Working Capital Management Live Project Report by Pranay Jindal in Jindal Steel and Power

Live Project Report On

Working Capital Management Of Jindal Steel & Power Limited Summer Internship Project Report Submitted In Partial Fulfillment of the Requirements for the Post Graduate Diploma in Management Submitted by Parnay Deep Supervisors: Company Guide: Ankit (Sr.manager Finance)

KURUKSHETRA UNIVERSITY KURUKSHETRA

Acknowledgement I have to thank KURUKSHETRA UNIVERSITY KURUKSHETRA for giving me an opportunity to undertake my project work and for giving me knowledge in the field of finance during my two years course.

I would like to thanks Mr. ANKIT, Sr.Manager - Finance for their valuable guidance and support in completion of live project at the Jindal Steel & Power Ltd. I would express my sincere thanks to all the staff members of Jindal Steel & Power Ltd, without their support, this project would not have been a success.

Last but not the least I would like to thank those person whose encouragement and ideas enriched my project.

Parnay Deep

Table of Content Executive Summary -

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Introduction

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Theoretical Framework of Working Capital Management

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The House of Jindal’s

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JSPL & its Products -

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Research Methodology-

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Analysis of Working Capital Management of JSPL

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Working Capital policy of JSPL Working Capital Borrowings from Bank Financial Ratio Analysis for Working CapitalAlternative Investment Policies Managing the Components of Working CapitalDetermination of Operating Cycle - Analysis of Asset Percentage Statement of Change of Working CapitalEstimating Working Capital- Regression Analysis Trend Analysis for Working Capital Current Asset Financing -

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24 27 28 52 54 62 67 71 72 75 78 84

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Objective of Study

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Findings and Suggestions - -

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Limitations - -

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Bibliography -

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References - -

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Glossary -

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List of Tables No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 35

Tables Name ESTIMATED CASH FLOW FOR APR 10 TO JUNE 10 Working Capital Borrowing from Banks Return on Working Capital Liquidity ratios Current Ratio Acid Test Ratio for JSPL Comparison between current ratio and acid test ratio Cash ratio for JSPL Working capital management ratios Current asset turnover for JSPL Working capital turnover for JSPL Working capital to gross sale for JSPL Working capital to cost of sale for JSPL Debtor’s turnover ratio for JSPL Average collection period for JSPL Creditor’s turnover ratio for JSPL Inventory turnover ratio for JSPL Inventory holding period for JSPL Current asset to total asset ratio for JSPL Cash to current asset ratio for JSPL Inventory to current asset ratio for JSPL Current liabilities to total liabilities ratio for JSPL Loan & Advances to Current assets ratio for JSPL Table showing alternative current assets investment policies Table showing different cash ratios Table showing payables management Table showing Inventory turnover ratio Table showing analysis of asset percentage Table showing analysis of working capital Table showing analysis of current assets Table showing analysis of current liabilities Table showing statement of change in working capital Table showing Production capacity and Sales Table showing Sales and working capital

Page No 24 27 28 29 30 31 32 33 34 35 36 37 39 40 41 43 44 45 46 47 48 49 50 53 56 57 59 67 68 69 70 71 76 77

List of Figures No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33

Figures Name Cash Cycle Working capital flows House of Jindal’s JSPL & its Products Working capital borrowing from Banks Return on working capital Current Ratio Acid Test Ratio For JSPL Cash Ratio for JSPL Current Asset Turnover Working Capital Turnover For JSPL Working Capital to Gross Sale for the JSPL Working Capital to Cost of Sale for the JSPL Debtor’s Turnover Ratio for the JSPL Average Collection Period for the JSPL Creditor’s Turnover Ratio for the JSPL Inventory Turnover Ratio for the JSPL Inventory Holding Period for the JSPL Current Asset to Total Asset Ratio for the JSPL Cash to Current Asset Ratio for the JSPL Inventory to Current Asset Ratio for the JSPL Current liabilities to Total liabilities Loan & Advances to Current Asset Alternate current assets investment policies Percentage of Current Asset to Fixed Asset Net working Capital Current Ratio Trend Cash Ratio Trend Current Asset Turnover Trend Working Capital Turnover Trend Debtor Turnover Trend Creditor Turnover Trend Inventory Turnover Trend

Page No 7 12 13 16 27 28 30 31 33 35 36 38 39 40 42 43 44 45 46 47 48 50 51 53 67 68 79 79 80 80 81 81 82

Executive summary

The management had to depend upon certain relevant information for taking various strategic decisions. The information is made useful by its analysis and interpretation. My project was related to “Analysis of Working Capital Management of Jindal Steel Power Ltd.”. This project report is the outcome of my eight-week live project in Jindal Steel & Power Ltd. My attempt is aimed to analyze the various aspects of working capital management of Jindal Steel & Power Ltd. It was found that the operating cycle of the company is bit disturbed. By adopting various calculation and analysis and then making interpretation with the solution of specific problem I put my efforts on giving appropriate suggestion to the company. To this context I adopted various methods and techniques like Trend analysis by using statistical tool, Regression analysis, a work towards the optimal level of working capital, estimation of working capital, analyzing of operating cycle and use of various ratio to put an exact picture of company. The report also consists of qualitative and quantitative analysis of Working Capital Management of Jindal Steel & Power Ltd. In the course of my study, I found that the organization faces the problem of liquidity.

Introduction Working Capital: “Working Capital includes the current assets and current liabilities areas of the balance sheet. Working Capital can be called by its alternative name - "Net Current Assets”. Working Capital Management is the process of planning and controlling the level and mix of current assets of the firm as well as financing these assets. It may be regarded as a life blood of a business; its effective provision can do much to ensure the success of a business, while its efficient management may lead not only to loss of profits but loss to ultimate downfall in a going concern. Analysis of working capital is of major importance to internal and external analysis because it is closely related to the current day-to-day operations.

Working Capital is the name given to the "short-term" area of the balance sheet. Working Capital includes four balance sheet items: Stock - stocks of raw materials, partly completed production and finished goods awaiting sale. Debtors - amounts owed TO the company, mainly from customers in respect of sales made on credit. Creditors - amounts owed BY the company, mainly to suppliers of raw materials, services (electricity, water, telephone, rent, etc.) but also, possibly, unpaid tax demands, unpaid dividends and other items. Cash - bank balances, cash holdings and short-term investments.

Some of the decisions taken in working capital management are: An adequate supply of raw materials. Cash to meet the operational payments. The ability to grant credit to customers. Investment in various current assets. Appropriate sources of fund to finance current assets.

Proportion of long term and short term funds to finance current assets.

Cash Cycle: As working capital moves from one process to another, it changes from one asset to another i.e., from cash to inventories and then to receivables and then back to cash. This movement is represented by cash cycle as below: Figure 1: Cash Cycle

Objective of Working Capital Management: Two fold objective of working capital management a) Maintenance of working capital, and b) Availability of ample funds at the times of need.

Uses of Working Capital: The typical uses of working capital are as follows: Adjusted net loss from operations Purchase of non-current assets: Repayment of long-term debt (debentures or bonds) and short-term debt (bank borrowing) Redemption of redeemable preference shares 5- Payment of cash dividend. Payment of cash dividend.

Advantages of adequate working capital: Increase in debt capacity and goodwill.

Increase in production efficiency Exploitation of favorable opportunities. Meeting contingencies and adverse changes Available cash discount: Solvency and efficiency of fixed assets Attractive Dividend to Shareholders

Disadvantage of inadequate working capital: Loss of goodwill and creditworthiness Firm can‟t make use of favorable opportunities Adverse effects of credit opportunities Operational inefficiencies Effects on financial capacity Non-achievement of Profit Target

Dangers of Redundant working capital: Low rate of return on capital Decline in Capital and Efficiency Loss of Goodwill and Confidence Evils of Over-Capitalization Destruction of Turnover Ratio Company must have adequate working capital pursuant to its requirements. It should neither be excessive nor inadequate. Both situations are dangerous. While inadequate working capital adversely affects the business operations and profitability, excessive working capital remains idle and earns no profits for the company. So company must assure its working capital is adequate for its operations.

Objective of Study This project was undertaken to analyze the working capital policies, working capital management of the company and to reduce down their problems and finding the solutions with respect to the working capital management of the company.

The objective of the study is to provide the solutions for reducing down the duration of the operating cycle, to analyze the working capital position of the company and the liquidity position, finding out the problems that the company is facing in managing the working capital and showing trend of particular ratios in future and at same suggesting them to solve their problems. To study the working capital concept. To see how the day-to-day operations of the company takes place. To study the working capital management process in Jindal Steel & Power Ltd. To see whether the company is prepared with enough working capital to face any kind of contingencies. To compare the performance of W/C for a particular year with previous years. To assess Liquidity position, Long term solvency, operational efficiency, and overall profitability of JSPL. Providing suggestions to solve the problems of the company.

Theoretical Framework of Working Capital Management Many profitable companies fail each year because their management teams fail to manage the area of working capital. The term working capital is closely related to the term funds and has two meaning. It is used to mean current assets minus current liabilities. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly. Working capital is just like the heart of the business. If it becomes weak, the business can hardly prosper and survive. It is an index of the solvency of a concern. Working capital management thus throws a challenge and should be a welcome opportunity for a financial manger that is ready to play an important role in organization.

Sources of Working Capital: The company can choose to finance its current assets by long-term or short-term sources, or a combination of them. A) Long term Permanent Working Sources of Capital: Long-term sources of permanent working capital include equity and preference shares, retained earnings, debentures and other long-term debts from public deposits and financial institutions. Financing through long-term means provides stability, reduces risk of payment, and increases liquidity of the business concern. Various types of long-term sources of working capital are as follows: Issue of shares Retained Earnings Issue of Debentures Long term debts Other sources B) Short-term Temporary Working Source of Capital: Temporary working capital is required to meet the day-to-day business expenditures. The variable working capital would

finance from short-term sources of funds, and only for the period needed. It has the benefit of low cost and establishes closer relationships with bankers. Some of the sources of temporary working capital are given below: Commercial Banks: In the form of short-term loans, cash credit, and overdraft and through discounting the bills of exchanges. Public Deposits Various Credits: Trade credit, Business credit papers and customer credit are other sources of short-term working capital. Credit from suppliers, advances from customers, bills of exchanges, promissory notes, etc helps to raise temporary working capital. Reserves and other funds

Sources of Additional Working Capital: Existing cash reserves Profits (when you secure it as cash) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

Various tools to measure & analyses working capital of a firm: Fund Flow Analysis: This technique helps to analysis the variation in working capital contents between two balance sheet dates. Fund flow analysis shows how much funds have been obtained from different sources to finance working capital and how they have been utilized. Due to need as well as importance of fund flow analysis finance managers of almost all the organization use it to make sound financial decisions. Working Capital Flows: Information regarding the financing and investment activities of an enterprise and the changes in the financial position for the period of time is essential for financial statement, used by owners as well as creditors for making business decisions.

Further, this technique can be used only by the internal administration in its control of working capital. Moreover, some important and significant question remains unanswered, such as whether the capital is being used most efficiently and whether the current financial position of the firm has improved.

Working Capital Flows Figure 2: Working capital flows

Opening Balance of Working capital

Closing Balance of Working Capital

Changes in Working Capital

SOURCES OF WORKING CAPITAL

USES OF WORKING CAPITAL

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Operations of the business Issue of long-term debt Sale of fixed investments Sale of long-term investments

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Redemption of long term debt Investments Acquisition of fixed assets Payment of dividend

THE HOUSE OF JINDAL’S Figure 3: House of Jindal’s

Shri. Naveen Jindal

ORGANISATIONS PROFILE The House of JINDAL‟s Group profile: In the world of business, the Jindal Organization is a celebrity. Ranked 4th amongst the top Indian Business Houses in terms of assets, the group today is a US $ 12 billion conglomerate

Jindal Organization aims to be a global player. For that, it is committed to maintain international quality standards, efficient delivery schedule, competitive price and excellent after sales service.

Jindal Organization set up in 1970 by the steel visionary late. Mr. O.P. Jindal has grown from an indigenous single unit steel plant in Hisar, Haryana to present multi-billion, multi-location and multi-product steel conglomerate and the organization is still expanding, integrating, amalgamating and growing. New directions, new objectives, but the Jindal motto remains the same – “We

are the Future of Steel”.

The group has been technology driven and has a broad product portfolio. Yet, the focus at Jindal has always been steel. From mining of iron-ore to the manufacturing of value added steel products, Jindal has a pre-eminent position in the flat steel segment in India and is on its way to be a major global player, with its overseas manufacturing facilities and strategic manufacturing and marketing alliances with other world leaders.

The Technological Edge: The hallmark of the organizations achievement and growth has been its ability to develop and adopt the latest technology, the match the demands of a dynamic and burgeoning Indian Industry.

Seeing doors where others see walls At Jindal, research is a self-imposed discipline; a challenge it has pursued with a pioneer‟s zeal. Exploring new ideas, attempting break through products and processes. For instance, tracking and adopting the latest in world technology, anticipating customer needs with constefficient, reliable solutions and promoting engineering skill and manpower caliber. Jindal‟s R&D investment, together with its R&D capability has given it a head start over others.

Jindal Family: Jindal organization has expanded and diversified into core business areas. Ensuring synergy amongst its various business ventures spread over 13 plants at 11 pivotal locations in India. The Jindal team embodies one of the most coveted talent pools of technological acumen available in the country today with expertise that have enabled the organization to put up large-scale projects in record time.

Jindal Steel and Power Limited Jindal Strips Limited Saw Pipes Limited Jindal Iron & steel co. Jindal Power Limited Nalwa Sponge Iron Limited Jindal Stainless Limited Jindal United Steel Corporation Jindal Thermal Power Company Limited Jindal Praxair Oxygen Company Limited Vijayanagar Minerals Private Limited

JINDAL STEEL & POWER LTD

Company Profile: Mr. O.P. Jindal promoted JSPL as Orbit Steel Private Limited (OSPL) in 1979. OSPL became a public limited company in 1998 and its name was changed to the current JSPL (Jindal Steel & Power Limited)

Jindal Steel & Power Limited (JSPL), a O.P. Jindal Group Company, was formed by hiving off the Raigarh and Raipur facilities of Jindal Stainless Limited into a separate Company as part of a scheme of arrangement, w.e.f. April 2, 1998.

The Company has plant at Raigarh (Chhattisgarh) for manufacture of sponge iron with an installed capacity of 13,70,000 tons per annum, & it is the only sponge iron producer in the country with its own raw material source and power generation making it one of the most cost effective producers of sponge iron in the country. Power Generation plants with a capacity of 290 MW, Steel Melting plant with a capacity of 24,00,000 TPA with Blast Furnace of 250,000 TPA capacity.

International Collaboration:

JSPL produces rails, H-beams, columns and sheet piles with JFE's technical services assistance. JSPL has entered into technical services assistance agreement with JFE (earlier known as NKK Corporation), Japan for technology transfer to produce superior quality, world‟s longest rails of 120m finished length, along with Parallel Flange Beams, Columns and Sheet Piles for the first time in the country. This technical collaboration shall enable production of long rails requiring far less joints in tracks, ushering a new era in safer rail-travel and making introduction of fast trains in India a reality.

Company Products: 

Rail: Giving impetus to the significant rail sector, JSPL has pioneered the manufacturing of 121 metre long track rails in the Indian sub-continent. The world‟s longest track rails are a testimony of JSPL‟s manufacturing capabilities where continuous innovation is a practice rather than an exception. What differentiates JSPL‟s 121 m long rails from others

is that there is a drastic reduction in the welded joints, providing enhanced safety, cost reduction and travel comfort. Our products are subjected to stringent quality norms and can therefore match all international standards

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Parallel Flange Sections

JSPL pioneered the production of medium and large size Hot Rolled Parallel Flange Beams and Column Sections (H-Beams) in India. The beams are cost effective and provide design-flexibility.

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Plates & Coils

JSPL is equipped with India's first 'one of a kind' stateof- the -art plate mill that produces plates and coils of 3.5 and 3 metres width, respectively, for the first time in the private sector. JSPL epitomizes its performance-oriented service by producing plates ranging from 7-120mm in thickness & widths of 1500 -3500 mm and coils varying in thickness of 7 -25 mm and widths of 1500 - 3000 mm. The products are of premium quality, owing to its sound steel refining properties. The total production capacity of the plant is 1 MTPA. JSPL adheres to stringent international standards and the steel grades are manufactured under various specifications like EN, DNV, BS, ASTM, JIS, LRS, ABS, etc.

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Power:

In order to contribute significantly to India's growing need for power we started power generation over a decade back. In the beginning it was a captive power facility using waste heat from the rotary kiln boilers and the coal rejects of the washery. Over the years however, Jindal Steel and Power Ltd (JSPL) and its subsidiary Jindal Power Ltd. (JPL) have come up in a big way and are producing about 1400 MW power through both captive and commercial facilities.

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Sponge Iron:

JSPL has world's largest coal-based sponge iron manufacturing facility and stands out as the market leader in coal-based sponge iron industry within India. Efficient backward integration has rendered JSPL as the only sponge iron manufacturer in the country, with its own captive raw material resources and power generation capacity helping the company to monitor both price and quality of its products.

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Semi-Finished Products

JSPL has a capacity to produce about three million tonne per annum of semis which are primarily used for captive use in JSPLs‟ 0.75 million tonne per annum capacity Rail & Universal Beam Mill and 1.0 million tonne per annum capacity Plate & Stackle Mill.

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Wire rods:

In line with our corporate philosophy of continuing efforts to expand our product range to offer a complete product basket to the customer, JSPL now offers Wire Rods from its first unit of 6 Million Tonne Steel Plant at Patratu, Jharkhand.

Awards & Recognition: The Forbes Asia's 'Fabulous 50' international award 2009 Most promising entrant into the big league, 2009

Golden peacock Environment Management Award 2008. National Award for Excellence in Cost Management 2005, third prize in the private sector-manufacturing segment, by the Institute of Cost & Works Accountant of India (ICWAI) National Energy Conservation Awards for 2001, 2002, 2003, 2004, 2005 and 2009 by the Ministry of Power, Government of India National Safety Awards 2003-2004, by the Minter of Labour IIM Quality Award for 2002-03 by the Indian Institute of Metals First Prize in the IIM Awards 2001 for Quality by the Indian Institute of Metals

Future plans: 10.0 Lac MTPA capacity Plate Mill 7.0 Lac TPA Rebar, TMT and Wire Rod Mill 4.0 Lac MTPA Coke Oven Plant 12.5 Lac MTPA Blast furnace A 12.5 million tonne integrated steel plant and 2600 MW captive power plant in phases in Orissa with an investment of US $ 8.00 billion (Rs. 40,000 crore). The first phase of 3 million tonne is expected to be commissioned by 2011. An 11 million tonne integrated steel plant and 2600 MW captive power plant in phases in Jharkhand , with an investment of US $ 6.00 billion (Rs. 30,000 crore). An MOU has been signed between JSPL and the Government of Chhattisgarh for setting up an additional 7.0 MTPA steel plant in phases and a 1600 MW power plant with an investment of over US $ 5.20 billion (Rs. 26,000 crore). 50 MW capacity Power Plant based on fuel gases of coke oven JSPL plans to invest US $ 2.1 billion (Rs. 10,500 crore) in Bolivia, South America, in the coming years for mining and setting up of an integrated 1.7 MT steel plant, 450 MW power plant, 6 MT sponge iron and 10 MT iron ore pellet plant.

Research Methodology

Information Requirement: Since my objective was to analyze the working capital policies, working capital management of the company and to reduce down their problems and finding the solutions with respect to the working capital management of the company. So, I required the annual report of the company, CMA of last few years and its working capital data to analyze the position of the company and correlate the theoretical and practical aspects of working capital management, to analyze the efficiency of the management in managing the working capital and to find out what are the problems that the company is facing. So, the company provided me the required information. Then relevant calculations and analysis were done.

Research Methodology: The methodology adopted for the project was divided into two types of analysis: Qualitative and Quantitative Qualitative analysis required studying the business profile of the company, its nature, its functioning, the hierarchy and the functioning of the management of the company, the performance of the company in last few years and what policy they adopt and studying what role the working capital plays in a manufacturing concern. Quantitative analysis required analyzing the current assets and the current liabilities of the company, the statement of working capital changes, performing the analysis for estimating the working capital requirement, analysing the operating cycle, analyzing the Working Capital Ratios to reveal the financial position and soundness of the business and give a good basis for quantitative analysis of financial problems and use of modern working tools to show the trend of working capital for upcoming year with adopting trend analysis.

Analysis of Working Capital Management Methods adopted for Working Capital analysis: The broad range of project management and financial advisory services include: Working Capital policy Financial Ratio analysis for Working Capital Management Managing the components of Working Capital of JSPL Determination of Operating cycle of JSPL Statement of change in Working Capital Estimating Working Capital needs, Permanent & Variable Capital Regression Analysis Trend Analysis of Working Capital Management

Working Capital policy of JSPL Table 1: ESTIMATED CASH FLOW FOR APR 11 TO JUNE 11

ESTIMATED CASH FLOW FOR APRIL 10 TO JUNE 10 PARTICULARS

Apr-11

RS IN Crores. May-11

Jun-11

PROJECTED

PROJECTED

PROJECTED

-DOMESTIC

750.00

750.00

750.00

-EXPORT

58.00

58.00

58.00

32.00

32.00

32.00

840

840

840

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-

39.30

39.30

39.30

243.85

243.85

243.85

TAMNAR

20.00

20.00

20.00

RAIPUR

10.89

11.72

11.88

BABIL

41.35

34.43

26.41

TENSA

27.46

27.46

27.46

PATRATU

5.50

6.00

6.00

DELHI

15.00

15.00

15.00

403.35

397.76

389.90

167.13

46.78

115.80

570.48

444.54

505.70

269.52

395.46

309.30

RAIGARH

61.60

49.57

12.79

RAIPUR

0.00

11.36

12.41

ANGUL

84.06

60.00

60.00

PATRATU

14.76

6.50

19.12

BARBIL

0.00

0.00

0.00

160.42

127.43

104.32

COLLECTION FOR THE MONTH STEEL

POWER

SUB TOTAL

FUNDS REQUIREMENT FOR THE MONTH OPEX PAYMENTS NOT UNDER L/C RAIGARH EXCISE/ STAT TAXES PAYMENT RAIGARH OTHERS

SUB TOTAL

RAIGARH-COKING COAL PAYMENT UNDER LC SUB TOTAL

SURPLUS/(DEFICIT) FROM OPERATIONS PROJECT PAYMENTS UNDER L/C

SUB TOTAL

PROJECT PAYMENTS NOT UNDER L/C

RAIGARH

86.08

107.32

124.65

ANGUL

123.50

162.33

204.99

PATRATU

40.60

45.55

34.30

BARBIL

43.60

45.00

46.50

RAIPUR

0.00

0.00

0.00

FOREIGN PROJECTS

15.00

15.00

15.00

REAL ESTATE

20.00

20.00

20.00

GLOBAL LAW SCHOOL/WINDMILLS

8.70

4.92

0.00

251.40

292.80

320.79

411.82

420.23

425.11

(142.29)

(24.77)

(115.81)

LONG TERM LOAN/ECB/FCTL

52.15

389.09

70.74

BUYER'S CREDIT / SHORT TERM LOAN/JPL

429.45

215.57

632.52

481.60

604.66

703.27

40.66

18.86

35.67

-

-

100.00

40.66

18.86

135.67

(664.55)

(648.29)

(954.74)

230.00

150.00

150.00

TERM LOANS FOR PROJECTS

-

-

-

STL/BUYERS CREDIT FOR OPERATIONS

-

-

-

SUB TOTAL

230.00

150.00

150.00

NET SURPLUS/(DEFICIT) AFTER COMMITTED CAPITAL FLOWS NET CUMMALATIVE SURPLUS/(DEFICIT)

(434.55)

(498.29)

(804.74)

(434.55)

(932.84)

(1,737.58)

167.13 85.00 169.69

46.78 77.00 93.00

115.80 40.00 269.92

SUB TOTAL

TOTAL PROJECT OUTFLOW SURPLUS/(DEFICIT) FROM OPERATIONS & PROJECT FLOW FINACING OUTFLOW PRINCIPAL PAYMENTS

SUB TOTAL INTEREST PAYMENTS CORPORATE TAX

SUB TOTAL

GROSS OUTFLOW CAPITAL INFLOW LIC NCD

DEFICIT TO BE FINANCED BY Probable Buyers Credit Coking Coal Probable Buyers Capital Goods Probable Rollover of Buyers Credit

STL CP SUB TOTAL

Net Deficit Net Cummulative Deficit

100.00

250.00

-

521.82

466.78

425.72

87.27 87.27

(31.50) 55.77

(379.03) (323.26)

JPL WC Limit

-20 -50

Net Cummalative Deficit

(449.03)

First they collect details of projected cash inflow and outflow from their different branches and make Project for the Cash Flow for three months. Then the process of procurement of fund takes place. If the fund is internally available no process takes place and if not available then they analysis all the option like short term loan, inter corporate loan and commercial paper etc. Now you see the above table there is deficit in last months. To overcome this deficit they will borrow from bank.

Working capital borrowing from Banks Table 2: Working Capital Borrowing from Banks WORKING CAPITAL BORROWINGS FROM BANKS (Rs. in Crores) 31st march 2004 56.1021 31st march 2005 92.0640 31st march 2006 43.91 31st march 2007 118.81 31st March, 2008 213.59 31st March, 2009 44.25 31st March, 2010 114.26 31st March, 2011 251.34

Figure 5: Working capital borrowing from Banks

Working capital borrowing from Banks 300.00 250.00 200.00 150.00 Working Capital Borrowing

100.00 50.00 0.00

31st march 31st 2003 march 31st 2004 march 31st 2005 march 31st2006 March, 31 st2007 March, 31 st2008 March,2009 31 st March,2010

Analysis: In the year 2004 higher percentage of working capital was financed by bank borrowing. In 2005 it was highest but in later stage the bank borrowing had come down as low as 43 crores. This shows that after 2006 onwards higher percentage of working capital is financed by their own cash inflow which reduce the liquidity problem as well cost of borrowing. Secured by hypothecation by way of first charge on stocks of finished goods, raw materials, work in progress, stores and spares and book debts, and guaranteed by Directors and Second charge in respect of other moveable and immoveable assets.

Financial Ratio Analysis for Working Capital Management Return on Working Capital: Return on Working Capital (ROWC) =

PBIT / Working Capital * 100

Table 3: Return on Working Capital Return on Working Capital For JSPL 31 March 2005

405.55 / 103.15 * 100

= 393.16 %

31 March 2006

743.52 / 142.25 * 100

= 522.68 %

31 March 2007

815.16 / 396.19 * 100

= 205.74 %

31 March 2008

1095.11/ 320.68 * 100

= 341.49 %

31 March 2009

1711.11 / 553.78 * 100

= 308.98 %

31 March 2010

2170.79 / 699.93 * 100

= 310.14 %

31 March 2011

2099.47/ 155.65* 100

= 1348.84 %

Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities + Proposed Dividend + Provision for Tax. Current Assets = Inventories + Debtors + Cash & Bank balance + Current Investments + Advance Income Tax + Advance recoverable in Cash. Figure 6: Return on working capital

Rrturn (in %)

Return on Working Capital 1600 1400 1200 1000 800 600 400 200 0

1348.84

522.68

310.14

393.16

308.98

205.74 2005

Return

341.49

2006

2007

2008

2009

2010

2011

Years

Analysis: There has been a initial increase in the Return on Working Capital during 2006,which was followed by a decline in ROWC between the two years – it reduces more than half during 2007. This respectable situation arises because of increase in current liabilities in past years as company is having proposal of lots of investment due to which company is financing its project and there is less tendency of free cash flow. During 2008 there was increase in the ROWC, which later decreased and was maintained steady.

Liquidity ratios:

Snapshot of Liquidity Ratios: Table 4: Liquidity ratios JSPL

For the year ended

Basic Ratios

31 Mar 05

31 Mar 06

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

07

08

09

10

11

Current ratio

1.20:1

1.24:1

1.39:1

1.23:1

1.87:1

1.19:1

1.03:1

Acid test ratio

0.81:1

0.80:1

0.82:1

0.76:1

1.27:1

0.85:1

0.73:1

0.044:1

0.056:1

0.031:1

0.038:1

0.35:1

0.087:1

0.013:1

Cash ratio

Current Ratio: The current ratio is also known as the working capital ratio and is normally presented as a real ratio. Table 5: Current Ratio Current Ratio For JSPL 31 March 2005

Current Assets: Current Liabilities

599.82:496.66

1.20:1

31 March 2006


736.4:594.15

1.24:1

31 March 2007


1403.56:1007.37

1.39:1

31 March 2008


1698.51:1377.83

1.23:1

31 March 2009


3060:1636.17

1.87:1

31 March 2010


4216.08:3516.15

1.19:1

31 March 2011


4603.1:4447.45

1.03:1

Figure 7: Current Ratio

Current Ratio

1.87

Current Ratio

2 1.2

1.5

1.24

1.39

1.23

1.19

1.03

1 0.5 0 2005

2006

2007

2008 Years

2009

2010

2011

Analysis: The current ratio is the measure of whether a company has enough short-term assets to cover its short-term debt and is index of strength of working capital. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. A ratio of greater than one means that the firm has more current assets then current claims. Current ratio of the company has increased from 1.20 in Year 2004-05 to 1.39 in Year 200607. Current Ratio of the company depicts that for every Re.1 worth of current liability there are assets worth Re.1.39. The company has sufficient liquidity as the ratio is increasing. This year there is an increase in ratio due to almost double inventory level in current year in comparison with previous year. But during the year 2009 there was steep increase in the current ratio of the company, not due to increase in the inventory level, but due to huge holding of the cash which was recovered from the debtors & not invested during that year. During last year i.e. 2011, the current ratio was found to be decreased because of the increase in sundry debtors and decrease in current investments..

Suggestions: In order to increase current ratio current assets should be increased. If we look into the detailed schedule of current assets then we can find out that major portion of current assets is due to debtors and inventories. Company should make market survey and should decide first that what should be the optimum amount of finished goods so that major portion of it can be sold off in the market. This will help in reducing the locking of funds or working capital in the finished goods.

Acid Test Ratio: Table 6: Acid Test Ratio for JSPL Acid Test Ratio For JSPL 31 March 2005

Current Assets - Stocks: Current Liabilities

403.32:496.66

0.81:1

31 March 2006


478.85:594.15

0.80:1

31 March 2007


834.91:1007.37

0.82:1

31 March 2008


1056.07:1377.83

0.76:1

31 March 2009


2079.02: 1636.17

1.27:1

31 March 2010


3005.62: 3516.15

0.85:1

31 March 2011


3274.6: 4447.45

0.73:1

Figure 8: Acid Test Ratio For JSPL

Acid Test Ratio

1

Acid Test Ratio

1.27

1.5 0.81

0.8

0.82

0.85

0.76

0.73

0.5

0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: Acid test ratio is a more rigorous test of liquidity than the current ratio and when used in conjunction with it, gives a better picture of the firm s ability to meet its short-term debts out of short-term assets. This ratio is used to determine risk that is not detected by the Working Capital ratio. A quick or liquid ratio of 1:1 is considered as satisfactory as the firm can easily or readily meets all of its current liabilities. Here JSPL had its acid test ratio around 0.8:1 during the year 2005-2008 which is constant from last three years, which indicates company was not having satisfactory financial position. But during the year 2009, the acid test ratio of the company was highly excellent and was able to pay its current liabilities which was followed by a decrease in the ratio. So it should be looked at with extreme care and also implies that current assets are highly dependent on inventory. .

Comparison between Current Ratio & Acid Test Ratio: Table 7: Comparison between current ratio and acid test ratio Comparison 2005

Current 1.20

Acid Test 0.81

2006

1.24

0.80

2007

1.39

0.82

2008

1.23

0.76

2009

1.87

1.27

2010

1.19

0.85

2011

1.03

0.73

JSPL's liquidity position had worsened when looked at its current ratio. The acid test ratio has fallen from 2004 to 2005. Current assets might not be that liquid since almost 80% of them are debtors. The fact that the differences between the current and acid test ratio is around .4, which is large, tells us that the JSPL stocks are large. The stocks are worth around 40.5% of current assets in 2008; that's a huge level of stock holdings. Additionally, the acid test ratio has decreased over the three-year period, meaning that the JSPL has a weak liquidity position than it had before. Normally that is not a good thing.

 Cash Ratio: Table 8: Cash ratio for JSPL Cash Ratio For JSPL 31 March 2005

Cash: Current Liabilities

21.89:496.66

0.044:1

31 March 2006


33.29:594.15

0.056:1

31 March 2007


31.30:1007.37

0.031:1

31 March 2008


52.97:1377.83

0.038:1

31 March 2009


577.91: 1636.17

0.35:1

31 March 2010


308.96: 3516.15

0.087:1

31 March 2011


60.10: 4447.45

0.013:1

Figure 9: Cash Ratio for JSPL

0.35

Cash Ratio

0.4 0.3

Cash ratio

0.2 0.1

0.056

0.044

0.087 0.031

0.038

0.013

0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: As cash is being the most liquid asset, quoted investment has been taken as marketable securities. In our case the company carried small amount of cash during the year 2005-2008 so it was not having a favorable cash ratio. But during year 2009 the company carried large amount of cash in hand which was some what good as compared to the previous year but during the last year 2010, the cash ratio was found to be decreased due to increase in current liabilities to large extent. From the above calculation it is clear that company‟s cash ratio had remained very low in comparison to the standard of .5. It is the notable point for the company as its current liabilities are much higher than the cash in hand. It can create problems in the future payments of current liabilities. Major portion of company‟s current assets goes to inventory and debtors, which only increase the carrying cost. Company need to reduce these assets to their optimum level.

Other Snapshot of Working Capital Management ratios Table 9: Working capital management ratios JSPL Asset Usage Current Asset Turnover Working Capital Turnover

For the year ended 31

31

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

Mar05

Mar06

07

08

09

10

11

3.77

3.51

1.84

2.04

1.76

1.81

1.62

times

times

times

Times

times

times

times

12.23

15.92

6.53

10.97

9.77

10.93

47.33

times

times

times

Times

times

times

times

0.06

0.05

0.12

0.07

0.08

0.07

0.01

Efficiency Working capital to Gross Sale

Working Capital to Cost of Sale

times

times

times

Times

times

times

times

0.13times

0.10times

0.25

0.15 times

0.16

0.13

0.03

times

times

times

times Stock/Debtors/Creditors Debtors‟ Turnover Average Collection Period

5.97

13.09

8.64

10.98

18.99

19.55

11.83

times

times

times

Times

times

times

times

60.20days

27.50days

41.66

32.78days

18.95days

18.41days

30.43days

1.30 times

2.30

1.47

1.16

times

times

times

days Credits‟ Turnover Inventory Turnover Inventory Holding period

----

2.14

1.28

times

times

6.42

8.75

4.55

5.47

5.51

6.32

5.54

times

times

times

Times

times

times

times

56.07

41.14

79.12

65.81

65.33

56.96

64.98

days

days

days

Days

days

days

days

0.25 times

0.22 times

0.26 times

0.25 Times

0.36 times

0.34 times

0.25 times

0.036 times 0.32 times



0.031 Times 0.37 times




0.2 times

0.16 times

0.17 times

0.18 times

0.16 times

0.24 times

0.28 times

0.36 times

0.77 times

0.42 times

0.46 Times

0.47 times

0.75 Times

0.83 Times

Ratio to analyze WC Structure Current Asset to Total Assets Ratio Cash to Current Asset Ratio Inventory to Current Asset Ratio Current Liabilities to Total Liabilities Loan & Advances to CA ratio

Working Capital Management I: Asset Usage Current Asset Turnover: Turnover Current Asset Turnover = Current Assets Table 10: Current asset turnover for JSPL Current Asset Turnover For JSPL 31 March 2005

2264.72/599.82

= 3.77times

31 March 2006

2590.25/736.4

= 3.51 times

31 March 2007

2589.29/1403.56

= 1.84 times

31 March 2008

3519.81/1698.51

= 2.07 times

31 March 2009

5410.75/3060

=1.76 times

31 March 2010

7653.19/4216.08

=1.81 times

31 March 2011

7484.90/4603.1

=1.62 times

Figure 10: Current Asset Turnover 3.77 4

3.51

Current Assets Turnover (times)

3.5

Current Asset

3 2.5

1.84

2.07

1.76

1.81

2

1.62

1.5 1 0.5 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: High current assets turnover ratio is more judicious and shows efficiency of management and proper utilization of the assets. The graph shows the company has managed to higher the ratio during the previous years however this year due to non-proportionate change in current assets and turnover the ratio declines to 1.84. Due to more inventory this ratio falls.

Working Capital Turnover: This ratio signifies how effectively working capital is being used in terms of the turnover. Sales Working Capital Turnover = Working Capital Table 11: Working capital turnover for JSPL Working Capital Turnover For JSPL 31 March 2005

1261.61/ 103.15

= 12.23 times

31 March 2006

2264.72/ 142.25

= 15.92 times

31 March 2007

2590.25 / 396.19

= 6.53times

31 March 2008

3519.81 / 320.67

= 10.97times

31 March 2009

5410.75/553.78

= 9.77 times

31 March 2010

7653.19/699.93

= 10.93 times

31 March 2011

7367.59/155.65

= 47.33 times

Figure 11: Working Capital Turnover For JSPL

Working Capital Turnover

50 45 40 35 30 25 20 15 10 5 0

Working capital Turnover (Times)

47.33


15.92 10.97 12.23

2005

2006

10.93

9.77

6.53 2007

2008

2009

2010

2011

Years

Analysis: What this ratio tries to highlight is how effectively working capital is being used in terms of the turnover it can help to generate: no ideal values here but the higher the better, surely. The declining working capital turnover ratio in JSPL indicates that working capital is not being utilized properly over the period of time. Management may think of increasing the sales in the market or it is going for certain expansion plans. But since 2009 the company managed to increase there working capital turnover as compared to 2008. During 2011, the working capital turnover ratio was found to be sharply increased, this shows that the working capital has been utilized efficiently by the management.

Working Capital Management II: Efficiency Working Capital to Gross Sale: Working Capital Working Capital to Gross Sale = Gross Sale Table 12: Working capital to gross sale for JSPL Working Capital to Gross Sale for the JSPL 31 March 2005

103.15 / 1547.06

= 0.06 times

31 March 2006

142.25 / 2775.32

= 0.05 times

31 March 2007

396.19 / 3274.05

= 0.12 times

31 March 2008

320.68 / 4336.54

= 0.07 times

31 March 2009

553.78 /6743.22

= 0.08 times

31 March 2010

699.93/8953.77

= 0.07 times

31 March 2011

155.65/8595.67

= 0.01 times

Figure 12: Working Capital to Gross Sale for the JSPL

Working Capital to Gross Sale working capital to gross sale (in times)

0.14 0.12

0.12 0.1

0.08

0.08 0.06

0.07

0.06

Working capital to Gross Sale

0.07

0.04

0.05

0.02

0.01

0 2005

2006

2007

2008 Years

2009

2010

2011

Analysis: The Company was showing a favourable trend as it was showing decline in the financial periods till 2006 but now as the ratio increased to .12 from .05 there is a matter of concern but here also JSPL is far better than the industry‟s average. Since 2008, the ratio was found to be decreasing and it decreased to 0.01 in 2011. Thus the company has managed to utilize their working capital more efficiently as compared previous years.

Working Capital to Cost of Sale:

Working Capital Working Capital to Cost of Sale = Cost of Sale

Table 13: Working capital to cost of sale for JSPL Working Capital to Cost of Sale for the JSPL 31 March 2005

103.15 / 760.75

= 0.13 times

31 March 2006

142.25 / 1363.05

= 0.10 times

31 March 2007

396.19 / 1583.16

=0.25times

31 March 2008

320.68 / 2116.93

=0.15 times

31 March 2009

553.78 / 3296.99

=0.16 times

31 March 2010

699.93 / 5195.41

=0.13 times

31 March 2011

155.65 / 4872.77

=0.03 times

Figure 13: Working Capital to Cost of Sale for the JSPL

Working Cpitak to Cost of Sales (in times)

Working Capital to Cost of Sale 0.3 0.25

0.25

0.2 0.15 0.1

0.16

0.15

0.13

0.13

Working Capital to Cost of Sale

0.1

0.05

0.03

0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: The Company is showing a favorable trend as it is showing decline in the ratio during the financial periods 2007-2011. This shows that the working capital used by them is less as compared to the cost of sale.

Working Capital Management III: Stock/Debtors/Creditors Debtor’s Turnover: Debtor’s Turnover =

Sales Debtors

Table 14: Debtor’s turnover ratio for JSPL Debtor’s Turnover Ratio for the JSPL 31 March 2005

1261.61 / 211.16

= 5.97 times

31 March 2006

2264.72 / 172.91

= 13.09 times

31 March 2007

2590.25 / 299.54

= 8.64 times

31 March 2008

3519.81 / 320.31

= 10.98 times

31 March 2009

5459.87 / 287.38

= 18.99 times

31 March 2010

7653.19 / 391.46

= 19.55 times

31 March 2011

7367.59/622.36

= 11.83 times

Figure 14: Debtor’s Turnover Ratio for the JSPL

18.99

19.55

Debtors turnover (in times)

20 13.09

15 10

11.83

10.98 8.64 5.97

5 0 2005

2006

2007

2008 Years

2009

2010

2011 Debtors’ Turnover

Analysis: 

Firstly, the ratio seems to have change by going from 5 to 19 times over the 6 years; and it means that, on average, the JSPL‟s debtors are taking less days to pay their accounts. Soundness of this ratio is more depend on the business policy and the terms with the clients. On the other side during 2007-2010 turnover is increasing, which implies higher the turnover, shorter the time between sales and collecting cash. It shows the company‟s debt-collecting machinery has improved through years. But during last year 2011, the debtors turnover ratio has decreased sharply due to increase in sundry debtors, this shows the debt collecting machinery of the company is not working efficiently.

 Average Collection Period: 360 Avg. Collection Period = Debtor Turnover

Table 15: Average collection period for JSPL Average Collection Period for the JSPL 31 March 2005 31 March 2006 31 March 2007 31 March 2008 31 March 2009 31 March 2010 31 March 2011

360 / 5.98 360 / 13.09 360 / 8.64 360 / 10.98 360 / 18.99 360 / 19.55 360 / 11.83

= 60.20 days = 27.50 days = 41.66 days = 32.78 days = 18.95 days = 18.41 days = 30.43 days

Figure 15: Average Collection Period for the JSPL

Average Collection Period (in days)

70

60.2

60

Average Collection Period

50

41.66 32.78

40

30.43

27.5

30

18.95

18.41

20 10 0 2004

2005

2006

2007

2008

2009

2010

Years

Analysis: The average collection period measures the quality of debtors since it indicates the speed of their collection. The shorter the average collection period, the better the quality of debtors, as a short collection period implies the prompt payment by debtors. The trend of JSPL was showing that the company was a success in decreasing the average collection period, which represent sound collection policy of the company. But during last year 2011, the average collection period of the company has increased from 18.41 to 30.43 days which is not a good sign for the company.

 Creditor’s Turnover: Creditor’s Turnover =

Purchases Creditors

Table 16: Creditor’s turnover ratio for JSPL Creditor’s Turnover Ratio for the JSPL

31 March 2006

411.23/191.77

= 2.14 times

31 March 2007

462.04/359.36

= 1.28 times

31 March 2008

601.91/461.77

= 1.30 times

31 March 2009

1156.1/567.46

= 2.03 times

31 March 2010

1800.16/1222.51

= 1.47 times

31 March 2011

1814.93/1560.48

= 1.16 times

Figure 16: Creditor’s Turnover Ratio for the JSPL

Creditor's turnover Ratio (in times)

2.5

Creditor's Turnover Ratio

2.14

2.03

2 1.28

1.5

1.47

1.3

1.16

1 0.5 0 2006

2007

2008

2009

2010

2011

Years

Analysis: It is observed that the creditors turnover ratio has been decreasing since 2008 which implies terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This shows company keep its obligation for long time.

Inventory Turnover Ratio: Net Sales

Inventory Turnover =

Inventory Table 17: Inventory turnover ratio for JSPL Inventory Turnover Ratio for the JSPL 31 March 2005

1261.61 / 196.47

= 6.42 times

31 March 2006

2253.60 / 257.55

= 8.75 times

31 March 2007

2590.25 / 568.65

= 4.55 times

31 March 2008

3519.81 / 642.44

= 5.47 times

31 March 2009

5410.75 / 980.56

= 5.51 times

31 March 2010

7653.19 / 1209.96

= 6.32 times

31 March 2011

7367.59 / 1328.50

= 5.54 times

Figure 17: Inventory Turnover Ratio for the JSPL

Inventory Turnover Ratio (in times)

10 8

8.75

Inventory Turnover Ratio

6.42

6.32 5.47

6

5.54

5.51

4.55

4 2 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: It measures approximately the number of times an entity is able to acquire the inventories and convert them into sales. The higher turnover ratio is good for the firm while A low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse, but several aspects of inventory holding policy have to be balanced like lead time, seasonal fluctuations in orders, alternative use of warehouse space. Inventory turnover has decreased in 2011, than the previous years due to increase in inventory and decrease in sales

Inventory Holding Period: Inventory Holding Period =

360 Inventory turnover Table 18: Inventory holding period for JSPL

Inventory Holding Period for the JSPL 31 March 2005

360 / 6.42

= 56.07 days

31 March 2006

360 / 8.75

= 41.14days

31 March 2007

360 / 4.55

= 79.12days

31 March 2008

360 / 5.47

= 65.81 days

31 March 2009

360 / 5.51

= 65.33 days

31 March 2010

360 / 6.32

= 56.96 days

31 March 2011

360 / 5.54

= 64.98 days

Figure 18: Inventory Holding Period for the JSPL

79.12 80 Inventory Holding Period (in days)

70 60

65.81

65.33 56.96

56.07

50

64.98

41.14

Inventory Holding Period

40 30 20 10 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: The company‟s inventory holding period was found to be fluctuating up and down during the year 2005 – 2007 , which is not good for the company as it was unnecessary locking up of working capital in the inventory and it shows inefficiency of the management. After hree year constant inventory holding period, during last year i.e.2011,the inventory holding period has increased from 56.96 to 64.98, this shows unnecessary locking up of working capital in the inventory and it shows inefficiency of the management.

Working Capital Management IV: Ratio to analyze WC Str. Current Asset to Total Assets Ratio: Table 19: Current asset to total asset ratio for JSPL Current Asset to Total Asset Ratio for the JSPL 31 March 2005

599.82 / 2319.78

= 0.25 times

31 March 2006

736.40 / 3250.62

= 0.22 times

31 March 2007

1403.56 / 5250.55

= 0.26 times

31 March 2008

1698.51 / 6783.63

= 0.25 times

31 March 2009

3060 / 8456.31

= 0.36 times

31 March 2010

4216.08 / 12279.99

= 0.34 times

31 March 2011

4603.1 / 17742.44

= 0.25 times

Current Assets to Total Asset Ratio (in times)

Figure 19: Current Asset to Total Asset Ratio for the JSPL

0.36

0.4

0.34

0.35 0.3

0.26

0.25

0.25

Current Asset to Total Assets Ratio 0.25

0.22

0.25 0.2 0.15 0.1 0.05 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: If we analyse the structural health of working capital for JSPL, the proportion of current assets to total assets has been showing decreasing trend as compared to financial year 2009 & 2010 , which shows that the company was having certain problems with its current asset management. This was due to increase in the application of funds in the fixed assets.

Cash to Current Ratio: Cash to current ratio

=

Cash Current asset

Table 20: Cash to current asset ratio for JSPL Cash to Current Asset Ratio for the JSPL 31 March 2005

21.90 / 599.82

= 0.036 times

31 March 2006

33.29 / 736.40

= 0.045 times

31 March 2007

31.30 / 1403.56

= 0.022 times

31 March 2008

52.97 / 1698.51

= 0.031 times

31 March 2009

577.91/3060

= 0.l88 times

31 March 2010

308.96/4216.08

= 0.073 times

31 March 2011

60.10/4603.1

= 0.013 times

Figure20: Cash to Current Asset Ratio for the JSPL

0.188

Cash to Current Asset Ratio (in times)

0.2 0.15

Cash to Current Asset Ratio

0.1

0.05

0.073 0.036

0.045

0.031

0.022

0.013

0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: The company shows an increasing trend in 2006 & again it decrease in 2007. However in the year 2009, the cash to current ratio was found to be increased hugely to 0.188 from 0.031 of 2008, which is almost more than six times from year 2008. But in 2011 the ratio again decreased sharply to 0.013. We can say that it will effect liquidity position of the firm but on the other hand it is observed that they do not keep any ideal cash with them, which is a positive sign for the company.

Inventory to Current Asset Ratio: Inventory Inventory to Current Asset

= Current asset

Table 21: Inventory to current asset ratio for JSPL

Inventory to Current Asset Ratio for the JSPL 31 March 2005

196.5 / 599.82

= 0.32 times

31 March 2006

257.55 / 736.40

= 0.34 times

31 March 2007

568.65 / 1403.56

= 0.40 times

31 March 2008

642.44 / 1698.51

= 0.37 times

31 March 2009

980.56 / 3060

= 0.32 times

31 March 2010

1209.96 /4216.08

= 0.28 times

31 March 2011

1328.50/4603.1

= 0.28 times

Inventory to Current Assets Ratio (in times)

Figure 21: Inventory to Current Asset Ratio for the JSPL

0.4 0.4 0.35

0.32

0.37

0.34

0.32 0.28

0.3

0.28

0.25 0.2 0.15 0.1 0.05 0 2004

2005

2006

2007

2008

2009

2010

Years

Analysis: Here, the company shows an unfavorable trend of increase in the proportion of the inventory to current assets during the year 2005 – 2007, which represents that the company was locking up the working capital unnecessarily in the inventory. But since 2007, the ratio is showing decreasing trend which is a good sign for the company as they are decreasing the locking up of working capital in the inventory.

 Current Liabilities to Total Liabilities:

Current Liabilities Current Liabilities to Total Liabilities

= Total Liabilities

Table 22: Current liabilities to total liabilities ratio for JSPL Current Liabilities to Total Liabilities Ratio for the JSPL 31 March 2005

496.66 / 2418.60

= 0.20 times

31 March 2006

594.15 / 3584.92

= 0.16 times

31 March 2007

1007.37 / 5768.53

= 0.17 times

31 March 2008

1377.83 / 7599.84

= 0.18 times

31 March 2009

1636.17 / 9735.21

= 0.16 times

31 March 2010

3516.15 / 14409.75

= 0.24 times

31 March 2011

4447.45 / 15844.26

= 0.28 times

Current Liabilities to Total liabilities (in times)

Figure 22: Current liabilities to Total liabilities Current Liabilities 0.28 to Total Liabilities

0.3 0.24 0.25

0.2

0.2

0.16

0.17

0.18

0.16

0.15 0.1 0.05 0 2005

2006

2007

2008 Years

2009

2010

2011

Analysis: The company shows a increasing trend in the proportion of the current liabilities in the total liabilities as this shows company is taking more loans to meet its liability and project investments are there, hence this shows a burden on the management of JSPL. This ratio is not the only means of reviewing a company's debt structure.

Loan & Advances to Current Asset Ratio: Loan & Advances Loan & Advances to Current Asset = Current Asset

Table 23: Loan & Advances to Current assets ratio for JSPL Loan & Advances to Current Asset Ratio for the JSPL 31 March 2005

218.07 / 599.82

= 0.36 times

31 March 2006

572.54 / 736.40

= 0.77 times

31 March 2007

591.01 / 1403.56

= 0.42 times

31 March 2008

785.94/1698.51

= 0.46 times

31 March 2009

1453.72/3060

= 0.47times

31 March 2010

3199.04/4216.08

= 0.75 times

31 March 2011

3865.94/4603.1

= 0.83 times

Figure 23: Loan & Advances to Current Assets

Loan & Advances to Current Assest (in times)

Loan & Advances to CA ratio 1 0.77

0.75

0.8 0.6

0.42

0.36

0.46

0.83

0.47

0.4 0.2 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: The increase in this ratio in the year 2011 shows the efficiency of the management. However this much increases in the ratio is not suggestible and due to the efforts of the company in the current year it is 0.83 times means 83% of current assets are Loans and Advances.

Interpretation (Ratio Analysis) As shown by current assets turnover ratio, the utilisation of current assets in terms of sales has shown a decreasing trend as compared previous years which shows that current assets has not been effectively used during the last year 2011 to achieve sales. Again if we look at the efficiency with which individual elements of working capital have been utilised, the picture of inventory turnover is bright.

As we look at the extent of liquidity of working capital, we notice that the ratio shows a decreasing trend. This indicates, problem on the liquidity front. As we look at debtors turnover ratio , we notice that the ratio had shown a increasing trend and a decreasing trend of average collection period during the period 2005-2010.But during last year the debtors turnover was found to be decreased and average collection period to be increased.

Management of Current Assets

Alternative Current Asset Investment policies Three alternative policies are there regarding the total amount of current assets. Essentially, these policies differ with regard to the amount of current assets carried to support any given level of sales, hence in the turnover of those assets. The line with the steepest slope represents a relaxed current asset investment (also known as “fat cat”) Policy, where relatively large amounts of cash, marketable securities, and inventories are carried, and where sales are stimulated by the use of a credit policy that provides liberal financing to customers and a corresponding high level of receivables.

Conversely, with the restricted current asset

investment (also known as “lean and mean”) policy, the holdings of cash, securities, inventories and receivables are minimized. Under the restricted, current assets are turned over more frequently, so each dollar of current assets is forced to “work harder”. The moderate current asset investment policy is between the two extremes.

Under the conditions of certainty, all firms would hold only minimal levels of current assets. Any larger amounts would increase the need for external funding without a corresponding increase in profits, while any smaller holdings would involve late payments to suppliers along with lost sales due to inventory shortages and an overly restrictive credit policy.

When uncertainty is introduced the firm requires some minimum amount of cash and inventories. A restricted lean and mean current asset investment policy often provides the highest expected return on this investment, but it entails the greatest risk, while the reverse is true under a relaxed policy.

Alternative Current Assets Investment Policies: Figure 24: Alternate current assets investment policies

JSPL 60 50 Relaxed 40 Moderate 30 20

Restricted

10

0

50

100

150

Sales

Table showing Alternative Current Assets Investment Policies:

Table 24: Table showing alternative current assets investment policies Policy Current asset to support Turnover of Current Sales of INR 100/-

Assets

Relaxed

30

3.3X

Modified

23

4.3X

Restricted

16

6.3X

61.72

1.62X

JSPL

Note: - The Sales/current assets relationship is shown here as being linear, but the relationship is often curvilinear.

Managing the Components of Working Capital of JSPL Four main components: Cash Marketable securities/Account Payables Inventory Accounts Receivables

Cash Management in JSPL: Cash management system adopted by Finance Department in JSPL is very reliable and transparent. As cash is a very important activity for a good operation of company here in JSPL cash is monitored every day and intimated to Finance Department. The daily cash report includes the all details of cash inflows and outflows. Monthly cash budgets are maintained for the estimated of monthly cash inflows and outflows. Finally the annual cash budget is made by the Finance Department in the corporate head office.

The corporate office allocates different amount of each to different manufacturing units as per their requirement. Corporate office acts as a linkage between the manufacturing unit and creditors. Corporate office has determined the credit facility for every units of the company and this keeps on changing from year to year depending up on company‟s position transactions, profitability and inventory position.

The corporate office provides cash to manufacturing units but there most function is controlled in unit itself. All the need related to inventory are met through corporate office as well as individual efforts of unit.

Fund Allocation: Here the initial allocation for manufacturing units is done by corporate office and all supplementary requirements are to look upon by Commercial department.

Fund Utilization: Company operates an annual „Cash Budget‟ and a rolling „Cash Plan‟ drawn up every month. Although specific forecasting technique is used, funds are deployed to different departments as per their requirements. Daily reports on cash transaction are prepared by Procurement department to keep a track of all payments made in the days work. Every month cash transaction report is sent to Finance department in the corporate office showing all the transaction of cash, (inflow and outflows) actual utilization of cash and allocation of fund is compared. If the utilization of cash is more than the allocation of fund, then the plant has to justify its more utilization.

To meet the requirement of cash company approach to bank and present the required detailed by the bank. JSPL kept less cash in hand to meet the entire cash requirement it depends on financing process.

Evaluation of cash management performances: To assess the cash management performance this phase is divided as follows: a) Size of Cash b) Liquidity and Adequacy of cash: This is depicted by the current ratio and acid test ratio, as calculated in part ratio analysis for working capital management and respective position is shown in graph. c) Control of cash

One of the major objectives of cash management from the stand point of increasing return on investment is to economize on the cash holding without impairing the overall liquidity requirements of the firms. This is possible by effecting tighter controls over cash flows. The following ratios have been applied to assess the efficiency of cash control:

Cash to Current Assets ratio Cash turnover ratio Cash to current liabilities ratio

Table 25: Table showing different cash ratios For the year ended

JSPL Efficiency of cash

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

control

05

06

07

08

09

10

11

Cash to Current Asset

0.036

0.045

0.022

0.031

0.188

0.073

0.013

Ratio

times

times

times

times

times

times

times

Cash to Current

0.044

0.056

0.031

0.038

0.353

0.087

0.013

liabilities Ratio

times

times

times

times

times

times

Times

Average: 0.071 (Cash to Current Asset Ratio) Average: 0.11 (Cash to Current liabilities Ratio)

Summary: It can be inferred from the above table that cash to current assets ratio during 2010, is lowest as compared to previous years. This shows decrease in liquidity position of the company, which ultimately affect the operational efficiency of the firm. Cash to current liability ratio shows the cash balance maintained by company at a certain point of time for meeting its current liabilities. The cash to current liabilities ratio is nearly on decreasing trend shows the efficiency of operations.

Payable Management in JSPL: Mostly the creditor comprises of the bank who is financing the working capital needs and the suppliers to whom payments are to be given. This is basically done as per terms and condition with the respective parties. The company is not able to make proper payment to its creditors as year on year company‟s creditors are increasing (creditors increased from 191.77 Cr on 2005 to 1560.48 in 2011.

Evaluation of Payables Management: The evaluation for payable management is done with the help of ratios: Creditor‟s turnover ratio

Table 26: Table showing payables management

For the year ended

JSPL Payable Management Creditor’s ratio

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

06

07

08

09

10

11

2.14times

1.28times

1.30

2.03

1.47

1.16

times

times

times

times

Summary: It is observed that the creditors turnover ratio has been decreasing since 2009 which implies terms of credit allowed by the suppliers are liberal and creditors are not paid promptly. This shows company keep its obligation for long time.

Inventory Management: Here the inventory is categorized in to: (1) A B C analysis (2) X Y Z analysis 1) ABC Analysis: - Items which constitutes to 70% of total consumption (of stores and spares) value when arranged in descending order of consumption value will be termed as „A‟ class items. Next 20% of total consumption value will be termed as „B‟ class items and the rest 10% as the „C‟ class items.

2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and spares holding value when arranged in descending order of stock holding will be termed a „X‟ class items next 20% of total stock holding value is „Y‟ class items and the rest 10% as the „Z‟ class. Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges. Four basic levels will need to be established for each line/category of stock. There are the: a) Maximum level – achieved at the point a new order of stock is physically received; b) Minimum level – the level at point just prior to delivery of a new order (sometimes called buffer stocks – those held for short term emergencies); c) Reorder level – point at which a new order should be placed so that stocks will not fall below the minimum level before delivery is received; and the d) Reorder quantity or economic order quantity – the quantity of stock, which must be reordered to replenish the amount held at the point delivery, arrives up to the maximum level. Once these controls are implemented an efficient system of recording receipts and issues is vital to exercise full control of inventories.

Inventory Management at JSPL: Inventory is stock of a company, which is manufacturing for sale and component that make up the product. In managing inventories the objective of the company is to determine and

maintain optimum level of inventory investment. The optimum level of inventory lies between two danger points of excess and inadequate inventories. Inventory is monitored differently for raw material, work in progress, finished goods and spares. Monthly inventory report is sent to the finance department in the corporate office. Obviously the inventory report is prepared at plant level. Procurement Department gives the data of closing stock of raw materials, finished goods as well as the work in progress.

Inventory Turnover Ratio: Table 27: Table showing Inventory turnover ratio For the year ended

JSPL

31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11 Inventory Turnover 6.42 times 8.75 times 4.55 times 5.47 times 5.51 times 6.32 times

5.54times

Average: 6.08

Summary: Inventory turnover ratio establishes a relationship between the total sales during a period and average inventory hold to meet that quantum at 5.54 times in 2011 and on average it is 6.08 times, that signifies the quick moving of inventory. In other words, the stock held during 2005 is for 56.07 days as comparison of average at 61.34 days for the view of 7 years which increases to 64.98 days in 2011.

Receivable Management: At a plant level mostly the finished goods are sold on credit to increase upon the market share and retain the customers but the major portion of debtors are dealt by Marketing Unit of the Commercial Department and the Finance Department. It is consideration as an essential marketing tool. Control of the debtors‟ element (the amount owed the business in the short term) involves a fundamental trade-off between the cost of providing credit to customers (which includes financing bad debts and administration), and the additional net revenue that can be earned by

doing so. The former can be kept to a minimum with effective credit control policies, which will require: Setting and enforcing credit terms; Vetting customers prior to allowing them credit; Setting and reviewing individual credit limits; Efficient invoicing and statement generation; Prompt query resolution; Continuous review of debtors position (generating „aged debtors‟ report); Effective chasing and collection procedures; and Limits beyond which legal action will be pursued.

Before allowing credit to a new customer trade and bank references should be sought. Accounts can be asked for and analyzed and a report including any county court judgments against the business and a credit score asked for from a credit rating business. Salesmen‟s views can also be canvassed and the premises of the potential customer visited. The extent to which all means are called upon will depend on the amount of the credit sought, the period, past experiences with this customer or trade sector, and the importance of the business that is involved. But this is not a one-off requirement. One classic fraud is to start off with small amounts of credit, with invoices being settled promptly, eventually building up to a huge order and a disappearing customer.

Credit checking, even for established customers, should therefore feature in regular procedures.

When the creditworthiness of a new customer is established, positive credit control calls for the setting of a credit limit, any settlement discounts, the credit period, and credit charges (if any).

The Late Payment of Commercial Debts (Interest) Act now allows small businesses to charge large interest on late payment of business debts by companies and public sector organisations. Nevertheless, it is wise to inform customers this right will be exercised.

Collection is a vital element of credit control and must include standard, polite and wellconstructed reminder letters, and effective telephone or e-mail follow up. Use of collection agencies should be considered, as could factoring – in its most comprehensive form a loan facility based on outstanding invoices plus a sales ledger and debtors control service.

Efficient control of debtors will assist cash flow, and help keep overdraft or other loan requirements down, and hence reduce interest costs. Debtors represent future cash – or they should do if proper credit control policies are pursued. Likewise stock will eventually become cash, but in the meantime represents working capital tied up in the business. Keeping levels to the minimum required for efficient operations will keep costs down. This means controlling buying, handling, and storing, issuing, and recording stock. Inherent in any system of inventory control is the concept of appropriate stock levels – normally expressed in physical units sometimes in monetary terms.

The objective of establishing control levels is to ensure that excessive stocks are never carried (and working capital thereby sacrificed) but that they never fall below the level at which they can be replenished before they run out.

Receivables Management in JSPL: Corporate office and the commercial department in coordination do the management of receivables. The management of receivable is dealt on major part by corporate office and minor part by commercial department of the company. JSPL in matter of granting a credit period to customers tighten their policy and reduce credit period to 30.43 days in 2010 to its debtors. Total Debtors amounted to Rs.211.16 Cr. by the end of 2004, which further increased to 622.36 Cr in 2010.

Determination of Operating Cycle of JSPL The determination of length of the operating cycle of a manufacturing firm is the sum of : The broad range of project management and financial advisory services include: inventory conversion period (ICP), & debtors conversion period (DCP)

A) Inventory conversion period: It is the total time needed for producing and selling the product. Typically, it includes: a) raw material conversion period (RMCP) b) work-in-process conversion period (WIPCP), and c) finished goods conversion period (FGCP). Inventory Conversion period = RMPC + WIPCP + FGCP

The raw material conversion period is depends on: 1) raw material consumption per day, & 2) raw material inventory Raw Material Consumption per day = Total Raw Material Consumption/Number of days in the year Raw Material Conversion period = Raw Material Inventory/Raw Material Consumption per day Similar calculations can be made for other inventories, debtors and creditors.

B) Debtors’ conversion period: It is the time required to collect the outstanding amount from the customers. The total of inventory conversion period and debtors‟ conversion period is referred to as gross operating cycle (GOC). Gross Operating Cycle = ICP + DCP

C) Payable Deferral period: This is very common to get gross operating cycle but in practice, a firm may acquire resources (such as raw materials) on credit and temporarily postpone payment of certain expenses. Payables, which the firm can defer, are spontaneous sources of capital to finance investment in current assets. The payables deferral period (PDP) is the length of time the firm is able to defer payments on various resource purchases. Net Operating Cycle = Gross Operating Cycle – Payable Deferral period If depreciation is excluded from expenses in the computation of operating cycle, the net operating cycle also represents the cash conversion cycle. It is net time interval between cash collections from sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firm‟s operations.

A) Inventory conversion period: a) Raw Material Conversion Period: Raw material consumed

=

Rs. 2225.71 Cr

Avg. Raw material inventory =

Rs. 1145.75 Cr

2225.71 -------------195.60 330 ---------

= 11.37 times

= 29 days

11.37

b) Work-In-Progress Conversion Period: Cost of Production

=

Rs. 4278.12 Cr

Avg. work-in-progress

=

Rs. 119.72

4278.12 ------------ = 47.24 times

90.545 330 ------- = 47.24

6.98 days

c) Finished Goods Conversion Period: Sales

=

Rs. 7367.59 Cr.

Closing stock

=

Rs. 551.56 Cr.

7367.59 --------------= 13.35 times 551.56 330 ------- = 13.35

24.70 days

B) Debtors Conversion: Sales Closing Debtors

= =

Rs. 7367.59 Cr Rs. 622.36 Cr

Average accounts payables

=

Rs.727.22 Cr.

Cost of sales

=

Rs.4872.77 Cr.

7367.59 ------------ = 11.83 times 622.36 330 ------- = 11.83

27.87 days

C) Payables Conversion:

Average accounts Payables Payables Conversion Period = ----------------------------------- *330 Cost of Sales

=

=

727.225 ------------- *330 4827.77 49.25 days

Operating Cycle: Gross Operating Cycle (GOC) = =

29+6.98+24.7+27.87 87.85 days

Net Operating Cycle (NOC) = =

87.85-49.25 39 days

Analysis: The Net operating cycle of the firm is of about 39 days which shows that the company realizes its profits quickly and company can quickly acquire cash that can be used for reinvestment. In general, the shorter the cycle, the better a company is since less time capital is tied up in the business process.

The company policy had a significant change for the year with regard to inventory as it had increased continuously But this policy has a cost to the company in the presence of a significant decrease in payables deferral period, will have to negotiate higher working capital funds. Company has tighten its steps towards the credit policy which signifies that in the current year company is proving itself more efficient, it as well as shows a increase in the market share of the company. The company had reduced down its payables deferral period significantly which strengthens its creditworthiness in the market and helps the company in getting the loans on liberal terms. This represents the efficiency of the management.

One can have a vastly different working capital outlay while performing the same activity. Having a large amount invested in stocks and debtors does not necessarily mean large profits, but it can mean a drop in the prime calculation that every businessman is interested in the return on investment. The object of working capital management is to trim down on stocks and debtors and get the cash coming faster within the comfort zone of the business. In the normal periods of business activity, cash that had completed the working capital cycle would be reinvested in stock and the whole process would begin again.

Analysis of Asset Percentage: Table 28: Table showing analysis of asset percentage For the year ended Rs/Crs

JSPL Particulars

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

05

06

07

08

09

10

11

Current asset

599.82

736.4

1403.56

1698.51

3060

4216.08

4603.1

Total asset

2319.78

3250.62

5250.55

6783.63

8456.31

12279.99

17742.44

Percentage of current assets over

25.85%

22.65%

26.73%

25.03%

36.18%

34.33%

25.94%

1.29

1.24

1.39

1.23

1.87

1.19

1.03

fixed assets Current ratios

Current assets to Fixed assets (in %)

Figure 25: Percentage of Current Asset to Fixed Asset

36.18

40 30

26.73

25.85

22.65

Percentage of current assets over fixed assets 34.33 25.94

25.03

20 10 0 2005

2006

2007

2008

2009

2010

2011

Years

Analysis: From the above calculation it can be analyzed that JSPL is following a liberal policy of working capital from last 4 years. When we give a thought to the current ratio of last three years we can very easily depict that its current ratio is very low than the standard one i.e. of 2:1. This type of moderate approach gives the negative impact on the liquidity of the company. As we know that profitability is measured by rate of return on total assets i.e. PBIT / Total sales. And if small part of total assets consists of current assets then it gives adverse impact on the rate of return.

Analysis of Net Working Capital: Table 29: Table showing analysis of working capital JSPL

For the year ended Rs/Crs

Particulars

31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11

Current asset

599.82

736.4

1403.56

1698.51

3060

4216.08

4603.1

Current Liabilities

496.66

594.15

1007.37

1377.83

1636.17

3516.15

4447.45

Net Working Capital

103.15

142.25

396.19

320.68

553.78

699.93

155.65

Figure 26: Net working Capital

Net Working Capital

800 Net Working Capital (in Cr.)

700

699.93

600

553.78

500 400

396.19 320.68

300 200 100

155.65

142.25

103.15

0 2005

2006

2007

2008

2009

2010

Years

2011 Net Working Capital

Analysis: As we can see from the above table and graph that company‟s Net Working Capital has been showing variation in its trend as last year‟s working capital is showing negative trend in increasing order. The above situation shows that company management is inefficient in management of working capital. Making the comparison of current assets and current liabilities in 2010 & 2011 current liabilities are increasing which leads the working capital in negative range so company management is required to put a vigil look to manage working capital.

Analysis of Current Assets: Table 30: Table showing analysis of current assets For the year ended Rs/Crs

JSPL Particulars

31 Mar 05 31 Mar 06 31 Mar 07 31 Mar 08 31 Mar 09 31 Mar 10 31 Mar 11

Debtors

211.16

172.91

299.54

320.31

287.38

391.46

622.36

Inventory

196.47

257.55

568.65

642.44

980.56

1209.96

1328.50

Cash & Bank balance

21.90

33.29

31.30

52.97

577.91

308.96

60.10

Loans & Advances

218.07

572.54

785.94

1453.72

3199.04

3865.94

Total

647.6

1036.29

1801.66

3299.57

5109.42

5876.90

591.01 1490.5

Analysis: Composition of all parts seems to be distribute but almost each component is showing increasing trend which has both kind of influence for the financial performance of the company so company need to mange this components very carefully. Inventory is showing an increasing trend that is the signal of danger for company‟s profitability and these are not giving any return by locking up working capital. Cash & bank balance has decreased to large extent during last year, due to excess of investments in the projects. This shows that the company holds less liquidity in hand.

Suggestions: First and foremost suggestion for the company is that, it should look into the idle funds, which are engaged in inventory. Company should withdraw money from this locked up working capital and invest it in some other assets.

Analysis of Current Liabilities: Table 31: Table showing analysis of current liabilities For the year ended Rs/Crs

JSPL Particulars

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

05

06

07

08

09

10

11

Sundry Creditors

292.85

298.33

505.47

573.60

619.78

1471.57

2211.71

Banks borrowings

92.06

43.91

118.81

213.59

44.25

114.26

251.34

Advances from

10.57

24.50

20.02

31.36

125.09

506.98

165.63

customers

provisions

88.55

179.99

272.14

Other Current liabilities

15.94

52.59

100.53

Total

499.97

599.32

1016.97

385.48 189.91 1393.94

581.94 294

985.81 467.65

1665.06

3546.27

1343.71 521.06 4493.45

Analysis: As we can see from the graph and table that major portion of current liabilities are with sundry creditors and every year it keeps on increasing. As the company obligations are increased so company need to put certain measure to control current liabilities. By looking the seven years position of company in current assets and current liabilities it can be seen that current liabilities are increasing over current assets so within the time company need to manage its liability portion and need to make safer decision

Suggestions: Due to the huge amount of current liabilities company has to lock up its funds in current assets. Therefore, it should reduce its current liabilities by paying them off so that regular cash outflow of cash get restricted and outflow gets converted into inflow to increase in profitability of the firm. One suggestion that could be made to the company is that, it should pay off its creditors by withdrawing some cash from its debtors, which is idle at this point of time and some amount from its inventory.

Statement of Change in Working Capital Table 32: Table showing statement of change in working capital For the year ended Rs/Crs

JSPL Particulars

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

31 Mar

05

06

07

08

09

10

11

(61.04)

(311.10)

(73.78)

(338.11)

(229.42)

(118.54)

(104.08)

(230.12)

Current Assets Inventory

(94.56)

Receivables

(46.05)

38.25

(126.63)

(22.76)

32.93

Other Current assets

(59.98)

(73.01)

(127.41)

(116.79)

(343.56)

82.67 (646.81)

Total Current assets (A)

(200.59)

(95.8)

(565.14)

(213.33)

(648.74)

(265.99) (980.31)

Current Liabilities Short term borrowings

35.96

74.91 (48.16)

94.78

(169.34)

303.61

658.64

Other Current Liabilities

149.10

58.02

245.62

163.68

248.72

1412.29

447.32

Total

185.06

9.86

320.53

258.46

79.38

1715.9

1105.96

(385.65)

(105.66)

(885.67)

(471.79)

(569.36)

(2696.21)

(1371.95)

CurrentLiabilities(B) Working Capital Shortfall (A-B)

Analysis: A statement of changes in working capital helps us in locating where these changes took place. Since working capital it measured by subtracting current liabilities from current assets. Any increase in current asset and any decrease in current liabilities show an increase in working capital similarly, a decrease in current assets and an increase in current liabilities represent a decrease in working capital. Negative Working capital shows that customers pay upfront and so rapidly, the business has no problems raising cash. In these companies, products are delivered and sold to the customer before the company ever pays for them. This table shows the changes in net working capital of JSPL. A wise financial policy of a firm requires that long-term funds be used to finance Fixed Assets and short term funds are used to finance Current Assets. The statement of changes in working capital shows that there was a tremendous increase in current liabilities during 2009.There is a decrease in working capital mainly because of the locking of working capital funds in inventories and receivables and due to the increase in the liabilities.

Estimating Working Capital Needs The most appropriate method of calculating the working capital needs of a firm is the concept of operating cycle. However, a number of other methods may be used to determine working capital needs in practice.

We shall illustrate here three approaches, which have been

successfully applied in practice: Current assets holding period: To estimate working capital requirements on the basis of average holding period of current assets and relating them to costs based on the company‟s experience in the previous years. This method is essentially based on the operating cycle concept.

Ratio of sales: To estimate working capital requirements as a ratio of sales on the assumption that current assets change with sales. Ratio of fixed investment: To estimate working capital requirements as a percentage of fixed investment.

Estimating Optimal Need of Working Capital Method: 1 a) Raw material consumed per month: 2225.71 = ------------ = Rs. 185.47Crs 12 b) Work in progress: Raw material per month + (Cost of Production /2) = --------------------------------------------------------12 185.47 + (4278.12 / 2) = ----------------------------- = (185.47 +2139.06)/12 =193.71Crs 12

c) Finished Goods: 551.56 Total cost per month = --------------- = 45.96 Crs 12 d) Total Inventory Needs: = 185.47+193.71+45.96= Rs. 425.14Crs e) Debtors: Sales per month

7367.59 = ----------------- = 613.96 Crs 12

f) Operating Cash: 4872.77 Total cost per month = ------------------ = 406.06 Rs/Crs 12 Therefore, Total Working Capital Required

= 425.14+613.96+406.06 = 1445.16 Rs/Crs

The first method gives details of the working capital items. This approach is subject to error if markets are seasonal. PBIT Rate of return = --------------------------------------------Net fixed investment + Working Capital A number of factors will govern the choice of methods of estimating working capital. Factors such as seasonal variations in operations, accuracy of sales forecasts, investment cost and variability in sales price would generally be considered. The production cycle and credit and collection policy of the firm would have an impact on working capital requirements. Therefore, they should be given due weightage in projecting working capital requirements.

Regression Analysis The regression analysis is a statistical technique of forecasting working capital requirement. Under this method a mathematical relationship (y = a + bx) is established between two variables, one dependent on another. In this case, the dependence of amount of working capital on sale value is established which helps in making working capital requirement projections. The method of least square is used in this regard. The relationship between sales (x) and working capital (y) is given by the equation: y = a + bx Simultaneous linear equation to obtain the value of a and b is as understated: ∑ y = na + b ∑ x ∑ xy = a ∑ x + b ∑ x² Where a = fixed component b = variable component x = sales y = working capital n = no. of observations/past years First we will regress between the sales (x) and the production capacity (y) as the company had thought of increasing its production capacity to 95 % in the year 2007.

Linear equation between sales and production capacity: 30117.04= 7a + 568b ------- eq. 1 2565207.34 = 568a + 46562b ----------eq. 2 Solving for a and b a = -16534

,

b = 256.78

y = -16534 + 256.78x

Therefore for the year 2011 the sales will be

y = -16534 + 256.78* 95 y = 7860.77 Table 33: Table showing Production capacity and Sales Year

Production Capacity (in

Sales(y)

percentage)(x) 2004

69

1261.61

2005

72

2264.72

2006

82

2590.25

2007

80

3519.81

2008

82

5459.87

2009

88

7653.19

2010

95

7367.59

2011

95

7860.77

Now we will regress between the sales (x) and working capital (y) by taking the forecasted sales of 2011 as x to forecast the working capital requirement for the year 2011. Linear equation between sales and working capital: 2371.63 = 7a + 30117.04b ------- eq. 1 12134284.78= 30117.04a + 168481954b ----------eq. 2 Solving for a and b a = 125.31

,

b = 0.04962

y = 125.31+ 0.04962 x

Therefore for the year 2011 the working capital will be y = 125.31+ 0.04962 * 7860.77 y = 515.36

Table 34: Table showing Sales and working capital Year

Sales (x)

Working Capital (y)

2004

1261.61

103.15

2005

2264.72

142.25

2006

2590.25

396.19

2007

3519.81

320.68

2008

5459.87

553.78

2009

7653.19

699.93

2010

7367.59

155.65

2011

7860.77

515.36

Therefore the working capital requirement for the next year will be 515.36 Rs/Crs.

The regression analysis for the working capital requirement for the next year shows that the company will have to find additional sources of working capital as the company will require 515.36 Rs/Crs calculated on the basis of the sales estimates for the next year and presently the company has the positive working capital because the current liabilities does not exceed the current assets. So by the next year the company will have to maintain its current assets or decrease its current liabilities to meet its working capital requirement.

Trend Analysis for Working Capital Management Trend analysis is comparative analysis of company‟s ratios over time. It tries to predict the future movement based on past data. Trend analysis is based on idea what is happened in past and given the idea what would happen in past. In trend analysis, industry ratios are compared over time, typically years. Year-to-year comparisons can highlight trends and point up the need for action. Trend analysis works best with five years of ratios.

"With the past, we can see trajectories into the future - both catastrophic and creative projections."

The Trend Analysis module allows to plot aggregated response data over time. This is especially valuable on the basis of five-year data and a result of long survey. The following data points can be measured (Y-Axis) 1. Mean and Mean Percentile 2. Standard Deviation and Variance 3. Ratio The "Time Factor" (X-Axis) can have the following granularity 1. Daily 2. Weekly 3. Monthly 4. Quarterly (Jan-Mar, Apr-Jun, Jul-Sept, Oct-Dec) 5. Yearly

Projection of Ratios through Trend Analysis

Figure 27: Current Ratio Trend

Current Ratio

Current Ratio Trend 2 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0

1.87 1.39 1.24

1.2

1.23

1.19 1.03 current ratio

2005

2006

2007

2008 Years

Slope Constant: -0.004

2009

2010

2011

Figure 28: Cash Ratio Trend

Cash Ratio Trend 0.4 0.35

0.35

Cash Ratio

0.3 0.25 0.2 Cash Ratio

0.15 0.1

0.087

0.05

0.056

0.044

0.038

0.031

0.013

0 2005

2006

2007

2008

2009

2010

2011

Years

Slope Constant: 0.010 Figure 29: Current Asset Turnover Trend

Current Assets Turnover Trend

4 3.5

3.51

current assets

3 2.5 2

1.84

2.07

1.5

1.62

1.81

Current Assets

1.76

1

0.79

0.5 0 2005

2006

2007

2008 Years


2009

2010

2011

Figure 30: Working Capital Turnover Trend


Working Capital Turnover Trend 50 45 40 35 30 25 20 15 10 5 0

47.33

Working Capital 15.92

12.23

10.97 6.53

2005

2006

2007

10.93

9.77 2008

2009

2010

2011

Years

Slope Constant: 3.52

Figure 31: Debtor Turnover Trend

Debtor Turnover Trend Debtors Turnover

25 20 18.99 15

13.09

10 5

19.55 11.83

10.98 8.64

Debtor Turnover

5.97

0 2005

2006

2007

2008 Years

Slope Constant: 1.45

2009

2010

2011

Figure 32: Creditor Turnover Trend

Creditors Turnover Ratio Trend creditors turnover

2.5 2

2.14

2.03 1.47

1.5 1.3

1.16

1.28

1

Creditors Turnover

0.5 0 2006

2007

2008

2009

2010

2011

Years


Inventory turnover

Figure 33: Inventory Turnover Trend

10 9 8 7 6 5 4 3 2 1 0

Inventory Turnover Ratio Trend 8.75 6.32 6.42

5.47 5.54 5.51

4.55

Inventory Turnover…

2005

2006

2007

2008 Years


2009

2010

2011

Analysis on the basis of Trend: Trend of current ratio put a picture of company that company is not having short term fund in hand to meet short term debt hence it put a threat in meeting current obligations.

Cash Ratio trend shows that company is having low amount of cash for paying current liability which can influence the financial position of company in upcoming period.

Current asset turnover trend of company is fluctuating over the period.

Working capital turnover is in positive range over the period that shows that the liquidity position of the company is favourable & this shows efficiency in use of working capital Debtor‟s turnover trend is showing an increase in future that signifies that there is shorter time period in sales and collecting cash. As the Creditor‟s turnover ratio trend is decreasing which shows that payments of company are not prompt and keep it obligation for long time where as it also shows that credit allowed by the suppliers are liberal.

Inventory is showing good position in hand of company but still company need to keep a check over it as inventory is influenced by seasonal fluctuations and market conditions.

Current Asset Financing Process of working capital financing: 1) Predictions are made based on sales. 2) Company has Credit Monitoring Arrangement (CMA) with banks. Accordingly Forms are prepared and sent to consortium of banks for approval. a. Form I contains information about Current Assets, this Form I should be sent one week before beginning of Quarter. b. Form II contains details about operations; this Form II should be sent six weeks from entering the Quarter.

3) Accordingly margins are decided. The company itself should meet margin amount. E.g. Inventory – 25%, Receivables – 35%. Normally margins are 25-35%. 4) Advances are received.

Finding & Suggestions Findings: The study conducted on working capital management of Jindal Steel & Power Limited shows the evaluation of management performance in this context. Major findings and suggestions thereon are narrated as under: 1. Current asset of the year 2009-10 is comprised of 25% of total investment in assets of the company. As current ratio is showing a decreasing trend year on year, which implies that current asset, are less compared to current liabilities. 2. High current assets turnover ratio is more judicious and shows efficiency of management and proper utilization of the assets. 3. Current ratio (1.03:1) and quick ratio (0.73:1) of the year 2009-10 are lesser than that of the ideal figures i.e. ideal current ratio is 2:1 while quick ratio is 1:1. 4. Inventory turnover ratio depict the fluctuating trend which indicates the accumulation of inventory in turn which cause loss to the company by way of deterioration of stock, interest loss on blockage of stock etc. 5. Debtors Turnover ratio reveals an increasing trend during the period of study and average collection period came down from 60 to 30 days which shows that company is having specific policy for debtors‟ management. 6. From regression analysis the working capital requirement for the next year is estimated to be 515.36 Rs/Crs. 7. The operating cycle of the firm is disturbed, as it is continuously increasing which is not good for the company. 8. The optimum need for working capital on an average basis company roughly will require more than 455.26 Rs/Crs as its working capital.

Suggestions: Keeping in view of detailed analysis for the 4 years of study and findings mentioned in above paragraphs, the following suggestions shall be helpful in increasing the efficiency in working capital management. 1. In case of inventory management ABC analysis, FSN technique, VED technique should be adopted to increase the efficiency of inventory management. Further a inventory monitoring system should be introduced to avoid holding of excess inventory. 2. It is suggested to maintain a favorable current and quick ratios which shows a lesser than ideal figures. It can be done either through increasing current assets or decreasing liabilities. 3. With the help of proper inventory management systems, like demand-based management, etc. the company can reduce the need for working capital and inventories can be financed through accounts payable. 4. The company should try and maintain an optimum level of working capital in order to improve upon the workings of the company.

Limitations: 1. Availability of the financial data was very limited which is not disclosed due to sensitive nature for the company. 2. The main component of working capital is cost of capital, which is not described in the project because of confidential nature. 3. External environment influence was not considered while doing the theoretical standard rather than the industrial standard because of unavailability of any such specific standard. 4. The scope of the study was limited to Jindal Steel & Power Limited.

Bibliography Agarwal J.D.A Goal Programming Model for Working Capital Management,Finance India,Vol.II, No. 2, June 1988 Arunachalam, S., Working Capital Management in Road Transport Corporations In Tamil Nadu.Finance India, Vol.VIII, No.1,March 1994 Asthana ,Rojul , Simulation for working capital management, Dissertation submitted in Centre for Systems and Management Studies.IIT,Delhi, 1982 Bannerjee,B.,Financing of working capital, The Indian Practice. The Management Accountant, Vol. 17, No. 8, August 1982 Bhadra , Biswajit The Role Of Working Capital In Public And Private Enterprises , Working Capital Management Bhattacharya S.K.,Raghavachari, M and Singh A.K.,Determinants of working capital management, IIM,Ahmedabad Block, Stanley and Geoffrey Hirt ,Foundations of Financial Management, Homewood, ILL: Richard D. Irwin, 1987 Brealey, R.A., S.C. Myers and A.J. Marcus. Fundamentals of Corporate Finance (1999), 2nd Edition, The McGraw-Hill Companies, Inc. Chowdhary ,A.B.Roy ,Working Capital Management, Eastern Law House,1978 Das, P.K., Working capital Management in the Public Sector Undertakings in India – A Case Study. The Management Accountant, Vol. 28, No. 12, December 1993 ICWAI Exposure Draft Guidelines on Inventory Management. The Management Accountant Vol-28, No-2, Feb 1993 Gitman, L.J. Principles of Managerial Finance (2000), 9th Edition, Addison Wesley Longman, Inc. Michael ,F., - Management of Working Capital, London ,The MacMillan Press Ltd.,1976 N.Chinta Rao & K.V.Rao , Management of Working Capital –Perceptions of Chief Executives- Working Capital Management Pandey, I M, Financial Management, Vikas Publishing House Pvt. Ltd. Ross, S.A., R.W. Westerfield and B.D. Jordan. Essentials of Corporate Finance (1999), 2nd Edition, Irwin/McGraw-Hill. Scott, D.F., J.D. Martin, J.W. Petty and A. Keown. Basic Financial Management (1999), 8th Edition, Prentice-Hall, Inc.

Richard I Levin, David S. Rubin. Statistics for Management 2007, 7th Edition, Pearson

References: Khan M.Y, Financial Management. Principles of Corporate Finance, Brealy and Myers, 7th edition

Pandey I.M., Financial Management

Annual Report of Jindal Steel & Power Ltd.

Working Capital data of Jindal Steel & Power Ltd.

www.indiansteel.com

www.nseindia.com

www.indianinfoline.com

www.steelex.com

www.jindalsteelpower.com

www.moneycontrol.com

Glossary: ABC Analysis: An approach of inventory management, which classifies inventories according to their monetary values. Inventory items are thus categorized as (i) A- items: high value items for which careful management is needed; (ii) B-items: moderate value items for which rules of thumb such as past inventory turnover are adequate management techniques, and (iii) C-items: low value items which can be maintained at a flat minimum amount.

Accrued Liability: Also known as outstanding liabilities or expenses. For example, accrued wages, accrued rent, accrued taxes and accrued interest and so on. They typically represent obligations for certain services for which payments are yet to be made and are indirect sources of financing.

Ageing Schedule: It is a tabular classification of receivables which showing the length of time which the account has been outstanding.

An Aggressive Policy: It resorts to short-term liabilities to finance temporary and also part or the entire permanent current assets requirement.

Average Collection Period: Accounts receivables / (annual credit sales/360).A ratio that express how rapidly the firm is collecting its credit accounts.

Balanced Policy: This policy is that balances the trade-off between risk and profitability in a manner consistent with its attitude towards bearing risk.

Bills Payable: Bills Payable is a current liability and arises when the bills written by creditors are accepted by the firm.

Capital Cost: The cost of the use of additional capital to support credit sales, which alternatively could be profitably employed elsewhere is, therefore a part of the cost of extending credit or receivables and are called capital costs.

Carrying Costs: These costs arise due to the storing of inventory and expenses made in raising funds to finance the acquisition of inventory.

Cash Budget: It is statement of the expected cash flows for a firm over a specified period of time.

Cash Cycle: This is length of the time between the purchase of raw materials and collection of receivables in the sale of the final product.

Cash Discount: A percent reduction in sales or purchase price allowed for early payment of invoices. It is an incentive for credit customers to pay invoices in a timely fashion.

Collection Cost: These costs are administrative costs or legal costs incurred in collecting the receivables from the customers to whom credit sales have been made.

Conservative Policy: A conservative policy ignores the distinction between temporary and permanent current assets, by financing almost all assets investments with long term capital.

Consumer Credit: Credit granted to an individual is referred to as consumer credit.

Credit Period: It is total length of time period over which credit is extended to a customer to pay bill.

Current Assets: Those assets which can be converted into cash within an accounting year or within the operating cycle, whichever is greater.

Current Ratio: The ratio of current assets divided by current liabilities. It is used as a measure of liquidity.

Factor: Specialized buyer, at a discount of company receivables. Factoring: It is selling of receivables to a financial institution, the factor, usually” without recourse.

Float: It refers to the amount of money tied up in Cheque that have been written but yet have to be collected and encashed. Alternatively it represents the difference between the bank balance and book balance of cash of a firm. Gross Working Capital: The firm‟s investment in current assets.

Inventory Turnover Ratio: Cost of goods sold / Inventory. A ratio that measures the number of times a firm‟s inventories are sold and replaced during the year. This ratio reflects the relative liquidity of inventories.

Just-in-time Inventory Control: A production and management system in which inventory is cut down to a minimum through adjustments to the time and physical distance between the various production operations. Under this system the firm keeps a minimum level of inventory an hand relying upon suppliers of furnish parts “just-in-time” for them to be assembled.

Liquidity Ratio: It indicates to the relationship between current assets and current liabilities.

Operating Cycle: The period involved from the time cash is invested in inventory until the time cash is recovered from the sale of the goods.

Optimal Cash Balance: Equal to the larger of (1) the sum of transaction balances and precautionary reserves and (2) compensating balance requirements.

Permanent Working Capital: These assets are required on a continuing basis over the entire year. They represent the amount of cash; receivables and inventory maintained as a minimum to carry on operations at any time.

Quick Ratio: Current assets minus inventory and prepaid expenses items divided by current liabilities. It is a measure of liquidity. It is also called acid test ratio.

Source of Funds: Decrease in an asset account or an increase in a liability or an equity account.

Temporary Working Capital: Trade credit, and other payables and accruals, that arises spontaneously in the firm‟s day to day operations.

Trade Credit: Credit extended to another firm is known as trade credit.

Working Capital Management: It is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and the interrelationships that exist between them.

Working Capital Management Live Project Report by Pranay Jindal in Jindal Steel and Power

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