow of internally generated
funds. Maturity pattern of various current obligations is an impotent factor
in risk assumptions and risk assessment.
Ratio to measure the efficiency of working capital:
• Current Ratio : Current assets/Current liabilities

• Quick Ratio : (current assets – Inventories) /Current liabilities
• Sales to cash: Sales during a period / Average cash balance.
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• Average collection period: Debtors dividend by annual credit sales

and the resulting figure multiplied by 365. This ratio indicates how
many days of credit is being obtained from the suppliers.
• Average payment Period: Creditors divided by annual credit
purchase and the resultant figure is multiplied by 365. This ratio
indicates how many days of credit are being obtained from the
suppliers.
• Inventory turnover ratio: Sales /Average inventory.
Working capital policy:
Working capital management policies have a great effect on firm`s

profitability, liquidity and its structural health. A finance manager should
therefore, chalk out appropriate working capital policies in respect of each
competent of working capital so as to ensure high profitability, proper
liquidity and sound structural health of the organization.
In order to achieve this objective the financial manager has to perform

basically following two functions.
1. Estimating the amount of working capital.
2. Sources from which these funds have to be raised.
Inventory management
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A) Objectives
The basic responsibility of the financial manager is to make sure the firms cash
flows are managed efficiently. Efficient management of inventory should
ultimately result in the
maximization of the owner’s wealth. As we know that in order to minimise cash

requirements, inventory should be turned over as quickly as possible, avoiding
stock-outs that might result in closing down the production line or lead to a loss
of sales. It implies that while the management should try to pursue the financial
objective of turning inventory as quickly as possible, it should at the same time
ensure sufficient inventories to satisfy production and sales demands. The
objective of inventory management consists of two counterbalancing parts: (I) to
minimize investment in inventory, and (ii) meet a demand for the product by
efficiently organizing the production and sales operations. These two conflicting
objectives of inventory management can also be expressed in terms of cost and
benefit associated with inventory. That the firm should minimize investment in
inventory implies that maintaining inventory involves costs, such that the smaller
the inventory, the lower is the cost to the firm. But inventories also provide
benefits to the extent that they facilitate the smooth functioning of the firm: the
larger the inventory, the better it is from the viewpoint. Obviously, the financial
managers should aim at a level of inventory which will reconcile these conflicting
elements. That is to say, an optimum level of inventory should be determined on
the basis of the trade-off between costs and benefits associated with the levels
of inventory.
B) Costs of Holding Inventory

One operating objective of inventory management is to minimize cost. Excluding
the cost of merchandise, the cost associated with inventory fall into two basic
categories:
(i) Ordering or Acquisition or Set-up costs: This category of cost is

associated with the acquisition or ordering of inventory. Firms have to
place orders with suppliers to replenish inventory of raw materials. The
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expense involved is referred to as ordering costs. The ordering costs

consist of (a) preparing the purchase order or requisition form and (b)
receiving, inspection, and recording the goods received to ensure both
quantity and quality. The cost of acquiring materials consists of clerical
costs and costs of stationery. It is therefore, called, a set-up cost. They
are generally fixed per order placed, irrespective of the amount of the
order. The acquisition costs are inversely related to the size of inventory:
they decline with the inventory. Thus, such costs can be minimized by
placing fewer orders for a large amount. But acquisition of a large
quantity would increase the cost associated with the maintenance of
inventory, that is, carrying cost.
(ii) Carrying costs: The second broad category of costs associated with
inventory is the carrying costs. They are involved in maintaining or
carrying inventory. The cost of holding inventory may be divided into two
categories:
(a) Those that arise due to the storing of inventory: The main
components of this category of carrying costs are (1).
Storage costs, that is, tax, depreciation, insurance,
maintenance of the building, utilities and janitorial
services; (2). insurance of inventory against fire and theft;
(3). Deterioration in inventory because of pilferage, fire,
technical obsolescence, style obsolescence and price
decline; (4). Serving costs, such as, labor for handling
inventory, clerical and accounting costs.
(b) The opportunity cost of funds: This consists of expenses in
raising funds (interest on capital) to finance the acquisition
of inventory. If funds are not locked in inventory, they
would have earned a return. This is the opportunity cost of
funds or financial cost component of the cost.
The carrying costs and the inventory size are positively
related and move in the same direction. If the level of
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inventory increases, the carrying costs also increase and

vice versa.
The sum of the order and carrying costs represents the

total cost of inventory. This is compared with the benefits
arising out of inventory to determine the optimum level of
inventory.
C) Benefits of Holding Inventory

The second element in the optimum inventory decision deals with the benefits
associated with holding inventory. The three types of inventory, raw materials,
work-in-progress and finished goods perform certain useful functions. The rigid
tying (coupling) of purchase and production to sales schedules is undesirable in
the short run as it will deprive the firms certain benefits. The effect of uncoupling
(maintaining inventory) is as follows
(i) Benefits in Purchasing: If the purchasing of raw materials and other

goods is not tied to production/sales, that is, a firm can purchase
independently to ensure the most efficient purchase, several
advantages would become available. In the first place, a firm can
purchase larger quantities than is warranted by usage in production or
the sales level. This will enable it to avail of discounts that are available
on bulk purchases. Moreover, it will lower the ordering cost as fewer
acquisitions would be made. There will, thus, be a significant saving in
the costs. Secondly, firms can purchase goods before anticipated or
announced price increases. This will lead to a decline in the cost of
production. Inventory, thus, serves as a hedge against price increases
as well as shortages of raw materials. This is highly desirable inventory
strategy.
(ii) Benefits in Production: Finished goods inventory serves to uncouple
production and sale. This enables production at rate different from that
of sales. That is, production can be carried on at a rate higher or lower
than the sales rate. This would be a special advantage to firms with
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seasonal sales pattern. In their case, the sales rate will be higher than
the production rate during the part of the year (peak season) and lower
during the off season. The choice before the firm is either to produce at
a level to meet the actual demand, that is, higher production during
peak season and lower (or nil) production during off-season, or,
produce continuously throughout the year and build up inventory which
will be sold during the period of seasonal demand. The former involves
discontinuity in the production schedule while the later ensures level
production. The level production is more economical as it allows the
firm to reduce the cost of discontinuities in the production process. This
is possible because excess production is kept as inventory to meet
future demands. Thus, inventory helps a firm to coordinate its
production scheduling so as to avoid disruption and the accompanying
expenses. In brief, since inventory permits least cost production
scheduling, production can be carried on more efficiently.
(iii) Benefits in Work-in-Progress: The inventory in Work-in-Progress
performs two functions. In the first place, it is necessary because
production processes are not instantaneous. The amount of such
inventory depends upon technology and efficiency of production. The
larger the steps involved in the production process, the larger the WIP
and vice versa. By shortening the production time, efficiency of the
production process can be improved and the size of this type of
inventory reduced. In a multi-stage production process, the WIP serves
a second purpose also. It uncouples the various stages of production so
that all of them do not have to be performed at the same time rate.
The stages involving higher set-up costs may be most efficiently
performed in batches with WIP inventory accumulated during a
production run.
(iv) Benefits in Sales: The maintenance in inventory also helps a firm to
enhance its sales efforts. For on thing, if there are no inventories of
finished goods, the level of sales will depend upon the level of current
production. A firm will not be able to meet demand instantaneously.
The inventory serves to bridge the gap between current production and
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actual sales. A basic requirement in a firms competitive position is its

ability vis-à-vis its competitor to supply goods rapidly. If it is not able to
do so, the customer is likely to switch to suppliers who can supply
goods at short notice. Moreover, in the case of firm having a seasonal
pattern of sales, there should be a substantial finished goods inventory
prior to the peak sales season. Failure to do so may mean loss of sales
during the peak season.
D) Techniques
There are many sophisticated mathematical techniques available to handle

inventory management problems. We will discuss some of the simple production-
oriented methods of inventory control to indicate a broad framework for
managing inventories efficiently in conformity with the goal of wealth
maximization. The major problem – areas that comprise the heart of inventory
control are
(i) Order Quantity Problem : Economic Order Quantity ( EOQ ) Model
After determining the type of controls for each categories of items ( A B and
C ), question arises regarding the appropriate quantity to be purchased in
each lot to replenish the stock. Buying a large quantity implies a higher
average inventory level which will assure (a) smooth production/sales
operations, and (b) lower ordering or setup costs. But it will involve higher
carrying costs. On the other hand, if the order quantity is small then the
carrying cost is reduced but it will increase the ordering costs. On the basis
of the trade-off between the both the optimum level of order to be placed
should be determined. The optimum level of inventory is called as economic
order quantity (EOQ). The economic order quantity can be defined as that
level of inventory order that minimizes the total cost associated with
inventory management.
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Assumptions: EOQ model is based on following assumptions:
- the firm knows with certainty the annual consumption of a

particular item of inventory.
- The rate at which the firm uses inventory is steady over time.
- The order placed to replenish inventory stocks are received at
exactly that point in time when inventories reach zero.
- There are two distinguishable costs associated with inventories:
cost of ordering and cost o carrying.
- Cost of order is constant regardless of the size of the order.
- The cost of carrying is fixed percentage of the average value of
inventory.
EOQ Formula :
EOQ = I 2FU
PC
where
U = annual sales
F = fixed cost per order
P = purchase price per unit
C = Carrying cost
Limitations:
- The assumption of constant consumption and the instantaneous

replenishment of inventories are of doubtful validity. It is
possible that deliveries from suppliers may be slower than
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expected for reasons beyond control. It is also possible that

there may be an unusual and unexpected demand for stocks. To
meet such contingencies additional stock called as safety stock
is kept.
- Another weakness of EOQ model is that the assumption of a
known annual demand for inventories is open to question. There
is likelihood of discrepancy between the actual and the expected
demand, leading to a wrong estimate of the economic ordering
quantity.
Cash management
Cash is the most important factor in financial management. It is also

the most important current asset for the operation of the business. Every
activity in an enterprise revolves round the cash. Cash is limited in every
enterprise and it cannot be raised as and when required which calls for an
efficient management of funds available.
Cash is the most liquid asset and is of vital importance to the daily
operations of the business. While the proportion of corporate assets held
in the form of cash is very small (often in between 1% to 3%) its efficient
management is crucial to the business because cash is the focal point in
business.
Meaning of cash:
The term ‘cash’ is used in two senses. In a narrower sense it includes

currency notes, cheques, bank drafts held by a firm with it and the
demand deposits held by it in banks. In a broader sense it also includes
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near cash assets such as marketable securities and time deposits with
bank.
The main reason for a firm to hold cash is to meet the needs of day-to-day
transactions and to protect the firm against uncertainties characterizing
its cash flows.
While cash serves these functions, it is an idle resource which has an

opportunity cost. The liquidity provided by cash holding is at the expense
of profits sacrificed foregoing alternative opportunities. Hence, the finance
manager should carefully plan and control cash.
OBJECTIVES OF CASH MANAGEMENT:
• To meet the cash disbursement need as per the payment schedule.

• To minimize the amount locked up as cash balances.
Advantages of sample cash funds:
a) A shield for technical inefficiency.

b) Maintenance of goodwill.
c) Availing of cash discount.
d) Good bank-relations.
e) Exploitation of business opportunities.
f) Encouragement to new investment.
g) Increase in efficiency.
h) Overcoming abnormal financial situations.
Receivable management
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A) Objectives
The term receivables are defined as debt owed to the firm by the
customers arising from sale of goods or services in the ordinary course of
business. When a firm makes an ordinary sale of goods or services and does not
receive payment, the firm grants trade credit and creates accounts receivables
which could be collected in the future. Receivables management is also called
trade credit management. Thus accounts receivable represent an extension of
credit to customers, allowing them a reasonable period of time in which to pay
for the goods received.
The sale of goods on credit is an essential part of the modern competitive

economic systems. In fact, the credit sale and, therefore, the receivables, are
treated as a marketing tool to aid the sale of goods. As a marketing tool, they
are intended to promote sales and obligations through a financial instrument.
Management should weigh the benefits as well as cost to determine the goal of
receivables management.
a) Costs : The major categories of costs associated with the extension of

credit and accounts receivable are
(i) Collection Cost: Collection costs are administrative
costs incurred in collecting the receivables from the
customers to whom credit sales have been made.
(ii) Capital Cost: The increased level of accounts

receivable is an investment in assets. They have to be
financed thereby involving a cost. It includes the
additional funds required to meet its own obligation
while waiting for payment from its customer and also
the cost on the use of additional capital to support credit
sales, which alternatively could be profitably employed
elsewhere.
(iii) Delinquency Cost: This cost arises out of the failure of
the customers to meet their obligations where payment
D.N.C Nagpur
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on credit sales become due after the expiry of the credit

period. Such costs are called delinquency costs.
(iv) Default Costs: Finally, the firm may not be able to
recover the over dues because of the inability of the
customers. Such debts are treated as bad debts and
have to be written off as they cannot be realized. Such
costs are treated as default costs associated with credit
sales and accounts receivables.
b) Benefits: Apart from the costs, another factor that has a bearing on
accounts receivable management is the benefit emanating from credit
sales. The benefits are the increased sales and anticipated profits because
of the more liberal policy. The impact of the liberal trade credit policy is
likely to take two forms. Firstly, it is oriented to sales expansion. Secondly,
the firm may extend credit to protect its current sales against emerging
competition.
While it is true that general economic conditions and industry
practices have a strong impact on the level of receivables, a firm’s
investment in this type of current assets is also greatly affected by its
internal policy. A firm has little or no control over environmental factors,
such as economic conditions and industry practices. But it can improve its
profitability through a properly conceived trade credit policy or receivables
management.
B) Credit Policies
In the preceding discussion it has been clearly shown that the firm’s objective
with respect to receivables management is not merely to collect receivables
quickly but attention should also be given to the benefit-cost trade-off involved
in the various areas of accounts receivable management. The first decision area
is Credit Policies.
The credit policy of the firm provides the framework to determine (a) whether or
not to extend credit to a customer and (b) how much credit to extend. The credit
policy decision of firm has two broad dimensions:
D.N.C Nagpur
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(i) Credit Standards: The term credit standards represent the basic
criteria for the extension of credit to customers. The quantitative basis
of establishing credit standards are factors such as credit ratings,
credit references, average payment period and certain financial ratios.
Since we are interested in illustrating the trade-off between benefit and
cost to the firm as a whole, we do not consider here these individual
components of credit standards. To illustrate the effect, we have
divided the overall standards into (a) tight or restrictive, and (b) liberal
or non-restrictive. The trade-off with reference to credit standards
covers
(a) Collection Costs: The implications of the relaxed credit standards
are (i) more credit, (b) a large credit department to service
accounts receivable and related matters, (iii) increase in collection
costs. The effect of tightening of credit standards will be exactly the
opposite. These costs are likely to be semi-variable.
(b) Investments in Receivables or the Average Collection
Period: The investment in accounts receivable involves a capital
cost as funds have to be arranged by the firm to finance them till
customer makes payment. Moreover higher the average accounts
receivables; the higher is the capital or carrying cost. A change in
credit standards-relaxation or tightening-leads to a change in the
level of accounts receivable either (i) through a change in sales, or
(ii) through a change in collections.
A relaxation in credit standards, as already stated, implies an
increase in sales which, in turn, would lead to higher average
accounts receivable. Further relaxed standards would mean that
credit is extended liberally so that it is available to even less credit-
worthy customers who will take a longer period to pay over dues.
(c) Bad Debt Expenses: Another factor which is expected to be

affected by changes in credit standards is bad debt expenses. They
can be expected to increase with relaxation in credit standards and
decrease if credit standards become more restrictive.
D.N.C Nagpur
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(d) Sales Volume: Changing credit standards can also be expected to

change the volume of sales. As standards are relaxed, sales are
expected to increase; conversely, a tightening is expected to cause
a decline in sales.
A) Credit Analysis
Besides establishing credit standards, a firm should develop procedures for

evaluating credit applicants. The second aspect of credit policies of a firm is
credit analysis and investigation. Two basic steps are involved in the credit
investigation process:
(a) Obtaining Credit information: The first step in

credit analysis is obtaining credit information on which to base the
evaluation of a customer. The sources of information, broadly speaking,
are
(ii) Internal: Usually, firms require their customers to fill various forms
and documents giving details about financial operations. They are
also required to furnish trade references with whom the firms can
have contacts to judge the suitability of the customer for credit.
This type of information is obtained from internal sources of credit
information. Another internal source of credit information is derived
from the records of the firms contemplating an extension of credit.
(iii) External: The availability of information from external sources to
assess the credit-worthiness of customers depends upon the
development of institutional facilities and industry practices. In
India, the external sources of credit information are not as
developed as in the industrially advanced countries of the world.
Depending upon the availability, the following external sources may
be employed o collect information.
- Bank References: Another useful source of credit information
is the bank of the firm which is contemplating the extension of
credit. The modus operandi here is that the firm’s banker
D.N.C Nagpur
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collects the necessary information from the applicant’s bank.

Alternatively, the applicant may be required to ask his banker to
provide the necessary information either directly to the firm or
to its bank.
- Trade References: These refer to the collection of information
from firms with whom the applicant has dealings and who on the
basis of their experience would vouch for the applicant.
- Credit Bureau Report: Finally, specialist credit bureau reports
from organizations specializing in supplying credit information
can also be utilized.
(b) Analysis of Credit Information: Once the credit information has been
collected from different sources, it should be analyzed to determine the
credit-worthiness of the applicant. The analysis should cover two
aspects:
(i) Quantitative: The assessment of the quantitative aspects is

based on the factual information available from the financial
statements, the past records of the firm, and so on. The first step
involved in this type of assessment is to prepare an Aging
Schedule of the accounts payable of the applicant as well as
calculate the average age of accounts payable. This exercise will
give an insight into the past payment pattern of the customer.
Another step in analyzing the credit information is through a ratio
analysis of the liquidity, profitability and debt capacity of the
applicant. These ratios should be compared with the industry
average. Moreover, trend analysis over a period of time would
reveal the financial strength of the customer.
(ii) Qualitative: The quantitative assessment should be
supplemented by a qualitative/subjective interpretation of the
applicant’s credit-worthiness. The subjective judgment would cover
D.N.C Nagpur
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aspects relating to the quality of management. Here, the reference

from other suppliers, bank references and specialist bureau reports
would form the basis for the conclusion to be drawn. In the
ultimate analysis, therefore, the decision whether to extend credit
to the applicant and what amount to extend will depend upon the
subjective interpretation of his credit standing.
B) Credit Terms
The second decision area in accounts receivables management is the
credit terms. After the credit standards have been established and the credit-
worthiness of the customer has been assessed, the management of a firm must
determine the terms and conditions on which the trade credit will be made
available. The stipulations under which goods are sold on credit are referred to
as credit terms. The credit terms specifies the repayment terms of receivables.
The credit terms have three components: (i) credit period, in terms of duration of
time for which trade credit is extended-during this period the overdue amount
must be paid by the customer; (ii) cash discount, if any, which the customer
can take advantage of, that is, the overdue amount will be reduced by this
amount; and (iii) cash discount period, which refers to the duration during which
the discount can be availed of.
(a) Cash Discount: The cash discount has implications for the sales volume,
average collection period/average investment receivables, bad debt expenses
and profit per unit. In taking a decision regarding the grant of cash discount the
management has to se what happens to these factors if it initiates increase, or
decrease in the discount rate. The changes in the discount rate would have both
positive and negative effects. The implications of increasing or initiating cash
discount are as follows:
i. The sales volume will increase. The grant of

discount implies reduced prices. If the demand for the products is
elastic, reduction in prices will result in higher sales volume.
D.N.C Nagpur
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ii. Since the customers, to take advantage of the discount,

would like to pay within the discount period, the average collection
period would be reduced. The reduction in the collection period would
lead to a reduction in the investment in receivables as also the cost.
The decrease in the average collection period would also cause a fall in
bad debt expenses. As a result, profits would increase.
iii. The discount would have a negative effect on the profits.
This is because the decrease in prices would affect the profit margins
per unit of sale.
C) Collection Policies
The third area involved in accounts receivable management is collection
policies. They refer to the procedures followed to collect the accounts receivable
when, after the expiry o the credit period, they become due. These policies cover
two aspects:
(i) Degree of Collection Effort: To illustrate the effect of the collection effort,
the credit policies of a firm may be categorized into (i) strict / light, and (ii)
lenient. The collection policy would be tight if very rigorous procedures are
followed. A tight collection policy has implications which involve benefits as well
as costs. The management has to consider a trade-off between them. Likewise, a
lenient collection effort also affects the cost-benefits trade-off. The effect of
tightening the collection is discussed below :
- Bad debt expenses would decline.

- The average collection period will be reduced.
- As a result profit will increase.
- Increased collection costs.
- Decline in sales volume.
The effect of lenient policy will just be the opposite.
(ii) Type of Collection Efforts: The second aspect of collection policies relates
to the steps that should be taken to collect over dues from the customers. A well
established collection policy should have clear-cut guidelines as to the sequence
D.N.C Nagpur
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of collection efforts. After the credit period is over and payment remains due, the
firm should initiate measures to collect them. The effort should in the beginning
be polite, but, with the passage of time, it should gradually become strict. The
steps usually taken are (i) letters, including reminders, to expedite payment; (ii)
telephone calls for personal contact; (iii) personal visits; (iv) help of collection
agencies; and finally,(v) legal action. The firm should take recourse to very
stringent measures, like legal actions, only after all other avenues have been
fully exhausted.
Payables management:
Management of accounts payable is as much important as the

management of accounts receivable. However there is a basic difference
between the approaches adopted by the Finance Manager in both the
cases. The underlying objective in case of accounts receivables is to
maximize the acceleration of collection process while incase of accounts
payable it is to slow down the payments process as much as possible. The
delay in payments of accounts payable may result in saving of some
interests costs but proves very costly to the firm in the form of loss of
credit in the market. The Finance Manager therefore has to ensure that
the payments to the credits are made at the stipulated time period after
obtaining the best credit term possible.
Control of accounts payable:
Computing the average age of payable can be calculated by any of

the following methods.
Months or days in the period / Accounts payable turnover accounts
payable turnover = Credit purchase in the period / Average accounts
payable.
D.N.C Nagpur
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Average accounts payable / average month / daily credit purchase.
Sources of funds:
Sunflag steel plant raises its working capital by multiple banking

arrangements with 5 Banks. The following are the five banks, from where
funds for working capital are raised:
1. State bank of India
2. Bank of India
3. Canara Bank
4. Indian Bank
5. State Bank of Bikaner & Jaipur (SBBJ)
6. IDBI Bank Limited
Limits:
Sunflag steel plant is having Non-fund based limits not exceeding Rs. 10
crores.
Types of working capital source:
1. Fund based limits: Under this source, Sunflag steel Plant can obtain
working capital finance by bank borrowing in the form of term loan
and additional financial assistance.
2. Non-fund based limits: Sunflag Steel Plant receives non-fund based

working capital not exceeding 10 crores.
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Chapter-5:
Quantification
WORKING CAPITAL MANAGEMENT IN SISCO
Borrowings from banks for working capital:
Year Borrowings for working capital (Rs. In ’000)
2003-04 309,460
2004-05 281,787
2005-06 169,952
2006-07 105,499
2007-08 252,011
Borrowings for working capital from banks are secured by way of

hypothecation of inventories and book debts and further secured by way
of second charge both present and future ranking par passes over the
fixed assets subject to prior charges created by the company in favor of
financial institutions and Banks for securing term loan. Working
Capital borrowings are also secured by personal guarantee of Mr. Ravi
Bhushan Bhardwaj, Vice Chairman & Managing Director.
Year wise changes in working capital
D.N.C Nagpur
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Gross working Change Net working Change

capital (In percentag capital (In percentag
Year Rs.’000) e Rs.’000) e
2003-
04 1544088.00 -16.43 1,009,053 3.31
2004-
05 2623639.00 69.92 1,701,568 68.63
2005-
06 2820375.00 7.50 1,631,678 -4.11
2006-
07 4000510.00 41.84 2,051,445 25.73
2007-
08 4548787.00 13.71 2,883,855 40.58
Interpretation:
The above table indicates that working capital is highest for

the year 2007-08. Statement of changes in working capital is done in the
pages that follow to give the complete picture of variations in working
capital.
D.N.C Nagpur
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350,000
300,000
250,000
200,000
Borrowingsfor working
150,000 capital (Rs. In ’000)
100,000
50,000
0
2003-04 2004-05 2005-06 2006-07 2007-08
Year wise changes in gross & net working capital
D.N.C Nagpur
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Statement of changes in working capital for the year 2003-04 & 2004-05
(figures in Rs.’000)
Particulars 2003-04 2004-05 Increase Decrease
Current Assets
Inventories 788,020 1,340,813 552,793
Sundry Debtors 433,688 540,162 106,474
Cash & Bank

98,528 136,708 38,180
Balances
Loans &
223,852 605,956 382,106
Advances
Current
Liabilities
Current
522,911 859,706 336,795
Liabilities
Provisions 12,124 62,365 50,241
Net increase in Working Capital 692,515
Source: Annual reports of SISCO
Interpretation :
The increase in net working capital in 2004-05 over 2003-04 is very

large (Rs.69.2515 crores). All the current assets & current liabilities
increased during the year but the increase in current assets is much more
than current liabilities specially inventories. The net result is the increased
amount of working capital.
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Current Assets
Inventories 1,340,813 1,307,863 32,950
Sundry Debtors 540,162 590,841 50,679
Cash & Bank

136,708 131,501 5,207
Balances
Loans &
605,956 790,170 184,214
Advances
Current
Liabilities
Current
859,706 904,144 44,438
Liabilities
Provisions 62,365 284,553 222,188
Net decrease in Working Capital 69,890
Interpretation:
Net working capital decreased by Rs.6.989 crores. This is because

provisions (a proposed dividend forms the major part of provisions for
2005-06) are increased by Rs.22.218 crores.
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(Figures in Rs.’000)
Current Assets
Inventories 1,307,863 1,834,948 527,085
Sundry Debtors 590,841 600,953 10,112
Cash & Bank

131,501 182,034 50,533
Balances
Loans &
802,424 1,382,575 580,151
Advances
Current
Liabilities
Current
916,398 1,617,847 701,449
Liabilities
Provisions 284,553 331,218 46,665
Interpretation:
The increase in net working capital in 2006-07 over 2005-06 is

Rs.41.9767 crores. All current assets (Mainly inventories & loans-
advances) & current liabilities (Mainly acceptances & sundry creditors) are
increased. All these changes have brought about an increase in net
working capital
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Current Assets
Inventories 1,834,948 2,247,489 412,541
Sundry Debtors 600,953 704,595 103,642
Cash & Bank

182,034 188,950 6,916
Balances
Loans &
1,382,575 1,407,753 25,178
Advances
Current
Liabilities
Current
1,617,847 1,165,507 452,340
Liabilities
Provisions 331,218 499,425 168,207
Interpretation:
There is a significant increase in net working capital which amounts to

Rs.83.241 crores. This increase in net working capital is due to increase in
inventories & sundry debtors.
D.N.C Nagpur
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Chapter- 6
Data Analysis:
D.N.C Nagpur
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Operating cycle analysis:
The level of current assets needed for a business significantly depends

upon the length of the operating cycle. The longer the operating cycle,
larger will be the working capital requirement of the firm for funds needed
at different stages of operating cycle and vice-versa.
Time series analysis of operating cycle in SISCO
Year 2003-04 2004-05 2005-06 2006-07 2007-08
Raw Material stage
i)Consumpti
on of R.M &
2,676,768 4,616,022 4,881,450 4,806,371 6,414,413
consumable
s
ii) Per day

consumptio 7333.6 12646.6 13373.84 13168.14 17573.73
n
iii) Average
stock of
R.M. & 236008 408837 460125 590950 955922.5
consumable
s
Duration of
R.M (iii/ii) 32.2 32.3 34.4 44.9 54.4
[In Days]
Work in process stage
D.N.C Nagpur
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i) Cost of
3,750,401 5,992,151 6,425,423 6,668,778 8,106,791
production
ii) Per day

cost of 10275.07 16416.85 17603.90 18270.62 22210.39
production
iii) Average
120882 172537.5 202171.5 208943.5 292611
stock of WIP
Duration of
WIP stage 11.76 10.51 11.48 11.44 13.17
[In days]
Year 2003-04 2004-05 2005-06 2006-07 2007-08
Finished goods stage period
i) Cost of
4,315,713 6,900,265 7,640,196 7,885,704 9,476,960
goods sold
ii) Per day

cost of 11823.87 18904.83 20932.04 21604.67 25964.27
goods sold
iii) Average
394744 483042 662041.5 777687.5 792685
stock of F/G
Duration of
F/G stage 33.4 25.6 31.6 35.9 30.5
[In days]
Debtors collection period
i) Sales 5203716 8797894 9242179 9495878 11264991
ii) Per day

14256.75 24103.82 25321.04 26016.10 30862.98
sales
iii) Average
568736 486925 565501.5 595897 652774
debtors
Debtors
Coll. Period 39.9 20.2 22.33 22.9 21.15
[In days]
D.N.C Nagpur
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(Creditors payment period)
i) Credit
2,756,876 4,862,728 4,718,476 5,230,995 6,719,734
purchases
ii) Credit
purchases/ 7553.08 13322.5 12927.3 14331.5 18410.2
Day
iii) Average
219777 194965.5 314464 507775.5 425849
Creditors
Creditors
payment
29.1 14.63 24.3 35.4 23.1
Period [In
days]
Total [In
88.1 73.9 75.4 79.7 96.12
days]
Interpretation:
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Operating cycle of SISCO is varying from 74-97 days. Company is able to

maintain a debtor’s collection period around 21 days during recent years.
Duration of semi-finished goods is nearly constant during the last five
years.
Gross working capital
Year Gross working capital (In Rs.’000)
2003-
04 1,544,088
2004-
05 2,623,639
2005-
06 2,820,375
2006-
07 4,000,510
2007-
08 4,548,787
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Net working capital:
The net working capital of Sun flag steel plant shows an uneven trend
from 2003-08. The main reason for the increasing trend in the years is
due to the increasing inventories & creditors year after year. It also
indicates a weak cash balance to meet the liabilities. The current liabilities
of the company are increasing almost every year. The operating cycle
period has reduced during 2004-05 & 2005-06. The increase in working
capital is due to better sales and higher capacity utilization. The cost of
production has increased over the years. The net working capital of SISCO
for the past six years is depicted in the table.
Net working capital (In

Year Rs.’000)
2003-04 1,009,053
2004-05 1,701,568
2005-06 1,631,678
2006-07 2,051,445
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2007-08 2,883,855
Current ratio:
A current ratio of 2:1 is considered to do ideal. The ratio is an indicator of

the firm’s commitment to meet its short-term liabilities. It indicates the
rupees of current assets available for each rupee of current liability. The
higher the current ratio higher the funds available for a rupee of current
liabilities. As a convention rule a current ratio of 2:1 or more is considered
satisfactory.
The higher the current ratio higher the funds available for a firm.
Current ratio=current assets/current liabilities.
Current Assets Current

Year Liabilities Current ratio
2003-04 1,544,088 535,035 2.89
2004-05 2,623,639 922,071 2.85
2005-06 2,820,375 1,188,697 2.37
2006-07 4,000,510 1,949,065 2.05

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2007-08 4,548,787 1,664,932 2.73
Interpretation:
The current ratio is maintained around 2 from 2003-08 which is ideal

current ratio. The current ratio is decreased continuously from 2003-04 to
2006-07. The ratio has increased during 2007-08 this is mainly because of
increase in raw materials, debtors & loans & advances.
Working capital turnover ratio:
Working capital turnover ratio is ratio of sales to net working capital. It is

indicator of efficiency of working capital management. Higher the ratio
greater is the efficiency.
The working capital turnover ratio has decreased from 2005-06 to till date.
This is mainly due to increased net working capital.
Working capital turnover ratio= Sales / Net working capital.
The turnover ratio for the last five accounting periods is as shown:
Working capital
Year turnover ratio
2003-04 5.16
2004-05 5.17
2005-06 5.66
2006-07 4.63
D.N.C Nagpur
2007-08 3.91
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Inventory management is SISCO:
SISCO is multi-product, integrated steel plant with 150,000 MT capacity

Direct Reduced iron Plant, 200,000 MT capacity Mild & Alloy steel rolled
products, 240,000 MT capacity Hot metal/Pig iron. This makes SISCO to
store, handle and process of huge quantity of material. Also SISCO being
a process industry running 365 days throughout the year 24 hrs a day.
This calls for efficient inventory management on the part of SISCO. SISCO
holds three types of inventory, they are:
1. Raw materials
2. Stores, spares and scrap
3. Semi/finished goods.
D.N.C Nagpur
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Different sections carry out the procurement, storage and control of these
inventories.
Raw materials:
The raw materials are produced and stored by stores department. The
basic principle followed by SISCO in holding raw material inventory is to
maintain a safety stock of 15 days.
Stores and spares:
The stores and spares are procured and stored by central stores
department.
Semi/finished goods:
The semi-finished goods comprise blooms and billets and finished goods
are the various products mentioned in product mix of SISCO. The semi
finished goods are stocked and controlled by production planning
department. They generally hold stock for 15 days production, the
finished goods stocks are held at central stockyard within plant & also at
other stockyards located across India.
The split of raw material, spares and stores and semi & finished goods
inventory, their percentage and total inventory are given in the table.
(Rs. In ‘000)
Semi
Finished Raw Spares &
finished
Goods materials stores
Goods Total
Year % % % % Inv.
of of of of Value
Value Value Value Value
tota tota tota tota
l l l l
2003- 374,70 47.5 137,25 17.4 201,832 25.6 74,230 9.4 788,020
D.N.C Nagpur
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04 7 1
2004- 591,37 207,82 1,340,8

44.1 15.5 458,261 34.2 83,351 6.2
05 7 4 13
2005- 732,70 196,51 156,18 1,307,8

56.0 15.0 222,452 17.0 11.9
06 6 9 6 63
2006- 822,66 209,01 1,834,9

44.8 11.4 714,008 38.9 89,254 4.9
07 9 7 48
2007- 762,70 376,20 1,016,1 2,247,4

33.9 16.7 45.2 92,422 4.1
08 1 5 61 89
The above table clearly shows that the contribution of each item of
inventory to the total inventory is changing constantly over the past five
years. The contribution of Stores & spares is around 4% of the total
inventory during the last two years. SISCO is maintaining Stores & spares
between 7-9 crores (Excluding 2005-06). This is one of the strongest areas
of SISCO’s management i.e. in controlling inventory. Also the contribution
of semi-finished goods is between 11-17%. The major change in the
contribution of inventory is observed in raw materials & finished goods.
Inventory turnover ratio:

D.N.C Nagpur
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Inventory turnover ratio is ratio of sales to average finished goods

inventory, the inventory turnover ratio of SISCO is between 12 and 18.
This is an ideal value, indicating stock converting quickly into funds.
The inventory turnover ratio of SISCO for the past five accounting periods
is shown in the table.
Total Average finished goods Inventory Turnover

Year Sales Inventory ratio
2003-
5203716 394744 13.18
04
2004-
05 8797894 483042 18.21
2005-
06 9242179 662041.5 13.96
2006-
07 9495878 777687.5 12.21
2007-
08 11264991 792685 14.21
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Cash management
Cash requirements can be forecasted depending on monthly and

weekly requirements of cash. The forecast of information regarding cash
inflows which include the cash from customers, export incentive export
credit, etc), cash outflows which include purchase of row materials,
spares, excise duty, sales tax, personnel payments customs duty, railway
freight etc.
Cash ratio:
Cash ratio is ratio of cash held by a firm to current liabilities. SISCO is

maintaining almost an average cash of around 0.1. This is because cash
holding is kept at minimum except for some petty cash needs.
Cash ratio = Cash in hand (or bank)/Current liabilities.
Cash ratio for the past five years is as shown.
Cash in Current
Year hand/bank liabilities Cash Ratio
2003-04 98528 522911 0.19

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2004-05 136708 859706 0.16
2005-06 131501 904144 0.15
2006-07 182034 1617847 0.11
2007-08 188950 1165507 0.16
Payable turnover ratio:
Payables turnover ratio is ratio of total purchases to average payable. It

indicates the number of times management is able to convert accounts
payables into purchase.
Payable turnover ratio = Purchases/Average payables.
Average Payables turnover

Year Purchases Payables ratio
2003-04 2756876 219777 12.54
2004-05 4862728 194965.5 27.94
2005-06 4718476 314464 15
2006-07 5230995 507775.5 10.3
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2007-08 6719734 425849 15.78
Interpretation:
The turnover ratio is maintained between 10 and 15 except for the year
2002-03: this is because of lower purchase value & 2004-05; this was
mainly because of increase in purchase value and better cash position.
Suggestions
Scope of enhancing: During the year 2007-08 the turnover is Rs 1126.49

crores and profit is Rs.43.62 crores, during the year 2006-07 turnover is
Rs.949.58 crores and profit is Rs.37.05 crores. It indicates that the net
profit forms nearly 4% of the total sales turnover. Company should try to
D.N.C Nagpur
P a g e | 79
go for expansion, such as production enhancement system, so that the

company comes to a position for further increasing its profits.
The steel industries are having very good time but SISCO could not able to
take full of its advantage due to the constraints, primarily raw materials.
Unlike any other steel companies, SISCO is not having its own sources of
raw material i.e. coal mine & iron ore. These are very basic needs as the
company always depends on its supplier for its raw material. Had the
company always depends on its supplier for its raw material. However in
the recent years SISCO is procuring coal from its Belgaon coal mine &
because of which its dependence on supply from outside is now 50%.
• The ratio of net working capital to sales for the last five accounting
years are as follows:
Net working
Sales (In
Year capital (In
Rs.’000) Ratio [In %]
Rs.’000)
5203716
2003-04 1,009,053 19.39
2004-05 1,701,568 8797894 19.34
2005-06 1,631,678 9242179 17.65
2006-07 2,051,445 9495878 21.60
2007-08 2,883,855 11264991 25.60
From the above ratios it can be observed that SISCO’s net working
capital to sales ratio is around 20 over the years (excluding 2007-08
where it is 25%), so I can suggest that in the future SISCO can
D.N.C Nagpur
P a g e | 80
predict the net working capital requirement of the upcoming

accounting year based on the sales forecast i.e. SISCO’s
management can assume the net working capital for the upcoming
accounting year to be 23-25% of the forecasted sales value, this can
be used as a guide in raising funds for working capital.
Conclusions:
1) The non moving inventory is one of the gray areas in SISCO’s

working capital management. They account for 1/10 th of value total
inventory. This is an area where SISCO’s management should focus
to bring down the level of non moving inventory. SISCO should
identify obsolete or non-usable items & dispose them if required.
Also identification of such items will help in preventing procurement
D.N.C Nagpur
P a g e | 81
of such items on future. In some cases company needs to maintain

sufficient level of spares even though they are not required for
months or years because absence of these spares in case of
emergency situations may lead to a huge loss in terms of
production.
2) The export sales of SISCO are only 5.7% of total sales during 2007-
08. Present scenario of steel industry indicates the need for more
steel even with the cause of lower production facilities. The
company should now give more importance to exports because it
provides good net sales realization but also export benefits.
The following table the contribution of export sales to sales and the
justification for the above suggestions.
(Rs. In ‘000)
Year 2003-04 2004-05 2005-06 2006-07 2007-08
Export
680,436 1,043,340 834,844 860,525 650,110
sales
D.N.C Nagpur
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Total
5,203,716 8,797,894 9,242,179 9,495,878 11,264,991
sales
% export
sales to
13.07 11.86 9.03 9.06 5.77
total
sales
Considering the fact that the margins in the export sales are low, but have
the potential to rise in the near future, the company can maintain a
minimum level of presence in the global market.
Bibliography:
Books:
Financial Management by I.M.Pandey
Financial Management by Prasanna Chandra
Financial Management by M.Y.Khan & P.K.Jain
D.N.C Nagpur
P a g e | 83
Annual Reports of Sunflag Iron & Steel Co. Ltd. from 2002-03 to 2007-08.
Websites:
www.economictimes.com
www.sunflagsteel.com
www.edifar.com
www.indiainfoline.com
www.indianexpress.com
D.N.C Nagpur
P a g e | 84
PROJECT REPORT ON
“WORKING CAPITAL MANAGEMENT”

AT
SUBMITTED TO PARTIAL FULFILLMENT OF REQUIREMENT
FOR THE AWARD OF DIPLOMA IN BUSINESS MANAGEMENT
TO RASHTRASANT TUKDOJI MAHARAJ NAGPUR UNIVERSITY,

NAGPUR
FOR THE ACADEMIC YEAR 2009-10
SUBMITTED BY
Mr.Sachin K.Karemore
SUPERVISOR
Prof.Amol Armarkar
SUBMITTED THROUGH
DR. PANJABRAO DESHMUKH INSTITUTE OF MANAGEMENT

TECHNOLOGY & RESEARCH,
DEPT. OF DHANWATE NATIONAL COLLEGE, NAGPUR
D.N.C Nagpur
P a g e | 85
DECLARATION
I hereby declare that the Project Report entitled “Working Capital
Management at Sun Flag” or any part thereof has not been
submitted earlier to any Institution or University for the award of any
other Diploma or Degree, not the data has been derived from any
thesis of any University.
The sources of material, data used in this study have been duly
acknowledged.
Mr.Sachin
K.Karemore
Researcher
Place: Nagpur
Date:
D.N.C Nagpur
P a g e | 86
SHRI SHIVAJI EDUCATION SOCIETY AMRAVATI’S
DR.PANJABRAO DESHMUKH INSTITUTE OF MANAGEMENT TECHNOLOGY &

RESEARCH
D.N.C. campus, Congress Nagar, Nagpur-440 012 Phone: 91-712-22430464,

22445356
e-mail: pdimtr@rediffmail.com / Website :http:\\www.pdimtr.com
CERTIFICATE
I hereby certify that this Project Report entitled “Working Capital

Management at Sun Flag Iron & Steel Co.Ltd” submitted by Mr.Sachin
K.Karemore to Rashrasant Tukdoji Maharaj Nagpur University, Nagpur for
the award of Diploma in Business Management, is a bonafide and original
research work carried out under my guidance and supervision. It is piece
of research of a sufficiently high standard to warrant its submission to the
University for the Award of the said degree.
No part of the thesis has been submitted for any Degree or Diploma, or
published in any other form.The assistance and the help rendered to the
researchers during the course of his investigation in the form of basic
source material and information have been duly acknowledged.
Dr.M.A.Burghate Prof.Amol Armarkar

Coordinator Supervisor
Dr.B.B.Taywade
Principal
APPROVED BY AICTE, NEW DELHI  AFFILIATED TO NAGPUR UNIVERSITY
D.N.C Nagpur
P a g e | 87
FOUNDER PRESIDENT : Late Dr.Panjabrao Deshmukh PRESIDENT : Hon. Shri Adv.Arunkumar B.

Shelke
DIRECTOR : Dr.B.B.Taywade CO-ORDINATOR : Dr.M.A.Burghate
CERTIFICATE
This is to certify that Mr. Sachin

K.Karemore of Danwate National College, Nagpur
has completed his project on working capital
management, here at Sunflag Iron & Steel Co. Ltd.,
Bhandara. The information submitted is true and
original to the best of my knowledge.
Mr. T.S. Chandrabose
Assistant General
Manager,
Fin A/C Dept.
Sunflag Iron & Steel

Co. Ltd. Bhandara.
D.N.C Nagpur
P a g e | 88
ACKNOWLEGEMENT
Project whether it is small or large can’t be completed until it is
assisted by a group of individuals fulfilling every criteria of its process.
Throughout this project I would like to acknowledge the precious help of

Prof. Amol Armarkar who helped me to choose the project title.
I Would Like to express my gratitude to the Director Of P.D.I.M.T.R.Nagpur

,Dr.B.B.Taywade and Co-ordinator Dr.Mukul Burghate for giving me
opportunity to do the project in order to enhance my knowledge & skills
and abilities.
At the onset I would like to thank Mr.N.K.Shil & Mr.T.S. Chandrabose

without whose guidance & feedback it would not been possible for me to
complete this project successfully.
I especially thankful to all departments who provide me valuable

guidance, which is helpful in fulfillment of my Project Report. I am also
thankful to my friends who directly or indirectly helped me lot.
Mr. Sachin K.Karemore
DBM
D.N.C Nagpur
P a g e | 89
CONTENT
Particulars Page No.
Executive summary
Chapter 1 - Introduction
1
Introduction of Project
Chapter 2 – Company profile 2
• Background
• SISCO Technology
• Product Mix
• Product Applications
• Vision, Mission & Technology
• Future projects
• Production Performance
• Financial Performance
• Steel Industry
D.N.C Nagpur
P a g e | 90
Chapter 3 - Research Methodology:

13
• Research Methodology
• Data Collection
• Primary Data
• Secondary Data
• Objectives of the study
• Hypothesis
Chapter 4 - Working Capital Management 16
Operating cycle 23
Approaches for financial working capital 25
Importance of working capital 26
Determinants of working capital 28
Principle of working capital management 30
Inventory management 33
Cash management 39
Receivable management 40
Payables Management 47
Chapter 5-Quantification
50
Working capital management in SISCO
D.N.C Nagpur
P a g e | 91
Chapter 6- Data Analysis
• Operating cycle analysis:
• Gross working capital
• Net working capital:
• Current ratio
• Working capital turnover ratio 58
• Inventory management is SISCO:
• Cash management
• Payable turnover ratio
suggestions
Chapter – 7: Conclusion 74
Bibliography 76
D.N.C Nagpur
P a g e | 92
Executive Summary
The concept of working capital is used in two ways i.e., gross and net.
Gross working capital refers to the firms investments in current assets.
Net working capital means the difference between current assets and
current liabilities, and therefore represents the position of current assets,
which is financed either from long term funds or banks borrowings.
Cash is required to meet a firm’s transactions and precautionary needs. A

firm needs cash to make payments for acquisitions of resources and
services for normal conduct of business. Cash is also held to meet
emergency situations. Some firms hold cash to take advantage of
speculative changes in prices of input and output. Management of cash
involves three things.
a) Managing cash flows in and out of a firm
b) Managing cash flows within a firm
c) Financing deficit or investing surplus cash
And thus, controlling cash balance at any point of time. Firms prepare
cash budget to plan and control and cash flows. Cash budget can serve its
purpose only when firm can manage its collection and payments within
the allowed limits. A firm should hold optimum amount of cash at any time
and invest the temporary excess amount in short term securities.
Trade credit creates book debts accounts receivable. It issued as a

marketing tool to expand or maintain the firm’s sales. A firm’s investment
on account receivable depends on volume of credit sales and collection
period through credit policy. Credit policy includes credit terms and
collection efforts the firm’s credit policy will be considered optimum at the
three methods monitor book debts. They are:
D.N.C Nagpur
P a g e | 93
a) Average collection period
b) Ageing schedule
c) Collection experience matrix
The first two methods are based on the showing payments patterns and
hence do not provide meaningful information for collecting book debts.
The third approach uses the desegregated data and it is better method
than first two methods.
Inventories constitute about 60% of current assets to public limited

companies of India. The manufacturing companies hold inventories in the
form of raw materials, work in process and finished goods. They are three
motives for holding inventories. They are transaction motive,
precautionary motive and speculative motive.
In finance, working capital is synonymous with current assets; SISCO is a

multi product large organization with huge capital turnover where the
working capital requirement depends on the level of operation and the
length of operation cycle. Monitoring the duration of the operating cycle is
an important aspect of current assets management and control.
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Working Capital Management

Capital is essential for the setting up and smooth running of any

The policies, procedures and measures taken for managing of

Industry Banking introduction

the co-operative banks. In terms of ownership, commercial banks can be further

The first phase of financial reforms resulted in the nationalization of 14 major

turn resulted in a significant growth in the geographical coverage of banks. Every

bank had to earmark a minimum percentage of their loan portfolio to sectors

next wave of reforms saw the nationalization of 6 more commercial banks in

of-the-art technology, which in turn helps them to save on manpower costs.

modern economy of the country.

their flab in terms of excessive manpower, excessive non Performing Assets

sector banks are consolidating themselves through mergers and acquisitions.

revenues from traditional sources, lack of modern technology and a massive

as 20 percent of their massive employee strength has dwindled in the wake of

the successful Voluntary Retirement Schemes (VRS) schemes.

the aftermath of successful VRS schemes. Also, following India’s commitment to

the W To agreement in respect of the services sector, foreign banks, including

Tasks of government diluting their equity from 51 percent to 33 percent in

the PSBs. The FDI rules being more

route to acquire willing Indian partners.

without risk participation, invest in an insurance company for providing

infrastructure and services support and set up of a separate joint-venture

insurance company with risk participation.

Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded

credit expanded at a Cagr of 16.3 percent per annum. Banks’ investments in

annum during the same period.

In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP)

Index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in

percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4

while the growth in credit by

dropped to 4.56 percent in the fourth quarter of 2000-2001.

capital as a percentage of the risk-weighted assets is maintained at the

current scenario doesn’t look too attractive for bank majors.

Consequently, banks have been forced to explore other avenues to shore up

SBI provides a range of banking products through its vast network of

SBI has tried to reduce over-staffing by computerizing operations and

Background of State Bank of India

SBI provides a range of banking products through its vast network of

SBI has tried to reduce over-staffing by computerizing operations and

SBI provides a range of banking products through its vast network of

SBI has tried to reduce over-staffing by computerizing operations and

• Vision, Mission & Technology

o Group with world class standards and significant global business

BACKGROUND OF State Bank of India:

SBI operates several foreign subsidiaries or affiliates. In 1990 it

In 1982, the bank established a subsidiary, State Bank of India

Offices of the Bank of Bengal

In 1959 the Government passed the State Bank of India (Subsidiary

State-associated banks as its subsidiaries. On September 13, 2008, State

[edit] Associate banks

• Commercial bank has two meanings:

Retail banking refers to banking in which banking institutions execute

Private banking is a term for banking, investment and other financial

Historically private banking has been viewed as very exclusive, only

Investment management is the professional management of various

The term asset management is often used to refer to the investment

The provision of 'investment management services' includes elements of

Investment management is the professional management of various

The term asset management is often used to refer to the investment

The provision of 'investment management services' includes elements of