PROJECT FINAL REPORT ON
“Working capital management at Nalco”
BY RAKESH KUMAR BARAL (PGDM)
Accman institute of management Summer Internship Project (Batch of 2008)
PREFACE
To start any business, First of all we need finance and the success of that business enti entire rely ly depe depend ndss on the the prop proper er mana manage geme ment nt of dayday-to to-d -day ay fina financ ncee and and the the management of this short-term capital or finance of the business is called Working capital Management.
Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader.
ACKNOWLEDGEMENT
A work is never a work of an individual. I owe a sense of gratitude to the intelligence and co-operation of those people who had been so easy to let me understand what I needed from time to time for completion of this exclusive project. I am greatly indebted to my guides Prof. DENESH SINGH ,faculty guide for Fina Financ ncee (sum (summe merr inte intern rnsh ship ip), ), Accm Accman an
Inst Instit itut utee Of Mana Manage geme ment nt & Mr. Mr.
SATYABRA SATYABRAT TA DASH , Mana Manage gerr , Fina Financ ncee Depa Depart rtme ment nt ,cor ,corpo pora rate te offi office ce ,
NALCO , Bhubaneswar for their constant guidance ,advice and help which enabled me to finish this project report properly in time . I am also grateful to Prof. S.C.GHOSH, CRIC Chief and Mr. RAJIV KUMAR , DIRECTOR, Accman Institute of Management, for permitting me to undertake this study. Last but not the least, I would like to forward my gratitude to my friends & other faculty members who always endured me and stood with me and without whom I could not have completed the project.
Rakesh Kumar Baral
DECLARATION
I do hereby declare that this piece of project report entitled “A Study on Working capital Management practices in NALCO” for partial fulfillment of the requirements for the award of the degree of “POST GRADUATE DIPLOMA IN MANAGEMENT” is a record of original work done by me under the supervision and guidance of Prof. DENESH SINGH, Accman Institute Of Management .This project work is my own and has neither been submitted nor published elsewhere.
PLACE: DATE:
SIGNATURE OF THE STUDENT
CERTIFICATE
This is to satisfy that the summer project work of Mr. Rakesh Kumar Baral Titled Working capital management is an original work and this work has not been submitted elsewhere in any form. The indebtness to other works/publications has been duly acknowledged at the relevant places. The project work was carried out during 02.05.2009 to 02.07.2009 in National Aluminum Company Limited (NALCO).
Date: Mr. Satyabrata Dash, Manager (finance) NALCO, Corporate office NALCO Bhaban, Bhubaneswar
TABLE OF CONTENTS Sr. No.
Contents
Page No.
1
Preface
2
2
Acknowledgement
3
3
Declaration
4
4
Certificate
5
5
Executive Summary
8
6
Introduction To The Study
9-10
Objective Of The Study (A)
Research Methodology and Scope Of Study (B)
Limitation Of The Study (C ) 7
Introduction- Indian Aluminium Industry
Aluminium Structure, Inputs and Products (A)
Financial Year-08 (B)
Prospects (c)
Salient Features Of The Industry (D)
Quantitative Industry (E)
11-21
Consumption Of Aluminium In India (F) 8
Introduction – NALCO
22-34
Brief History (A)
Achievements (B)
Nalco- products (C)
5 years performance – physical and highlights (D)
Production - next 5 years (E) 9
Introduction-Working Capital
35-42
10
Working Capital Management
43-51
Consequences of under and over assessment of W.C (A)
Types of W.C (B)
Financing W.C (C)
Inventory Management (D)
Cash Management (E)
Receivables Management (F) 11
Important Terms and Ratios (graphical presentation)
12
Conclusion
52-62 63
13
Bibliography
64
EXECUTIVE SUMMERY The major objective of the study is to proper understanding the working capital of NALCO & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relat relating ing to workin working g capita capitall (Curr (Current ent assets assets-Cu -Curre rrent nt liabil liabiliti ities) es) and short short term term financing are known as working capital management. It involves the relationship between a firm’s short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period. The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management.
Inventories management at NALCO: NALCO is a large scale manufacturing company involved in mining of Bauxite and produc productio tion n of Aluminu Aluminum. m. Theref Therefore ore,, it has to mainta maintain in large large quanti quantity ty of inventories at production units for its smooth s mooth running and functioning.
Cash management at NALCO: NALCO has been accumulating huge cash surpluses over last several years, which enable enabless the organ organiza izatio tion n to mainta maintain in adequa adequate te cash cash reserv reserves es and to genera generate te required amount of cash.
Receivables management at NALCO: NALCO has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office
obtains sales order from Aluminum users in India as well as globally. On the basis of order received for different products it marks production planning of different i.e. Ingot sow ingot, Billets, Wire etc.
INTRODUCTION
Working Capital:The life blood of business, as is evident, signified funds required for day-to-day oper op erat atio ions ns of the the firm firm.. Th Thee mana manage geme ment nt of work workin ing g capi capita tall assu assume mess grea greatt import importanc ancee becaus becausee shorta shortage ge of workin working g capita capitall funds funds is perhap perhapss the bigges biggestt possible cause of failure of many business units in recent times. There it is of great importance on the part of management to pay particular attention to the planning and control for working capital. An attempt has been made to make critical study of the various dimensions of the working capital management of NALCO, a Star Trading House with NAVRATNA Status. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing short-term debt and upcoming operational expenses.
Objective of the study:The following are the main objective which has been undertaken in the present study:
1. To determ determine ine the amount amount of working working capital capital require requireme ment nt and to calcul calculate ate various ratios relating to working capital. 2. To make an item wise wise study of the the components components of the workin working g capital. capital.
3. To suggest the steps steps to be taken to increase increase the efficie efficiency ncy in manageme management nt of working capital.
Place of study:The project study is carried carried out at the Finance Finance Department Department of NALCO Corporate office Situated at Bhubaneswar, ORISSA. The study is undertaken as a part of the PGDM curriculum from 02 MAY 2009 to 02 JULY 2009 in the form of summer placement.
Study design and methodology:Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, NALCO. The secondary data were collected from the Annual Report of NALCO, NALCO website, etc.
Limitations:Theree may Ther may be limit limitat atio ions ns to this this stud study y beca becaus usee the the stud study y du dura rati tion on (sum (summe mer r placement) is very short and it’s not possible to observe every aspect of working capital management practices.
INDIAN ALUMINIUM INDUSTRY Aluminium Industries in India is one of the leading industries in the Indian economy. The growth of the aluminum Metal industry in India would be sustained by the diversification and exploration of new horizons for the industry. India has huge deposits of natural resources in form of minerals like copper, chromite, iron ore, manganese, bauxite, gold, etc. The India aluminum industry falls under the category of non iron based which include the production of copper, tin, brass, lead, zinc,aluminum,andmanganese. The main operations of the of the India aluminum industry is mining of ores, refining of the ore, casting, alloying, sheet, and rolling into foils. At present, Hindalco and Nalco are one of the most economical in the production of aluminum in the world. For the sustenance of the growth the aluminum industry in India has to develop research and development units to assist the production and improve on the quality measures to keep a stringent quality control. The India aluminum Metal Industries sector in the previous decade experienced substantial success among the other industries. The India aluminum industry is developing fast and the advancement in its technologies is boosting the growth even faster. The utilization of both international and domestic resources was significant in the rapid development of the India aluminum industry. This rapid development has made the India aluminum industry prominent among the investors. The India aluminum industry has a bright future as it can become one of the largest players in the global aluminum market as in India the consumption is fairly low, the industry may use the surplus production to cater the international need for aluminum which is used all over the world for several applications such as aircraft manufacturing, automobile manufacturing, utensils, etc. The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg. In USA, 19 kg.in Japan and 10 kg. In Europe , Even the World’s average per capita consumption is about 10times of that in India. One reason of low consumption in the country could be that consumption pattern of aluminium in India is vastly different from that of developed countries. The demand of aluminium is expected to grow by about 9 percent per annum from present consumption levels. This sector is going through a consolidation phase and existing producers are in the process of
enhancing their production capacity so that a demand supply gap expected in future is bridged. However, India is a net exporter of alumina and aluminium metal at present.
ALUMINIUM-STRUCTURE •
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The aluminium industry in India can be classified as: (a) The primary producers who produce ingots and billets (primary form of aluminium) using bauxite. (b) The secondary producers who add value to the ingots and billets to produce semi-fabricated products. At present there are only five companies in the primary aluminium market viz. Hindalco , Indian Aluminum (Indal), Madras Aluminum (Malco), National Aluminum (Nalco) and Bharat Aluminum (Balco). The former three are private sector companies while the latter two are government owned. All the primary producers have integrated forward into the manufacture of high value semi-fabricated products like rods, rolled products, extrusions and foils.
Regulated till 1989 o
o
Until 1989, the Aluminum Control Order (ACO) required all domestic manufacturers to ensure that atleast 50% of their ingot production was electrical grade, for use by the transmission power industry. The government fixed ingot prices on the basis of a Retention Pricing Mechanism, taking into consideration the average retention prices of all producers and a minimum return on equity. The above control resulted in a skewed product mix and shortages of aluminum for other sectors. The problem was further compounded by the vulnerable financial position of State Electricity Boards (the main users of electrical grade aluminum) and high import and excise duties. The producers resorted to inflated prices for other types of aluminium to compensate for the disadvantages they suffered because of this regulation.
o
The ACO was scrapped in 1989 and in 1991 the government lifted restrictions on capacity additions resulting in a free market environment.
Aluminium – Inputs
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The aluminium industry in India can be classified as: Captive power, ample bauxite reserves, coupled with cheap labour costs make Indian companies amongst the most competitive aluminium producers globally.
The main raw material for the manufacture of aluminium includes bauxite, caustic soda, calcined petroleum coke, coal tar pitch, and LS/FS furnace oil. The production process for manufacture of aluminium is briefly outlined below.
The mined bauxite ore is mixed with caustic liquor and is refined to produce alumina. This is then smelted (through electrolysis in a smelter) to obtain aluminium. Depending on the quality of bauxite, 2.5 – 3 tonnes are required for manufacture of 1 tonne of alumina. In turn, 2 tonnes of alumina are required for manufacture of 1 tonne of aluminium.
Bauxite o
o
Indian bauxite reserves at 3 bn tonnes, are the 5th largest in the world, and account for 6% of total world reserves. Most alumina refineries are designed around the bauxite reserves to reduce transportation costs. Cost per tonne of bauxite varies for players depending on the location of the refinery and bauxite mines. For example, Nalco has an estimated 1,600 m tonnes of bauxite reserves only 20 kms from its alumina refinery, enabling it to become one of the most economical bauxite producers in the world.
Power •
•
Power constitutes the single largest cost component for aluminium manufacturers (35–40% of operating costs). Almost all the major Indian companies have captive power plants thus giving them access to cheap power. This makes India one of the most competitive low cost aluminium producers in the world. Hindalco and Nalco’s production costs are amongst the lowest in the world. Both companies have the advantage of 100% captive power, vital in a power intensive industry and in a power deficit country like India.
Aluminium – Products o
Aluminium products can be segregated into rolled products, extrusions, and foils.
o
o
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Rolled products find applications in automobiles (paneling, floors and windows, but are yet to find use in structural parts and bodies), construction (roofing and walls), consumer durables, engineering applications, web stock for laminated packaging (for toothpastes). A major portion of rolled products capacity is accounted for by the five integrated producers (around 82%). Extrusions include products as bars, pipes and tubes. Major users of extruded aluminium products are buildings, transportation and electrical sector Production in this segment is widely spread and the top three players control around 31% of the market (the largest company - Hindalco commands around 14% market share in this segment). Foils are sheets having thickness of less than 0.2 mm up to 0.006 mm finding application mainly in the packaging sector. Major users of aluminium foils include the pharmaceutical, consumer products, cigarette and cable manufacturing industries.
KEY POINTS Supply - Supply of aluminum is in excess and any deficit can be imported at low rates of duty. Currently, domestic production comfortably meets domestic requirements.
Demand- Demand for aluminium is estimated to grow at 6%-8% per annum in view of the low per capita consumption in India. Also, demand for the metal is expected to pick up as the scenario improves for user industries, like power, infrastructure and transportation. Barriers to entry- Large economies of scale. Consequently, high capital costs.
Bargaining power of suppliers- Most domestic players operate integrated plants. Bargaining power is limited in case of power purchase, as Government is the only supplier. However, increasing usage of captive power plants (CPP) will help to rationalise power costs to a certain extent in the long-term. Bargaining power of customers- Being a commodity, customers enjoy relatively high bargaining power, as prices are determined on demand and supply. Competition- competition is primarily on quality and price, as being a commodity, differentiation is difficult. However, the recent spate of consolidation has reduced the competitive pressure in the industry. Further, increasing value addition to aluminium products has helped some companies protect themselves from the high volatilities witnessed in this industry.
FINANCIAL YEAR-08
•
•
Global production of primary aluminum rose from 32 million tons (MT) in 2005 to 34 MT in 2006, a jump of 6%. In 2007, it further increased to 38 MT, an increase of 12% YoY. China alone accounted for 29% of global primary aluminum production. Asia, once again showed the largest annual increases in consumption of primary aluminum, driven largely by increased industrial consumption in China, which has emerged as the largest aluminum consuming nation, accounting for 30% of global primary aluminum consumption in 2007. As far as global consumption is concerned, it increased by 8.2% in 2006 and touched 34.7 MT. In 2007, the corresponding figures were 10% and 37.8 MT respectively.
The Indian aluminium industry registered a strong double-digit growth in 2007 in tune with the economic growth. Strong growths in industrial, infrastructure, automobile, transportation and power sectors were the drivers
for the metals demand. However, macroeconomic parameters like the rupee appreciation, import duty cut and unrelenting cost-push impacted the sector adversely. Thus causing margins to squeeze at both ends. Although the average LME remained strong but could not help the companies like Hindalco to increase the domestic realisation due to fall in import duty and rupee appreciation, causing a drop in average rupee realisation per tonne of the primary metal as compared to FY07.
PROSPECTS o
o
o
Globally, newer packaging applications and increased usage in automobiles is expected to keep the demand growth for aluminium over 5% in the longterm. Asia will continue to be the high consumption growth area led by China, which is expected to continue to register double-digit growth rates in aluminium consumption in the medium-term. With key consuming industries forming part of the domestic core sector, the aluminium industry is sensitive to fluctuations in performance of the economy. Power, infrastructure and transportation account for almost 3/4th of domestic aluminium consumption. With the government focusing towards attaining GDP growth rates above 8%, the key consuming industries are likely to lead the way, which could positively impact aluminium consumption. Domestic demand growth is estimated to average in the region of over 8% over the longer-term. Lowering of duties reduces the net tariff protection for domestic aluminium producers. Aluminum imports are currently subject to a customs duty of 5% and an additional surcharge of 3% of the customs duty. The customs duty has been reduced in a series of steps from 15% in 2003 to 5% in January 2007. With reduction in import duties, domestic realisation of aluminium majors, namely Hindalco and Nalco, is likely to be under pressure, as the buffer on international prices is reduced. Moreover, with greater linkage to international prices, volatility in financials could increase. However, producers are moving downstream to negate the higher volatility.
Salient features of Indian Aluminium Industry •
Highly concentrated industry with only five primary plants in the country
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Controlled by two private groups and one public sector unit
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Bayer-Hall-Heroult technology used by all producers
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Electricity, coal and furnace oil are primary energy inputs
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•
•
All plants have their own captive power units for cheaper and un-interrupted power Supply Energy cost is 40% of manufacturing cost for metal and 30% for rolled products Plants have set internal target of 1 – 2% reduction in specific energy consumption in the next 5 – 8 years
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Energy management is a critical focus in all the plants Two plants have declared formal energy policy
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Each plant has an Energy Management Cell
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Achievements in energy conservation are highlighted in the Annual Report of the Company Energy targets are based on best energy figures achieved in their sector / region and by the plant itself in the past Generally, government policies were rated as conducive to energy management ‘Task Force’ formed by BEE in this sector to work as catalyst in promoting energy efficiency High cost of technology is the main barrier in achieving high energy efficiency
Quantitative details
Raw material and product type: Bauxite and calcined petroleum coke are primary raw materials for this industry. However, alumina is raw materials for smelters and aluminium metal is raw material for fabrication units.
Fuel Usage: Coal, Furnace oil and electricity are primary energy inputs in aluminium production. Coal is primarily used to generate steam, which is used in the process while fuel oil is mainly used in Calcinations of alumina and various furnaces in fabrication plants. Electricity is the major energy input in aluminium production and is considered to be prime factor in determining economics of aluminium production. Hence, all primary metal producers have installed their own captive power plants to supply cheaper and uninterrupted power for their use. Majority of electricity consumed in this industry is supplied by their captive power plants.
Technology Status: Invented over 100 years ago, Bayer-Hall-Heroult is the only available commercial technology, even today, for the production of aluminium. Alumina is the basic raw material for the production of aluminium metal through electrolytic process. The production of alumina obtained from bauxite, a mineral containing up to 60% in the form of mono/tribhydrate is carried out through the Bayer route, which is an extractive hydro-metallurgical process.
Consumption of Aluminium in India
The consumption of aluminium in India of 0.7 kg per person in 2005 is very low in keeping with the countries low GDP. However, the low per capita consumption of aluminum in India is in fact an opportunity for growth in aluminium consumption against the back drop of fast growing economic conditions in India. However, aluminum consumption has increased 12.6% in 2006 to around 1.08mt. Consumption is estimated to have increased to a 5 year CAGR of 12.9%. Secondary aluminium demand also shot up to 0.6 MT last year.
Sector-wise aluminum consumption Aluminium is used in various sectors, such as, transportation, packaging, building / construction and electricity. However, the usage pattern differs significantly for Indian and rest of the world. Globally, the automotive, packaging and the construction sectors are the major end users of aluminium, while in India the power sector consumes most followed by automotive and housing sectors.
Sector wise consumption break up
Electrical – 65% Transport-21% Construction -8% Packaging – 5% Industrial machinery – 4% Consumer durables – 4% Steel sweetening, powers & chemicals – 13% The Transportation sector is a major driver of aluminum consumption in the future where the onus of growing consumption lies with the industry. The automobile
segment has attracted major global producers to set up their manufacturing facilities in the country. All these manufacturers are now engaged in bringing out high quality fuel-efficient cars in the market for India as well as global markets. Besides cars, there are commercial vehicles which have also witnessed quantum growth over the years. Use of Aluminum as an alternative to steel has huge potential in the railways. The government has taken note of this and has started working on that. Aluminum castings are primarily used in transport and automobile sectors. The global casting is currently estimated at around 7.4 million tons, against that consumption in India as only around 110,000 tons. The country’s share in the global downstream sector is low as compared to other developed countries. Casting of aluminum alloys is a particularly versatile process and offers greater degree of flexibility than other methods of manufacture, and can be done by various methods like in sand, in metallic dies, under gravity or pressure, and cast by modern methods like low-pressure die- casting (LPDC), investment casting, and squeeze casting. No other metal can be cast under such a wide range of processes and sizes varying from a few grams to 100 kg. Although, domestic aluminum production exceeds the domestic demand, India imports on an average 15-20 per cent of the total supply of aluminum. Imports are necessary, due to the shortage of domestically produced ingots. India’s imports of aluminum and products primarily comprise of unwrought items like ingots, billets, scrap, bars and rods. Imports of primary aluminum products account for less than 10 per cent of domestic consumption. India also exports aluminum products such as, scrap, powder and flakes, bar rods, foil, pellets, sheets, tubes and pipes. Exports figures hovers around 82000 tons annually and the major importer countries of Indian aluminium are Bangladesh, Sri Lanka, Egypt and Iraq.
NATIONAL ALUMINIUM COMPANY LTD.
National Aluminium Company Ltd. (Nalco) is considered to be a turning point in the history of Indian Aluminium Industry. In a major leap forward, Nalco has not only addressed the need for self-sufficiency in aluminium, but also given the country a technological edge in producing this strategic metal to the best of world standards. Nalco was incorporated in 1981 in the Public Sector, to exploit a part of the large deposits of bauxite discovered in the East Coast. The Captive Power Plant (CPP) & Smelter Plant are situated near Angul. Nalco is one of the biggest and Asia’s largest integrated complex, encompassing Bauxite mining, Alumina refining, Aluminium smelting and casting power generation, rail and port operations. NALCO was established in 1981 as a public sector enterprise of the Govt.of India. It is considered a truing point in the 50-yearold history of the Indian aluminum industry. In Orissa, for setting up Asia's largest integrated alumina-aluminium complex in 1981, National Aluminium Company Limited (Nalco) acquired 7263 acres of land at Damanjodi in Koraput district and 4057 acres at Angul. During the inception of the company, 635 families in 51 villages were displaced - 600 families in Damanjodi sector and 35 families in Angul sector. From these 635 displaced families, employment has been provided to 625 nominees. Confusion regarding educational background and nomination status of balance 10 families has been taken up at appropriate level. Besides, 1495 families were substantially affected (i.e. parting with one third or more land) in Angul sector. Even from these, jobs have been provided to 1060 persons. Nalco has also been sponsoring ITI training to such persons and 543 have been technically trained so far. Apart from financial compensation, employment and rehabilitation packages, Nalco has also spent more than Rs. 100 crore towards various social sector development activities. Creation of infrastructure in the surrounding villages for communication, education, health care and drinking water gets priority in the periphery development plans of the company. Community participation in innovative farming, pisciculture, social forestry and sanitation programmes apart, encouragement to sports, art, culture and literature are all a part of Nalco's deep involvement with the life of the community. Successful operations of the company have led to employment and income generation for the local people in many significant ways.
ALUMINIUM SMELTER PLANT
The 2, 30,000 tpa capacity Aluminium Smelter is located at Angul in Orissa. Based on energy efficient state-of-the-art technology of smelting and pollution control, the Smelter Plant is in operation since early 1987. Presently, the capacity is being expanded to 3, 45,000 tpa.
The salient features: o
Advanced 180 KA cell technology
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Micro-processor based pot regulation system
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Fume treatment plant with dry-scrubbing system for pollution control and fluoride salt recovery Integrated facility for manufacturing carbon anodes, bus bars, anode tems etc. 4 x 35 tone and 4 x 45 tone furnaces and 2 x 15 tph and 2 x 20 tph ingot casting machines
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4 x 45 tonne furnaces and 2 x 9.5 tph wire rod mills
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2 x 45 tonne furnaces and 60/42 per drop billet casting machine
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2 x 1.5 tonne induction furnace with a 4 tph alloy ingot casting machine
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26,000 tpa strip casting machines
With the acquisition and subsequent merger of International Aluminium Products Limited (IAPL) with Nalco, the 50,000 tpa export-oriented Rolled Products Unit is all set to produce foil stock, fin stock, can stock, circles, coil stock, cable wraps, standard sheets and coils
CAPTIVE POWER PLANT
Close to the Aluminium Smelter at Angul, a Captive Power Plant of 720 MW capacity, comprising 6 x 120 MW clusters, has been established for firm supply of power to the Smelter. Presently, the capacity is being expanded to 960 MW.
The salient features: •
Micro-processor based burner management system for optimum thermal efficiency
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Computer controlled data acquisition system for on-line monitoring
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Automatic turbine run-up system
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Specially designed barrel type high pressure turbine
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Electrostatic precipitators with advanced intelligent controllers
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Wet disposal of ash
The water for the Plant is drawn from River Brahmani through a 7 km long double circuit pipeline. The coal demand is met from a mine of 3.5 million tpa capacity opened up for Nalco at Bharatpur in Talcher by Mahanadi Coalfields Limited. The Power Plant is inter-connected with the State Grid.
Brief History: After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats, the govt. of India on the 28 th March, 1978, authorized Aluminum Pechiney of France to prepare a feasibility report on the industrial exploration of bauxite for the establishment of an integrated Aluminum complex. The result of this study led to sifting of focus of attention to Panchpattermali, 30km.East of Koraput District of Orissa. Nalco was incorporated in 1981as a public sector Unit. The newly founded NALCO signed an agreement of collaboration with aluminum Pechiney, the world leader in this field for incorporation of technical know-how to set up Asia’s largest integrated aluminium complex.
Location:
Registered office………………………………...Bhubaneswar Bauxite mine…………………………………….Panchpatmali Aluminium refinery…………..............................Damanjodi Captive power plant….…………………………Angul Aluminium smelter…………………………..…Angul Port facilities….…………………………………. Visakhapatnam Rolled product unit……………………………….Angul
Achievements of Nalco:
1980: A Memorandum of Understanding was signed in January, by the Government of India for technical collaboration and financing of an integrated alumina-aluminium complex with Aluminium Pechiney of France.
1981: The Company was incorporated on 7th January, as a wholly owned enterprise of Government of India. The Company Manufacture aluminium hydrate, claimed alumina, aluminium ingots and aluminium wire rods.
1993: NALCO signed a project co-operation agreement with Hydro Aluminium AG, Norway to carry out a joint study for feasibility of setting up a100% export oriented aluminium plant of 0.9 million tonnes per annum capacity. 1,28,86,19,200 No. of shares allotted
1994: The Company proposed to undertake expansion of bauxite mine from2.4million TPA. to 4.8 million tpa. and alumina refinery from 8,00,000 tpa. to 13,50,000 tpa. This was subject to necessary clearances.
1995: A Smelter plant at Angul was undertaken with a capacity of 26000 TPY of strip casting facility. A special Alumina plant at Damanjodi was undertaken with a Capacity of 20,000 TPY. A 10,000 TPY detergent grade Zeolite (Zeolite-A) plant at Damanjodi, was undertaken.
1996: The proposal to expand the capacities of bauxite mine at Panchpatmali from 24 lakh tonnes to 48 lakh tonnes and alumina refinery at Damanjodi from 8 lakh tonnes to 15.75 lakh tonnes was approved by the Government on 18.12.1996.
1997:
Subject to necessary approvals being obtained the company proposed to convert 50% of its existing equity capital into debt. The public sector aluminium giant, National Aluminium Company (NALCO) set up in technical collaboration with Pechiney, France is the largest integrated aluminium company in Asia. National Aluminium Company Ltd (Nalco), country's largest Aluminium Company, has opened a stockyard at Bhiwandi in Thane district. National Aluminium Company (Nalco), India's largest producer andex porter, got the ISO 14001 certification for environmental excellence. The National Aluminium Company, Bhubaneswar, signed an agreement of national importance with the NRDC for licensing from the NRDC the knowhow to manufacture gallium from the sodium alumina plant.
1998: The company has been forced to curtail its power generation capacity due to a drastic reduction in intake by Gridco. - the nodal power transmission and distribution agency in Orissa.
1999: The National Aluminium Company Ltd (NALCO) a Government of India undertaking is setting up a plant for extraction of gallium at its aluminium refinery complex at Damanjodi. The National Aluminium Company (Nalco) will take over International
2000: Icra has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture issue of the company, while it has assigned an A1 rating to the Rs 5-crore CP issue of Narmada Chematur Petrochemicals.
2001: A public sector Aluminium Company making a foray into detergent business sounds out of place. But if senior officials of National Aluminium Company (Nalco) are to be believed, the country’s second largest aluminium company will be doing that at its zeolite plant scheduled to start operations in July end.
2002:
S Behuria appointed as part time official Director of Nalco. Nalco's alumina refinery capacity increased to 15.75 lakh tone
2003: Commissions one unit of Captive Power Plant with a capacity of 120 MW and 120 pots of Smelter with a capacity to produce 57,500 MT of Aluminium per year Nalco members okay delisting of securities from stock exchanges of Bhubaneshwar, Delhi, Calcutta & Madras
2004: National Aluminium Company Limited (NALCO) has informed that Madras Stock Exchange Limited vide its letter dated December 22, 2003 have withdrawn the admission granted to dealings on their exchange for the securities of NALCO. Nalco open offer to acquire 20% stake for Ondeo Nalco India.
2005: Nalco inks agreement with NMDC.
NALCO-PRODUCTS
Aluminium Metal
Ingots
Sows
Billets
Wire rods
Alloy wire rods
Cast strips
Alumina & Hydrate
Calcined Alumina
Alumina Hydrate
Zeolite-A
5 years performance at a glance (physical)
particulars 1.production Bauxite Alumina Hydride Alumina for
units 2007/08 2006/07 2005/06 2004/05 2003/04 MT MT
4854253
1575500
15,90,000 1575500
1475200
4851721
48,16,762 1556100
MT 3,60,457 3,58,734 3,58,954 3,38,483 2,98,207
In consumption Rolled products MT Power(net) MU 2.Export sales Alumina MT Aluminum MT 3.Domestic sales Alumina MT /hydride Aluminum Power
46,84,684 46,23278
10,004 2,587 5,609 5,968
5,040 5,679
858 5,613
2,660 5,122
8,59,943 7,73,573 8,62,616 9,09,081 9,34,874 1,00,847 92,678 95,747 1,32,730 1,29,718
11,307
10,920 12,994 21,177 17,784
MT 2,43,064 2,61,636 2,58,094 2,05,794 1,66,650 MU 129 421 322 406 498
5 YEARS PERFORMANCE HIGHLIGHTS
1. SALES – Rs.crores 6515 5324 4420 3349 2740
2003
2.
2004
2005
2006
2007
EXPORTS-Rs.crores
2586 2200
2306
1717 1501
2003
2004
3. NET PROFIT-Rs.crores
2005
2006
2007
2381
1562 1235 737 521
2003
4.
2004
2005
2006
2007
EARNING PER SHARE-Rs.
37
24.25 19.17 8.08
2003
11.44
2004
2005
2006
2007
PRODUCTION-NEXT 5 YEARS
Bauxite 90 90
80
60
46.5
T M h k a L
64
63
70
64
50
50
40
30
20
10
0 2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Year
Alumina 30 30
22.75
20
22.75
21
25
15.75
16.3
15
L T M h k a 10
Aluminium 5
5.85 60 2007-08
2008-09
2009-10 4.6
5 3.57
2010-11 4.7
2011-12 4.7
2012-13
2011-12
2012-13
Year
3.7
4
3
L T M h k a 2
1
0 2007-08
2008-09
2009-10
2010-11 Year
Power 9500 10000
8000
9000
8000
8000
8000 7000
H W K n l M
5650
6000
6000 5000 4000 3000 2000 1000 0
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Year
Working Capital
Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Business also needs funds for short-term purposes to finance current operations. Investment in short term assets like cash, inventories, debtors etc., is called ‘Shortterm Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorized, as funds needed for carrying out day-to-day operations of the business smoothly. The management of the working capital is equally important as the management of long-term financial investment. Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without o adequate supply of raw materials for processing; o cash to pay for wages, power and other costs; o creating a stock of finished goods to feed the market demand regularly; and, o The ability to grant credit to its customers. All these require working capital. Working capital is thus like the lifeblood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Working capital cycle involves conversions and rotation of various constituents Components of the working capital. Initially ‘cash’ is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus ‘cash’ assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital. While managing the working capital, two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii) swift transformation into other form of current asset.
Each constituent of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronization among them. A very short life span of current assets results into swift transformation into other form of current assets for a running business.
These characteristics have certain implications:
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•
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Decision regarding management of the working capital has to be taken frequently and on a repeat basis. The various components of the working capital are closely related and mismanagement of any one component adversely affects the other components too. The difference between the present value and the book value of profit is not significant.
The working capital has the following components, which are in several forms of current assets:
o
Stock of Cash
o
Stock of Raw Material
o
Stock of Finished Goods
o
Value of Debtors
o
Miscellaneous current assets like short term investment loans & Advances
A number of definitions have been formulated: perhaps the most widely acceptable would be;
“WORKING CAPITAL represents the excess of CURRENT ASSETS over CURRENT LIABILITIES “ The same may be designated in the following equation: WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES:
Funds thus invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Thus it is known as revolving or circulating capital or short term capital.
These are two concepts of working capital :-
a. b.
Gross Working Capital. Net Working Capital.
Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current assets and current liabilities. The constituents of current assets and current liabilities are shown in table A.
Constituents of Current Assets and Current Liabilities
Current Assets •
•
•
•
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Inventories – Raw materials and components, Work in progress, Finished goods, other. Trade Debtors. Loans and Advances. Investments. Cash and Bank balance.
Current Liabilities •
•
•
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Sundry Creditors. Trade Advances. Borrowings. Provisions.
The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below : Nature of Enterprise
The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.
Manufacturing/Production Policy
Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.
Working Capital Cycle
In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves 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 in to stock of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.
Operations
The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.
Market Condition
If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.
Credit Policy The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables.
Business Cycle
Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at he time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal
Availability of Raw Material
If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same.
Growth and Expansion
Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.
Earning Capacity and Dividend policy
Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. Price Level Changes
Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.
Manufacturing Cycle
The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion.
Other Factors
Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital.
Component of Working Capital Basis of Valuation
•
Stock of raw material Purchase cost of raw materials
•
Stock of work in process At cost or market value, whichever is lower
•
Stock of finished goods Cost of production
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Debtors Cost of sales or sales value
•
Cash Working expenses
Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous.
WORKING CAPITAL MANAGEMENT
Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets .This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:•
•
Investment in current assets represents a substantial portion of total investment. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components.
The importance of working capital management is effected in the fact that financial manages spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers. The problem of working capital management is one of the “best” utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations.
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL o
Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital.
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Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. Cash crisis may emerge due to paucity of working funds. Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. The business may fail to honour its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. Non-availability of stocks due to non-availability of funds may result in production stoppage. While underassessment of working capital has disastrous implications on business, over assessment of working capital also has its own dangers.
CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL o
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E xcess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. It may make management complacent leading to its inefficiency. Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit.
The working capital in certain enterprise may be classified into the following kinds.
1. Initial working capital. The capital, which is required at the time of the commencement of business, is called initial working capital. These are the promotion expenses incurred at the earliest stage of formation of the enterprise which include the incorporation fees. Attorney's fees, office expenses and other expenses.
2. Regular working capital. This type of working capital remains always in the enterprise for the successful operation. It supplies the funds necessary to meet the current working expenses i.e. for purchasing raw material and supplies, payment of wages, salaries and other sundry expenses.
3. Fluctuating working capital . This capital is needed to meet the seasonal requirements of the business. It is used to raise the volume of production by improvement or extension of machinery. It may be secured from any financial institution which can, of course, be met with short term capital. It is also called variable working capital. 4. Reserve margin working capital. It represents the amount utilized at the time of contingencies. These unpleasant events may occur at any time in the running life of the business such as inflation, depression, slump, flood, fire, earthquakes, strike, lay off and unavoidable competition etc. In this case greater amount of capital is required for maintenance of the business.
Financing Working Capital Now let us understand the means to finance the working capital. Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds:
I. Supplier’s Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc.
ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the Required business level. The loans are available for creating the following current Assets: Stock of Raw Materials Stock of Work in Process Stock of Finished Goods Debtors Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. •
• • •
iii. Promoter’s Fund It is advisable to finance a portion of current assets from the promoter’s funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.
Management of Inventory
Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques.
Needs to hold inventories:There are three general motives for holding inventories:•
•
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Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation.
Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.
Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in reordering costs and quantity discounts etc.
Objective of Inventory Management:-
The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it.
The following are the objectives of inventory management:-
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To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. To minimize losses through deterioration, pilferage, wastages and damages. To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. To ensure right quality of goods at reasonable prices. To facilitate furnishing of data for short-term and long term planning and control of inventory
Management of cash
Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firm’s profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm.
Need to hold cash
The firm’s need to hold cash may be attributed to the following three motives:-
The Transaction Motive: The transaction motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc.
The Precautionary Motive: A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. For example a debtor who pays after 7 days may inform of his inability to pay, on the other hand a supplier who used to give credit for 15 days may not have the stock to supply or he may not be in opposition to give credit at present.
Speculative Motive: - The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise.
The opportunities to make profit changes. The firm will hold cash, when it is expected that interest rates will rise and security price will fall.
Components of working capital are calculated as follows:
1) Raw Materials Storage Period =Average stock of raw materials/Average cost of raw material consumption per day. 2.) W-I-P Holding period= Average w-i-p in inventory/Average cost of production per day. 3.) Stores and spares conversion period= Average stock of Stores and spares/ Average consumption per day. 4.) Finished goods conversion period= Average stock of finished goods/Average cost of goods sold per day. 5.) Debtors collection period= Average book debts/Average credit sales per day. 6.) Credit period availed=Average trade creditors/Average credit purchase per day.
Management of Receivables
A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables.
Needs to hold cash: Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to take a sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is “to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.”
Important Terms
Working Capital Cycle Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands , the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.
Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.
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If you....... Then...... Collect receivables (debtors) faster You release cash from the cycle
Collect receivables (debtors) slower Your receivables soak up cash Get better credit (in terms of You increase your duration or amount) from suppliers cash resources
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Shift inventory (stocks) faster
You free up cash
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Move inventory (stocks) slower
You consume more cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business. More businesses fail for lack of cash than for want of profit.
Sources of Additional Working Capital
Sources of additional working capital include the following: •
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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
If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business.
This is called overtrading . Early warning signs include: o o
o o o o o
Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).
Handling Receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt.
The following measures will help manage your debtors :
Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10.Consider charging penalties on overdue accounts. 11.Consider accepting credit /debit cards as a payment option. 12.Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old. 1.
Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects:
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weak credit judgement poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example.........
o o o o o
longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demand their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer.
Managing Payables (Creditors)
Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: o
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Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stock-holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?
There is an old adage in business that if you can buy well then you can sell well . Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!).
Remember, a good supplier is someone who will work with you to enhance the future viability and profitability of your company
Key Working Capital Ratios
The following, easily calculated, ratios are important measures of working capital utilization.
Ratio
Stock Turnover (in days)
Formulae
Result
Average Stock * 365/ =x Cost of Goods days Sold
Receivables Debtors * 365/ = x Ratio Sales days (in days)
Payables Ratio (in days)
Current Ratio
Creditors * 365/ =x Cost of Sales days (or Purchases)
Total Current =x Assets/ times Total Current Liabilities
Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies due to you. If you’re official credit terms are 45 day and it takes you 65 days... why? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure
to generate sufficient cash to meet oncoming demands. (Total Current Assets Similar to the Current Ratio but takes =x Quick Ratio Inventory)/ account of the fact that it may take time to times Total Current convert inventory into cash. Liabilities (Inventory + Working A high percentage means that working Receivables - As % Capital capital needs are high relative to your Payables)/ Sales Ratio sales. Sales
Other working capital measures include the following: •
•
•
Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers.
Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors. When planning the development of a business, it is critical that the impact of working capital be fully assessed when making cash flow forecasts.
DATA ANALYSIS AND INTERPRETATION (Rs in cores )
2004/05
2005/6
2006/7
2007/8
529.06
591.58
634.96
686.65
Sundry debtors:
92.81
29.42
34.13
60.65
Cash and bank balance:
755.21
2193.71
3686.53
3516.46
Other current assets:
82.01
118.62
212.4
236.46
Loans and advances:
351.95
364.95
406.42
541.10
A: CURRENT ASSETS: Inventories:
……………………………………………………………………………..
TOTAL:
1811.04
3257.88
5041.33
4974.08
64.72
44.39
102.09
272.78
b) on others:
169.38
222.95
260.74
324.94
Other liabilities:
326.92
284.96
424.64
557.94
Security deposit:
55.92
55.10
74.66
162.69
Book over draft
…….
………
9.98
…….
B: CURRENT LIABELITIES: Sundry creditors: a) On capital a/c:
Provisions: …
190.14 332.82 346.49 222.57 …………………………………………………………
TOTAL: WORKING CAPITAL (A-B):
806.39
940.15
1218.61
1540.40
1004.65
2317.73
3822.72
3433.68
IMPORTANT RATIOS OF NALCO
1. OPERATING PROFIT MARGIN (%)
61.12 56.36 54.81 48.46
2004
46.36
2005
2006
2007
2008
2. NET PROFIT MARGIN (%)
40.09 32.71
31.96 30.09 23.6
30.95 2004
2005
26.29
2006
26.51
2007
2008
18.39
3. RETURN ON NETWORTH (RONW) (%) 19.63
2004
2005
2006
2007
2008
4. RETURN ON CAPITAL EMPLOYED (ROCE)
31.89 24.01
24.79
23.21
18.3
2004
2005
2006
2007
2008
CONCLUSION
After studying the components of working capital management system of NALCO. It is found that the company has a sound and effective
policy and its performance is very good even in this bad recession situation company has managed to post good profit. Company is competing well at the domestic as well as the international level and it is among the low cost producers of aluminium in the world only because of its proper management of finance, specially the short term finance known as the working capital. The company is a matured one and it has contributed well in the countries growth and development and will also continue to perform and contribute to the whole nation. In conclusion ,we can say that the companies management is an effective one and knows well the management of finance, its working capital management system is very good because of which only the company has got the status of NAVRATNA company.
BIBLIOGRAPHY
1. Financial Management……..Prasanna Chandra
