working capital management live project report by pranay jindal in jindal steel and power
TRANSCRIPT
Live Project ReportOn
Working Capital ManagementOf
Jindal Steel & Power Limited
Summer Internship Project Report Submitted In Partial Fulfillment of the Requirements for the Post Graduate Diploma in Management
Submitted by
Parnay Deep
Supervisors: Company Guide: Ankit (Sr.manager Finance)
KURUKSHETRA UNIVERSITYKURUKSHETRA
Acknowledgement
I have to thank KURUKSHETRA UNIVERSITY KURUKSHETRA for giving me an opportunity to
undertake my project work and for giving me knowledge in the field of finance during my
two years course.
I would like to thanks Mr. ANKIT, Sr.Manager - Finance for their valuable guidance and
support in completion of live project at the Jindal Steel & Power Ltd. I would express my
sincere thanks to all the staff members of Jindal Steel & Power Ltd, without their support,
this project would not have been a success.
Last but not the least I would like to thank those person whose encouragement and ideas
enriched my project.
Parnay Deep
Table of Content
Executive Summary - - - - - - - 5
Introduction - - - - - - - - 6
Objective of Study - - - - - - - 9
Theoretical Framework of Working Capital Management - 10
The House of Jindal’s - - - - - - 13
JSPL & its Products - - - - - - - 16
Research Methodology- - - - - - - 22
Analysis of Working Capital Management of JSPL - - 23
Working Capital policy of JSPL - - - - 24 Working Capital Borrowings from Bank - - - 27 Financial Ratio Analysis for Working Capital- - - 28 Alternative Investment Policies - - - - 52 Managing the Components of Working Capital- - - 54 Determination of Operating Cycle - - - - - 62 Analysis of Asset Percentage - - - - 67 Statement of Change of Working Capital- - - - 71 Estimating Working Capital- - - - - - 72 Regression Analysis - - - - - - 75 Trend Analysis for Working Capital - - - - 78 Current Asset Financing - - - - 84
Findings and Suggestions - - - - - - - 85
Limitations - - - - - - - - - 87
Bibliography - - - - - - - - 88
References - - - - - - - - - 90
Glossary - - - - - - - - 91
List of Tables
No Tables Name Page No1 ESTIMATED CASH FLOW FOR APR 10 TO JUNE 10 242 Working Capital Borrowing from Banks 273 Return on Working Capital 284 Liquidity ratios 295 Current Ratio 306 Acid Test Ratio for JSPL 317 Comparison between current ratio and acid test ratio 328 Cash ratio for JSPL 339 Working capital management ratios 34
10 Current asset turnover for JSPL 3511 Working capital turnover for JSPL 3612 Working capital to gross sale for JSPL 3713 Working capital to cost of sale for JSPL 3914 Debtor’s turnover ratio for JSPL 4015 Average collection period for JSPL 4116 Creditor’s turnover ratio for JSPL 4317 Inventory turnover ratio for JSPL 4418 Inventory holding period for JSPL 4519 Current asset to total asset ratio for JSPL 4620 Cash to current asset ratio for JSPL 4721 Inventory to current asset ratio for JSPL 4822 Current liabilities to total liabilities ratio for JSPL 4923 Loan & Advances to Current assets ratio for JSPL 5024 Table showing alternative current assets investment policies 5325 Table showing different cash ratios 5626 Table showing payables management 5727 Table showing Inventory turnover ratio 5928 Table showing analysis of asset percentage 6729 Table showing analysis of working capital 6830 Table showing analysis of current assets 6931 Table showing analysis of current liabilities 7032 Table showing statement of change in working capital 7133 Table showing Production capacity and Sales 7635 Table showing Sales and working capital 77
List of Figures
No Figures Name Page No1 Cash Cycle 72 Working capital flows 123 House of Jindal’s 134 JSPL & its Products 165 Working capital borrowing from Banks 276 Return on working capital 287 Current Ratio 308 Acid Test Ratio For JSPL 319 Cash Ratio for JSPL 33
10 Current Asset Turnover 3511 Working Capital Turnover For JSPL 3612 Working Capital to Gross Sale for the JSPL 3813 Working Capital to Cost of Sale for the JSPL 3914 Debtor’s Turnover Ratio for the JSPL 4015 Average Collection Period for the JSPL 4216 Creditor’s Turnover Ratio for the JSPL 4317 Inventory Turnover Ratio for the JSPL 4418 Inventory Holding Period for the JSPL 4519 Current Asset to Total Asset Ratio for the JSPL 4620 Cash to Current Asset Ratio for the JSPL 4721 Inventory to Current Asset Ratio for the JSPL 4822 Current liabilities to Total liabilities 5023 Loan & Advances to Current Asset 5124 Alternate current assets investment policies 5325 Percentage of Current Asset to Fixed Asset 6726 Net working Capital 6827 Current Ratio Trend 7928 Cash Ratio Trend 7929 Current Asset Turnover Trend 8030 Working Capital Turnover Trend 8031 Debtor Turnover Trend 8132 Creditor Turnover Trend 8133 Inventory Turnover Trend 82
Executive summary
The management had to depend upon certain relevant information for taking various strategic
decisions. The information is made useful by its analysis and interpretation. My project was
related to “Analysis of Working Capital Management of Jindal Steel Power Ltd.”.
This project report is the outcome of my eight-week live project in Jindal Steel & Power Ltd.
My attempt is aimed to analyze the various aspects of working capital management of Jindal
Steel & Power Ltd.
It was found that the operating cycle of the company is bit disturbed. By adopting various
calculation and analysis and then making interpretation with the solution of specific problem
I put my efforts on giving appropriate suggestion to the company. To this context I adopted
various methods and techniques like Trend analysis by using statistical tool, Regression
analysis, a work towards the optimal level of working capital, estimation of working capital,
analyzing of operating cycle and use of various ratio to put an exact picture of company.
The report also consists of qualitative and quantitative analysis of Working Capital
Management of Jindal Steel & Power Ltd. In the course of my study, I found that the
organization faces the problem of liquidity.
Introduction
Working Capital:
“Working Capital includes the current assets and current
liabilities areas of the balance sheet. Working Capital can be
called by its alternative name - "Net Current Assets”.
Working Capital Management is the process of planning and controlling the level and mix of
current assets of the firm as well as financing these assets. It may be regarded as a life blood
of a business; its effective provision can do much to ensure the success of a business, while
its efficient management may lead not only to loss of profits but loss to ultimate downfall in a
going concern. Analysis of working capital is of major importance to internal and external
analysis because it is closely related to the current day-to-day operations.
Working Capital is the name given to the "short-term" area of the balance sheet. Working
Capital includes four balance sheet items:
Stock - stocks of raw materials, partly completed production and finished goods
awaiting sale.
Debtors - amounts owed TO the company, mainly from customers in respect of
sales made on credit.
Creditors - amounts owed BY the company, mainly to suppliers of raw materials,
services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax
demands, unpaid dividends and other items.
Cash - bank balances, cash holdings and short-term investments.
Some of the decisions taken in working capital management are:
An adequate supply of raw materials.
Cash to meet the operational payments.
The ability to grant credit to customers.
Investment in various current assets.
Appropriate sources of fund to finance current assets.
Proportion of long term and short term funds to finance current assets.
Cash Cycle:
As working capital moves from one process to another, it changes from one asset to another
i.e., from cash to inventories and then to receivables and then back to cash. This movement is
represented by cash cycle as below:
Figure 1: Cash Cycle
Objective of Working Capital Management:
Two fold objective of working capital management
a) Maintenance of working capital, and
b) Availability of ample funds at the times of need.
Uses of Working Capital:
The typical uses of working capital are as follows:
Adjusted net loss from operations
Purchase of non-current assets:
Repayment of long-term debt (debentures or bonds) and short-term debt (bank
borrowing)
Redemption of redeemable preference shares 5- Payment of cash dividend.
Payment of cash dividend.
Advantages of adequate working capital:
Increase in debt capacity and goodwill.
Increase in production efficiency
Exploitation of favorable opportunities.
Meeting contingencies and adverse changes
Available cash discount:
Solvency and efficiency of fixed assets
Attractive Dividend to Shareholders
Disadvantage of inadequate working capital:
Loss of goodwill and creditworthiness
Firm can’t make use of favorable opportunities
Adverse effects of credit opportunities
Operational inefficiencies
Effects on financial capacity
Non-achievement of Profit Target
Dangers of Redundant working capital:
Low rate of return on capital
Decline in Capital and Efficiency
Loss of Goodwill and Confidence
Evils of Over-Capitalization
Destruction of Turnover Ratio
Company must have adequate working capital pursuant to its requirements. It should neither
be excessive nor inadequate. Both situations are dangerous. While inadequate working
capital adversely affects the business operations and profitability, excessive working capital
remains idle and earns no profits for the company. So company must assure its working
capital is adequate for its operations.
Objective of Study
This project was undertaken to analyze the working capital policies, working capital
management of the company and to reduce down their problems and finding the solutions
with respect to the working capital management of the company.
The objective of the study is to provide the solutions for reducing down the duration of the
operating cycle, to analyze the working capital position of the company and the liquidity
position, finding out the problems that the company is facing in managing the working capital
and showing trend of particular ratios in future and at same suggesting them to solve their
problems.
To study the working capital concept.
To see how the day-to-day operations of the company takes place.
To study the working capital management process in Jindal Steel & Power Ltd.
To see whether the company is prepared with enough working capital to face any
kind of contingencies.
To compare the performance of W/C for a particular year with previous years.
To assess Liquidity position, Long term solvency, operational efficiency, and
overall profitability of JSPL.
Providing suggestions to solve the problems of the company.
Theoretical Framework of Working Capital Management
Many profitable companies fail each year because their management teams fail to manage the
area of working capital. The term working capital is closely related to the term funds and has
two meaning. It is used to mean current assets minus current liabilities. In simple words it is
the investment needed for carrying out day-to-day operations of the business smoothly.
Working capital is just like the heart of the business. If it becomes weak, the business can
hardly prosper and survive. It is an index of the solvency of a concern. Working capital
management thus throws a challenge and should be a welcome opportunity for a financial
manger that is ready to play an important role in organization.
Sources of Working Capital:
The company can choose to finance its current assets by long-term or short-term sources, or a
combination of them.
A) Long term Permanent Working Sources of Capital: Long-term sources of permanent
working capital include equity and preference shares, retained earnings, debentures and other
long-term debts from public deposits and financial institutions. Financing through long-term
means provides stability, reduces risk of payment, and increases liquidity of the business
concern.
Various types of long-term sources of working capital are as follows:
Issue of shares
Retained Earnings
Issue of Debentures
Long term debts
Other sources
B) Short-term Temporary Working Source of Capital: Temporary working capital is
required to meet the day-to-day business expenditures. The variable working capital would
finance from short-term sources of funds, and only for the period needed. It has the benefit of
low cost and establishes closer relationships with bankers.
Some of the sources of temporary working capital are given below:
Commercial Banks: In the form of short-term loans, cash credit, and overdraft and
through discounting the bills of exchanges.
Public Deposits
Various Credits: Trade credit, Business credit papers and customer credit are other
sources of short-term working capital. Credit from suppliers, advances from
customers, bills of exchanges, promissory notes, etc helps to raise temporary
working capital.
Reserves and other funds
Sources of Additional Working Capital:
Existing cash reserves
Profits (when you secure it as cash)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Long-term loans
Various tools to measure & analyses working capital of a firm:
Fund Flow Analysis: This technique helps to analysis the variation in working
capital contents between two balance sheet dates. Fund flow analysis shows how
much funds have been obtained from different sources to finance working capital
and how they have been utilized. Due to need as well as importance of fund flow
analysis finance managers of almost all the organization use it to make sound
financial decisions.
Working Capital Flows: Information regarding the financing and investment
activities of an enterprise and the changes in the financial position for the period
of time is essential for financial statement, used by owners as well as creditors for
making business decisions.
Changes in Working Capital
Closing Balance of Working
Capital
Opening Balance of Working capital
USES OF WORKING CAPITAL
Redemption of long term debtInvestmentsAcquisition of fixed assetsPayment of dividend
SOURCES OF WORKING CAPITAL
Operations of the businessIssue of long-term debtSale of fixed investmentsSale of long-term investments
Further, this technique can be used only by the internal administration in its
control of working capital. Moreover, some important and significant question
remains unanswered, such as whether the capital is being used most efficiently
and whether the current financial position of the firm has improved.
Working Capital Flows
Figure 2: Working capital flows
THE HOUSE OF JINDAL’S
Figure 3: House of Jindal’s
Shri. Naveen Jindal
ORGANISATIONS PROFILE
The House of JINDAL’s
Group profile:
In the world of business, the Jindal Organization is a celebrity. Ranked 4th amongst the top
Indian Business Houses in terms of assets, the group today is a US $ 12 billion
conglomerate
Jindal Organization aims to be a global player. For that, it is committed to maintain
international quality standards, efficient delivery schedule, competitive price and excellent
after sales service.
Jindal Organization set up in 1970 by the steel visionary late. Mr. O.P. Jindal has grown from
an indigenous single unit steel plant in Hisar, Haryana to present multi-billion, multi-location
and multi-product steel conglomerate and the organization is still expanding, integrating,
amalgamating and growing. New directions, new objectives, but the Jindal motto remains the
same – “We are the Future of Steel”.
The group has been technology driven and has a broad product portfolio. Yet, the focus at
Jindal has always been steel. From mining of iron-ore to the manufacturing of value added
steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its
way to be a major global player, with its overseas manufacturing facilities and strategic
manufacturing and marketing alliances with other world leaders.
The Technological Edge:
The hallmark of the organizations achievement and growth has been its ability to develop and
adopt the latest technology, the match the demands of a dynamic and burgeoning Indian
Industry.
Seeing doors where others see walls
At Jindal, research is a self-imposed discipline; a challenge it has pursued with a pioneer’s
zeal. Exploring new ideas, attempting break through products and processes. For instance,
tracking and adopting the latest in world technology, anticipating customer needs with const-
efficient, reliable solutions and promoting engineering skill and manpower caliber. Jindal’s
R&D investment, together with its R&D capability has given it a head start over others.
Jindal Family:
Jindal organization has expanded and diversified into core business areas. Ensuring synergy
amongst its various business ventures spread over 13 plants at 11 pivotal locations in India.
The Jindal team embodies one of the most coveted talent pools of technological acumen
available in the country today with expertise that have enabled the organization to put up
large-scale projects in record time.
Jindal Steel and Power Limited
Jindal Strips Limited
Saw Pipes Limited
Jindal Iron & steel co.
Jindal Power Limited
Nalwa Sponge Iron Limited
Jindal Stainless Limited
Jindal United Steel Corporation
Jindal Thermal Power Company Limited
Jindal Praxair Oxygen Company Limited
Vijayanagar Minerals Private Limited
JINDAL STEEL & POWER LTD
Company Profile:
Mr. O.P. Jindal promoted JSPL as Orbit Steel Private Limited (OSPL) in 1979. OSPL
became a public limited company in 1998 and its name was changed to the current JSPL
(Jindal Steel & Power Limited)
Jindal Steel & Power Limited (JSPL), a O.P. Jindal Group Company, was formed by hiving
off the Raigarh and Raipur facilities of Jindal Stainless Limited into a separate Company as
part of a scheme of arrangement, w.e.f. April 2, 1998.
The Company has plant at Raigarh (Chhattisgarh) for manufacture of sponge iron with an
installed capacity of 13,70,000 tons per annum, & it is the only sponge iron producer in the
country with its own raw material source and power generation making it one of the most
cost effective producers of sponge iron in the country. Power Generation plants with a
capacity of 290 MW, Steel Melting plant with a capacity of 24,00,000 TPA with Blast
Furnace of 250,000 TPA capacity.
International Collaboration:
JSPL produces rails, H-beams, columns and sheet piles with JFE's technical services
assistance.
JSPL has entered into technical services assistance agreement with JFE (earlier known as
NKK Corporation), Japan for technology transfer to produce superior quality, world’s longest
rails of 120m finished length, along with Parallel Flange Beams, Columns and Sheet Piles for
the first time in the country. This technical collaboration shall enable production of long rails
requiring far less joints in tracks, ushering a new era in safer rail-travel and making
introduction of fast trains in India a reality.
Company Products:
Rail:
Giving impetus to the significant rail sector, JSPL has
pioneered the manufacturing of 121 metre long track
rails in the Indian sub-continent. The world’s longest
track rails are a testimony of JSPL’s manufacturing
capabilities where continuous innovation is a practice
rather than an exception.
What differentiates JSPL’s 121 m long rails from others
is that there is a drastic reduction in the welded joints, providing enhanced safety, cost
reduction and travel comfort. Our products are subjected to stringent quality norms and can
therefore match all international standards
Parallel Flange Sections
JSPL pioneered the production of medium and large size
Hot Rolled Parallel Flange Beams and Column Sections
(H-Beams) in India. The beams are cost effective and
provide design-flexibility.
Plates & Coils
JSPL is equipped with India's first 'one of a kind' state-
of- the -art plate mill that produces plates and coils of
3.5 and 3 metres width, respectively, for the first time in
the private sector.
JSPL epitomizes its performance-oriented service by
producing plates ranging from 7-120mm in thickness &
widths of 1500 -3500 mm and coils varying in thickness
of 7 -25 mm and widths of 1500 - 3000 mm. The products are of premium quality, owing to
its sound steel refining properties. The total production capacity of the plant is 1 MTPA.
JSPL adheres to stringent international standards and the steel grades are manufactured under
various specifications like EN, DNV, BS, ASTM, JIS, LRS, ABS, etc.
Power:
In order to contribute significantly to India's growing
need for power we started power generation over a
decade back. In the beginning it was a captive power
facility using waste heat from the rotary kiln boilers
and the coal rejects of the washery. Over the years
however, Jindal Steel and Power Ltd (JSPL) and its
subsidiary Jindal Power Ltd. (JPL) have come up in a
big way and are producing about 1400 MW power through both captive and commercial
facilities.
Sponge Iron:
JSPL has world's largest coal-based sponge iron
manufacturing facility and stands out as the market
leader in coal-based sponge iron industry within India.
Efficient backward integration has rendered JSPL as
the only sponge iron manufacturer in the country, with
its own captive raw material resources and power
generation capacity helping the company to monitor
both price and quality of its products.
Semi-Finished Products
JSPL has a capacity to produce about three million tonne per annum of semis which are
primarily used for captive use in JSPLs’ 0.75 million tonne per annum capacity Rail &
Universal Beam Mill and 1.0 million tonne per annum capacity Plate & Stackle Mill.
Wire rods:
In line with our corporate philosophy of continuing
efforts to expand our product range to offer a complete
product basket to the customer, JSPL now offers Wire
Rods from its first unit of 6 Million Tonne Steel Plant
at Patratu, Jharkhand.
Awards & Recognition:
The Forbes Asia's 'Fabulous 50' international award 2009
Most promising entrant into the big league, 2009
Golden peacock Environment Management Award 2008.
National Award for Excellence in Cost Management 2005, third prize in the
private sector-manufacturing segment, by the Institute of Cost & Works
Accountant of India (ICWAI)
National Energy Conservation Awards for 2001, 2002, 2003, 2004, 2005 and 2009
by the Ministry of Power, Government of India
National Safety Awards 2003-2004, by the Minter of Labour
IIM Quality Award for 2002-03 by the Indian Institute of Metals
First Prize in the IIM Awards 2001 for Quality by the Indian Institute of Metals
Future plans:
10.0 Lac MTPA capacity Plate Mill
7.0 Lac TPA Rebar, TMT and Wire Rod Mill
4.0 Lac MTPA Coke Oven Plant
12.5 Lac MTPA Blast furnace
A 12.5 million tonne integrated steel plant and 2600 MW captive power plant in
phases in Orissa with an investment of US $ 8.00 billion (Rs. 40,000 crore). The
first phase of 3 million tonne is expected to be commissioned by 2011.
An 11 million tonne integrated steel plant and 2600 MW captive power plant in
phases in Jharkhand , with an investment of US $ 6.00 billion (Rs. 30,000 crore).
An MOU has been signed between JSPL and the Government of Chhattisgarh for
setting up an additional 7.0 MTPA steel plant in phases and a 1600 MW power
plant with an investment of over US $ 5.20 billion (Rs. 26,000 crore).
50 MW capacity Power Plant based on fuel gases of coke oven
JSPL plans to invest US $ 2.1 billion (Rs. 10,500 crore) in Bolivia, South
America, in the coming years for mining and setting up of an integrated 1.7 MT
steel plant, 450 MW power plant, 6 MT sponge iron and 10 MT iron ore pellet
plant.
Research Methodology
Information Requirement:
Since my objective was to analyze the working capital policies, working capital management
of the company and to reduce down their problems and finding the solutions with respect to
the working capital management of the company. So, I required the annual report of the
company, CMA of last few years and its working capital data to analyze the position of the
company and correlate the theoretical and practical aspects of working capital management,
to analyze the efficiency of the management in managing the working capital and to find out
what are the problems that the company is facing. So, the company provided me the required
information. Then relevant calculations and analysis were done.
Research Methodology:
The methodology adopted for the project was divided into two types of analysis: Qualitative
and Quantitative
Qualitative analysis required studying the business profile of the company, its
nature, its functioning, the hierarchy and the functioning of the management of the
company, the performance of the company in last few years and what policy they
adopt and studying what role the working capital plays in a manufacturing
concern.
Quantitative analysis required analyzing the current assets and the current
liabilities of the company, the statement of working capital changes, performing
the analysis for estimating the working capital requirement, analysing the
operating cycle, analyzing the Working Capital Ratios to reveal the financial
position and soundness of the business and give a good basis for quantitative
analysis of financial problems and use of modern working tools to show the trend
of working capital for upcoming year with adopting trend analysis.
Analysis of Working Capital Management
Methods adopted for Working Capital analysis:
The broad range of project management and financial advisory services include:
Working Capital policy
Financial Ratio analysis for Working Capital Management
Managing the components of Working Capital of JSPL
Determination of Operating cycle of JSPL
Statement of change in Working Capital
Estimating Working Capital needs, Permanent & Variable Capital
Regression Analysis
Trend Analysis of Working Capital Management
Working Capital policy of JSPL
Table 1: ESTIMATED CASH FLOW FOR APR 11 TO JUNE 11
ESTIMATED CASH FLOW FOR APRIL 10 TO JUNE 10
RS IN Crores.
PARTICULARS Apr-11 May-11 Jun-11
COLLECTION FOR THE MONTH
PROJECTED
PROJECTED
PROJECTED
STEEL
-DOMESTIC 750.00 750.00 750.00
-EXPORT 58.00 58.00 58.00
POWER 32.00 32.00 32.00
SUB TOTAL 840 840 840 - - -FUNDS REQUIREMENT FOR THE MONTHOPEX PAYMENTS NOT UNDER L/CRAIGARH EXCISE/ STAT TAXES PAYMENT
39.30 39.30 39.30
RAIGARH OTHERS 243.85 243.85 243.85
TAMNAR 20.00 20.00 20.00
RAIPUR 10.89 11.72 11.88
BABIL 41.35 34.43 26.41
TENSA 27.46 27.46 27.46
PATRATU 5.50 6.00 6.00
DELHI 15.00 15.00 15.00
SUB TOTAL 403.35 397.76 389.90
RAIGARH-COKING COAL PAYMENT UNDER LC
167.13 46.78 115.80
SUB TOTAL 570.48 444.54 505.70
SURPLUS/(DEFICIT) FROM OPERATIONS
269.52 395.46 309.30
PROJECT PAYMENTS UNDER L/C
RAIGARH 61.60 49.57 12.79
RAIPUR 0.00 11.36 12.41
ANGUL 84.06 60.00 60.00
PATRATU 14.76 6.50 19.12
BARBIL 0.00 0.00 0.00
SUB TOTAL 160.42 127.43 104.32PROJECT PAYMENTS NOT UNDER L/C
RAIGARH 86.08 107.32 124.65
ANGUL 123.50 162.33 204.99
PATRATU 40.60 45.55 34.30
BARBIL 43.60 45.00 46.50
RAIPUR 0.00 0.00 0.00
FOREIGN PROJECTS 15.00 15.00 15.00
REAL ESTATE 20.00 20.00 20.00
GLOBAL LAW SCHOOL/WINDMILLS
8.70 4.92 0.00
SUB TOTAL 251.40 292.80 320.79
TOTAL PROJECT OUTFLOW 411.82 420.23 425.11
SURPLUS/(DEFICIT) FROM OPERATIONS & PROJECT FLOW
(142.29) (24.77) (115.81)
FINACING OUTFLOWPRINCIPAL PAYMENTS LONG TERM LOAN/ECB/FCTL 52.15 389.09 70.74
BUYER'S CREDIT / SHORT TERM LOAN/JPL
429.45 215.57 632.52
SUB TOTAL 481.60 604.66 703.27INTEREST PAYMENTS 40.66 18.86 35.67
CORPORATE TAX - - 100.00SUB TOTAL 40.66 18.86 135.67
GROSS OUTFLOW (664.55) (648.29) (954.74)CAPITAL INFLOW
LIC NCD 230.00 150.00 150.00
TERM LOANS FOR PROJECTS - - -
STL/BUYERS CREDIT FOR OPERATIONS
- - -
SUB TOTAL 230.00 150.00 150.00
NET SURPLUS/(DEFICIT) AFTER COMMITTED CAPITAL FLOWS
(434.55) (498.29) (804.74)
NET CUMMALATIVE SURPLUS/(DEFICIT)
(434.55) (932.84) (1,737.58)
DEFICIT TO BE FINANCED BY Probable Buyers Credit Coking Coal
167.13 46.78 115.80
Probable Buyers Capital Goods 85.00 77.00 40.00Probable Rollover of Buyers Credit
169.69 93.00 269.92
STL - - -CP 100.00 250.00 -
SUB TOTAL 521.82 466.78 425.72 Net Deficit 87.27 (31.50) (379.03)Net Cummulative Deficit 87.27 55.77 (323.26)
JPL -20WC Limit -50
Net Cummalative Deficit (449.03)
First they collect details of projected cash inflow and outflow from their different branches and make Project for the Cash Flow for three months. Then the process of procurement of fund takes place. If the fund is internally available no process takes place and if not available then they analysis all the option like short term loan, inter corporate loan and commercial paper etc. Now you see the above table there is deficit in last months. To overcome this deficit they will borrow from bank.
Working capital borrowing from Banks
Table 2: Working Capital Borrowing from Banks
WORKING CAPITAL BORROWINGS FROM BANKS(Rs. in Crores)
31st march 2004 56.102131st march 2005 92.064031st march 2006 43.9131st march 2007 118.8131st March, 2008 213.5931st March, 2009 44.2531st March, 2010 114.2631st March, 2011 251.34
Figure 5: Working capital borrowing from Banks
20042005
20062007
20082009
20102011
31st march 2003
31st march 2004
31st march 2005
31st march 2006
31st March, 2007
31 st March, 2008
31 st March,2
009
31 st March,2
010
0.00
50.00
100.00
150.00
200.00
250.00
300.00
Working capital borrowing from Banks
Working Capital Borrowing
Analysis:
In the year 2004 higher percentage of working capital was financed by bank borrowing. In 2005 it was highest but in later stage the bank borrowing had come down as low as 43 crores. This shows that after 2006 onwards higher percentage of working capital is financed by their own cash inflow which reduce the liquidity problem as well cost of borrowing.
Secured by hypothecation by way of first charge on stocks of finished goods, raw materials, work in progress, stores and spares and book debts, and guaranteed by Directors and Second charge in respect of other moveable and immoveable assets.
Financial Ratio Analysis for Working Capital Management
Return on Working Capital:
Return on Working Capital (ROWC) = PBIT / Working Capital * 100
Table 3: Return on Working Capital
Return on Working Capital For JSPL
31 March 2005
405.55 / 103.15 * 100 = 393.16 %
31 March 2006
743.52 / 142.25 * 100 = 522.68 %
31 March 2007
815.16 / 396.19 * 100 = 205.74 %
31 March 2008
1095.11/ 320.68 * 100 = 341.49 %
31 March 2009
1711.11 / 553.78 * 100 = 308.98 %
31 March 2010
2170.79 / 699.93 * 100 = 310.14 %
31 March 2011
2099.47/ 155.65* 100 = 1348.84 %
Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities +
Proposed Dividend + Provision for Tax.
Current Assets = Inventories + Debtors + Cash & Bank balance + Current
Investments + Advance Income Tax + Advance recoverable in Cash.
Figure 6: Return on working capital
2005 2006 2007 2008 2009 2010 20110
200
400
600
800
1000
1200
1400
1600
393.16
522.68
205.74
341.49
308.98310.14
1348.84
Return on Working Capital
Return
Years
Rrtu
rn(in
%)
Analysis:
There has been a initial increase in the Return on Working Capital during 2006,which was
followed by a decline in ROWC between the two years – it reduces more than half during
2007. This respectable situation arises because of increase in current liabilities in past years
as company is having proposal of lots of investment due to which company is financing its
project and there is less tendency of free cash flow. During 2008 there was increase in the
ROWC, which later decreased and was maintained steady.
Liquidity ratios:
Snapshot of Liquidity Ratios:
Table 4: Liquidity ratios
JSPL For the year ended
Basic Ratios 31 Mar
05
31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Current ratio 1.20:1 1.24:1 1.39:1 1.23:1 1.87:1 1.19:1 1.03:1
Acid test ratio 0.81:1 0.80:1 0.82:1 0.76:1 1.27:1 0.85:1 0.73:1
Cash ratio 0.044:1 0.056:1 0.031:1 0.038:1 0.35:1 0.087:1 0.013:1
Current Ratio:
The current ratio is also known as the working capital ratio and is normally presented as a
real ratio.
Table 5: Current Ratio
Current Ratio For JSPL
31 March
2005
Current Assets: Current Liabilities 599.82:496.66 1.20:1
31 March
2006
Current Assets: Current Liabilities 736.4:594.15 1.24:1
31 March
2007
Current Assets: Current Liabilities 1403.56:1007.37 1.39:1
31 March
2008
Current Assets: Current Liabilities 1698.51:1377.83 1.23:1
31 March
2009
Current Assets: Current Liabilities 3060:1636.17 1.87:1
31 March
2010
Current Assets: Current Liabilities 4216.08:3516.15 1.19:1
31 March
2011
Current Assets: Current Liabilities 4603.1:4447.45 1.03:1
Figure 7: Current Ratio
2005 2006 2007 2008 2009 2010 20110
0.20.40.60.8
11.21.41.61.8
2
1.2 1.241.39
1.23
1.87
1.191.03
Current Ratio
Years
Curr
ent
Rati
o
Analysis:
The current ratio is the measure of whether a company has enough short-term assets to cover
its short-term debt and is index of strength of working capital. Anything below 1 indicates
negative W/C (working capital). While anything over 2 means that the company is not
investing excess assets. A ratio of greater than one means that the firm has more current
assets then current claims.
Current ratio of the company has increased from 1.20 in Year 2004-05 to 1.39 in Year 2006-
07. Current Ratio of the company depicts that for every Re.1 worth of current liability there
are assets worth Re.1.39. The company has sufficient liquidity as the ratio is increasing. This
year there is an increase in ratio due to almost double inventory level in current year in
comparison with previous year.
But during the year 2009 there was steep increase in the current ratio of the company, not
due to increase in the inventory level, but due to huge holding of the cash which was
recovered from the debtors & not invested during that year.
During last year i.e. 2011, the current ratio was found to be decreased because of the increase
in sundry debtors and decrease in current investments..
Suggestions:
In order to increase current ratio current assets should be increased. If we look into
the detailed schedule of current assets then we can find out that major portion of
current assets is due to debtors and inventories.
Company should make market survey and should decide first that what should be
the optimum amount of finished goods so that major portion of it can be sold off
in the market. This will help in reducing the locking of funds or working capital in
the finished goods.
Acid Test Ratio:
Table 6: Acid Test Ratio for JSPL
Acid Test Ratio For JSPL
31 March 2005 Current Assets - Stocks: Current Liabilities 403.32:496.66 0.81:
1
31 March 2006 Current Assets - Stocks: Current Liabilities 478.85:594.15 0.80:
1
31 March 2007 Current Assets - Stocks: Current Liabilities 834.91:1007.37 0.82:
1
31 March 2008 Current Assets - Stocks: Current Liabilities 1056.07:1377.83 0.76:
1
31 March 2009 Current Assets - Stocks: Current Liabilities 2079.02: 1636.17 1.27:
1
31 March 2010 Current Assets - Stocks: Current Liabilities 3005.62: 3516.15 0.85:
1
31 March 2011 Current Assets - Stocks: Current Liabilities 3274.6: 4447.45 0.73:
1
Figure 8: Acid Test Ratio For JSPL
2005 2006 2007 2008 2009 2010 20110
0.2
0.4
0.6
0.8
1
1.2
1.4
0.81 0.8 0.82 0.76
1.27
0.850.73
Acid Test Ratio
Years
Aci
d T
est
Rati
o
Analysis:
Acid test ratio is a more rigorous test of liquidity than the current ratio and when used in
conjunction with it, gives a better picture of the firm s ability to meet its short-term debts out
of short-term assets. This ratio is used to determine risk that is not detected by the Working
Capital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm can easily
or readily meets all of its current liabilities. Here JSPL had its acid test ratio around 0.8:1
during the year 2005-2008 which is constant from last three years, which indicates company
was not having satisfactory financial position. But during the year 2009, the acid test ratio of
the company was highly excellent and was able to pay its current liabilities which was
followed by a decrease in the ratio. So it should be looked at with extreme care and also
implies that current assets are highly dependent on inventory.
.
Comparison between Current Ratio & Acid Test Ratio:
Table 7: Comparison between current ratio and acid test ratio
Comparison
Current Acid Test
2005 1.20 0.81
2006 1.24 0.80
2007 1.39 0.82
2008 1.23 0.76
2009 1.87 1.27
2010 1.19 0.85
2011 1.03 0.73
JSPL's liquidity position had worsened when looked at its current ratio. The acid test ratio has
fallen from 2004 to 2005. Current assets might not be that liquid since almost 80% of them
are debtors. The fact that the differences between the current and acid test ratio is around .4,
which is large, tells us that the JSPL stocks are large. The stocks are worth around 40.5% of
current assets in 2008; that's a huge level of stock holdings. Additionally, the acid test ratio
has decreased over the three-year period, meaning that the JSPL has a weak liquidity position
than it had before. Normally that is not a good thing.
Cash Ratio:
Table 8: Cash ratio for JSPL
Cash Ratio For JSPL
31 March 2005 Cash: Current
Liabilities
21.89:496.66 0.044:1
31 March 2006 Cash: Current
Liabilities
33.29:594.15 0.056:1
31 March 2007 Cash: Current
Liabilities
31.30:1007.37 0.031:1
31 March 2008 Cash: Current
Liabilities
52.97:1377.83 0.038:1
31 March 2009 Cash: Current
Liabilities
577.91: 1636.17 0.35:1
31 March 2010 Cash: Current
Liabilities
308.96: 3516.15 0.087:1
31 March 2011 Cash: Current
Liabilities
60.10: 4447.45 0.013:1
Figure 9: Cash Ratio for JSPL
2005 2006 2007 2008 2009 2010 20110
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.044 0.0560.031 0.038
0.35
0.087
0.013
Cash ratio
Years
Cas
h R
atio
Analysis:
As cash is being the most liquid asset, quoted investment has been taken as marketable
securities. In our case the company carried small amount of cash during the year 2005-2008
so it was not having a favorable cash ratio. But during year 2009 the company carried large
amount of cash in hand which was some what good as compared to the previous year but
during the last year 2010, the cash ratio was found to be decreased due to increase in current
liabilities to large extent. From the above calculation it is clear that company’s cash ratio had
remained very low in comparison to the standard of .5. It is the notable point for the company
as its current liabilities are much higher than the cash in hand. It can create problems in the
future payments of current liabilities. Major portion of company’s current assets goes to
inventory and debtors, which only increase the carrying cost. Company need to reduce these
assets to their optimum level.
Other Snapshot of Working Capital Management ratios
Table 9: Working capital management ratios
JSPL For the year ended
Asset Usage 31
Mar05
31
Mar06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Current Asset Turnover 3.77
times
3.51
times
1.84
times
2.04
Times
1.76
times
1.81
times
1.62
times
Working Capital Turnover 12.23
times
15.92
times
6.53
times
10.97
Times
9.77
times
10.93
times
47.33
times
Efficiency
Working capital to Gross
Sale
0.06
times
0.05
times
0.12
times
0.07
Times
0.08
times
0.07
times
0.01
times
Working Capital to Cost of
Sale
0.13time
s
0.10time
s
0.25
times
0.15
times
0.16
times
0.13
times
0.03
times
Stock/Debtors/Creditors
Debtors’ Turnover 5.97
times
13.09
times
8.64
times
10.98
Times
18.99
times
19.55
times
11.83
times
Average Collection Period 60.20da
ys
27.50da
ys
41.66
days
32.78da
ys
18.95da
ys
18.41da
ys
30.43da
ys
Credits’ Turnover ---- 2.14
times
1.28
times
1.30
times
2.30
times
1.47
times
1.16
times
Inventory Turnover 6.42
times
8.75
times
4.55
times
5.47
Times
5.51
times
6.32
times
5.54
times
Inventory Holding period 56.07
days
41.14
days
79.12
days
65.81
Days
65.33
days
56.96
days
64.98
days
Ratio to analyze WC
Structure
Current Asset to Total
Assets Ratio
0.25times
0.22times
0.26times
0.25Times
0.36times
0.34times
0.25times
Cash to Current Asset Ratio 0.036times
0.045times
0.022times
0.031Times
0.188times
0.073Times
0.013Times
Inventory to Current Asset
Ratio
0.32times
0.34times
0.4times
0.37times
0.32times
0.28times
0.28times
Current Liabilities to Total
Liabilities
0.2times
0.16times
0.17times
0.18times
0.16times
0.24times
0.28times
Loan & Advances to CA
ratio
0.36times
0.77times
0.42times
0.46Times
0.47times
0.75Times
0.83Times
Working Capital Management I: Asset Usage
Current Asset Turnover:
Current Asset Turnover = Turnover
Current Assets
Table 10: Current asset turnover for JSPLCurrent Asset Turnover For JSPL
31 March
2005
2264.72/599.82 = 3.77times
31 March
2006
2590.25/736.4 = 3.51 times
31 March
2007
2589.29/1403.56 = 1.84 times
31 March
2008
3519.81/1698.51 = 2.07 times
31 March
2009
5410.75/3060 =1.76 times
31 March
2010
7653.19/4216.08 =1.81 times
31 March
2011
7484.90/4603.1 =1.62 times
Figure 10: Current Asset Turnover
2005 2006 2007 2008 2009 2010 20110
0.5
1
1.5
2
2.5
3
3.5
43.77
3.51
1.842.07
1.76 1.81 1.62
Current Asset
Years
Cu
rre
nt
Ass
ets
Tu
rno
ver
(tim
es)
Analysis:
High current assets turnover ratio is more judicious and shows efficiency of management and
proper utilization of the assets. The graph shows the company has managed to higher the ratio
during the previous years however this year due to non-proportionate change in current assets
and turnover the ratio declines to 1.84. Due to more inventory this ratio falls.
Working Capital Turnover:
This ratio signifies how effectively working capital is being used in terms of the turnover.
Working Capital Turnover = Sales
Working Capital
Table 11: Working capital turnover for JSPLWorking Capital Turnover For JSPL
31 March
2005
1261.61/ 103.15 = 12.23 times
31 March 2264.72/ 142.25 = 15.92 times
2006
31 March
2007
2590.25 / 396.19 = 6.53times
31 March
2008
3519.81 / 320.67 = 10.97times
31 March
2009
5410.75/553.78 = 9.77 times
31 March
2010
7653.19/699.93 = 10.93 times
31 March
2011
7367.59/155.65 = 47.33 times
Figure 11: Working Capital Turnover For JSPL
2005 2006 2007 2008 2009 2010 20110
5
10
15
20
25
30
35
40
45
50
12.23
15.92
6.53
10.97
9.7710.93
47.33
Working Capital Turnover
Working Capital Turnover
Years
Wo
rkin
g ca
pit
al T
urn
ove
r(T
ime
s)
Analysis:
What this ratio tries to highlight is how effectively working capital is being used in terms of
the turnover it can help to generate: no ideal values here but the higher the better, surely. The
declining working capital turnover ratio in JSPL indicates that working capital is not being
utilized properly over the period of time. Management may think of increasing the sales in
the market or it is going for certain expansion plans. But since 2009 the company managed to
increase there working capital turnover as compared to 2008. During 2011, the working
capital turnover ratio was found to be sharply increased, this shows that the working capital
has been utilized efficiently by the management.
Working Capital Management II: Efficiency
Working Capital to Gross Sale:
Working Capital to Gross Sale =Working Capital
Gross Sale
Table 12: Working capital to gross sale for JSPL
Working Capital to Gross Sale for the JSPL
31 March
2005
103.15 / 1547.06 = 0.06 times
31 March
2006
142.25 / 2775.32 = 0.05 times
31 March
2007
396.19 / 3274.05 = 0.12 times
31 March
2008
320.68 / 4336.54 = 0.07 times
31 March
2009
553.78 /6743.22 = 0.08 times
31 March
2010
699.93/8953.77 = 0.07 times
31 March
2011
155.65/8595.67 = 0.01 times
Figure 12: Working Capital to Gross Sale for the JSPL
2005 2006 2007 2008 2009 2010 20110
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.06
0.05
0.12
0.07
0.08
0.07
0.01
Working Capital to Gross Sale
Working capital to Gross Sale
Years
wo
rkin
g ca
pit
al t
o g
ross
sal
e(i
n ti
me
s)
Analysis:
The Company was showing a favourable trend as it was showing decline in the financial
periods till 2006 but now as the ratio increased to .12 from .05 there is a matter of concern
but here also JSPL is far better than the industry’s average. Since 2008, the ratio was found to
be decreasing and it decreased to 0.01 in 2011. Thus the company has managed to utilize
their working capital more efficiently as compared previous years.
Working Capital to Cost of Sale:
Working Capital to Cost of Sale =Working Capital
Cost of Sale
Table 13: Working capital to cost of sale for JSPL
Working Capital to Cost of Sale for the JSPL
31 March 2005 103.15 / 760.75 = 0.13 times
31 March 2006 142.25 / 1363.05 = 0.10 times
31 March 2007 396.19 / 1583.16 =0.25times
31 March 2008 320.68 / 2116.93 =0.15 times
31 March 2009 553.78 / 3296.99 =0.16 times
31 March 2010 699.93 / 5195.41 =0.13 times
31 March 2011 155.65 / 4872.77 =0.03 times
Figure 13: Working Capital to Cost of Sale for the JSPL
2005 2006 2007 2008 2009 2010 20110
0.05
0.1
0.15
0.2
0.25
0.3
0.13
0.1
0.25
0.15 0.16
0.13
0.03
Working Capital to Cost of Sale
Working Capital to Cost of Sale
Years
Wo
rkin
g C
pit
ak t
o C
ost
of
Sale
s(i
n ti
me
s)
Analysis:
The Company is showing a favorable trend as it is showing decline in the ratio during the
financial periods 2007-2011. This shows that the working capital used by them is less as
compared to the cost of sale.
Working Capital Management III: Stock/Debtors/Creditors
Debtor’s Turnover:
Debtor’s Turnover = Sales
Debtors
Table 14: Debtor’s turnover ratio for JSPL
Debtor’s Turnover Ratio for the JSPL
31 March
2005
1261.61 / 211.16 = 5.97 times
31 March
2006
2264.72 / 172.91 = 13.09 times
31 March
2007
2590.25 / 299.54 = 8.64 times
31 March
2008
3519.81 / 320.31 = 10.98 times
31 March
2009
5459.87 / 287.38 = 18.99 times
31 March
2010
7653.19 / 391.46 = 19.55 times
31 March
2011
7367.59/622.36 = 11.83 times
Figure 14: Debtor’s Turnover Ratio for the JSPL
2005 2006 2007 2008 2009 2010 20110
2
4
6
8
10
12
14
16
18
20
5.97
13.09
8.64
10.98
18.99 19.55
11.83
Debtors’ TurnoverYears
Deb
tors
tur
nove
r(in
tim
es)
Analysis:
Firstly, the ratio seems to have change by going from 5 to 19 times over the 6 years;
and it means that, on average, the JSPL’s debtors are taking less days to pay their
accounts. Soundness of this ratio is more depend on the business policy and the terms
with the clients. On the other side during 2007-2010 turnover is increasing, which
implies higher the turnover, shorter the time between sales and collecting cash. It
shows the company’s debt-collecting machinery has improved through years. But
during last year 2011, the debtors turnover ratio has decreased sharply due to increase
in sundry debtors, this shows the debt collecting machinery of the company is not
working efficiently.
Average Collection Period:
Avg. Collection Period = 360
Debtor Turnover
Table 15: Average collection period for JSPL
Average Collection Period for the JSPL
31 March 2005
360 / 5.98 = 60.20 days
31 March 2006
360 / 13.09 = 27.50 days
31 March 2007
360 / 8.64 = 41.66 days
31 March 2008
360 / 10.98 = 32.78 days
31 March 2009
360 / 18.99 = 18.95 days
31 March 2010
360 / 19.55 = 18.41 days
31 March 2011
360 / 11.83 = 30.43 days
Figure 15: Average Collection Period for the JSPL
2004 2005 2006 2007 2008 2009 20100
10
20
30
40
50
60
7060.2
27.5
41.66
32.78
18.95 18.41
30.43
Average Collection Period
Years
Ave
rage
Col
lecti
on P
erio
d(in
day
s)
Analysis:
The average collection period measures the quality of debtors since it indicates the speed of
their collection. The shorter the average collection period, the better the quality of debtors, as
a short collection period implies the prompt payment by debtors. The trend of JSPL was
showing that the company was a success in decreasing the average collection period, which
represent sound collection policy of the company. But during last year 2011, the average
collection period of the company has increased from 18.41 to 30.43 days which is not a good
sign for the company.
Creditor’s Turnover:
Creditor’s Turnover = Purchases
Creditors
Table 16: Creditor’s turnover ratio for JSPL
Figure 16: Creditor’s Turnover Ratio for the JSPL
2006 2007 2008 2009 2010 20110
0.5
1
1.5
2
2.52.14
1.28 1.3
2.03
1.47
1.16
Creditor's Turnover Ratio
Years
Cred
itor
's t
urno
ver
Rati
o(in
tim
es)
Analysis:
Creditor’s Turnover Ratio for the JSPL
31 March 2006 411.23/191.77 = 2.14 times
31 March 2007 462.04/359.36 = 1.28 times
31 March 2008 601.91/461.77 = 1.30 times
31 March 2009 1156.1/567.46 = 2.03 times
31 March 2010 1800.16/1222.51 = 1.47 times
31 March 2011 1814.93/1560.48 = 1.16 times
It is observed that the creditors turnover ratio has been decreasing since 2008 which implies
terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This
shows company keep its obligation for long time.
Inventory Turnover Ratio:
Inventory Turnover = Net Sales
Inventory
Table 17: Inventory turnover ratio for JSPL
Inventory Turnover Ratio for the JSPL
31 March
2005
1261.61 / 196.47 = 6.42 times
31 March
2006
2253.60 / 257.55 = 8.75 times
31 March
2007
2590.25 / 568.65 = 4.55 times
31 March
2008
3519.81 / 642.44 = 5.47 times
31 March
2009
5410.75 / 980.56 = 5.51 times
31 March
2010
7653.19 / 1209.96 = 6.32 times
31 March
2011
7367.59 / 1328.50 = 5.54 times
Figure 17: Inventory Turnover Ratio for the JSPL
2005 2006 2007 2008 2009 2010 20110
1
2
3
4
5
6
7
8
9
6.42
8.75
4.55
5.47 5.516.32
5.54
Inventory Turnover Ratio
Years
Inve
ntor
y Tu
rnov
er R
atio
(in ti
mes
)
Analysis:
It measures approximately the number of times an entity is able to acquire the inventories and convert them into sales. The higher turnover ratio is good for the firm while A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse, but several aspects of inventory holding policy have to be balanced like lead time, seasonal fluctuations in orders, alternative use of warehouse space. Inventory turnover has decreased in 2011, than the previous years due to increase in inventory and decrease in sales
Inventory Holding Period:
Inventory Holding Period = 360
Inventory turnover
Table 18: Inventory holding period for
JSPL
Inventory Holding Period for the JSPL
31 March 2005 360 / 6.42 = 56.07 days
31 March 2006 360 / 8.75 = 41.14days
31 March 2007 360 / 4.55 = 79.12days
31 March 2008 360 / 5.47 = 65.81 days
31 March 2009 360 / 5.51 = 65.33 days
31 March 2010 360 / 6.32 = 56.96 days
31 March 2011 360 / 5.54 = 64.98 days
Figure 18: Inventory Holding Period for the JSPL
Analysis:
The company’s inventory holding period was found to be fluctuating up and down during
the year 2005 – 2007 , which is not good for the company as it was unnecessary locking up of
working capital in the inventory and it shows inefficiency of the management. After hree year
constant inventory holding period, during last year i.e.2011,the inventory holding period has
increased from 56.96 to 64.98, this shows unnecessary locking up of working capital in the
inventory and it shows inefficiency of the management.
Working Capital Management IV: Ratio to analyze WC Str.
Current Asset to Total Assets Ratio:
Table 19: Current asset to total asset ratio for JSPL
Current Asset to Total Asset Ratio for the JSPL
31 March 2005 599.82 / 2319.78 = 0.25 times
31 March 2006 736.40 / 3250.62 = 0.22 times
31 March 2007 1403.56 / 5250.55 = 0.26 times
31 March 2008 1698.51 / 6783.63 = 0.25 times
31 March 2009 3060 / 8456.31 = 0.36 times
31 March 2010 4216.08 / 12279.99 = 0.34 times
31 March 2011 4603.1 / 17742.44 = 0.25 times
Figure 19: Current Asset to Total Asset Ratio for the JSPL
2005 2006 2007 2008 2009 2010 20110
10
20
30
40
50
60
70
80
56.07
41.14
79.12
65.81 65.33
56.96
64.98
Inventory Hold-ing Period
Years
Inve
ntor
y H
oldi
ng P
erio
d(in
day
s)
2005 2006 2007 2008 2009 2010 20110
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.250.22
0.26 0.25
0.360.34
0.25
Current Asset to Total Assets Ratio
Years
Cu
rre
nt
Ass
ets
to
To
tal A
sse
t R
atio
(in
tim
es)
Analysis:
If we analyse the structural health of working capital for JSPL, the proportion of current
assets to total assets has been showing decreasing trend as compared to financial year 2009 &
2010 , which shows that the company was having certain problems with its current asset
management. This was due to increase in the application of funds in the fixed assets.
Cash to Current Ratio:
Cash to current ratio = Cash
Current asset
Table 20: Cash to current asset ratio for JSPL
Cash to Current Asset Ratio for the JSPL
31 March 2005 21.90 / 599.82 = 0.036 times
31 March 2006 33.29 / 736.40 = 0.045 times
31 March 2007 31.30 / 1403.56 = 0.022 times
31 March 2008 52.97 / 1698.51 = 0.031 times
31 March 2009 577.91/3060 = 0.l88 times
31 March 2010 308.96/4216.08 = 0.073 times
31 March 2011 60.10/4603.1 = 0.013 times
Figure20: Cash to Current Asset Ratio for the JSPL
2005 2006 2007 2008 2009 2010 20110
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
0.0360.045
0.0220.031
0.188
0.073
0.013
Cash to Current Asset Ratio
Years
Cas
h t
o C
urr
en
t A
sse
t R
atio
(in
tim
es)
Analysis:
The company shows an increasing trend in 2006 & again it decrease in 2007. However in the
year 2009, the cash to current ratio was found to be increased hugely to 0.188 from 0.031 of
2008, which is almost more than six times from year 2008. But in 2011 the ratio again
decreased sharply to 0.013. We can say that it will effect liquidity position of the firm but on
the other hand it is observed that they do not keep any ideal cash with them, which is a
positive sign for the company.
Inventory to Current Asset Ratio:
Inventory to Current Asset = Inventory
Current asset
Table 21: Inventory to current asset ratio for JSPL
Inventory to Current Asset Ratio for the JSPL
31 March
2005
196.5 / 599.82 = 0.32 times
31 March
2006
257.55 / 736.40 = 0.34 times
31 March
2007
568.65 / 1403.56 = 0.40 times
31 March
2008
642.44 / 1698.51 = 0.37 times
31 March 980.56 / 3060 = 0.32 times
2009
31 March
2010
1209.96 /4216.08 = 0.28 times
31 March
2011
1328.50/4603.1 = 0.28 times
Figure 21: Inventory to Current Asset Ratio for the JSPL
2004 2005 2006 2007 2008 2009 20100
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.40.320000000000004
0.34
0.40.37
0.320000000000004
0.28 0.28
Years
Inve
ntor
y to
Cur
rent
Ass
ets
Rati
o(in
tim
es)
Analysis:
Here, the company shows an unfavorable trend of increase in the proportion of the inventory
to current assets during the year 2005 – 2007, which represents that the company was locking
up the working capital unnecessarily in the inventory. But since 2007, the ratio is showing
decreasing trend which is a good sign for the company as they are decreasing the locking up
of working capital in the inventory.
Current Liabilities to Total Liabilities:
Current Liabilities to Total Liabilities =Current Liabilities
Total Liabilities
Table 22: Current liabilities to total liabilities ratio for JSPL
Current Liabilities to Total Liabilities Ratio for the JSPL
31 March
2005
496.66 / 2418.60 = 0.20 times
31 March
2006
594.15 / 3584.92 = 0.16 times
31 March
2007
1007.37 / 5768.53 = 0.17 times
31 March
2008
1377.83 / 7599.84 = 0.18 times
31 March
2009
1636.17 / 9735.21 = 0.16 times
31 March
2010
3516.15 / 14409.75 = 0.24 times
31 March
2011
4447.45 / 15844.26 = 0.28 times
Figure 22: Current liabilities to Total liabilities
2005 2006 2007 2008 2009 2010 20110
0.05
0.1
0.15
0.2
0.25
0.3
0.2
0.16 0.17 0.180.16
0.24
0.28Current Liabilities to Total Liabilities
Years
Cu
rre
nt
Liab
iliti
es
to T
ota
l lia
bili
tie
s(i
n ti
me
s)
Analysis:
The company shows a increasing trend in the proportion of the current liabilities in the total
liabilities as this shows company is taking more loans to meet its liability and project
investments are there, hence this shows a burden on the management of JSPL. This ratio is
not the only means of reviewing a company's debt structure.
Loan & Advances to Current Asset Ratio:
Loan & Advances to Current Asset =Loan & Advances
Current Asset
Table 23: Loan & Advances to Current assets ratio for JSPL
Loan & Advances to Current Asset Ratio for the JSPL
31 March
2005
218.07 / 599.82 = 0.36 times
31 March
2006
572.54 / 736.40 = 0.77 times
31 March
2007
591.01 / 1403.56 = 0.42 times
31 March
2008
785.94/1698.51 = 0.46 times
31 March
2009
1453.72/3060 = 0.47times
31 March
2010
3199.04/4216.08 = 0.75 times
31 March
2011
3865.94/4603.1 = 0.83 times
Figure 23: Loan & Advances to Current Assets
Analysis:
The increase in this ratio in the year 2011 shows the efficiency of the management. However
this much increases in the ratio is not suggestible and due to the efforts of the company in the
current year it is 0.83 times means 83% of current assets are Loans and Advances.
Interpretation (Ratio Analysis)
2005 2006 2007 2008 2009 2010 20110
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
0.36
0.77
0.420.46 0.47
0.750.83
Loan & Advances to CA ratio
Years
Loan
& A
dva
nce
s to
Cu
rre
nt A
sse
st(i
n ti
mes
)
As shown by current assets turnover ratio, the utilisation of current assets in terms
of sales has shown a decreasing trend as compared previous years which shows
that current assets has not been effectively used during the last year 2011 to
achieve sales.
Again if we look at the efficiency with which individual elements of working
capital have been utilised, the picture of inventory turnover is bright.
As we look at the extent of liquidity of working capital, we notice that the ratio
shows a decreasing trend. This indicates, problem on the liquidity front.
As we look at debtors turnover ratio , we notice that the ratio had shown a
increasing trend and a decreasing trend of average collection period during the
period 2005-2010.But during last year the debtors turnover was found to be
decreased and average collection period to be increased.
Management of Current Assets
Alternative Current Asset Investment policies
Three alternative policies are there regarding the total amount of current assets. Essentially,
these policies differ with regard to the amount of current assets carried to support any given
level of sales, hence in the turnover of those assets. The line with the steepest slope represents
a relaxed current asset investment (also known as “fat cat”) Policy, where relatively large
amounts of cash, marketable securities, and inventories are carried, and where sales are
stimulated by the use of a credit policy that provides liberal financing to customers and a
corresponding high level of receivables. Conversely, with the restricted current asset
investment (also known as “lean and mean”) policy, the holdings of cash, securities,
inventories and receivables are minimized. Under the restricted, current assets are turned over
more frequently, so each dollar of current assets is forced to “work harder”. The moderate
current asset investment policy is between the two extremes.
Under the conditions of certainty, all firms would hold only minimal levels of current assets.
Any larger amounts would increase the need for external funding without a corresponding
increase in profits, while any smaller holdings would involve late payments to suppliers along
with lost sales due to inventory shortages and an overly restrictive credit policy.
When uncertainty is introduced the firm requires some minimum amount of cash and
inventories. A restricted lean and mean current asset investment policy often provides the
highest expected return on this investment, but it entails the greatest risk, while the reverse is
true under a relaxed policy.
Alternative Current Assets Investment Policies:
Figure 24: Alternate current assets investment policies JSPL
60 50 Relaxed
40 Moderate
30
20 Restricted
10
0 50 100 150 Sales
Table showing Alternative Current Assets Investment Policies:
Table 24: Table showing alternative current assets investment policiesPolicy Current asset to support
Sales of INR 100/-
Turnover of Current
Assets
Relaxed 30 3.3X
Modified 23 4.3X
Restricted 16 6.3X
JSPL 61.72 1.62X
Note: - The Sales/current assets relationship is shown here as being linear, but the relationship is often curvilinear.
Managing the Components of Working Capital of JSPL
Four main components:
Cash
Marketable securities/Account Payables
Inventory
Accounts Receivables
Cash Management in JSPL:
Cash management system adopted by Finance Department in JSPL is very reliable and
transparent. As cash is a very important activity for a good operation of company here in
JSPL cash is monitored every day and intimated to Finance Department. The daily cash
report includes the all details of cash inflows and outflows. Monthly cash budgets are
maintained for the estimated of monthly cash inflows and outflows. Finally the annual cash
budget is made by the Finance Department in the corporate head office.
The corporate office allocates different amount of each to different manufacturing units as
per their requirement. Corporate office acts as a linkage between the manufacturing unit and
creditors. Corporate office has determined the credit facility for every units of the company
and this keeps on changing from year to year depending up on company’s position
transactions, profitability and inventory position.
The corporate office provides cash to manufacturing units but there most function is
controlled in unit itself. All the need related to inventory are met through corporate office as
well as individual efforts of unit.
Fund Allocation:
Here the initial allocation for manufacturing units is done by corporate office and all
supplementary requirements are to look upon by Commercial department.
Fund Utilization:
Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn up every month.
Although specific forecasting technique is used, funds are deployed to different departments
as per their requirements. Daily reports on cash transaction are prepared by Procurement
department to keep a track of all payments made in the days work. Every month cash
transaction report is sent to Finance department in the corporate office showing all the
transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund, then the plant has to
justify its more utilization.
To meet the requirement of cash company approach to bank and present the required detailed
by the bank. JSPL kept less cash in hand to meet the entire cash requirement it depends on
financing process.
Evaluation of cash management performances:
To assess the cash management performance this phase is divided as follows:
a) Size of Cash
b) Liquidity and Adequacy of cash:
This is depicted by the current ratio and acid test ratio, as calculated in part ratio analysis for
working capital management and respective position is shown in graph.
c) Control of cash
One of the major objectives of cash management from the stand point of increasing return on
investment is to economize on the cash holding without impairing the overall liquidity
requirements of the firms. This is possible by effecting tighter controls over cash flows. The
following ratios have been applied to assess the efficiency of cash control:
Cash to Current Assets ratio
Cash turnover ratio
Cash to current liabilities ratio
Table 25: Table showing different cash ratios
JSPL For the year ended
Efficiency of cash
control
31 Mar
05
31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Cash to Current Asset
Ratio
0.036
times
0.045
times
0.022
times
0.031
times
0.188
times
0.073
times
0.013
times
Cash to Current
liabilities Ratio
0.044
times
0.056
times
0.031
times
0.038
times
0.353
times
0.087
times
0.013
Times
Average: 0.071 (Cash to Current Asset Ratio)
Average: 0.11 (Cash to Current liabilities Ratio)
Summary:
It can be inferred from the above table that cash to current assets ratio during 2010, is lowest
as compared to previous years. This shows decrease in liquidity position of the company,
which ultimately affect the operational efficiency of the firm. Cash to current liability ratio
shows the cash balance maintained by company at a certain point of time for meeting its
current liabilities. The cash to current liabilities ratio is nearly on decreasing trend shows the
efficiency of operations.
Payable Management in JSPL:
Mostly the creditor comprises of the bank who is financing the working capital needs and the
suppliers to whom payments are to be given. This is basically done as per terms and
condition with the respective parties. The company is not able to make proper payment to its
creditors as year on year company’s creditors are increasing (creditors increased from 191.77
Cr on 2005 to 1560.48 in 2011.
Evaluation of Payables Management:
The evaluation for payable management is done with the help of ratios:
Creditor’s turnover ratio
Table 26: Table showing payables management
JSPL For the year ended
Payable Management 31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Creditor’s ratio 2.14time
s
1.28time
s
1.30
times
2.03
times
1.47
times
1.16
times
Summary:
It is observed that the creditors turnover ratio has been decreasing since 2009 which implies
terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This
shows company keep its obligation for long time.
Inventory Management:
Here the inventory is categorized in to:
(1) A B C analysis
(2) X Y Z analysis
1) ABC Analysis: - Items which constitutes to 70% of total consumption (of stores and
spares) value when arranged in descending order of consumption value will be termed as ‘A’
class items. Next 20% of total consumption value will be termed as ‘B’ class items and the
rest 10% as the ‘C’ class items.
2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and spares
holding value when arranged in descending order of stock holding will be termed a ‘X’ class
items next 20% of total stock holding value is ‘Y’ class items and the rest 10% as the ‘Z’
class.
Higher than necessary stock levels tie up cash and cost more in insurance, accommodation
costs and interest charges.
Four basic levels will need to be established for each line/category of stock. There are the:
a) Maximum level – achieved at the point a new order of stock is physically
received;
b) Minimum level – the level at point just prior to delivery of a new order
(sometimes called buffer stocks – those held for short term emergencies);
c) Reorder level – point at which a new order should be placed so that stocks will
not fall below the minimum level before delivery is received; and the
d) Reorder quantity or economic order quantity – the quantity of stock, which
must be reordered to replenish the amount held at the point delivery, arrives up
to the maximum level.
Once these controls are implemented an efficient system of recording receipts and issues is
vital to exercise full control of inventories.
Inventory Management at JSPL:
Inventory is stock of a company, which is manufacturing for sale and component that make
up the product. In managing inventories the objective of the company is to determine and
maintain optimum level of inventory investment. The optimum level of inventory lies
between two danger points of excess and inadequate inventories.
Inventory is monitored differently for raw material, work in progress, finished goods and
spares. Monthly inventory report is sent to the finance department in the corporate office.
Obviously the inventory report is prepared at plant level. Procurement Department gives the
data of closing stock of raw materials, finished goods as well as the work in progress.
Inventory Turnover Ratio:
Table 27: Table showing Inventory turnover ratio
JSPL For the year ended
31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11
Inventory Turnover 6.42 times 8.75 times 4.55 times 5.47 times 5.51 times 6.32 times 5.54times
Average: 6.08
Summary:
Inventory turnover ratio establishes a relationship between the total sales during a period and
average inventory hold to meet that quantum at 5.54 times in 2011 and on average it is 6.08
times, that signifies the quick moving of inventory. In other words, the stock held during
2005 is for 56.07 days as comparison of average at 61.34 days for the view of 7 years which
increases to 64.98 days in 2011.
Receivable Management:
At a plant level mostly the finished goods are sold on credit to increase upon the market share
and retain the customers but the major portion of debtors are dealt by Marketing Unit of the
Commercial Department and the Finance Department. It is consideration as an essential
marketing tool.
Control of the debtors’ element (the amount owed the business in the short term) involves a
fundamental trade-off between the cost of providing credit to customers (which includes
financing bad debts and administration), and the additional net revenue that can be earned by
doing so. The former can be kept to a minimum with effective credit control policies, which
will require:
Setting and enforcing credit terms;
Vetting customers prior to allowing them credit;
Setting and reviewing individual credit limits;
Efficient invoicing and statement generation;
Prompt query resolution;
Continuous review of debtors position (generating ‘aged debtors’ report);
Effective chasing and collection procedures; and
Limits beyond which legal action will be pursued.
Before allowing credit to a new customer trade and bank references should be sought.
Accounts can be asked for and analyzed and a report including any county court judgments
against the business and a credit score asked for from a credit rating business. Salesmen’s
views can also be canvassed and the premises of the potential customer visited.
The extent to which all means are called upon will depend on the amount of the credit sought,
the period, past experiences with this customer or trade sector, and the importance of the
business that is involved. But this is not a one-off requirement. One classic fraud is to start
off with small amounts of credit, with invoices being settled promptly, eventually building up
to a huge order and a disappearing customer.
Credit checking, even for established customers, should therefore feature in regular
procedures.
When the creditworthiness of a new customer is established, positive credit control calls for
the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if
any).
The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge
large interest on late payment of business debts by companies and public sector organisations.
Nevertheless, it is wise to inform customers this right will be exercised.
Collection is a vital element of credit control and must include standard, polite and well-
constructed reminder letters, and effective telephone or e-mail follow up. Use of collection
agencies should be considered, as could factoring – in its most comprehensive form a loan
facility based on outstanding invoices plus a sales ledger and debtors control service.
Efficient control of debtors will assist cash flow, and help keep overdraft or other loan
requirements down, and hence reduce interest costs.
Debtors represent future cash – or they should do if proper credit control policies are pursued.
Likewise stock will eventually become cash, but in the meantime represents working capital
tied up in the business. Keeping levels to the minimum required for efficient operations will
keep costs down. This means controlling buying, handling, and storing, issuing, and
recording stock.
Inherent in any system of inventory control is the concept of appropriate stock levels –
normally expressed in physical units sometimes in monetary terms.
The objective of establishing control levels is to ensure that excessive stocks are never carried
(and working capital thereby sacrificed) but that they never fall below the level at which they
can be replenished before they run out.
Receivables Management in JSPL:
Corporate office and the commercial department in coordination do the management of
receivables. The management of receivable is dealt on major part by corporate office and
minor part by commercial department of the company.
JSPL in matter of granting a credit period to customers tighten their policy and reduce credit
period to 30.43 days in 2010 to its debtors. Total Debtors amounted to Rs.211.16 Cr. by the
end of 2004, which further increased to 622.36 Cr in 2010.
Determination of Operating Cycle of JSPL
The determination of length of the operating cycle of a manufacturing firm is the sum of :
The broad range of project management and financial advisory services include:
inventory conversion period (ICP), &
debtors conversion period (DCP)
A) Inventory conversion period:
It is the total time needed for producing and selling the product. Typically, it includes:
a) raw material conversion period (RMCP)
b) work-in-process conversion period (WIPCP), and
c) finished goods conversion period (FGCP).
Inventory Conversion period = RMPC + WIPCP + FGCP
The raw material conversion period is depends on:
1) raw material consumption per day, &
2) raw material inventory
Raw Material Consumption per day = Total Raw Material Consumption/Number
of days in the year
Raw Material Conversion period = Raw Material Inventory/Raw Material
Consumption per day
Similar calculations can be made for other inventories, debtors and creditors.
B) Debtors’ conversion period:
It is the time required to collect the outstanding amount from the customers. The total of
inventory conversion period and debtors’ conversion period is referred to as gross operating
cycle (GOC).
Gross Operating Cycle = ICP + DCP
C) Payable Deferral period:
This is very common to get gross operating cycle but in practice, a firm may acquire
resources (such as raw materials) on credit and temporarily postpone payment of certain
expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance
investment in current assets. The payables deferral period (PDP) is the length of time the firm
is able to defer payments on various resource purchases.
Net Operating Cycle = Gross Operating Cycle – Payable Deferral period
If depreciation is excluded from expenses in the computation of operating cycle, the net
operating cycle also represents the cash conversion cycle. It is net time interval between cash
collections from sale of the product and cash payments for resources acquired by the
firm. It also represents the time interval over which additional funds, called working capital,
should be obtained in order to carry out the firm’s operations.
A) Inventory conversion period:
a) Raw Material Conversion Period:
Raw material consumed = Rs. 2225.71 Cr
Avg. Raw material inventory = Rs. 1145.75 Cr
2225.71-------------- = 11.37 times 195.60
330--------- = 29 days
11.37b) Work-In-Progress Conversion Period:
Cost of Production = Rs. 4278.12 Cr
Avg. work-in-progress = Rs. 119.72
4278.12------------ = 47.24 times 90.545
330------- = 6.98 days47.24
c) Finished Goods Conversion Period:
Sales = Rs. 7367.59 Cr.
Closing stock = Rs. 551.56 Cr.
7367.59--------------= 13.35 times551.56
330------- = 24.70 days13.35
B) Debtors Conversion:
Sales = Rs. 7367.59 CrClosing Debtors = Rs. 622.36 Cr
7367.59------------ = 11.83 times622.36
330------- = 27.87 days11.83
C) Payables Conversion:
Average accounts payables = Rs.727.22 Cr.
Cost of sales = Rs.4872.77 Cr.
Average accounts PayablesPayables Conversion Period = ----------------------------------- *330 Cost of Sales
727.225 = ------------- *330
4827.77 = 49.25 days
Operating Cycle:
Gross Operating Cycle (GOC) = 29+6.98+24.7+27.87 = 87.85 days
Net Operating Cycle (NOC) = 87.85-49.25= 39 days
Analysis:
The Net operating cycle of the firm is of about 39 days which shows that the company
realizes its profits quickly and company can quickly acquire cash that can be used for
reinvestment. In general, the shorter the cycle, the better a company is since less time capital
is tied up in the business process.
The company policy had a significant change for the year with regard to inventory as it
had increased continuously But this policy has a cost to the company in the presence of a
significant decrease in payables deferral period, will have to negotiate higher working
capital funds.
Company has tighten its steps towards the credit policy which signifies that in the current
year company is proving itself more efficient, it as well as shows a increase in the market
share of the company.
The company had reduced down its payables deferral period significantly which
strengthens its creditworthiness in the market and helps the company in getting the loans
on liberal terms. This represents the efficiency of the management.
One can have a vastly different working capital outlay while performing the same activity.
Having a large amount invested in stocks and debtors does not necessarily mean large profits,
but it can mean a drop in the prime calculation that every businessman is interested in the
return on investment. The object of working capital management is to trim down on stocks
and debtors and get the cash coming faster within the comfort zone of the business. In the
normal periods of business activity, cash that had completed the working capital cycle would
be reinvested in stock and the whole process would begin again.
Analysis of Asset Percentage:
Table 28: Table showing analysis of asset percentage
JSPL For the year ended Rs/Crs
Particulars 31 Mar
05
31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Current asset 599.82 736.4 1403.56 1698.51 3060 4216.08 4603.1
Total asset 2319.78 3250.62 5250.55 6783.63 8456.31 12279.9
9
17742.4
4
Percentage of current assets
over fixed assets
25.85% 22.65% 26.73% 25.03% 36.18% 34.33% 25.94%
Current ratios 1.29 1.24 1.39 1.23 1.87 1.19 1.03
Figure 25: Percentage of Current Asset to Fixed Asset
2005 2006 2007 2008 2009 2010 20110
5
10
15
20
25
30
35
40
25.8522.65
26.7325.03
36.1834.33
25.94
Percentage of current assets over fixed assets
Years
Curr
ent
asse
ts t
o Fi
xed
asse
ts(in
%)
Analysis:
From the above calculation it can be analyzed that JSPL is following a liberal policy of
working capital from last 4 years. When we give a thought to the current ratio of last three
years we can very easily depict that its current ratio is very low than the standard one i.e. of
2:1. This type of moderate approach gives the negative impact on the liquidity of the
company. As we know that profitability is measured by rate of return on total assets i.e. PBIT
/ Total sales. And if small part of total assets consists of current assets then it gives adverse
impact on the rate of return.
Analysis of Net Working Capital:
Table 29: Table showing analysis of working capital
JSPL For the year ended Rs/Crs
Particulars 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11
Current asset 599.82 736.4 1403.56 1698.51 3060 4216.08 4603.1
Current Liabilities 496.66 594.15 1007.37 1377.83 1636.17 3516.15 4447.45
Net Working Capital 103.15 142.25 396.19 320.68 553.78 699.93 155.65
Figure 26: Net working Capital
2005 2006 2007 2008 2009 2010 20110
100
200
300
400
500
600
700
800
103.15142.25
396.19
320.68
553.78
699.93
155.65
Net Working Capital
Net Working CapitalYears
Ne
t W
ork
ing
Cap
ital
(in
Cr.
)
Analysis:
As we can see from the above table and graph that company’s Net Working Capital has
been showing variation in its trend as last year’s working capital is showing negative
trend in increasing order.
The above situation shows that company management is inefficient in management of
working capital.
Making the comparison of current assets and current liabilities in 2010 & 2011 current
liabilities are increasing which leads the working capital in negative range so company
management is required to put a vigil look to manage working capital.
Analysis of Current Assets:
Table 30: Table showing analysis of current assets
JSPL For the year ended Rs/Crs
Particulars 31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11
Debtors 211.16 172.91 299.54 320.31 287.38 391.46 622.36
Inventory 196.47 257.55 568.65 642.44 980.56 1209.96 1328.50
Cash & Bank balance 21.90 33.29 31.30 52.97 577.91 308.96 60.10
Loans & Advances 218.07 572.54 591.01 785.94 1453.72 3199.04 3865.94
Total 647.6 1036.29 1490.5 1801.66 3299.57 5109.42 5876.90
Analysis:
Composition of all parts seems to be distribute but almost each component is showing
increasing trend which has both kind of influence for the financial performance of the
company so company need to mange this components very carefully.
Inventory is showing an increasing trend that is the signal of danger for company’s
profitability and these are not giving any return by locking up working capital.
Cash & bank balance has decreased to large extent during last year, due to excess of
investments in the projects. This shows that the company holds less liquidity in hand.
Suggestions:
First and foremost suggestion for the company is that, it should look into the idle funds,
which are engaged in inventory. Company should withdraw money from this locked up
working capital and invest it in some other assets.
Analysis of Current Liabilities:
Table 31: Table showing analysis of current liabilities
JSPL For the year ended Rs/Crs
Particulars 31 Mar
05
31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Sundry Creditors 292.85 298.33 505.47 573.60 619.78 1471.57 2211.71
Banks borrowings 92.06 43.91 118.81 213.59 44.25 114.26 251.34
Advances from
customers
10.57 24.50 20.02 31.36 125.09 506.98 165.63
provisions 88.55 179.99 272.14 385.48 581.94 985.81 1343.71
Other Current liabilities 15.94 52.59 100.53 189.91 294 467.65 521.06
Total 499.97 599.32 1016.97 1393.94 1665.06 3546.27 4493.45
Analysis:
As we can see from the graph and table that major portion of current liabilities are with
sundry creditors and every year it keeps on increasing.
As the company obligations are increased so company need to put certain measure to
control current liabilities.
By looking the seven years position of company in current assets and current liabilities it
can be seen that current liabilities are increasing over current assets so within the time
company need to manage its liability portion and need to make safer decision
Suggestions:
Due to the huge amount of current liabilities company has to lock up its funds in current
assets. Therefore, it should reduce its current liabilities by paying them off so that regular
cash outflow of cash get restricted and outflow gets converted into inflow to increase in
profitability of the firm.
One suggestion that could be made to the company is that, it should pay off its creditors
by withdrawing some cash from its debtors, which is idle at this point of time and some
amount from its inventory.
Statement of Change in Working Capital
Table 32: Table showing statement of change in working capital
JSPL For the year ended Rs/Crs
Particulars 31 Mar
05
31 Mar
06
31 Mar
07
31 Mar
08
31 Mar
09
31 Mar
10
31 Mar
11
Current Assets
Inventory (94.56) (61.04) (311.10) (73.78) (338.11) (229.42) (118.54)
Receivables (46.05) 38.25 (126.63) (22.76) 32.93 (104.08) (230.12)
Other Current assets (59.98) (73.01) (127.41) (116.79) (343.56) (646.81
)
82.67
Total Current assets (A) (200.59) (95.8) (565.14) (213.33) (648.74) (980.31)
(265.99)
Current Liabilities
Short term borrowings 35.96
(48.16)
74.91 94.78 (169.34) 303.61 658.64
Other Current Liabilities 149.10 58.02 245.62 163.68 248.72 1412.29 447.32
Total
CurrentLiabilities(B)
185.06 9.86 320.53 258.46 79.38 1715.9 1105.96
Working Capital
Shortfall (A-B)
(385.65) (105.66) (885.67) (471.79) (569.36) (2696.21) (1371.95)
Analysis:
A statement of changes in working capital helps us in locating where these changes took
place. Since working capital it measured by subtracting current liabilities from current assets.
Any increase in current asset and any decrease in current liabilities show an increase in
working capital similarly, a decrease in current assets and an increase in current liabilities
represent a decrease in working capital. Negative Working capital shows that customers pay
upfront and so rapidly, the business has no problems raising cash. In these companies,
products are delivered and sold to the customer before the company ever pays for them.
This table shows the changes in net working capital of JSPL. A wise financial policy of a
firm requires that long-term funds be used to finance Fixed Assets and short term funds are
used to finance Current Assets. The statement of changes in working capital shows that there
was a tremendous increase in current liabilities during 2009.There is a decrease in working
capital mainly because of the locking of working capital funds in inventories and receivables
and due to the increase in the liabilities.
Estimating Working Capital Needs
The most appropriate method of calculating the working capital needs of a firm is the concept
of operating cycle. However, a number of other methods may be used to determine working
capital needs in practice. We shall illustrate here three approaches, which have been
successfully applied in practice:
Current assets holding period: To estimate working capital requirements on the basis of
average holding period of current assets and relating them to costs based on the
company’s experience in the previous years. This method is essentially based on the
operating cycle concept.
Ratio of sales: To estimate working capital requirements as a ratio of sales on the
assumption that current assets change with sales.
Ratio of fixed investment: To estimate working capital requirements as a percentage of
fixed investment.
Estimating Optimal Need of Working Capital
Method: 1
a) Raw material consumed per month:
2225.71 = ------------ = Rs. 185.47Crs 12
b) Work in progress:
Raw material per month + (Cost of Production /2) = ---------------------------------------------------------
12 185.47 + (4278.12 / 2)
= ----------------------------- = (185.47 +2139.06)/12 =193.71Crs 12
c) Finished Goods:
551.56 Total cost per month = --------------- = 45.96 Crs
12
d) Total Inventory Needs:
= 185.47+193.71+45.96= Rs. 425.14Crs
e) Debtors:
7367.59 Sales per month = ----------------- = 613.96 Crs
12
f) Operating Cash:
4872.77 Total cost per month = ------------------ = 406.06 Rs/Crs
12 Therefore, Total Working Capital Required
= 425.14+613.96+406.06
= 1445.16 Rs/Crs
The first method gives details of the working capital items. This approach is subject to error
if markets are seasonal.
PBITRate of return = ---------------------------------------------
Net fixed investment + Working Capital
A number of factors will govern the choice of methods of estimating working capital. Factors
such as seasonal variations in operations, accuracy of sales forecasts, investment cost and
variability in sales price would generally be considered. The production cycle and credit and
collection policy of the firm would have an impact on working capital requirements.
Therefore, they should be given due weightage in projecting working capital requirements.
Regression Analysis
The regression analysis is a statistical technique of forecasting working capital requirement.
Under this method a mathematical relationship (y = a + bx) is established between two
variables, one dependent on another. In this case, the dependence of amount of working
capital on sale value is established which helps in making working capital requirement
projections.
The method of least square is used in this regard. The relationship between sales (x) and
working capital (y) is given by the equation:
y = a + bx
Simultaneous linear equation to obtain the value of a and b is as understated:
∑ y = na + b ∑ x
∑ xy = a ∑ x + b ∑ x²
Where a = fixed component
b = variable component
x = sales
y = working capital
n = no. of observations/past years
First we will regress between the sales (x) and the production capacity (y) as the company
had thought of increasing its production capacity to 95 % in the year 2007.
Linear equation between sales and production capacity:
30117.04= 7a + 568b ------- eq. 1
2565207.34 = 568a + 46562b ----------eq. 2
Solving for a and b
a = -16534 , b = 256.78
y = -16534 + 256.78x
Therefore for the year 2011 the sales will be
y = -16534 + 256.78* 95
y = 7860.77
Table 33: Table showing Production capacity and Sales
Year Production Capacity (in
percentage)(x)
Sales(y)
2004 69 1261.61
2005 72 2264.72
2006 82 2590.25
2007 80 3519.81
2008 82 5459.87
2009 88 7653.19
2010 95 7367.59
2011 95 7860.77
Now we will regress between the sales (x) and working capital (y) by taking the forecasted
sales of 2011 as x to forecast the working capital requirement for the year 2011.
Linear equation between sales and working capital:
2371.63 = 7a + 30117.04b ------- eq. 1
12134284.78= 30117.04a + 168481954b ----------eq. 2
Solving for a and b
a = 125.31 , b = 0.04962
y = 125.31+ 0.04962 x
Therefore for the year 2011 the working capital will be
y = 125.31+ 0.04962 * 7860.77
y = 515.36
Table 34: Table showing Sales and working capital
Year Sales (x) Working Capital (y)
2004 1261.61 103.15
2005 2264.72 142.25
2006 2590.25 396.19
2007 3519.81 320.68
2008 5459.87 553.78
2009 7653.19 699.93
2010 7367.59 155.65
2011 7860.77 515.36
Therefore the working capital requirement for the next year will be 515.36 Rs/Crs.
The regression analysis for the working capital requirement for the next year shows that the
company will have to find additional sources of working capital as the company will require
515.36 Rs/Crs calculated on the basis of the sales estimates for the next year and presently
the company has the positive working capital because the current liabilities does not exceed
the current assets. So by the next year the company will have to maintain its current assets or
decrease its current liabilities to meet its working capital requirement.
Trend Analysis for Working Capital Management
Trend analysis is comparative analysis of company’s ratios over time. It tries to predict the
future movement based on past data. Trend analysis is based on idea what is happened in past
and given the idea what would happen in past. In trend analysis, industry ratios are compared
over time, typically years. Year-to-year comparisons can highlight trends and point up the
need for action. Trend analysis works best with five years of ratios.
"With the past, we can see trajectories into the future - both catastrophic and creative
projections."
The Trend Analysis module allows to plot aggregated response data over time. This is
especially valuable on the basis of five-year data and a result of long survey.
The following data points can be measured (Y-Axis)
1. Mean and Mean Percentile
2. Standard Deviation and Variance
3. Ratio
The "Time Factor" (X-Axis) can have the following granularity
1. Daily
2. Weekly
3. Monthly
4. Quarterly (Jan-Mar, Apr-Jun, Jul-Sept, Oct-Dec)
5. Yearly
Projection of Ratios through Trend Analysis
Figure 27: Current Ratio Trend
2005 2006 2007 2008 2009 2010 20110
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
1.2 1.241.39
1.23
1.87
1.191.03
Current Ratio Trend
current ratio
Years
Cu
rre
nt
Rati
o
Slope Constant: -0.004
Figure 28: Cash Ratio Trend
2005 2006 2007 2008 2009 2010 20110
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.044 0.0560.031 0.038
0.35
0.087
0.013
Cash Ratio Trend
Cash Ratio
Years
Cas
h R
atio
Slope Constant: 0.010
Figure 29: Current Asset Turnover Trend
2005 2006 2007 2008 2009 2010 20110
0.5
1
1.5
2
2.5
3
3.5
43.51
1.842.07
1.761.81
0.79
1.62
Current Assets Turnover Trend
Current Assets
Years
curr
en
t a
sse
ts
Slope Constant: -0.286
Figure 30: Working Capital Turnover Trend
2005 2006 2007 2008 2009 2010 201105
101520253035404550
12.2315.92
6.53
10.97
9.7710.93
47.33
Working Capital Turnover Trend
Working Capital
Years
Wo
rkin
g C
apit
al T
urn
ove
r
Slope Constant: 3.52
Figure 31: Debtor Turnover Trend
2005 2006 2007 2008 2009 2010 20110
5
10
15
20
25
5.97
13.09
8.6410.98
18.9919.55
11.83
Debtor Turnover Trend
Debtor Turnover
Years
De
bto
rs T
urn
ove
r
Slope Constant: 1.45
Figure 32: Creditor Turnover Trend
2006 2007 2008 2009 2010 20110
0.5
1
1.5
2
2.5
2.14
1.281.3
2.03
1.47
1.16
0
Creditors Turnover Ratio Trend
Creditors Turnover
Years
cre
dit
ors
tu
rno
ver
Slope Constant: -0.10
Figure 33: Inventory Turnover Trend
2005 2006 2007 2008 2009 2010 20110
1
2
3
4
5
6
7
8
9
10
6.42
8.75
4.55
5.47
5.51
6.32
5.54
Inventory Turnover Ratio Trend
Inventory Turnover Ratio
Years
Inve
nto
ry t
urn
ove
r
Slope Constant: -0.23
Analysis on the basis of Trend:
Trend of current ratio put a picture of company that company is not having short term
fund in hand to meet short term debt hence it put a threat in meeting current obligations.
Cash Ratio trend shows that company is having low amount of cash for paying current
liability which can influence the financial position of company in upcoming period.
Current asset turnover trend of company is fluctuating over the period.
Working capital turnover is in positive range over the period that shows that the liquidity
position of the company is favourable & this shows efficiency in use of working capital
Debtor’s turnover trend is showing an increase in future that signifies that there is shorter
time period in sales and collecting cash.
As the Creditor’s turnover ratio trend is decreasing which shows that payments of
company are not prompt and keep it obligation for long time where as it also shows that
credit allowed by the suppliers are liberal.
Inventory is showing good position in hand of company but still company need to keep a
check over it as inventory is influenced by seasonal fluctuations and market conditions.
Current Asset Financing
Process of working capital financing:
1) Predictions are made based on sales.
2) Company has Credit Monitoring Arrangement (CMA) with banks. Accordingly
Forms are prepared and sent to consortium of banks for approval.
a. Form I contains information about Current Assets, this Form I should be sent
one week before beginning of Quarter.
b. Form II contains details about operations; this Form II should be sent six
weeks from entering the Quarter.
3) Accordingly margins are decided. The company itself should meet margin amount.
E.g. Inventory – 25%, Receivables – 35%. Normally margins are 25-35%.
4) Advances are received.
Finding & Suggestions
Findings:
The study conducted on working capital management of Jindal Steel & Power Limited shows
the evaluation of management performance in this context. Major findings and suggestions
thereon are narrated as under:
1. Current asset of the year 2009-10 is comprised of 25% of total investment in assets of
the company. As current ratio is showing a decreasing trend year on year, which
implies that current asset, are less compared to current liabilities.
2. High current assets turnover ratio is more judicious and shows efficiency of
management and proper utilization of the assets.
3. Current ratio (1.03:1) and quick ratio (0.73:1) of the year 2009-10 are lesser than that
of the ideal figures i.e. ideal current ratio is 2:1 while quick ratio is 1:1.
4. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation
of inventory in turn which cause loss to the company by way of deterioration of stock,
interest loss on blockage of stock etc.
5. Debtors Turnover ratio reveals an increasing trend during the period of study and
average collection period came down from 60 to 30 days which shows that company is
having specific policy for debtors’ management.
6. From regression analysis the working capital requirement for the next year is estimated
to be 515.36 Rs/Crs.
7. The operating cycle of the firm is disturbed, as it is continuously increasing which is
not good for the company.
8. The optimum need for working capital on an average basis company roughly will
require more than 455.26 Rs/Crs as its working capital.
Suggestions:
Keeping in view of detailed analysis for the 4 years of study and findings mentioned in above
paragraphs, the following suggestions shall be helpful in increasing the efficiency in working
capital management.
1. In case of inventory management ABC analysis, FSN technique, VED technique
should be adopted to increase the efficiency of inventory management. Further a
inventory monitoring system should be introduced to avoid holding of excess
inventory.
2. It is suggested to maintain a favorable current and quick ratios which shows a lesser
than ideal figures. It can be done either through increasing current assets or decreasing
liabilities.
3. With the help of proper inventory management systems, like demand-based
management, etc. the company can reduce the need for working capital and
inventories can be financed through accounts payable.
4. The company should try and maintain an optimum level of working capital in order to
improve upon the workings of the company.
Limitations:
1. Availability of the financial data was very limited which is not disclosed due to
sensitive nature for the company.
2. The main component of working capital is cost of capital, which is not described in
the project because of confidential nature.
3. External environment influence was not considered while doing the theoretical
standard rather than the industrial standard because of unavailability of any such
specific standard.
4. The scope of the study was limited to Jindal Steel & Power Limited.
Bibliography
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References:
Khan M.Y, Financial Management.
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Annual Report of Jindal Steel & Power Ltd.
Working Capital data of Jindal Steel & Power Ltd.
www.indiansteel.com
www.nseindia.com
www.indianinfoline.com
www.steelex.com
www.jindalsteelpower.com
www.moneycontrol.com
Glossary:
ABC Analysis: An approach of inventory management, which classifies inventories
according to their monetary values. Inventory items are thus categorized as (i) A- items: high
value items for which careful management is needed; (ii) B-items: moderate value items for
which rules of thumb such as past inventory turnover are adequate management techniques,
and (iii) C-items: low value items which can be maintained at a flat minimum amount.
Accrued Liability: Also known as outstanding liabilities or expenses. For example, accrued
wages, accrued rent, accrued taxes and accrued interest and so on. They typically represent
obligations for certain services for which payments are yet to be made and are indirect
sources of financing.
Ageing Schedule: It is a tabular classification of receivables which showing the length of
time which the account has been outstanding.
An Aggressive Policy: It resorts to short-term liabilities to finance temporary and also part or
the entire permanent current assets requirement.
Average Collection Period: Accounts receivables / (annual credit sales/360).A ratio that
express how rapidly the firm is collecting its credit accounts.
Balanced Policy: This policy is that balances the trade-off between risk and profitability in a
manner consistent with its attitude towards bearing risk.
Bills Payable: Bills Payable is a current liability and arises when the bills written by
creditors are accepted by the firm.
Capital Cost: The cost of the use of additional capital to support credit sales, which
alternatively could be profitably employed elsewhere is, therefore a part of the cost of
extending credit or receivables and are called capital costs.
Carrying Costs: These costs arise due to the storing of inventory and expenses made in
raising funds to finance the acquisition of inventory.
Cash Budget: It is statement of the expected cash flows for a firm over a specified period of
time.
Cash Cycle: This is length of the time between the purchase of raw materials and collection
of receivables in the sale of the final product.
Cash Discount: A percent reduction in sales or purchase price allowed for early payment of
invoices. It is an incentive for credit customers to pay invoices in a timely fashion.
Collection Cost: These costs are administrative costs or legal costs incurred in collecting the
receivables from the customers to whom credit sales have been made.
Conservative Policy: A conservative policy ignores the distinction between temporary and
permanent current assets, by financing almost all assets investments with long term capital.
Consumer Credit: Credit granted to an individual is referred to as consumer credit.
Credit Period: It is total length of time period over which credit is extended to a customer to
pay bill.
Current Assets: Those assets which can be converted into cash within an accounting year or
within the operating cycle, whichever is greater.
Current Ratio: The ratio of current assets divided by current liabilities. It is used as a
measure of liquidity.
Factor: Specialized buyer, at a discount of company receivables.
Factoring: It is selling of receivables to a financial institution, the factor, usually” without
recourse.
Float: It refers to the amount of money tied up in Cheque that have been written but yet have
to be collected and encashed. Alternatively it represents the difference between the bank
balance and book balance of cash of a firm.
Gross Working Capital: The firm’s investment in current assets.
Inventory Turnover Ratio: Cost of goods sold / Inventory. A ratio that measures the
number of times a firm’s inventories are sold and replaced during the year. This ratio reflects
the relative liquidity of inventories.
Just-in-time Inventory Control: A production and management system in which inventory
is cut down to a minimum through adjustments to the time and physical distance between the
various production operations. Under this system the firm keeps a minimum level of
inventory an hand relying upon suppliers of furnish parts “just-in-time” for them to be
assembled.
Liquidity Ratio: It indicates to the relationship between current assets and current liabilities.
Operating Cycle: The period involved from the time cash is invested in inventory until the
time cash is recovered from the sale of the goods.
Optimal Cash Balance: Equal to the larger of (1) the sum of transaction balances and
precautionary reserves and (2) compensating balance requirements.
Permanent Working Capital: These assets are required on a continuing basis over the entire
year. They represent the amount of cash; receivables and inventory maintained as a minimum
to carry on operations at any time.
Quick Ratio: Current assets minus inventory and prepaid expenses items divided by current
liabilities. It is a measure of liquidity. It is also called acid test ratio.
Source of Funds: Decrease in an asset account or an increase in a liability or an equity
account.
Temporary Working Capital: Trade credit, and other payables and accruals, that arises
spontaneously in the firm’s day to day operations.
Trade Credit: Credit extended to another firm is known as trade credit.
Working Capital Management: It is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the interrelationships that exist between
them.