RICHA RAI INDIAN INSTITUTE OF PLANNING & MANAGEMENTNew Delhi, Satbari

AKNOWLAGEMENT

This project has been prepared as a part of an internship required during thecompletion of PGDBM programme at INDIAN FARMERS FERTILIZERSASSOCIATION COOPEARTIVE LIMITED, HEAD OFFICE, and NEWDELHI.

With an overwhelming sense of genuine obligation, I express my deep sense ofgratitude to Mr S.B RINDANI, EXECUTIVE DIRECTOR (FINANCE), andHEAD OFFICE for allowing me to carry out my dissertation work in thedepartment.

I feel very opportune in presenting my thanks to my project guiderespected Mr. Suresh Goyal, Chief Manager (Finance and Accounts) whoseconstant support, patience, positive attitude, able guidance and blessing wereresponsible for the accomplishment of the work.

I also extend my conceded regards to Mr Ram Niwas Rathi, SeniorManager for rendering knowledge about working capital management ofIFFCO.

I also express my earnest gratitude to Mr Sukant Sharma, AssistantManager and Mr.J.D Chandra, Manager Accounts for their constant supportduring the entire tenure.

At this junction, I also owe my regards to my faculty members of M.SRAMAIAH INSTITUTE OF MANAGEMENT.

I express my sincere thanks to all friends and person who helped directlyor indirectly with his or her labour and advice for the successful completion ofthe dissertation report.

These past 2 months were of utmost importance as they added valuetowards my path of knowledge.

At the nib but not at the neep, I bow down my head before my belovedparents with all Sthe reverence whose blessing has solely contributed to reachthe point.

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Executive Summary

IFFCO (Indian Farmers and Fertilizers Cooperative Limited) is the largest

producer and distributor of fertilizers in India. The project is primarily focused

on the Working Capital Management of the company. Some other areas like

foreign payment management, Buyer’s Credit, Hedging, Derivative etc are also

taken into consideration for the study during the training period.

The Working capital consists of four broad sub- topics:

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

Working Capital Assessment of the company is done by preparing statement

called cash Monitoring Authorization, which calculates the working capital Gap

of the company and the same is submitted with the Bank for availing the Loan.

Bank finances the 75% of the Working Capital Gap and the rest is to be

financed by the company. The mode of loan is Cash Credit Loan. Now it

depends on the company, the amount of loan it wants to avail. The loan amount

cannot exceed the limit financed by the Bank.

The Working Capital requirement of the company has been considerably

increased from Rs. 950 crore in the year 2005-06 to Rs. 1450 crore in the year

2006-07 and to Rs. 2000 crores in the year 2007-08 to Rs.5000 crores in the

year 2008-2009. The primary reason for the increase in the Working capital of

the company is because of the increase in the demand of the fertilizers and the

company has to increase its production, increase in the price of the raw

materials and delay in the disbursement of the subsidy by FICC.

There is an efficient Cash Management system in the company. As the entire

fund requirement of the company is financed by the Bank. The cash in hand of

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the company is very less. The company manages its cash at bank in such a way

that no balance in any account is kept idle even for one day.

All the favorable balances of the sales Collection account and the current

account is transferred to the Cash Credit account at the end of every day in

order to save the interest on the overdraft balances for the day. All the major

cash requirements are fulfilled from the cash credit account. Any cash received

by IFFCO is immediately transferred to the cash credit account in order to

decrease the overdraft balances.

The major sources of the company are the sales of the fertilizers, Other revenues

received from the investment in the subsidiary companies and the subsidy

received from the FICC and the application of the Cash is for making the

payment to the suppliers both national and the international.

There are supply chains through which the finished products of IFFCO reach to

the final consumers. There are Marketing Federations in every state which

purchases the fertilizers from IFFCO and the same is sold to the cooperatives

and from the cooperatives it reaches to the farmers. IFFCO generally does not

sell the fertilizers directly to the cooperatives and if it does no credit is allowed

to them, the cooperatives have to purchase the fertilizers in Cash. Federations

and the Agro Industrial Development Corporations are the debtors of IFFCO

because the fertilizers are sold to these agencies on credit. A credit of 30 – 45

days is provided to the federations and a cash discount is provided to the

federations if the payment is made within the credit period. The government is

the major debtor of IFFCO because the major portion of the cost of production

in the form of subsidy is due with the government.

The subsidy becomes due when the fertilizers are dispatched from the

warehouses of IFFCO and it is expected to be received within the period of 45

days but the same does not happens. Sometimes due to lack of the budget with

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the government, the government issues fixed bonds for 15 to 20 years and the

fund of the company is blocked and thus the requirement of the Working Capital

increases.

The major source of the short term financing for the company is Cash Credit

which fulfills the entire Working Capital requirement, the interest is charged by

the bank on the amount withdrawn from the bank by the company. The

company also takes short term loans, these loans are taken for a period of 4

months. As the rate of interest on these loans are cheaper than that of the Cash

Credit Loans, sometimes the company take the Short Term Loans and deposit in

the cash credit account in order to decrease the overdraft balance of the Cash

credit Account.

The inventory conversion period cannot be determined as the production is

continuous in the Urea manufacturing plants. The major inventory is gas which

is supplied by the gas companies through pipelines. In the plants producing the

complex fertilizers the raw material are not easily available in the national as

well as the international market. The company is ready to purchase any amount

of raw materials if the same is available in the market.

The raw materials for the complex fertilizers are imported from other countries

and the payment is also made in the foreign currencies. These foreign payments

are managed by using different exchange rate options such as spot rate, tom rate

and the cash rate. The company also protects itself from the losses, by hedging

the exchange rate and through the derivatives. Moreover the company also avail

the finance facility from banks.

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TABLE OF CONTENTS

1) Acknowledgement…………………………………………........01

2) Executive Summary……………………………………………..04

3) Introduction............................................................................

4) Objectives…………………………………………………..........08

5) Methodology……………………………………………….........10

a) Limitations………………………………………………..…..11

6) Organization Profile…………………………………………....12

7) Chapter 1

WORKING CAPITAL MANAGEMENT…………….........……35

8) Chapter 2

Financial Ratio Analysis ……………………………………..…86

9) Findings……………………………………………………..…..148

10) Conclusion…………………………………………………...…..149

11) Bibliography…………………………………………………......152

INTRODUCTION TO THE TASK

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Our summer training helps us to get our theoretical concepts more clear. We can

actually link our theoretical concepts with the actual practices followed in the

organizations. I had talked to my seniors, faculties, supervisors and other

trainees in my organization. Everybody told me that I should select such a topic

on which I can get the full information, support, and guidance from my

supervisors. I had talked to my supervisor about the same and he suggested to

me take Working Capital Management as the title of my Summer Training

Project Report. There is altogether a different section which takes care of all the

aspects of working capital.

Working capital refers to the amount required for meeting day-to-day expenses

and for the regular trading activities. That is why; working capital is a very

sensitive issue. It is very important to take care of working capital very

carefully. No company can survive and perform effectively without managing it

efficiently. If the working capital is not managed efficiently then is can spoil the

image of the company because it would not be able to run its day-to-day

activities smoothly.

I always wanted to take such a topic which suits my interest. Being good in

numbers and accounts, I wanted to take a topic which is related to accounts or

which involves numbers. Working capital involves both the things. It is very

interesting. This is the section where you feel a very significant part of your

organization. I have chosen this topic because it involves the arrangement and

application of funds. It involves a lot of activities that are very important to

understand from the point of view of a finance manager. That is why, I have

chosen this topic.

Rationale of the study

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The Working Capital Management is a very good subject to work upon. If you

work on this subject, you will come to know about the various aspects related to

it. You will get to know how sensitive it is. It serves as the backbone of any

enterprise.Every department is directly or indirectly related to it. If the Working

Capital is managed efficiently then the whole organization gets benefited.

Therefore, in order to ensure the smooth functioning of your organization

Working Capital Management has to be done in a proper and effective manner.

This project will help us to know:

Concepts of Working Capital

How Working Capital Management is done.

What needs to consider while calculating the Working Capital

Requirements.

SCOPE OF THE STUDY

The scope of the study refers to the extent to which the other concepts are

included in the study. The scope of Working Capital Management includes:-

Cash Management: - Identify the cash balance which allows for the

business to meet day to day expenses, but reduces cash holding costs.

Debtors Management: - Identify the appropriate credit policy, i.e. credit

terms which will attract customers, such that any impact on cash flows

and the cash conversion cycle will be offset by increased revenue and

hence Return on Capital (or vice- versa); see Discounts and allowances

8

Inventory Management: - Identify the level of inventory which allows

for uninterrupted production but reduces the investment in raw materials -

and minimizes reordering costs - and hence increases cash flow; see

Supply chain management; Just In Time (JIT); Economic order quantity

(EOQ); Economic production quantity (EPQ).

Short term financing: - Identify the appropriate source of financing,

given the cash conversion cycle: the inventory is ideally financed by

credit granted by the supplier; however, it may be necessary to utilize a

bank loan (or overdraft), or to "convert debtors to cash" through

"factoring".

FINANCIAL PERFORMANCE

In spite of constraints in availability of raw materials, and inordinate delays in

receipt of large subsidy amounts from Government of India, IFFCO has yet

again delivered an impressive financial performance in all its major parameters,

namely, Revenue Growth, Operating Margins and Resource Utilisation

testifying to robustness of its Corporate Strategy of creating multiple drivers of

growth. This was possible due to higher production, sales volume and

improvement in operating efficiencies. The Society achieved the highest ever

sales of Urea of 63.35 Lakh MT and Fertilizers 118.27 Lakh MT. This

represents an increase of 8% for Urea and 5 per cent in case of Fertilizers over

the previous best.

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OBJECTIVES OF THE STUDY:-

This Research Project covers the two most important aspects or features of the functioning of

the “FINANCE DEPARTMENT of Indian Farmers Fertilizers Cooperative Limited

(IFFCO)”.

The First Part is both, an analytical as well as an academic study that involves an analysis of

the Working Capital and Working Capital Management Policies of the Organization-

IFFCO.

The main objectives of this study are: -

To understand the Working Capital Management policies of the organization.

To understand the importance of Working Capital Management.

To analyze the liquidity position of the organization.

To analyze the short term financing policies and patterns, which affect the working

capital of the organization.

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

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

To analyze the data and information of the previous years to know the actual position

of funds, investments and liabilities of the organization.

To identify some broad policy measures to improve the working capital position of

the organization.

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To estimate the working capital requirements of the organization in the near future.

METHODOLOGY OF THE STUDY:-

The training is basically an in house training which intimated me with various aspects of the

project.

Here, while conducting the study I have relied on two types of data, viz. primary data and

secondary data.. Based on the outcome of primary and secondary data, various statistics were

prepared.

Primary Data: The data collected through meetings with various managers & employees of

Finance and accounts department. I worked under guidance of Mr. Suresh Goyal, who gave

me his valuable time and information. He sent me to various sections of Finance & Accounts

Dept. and other departments for collection of data.

Sources of collection of secondary data:

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

Research Design

The research will be both descriptive and conclusive.

Descriptive research is a kind of research where the description of the topic is given.

Conclusive research is the kind of research in which the conclusion is given at the end of the

report.

Other sources of information

Web site

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LIMITATIONS OF THE STUDYThe following are the limitations of this summer project training:-

The study is limited to five financial years i.e. from 2006-07 to 2010-11.

The data used in this study has been taken from the Balance sheet & their related

schedules of IFFCO Ltd., New

Delhi as per the requirement. Some data are grouped and sub-grouped.Since this

study is being done for academic purpose the time available does not allow the

student to go in depth.

Information or the secondary data required for the study is also limited (in relation to

Indian Fertiliser Industry).

Some of the information that was essential for this study cannot however be given in

this report due to company’s confidentiality.

The scope and area of the study was limited to corporate office of IFFCO (Finance

Division) New Delhi only.

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SECTOR

OVERVIEW

13

COMPANY’ s Mission

“IFFCO's mission is "to enable Indian farmers to prosper through timely supply of

reliable, high quality agricultural inputs and services in an environmentally sustainable

manner and to undertake other civilities to improve their welfare"

Emerging as a dynamic organization, focusing on strategic strengths, seizing opportunities for

generating and building upon past success, enhancing earnings to

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

quantities with an objective to increase crop productivity. .

Commitment to health, safety, environment and forestry development to

enrich the quality of community life.

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

technologies.

A true Cooperative Society committed for fostering cooperative movement in

the country.

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

Sourcing raw materials for production of phosphoric fertilizers at economical

cost by entering into Joint Ventures outside India.

14

15

Company’s VisionIFFCO’s vision is "to augment the incremental incomes of farmers by helping them to

increase their crop productivity through balanced use of energy efficient fertilizers,

maintain the environmental health and to make cooperative societies economically &

democratically strong for professionalized services to the farming community to ensure

an empowered rural India.”

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

Sourcing raw materials for production of Phosphate Fertilizers at low cost with joint

ventures outside India.

Emerging as a dynamic organization, focusing on strategies maximizing the

shareholders value.

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

Implement diversification in information technologies.

Committed to cooperate social responsibilities for sustainable development.

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

quality of community life.

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

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SHARE CAPITAL (AS ON 31 ST MARCH, 2011)

(Rs in Crore)

Authorized Share Capital : 1000.00

Subscribed and Paid up Capital : 425.95

(All Share Capital by Cooperatives only)

GROWTH IN NUMBER OF MEMBER

SOCIETIES

(As on 31st March)

1974-75 1980-81 1986-87 1992-93 1998-99 2004-05 2010-110

5000

10000

15000

20000

25000

30000

35000

40000

45000

2552826960 28134

30200

3507237381

39877

Column2 Linear (Column2) Linear (Column2)

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

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PRODUCT WISE PRODUCTION

PERFORMANCE:-

2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

10

20

30

40

50

60

70

80

90

27.1732.26

28.84 31

38.7441.81

37.18 37.86 39.63 40.68 43.24 44.02

64.3570.12 68.47

71.68

81.9885.83

DAP UREA TOTAL

Chart 2 : PRODUCTWISE PRODUCTION PERFORMANCE

MARKETING CHANNELS:-

Distribution of fertilizers mainly through the Cooperative System: -

State level Apex Cooperative Marketing Federation Acts as wholesaler Direct supplies to Societies in some States IFFCO-NCDC Cooperative Societies Small quantities to institutional agencies like Agro Industries Corporation et 157 IFFCO Farmers Service Centers

DISTRIBUTION AND WAREHOUSING: TRANSPORTATION Both by Rail (91%) and Road (09%)

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WAREHOUSING

Federations & Cooperative Godowns Central Warehousing Corporation (CWC) and

State Warehousing Corporation (SWC

Distribution of fertilizers mainly through the Cooperative System: -

State level Apex Cooperative Marketing Federation Acts as wholesaler

Direct supplies to Societies in some States

IFFCO-NCDC Cooperative Societies

Small quantities to institutional agencies like Agro Industries Corporation etc

158 IFFCO Farmers Service Centers.

IFFCO PLANTS

PLANTS LOCATIONCOMMISSIONE

D INEXPANDED IN

ANNUAL PRODUCTION

CAPACITY ( In Lakh MT)

KALOL GUJARAT 1975 1997 UREA 5.45

KANDLA GUJARAT 1975 1981&1999 DAP/NPK 24.15

PHULPUR U.P. 1981 1997 UREA 14.16

AONLA U.P. 1988 1996 UREA 17.29

PARADEEP ORISSA SEPT. 2005 - DAP/NPK 19.20

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Table 1 : Details Of Plants

PLANT LOCATIONS

20

KANDALA UNITS

Paradeep Unit

21

FINANCIAL PERFORMANCE:-

(Rs.

Crore)

YEARS 2006-07 2007-08 2008-09 2009-10

TURNOVER 10330 12163 32933.30 16808.57

PROFIT BEFORE TAX 251.25 380.52 441.95 567.28

INCOME TAX 76.23 122.93 81.94 90.34

PROFIT AFTER TAX 175.02 257.59 360.01 401.10

SHARE CAPITAL 422.92 423.93 426.28 426.24

RESERVES AND SURPLUS 3218.9 3264.7 3532.59 3844.26

NETWORTH 3301.2 3555.4 3641.8 4968.04

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NET ASSETS EMPLOYED 4369.5 9049.2 10662 16737.31

INVESTMENTS 690.73 776.16 740.46 1169.91

Table 2 : Last Five Year Financial Performance of IFFCO

PROFIT BEFORE TAX (PBT)(Rs. Crore)

2005-06 2006-07 2007-08 2008-09 2009-10 2010-110

200

400

600

800

1000

1200

481.9

251.25

380.52441.95

567.28

1025.78

Column2

Chart 5 : Five Year Profit Before Tax details

TURNOVER:-

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2006-07 2007-08 2008-09 2009-10 2010-110

5000

10000

15000

20000

25000

30000

35000

10330.1112162.82

32933.3

16809

21195

Column2

Chart 6 : Five Year turnover Performance of IFFCO

SERVICE TO FARMERS:-

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Agricultural Extension and fertilizer use Promotion Programmes that are an integral part of

the marketing activity. Programmes are conducted at Area/State/Zonal offices under the

guidance of agricultural scientists.

Programmes undertaken are:

Balanced Fertilization Programmes.

Adoption of villages for all round socio-economic development.

Farmers visit to various agricultural institutes and research farms.

Farmers’ Meetings, Field Days and Crop Seminars.

Static/Mobile Soil Testing Laboratories with Audiovisual.

Other Social Activities/Development Programmes include:-

Supply of fodder in draught prone areas

Veterinary Checkup and Distribution of Medicines

Human Health Checkup and Distribution of Medicines

Providing drinking water facilities

Assistance to School / School children

Watershed development projects

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COOPERATIVE RURAL DEVELOPMENT

TRUST (CORDET )

PROMOTED BY IFFCO

LOCATIONS: KALOL (GUJARAT),

PHULPUR (U.P.),

KANDLA(GUJARAT).

ACTIVITIES OF CORDET

Farmers’ Training

Soil Testing

Bio Fertiliser Production

Demonstration Farming

Seed Multiplication

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INVESTMENTS OUTSIDE IFFCO:-Indian Potash Ltd (IPL)

IFFCO’s Equity : Rs. 2.68 Crore

Percentage of Equity held : 34%

Activity : Marketing of Potash and

imported fertilizers

Industries Chimiques du Senegal (ICS) I & II

IFFCO’s Equity : Rs 161.53 Crore

Percentage of Equity held : 19.47 %

Plant Site : Darou, Senegal

Product : Phosphoric Acid, NPK

Fertilizers

IFFCO - TOKIO General Insurance Company Ltd.(ITGI)

IFFCO’s Equity : Rs. 193.91 Crore

Percentage of Equity held : 72.6%

Activity : General Insurance

Oman India Fertiliser Company (OMIFCO)

IFFCO’s Equity : Rs. 329.08 Crore

Percentage of Equity held : 25%

Plant Site : Sur, Oman

Product : Ammonia, Urea

National Commodity and Derivative Exchange (NCDEX)

IFFCO’s Equity : Rs. 3.60 Crore

Percentage of Equity held : 12%

Activity : On Line Trading in

Commodity Futures

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National Collateral Management Services Ltd. (NCMSL)

IFFCO’s Equity : Rs. 4 Crore

Present percentage of : 13.33%

Equity held

Activity : Collateral Risk

Management Solutions

OTHERS

Indian farm forestry development corporation (IFFDC) : Rs 8.60 crore

Maharashtra State Coop. Bank Ltd. : Rs. 10 Lakhs

IFFCO Kisan Bazaar : Rs. 5 Lakhs

Indian Tourism Coop. Ltd. : Rs. 1 Lakh

DIVERSIFICATION:-

1) IFFCO-TOKIO GENERAL INSURANCE CO. LTD.

Diversified into General Insurance due to :-

Tremendous potential available

To serve the insurance needs of farmers

IFFCO’s Rural Brand Equity

Low gestation period

The scope includes a mix of following:

Rural Insurance Business

Fire Insurance Business

Marine Insurance Business

Miscellaneous Insurance Business.

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IFFCO KISAN BAZAR LTD.:-

IFFCO Kisan Bazar Ltd. was incorporated on 26.02.2004 with an Authorised Equity Capital

of Rs. 1 Crore with the objective to set up a chain of Super Stores across the Country .

Negotiations are in progress for strategic alliance with the prospective Foreign partner for

operations of large format Retail Outlets in India.

OTHER PROGRAMS BY IFFCO:-

SANKAT HARAN BIMA YOJANA: With the purchase of each bag of IFFCO/IPL

fertilizer from Cooperative Society/FSC, the buyer is automatically covered against accident

up to an amount of Rs. 4000/- for one year. Maximum liability limited to Rs. 0.1 Million

irrespective of the number of bags purchased. Respective manufacturer pays premium @ Rs.

1/- per bag. Cash receipt is evidence of insurer cover.

OMAN INDIA FERTILIZER PROJECT: Grassroots ammonia/urea complex has

been set up at Aloha near Sur, Oman. The project comprises two ammonia and two urea

plants of 2*1750 MTPD and 2*2530 MTPD respectively. Entire urea production of 1.65

MILLION MT is being purchased by GOI under off take Agreement. Surplus Ammonia is

being purchased by IFFCO.

NELLORE FERTILIZER PROJECT: Environment clearance, Rail transport clearance,

Allocation of Naphtha, Water and Power are accorded for the project. Project is kept in

abeyance till finalization of long term fertilizer policy. Plant capacities of Urea are 2328

MTPD and Ammonia is 1350 MTPD.

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VISION – 2010 OF IFFCO

The Society has embarked upon another growth plan titled “VISION 2010“

to achieve annual turnover of Rs. 15,000 crore (USD 3400 Million) by the

year 2010.

Society is exploring avenues for diversification into other profitable business

areas, apart from fertiliser sector, for sustained growth and adequate return to

member shareholders.

Vision 2010 would mainly focus on farmer oriented schemes and

strengthening of cooperative infrastructure.

o Broadly identified business activities under the “VISION 2010“

are :-

Installation of Ammonia/Urea plants including acquisition of fertilizer units

Generation of Power

Production and Marketing of micro-nutrients, seeds, biofertilisers, pesticides

etc.

Value addition to agri-products and marketing

Banking and Financial Services

Information Technology and IT enabled services

Establishments of Retail Chain in urban and semi-urban locations

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WORKING CAPITAL MANAGEMENT:-

AN ANALYTICAL RESEARCH

Working Capital Management is the interaction between current assets and

current liabilities. The current assets refer to those assets, which in ordinary

course of business can be, or will be turned into cash within one year without

undergoing a diminution in value and without disrupting the operation of the

firm. Decisions relating to working capital and short term financing are referred

to as Working Capital Management. This involves managing the relationship

between a firm's short-term assets and its short-term liabilities. The major thrust

is on managing the current assets because a current liability arises in context of

current assets.

The goal of working capital management is to ensure that a firm is able to

continue its operations and that it has sufficient ability to satisfy both maturing

short-term debt and upcoming operational expenses. The management of

working capital involves managing inventories, accounts receivable and

payable, and cash.

The management of current assets is similar to that of fixed assets in the sense

that in both cases the firm analyses their effects on its return and risk.

However, The management of fixed and current assets differs in THREE

ways:-

1) In the management of fixed assets, time is very important consequently, discounting

and compounding aspects of time element play a significant role in capital budgeting

and a minor one in the management of current assets.

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2) Large holdings of current assets especially cash strengthen times liquidity (and

reduces riskiness) but also reduces overall profitability.

3) The levels of fixed as well as current assets depend upon the “expected sales” , but it

is only the current assets, which can be adjusted with sales fluctuations in short runs.

In examining the management of current assets, answers will be sought to the following

questions:-

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

How much funds should be invested in each type of current assets?

What should be the proportion of long term and short term funds to finance current

assets?

What appropriate sources of funds should be there to finance current assets?

Working Capital Management is a significant part of financial management. It’s importance

arises from two reasons: -

Investment in current represents assets a substantial portion of total management.

Investment in current assets and the level of current liabilities have to be geared

quickly to changes in sales. To be sure, fixed assets investment and long term

financing are also responsive to variations in sales. However this relationship is not as

close and direct as it is in the case of Working Capital Management.

Hence in this study an attempt has been made to analyze the size and composition of working

capital and whether such an investment has increased or declined over a period of time.

32

Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is

involved in the most vital decision of the allocation of capital. There is a need to have a

broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in

the most efficient manner .One of the most important task of financial manager is to select an

assortment of appropriate sources of finance for the current assets. Normally the excess of

current assets over current liabilities should be financed by long-term sources. Precisely it is

not possible to find out which long term sources has been used to finance current assets, but it

can be examined as to what proportion of current assets has been financed by long term

funds. Therefore, an attempt has been made in this regard.

In working capital analysis the direction of change over a period of time is of crucial

importance. Not only that, analysis of working capital trends provides a base to judge

whether the practice and prevailing policy of the management with regards to the working

capital is good enough or an improvement is to be made in managing the working capital

funds.

Hence in this study, an attempt is made about the trends of the working capital management

of selected enterprise. In addition, to have higher profitability the firms may sacrifice

solvency and maintained a relatively low of current assets. When the firms do so their

profitability will improve and less are tied up in the idle current assets, but their solvency will

be threatened. Hence, an attempt is made to study the association of profitability with the

working capital ratios. With this view, an effort has been made in this project report to, make

an in-depth study of IFFCO in respect of its performance and its working capital

management.

33

34

MEANING OF WORKING CAPITAL:-

Capital required for business can be classified under two main categories: -

1) FIXED CAPITAL

2) WORKING CAPITAL

Every business needs funds for two purposes for its establishment to carry out its day-to-day

operations.

FIXED..CAPITAL Long term funds are required to create production facilities through purchase of fixed assets

such as plant & machinery, land, buildings, furniture, etc. investments in these assets

represents that part of firm’s capital, which is blocked on a permanent or fixed basis and is

called fixed capital.

WORKING CAPITAL

Funds are also needed for short-term purpose for the purchase of raw materials, payment of

wages and other day-to-day expenses, etc. These funds are known as Working Capital.

The term Working Capital refers to the amount of capital, which is readily available to an

organization. That is, working capital is the difference between resources in cash or readily

convertible into cash (Current Assets) and organizational commitments for which cash will

soon be required (Current Liabilities).

Current Assets are resources, which are in cash or will soon be converted into cash in "the

ordinary course of business”. Current assets like Liquid Assets (cash and bank deposits),

Inventory, Debtors and Receivables, etc.

Current Liabilities are commitments, which will soon require cash settlement in "the

ordinary course of business". Current Liabilities like Bank Overdraft, Creditors and

Payables, Other Short -Term Liabilities.

Thus: WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

35

TYPES OF WORKING CAPITAL

Working Capital can be further divided into two types namely:

1) Permanent or fixed working capital

2) Variable or temporary working capital

1) Permanent or Fixed working capital

Permanent or Fixed working capital is the minimum amount which is

required to ensure effective utilization of fixed facilities and for

maintaining the circulation to the current assets, for example: every firm

has to maintain a minimum level of raw material, work-in-progress,

finished goods and cash balance. This minimum level of current assets is

called permanent or fixed working capital. As the business grows, the

requirements of permanent working capital also increase due to the

increases in current assets.

2) Temporary or Variable Working Capital

Variable working capital can be further classified as seasonal working

capital and special working capital. Most of the enterprises have to

provide additional working capital to meet the seasonal and special needs.

The capital required to meet the seasonal needs of the enterprise is called

seasonal working capital. Special working capital is that part which is

required to meet the special exigencies such as launching of extensive

marketing campaigns for conducting research etc..

36

GOOD MANAGEMENT OF WORKING CAPITAL

Good management of working capital is part of good financial

management. Effective use of working capital will contribute to the

operational efficiency of a department; optimum use will help to generate

maximum returns.

Ratio analysis can be used to identify working capital areas, which

require closer management. Various techniques and strategies are

available for managing specific working capital items.

Debtors, creditors, cash and in some cases inventories are the areas most

likely to be relevant to departments.

Objectives of Working Capital Management:-

Liquidity vs. Profitability

o The basic objective of working capital is to provide adequate

support for the smooth functioning of the normal business

operations of the company.

o Based on this the companies can follow any of the two approaches

or even a combination of both. A company opting for high

investment in current assets follows the Conservative Approach

i.e. subjected to lower degree of risk. This approach imparts greater

LIQUIDITY to the company.

o The other approach is the Aggressive Approach in which the firm

goes for fewer investments in current assets, thus leaving more

amounts of funds for investment in more profitable ventures. This

approach imparts greater PROFITABILITY to the company.

37

Choosing the pattern of financing

The management of financing the chosen level of current assets once

again takes into consideration the attitude of management towards risk.

Determinants of Working Capital

The working capital requirements of a concern depend upon a large number of

factors. It is not possible to rank them because all such factors are of different

importance and the influence of individual factors changes for a firm over time.

However the following are the factors generally influencing the working

capital requirements: -

Nature or character of business

The working capital requirements of a firm basically depend upon the

nature of the business. Public undertakings like electricity, water supply,

and railways need very limited working capital because they offer cash

sales only and supply services.

Size of business

The working capital requirements of a concern are directly influenced by

the size of the business. Greater the size of a business unit, generally

larger will be the requirements of working capital.

Manufacturing process

38

In manufacturing business, the requirements of working capital increase

in direct proportion to length of manufacturing process. Larger the

process period of manufacture, larger is the amount of working capital

required. The longer the manufacturing time, the raw material and other

supplies have to be carried far a longer period in the process with

progressive increment of labor and service costs the finished product is

finally obtained.

Seasonal variations

In certain industries raw material is not available throughout the year.

They have to buy raw materials in bulk during the season to ensure the

uninterrupted flow and process them during the entire year. A huge

amount is thus blocked in the form of material inventories during such

seasons, which gives rise to more working capital requirements.

Rate of stock turnover

There is a high degree of inverse co-relationship between the quantum of

working capital and the velocity or speed with which the sales are

affected. A firm having a high rate of stock turnover will need lower

amount of working capital as compared to a firm having low rate of

turnover.

Firm’s credit policy

A concern that purchases its requirements on credit and sells its

products/services on cash requires lesser amount of working capital. On

the other hand the concern buying its requirements for cash and allowing

credit to its customers shall need larger amount of working capital.

39

Advantages Of Adequate Working Capital:

The main advantages of maintaining adequate amount of working capital are

as follows:

Solvency of the business

Adequate working capital helps in maintaining solvency of the business

by providing uninterrupted flow of production.

Goodwill

Sufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

Quick and regular return on investments

Every investor wants a quick and regular return on his investments.

Sufficiency of working capital enables a concern to pay quick and regular

dividends to its investors, as there may not be much pressure to plough

back profits. This gains the confidence of its investors and creates a

favorable market to raise additional funds in the future.

Ability to face crises

Adequate working capital enables a concern to face business crises in

emergencies such as depression because during such periods, generally,

there is much pressure on working capital.

40

Regular payments of salaries, wages and other day-to-day

commitments

A company which has ample working capital can make regular payments

of salaries, wages and other day-to-day commitments which raise the

morale of its employees, increases their efficiency, reduces wastages and

costs and enhances production and profits.

Easy loans

A concern having adequate working capital, high solvency and good

credit standing can arrange loans from the banks and others on easy and

favorable terms.

Regular supply of raw materials

Sufficient working capital ensures regular supply of raw materials and

continuous production

Factors Affecting Working Capital

Every business concern should have adequate working capital to run its

business operations. It should have neither redundant for excess working

capital nor inadequate or shortage of working capital. Both Excess, as

well as short Working capital positions are bad for any business.

Disadvantages Of Redundant Or Excessive Working Capital

Excessive working capital means idle funds, which earn no profit for the

business, and hence the business cannot earn proper rate of return on

investments.

41

When there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more changes of

theft, losses and waste.

Excessive working capital implies excessive debtors and defective credit

policy, which may cause higher incidents of bad debts.

When there is excessive working capital, relations with the bank and

other financial institutions may not be maintained.

It may result into overall inefficiency in the organization and also due to

low rate of return on investments, the value of shares may also falls.

Dangers Of Inadequate Working Capital

A concern, which has inadequate working capital, can pay its short-term

liabilities in time. Thus, it will loss its reputation and shall not be able to

get good credits facilities.

It becomes difficult for the firm to exploit favorable market conditions

and undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and creates

inefficiencies, increase costs and reduces the profits if the business.

42

Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum

balance of each of the working capital components. This includes making sure

that funds are held as cash in bank deposits for as long as and in the largest

amounts possible, thereby maximizing the interest earned. However, such cash

may more appropriately be "invested" in other assets or in reducing other

liabilities.

Working Capital Management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital

and to identify areas requiring closer management

The individual components of working capital can be effectively

managed by using various techniques and strategies

The main purposes of Working Capital Ratio Analysis are:

To indicate working capital management performance; and

To assist in identifying areas requiring closer management.

Three key points need to be taken into account when analyzing

financial ratios. These key points are as follows:-

43

The results are based on highly summarized information. Consequently,

situations, which require control, might not be apparent, or situations,

which do not warrant significant effort, might be unnecessarily

highlighted.

Different departments face very different situations. Comparisons

between them, or with global “ideal” ratio values, can be misleading.

Ratio analysis is somewhat one-sided; favorable results mean little,

whereas unfavorable results are usually significant.

However, financial ratio analysis is valuable because it raises questions and indicates

directions for more detailed investigation.

Sources Of Cash

The various sources of cash that provide the money to fund the working capital

include the following:-

Existing cash reserves

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long term loans

Profit or net income

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

company requires Capital for the procurement of raw materials, conversion

process and for the time taken to recover cash from the debtors. All these

process takes time and money.

44

A company estimates its inventory conversion period and debtors collection

period and subtract the average payment period to determine its Cash

Conversion Cycle. It is the period for which the company requires the cash.

Inventory conversion period + debtors collection period is the gross working capit

ASSESSMENT OF WORKING CAPITAL

REQUIREMENTS

( FORM- I )

Particulars of the existing /proposed limits from the Banking System

(Limits from all Banks and Financial Institutions as on date of application)

Sl.

No

(1)

.

Name of the bank/

Financial Institutions

(2)

Nature

of

facility

(3)

Existing

Limit

(4)

Extent to which

limits were

utilized during

last 12 month.

Balance as

on

31/3/2009

(7)

Balance as

on

31/3/2009

(8)

Limits now

requested for

the year 2007-

09

(9)

Max(5) Min(6)

A

1.

2.

Working capital

Limits

Indian Overseas Bank

State Bank of India

Standard Chartered

Bank

45

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

Bank Of Baroda

The Maharashtra State

Cooperative Bank

The West Bengal State

Cooperative Bank

Madhya Pradesh State

Cooperative Bank

The Karnataka State

Coop. Bank

The Punjab State

Coop. Bank

ICICI Bank Ltd.

IDBI Bank Ltd.

HSBC Bank Ltd.

46

Total

Form -1 consists of existing limits from all the banks and financial institutions as on date of

application of cash credit. It Contains following items:-

Name of the banks –there are all together 14 banks with different existing

limits who together has sanctioned a limit of 1450crs for the year 2006-07 in

the lieu of working capital requirement of the company Existing limits: the share of each bank in providing the existing limit of 1450crs

to the company. Balance outstanding as on the end of previous financial year i.e.31/3 2006:-

This column displays the amount currently being used by the company of the

limits sanctioned by each banks. The amount outstanding to each bank is

displayed in the column at the end of previous financial year. Balance outstanding as on end of current financial year i.e.31/03/2007:- this

column displays the amount outstanding to each bank at the end of financial

year 2006-07. The difference in the amount of out standing between the year

end 2005-06 and 2006-07 is repaid or withdrawn by the company. Limits requested for upcoming year i.e. 2007-08:- the amount requested by the

company for the upcoming year i.e. 2000crs is displayed in this column.

This statement is prepared to inform the bankers about the limits sanctioned

by the consortium in the previous year, credit status, and to request for new

cash credit limit.

Form II: Operating statement

47

SI.n

o.

Particulars 2008-09 Actual 2009-10 Projections

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Total

1..

2.

3.

4.

5.

Gross Sales

(i)Domestic sales

(ii)Export sales

Total sales

Less: Excise duty

a)Net Sales(1-2)

b)Subsidy from

FICC

C)Net sales

including

Subsidy[a+b]

% age rise or fall in

net sales as

compared to

previous year

Cost of Sales

i)Raw materials

(including stores and

other items used in

the process of

manufacture)

48

a)Imported

b)Indigenous

ia)Purchase of

finished goods

a)Imported

b)indigenous

ii) Other spares

a)Imported

b)Indigenous

iii)Power and fuel

iv)Direct Labour

v)Other

Manufacturing

Expenses

vi)Depreciation

vii) sub-Total( i to vi )

viii)Add: opening

49

stock in process

sub –total

ix)

a)Less; closing

stock

b)Less: stock Trf.

For self

consumption

x)cost of production

xi)Add: opening

stock of finished

goods

sub – total

xii)Deduct: closing

stock of finished

goods

xiii) Sub-Total(Total

cost of sales)

Selling and General

50

6.

7.

8.

9.

10.

11.

Administration

Expenses

Sub –total (5+6)

Operating profit

before interest (3-7)

Interest

Operating profit after

interest(8-9)

i)Add:other non-

operating income

a)Misc.income

b)Interest on

Deposits with Banks

c)Dividend income

d)Handling

remuneration from

GoI on imp.

Fertilizer

e)others

sub – total(income)

ii) Deduct other non-

51

12.

13.

operating expenses

a)Prior period

Expenditure/icome

b)Provision for taxes

c)Handling

Expenses on

imported fertilizer

d)Others

sub total (expenses)

iii)Net of other non-

operating income/

expenses(net

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

Profit before

tax/loss[10 +11(iii)]

Provision for taxes

Net

profit/loss(12+13)

a)contribution to co-

operative edu. Fund

b)Donations

52

14.

15.

16.

c)Equity dividend

paid

d)dividend rate

Retained profit(14-

15)

Retained Profit/ Net

Profit (%)

FORM-II

It is the operating statement of the company for two previous year i.e. 2005-06 and

2006-07 and the current year i.e.2007-08.

First of all the net sales is calculated, secondly the calculation of cost of sales is

done, which contains total cost of production and selling, general and administrative

expense.

The operating profit or loss is calculated by subtracting the total cost of production

and selling, general and administrative expense from net sales. After then the

operating profit or loss after interest is calculated by subtracting interest from the

operating profit. To get the PBT i.e. profit before tax other non operating income like

interest, rent, lease rent on machine, and miscellaneous interest are added and

other non operating expenses like other expenses and donation is subtracted.

Net profit or loss is derived by subtracting the provision for taxes. Again by subtracting the

dividend paid and partners salary, retained profit can be derived.

53

This statement is submitted to the bank in order to display all the operations profit and loss

and retained profit to the consortium of banks providing cash credit

Form III: Analysis of Balance sheet

SL.

No.

Particulars 31-March-

07

Actual

(1)

31-March-

08

Actual

(2)

31-March-

09

Actual

(3)

31-March-

10

Projection

(4)

1.

2.

3.

4.

5.

6.

7.

CURRENT LIABILITIES

Short-term borrowings from banks(including

bills purchased, discounted excess

borrowings placed on repayment basis)

i)From applicant bank-WCD

From applicant bank-CC/Bills

ii)From other banks

iii) Of which BP&BD

Sub total [A]

Short term borrowings from others

Sundry Creditors[ Trade]

Advance Payments from

Customers/Deposits from Dealers

Provision for Taxation

Dividend payable

Other statutory Liabilities[Due within one

year]

Deposits/Installment of Term loans/DPG’s

54

8.

9.

10.

11.

12

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

Debentures etc.[Due with one year]

Other Current Liabilities & provisions [Due

within one year]

Total Current Liabilities[total of 1 to 9 ]

TERM LIABILITIES

Debentures [Not maturing within one year]

Preference Shares [Redeemable after one

year]

Term loans [Excluding installments payable

within one year]

Deferred payment credits [Excluding

installments due within one year]

Other term loans[ unsecured]

Other term liabilities

TOTAL TERM LIABILITIES [Total of 11 to 16]

TOTAL OUTSIDE LIABILITIES [total of

10+17]

NET WORTH

Other share capital

General Reserve

Revaluation Reserve

Other Reserves [Excluding Provisions]

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

Account

55

24.

25.

28.

29.

30.

NET WORTH

TOTAL LIABILITIES[18+24]

CURRENT ASSETS

Cash& Bank Balances

Investments [other than ling term

investments ]

i)Government &Other Trusted Securities

ii)Fixed Deposits with banks

i)Receivables other than deferred& exports

[including Bills purchased and Discounted by

banks]

ii) Export receivables [including bills

purchased/Discounted by bands ]

Installment of Deferred receivables[ Due

within on year]

Inventory

i)Raw Materials [including stores and other

items used in the process of manufacture ]

a)Imported

b)Indigenous

ii)Stocks-in-process

iii)Finished Goods

iv) Other consumable Spares

a)Imported

b) Indigenous

Advances to suppliers of Raw Material

56

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

Stores/Spares

Advances payment of Taxes

Other Current Assets [including subsidy

Recoverable]

TOTAL CURRENT ASSETS[Total of 26 to

33]

FIXED ASSETS

Gross Block [Land&Building, Machinery,

capital work-in-progress]

Depreciation to date

NET BLOCK[35-36]

OTHER NON-CURRENT ASSETS

Investments /book debts/advances/deposits

which are not current Assets

[i]a)Investments in subsidiary companies/

affiliates

b)Others

[ii]Advances to suppliers of capital Goods &

Contractors

[iii] Deferred receivables maturity exceeding

on year

[Iv]Others

Non-consumable stores &spares

Other non-current assets including dues

from directors

TOTAL OTHER NON-CURRENT ASSETS

[Total o f 38 to 40]

57

41.

42.

43.

44.

45.

46.

47.

Intangible Assets

[Patents, goodwill, preliminary expenses,

bad/doubtful debts not provided for, etc.]

TOTAL ASSETS [Total of 34,37,41&42]

TANGIBLE NET WORTH [24-42]

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

42)] To tally with [34-10]

Current Ratio[ item 34/10]

Total Outside Liabilities/ Tangible Net

Worth[18/44]

ADDITIONAL INFORMATION

[I] Arrears of cumulative Dividend

[ii]Gratuity liability not provided for

[iii]Disputed excise /customs /tax liabilities

[iii]Other Liabilities not provided fo

FORM - III

Form III is the analysis of balance sheet of the company.

First of all the total outside liabilities are calculated by adding total current liabilities

which includes short term borrowings from bank, short term borrowing from others,

sundry creditors, advances provision for taxation dividend payable, other statutory

liabilities, deposits, debentures (redeemable within one year) and term liabilities

which includes debentures preference shares (redeemable after one year), term

loans, deferred payments credits, term deposits, other term liabilities.

Secondly total liabilities are calculated by adding total outside liabilities and Net

Worth.

58

Thirdly the calculation of total asset is done by adding total current assets, net block,

total other non current assets and intangible assets.

Fourthly tangible Net Worth is calculated by subtracting intangible assets from Net

Worth.

Net working capital is calculated by adding total term liabilities with Net Worth and

subtracting Net Block, totals other current asset and intangible asset to tally with total

current assets less total current liabilities. The sole purpose of this form is to bring

out the excess of total current assets over current liabilities i.e. the net working

capital and tally the same with the total term liabilities + Net Worth – Net Block, total

other current assets and intangible assets.

Form IV: Comparative Statement of current Assets & current Liabilities

SI.n

o.

Particulars 2008-09 Actual 2009-10 Projections

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Total

1.

A.

A. Current

Assets Raw

Materials( including

stores and other

items used in the

process of

manufacture )

a)Indigenous

Months

59

2.

3.

4.

5.

6.

7.

consumption

Other consumable

spares, excluding

those included in

1above

a)Imported

months consumption

b)Indigenous

Months,

consumption

Stock in progress

months consumption

Finished Goods

Months, cost of

sales

Receivables other

than exported

&deferred

receivables

Export receivables

Advances to

suppliers of raw

materials &

stores/spares,

60

8.

9.

10.

11.

12.

consumables

Other current assets

including cash bank

balances& deferred

receivables due

within one year

Total Current Assets

B.

Current

liabilities( other than

bank borrowing for

working capital)

Creditors for

purchase of raw

materials, stores

and consumable

spares

Advances from

customers

Statutory liabilities

Other current

liabilities[ specify

major items ] short

term borrowing,

unsecured loans ,

dividend payable,

61

13.

14.

instalment of term

loan, deffered

payment credit,

public deposits ,

debentures etc.

Total [ to agree with

sub-total B – Form

iii]

Form IV

Form IV is the comparative statement of current assets and the current liabilities

where all the items of current assets and current liabilities are shown in details.

Form v: Computation of Maximum permissible bank finance for working capital

SI.n

o.

Particulars 2008-09 Actual 2009-10 Projections

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Total

62

1.

2.

3.

4.

5.

6.

Total current Assets

( 9 in form iv)

Total other current

Liablities ( other

than bank

borrowing)

Working Capital Gap

WCG (1-)

Actual/ Projected net

working capital (45

in form iii)

Item 3 minus item 4

Assessed Bank

Finance

a)

b)

ii)

63

Form V

Form V is the computation of maximum permissible Bank Finance for the Working

Capital.Items content

Current Assets Current Liabilities The working capital Gap is calculated by subtracting the current liabilities from

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

The bank finances the minimum of the above two, i.e. the minimum of stipulated Net

Working Capital and the Actual Net Working Capital

SL

NO

PARTICULARS 31-MARCH-

07

ACTUALS

(1)

31-MARCH-

08

ACTUAL

(2)

31-MARCH-

09

FOLLOWING

YR.

PROJECTION

(3)

64

1.

2.

3.

SOURCES

a)Net profit (after tax)

b)Depreciation

c)Increase in capital

d) Increase in Term Loans

(incl.Public deposits)

e) Decrease in

i) Fixed assets

ii) Other non –current assets

f) Others

g)Total

USES

a)Net Loss

b)Decrease in share capital

c)Decrease in Term Loans (Including

public deposits)

d)Increase in

i)Fixed assets

ii)Other non-current assets

e) Dividend payments

f)Others

g)TOTAL

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

Increase / decrease in current

65

4.

5.

6.

7.

8.

assets (As per details given

below)

Increase /decrease in current

liabilities other than bank borrowings

( as per details given below)

Increase / decrease in working

capital gap

Net surplus (+)/deficit(-)

Difference of 3 and 6

Increase /Decrease in bank

borrowings

INCREASE / DECREASE IN NET

SALES [Including subsidy]

The Bank sanction the 75% of the working capital Gap i.e. the amount excess of the

current asset over the current liability. For instance the Working Capital Gap of

IFFCO is Rs. 2670 crore then the company will be eligible for a loan of 2000 crore

only.

The reason behind this evaluation is because the Current Assets that is the Stock of

Finished Goods, Book debts and the Subsidy receivable remains hypothecated with

the Consortium (consortium is the group of banks that together provide the Cash

Credit to the company of the agreed limit). This is done because if the company fails

to repay the banks loan then the bank can liquidate its current assets and recover its

money. The original value of current assets cannot be recovered if it is liquidated

instantly. Thus to be in the safer side the 75% of the total amount of working capital

gap is provided as cash credit.

66

CHAPTER - 3

67

The Financial Performance has been analyzed by grouping the Financial

Ratios in four broad categories:

1. Liquidity Ratio

2. Leverage Ratio

3. Profitability Ratios

4. Activity Ratios

1. Liquidity Ratio: - Liquidity ratio measures the firm’s ability to meet

current obligations.

Current Ratio:-

For 2007-08 = Current asset/ Current liabilities = 5575.74/1371.57 = 4.21 i.e. =4.21:1For 2008-09 =7672.99/3782.89 =2.41

Objective:-

Current ratio shows the short term financial position of the business.

This ratio measures the ability of the firm to pay its current liabilities. The ideal

current ratio is supposed to be 2:1 i.e. current assets must be twice the current

liabilities. In case this ratio is less than 2:1 the short term financial position is not

supposed to be very sound and in case, it is more than 2:1, it indicates idleness of

working capital.

Regarding IFFCO, the current ratio is above the standard yardstick that shows the

firm’s ability to pay its current liabilities. Company has 4.21 Rs. Current assets for

1Rs. Current liabilities in financial year 2007-08. But it decreased in 2008-09 but still

yet it is up to the standard yardstick.

68

Year Current

Assets

Current Liabilities Current Ratio =Current

Assets / Current Liabilities(Rs.In

Lakhs)

(Rs. In Lakhs)

2003-04 2564.02 902.44 2.842004-05 2603.98 1104.84 2.362005-06 4748.98 1361.59 3.492006-07 6071.97 1201.23 5.052007-08 5775.74 1371.57 4.212008-08 7672.99 3782.89 2.41

2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

1000

2000

3000

4000

5000

6000

7000

8000

9000

Current Assets Current Liabilities

2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

Current Ratio

Current Ratio

69

Quick ratio:-

For 2007-08,

= Current asset – Inventory /Current

Liabilities

= 5775.74-1577.10/1371.57

= 3.06

i.e. = 3.06:1

For 2008-09

=7672.99-1731.36/3182.89

= 1.87

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

This ratio measures the ability of the business to pay its current liabilities in a real

way. The ideal quick ratio is supposed to be 1:1 i.e. quick assets must be equal to

the current liabilities. In case, the ratio is less than 1:1 it shows a very weak short

term financial position and in case it is more than 1:1 it shows a better short-term

financial position.

70

2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

3

3.5

Quick ratio

quick ratio

2. Leverage Ratio:-

Judge the long term financial position of the firm.

a) Total Debt Equity Ratio :-

= Total debt/ net worth

= 6775.64/3688.66

= 1.84

i.e. =1.84:1

For 2008-09

= 12802.78/ 3958.87

=3.23

Objective: - Debt to total funds (net worth) ratio shows the proportion of long

term funds. Which have been raised by way of loans. This ratio measures the long

term financial position and soundness of long term financial policies. The debt to

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total fund ratio of 2:3 or 0.67 is considered satisfactory. A higher proportion is not

considered good and treated an indicator of risky long term financial position of the

business. It indicates that the business depends too much upon outsider’s loan.

Regarding IFFCO, the total debt equity ratio is 3.23:1 which shows that company is

using more debt from outside to meet its working capital requirements, which is not a

good indicator.

b) Coverage Ratio:-

Interest coverage ratio or the times –interest earned is used to test the firm’s debt

servicing capacity.

For 2007-08,

Interest coverage = EBIDT/ Interest

= 1180.82/389.37

= 3.03

For 2008-09

= 1935.55/1023.20

=1.89

Objective:- The interest coverage ratio shows the number of times the interest

charges are covered by funds that are ordinary available for their payment. A higher

ratio is desirable, but too high a ratio indicates that the firm is very conservative in

using debt, and that it is not using credit to the best advantage of shareholders. A

lower ratio indicates excessive use of debt, or inefficient operations. The firm should

make efforts to improve the operating efficiency, or to retire debt to have a

comfortable coverage ratio.

In case of IFFCO the interest coverage ratio 1.89 shows that the firm is earning

sufficient profit to meet its interest obligations on the short term and long term

borrowings.

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3. Profitability Ratio:-

It measures the overall performance and effectiveness of the firm.

A) EPS (Earning per share) :-

For 2007-08,

= PAT (profit after tax) /no. of Shares

= 258 cr. /4239 lakhs

= 6.08

For 2008-09,

= 360/42.39

= 8.43

Objective: - Earning per share helps in determines the market price of the

equity share of the company. It also helps to know whether the company is able to

use its equity share capital effectively with compare to other companies. It also tells

about the capacity of the company to pay dividends to its equity share holders.

Regarding IFFCO the earning per share has increased in year 2008-09 which shows

that the company is able to use its equity share capital effectively.

b) Return on Capital Employed :-

For 2007-08

= PBT (profit before tax)/

Capital employed

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= 380.52/10830.235

= 3.51

For 2008-09,

= 441.95/14151.13

= 3.12

Objective: - Return on capital employed measures the profit, which a firm earns on investing a

unit of capital. The profit being the net result of all operations, the return on capital

expresses all efficiencies and inefficiencies of a business. This ratio has a great

importance to the share holders and investors and also to management. To

shareholders it indicates how much their capital is earning and to the management

as to how efficiently it has been working. This ratio influences the market price of the

shares. The higher the ratio, the better it is.

Regarding IFFCO the return on capital has decreased in the year 2008-09 which is

now 3.12%. Due to the higher cost of production it decreased. This ratio influences

the market prices of the shares.

5. Activity Ratio:-

Activity ratios are employed to evaluate the efficiency with which the firm

manages and utilizes its assets.

a) Debtor’s turnover ratio :- = Sales/ Avg. debtors = 12162.82/ 3194.69

= 3.81

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Objective: - This ratio indicates the efficiency of the concern to collect the

amount due from debtors. It determines the efficiency with which the trade debtors

are managed higher the ratio, better it is as it proves that the debts are being

collected very quickly.

Regarding IFFCO the debtor’s turnover ratio is 3.81:1 which shows the efficiency of

the company to collect the amount due from debtors is excellent.

b) Working capital turnover ratio :- For 2007-08, = Sales / Avg. working Capital = 12162.82/4642.11 = 2.62For 2008-09, = 339.33/4447.135 = 7.63

Objective: - This ratio indicates the number of times the utilization of working capital in the

process of doing business. The higher is the ratio, the lower is the investment in

working capital and the greater are the profits. However, a very high turnover

indicates a sign of over trading and puts the firm in financial difficulties. A low working

capital turnover ratio indicates that the working capital has not been used efficiently.

In case of IFFCO, there is big change in working capital ratio that is 2.62:1 to 7.63:1.

That shows that the requirement of working capital management of society is

excellent with minimum collection period of debtors and cash realization.

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2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

5000

10000

15000

20000

25000

30000

35000

Net Sales Working Capital

2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

7

8

9

working capital ratio

c) Fixed assets turnover ratio:-

For 2007-08,

= Net sales /Net fixed assets

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= 12162.82/ 5099.75

= 2.38

For 2008-09

= 33933/5213

= 6.32

Objective: - This ratio expresses the number to times the fixed assets are

being turned over in a stated period. It measures the efficiency with which fixed

assets are employed. A high ratio means a high rate of efficiency of utilization of

fixed asset and low ratio means improper use of the assets.

Regarding IFFCO the fixed assets turnover ratio in year 2008-09 is 6.32:1 that

shows the optimum utilization of fixed assets. In comparison of previous year the

ratio has increased from 2.38:1 to 6.32:1.

Subject:-

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

fertilizer sector for the year ended 31st March, 2008. The salient features brought

enclosed statement is given as under:

1. Physical Performance:

During the Financial year2007-08, IFFCO has produced 68.48 lakh MT

fertilizer which is highest amongst the all other fertilizer companies. However, the

total fertilizer production of top three companies in the fertilizer sector for the

financial year 2007-08 is as under:

Name of the Production (LMTs)UREA COMPLEX TOTAL

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companyIFFCO 39.64 28.84 68.48NFL 32.68 00.00 32.68RCF 18.32 04.68 23.00

Similarly IFFCO has achieved highest sales of 68.48 lakh MT, which is also highest

amongst all companies in the Fertilizer sector. However, other than IFFCO Rank-

wise other two companies are NFL and RCF, which have achieved sales of 32.68

lakh MT

and 23.00 Lakh MT respectively.

2003-04 2004-05 2005-06 2006-07 2007-08 2008-090

10

20

30

40

50

60

70

80

UREA COMPLEX FER. TOTAL

Financial Performance:-

Since IFFCO has achieved highest sales of 68.48 lakh MT fertilizers amongst all

fertilizer companies during the year 2007-08, the performance of the society is also

highest in terms of all financial parameters i.e. Turnover, operating Profit, Profit

before Tax and Profit after Tax. However, the ranking of top three companies in each

of these financial parameters is given as under:

NAME OF THE COMPANY Turnover( Amount Rs. Crore )

1. IFFCO 12162.82

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2. RCF 5137.27

3. NFL 4141.00

FINDINGS:- After the analysis of the components of current assets & current liabilities and the

trends of working capital, we find that :-

Current assets are increasing more than current liabilities.

Cash & Bank Balances have decreased sharply, which indicates proper utilization of

funds at IFFCO.

Position of inventory is Very Good in current assets (31.99%). Inventory Turnover

Ratio increases consistently, which shows greater degree of utilization of inventory

during the study period.

Position of Debtors To Current Assets is average (14.760 %). This ratio had increased

from the year 2001-02 to 2003-04 showing a liberal credit policy followed by the

company.

Large part of working capital is involved in maintaining inventory.

Working capital of the company increases from 149914 in 2004-05 to 33873 in 2005-

06.

Inventory as a component of current assets is high (35.78%) as compared to the other

components.

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CONCLUSIONS & SUGGESTIONS

Working capital is one of the most important aspects of operational efficiency of

business. Working Capital plays a very important role in the functioning of any

organization. Both the current assets & current liabilities are very much

influencing factors on the working capital of an organization.

After the discussion and analysis of the financial position of IFFCO Ltd.., it is

clear that the working capital of IFFCO is in sound position. Working capital is

not measurable by only current assets & current liabilities but there are

some other factors also that have an influence on the working capital.

In current assets also, there are two most important factors that are Debtors and

Inventory that affect working capital. In IFFCO Ltd. Inventory and Debtors are

efficiently managed to strengthen the position of the organization both in short

term and long terms.

After analyzing and interpreting the financial data of INDIAN FARMERS

FERTILIZER COOPERATIVE LIMITED with the help of Ratio Analysis,

the following suggestions were given to the organization for further betterment

& improvement in the working capital:

The present status and levels of current assets is extremely good and

therefore it requires proper maintenance.It can be observed that there is

though large sum of current assets than the ideal ratio 2:1, however it is

because of the selling of government special Bonds.

The current percentage of cash is too high which means there is a need to

route this idle cash inorder to increase the profitability of the firm.

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BIBLIOGRAPHY

Book

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

edition, Tata Mc-Grawhill Publishing company Ltd. Dr.S.N.Maheshwari,”Management Accounting and Financial control” Thirteen

edition, Sultan Chand & Sons.

JOURNALS

The Management Accountant,vol.39,no.7,july 2007 The Management Accountant,vol.39,no.5,july 2007 Revenue Budget IFFCO Account Manual IFFCO Statement Of F&A Section IFFCO Annual Reports of IFFCO

WEB SITES

www.iffco.nic.in

www.google.com

www.indiatimes.com

www.investopedia.com

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