CHAPTER 1
INTRODUCTION
1
(1.1) INTRODUCTION The
life blood of any business is finance. Existence and growth
of a firm depends upon the financial position. Financial position of affirm can be identified by the proper capital requirement by the proper capital requirement by the firm. Before Before raising capital, it it is essential to make estimates for long term and short term financial needs. In absence of correct estimates ,the business may suffer either from inadequate or excess capital. If continue to struggle for existence. on the other hand ,if capital is in excess of needs, it will remain idle due to utilization of money and may reduce earnings in comparison to investment. Working capital management management is so far the best way to find out The management of current assets and current liabilities.This analysis analysis is carried out with the help of several statiastical, mathematical tools practicalmethods and procedures which are based upon rules and strict principles for this reason the analysis is more reliable and acceptable.This working capital management is done on National Aluminium Company limited with special emphasis on the current liabilities. This company is one of the biggest profit making public sector in India.
To analyze the working capital requirement requirement of a company. To analyze the purchase of raw materials components and spares. To know the day to day expenses of the th e business. To know the amount amount of inventories inventories of raw matetrials, matetrials, work - in – progress, progress, Stores and spares, finished goods of NALCO. To know the management of working capital of NALCO. To ascertain the short term solvency position. To focus on the management of current liabilities. To focus on the management of current assets.
2
(1.1) INTRODUCTION The
life blood of any business is finance. Existence and growth
of a firm depends upon the financial position. Financial position of affirm can be identified by the proper capital requirement by the proper capital requirement by the firm. Before Before raising capital, it it is essential to make estimates for long term and short term financial needs. In absence of correct estimates ,the business may suffer either from inadequate or excess capital. If continue to struggle for existence. on the other hand ,if capital is in excess of needs, it will remain idle due to utilization of money and may reduce earnings in comparison to investment. Working capital management management is so far the best way to find out The management of current assets and current liabilities.This analysis analysis is carried out with the help of several statiastical, mathematical tools practicalmethods and procedures which are based upon rules and strict principles for this reason the analysis is more reliable and acceptable.This working capital management is done on National Aluminium Company limited with special emphasis on the current liabilities. This company is one of the biggest profit making public sector in India.
To analyze the working capital requirement requirement of a company. To analyze the purchase of raw materials components and spares. To know the day to day expenses of the th e business. To know the amount amount of inventories inventories of raw matetrials, matetrials, work - in – progress, progress, Stores and spares, finished goods of NALCO. To know the management of working capital of NALCO. To ascertain the short term solvency position. To focus on the management of current liabilities. To focus on the management of current assets.
2
Study is based on the secondary data collected from different departments of Smelter plant at Anugul, Odisha.
The entire research research involved on extensive extensive and intensive intensive study of annual reports, reports, final reports, operating cycle. The data collected from financial statements of the company are analyzed with the help of accounting, financial and statistical tools. The whole study is based on secondary data of National Aluminium Company limited and one of its units, Smelter plant situated at Anugul. I have used following sources of data during my study. s tudy.
1.2.3 Annual report of NALCO. Annual audited accounts. Balance sheet. Profit and loss account. Monthly in – house magazine,
“PARICHAYA”.
1.2.4 Inventory management: Stock level Economic order quantity (EOQ) ABC analysis VED analysis Inventory turn over ratio (ITR)
3
Cash management: Cash budget. Cash flow statement. Receivable Management: Management: Debtor turn over ratio. Average collection period. Ratio Analysis: Current ratio. Quick ratio. Debt equity ratio. Interest coverage ratio. Working capital turnover ratio.
1.2.5 rd
th
The data and information were collected from 23 May to 06 July 2011. The scope is limited to secondary data only.
1.2.6 The company has not finalized accounts for the financial year 2010-2011 during period of study as a result of which the present year figures of the balance sheet and profit and loss accounts are not available. The entire study is based upon the secondary data available at the site office. The financial decisions are taken at corporate office and time is being short it was not possible to go for primary data collection and for an extensive study on the topic. Ratios used for working capital management are not necessarily the true indicator of future results. Result of ratio analysis is not a solution for the problem, when there is change change in price &quantitative &quantitative data data absolute figures are are required required for managerial decision, ratio analysis is useless.
4
CHAPTER 2
NALCO PROFILE
5
Incorporated in 1981, as a public sector enterprise of the Government of India National Aluminium Company Limited (NALCO) is Asia‟s largest integrated aluminium complex, encompassing bauxite mining, alumnia refining, aluminium smelting and casting, power generation, rail and port operations. Commissioned during 1985-87, Nalco has emerged to be a star performer in production, export of alumnia and aluminium, and more significantly, in propelling a self-sustained growth. It got the Navratna status in the year 2000.
“To be a reputed global company in the metals and energy sectors ”
“To achieve growth in business with global competitive edge providing satisfaction to the customers employees share holders and community at large.”
To maximize capacity of utilization. To optimize operational efficiency and productivity. To maintain highest international standard of excellence in product quality, cost efficiency and customer service. To provide steady growth in business by technology up-gradation, expansion and diversification. To have global presence and to earn foreign exchange. To maintain the leadership in domestic market. To instill financial discipline at all levels for achieving cost and budgetary control optimizing utilization of working capital and effective cash flow management. To maximize return on investment. To develop a strong R&D base and increase business development activities.
6
To promote the results oriented organizational ethos and work cultures that empowers employees and helps realization of individuals and organizational goal. To maximize internal customers satisfaction. To participate in peripheral development of the area.
To attract committed personnel with growth potential and develop their skills and capabilities in congenial work and social environ vent through opportunity for training recognition, career advancement and incentives. To develop the favorable attitude among the employees and to obtain their best construction to the organization by providing stable employment ,safe working conditions job satisfaction, reduce grievance through good pay and welfare amenities commensurate with company capacity to spend and government guidelines. To foster fellowship and sense of belongingness among all section of employees through closer association of employees with the management and by encouraging healthy trade union practices
Modern updated technology Captive resources in raw materials Integrated operations Pithead location of the power plant th 9 largest producer of aluminium in world Efficient logistics in transportation Directed port facilities on the Bay of Bengal International linkages in technology and markets Environment friendly operations
7
National aluminium company limited (NALCO) is consider to be turning point in the history of Indian Aluminium Industry. In a major leap forward, NALCO has not only addressed the need fir the self sufficiency in Aluminium but also given the country a technological edge in producing this strategic metal as per world standards. Incorporated in1987 as a public sector enterprise, Nalco was set up to exploit a part of the large bauxite deposits discovered in the east coast, in technical collaboration with Aluminium Pechiney of France. With the consistent track record in capacity utilization, technology absorption, quality assurance, exports performance and posting of profits, NALCO is a bright example of India‟s industrial capacity. The discovery of large reserves of bauxite are in the east coast and the preliminary project work done by Bharat Aluminium company limited , The company was set up by the government of India in 1987 to implement one of the largest multi-locational integrated Aluminium projects of the world with its own captive power plant and port facilities. The technical collaboration of Aluminium Pechiney of France, the support of Euro-dollar loan from a consortium of international Banks & the special dispensations of the government of India and the government of odisha helped the company to implement the project expeditiously within the budgeted cost of Rs.2408 crore under very difficult logistics of project management. Different segments of the company went into production in a phased manner starting from November 1985. within a short span of time the company has emerged as a leader in the field of aluminium production in country to make a quantum jump in production of Aluminium and has also been earning substantial foreign exchange through creditable export performance year after year. The Integrated complex has five main segments :-
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The giant Aluminium complex of NALCO in Odisha is the result of team efforts following consulting organizations:Engineers India Ltd. New Delhi :- For mines and all project monitoring consultant. D.C.P.L Kolkata: - Captive power plant. H.I.P.L. New Delhi: - Port facilities. RITES, New Delhi: - Rail facilities.
Manning your company, there are 6147 persons processing a variety of skills qualifications and competence. This company is truly youthful with the average age of employees being below 35 years. Starting with a core group of 262 employees in 1982, the progressive growth in manpower has taken place in a planned manner, matching the needs of the different stages of the project. Present strength of 6147 as on June 96 is close to optimum requirement against existing capacity.
The collaborative approach on industrial relation front has kept the performance level of the company high irrespective of the constraints on availability of required manpower and inter-union rivalry in multi-union scenario. The revision of the canteen subsidy reimbursement was done at be-partite level at all the units of the company and later registered with the statutory authority for legal sanction. There has been no man days lost on account of industrial relation problem. How ever the state wide agitation by political parties, trade union of the state and the coordination committee of the officers Association and unions against central Government‟s decision ondisinvestments/privatization have resulted in total bandh. The total mandays lost during the year mainly on this account is about 0.38% of the total mandays available HRD subsystems like suggestion, Reward schemes and monitoring scheme being implemented at various writs of the company, As well equipped HRD centre of Excellence is in operation at corporate office. For structured training and developing practical skill at workplace, each unit has its HRD centre.
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Providing mobile health services consisting of a van along with team or doctors and para medical staff with medicines in close cooperation with District Administration and Lions club of Angul to provide free medical services at door step to the resident of 38 peripheral villages. * organizing 5 Animal Health camps in identified villages. * organizing 15 health camps in identified villages. * providing dinking water by tanker by regular basis in 18 water scarcity peripheral villages. * sanctioning additional funds to the tune of Rs.2.00 crore for development of 2 labour colonies viz. Sahid Laxman Nayak Nagar and Pandit Raghunath Murmu Samiti, where large number of contract laborers are working in the smelter plant and CPP reside. * Development of public utility facility like tube well, roads, drains, playgrounds, schools, and community center for their decent living. * To improve the environment, various plantation programmes is being taken up and seedlings are being distributed among the peripheral inhabitants.
NALCO has received following awards in various fields. th 1. The highest Export Award of CAPEXIL for 2005-06 for 19 time in succession. 2. Top Exporter Gold Trophy of EEPC (Eastern Region) for the year 20042005 3. The prestigious Niryat Shree Award for Excellence in Export for the year 2003-2004, instituted by the Federation of Indian Export Organization (FIEO). 4. Best Mother plan Award at EXPO-ODISHA-2006. 5. Star performer Award of PEPC Southern Region.
setting up of a award class corporate R & D, Engineering and Technology Development Centre at Bhubaneswar. Setting up of a TTPA Gallium plant of 4N+ purity at Aluminium Refinery Damanjodi based of the least and ecofriendly Lon-Exchange Resin Technology of NLM, Japan. Setting up of a 1000000 TPA Nickel carbonate production plant based of the know-how of modified carbon process, developed by IMMT, Bhubaneswar.
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Year
2004-05
Production 4852 in MT
2005-06
2006-07
2007-08
2008-09
2009-10
4854
4623
4684
4700
4878
BAUXITE PRODUCTION(in 000mts) 4900 4850 4800 4750 4700 4650 4600 4550 4500 4450
Production
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 year
ALUMINA REFINERY:Production of Alumina Hydrate at 1590100MT and claimed Alumina of 15501100MT have been the highest since inception. Similarly the power generation plant of refinery has been the highest ever since inception. TABLE-2.2 year
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Production 1556 in MT
1576
1590
1475
1575
1591
export sale crores
909
863
774
626
751
935 in
11
GRAPH-2.2
.
Alumina(in 000MTS) 1800
s e 1600 l a s 1400 t r o 1200 p x 1000 e & 800 n o i t 600 c u 400 d o r 200 p
production export sale
0
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
year
The year ended with all the 600 pots in operation. Smelter plant has exceeded the rated capacity with highest ever cast metal production at 298207MT. The metal purity and pot productivity during the year has also increased to 99.77% and 1.367Mt/pot/day was achieved last year zero discharge of industrial effluents was achieved in year. TABLE-2.3 Year
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Production inMT Export sale in crores Domestic sales in crores
298
338
359
359
361
431
130
133
96
93
100
110
167
206
258
263
245
271
TABLE-2.3
Alumina(in 000MTs) 500 & t r s 400 o e p l x a s e , c 300 n i t o i s t e 200 c u m d o d o r 100 p
Production Export sale Domestic sales
0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
year
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Close to Aluminium Smelter plant at Angul, a captive power plant of 960MW cluster, has been established for firm supply of power to the smelter. Presently, the capacity is being expanded to 1200MW.
Micro- processor based burner management system for optimum thermal efficiency. Computer controlled data acquisition system fir on-line monitoring . Specially designed barrel type high pressure turbine. Electronic precipitators with advanced intelligent controllers. Wet disposal of cash.
On the Northern arm of the inner labor of Visakhapatnam port on the Bay Of Bengal NALCO has established mechanized storage and handling facilities for exporting aluminium in bulk and importing caustic soda. THE SALIENT FEATURES:
Maximum ship size -3500DWT. Alumina reception-48*53 ton pay-load wagons. Alumina storage -3*25000tonRCCsilos. Ship loading rate -2200tph. These facilities are being upgraded to handle higher volumes of exports, following expansion of production capacities.
The company has achieved the highest ever sale of metal, rolled products and special grade alumina/hydrate during the year. With launching of NALCO special products alumina (NSPL)-102in the overseas market through export of 41MT to Vietnam during the year. The company achieved the highest ever sale of 4,35,979MT metal as against sale of 3,53,589 MT metal during the previous financial year. This comprises of 2,89,031 MT, the highest ever domestic sale of metal surpassing previous best of 2,71,274 MT achieved in 2008-09 and the highest ever export sale of 1,46,948 MT against the previous best of 1,32,730 MT achieved in2004-05.The company achieved a total chemical sale of 7,51,410 MT during year compared to 8,93,332 MT during previous financial year. Hence, The marketing performance of company is excellent.
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Products
2005-06
2006-07
2007-08
2008-09
2009-10
Bauxite
48,00000
46,84684
46,23278
49,00000 46,00000
Aluminium
3,45,000
3,60,457
3,58,734
8,46,012
1,332084
Alumina
15,75000
15,75500
14,75200
12,20026
8,70,029
Power from 5,80,000 CPP
5,60,900
5,96,800
1,30,047
4,38,000
The company posted a lower total income of Rs.5,548 crore in the year under report ,as against Rs.5,631 crore during the previous year. Profit after tax for the year stands at Rs.814 crore ,as against Rs.1,272 crore in previous year. The decline in net profit during the year compared to previous year was due to combined effect of lower sales realization, reduced earnings from investment of surplus fund and increase in operating cost. Your company has recorded higher export earning of Rs.2,209 crore during the year as against Rs.2,071 crore achievedduring the previous year.
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PARTICULARS
2009-10
200809
200708
200607
200506
1. Exports 2. Domestic sales 3. Gross sales (1+2) 4. Less: Excise Duty 5. Net sales (3+4) 6. Other income: 7. Operating 8. Non-Operating 9. Operating expenses 10. Operating profit (5+7-9) 11. Earning before interest, Dep. &taxes (EBIDT) (10+8) 12.Interest&Financing Charges 13.Earning before dep. &taxes(EBDT) (11-12) 14. Depreciation and Amortization 15. Profit Before Tax(PBT) (13-14) 16. Provision for tax 17. Net Profit (PAT) (15-16) B. Balance Sheet:
2,209 3,102 5,311 256 5,055
2,085 3,446 5,531 423 5,108
2,134 3,340 5,474 485 4,989
2,586 3,929 6,515 575 5,940
2,306 3,018 5,324 435 4,889
119 374 4.072 1,102
123 400 3.428 1,803
146 441 2.822 2,313
103 311 2.412 3,631
101 132 2.311 2,679
1,476
2,203
2,754
3,942
2,811
2
4
2
-
-
1,474
2,199
2,752
3,942
2,811
319
272
285
322
381
1,155 341 814
1,927 655 1,272
2,467 835 1,632
3,620 1,239 2,381
2,430 868 1,562
18. Equity Capital 19. Reserves & surplus 20. Networth (18+19) 21. Loans outstanding 22.Net Fixed Assets 23. Net Current Assets 24.Capital Employed (22+23)
644 9,751 10,395 4,836 2,990 7,826
644 9,126 9,770 4,032 2,596 6,628
644 8,230 8,874 3,531 3,500 7,031
644 7,051 7,695 3,711 3,755 7,466
644 5,249 5,893 3,944 2,357 6,301
A. Income statement:
15
CHAPTER-3
WORKING CAPITAL MANAGEMENT
16
Every business needs funds for 2 purposes i.e. (i) for its establishment (ii) to carry out its day to day operations. Long funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investment in these assets represents that part of fixed capital which is blocked on permanent or fixed basis and it is called as fixed assets. Funds are also needed for short term purposes for the purchase of raw materials. Payment of wages and other day to day expenses etc. These funds are known as working capital. Thus working capital refers to that of firms which is required for financing short term or current assets such as cash, marketable securities, debtors and inventories. Hence, such working capital is known as revolving or circulating or short term working capital.
Working capital management is need for the following purposes: For the purpose of raw materials, components and spares. To pay wages and salaries. To incur day to day expenses and overhead cost such as fuel, power and office expenses etc. To meet the selling cost as packing, advertising etc. To provide credit facilities to the customers. To maintain the inventories of raw materials, work-in-progress, stores, spares and finished goods.
Working capital may be classified in to 2 ways:(a) on the basis of concept (b) on the basis of time.
on the basis of concept working capital is classified as: (i) Gross working capital
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(ii)
Net working capital.
Gross working capital is the capital invested in total current assets of the enterprise. Current assets are those assets which in the ordinary course of business can be converted in to cash with in a short period of normally one accounting year. Constituents current assets: 1. cash in hand and bank balances 2. Bills receivable 3. sundry debtors 4. short term loans and advances 5. inventories of stock as: a) Raw material b) Work in progress c) Stores and spares d) Finished goods 6. Temporary investment of surplus funds 7. prepaid expenses 8. Accrued income.
Net working capital is the excess of current assets over current liabilities. Net working capital= Current assets (-) current liabilities. Net working capital may be positive or negative. when current assets exceed the current liabilities the working capital is positive the negative working results when the current liabilities are more than the current assets current liabilities are those liabilities which are intended to be paid in the ordinary course of business within a short period normally one accounting year out of current assets or the income of the business. constituents of current liabilities: 1. Bills payable 2. Sundry creditor 3. Accrued or outstanding expenses 4. Short term loans, advances and deposits 5. Dividend payable
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6. Bank overdraft
On the basis of time the working capital may be classified as: (i) permanent or fixed working capital. (ii) Temporary or variable working capital
permanent or fixed capital is the minimum account which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets which is continuously required by the enterprises to carry out its normal business operation. For example ever firm has to maintain minimum level of raw material. Work-in-progress, finished goods and cash balance.This minimum level co current assets is called fixed working capital as these part of capital is blocked in current assets. As business grows the requirement of permanent working capital also increases due to increase in current assets. Fixed working is further classified as: regular working capital reserve working capital Regular working capital is required to ensure circulation of current assets from cash to inventories to receivables to cash and so on. Reserve working capital is the excess amount over the requirement over for regular working capital which may be provided at the unstable periods such as strikes, rise in prices etc. (ii)
Temporary or variable working is the amount of working capital which is required to meet the seasonal demands and special exigencies. variable working capital can further be classified into as follows: seasonal working capital special working capital
The capital required to meet seasonal need of enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies.
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It is the quantitative sense (Excess of current asset over current liabilities) that the working capital has been taken in the present study. The current asset and current liabilities are flowing around in a business like electric current. The working capital plays the same role in the business as the heart in the human body. Just like gates blood and circulates the same in the body, in the same way working capital funds are generated and these funds are circulated in the business. As and when this circulation stops, the business become lifeless. It is because of the reason that the working capital is known as circulating capital. The funds generated from the issue of shares, borrowings and from operation are used to pay creditors for materials etc. the material are processed, wages and over head expenses are paid. This makes available the stock of finished goods by sale of which either debtors are created or cash is received, thus generating profit. Apportions of profit is utilized for payment of tax, interest and dividends. This cycle continues throughout the life of business.
The need for working capital to run day to day business activities can not be over emphasized. Its very difficult to find a business, which does not required any amount working capital. Indeed firms differ in their requirements of working capitals. It is very obvious that a firm should aim at maximizing the wealth of its shareholder. In its endeavour to do so, firm should earn sufficient return from its operations. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough fund in current asset for generating sales. Current asset are needed because sales do not convert into cash instantaneously.
The most accurate method of calculating the working capital needs of a firm is the concept of operating cycle. Operating cycle is the time duration required to concert sales after the conservation of resources in to inventories in to cash. The operating cycle of a manufacturing company like NALCO involved 3 phases:-
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1) Acquisition of resources such as raw material, labour power and fuel etc. 2) Manufacture of the product which involves conversion of raw material in to work-in-progress in to finished goods . 3) Sale of the product either for cash or on credit sale creates amount receivable collection. A manufacturing concern the operating cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion of finished stock in to sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on. The speed with which one operating cycle completes determines the requirements of working capital. The longer the period of cycle larger is the requirement of working capital and vice-versa.
Operating cycle process GRAPH-3 cash received from debtors and paid to suppliers of raw materials
Raw material introduced into process
Sale of finished goods
Finished goods produced
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3.6
The business firm needs funds for working capital to maintain inventories of raw materials, work-in-progress, finished goods, payment of wages and salaries, factory, O.H. etc. These funds can be arranged from different sources. The various sources are Trade credit, bank borrowing, inter corporate funds, long term loans, equity shares etc. it varies from one company to the other as to what source of fund a company chooses looking into the liability of the available options.
A firm can adopt different financing policies. Two types of financing may be distinguished. LONG TERM FINANCING : The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserves and surplus ( retained earnings) SHORT TERM FINANCING: The short term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short term finance in the money market. Short term finances include working capital funds from banks, public deposits, commercial paper, factoring of receivable etc.
What should be the mix of short and long term sources in financing current assets? Depending on the mix of short and long term financing, the approach followed by a company may be referred to as: * MATCHING APPROACH * CONSERVATIVE APPROACH * AGGRESSIVE APPROACH
This approach is also called as hedging approach. The term “hedging” refers to 2 off selling transactions of a simultaneous but opposite nature which counter balance the effect of each other.
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This approach suggest that the entire estimated investments in current assets should be financed from long term sources and short term sources should be used only for emergency requirements.
The aggressive approach suggest that entire estimated requirement of current assets should be financed from short term sources and even a part of fixed assets investments be financed from short term sources.
Every enterprise needs inventory for smooth running of its activities. It serves a link between production and distribution process. There is generally a time lag between the recognition of need and its fulfillment. The greater the time lag, the higher the requirement for inventories. The investment in inventories constitutes the most significant part of working capital in most undertaking. The dictionary meaning of inventory is stock of goods or a list of goods. In accounting language it may mean stock of finished goods only. Thus inventory includes the following things in a manufacturing concern. (a) Raw material (b) Work-in-progress (c) Consumables (d) Finished good (e) Spares
Raw material from a major input into the organization. They are required to carry out production activities uninterruptedly. The quantity of raw material required will be determined by the rate of consumption and the time required for replenishing the supplies. The factor like availability of raw material and Government regulations etc. too affect the stock of raw material. The profit and st loss account of NALCO for the year ended 31 march 2008 shows that the raw materials are for Rs.574.36 crores, but in 2006-07 it was for Rs. 557.59 crores. It means the raw materials consumed in the current year have increased than the previous year.
The work in progress is the stage if stock which is in between raw material and finished goods. The raw material enters the process of manufacture, but they are
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yet to attain a final shape of finished goods. The quantity of work in progress depends upon the time taken in manufacturing, the more will be the amount of work in progress. Construction and other work in progress in the year 2006-07 is Rs.246.60 crores. But in 2007-08 it has increased a lot. The work in progress as on st 31 march 2008 is Rs.266.93 crores. So as compared to increase in raw material the production increased. In NALCO the stock of work in progress is ascertained on the basis of technical estimates and is valued at lower annual average direct material , power and fuel and proportionate conversion cost or net realizable value.
These are the materials which are needed to smoother the process of production. Consumables may be classified according to their consumption and criticality. Generally, consumable stores do not create any supply problem and form a small part of production cost. There can be situations where those materials may account much value then the raw material. The fuel oil may form a substantial part of cost.
These are the goods which are ready for the customers. The purpose of maintaining inventory is to ensure proper supply of goods to customers. In some concern, production is undertaken on order basis. In these concerns there will be no need for stock of finished goods inventory will be more when production is under taken in general without waiting for special order.
Spares also form a part of inventory. The stocking policies of spares are different from industry to industry. some industries like transport will require more spares than other concern. The costly spare parts like engines, maintenance spares etc. are not discarded after use rather than they are in ready position for further use. The consumables and spares during 2007-08 Rs.230.60 crores which is little higher than the previous year. In 2006-07 the consumable goods and spares were Rs.222.25 crores.
Cash at bank are one type of current asset in the business. It is needed at all times to keep the business going. Cash include both cash in hand and cash at bank. Marketable securities are also part of current assets. These current assets are also called as absolute liquid assets.
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Cash itself does not produce goods or services. It is used as a medium to acquire other assets. It is the assets which are used in manufacturing goods or providing services. The idle cash can be deposited in bank to earn interest. If at a time it does not have sufficient cash with it, will have to borrow from the market for reaching the required level. The firm need for the cash may be attributed to the following needs: (a) transaction motive (b) precautionary motive (c) Speculative motive
A firm needs cash for making transactions in day to day operations. The cash is needed to make purchase, pay expenses, taxes, dividends etc. if more cash is needed for payments than receipts, it may raise through bank overdraft. On the other hand if there are more receipts than payments, it may be spent on marketable securities. The maturity of securities may be adjusted to the payments in future such as interest payments, dividend payments etc.
A firm is required to keep cash meeting various contingencies for example, a debtor who was to pay after 7 days may inform his inability to pay. On the other hand a supplier who used to give credit at present. In these situation cash receipt may be less than expected and cash payment will be more as purchases may have to be made for cash instead of credit. So a firm should keep some cash for contingencies or it should be in a position to raise finances at a short period. ( C) SPECULATIVE MOTIVE:The speculative motive relates to holding of cash for investing in profitable opportunities as and when they arise. Such opportunities do not come in regular manner. For example, the prices of shares and securities may be low at a time with an exemption that these will go up shortly. The prices of raw material may fall temporarily and a firm may like to make purchases at their price. Such opportunities can be availed of if a firm has cash balance with it. So the cash and bank balance is needed for all these purposes. Thus, the cash and bank balance is needed for all these purposes. Thus the cash and bank balance st of NALCO as on the date 31 march 2008 was Rs.3516.46 crores where as it was
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Rs.3686.53 crores in the last year. From Rs.3686.53 crores, Rs.0.15 crores are cash in hand in the organization. So these are the cash and bank balance which are with NALCO to meet the transaction, precautionary and speculative motive.
Debtor is people or other firm who owe the firm. This is usually happen where the firm has soled goods with a period of credit. The firm sells the goods and services, but allows the purchaser a period of credit to pay. These are called as debtors. If firm has debt, these are considered as assets because when the debtors pay will have converted the debt in to cash in the bank. Because most debts are relatively short term and considered current assets. If you sell goods and offer a period of credit , than they have to ensure that all the debts are paid and they are paid at time . it is called as debt control which is an important part of business activities because although a debt is an asset, it is not liquid or asset as cash as bank. In NALCO, the sundry debtors are Rs.34.13 crore in 2006-07, but the balance sheet of 2007-08 shows that the debtors are of Rs.60.65 crores. So debtors are increasing every years. It means NALCO is increasing its credit sales day by day.
A creditor is a party (e.g. persons, organization, company or Govt.) that has a nd claim to the service of a second party under the assumption that 2 party will return an equivalent property or services. Here, the first party is called sundry creditor and the second party is called as debtors. Credit is temporary capital and the objective of credit is to lend with the purpose of increasing profits and sales.
An overdraft is a service provided by a bank which allows a customer ot continue to write cheques or make other withdrawals from an account even when there is not enough money in account to cover them. In effect an overdraft is a form of credit which attracts interest charges for as long as you are withdrawn. Most of the overdrafts are charged at variable interest rates. Different charging periods and policies, some of the alternatives are arranging a monthly management fee, a charge only on the overdrawn balance, a chare for every cheque and transaction made during the period when your over draft is in use.
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The main advantage of this facility is that an overdraft allows the customer to overdraw on a current account up to an agreed limit and subject to an annual review. In 2005-06 NALCO has no bank overdraft, but in the year 2006-07 the balance sheet of NALCO shows that it has Rs.9.8 crores of bank overdraft which shows the current liabilities of the company which the company has to pay within a very short period. :Other liabilities include various current liabilities such as bills payable, short term loans and advances, provisions for taxation.
Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. Adequate working capital also enables a concern to avail cash discount on the purchases and hence it reduces costs. Sufficient working capital ensures regular supply of raw materials and continuous production. Only concerns with adequate working capital can exploit favourable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices . Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods , generally there is much pressure on working capital. Adequacy of working capital creates an environment of security , confidence, high morale and creates overall efficiency in a business .
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In view of working capital management and its requirements we may classify these into following important categories. 1. inventory management 2. cash management 3. receivable management 4. ration analysis 1. inventory management:An efficient system of inventory unit determines: (a) How much to purchase (b) From where to purchase (c) Where store etc.
The main objective of inventory management is operational and financial. The operational objective means that work is not disrupted for want of inventory. The financial objective means that investment in inventories should not remain idle and minimum working capital should be locked in it. So, it is necessary to manage the inventory properly. The following are the tools and techniques of inventory management.
Stock level Economic order quantity ABC analysis VED analysis Inventory turn over ratios
Carrying too much and too little is dangerous to the firm. If the inventory level is too little them firm will face frequent stock out involving heavy ordering costs and if the inventory level is too high it is unnecessary tie up capital. Therefore, the form requires an efficient inventory management. Various stock levels are:
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This represents the quantity which must be maintained in hand at all times. If stocks ate less than minimum levels, then the work will stock due to shortage of materials. Minimum stock level = Re-ordering level – (Normal consumption * Normal reorder period)
Re-ordering level is the level when the quantity of materials reaches at a certain figure them fresh order is sent before the materials reach minimum stock level. Reordering level is fixed between minimum level and maximum level. The rate of consumption, number of days required to replenish the stocks and maximum quantity of materials on one day are taken in to account when fixing re-ordering level. Re-ordering level=maximum consumption*re-order period
It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit, it will be over stocking. A firm should avoid over stocking, because it will a high material costs. Over stocking will mean blocking of the more working capital. More space for storing the materials more will be the wastage of materials. Maximum level = Re-ordering level + Re-order quantity (minimum consumption * Minimum re-order period)
It is the level beyond which materials should not fall in any case. If danger arises then immediate steps should be taken to replenish the stock even if more cost is incurred in arranging the materials. If materials are not arranged immediately there is possibility of stoppage of work.
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The quantity to be purchased should be neither small nor big because cost of buying and carrying material is very high. EOQ is the size of lot to be purchased which is economically suitable. This is the quantity of materials which can be purchased at minimum cost. Generally EOQ is the point at which inventory carrying cost are equal to order cost. Thus, economic ordering quantity can be calculated with the help of following formula EOQ=⁄ Where A= annual consumption in rupees S= cost of placing an order I= Inventory carrying cost of one unit.
These are the cost which is associated with the purchasing or ordering of materials. These costs are also known as buying cost and will arise only when some purchase are made. The ordering cost are totaled up for the year point end then divided by the number of order placed each year.
These are the cost of holding inventory. The planning commission of India had established these costs “between” 15% to 20% total cost. The longer the materials kept in stocks the costlier it becomes by 20% every year.
It is generally seen that in manufacturing concern, a small percentage of value of consumption and a large percentage of value of consumption and a large percentage of value. Under A,B and C. At 10% of the items contribute above 20% of value of consumption and this category is called „A‟ category „C‟ concerns about 70% of items of materials which contribute only 10% of value of consumption.
Class A B C
No. of items 10 20 70
Value of items 70 20 10 30
The VED analysis is used generally for spare parts. The demand for spares depends upon the performance of the plant and machinery. Spare parts are classified as vital (V) Essential (E) and Desirable(D). The vital spare are must for running the concern smoothly and must be stored adequately. The E type of spares is also necessary, but their stocks may be kept at low figures. The socking of D type of spares may be avoided at times. B. CASH MANAGEMENT:Cash management has assumed the importance because it is the most significant of all the current assets. It is required to meet the business obligations. Cash management deals with the following. Cash inflows and outflows Cash flows within the firm Cash balance held by the firm Basically, there are two techniques to manage the cash, such as: 1. cash budget 2. cash flow statement 1.Cash Budget: A cash budget is a estimate of cash receipts and payments of cash during a future period of time. It is a device to plan and control the use of cash. The cash budget pin points period when there is likely to be excess or shortage of cash. Thus, a firm by preparing the cash budget can plan the use of excess cash and make arrangements for the necessary cash and when required. Cash budget will include all possible sources from which cash will be received and the channel in which payments are to be made, so that a consolidated cash position is determined. 2. Cash Flow Statement: Cash flow statement is a statement which describes the inflow and outflow of cash and cash equivalents in an enterprise during a specified period of time. A cash flow statement summarizes the causes of changes in cash position of business enterprises between dates of two balance sheets. Cash flow statement should report cash flow during the period classified by operating, investing and financing activities. The cash flow is classified into 3 main categories. Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities
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Operating activities are the principal revenue producing activities of the enterprise cash flows from operating activities are primarily derived from the principal revenue producing activities of enterprise. Investing activities are the acquisition and disposal of long term assets and investments not included in cash equivalents. Financing activities are activities that result in changes in the size and composition of owner‟s capital and borrowings of the ente rprise.
TABLE3.1 The cash flow statement of NALCO for last two years has been given below : CASH FLOW STATEMENT
Rs. In (crores)
Year ended st March-31 -2010
Year ended st March-31 -2009
A. Cash flow from operating activities: Net profit before tax and extra ordinary income Adjustment for: Depreciation Interest&financingcharges÷nd Provisions (Net) Claims/ Recoverable written off Stores &spares written off Exchange variation gain/Dividend Loss/(Profit) on sale of assets (net) Operating profit before working capital charges: Adjustment for: Inventories Trade &other receivables Trade payables
Cash generated from operation Direct tax paid Cash flow before extraordinary items Extra ordinary Net cash from operating activities
1,154.86 319.40 2.28 71.54 0.13 19.54 (84.46) (0.20)
1,927.16 272.96 3.96 55.10 0.14 6.72 (6.31) (0.04)
328.23 1,483.09 (94.83) (241.88) 317.20
332.53 2,259.69 (163.47) 65.09 459.13
(19.51) 1,463.58 (291.930)
360.75 2620.44
1,171.65 1,171.65
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B. Cash flow from Invensting Activities: Purchage of Fixed assets Dividend income from mutual fund Net cash used in investing activities
(677.60) 84.46
(539.14)
(2,211.08) 13.10
(2,197.98)
C. Cash flow from Activities: Interest &financing charges Exchange Variation gains Dividends including dividends tax paid
D. Net changes in cash and cash equipments (A+B+C) E. Cash & cash equivalentsopening balance F. Bank overdraft Cash&cash eqivalentsG. Closing balance
(2.28) 301.53
303.81
274.70 2869.04 8.61 3,152.35
(3.96) (6.79) 376.91
387.66
(647.42) 3516.46 2869.04
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CHAPTER-4
ANALYSIS OF WORKING CAPITAL MANAGEMENT
.
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Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making certain decisions. However, ratio analysis is only a means of better understanding of financial strengths and weaknesses of a firm. In view of various users of ratios, we may classify them into following 4 categories. Liquidity ratios Leverage ratios Activity ratios Profitability ratios
liquidity ratio measures the ability of the company to meet its current obligations i.e. ability to pay its obligations as and when they become due. In fact analysis of liquidity needs the preparation of cash budgets, cash and funds flow statements. The failure of a company to meet its obligations due to lack of sufficient liquidity will result in a poor creditworthiness loss of creditors worthiness or even in legal tangles resulting in the course of the company. A very high degree of liquidity is also bad. Ideal assets earn nothing. So it is necessary to strike a proper balance between high liquidity and lack of liquidity. The liquidity ratios are Current ratio, Quick ratio, Absolute liquid ratio.
Leverage ratios show the proportion of debt and equity is financial by outsiders. These ratios measure the contribution of financing by owners as compared to financing by outsiders. The leverage ratios are debt equity ratio, interest coverage ratio, capital gearing ratio etc.
Activity ratios are calculated to measure the efficiency with which the resources a firm have been employed. These ratios are also called turnover ratios because they indicate the speed with which assets are being turned over into sales. The various turnover ratios are inventory turnover ratio, debtor turnover ratio, working capital turnover ratio etc.
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These ratios measure the result of business operations or overall performance and effectiveness of the firm. Various profitability ratios are gross profit ratio, net profit, operating profit ratio, expenses ratio etc.
The inventory turn over ratio is calculated by dividing cost of goods sold by average inventory. Inventory turn over ratio = stock of goods sold = sales – gross profit ---------------------- --------------------Average inventory average inventory Every firm had to maintain certain level of inventory of finished goods so as to be able to meet the requirement of business. But the level of inventory should neither be too high nor too low. Inventory turn over ratio indicates the number of items the stock had been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. This ratio measures how fast the inventory is moving through the company and generating sales in a year . generally a high inventory turn over is an indication of good inventory management, where as a low inventory turn over id danger signal from company point of view because it cannot meet customers demand in the time of urgency. A high level of inventory amounts to unnecessary tip up funds reduced profits and increased costs rental of spares and so on. The inventory turn over ratio of NALCO from 2006-2007 to 2009-10 is as follows:
Year
2006-07
2007-08
2008-09
2009-10
Cost of Goods sold 2580.07
2714.45
3453.67
3645.06
Average Inventory
150.62
201.52
313.68
349.81
Ratio
17.13
13.47
11.01
10.42
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Inventory turn over ratio 18 16 14 12 10 8 6 4 2 0
ratio
2006-07
2007-08
2008-09
2009-10
year
INTERPRETATION Generally, a high inventory turnover is an indication of good inventory management, where as a low inventory turnover is danger signal from company point of view because it cannot meet customers demand in the time of urgency. From the graph it is evident that the performance in the year 2006-07 is better than the 2007-08 and the performance of 2008-09 is better than in 2009-10
DAYS OF INVENTORY HOLDING; It is calculated by the following methodNo. of Days in a year Inventory Turn over ratio
Year
2006-07
2007-08
2008-09
2009-10
No. of Days in a year
365
365
365
365
Inventory turnover ratio 17.13
13.47
11.01
10.42
Days of Inventory
27.09 days
33.15 days
35.03 days
Holding 21.3 days
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Days of Holding Inventory 40 35 30 25 20
Days of Holding Inventory
15 10 5 0 2006-07
2007-08
2008-09
2009-10
Year
INTERPRETATION Normally, a low holding inventory shows the efficiency of the company to quickly dispose the inventory in to sales. The graph indicates that the year 2006-07 has lower inventory holding period than the year 2009-10.
Current ratio may be defined as the relationship between the current assets and current liabilities. This ratio also known as working capital ratio as it is a measure of general liquidity and is most widely used to make the analysis of a short term financial position or liquidity of a firm. Current assets include cash and those assets which can be converted into cash within a year such as marketable securities, debtors and inventories, bills receivable and prepaid expenses. All obligations within a year are included in current liabilities. Current liabilities include creditors, bills payable, accrued expenses, short term bank loans. The current ratio is calculated by dividing the total current assets by total current liabilities. Current ratio = Current Assets Current liabilities
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As a conventional rule a current ratio of 2:1 or more is considered to be satisfactory. It represents the margin of safety for creditors. An extremely high ratio of current asset to current liability is an indication of slack management. Poor credit management and excessive inventories for the current requirement.
Year
2006-07
2007-08
2008-09
2009-10
Current Assets
3755
3500
2596
2990
Current Liabilities
1416.98
1515.15
1483.43
1679.77
Ratio
2.65
2.31
1.75
1.78
4000 3500 3000 2500
Current Ass ets
2000
Current Liabilities Ratio
1500 1000 500 0 2006-07
2007-08
2008-09
2009-10
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Ratio 3 2.5 2 1.5
Ratio
1 0.5 0 1
2
3
4
INTERPRETATION: As a convention rule a current ratio of 2:1 or more is considered to be satisfactory. It represents the margin of safety for creditors. An extremely high ratio of current assets to current liability is an indication of slack management. Thus the graph represent that the company has better current ratio over the four years.
Acid test or quick ratio is more rigorous test of liquidity than the current ratio. The term liquidity “refers to the ability of a firm to pay its short term obligations as and when they become due. Quick ratiomay defined as the relationship between quick liquid assets and current or liquid liabilities. An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash in hand and cash at bank are the most liquid assets. The other assets which can include in the liquid assets are bills receivable, sundry debtors, marketable securities and short term or temporary investments. The ratio is calculated by dividing Quick Assets by Current Liabilities. Quick ratio = Quick Assets Current liabilities [where: quick asset = current asset- inventories]
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Quick assets are those assets which are converted into cash immediately. For example cash, debtors, bills receivables and marketable securities. Generally, Quick ratio of 1:1 is considered satisfactory. Usually a high acid test ratio is an indication that the company is liquid and has the ability to meet its current liabilities in time and on other hand, a low quick ratio represent that the company‟s liquid position is not good. A company with a high value of quick ratio can suffer from the storage of funds. If it has value of quick ratio can suffer from the storage of funds. If it has slow paying doubtful and long duration outstanding book debt receivables and it can really preparing with a low value of quick ratio if it is realizing each efficiently from inventories and paying its current obligations in time.
Year Quick crores)
assets(in
Current crores)
liabilities(in
Ratio
2006-07
2007-08
2008-09
2009-10
3230.71
2984.84
2076.80
2385.27
1416.98
1515.15
1483.43
1679.77
2.28
1.97
1.40
1.42
3500 3000 2500 2000
Quick Assets
1500
Current Liabilities
1000 500 0 2006-07
2007-08
2008-09
2009-10
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Ratio 2.5 2 1.5 Ratio 1 0.5 0 1
2
3
4
INTERPRETATION: Generally, Quick ratio of 1:1 is considered satisfactory. Usually a high acid test ratio is an indication that the company is liquid and has the ability to meet its current liabilities in time. The graph shows that the company has a high liquid asset in the year 2006-07 which is capable of repayment of short term liabilities in time over the following years.
Debt equity is calculated by dividing total debt by total equity. Debt equity Ratio = Total Debt Total equity The debt equity ratio describes the lenders contributions for each rupee of the owner‟s contribution. A ratio of 1:1 may be usually considered satisfactory although the norm of such ratio is 2:1. The higher ratio the greater will be the risk to the creditors and too depended on long term debts by the firm. A lower ratio reveals a high margin of safety to the creditors and a relatively high stake of the owners‟ in capital structures of the firm. The debt equity ratio of NALCO from 2006-07 to 2009-10 has been given below
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Year
2006-07
2007-08
2008-09
2009-10
Debt
0
0
0
0
Equity
644
644
644
644
Ratio
0
0
0
0
700 600 500 400
Debt
300
Equity
200 100 0 2006-07
2007-08
2008-09
2009-10
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Ratio 1 0.9 0.8 0.7 0.6 0.5
Ratio
0.4 0.3 0.2 0.1 0 1
2
3
4
INTERPRETATION: A high debt equity ratio which indicates the claims of outsiders (creditors) are greater than those of owners, may not be considered by the creditors because it gives a lesser margin of safety for them at the liquidation of the firm. But the graph shows that the company (NALCO) has no debts, indicates a stronger position than its competitors Interest coverage ratio measure the debt servicing capacity of the firm is so far as fixed interest on long term loan is concern coverage ratio is calculated by dividing EBIT by interest. Interest coverage Ratio = EBIT Interest It shows the numbers of times the interest charges of long term loan are covered by the fund that are originally available for payment. The ratio is used to test the firm‟s debt servicing capacity. A higher interest co verage ratio is danger signal that the firm is using excessive debt and does not have the ability of offer assured payment interest to the creditors. From the point of view of the creditors the large the coverage the large the ability of the firm to handle fixed charge liabilities and more assumed the payment of interest to the creditors. However two
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high ratio may imply unused debt capacity. However lows high a ratio is danger signal to the firm. The interest coverage ratio of NALCO from the year 2006-07 to 2009-10 is given below.
Year
2006-07
2007-08
2008-09
2009-10
EBIT
3942
2754
2203
1476
Interest
0
2
4
2
Ratio
0%
1377%
550.75%
738%
4500 4000 3500 3000 2500
EBIT
2000
Interest
1500 1000 500 0 2006-07
2007-08
2008-09
2009-10
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Ratio 1600 1400 1200 1000 800
Ratio
600 400 200 0 1
2
3
4
INTERPRETATION: This ratio indicates the interest-paying capacity of a firm. But a too high interest coverage ratio may not be good for the firm because it may imply that firm is not using debt as a source of finance, so as to increase the earning per share. The graph shows that in year 2007-08 the company has highest interest coverage ratio than in the other years which means that the company (NALCO) has not used more debt in that year.
This ratio measure the efficiency with which the working capital is being used by a firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a high working capital turn over ratio is not a good situation for any firm. The working capital turn over ratio is calculated by dividing working capital with sales. Sales Working Capital Turn over Ratio = ------------------Average Working Capital
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TABLE-4.7 Year
2006-07
2007-08
2008-09
2009-10
2580.07
2714.45
3453.67
3645.06
Net working capital 2338.02
1984.85
1112.57
1310.23
1.36%
3.104%
2.78%
Cost sold
of
Goods
1.103%
Ratio
4000 3500 3000 2500 Cost of Goods sold
2000
Net working capital
1500 1000 500 0 2006-07
2007-08
2008-09
2009-10
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Ratio 3.5 3 2.5 2 Ratio 1.5 1 0.5 0 1
2
3
4
INTERPRETATION A high ratio indicates the efficient utilization of working capital and a low ratio indicates otherwise. But a high working capital turnover ratio is not a good situation for any firm. From this given graph, we can know that during the four years the company has a better performance over management of working capital.
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CHAPTER 5
SWOT ANALYSIS 49
Nalco has achieved the “Zero Debt‟ status. It has its own strong financial resources. Due to effective implements of „state of the art‟ technology its image in the Global Market is excellent and in Indian Market it is the leader in Aluminum market/sector.
The company has its own fully mechanized open cast mines along with its own Aluminum plant. It has its own microprocessor-based burner at its own power plant having automatic turbine run up system.
Due to present scenario of industrial development, there is an exodus of experienced personnel from the company. It is difficult in obtaining highly proficient/skilled/employees. The company work culture is poor due to strong trade union activities and political interferences. Average age of workmen is high which bas becomes a hindrance of effective working.
Now a day‟s coal supply has become a major problem for the company. As the company is dependant upon others for supply of coal is the major weakness.
The company has commenced its project activities for the second phase expansion and shall proceed its own resources to a considered extent. The availability of surplus Alumina with the company and the sustaining demand for Alumina in the global market has put it in a demanding stage and offers attractive opportunities for entering into creative business deals and for participating in the JVS of overseas smelter.
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The continuation of reform process focus on second generation liberalization process and the ongoing globalization trend may bring ample opportunities for the company in playing a key role in metal trading, hedging, tolling, capacity addition, technology collaboration and in redefining new areas for application of its value added rolled products and chemical business.
Continuous rising of crude oil in global market, developments of fragmented geopolitical scenario, slowdown in the economic activities across the global, possible halt to the peace initiatives with neighboring countries, terrorism, reversal in global economic scenario, hardening of interest rates, natural calamities, erratic monsoon, poaching of its man power by competitors for their green field projects and levy of anti dumping duties on its raw material import are the major threats of NALCO.
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1. NALCO is not providing credit sales to its customers. 2. During my project work I found that the NALCO has a good liquidity position. 3. The return generated by employing capital is not good. 4. The profitability position is also not satisfactory. 5. During my project work I found that NALCO is efficient in managing the working capital. 6. The company has high liquid asset which is enough for repayment of short term liabilities. 7. Moreover the company has good current ratio position ,which shows that company uses its current assets efficiently.
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Suggestions made by me in my project indicates the possible cause of situation and effects on the profit are given below:-
The management of NALCO should try to avoid two danger points – excessive or inadequate investment in current assets.
The management of NALCO should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may be temporarily invested.
Though NALCO has efficient liquidity ratio, but the excess cash balance should be managed properly.
NALCO has done its entire sale on cash basis. It should try to sell on credit also, because there is also some other company operating over India.
NALCO should try to hold the required amount of inventory in every time to reduce is idle fund.
NALCO should try to accelerate the cash conversion cycle for better management of cash.
NALCO should try to take some risk of investing the idle cash in short-term securities, so that it can gives extra earning to the company in the form of cash inflow.
NALCO should try to maintain a low working capital fund so that the funds may not remain idle.
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“The financial statement analysis” pla ys a vital role in helping the financial manger and top management of the company to plan and control their financial structural operations. An efficient analysis would therefore high light the pitfalls in management in terms of financial matter such as income, expenditure, profitability, fund availability etc.
This gives an idea about controllable and uncontrollable variables. These can be re-examined and integrated to evolve an innovative decision gives the way for higher profitability and performance
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Books
Khan and Jain. – Financial Management : Theory and practices 4th Edition, New Delhi, Tata McGraw Hill Publications. Page.No. 26.3 Pandey I.M. – Financial Management Page.No. 577
:
9th Edition, New Delhi,Vikas.
Sharma R.K., Shashi K. Gupta – Management Accounting : 11 Kalyani publishers. Page.No 4.1
th
edition,
Sharma R.K., Shashi K. Gupta-Financial management, Kalyani publishers. Page.No 10.1,11.1
http://www.investopedia.com/terms/a/acidtest.asp#axzz1qPPu5gwU
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