A

PROJECT – REPORT ON

STUDY OF

WORKING CAPITAL MANAGEMENT

At

SOUTH EASTERN COALFIELDS LIMITED

Submitted towards the partial fulfillment of the requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by External Guide

A. SRINIVAS

MBA (2009-11)

CHOUKSEY ENGINEERING COLLEGE BILASPUR (CHHATTISGARH)

Chapter

No.

Particular Page No.

Title Page

Declaration

Certificate From Company

Certificate From Guide

Acknowledgement

I

II

III

IV

V

1 WORKING CAPITAL

MANAGEMENT

I. Introduction

II. Objectives Of The Study

III. Need And Importance Of Working Capital

IV. Gross W.C And Net W.C

V. Types Of Working Capital

VI. Determination Of Working Capital

VII. Scope & Limitations

2 RESEARCH METHODOLOGY I. Introduction

II. Type of Research Methodology

3 INTRODUCTION OF COMPANY I. Company Overview

II. Industrial Overview

III. Literature Overview

4 DATA ANALYSIS

1 Working Capital Size And Analysis 1.1.1 Working Capital Level

1.1.2 Working Capital Trend Analysis

1.1.3 Current Asset Analysis

1.1.4 Current Liabilities Analysis

1.1.5 Change In Working Capital

1.1.6 Operating Cycle

1.1.7 Working Capital Leverage

2 Working Capital Ratio Analysis 2.1.1 Introduction

2.1.2 Role Of Ratio Analysis

2.1.3 Limitation Of Ratio Analysis

2.1.4 Classification Of Ratio

2.1.5 Efficiency Of Ratio

2.1.6 Liquidity Of Ratio

3 Working Capital Component 3.1.1 Receivable Management

3.1.2 Inventory Management

3.1.3 Cash Management

4 Working Capital Finance & Estimation 4.1.1 Introduction

4.1.2 Source Of Working Capital Finance

4.1.3 Working Capital Loan & Interest

4.1.4 Estimation Of Working Capital

5 FINDING, RECOMMENDATION,

CONCLUSION

ANNEXURE QUESTIONNAIRE

BIBLIOGRAPHY

Total no. of page content in this project

EXECUTIVE SUMMARY

The project on Working Capital Management has been a very good experience.

Every manufacturing company faces the problem of Working Capital Management

in their day to day processes. An organization‟s cost can be reduced and the profit

can be increased only if it is able to manage its Working Capital efficiently. At the

same time the company can provide customer satisfaction and hence can improve

their overall productivity and profitability.

This project is a sincere effort to study and analyze the

Working Capital Management of SOUTH EASTERN COALFIELDS LIMITED

(SECL). The project was focused on making a financial overview of the company

for the years 2008 to 2010 and ratios & various components of working capital for

the year 2010 in a CMA (Cash Monitoring Arrangement) format emphasizing on

Working Capital.

The internship is a bridge between the institute and the

organization. This made me to be involved in a project that helped me to employ

my theoretical knowledge about the myriad and fascinating facets of finance. And

in the process I could contribute substantially to the organization‟s growth.

The experience that I gathered over the past 45 DAYS has

certainly provided the orientation, which I believe will help me in shouldering any

responsibility in future.

CHAPTER I

WORKING CAPITAL MANAGEMENT

1) Introduction

2) Need of working capital

3) Gross W.C. and Net W.C.

4) Types of working capital

5) Determinants of working Capital

1.1) INTRODUCTION

Working Capital Management

Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary

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

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

The major current assets are cash, marketable securities, account receivable and

inventory. Current liabilities ware those liabilities which intended at there

inception to be paid in ordinary course of business, within a year, out of the current

assets or earnings of the concern.

The basic current liabilities are account payable, bill payable, bank over-draft, and

outstanding expenses. The goal of working capital management is to manage the

firm‟s current assets and current liabilities in such way that the satisfactory level of

working capital is mentioned. The current should be large enough to cover its

current liabilities in order to ensure a reasonable margin of the safety.

Definition :

According to Guttmann & Dougall-

“Excess of current assets over current liabilities”.

According to Park & Gladson-

“The excess of current assets of a business (i.e. cash, accounts

receivables, inventories) over current items owned to employees and others

(such as salaries & wages payable, accounts payable, taxes owned to

government)”.

1.2) Need of working capital management

The need for working capital gross or current assets cannot be over emphasized.

As already observed, the objective of financial decision making is to maximize the

shareholders wealth. To achieve this, it is necessary to generate sufficient profits

can be earned will naturally depend upon the magnitude of the sales among other

things but sales can not convert into cash. There is a need for working capital in the

form of current assets to deal with the problem arising out of lack of immediate

realization of cash against goods sold. Therefore sufficient working capital is

necessary to sustain sales activity. Technically this

is refers to operating or cash cycle.

If the company has certain amount of cash, it will be

required for purchasing the raw material may be available on credit basis. Then the

company has to spend some amount for labour and factory overhead to convert the

raw material in work in progress, and ultimately finished goods. These finished

goods convert in to sales on credit basis in the form of sundry debtors. Sundry

debtors are converting into cash after expiry of credit period. Thus some amount of

cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day

to day cash requirements. However some part of current assets may be financed by

the current liabilities also. The amount required to be invested in this current assets

is always higher than the funds available from current liabilities. This is the precise

reason why the needs for working capital arise.

1.3) Gross working capital and Net working capital

There are two concepts of working capital management :

1) Gross working capital

Gross working capital refers to the firm‟s investment I current assets. Current

assets are the assets which can be convert in to cash within year includes cash,

short term securities, debtors, bills receivable and inventory.

2) Net working capital

Net working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to

mature for payment within an accounting year and include creditors, bills payable

and outstanding expenses. Net working capital can be positive or negative.

Efficient working capital management requires that firms should operate with

some amount of net working capital, the exact amount varying from firm to firm

and depending, among other things; on the nature of industries. Net working

capital is necessary because the cash outflows and inflows do not coincide.

The cash outflows resulting from payment of current liabilities are relatively

predictable. The cash inflow are however difficult to predict. The more predictable

the cash inflows are, the less net working capital will be required.

The concept of working capital was, first evolved by Karl Marx. Marx used the

term „variable capital‟ means outlays for payrolls advanced to workers before the

completion of work. He compared this with „constant capital‟ which according to

him is nothing but „dead labour‟. This „variable capital‟ is nothing

wage fund which remains blocked in terms of financial management, in work-in-

process along with other operating expenses until it is released through sale of

finished goods. Although Marx did not mentioned that workers also gave credit to

the firm by accepting periodical payment of wages which funded a portioned of

W.I.P, the concept of working capital, as we understand today was embedded in

his „variable capital‟.

1.4) Type of working capital :

The operating cycle creates the need for current assets (working capital). However

the need does not come to an end after the cycle is completed to explain this

continuing need of current assets a destination should be drawn between permanent

and temporary working capital.

1) Permanent working capital

The need for current assets arises, as already observed, because of the cash cycle.

To carry on business certain minimum level of working capital is necessary on

continues and uninterrupted basis. For all practical purpose, this requirement will

have to be met permanent as with other fixed assets. This requirement refers to as

permanent or fixed working capital.

2) Temporary working capital

Any amount over and above the permanent level of working capital is temporary,

fluctuating or variable, working capital. This portion of the required working

capital is needed to meet fluctuation in demand consequent upon changes in

production and sales as result of seasonal changes.

Graph shows that the permanent level is fairly castanet; while temporary working

capital is fluctuating in the case of an expanding firm the permanent working

capital line may not be horizontal.

This may be because of changes in demand for permanent current assets might be

increasing to support a rising level of activity.

1.5) Determinants of working capital

The amount of working capital is depends upon a following

factors :

1) Nature of business

Some businesses are such, due to their very nature, that their requirement of fixed

capital is more rather than working capital. These businesses sell services and not

the commodities and that too on cash basis. As such, no founds are blocked in

piling inventories and also no funds are blocked in receivables. E.g. public utility

services like railways, infrastructure oriented project etc. there requirement of

working capital is less. On the other hand, there are some businesses like trading

activity, where requirement of fixed capital is less but more money is blocked in

inventories and debtors.

2) Length of production cycle

In some business like machine tools industry, the time gap between the acquisition

of raw material till the end of final production of finished products itself is quite

high. As such amount may be blocked either in raw material or work in progress or

finished goods or even in debtors. Naturally there need of working capital is high.

3) Size and growth of business

In very small company the working capital requirement is quit high due to high

overhead, higher buying and selling cost etc. as such medium size business

positively has edge over the small companies. But if the business start growing

after certain limit, the working capital requirements may adversely affect by the

increasing size.

4) Business/ Trade cycle

If the company is the operating in the time of boom, the working capital

requirement may be more as the company may like to buy more raw material, may

increase the production and sales to take the benefit of favorable market, due to

increase in the sales, there may more and more amount of funds blocked in stock

and debtors etc. similarly in the case of depressions also, working capital may be

high as the sales terms of value and quantity may be reducing, there may be

unnecessary piling up of stack without getting sold, the receivable may not be

recovered in time etc.

5) Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to

extend more and more credit to customers, as result which more and more amount

is locked up in debtors or bills receivables which increase the working capital

requirement. On the other hand, in the case of purchase, if the credit is offered by

suppliers of goods and services, a part of working capital requirement may be

financed by them, but it is necessary to purchase on cash basis, the working capital

requirement will be higher.

6) Profitability

The profitability of the business may be vary in each and every individual case,

which is in turn its depend on numerous factors, but high profitability will

positively reduce the strain on working capital requirement of the company,

because the profits to the extend that they earned in cash may be used to meet the

working capital requirement of the company.

7) Operating efficiency

If the business is carried on more efficiently, it can operate in profits which may

reduce the strain on working capital; it may ensure proper utilization of existing

resources by eliminating the waste and improved coordination etc.

RATIO ANALYSIS

Introduction of Ratio Analysis

Alexander Wall made the presentation of an elaborate system of ratio analysis in

1919. He criticized the bankers for their lopsided development owing to their

decisions regarding the grant of credit on current ratio alone. Alexander Wall, one

of the foremost proponents of ratio analysis, pointed out that in order to get a

complete picture, it is necessary to consider the other relationship in the financial

statement than current ratio. Since then, more & more types of ratios have been

developed and are used for analysis and interpretation point of view.

Ratio may be defined as “a number expressed in terms of another number.” It

shows relationship of one figure with another figure. It is found by dividing

one number by the other number. It may be expressed as a percentage or in

terms of “times” or proportion or as quotient.

According to Robert N. Anthony “A ratio is simply one number expressed in

term of another”.

Ratio Analysis, therefore, means the process of computing, determining and

presenting the relationship of related items and group of items of the financial

statement.

“The relationship between two accounting figures, expressed mathematically, is

known as financial ratio. Ratio analysis is the process of identifying the financial

strengths and weakness of an enterprise by properly establishing relationships

between the items of the balance sheet and profit and loss account”.

“The essence of financial soundness of a company lies in balancing its goals,

commercial strategy, product market choices and resultant needs. The company

should have financial capability and flexibility to pursue its commercial strategy.

Ratio analysis is a very useful analytical technique to raise pertinent question on a

number of managerial issues. It provides bases or clues to investigate such issues

in detail”.

Ratio analysis is the one of the powerful tools of the financial analysis. “A ratio

can be defined as the indicated quotient of mathematical expression” and as “the

relationship between two or more things”.

Accounting ratios can be expressed in various ways such as: -

i. A pure ratio, say ratio of current assets to current liabilities is 2:1 or,

ii. A ratio, say current assets are two times of current liabilities or

iii. A percentage, say current assets are 200% of current liabilities.

Each method of expression has a distinct advantage over the other. The analyst will

select that method which will best suit his convenience and purpose.

Standard (or Basis) of Comparison of Ratio Analysis: -

The ratio analysis involves comparison for a senseful interpretation of financial

statement. A single ratio in itself does not indicate favourable or unfavourable

condition. It should be compared with some standard. According to Anthony, R.N.

and Reece, J.S. (Management Accounting Principle PP. 260-263), standard of

comparison consist of –

1. Ratio calculated from past financial statement of the same enterprise.

2. Ratio developed using the projected or Performa, financial statements of

the same enterprise.

3. Ratio of some selected enterprise, especially the most progressive and

successesful, at the same point of time, and

4. Ratio of the industry to which the enterprise belongs.

The easiest way to evaluate the performance of a company is to compare present

or current ratio with the past ratios. If financial ratios over a time are compared, it

is known as the time series or trend analysis. The trend analysis provides an

indication of the direction of change and reflects the performance of an enterprise.

Importance (or Advantage) of Ratio Analysis:-

Ratio analysis is the process of determining and presenting the relationship of

items and group of items in the financial statements. It is an important technique of

financial stability and health of a concern can be judged. The following are the

main points of importance or advantages of ratio analysis:

1. Useful in financial position analysis: - Accounting ratios reveal the

financial position of the concern. This helps the banks, insurance companies and

other financial institutions in leading and making investment decisions.

2. Useful in simplifying accounting figure: - Accounting ratios simplify,

summaries and systematize the accounting figures in order to make them more

understandable and in lucid form. They highlight the inter-relationship, which

exists between various segments of the business as expressed by accounting

statements.

3. Useful in assessing the operational efficiency: - Accounting ratios help

to have an idea of a concern. The efficiency of the enterprise becomes evident

when analysis is based on accounting ratios. They diagnose the financial health by

evaluating liquidity, solvency, profitability etc. This helps the management to

assess financial requirements and the capabilities of various business units.

4. Useful in forecasting purpose: - If accounting ratios are calculated for a

number of years, than a trend is established. This trend helps in setting up future

plans and forecasting. For example, expenses as a percentage of sales can be easily

forecasted on the basis of sales and expenses of the past years.

5. Useful in locating the weak spots of the business: - Accounting ratios

are of a great assistance in locating the weak spots in the business even through the

overall performance may be efficient. Weakness in financial structure due to

incorrect policies in the past or present are revealed through accounting ratio.

6. Useful in comparison of performance: - Through accounting ratios

comparison can be made between one department of an enterprise with another of

the same enterprise in order to evaluate the performance of various departments in

the enterprise. Managers are naturally interested in such comparison in order to

know the proper and smooth functioning of such departments. Ratios also help

them to make any change in the organization structure.

Limitation of Accounting Ratios(or Ratio Analysis) :-

Ratio analysis is very important in revealing the financial position and

soundness of the business or enterprise. Ratio Analysis is very fashionable

these days and useful but it has some limitations also, which restrict its use.

These limitations should be kept in mind while making use of ratio analysis

for interpreting the financial statements. The following are the main

limitations of accounting ratios.

1. False results: - Ratios are based upon the financial statement. In case,

financial statements are incorrect or the data upon which ratios are based

is incorrect, ratios calculated will also be false and defective. The

accounting system itself suffers from many inherent weaknesses, so the

ratios based upon it cannot be said to be always reliable.

For instance, if inventory value is inflated, not only will one have an

exaggerated view of profitability of the concern, but also of it financial position.

Also the ratios worked out on its basis are to be relied upon.

2. Variation in accounting policies: - Financial results of two enterprises

are comparable with the help of accounting ratios only if they follow the same

accounting policy or bases, comparison will become difficult if they two concerns

follow different policies for providing depreciation, valuation of stock etc.

Similarly, if the enterprises are following different standards and methods, an

analysis by reference to the ratio would be misleading. The ratio of the one firm

cannot always be compared with the performance of other firm, if they do not

adopt uniform accounting policies.

3. Price level changes affect ratios: - The third major limitation of the ratio

analysis, as a tool of financial analysis is associated with price level change. This,

in fact, is a weakness of the Traditional Financial Statements, which are based on

Historical cost. As a result, ratio analysis will not yield strictly comparable and,

therefore, dependable results.

To illustrate, there are two firms, which have identical rates of return on

Investment, say, 15%. But one of these had acquired its Fixed Assets when prices

were relatively low while the other one had purchased them when prices were

high. The result will be that the book value of fixed assets of the former firm would

be lower, while that of the later will be high. From the point of profitability the

Return on Investment of the firm with lower book value are over-stated.

4. Absence of standard universally accepted terminology: - Different

meanings are given to particular term, such as some firms take profit before

interest and after tax, other may take profit before interest and tax. Bank overdraft

is taken as current liability but some firms may take it is as non-current. The ratios

can be comparable only when both the firms adopt uniform terminology.

5. Ignoring qualitative factors: - Ratio analysis is the quantitative

measurement of the performance of the business. It ignores the qualitative aspect

of the firm, how so ever important it may be. It shows that ratio is only one-sided

approach to measure the efficiency of the business.

6. No single standard ratio: - There in not a single standard ratio, which

can indicate the true performance of the business at all time, and in all

circumstances. Every firm has to work in different situations and circumstances, so

a particular ratio cannot be supposed to be standard for everyone. Strikes, lockouts,

floods, wars, etc. materially affect the performance, so it cannot be matched with

the circumstances in normal days.

7. Misleading results in the absence of absolute data: - In the absence of

actual data, the size of the business cannot be known. If Gross Profit Ratio of two

firms is 25% it may be just possible that the gross profit of one is 2,500 and sales

Rs. 10,000, whereas the gross profit and sales of the other firm is Rs. 5,00,000 and

sales 20,00,000. Profitability of the two firms is the same but the magnitude of

their business is quite different.

8. Window dressing: -Many companies, in order to depict rosy picture of

their business indulge in manipulation. They conceal the material facts and exhibit

false position. It makes the Financial Statements and Ratio Analysis based upon

these statements defective. The process of manipulation includes under statement

of Current Liability, over statement of Current Assets, recording the transaction in

the next financial year, showing the purchases of raw material as purchases of

assets etc. Window dress restricts the utility of ratio analysis.

Types of Ratios and their uses: - Ratios may be classified in a number of ways keeping in view the particular

purpose. Ratios indicating profitability are calculated on the basis of the Profit and

Loss Account, those indicating financial position are computed on the basis of the

Balance Sheet and those which show operating efficiency or productivity or

effective use of resources are calculated on the basis of figures in the Profit and

Loss Account and the profitability and financial position of the business/company.

To achieve this purpose effectively, ratios may be classified into the following four

important categories:

A. Liquidity Ratio,

B. Leverage Ratio / Solvency Ratio,

C. Activity Ratio / Turnover Ratio,

D. Profitability Ratio.

LIQUIDITY RATIOS

To study the liquidity position of the concern in order to highlight the relative

strength of the concern in meeting their current obligation liquidity ratios are

calculated. These ratios are used to measure the enterprise‟s ability to meet short-

term obligations. These ratios compare short-term obligation to short-term (or

current) resources available to meet these obligations. From these ratios, much

insight can be obtained about the present cash solvency of the enterprise and the

enterprises ability to remain solvent in the event of adversity. A proper balance

between the two contradictory requirements, i.e. Liquidity and Profitability is

required for efficient financial management. The important liquidity ratios are: -

1. Current Ratio: - This is the most widely used ratio. It is the ratio of Current

Assets to Current Liabilities. It shows an enterprise ability to cover its current

liabilities with its current assets. It is expressed as follows: -

Current Assets

Current Ratio =

Current Liabilities

Generally, Current Ratio of 2:1 is considered ideal for any concern i.e. current

assets should be twice the amount of current liabilities. If the current assets are two

times the current liabilities, there will be no adverse effect on business operations

when current liabilities are paid off. If the ratio is less than 2 difficulties may be

experienced in the payment of current liabilities and day-to-day operations of the

business may suffer. If the ratio is higher than 2, it is very comfortable for the

creditors but, for the concern, it indicates accumulation of idle funds and a lack of

enthusiasm for work. However this standard of 2:1 is only quantitative and may

differ from industry to industry.

2. Liquid or Acid Test or Quick Ratio: - This is the Ratio of Liquid Assets

to Liquid Liabilities. It shows an enterprises ability to meet current liabilities with

its most liquid (quick assets). It is expressed as follows: -

Quick Assets

Liquid Ratio =

Current Liabilities

(Quick Assets = Current Assets – Inventory or Stock)

The quick ratio of 1:1 ratio is considered ideal ratio for a concern because it is wise

to keep the liquid assets at least equal to the liquid liabilities at all time. Liquid

assets are those assets, which can be readily converted into cash and will include

cash balance, bills receivable, sundry debtors, and short-term investments.

Inventories and prepaid expenses are not included in liquid assets because the

emphasis is on the ready availability of cash in case of liquid assets. Liquid

liabilities include all items of current liabilities except bank overdraft. This ratio is

the “acid test” of a concerns financial soundness.

3. Super Quick or Absolute liquidity Ratio: - Though receivable are generally

more liquid than inventories, there may be debts having doubt regarding their

realization in time. So, to get idea about the absolute liquidity of a concern, both

receivables and inventories are excluded from current assets and only absolute

liquid assets, such as cash in hand, cash at bank and readily realizable securities are

taken into consideration. Absolute liquidity ratio is computed as follows:

Cash in hand and at bank + short terms marketable securities

Super Quick Ratio =

Current liabilities

Or

Current Assets – Stock – Bills Receivable

Current liabilities – Bank overdraft – Bills Payable

The desirable norm for this ratio is 1:2, i.e., Rs. 1 worth of absolute liquid assets

are sufficient for Rs 2 worth of current liabilities. Even though the ratio gives a

more meaningful measure of liquidity, it is not in much use because the idea of

keeping large cash balance or near cash items has long since been disapproved.

Cash balance yields no return and as such is barren.

4. Cash Ratio: - Since cash is the most liquid assets, a financial analyst may

examine cash ratio and its equivalent to current liabilities. Trade investment or

marketable securities are equivalent of cash; therefore, they may be included in the

computation of cash ratio:

Cash + Marketable Securities

Cash ratio =

Current Liabilities

5. Ratio of inventory to working Capital: - In order to ascertain that there

is no overstocking; the ratio of inventory to working capital should be computed. It

is worked out as follows:

Inventory

Ratio of inventory to working Capital =

Working Capital

Working capital is the excess of current assets over current liabilities. Increase in

volume of sales requires increase in size of inventory, but from a sound financial

point of view, inventory should not exceed amount of working capital. The

desirable ratio is 1:1.

LEVERAGE RATIO / SOLVENCY RATIO

Long term creditors like debenture holders, financial institution etc., are more

concerned with long-term financial strength of an enterprise. The leverage/ capital

structure ratios are very helpful in judging the long-term solvency position of an

enterprise. Leverage ratio may be calculated from the Balance Sheet items to

determine the proportion of debt in total financing. Many variations of these ratios

exist; all these ratios indicate the same thing i.e., the extent to which the enterprise

has relied on debt in financing assets. Leverage ratios are also computed from the

income statement items by determining the extent to which operating profits are

sufficient to cover the fixed charges. The important long-term

solvency/leverage/capital structure ratios are as follows:

1. Debt-Equity Ratio: - This ratio relates debts to equity or owners funds. Here,

Equity is used in a broader sense as net worth (i.e., capital + retained earnings)

while debt normally means long-term interest bearing loans.

Debt (Long-term) Total Debt Outsider fund

Debt-Equity Ratio = Or Or

Equity Net Worth Shareholder fund

External equities are outsiders fund while internal equities represent

shareholders funds. Outsiders‟ fund includes Long-term debt / liabilities.

Shareholders funds or equity consists of preference share capital, equity share

capital, profit & loss a/c (Cr. Balance), Capital reserves, revenue reserves and

reserves representing marked surplus, like reserves for contingencies, sinking

funds for renewal of fixed assets or redemption of debentures etc., less fictitious

assets. In other words, shareholders funds or equity is equal to Equity share

capital + preference share capital + reserves & surplus etc.

This ratio is very useful for analysis for long-term financial

condition. This ratio signifies the excess of proprietor‟s funds over outsiders‟ funds

and thereby indicates the soundness of the financial / capital structure of the

business enterprise.

2. Proprietary Ratio: -This ratio indicates the relationship between proprietary fund

and total assets. The Proprietary funds include Equity Share Capital, Preference

Share Capital, Revenue, Capital Reserves and accumulated surplus. Total Assets

include Fixed, Current and Fictitious assets.

This ratio is very important for the creditors, because they know the share of

Proprietors Funds in the total assets and satisfy how far their loan is secured. The

higher the ratio, the more safety will be to the creditor. The ratio also shows the

general financial position of the company also. 50% is supposed to be the

satisfactory Proprietary Ratio for the creditors. Less than 50% is the sign of risk for

creditors. The following formula is used to calculate Proprietary Ratio: -

Shareholders funds Proprietor‟s Fund

Proprietary Ratio = Or

Total Tangible Assets Total Assets

(Total Assets = Fixed Assets + Current Assets)

3. Debt Ratio: - Several debt ratios may be used to analyze the long-term solvency

of an enterprise. The enterprise may be interested in knowing the proportion of the

interest bearing debt (also called funded debt) in the capital structure. It may,

therefore, compute debt ratio by dividing total debt by capital employed or net

assets.

Total Debt

Debt Ratio =

Total Debt + Net Worth

4. Capital Employed to Net Worth Ratio: - There is yet another alternative way of

expressing the basic relationship between debt and equity. One may want to know,

how much funds are being contributed together by lenders and owners for each

rupee of the owners contribution. This can be found out by calculating the ratio of

capital employed or net assets or net worth.

Capital Employed

Capital Employed to Net Worth Ratio =

Net Worth

(Capital Employed = Shareholders fund + Long-term liabilities)

ACTIVITY OR TURNOVER RATIO

These ratios are very important for a concern to judge how well facilities at the

disposal of the concern are being used or to measure the effectiveness with which a

concern uses its resources at its disposal. In short, these will indicate position of

assets usage. These ratios are usually calculated on the basis of sales or cost of

sales and are expressed in integers rather than as a percentage. Such ratios should

be calculated separately for each type of assets. The greater the ratio more will be

efficiency of assets usage. The lower ratio will reflect underutilization of the

resources available at the command of concern. The concern must always plan for

efficient use of the assets to increase the overall efficiency. The following are the

important activity or turnover ratios usually calculated by a concern:

1. Sales to capital Employed (or Capital Turnover) Ratio: - This ratio shows

the efficiency of capital employed in the business by computing how many times

capital employed is turned over in a stated period. The ratio ascertained as follows:

Sales

Sales to capital Employed Ratio =

Capital Employed

(Shareholders Fund +Long-term Liabilities)

The higher the ratio, the greater are the profits. A low capital turnover ratio would

mean that sufficient sales are not being made and profits are lower.

2. Sales to Fixed Assets (or Fixed Assets turnover) Ratio: - This ratio measures

the efficiency of the assets use. The efficient use of assets will generate greater

sales per rupee invested in all the assets of a concern. The inefficient use of the

assets will result in low sales volume coupled with higher overhead changes and

under utilization of the available capacity. Hence the management must strive for

using total resources at optimum level, to achieve higher ratio. This ratio expresses

the number of times fixed assets are being turned over in a stated period. It is

calculated as under:

Sales

Sales to Fixed Assets =

Net Fixed Assets

(Net Fixed Assets = Fixed Assets Less Depreciation)

This ratio shows how well the fixed assets are being used in the business. The

ratio is important in case of manufacturing concern because sales are produced not

only use of current assets but also by amount invested in fixed assets. The higher in

the ratio, the better is the performance. On the other hand, a low ratio indicates that

fixed assets are not being efficiently utilized.

3. Sales to working capital (or Working Capital Turnover) Ratio: - This ratio is

shows the number of times working capital is turnover in a stated period. It is

calculated as below: -

Sales

Sales to working capital Ratio =

Net Working Capital

(Net Working Capital = Current Assets – Current Liabilities)

The higher is the ratio, the lower is the investment in working capital and the

greater are the profits. However, a very high turnover of working capital is a sign

of overtrading which may put the concern into financial difficulties. On the other

hand, a low working capital turnover ratio indicates that working capital is not

efficiently utilized.

4. Total Assets Turnover Ratio: - This ratio is calculated by dividing the net sales

by the value of total assets.

Net Sales

Total Assets Turnover Ratio =

Total Assets

(Total Assets = Net Fixed Assets + Investments + Current Assets)

A high ratio is an indicator of overtrading of total assets while a low ratio reveals

idle capacity. The traditional standard for this ratio is two times.

5. Inventory or Stock Turnover Ratio: - This ratio indicates the number of times

inventory is rotated during the year. It is calculated as follows:

Cost of good sold

Inventory or Stock Turnover Ratio =

Average Inventory

(Average Inventory = (Opening inventory + Closing Inventory)

2

and Cost of goods sold = Sales – Gross profit )

If only closing inventory data is given and opening inventory data is not available

then the formula will be as follows:

Cost of Good Sold

Inventory Turnover =

Closing Inventory

However, this formula should be applied only when the opening inventory figures

are not available.

The inventory turnover ratio measures how quickly stock is sold. It is really a test

of stock (inventory) management. In general high inventory turnover ratio is good.

Yet a very high inventory turnover ratio requires careful analysis. Because very

high ratio will lower investment in inventory, and lower investment in inventory is

considered to be very dangerous. Similarly, very low inventory turnover is also

dangerous as there will be very heavy amount invested in inventory.

6. Receivable (or Debtors) Turnover Ratio: - Receivable turnover ratio is the

comparison of sales with uncollected amounts from debtors or customers to whom

goods were sold on credit basis. If the enterprise is having a large amount of

debtors, it will have a low ratio. Conversely, with prompt collection from debtors,

the debtor‟s balance will be low and the debtors‟ turnover ratio will be high. In

other words, the debtors or receivable turnover is the test of liquidity of a business

enterprise.

Credit Sales

Debtor Turnover Ratio =

Average Debtors + Average Bills Receivable

If some information, i.e. figures for Credit sales, opening figures of debtors or bills

receivable etc., is not available them the following formula can be used:

Total Sales

Debtor Turnover Ratio =

Debtors + Bills Receivable

It should be noted that the first formula is superior to second formula as the

question of speed of conversion of sales into cash arises only in case of credit

sales.

7. Creditors Turnover (or Accounts Payable) Ratio: - This ratio gives the

average credit period enjoyed from the creditors and is calculated as under:

Credit Purchases

Creditors Turnover Ratio =

Average Account payable

(Average Account Payable = (Average Creditors + Average Bills Payable)

A low ratio indicates that the creditors are not paid in time while a high ratio gives

an idea that the business in not taking full advantages of credit period allowed.

Profitability Ratio

Profitability is the overall measures of the companies with regard to efficient and

effective utilization of resources at their command. It indicates in a nutshell the

effectiveness of the decision taking by the management from time to time.

Profitability ratios are of at most importance for a concern. These ratios are

calculated to enlighten the end result of business activities, which is the sole

criterion of the overall efficiency of a business concern. The following are the

important profitability ratios:

1. Gross Profit Ratio: - This ratio tells gross profit on trading and is calculated as

under:

Gross Profit

Gross Profit Ratio =

Net Sales

(Gross Profit = Net Profit + Interest + Prior Period Item + Extra Ordinary

Expense –Extra Ordinary Income)

Higher the ratio the better it is, a lower ratio indicates unfavorable trends in the

form of reduction in selling prices not accompanied by proportionate decrease in

cost of goods or increase in cost of production.

A high gross profit margin ratio is a good sign to management or owners. This

high ratio can be due to:

(i) High sales price, cost of good sold remaining constant,

(ii) Lower cost of good sold, sales prices remaining constant,

(iii) An increase in the proportionate volume of higher margin items.

(iv) A combination of variations in sales prices and costs, the margin widening.

A low gross profit margin ratio may be due to:

(i) Higher cost of goods sold as the enterprise is not getting the raw materials at

lower prices.

(ii) Inefficient utilization of production capacity.

(iii) Over-investment in plant and machinery.

2. Gross Margin Ratio: - This is also known as gross margin. It is calculated by

diving gross margin by net sales. Thus

Gross Margin

Gross Margin Ratio = 100

Net Sales

(Gross Margin = Gross Profit + Depreciation of P/L + Depreciation of Sch

10(SOH) + Extra Ordinary expenses – Extra Ordinary Income)

3. Net Profit Ratio: - This ratio explains per rupee profit generating Capacity of

sales. If the cost of sales is lower, then the net profit will be higher and then we

divide it with the net sales, the result is the sales efficiency. The concern must try

for achieving greater sales efficiency for maximizing the Ratio. This ratio is very

useful to the proprietors and prospective investors because it reveals the over all

profitability of the concern. This is the ratio of net profit after taxes to net sales and

is calculated as follows:

Net Profit After Tax

Net Profit Ratio =

Net Sales

The ratio differs from the operating profit ratio in as much as it is calculated after

deducting non-operating expenses, such as loss on sale of fixed assets etc., from

operating profit and adding non-operating income like interest or dividends on

investments, profit on sale of investments or fixed assets etc., to such profit.

Higher the ratio, the better it is because it gives idea improved efficiency of the

concern.

4. Operating Expenses Ratio: - It is an important ratio. It explains the changes in

the profit margin ratio. The operating expenses ratio is calculated as follows:

Operating Expenses

Operating Expenses Ratio = 100

Sales

(Operating Expenses = Net sales - Net Profit before Tax )

Note: - Interest on loans will not be included in operating expenses.

A higher operating expenses ratio is not favorable, as it will leave a very small

amount of operating income to meet interest and dividend etc.

Expenses

5. Expenses Ratio = 100

Sales

6. Return on capital Employed: - This ratio is an indicator of the earning

capacity of the capital employed in the business. This ratio is calculated as

follows:

Operating profit

Return on capital Employed = 100

Capital Employed

(Operating Profit = Profit before interest on long-term borrowings and tax)

Capital Employed = Equity Share Capital + Preference Share Capital +

Undistributed profit + Reserve & Surplus + Long-term Liabilities – Fictitious

Assets – Non-business Assets )

Or

Tangible Fixed Assets and Intangible Assets + Current Assets – Current

Liabilities.

This ratio considered being the most important ratio because it reflects the overall

efficiency with which capital is used. This ratio is a helpful tool for making capital

budgeting decisions; a project yielding higher return is favored.

6. Return on Investment (ROI): - The term investment may refer to total assets

or net assets. The funds employed in net assets are known as capital employed.

Net Assets = Net Fixed Assets + Current Assets – Current Liabilities (excluding

Bank loans) Or

Capital Employed – Net Work + Debt.

Earning Before Interest and Tax (EBIT)

I. Return on Investment =

Net Assets or Capital Employed

Higher the ratio, better it is.

CHAPTER II

Research Methodology

1) Introduction

2) Types of research methodology

3) Objective of study

4) Scope and limitations of study

2.1) Introduction

Research methodology is a way to systematically solve the research problem. It

may be understood as a science of studying now research is done systematically. In

that various steps, those are generally adopted by a researcher in studying his

problem along with the logic behind them.

It is important for research to know not only the research method but also know

methodology. ”The procedures by which researcher go about their work of

describing, explaining and predicting phenomenon are called methodology.”

Methods comprise the procedures used for generating, collecting and evaluating

data. All this means that it is necessary for the researcher to design his

methodology for his problem as the same may differ from problem to problem.

Data collection is important step in any project and success of any project will be

largely depend upon now much accurate you will be able to collect and how much

time, money and effort will be required to collect that necessary data, this is also

important step. Data collection plays an important role in research work. Without

proper data available for analysis you cannot do the research work accurately.

2.2) Types of data collection

There are two types of data collection methods available.

Primary data collection

Secondary data collection

1) Primary data

The primary data is that data which is collected fresh or first hand, and for first

time which is original in nature. Primary data can collect through personal

interview, questionnaire etc. to support the secondary data.

2) Secondary data collection method

The secondary data are those which have already collected and stored. Secondary

data easily get those secondary data from records, journals, annual reports of the

company etc. It will save the time, money and efforts to collect the data.

Secondary data also made available through trade magazines, balance sheets,

books etc.

This project is based on primary data collected through personal interview of head

of account department, head of SQC department and other concerned staff member

of finance department. But primary data collection had limitations such as matter

confidential information thus project is based on secondary information collected

through five years annual report of the company, supported by various books and

internet sides. The data collection was aimed at study of working capital

management of the company

Project is based on

Annual report of SECL 2005-06

Annual report of SECL 2006-07

Annual report of SECL 2007-08

Annual report of SECL 2008-09

Annual report of SECL 2009-10

2.3) OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working

capital is managed effectively, monitored efficiently planed properly and reviewed

periodically at regular intervals to remove bottlenecks if any the company cannot

earn profits and increase its turnover. With this primary objective of the study, the

following further objectives are framed for a depth analysis.

To study the working capital management of SECL.

To study the optimum level of current assets and current liabilities of the

company.

To study the liquidity position through various working capital related ratios.

To study the working capital components such as receivables accounts, cash

management, Inventory position etc.

To study the way and means of working capital finance of the SECL.

To estimate the working capital requirement of SECL.

To study the operating and cash cycle of the company.

To examine the effectiveness of working capital management polices with

the help of accounting ratio.

To evaluation the financial performance of the company.

To make suggestions for policy makers for effective management of

working capital.

2.4) SCOPE & LIMITATIONS OF THE STUDY

Scope of the study

The scope of the study is identified after and during the study is conducted. The

study of working capital is based on tools like trend Analysis, Ratio Analysis,

working capital leverage, operating cycle etc. Further the study is based on last 5

years Annual Reports of Jain Irrigation Systems Ltd. And even factors like

competitor‟s analysis, industry analysis were not considered while preparing this

project.

Limitations of the study

Following limitations were encountered while preparing this project:

1) Limited data:-

This project has completed with annual reports; it just constitutes one part of data

collection i.e. secondary. There were limitations for primary data collection

because of confidentiality.

2) Limited period:-

This project is based on five year annual reports. Conclusions and

recommendations are based on such limited data. The trend of last five year may or

may not reflect the real working capital position of the company.

3) Limited area:-

Also it was difficult to collect the data regarding the competitors and their

financial information. Industry figures were also difficult to get.

CHAPTER III

INTRODUCTION OF COMPANY

INTRODUCTION

Coal has been and shall remain the prime source of commercial energy in India. It

meets nearly 60 % of the total commercial energy requirement of our country. Since

coal India contributed almost 90 % of the coal produced in the country it can be

perceived to be the synonym of Indian coal industry. India is currently the third largest

coal producing country in the world after China & U.S.A. The Coal India has to play a

significant role in shaping the destiny of industries of the nation at large. We

currently witness changes that are sweeping economic & social life of our

country, as well as, that of the world. Products, services and manufacturing goods

or no longer limited to any national boundary but are getting across to countries

where they find acceptance. The liberalization and the economic reforms initiated

in our country, in real earnest, since the mid of 1991,are attempt to bring India in to the

economic main stream of global market. Performance for the competence, if I

may say so, is the key word for any company or corporation. Undoubtedly these

moves effect our life, as well as our thinking.

History of Coal Industry in India:

Coal and oil are two primary natural fuels. Coal constitutes approximately 85% of

total fossil fuel reserves in the world. The Gondwana coal contributes about 99%

of the country‟s coal resources. They are located in peninsular India and the too in

the southeastern quadrant bounded by 78 E longitudes & 24 N latitude, thus

leaving a major part of country devoid of any coal deposits. The major Gondwana

Coalfields are represented by isolated basins, which occur along prominent present

day rivers viz Damodar, Sone, Mahanadi, and Kanhan & Godavari. The relative

minor resources of tertiary coal are located on the either extremities of peninsular

India.

State and Area wise Coal reserves in India:

S.

No

State name Standard

Reserve

Actual

Reserve

Expected

Reserve

Total

Reserve

% Of

Reserve

1 Madhya

Pradesh

7565.50 9258.38 2934.49 19758.37 8.17

2 Chhattisgarh 9570.15 27432.89 4439.06 41442.10 17.14

3 Uttar

Pradesh

765.98 295.82 - 1061.80 0.44

4 Maharashtra 4652.39 2432.18 1992.17 9076.74 3.75

5 Orissa 16910.63 30793.07 14295.56 61999.26 25.64

6 Andhra

Pradesh

8403.18 6158.17 2584.25 17145.60 7.09

7 Assam 314.59 26.83 34.01 375.43 0.16

8 Arunanchal

Pradesh

31.23 40.11 18.89 90.23 0.04

9 Meghalaya 117.83 40.89 300.71 459.43 0.19

10 Nagaland 3.43 1.35 15.16 19.94 0.01

11 West Bengal 25123.00 10.39

12 Jharkhand 64371.00 26.62

13 North East 864.00 0.36

Total 241786.90 100.00

The mining industry in India is next to agriculture in terms of resource generation and

employment opportunity. Coal mining occupies a major position, contributing nearly

60 % of commercial energy requirement of India, followed by iron-ore,

limestone and bauxite.

Coal has traditionally been a vital input to the industrial heritage of India nearly

200 year ago, in Ranigunj coal field, about 120 miles west of Calcutta. Coal

mining gradually spread to other parts of India as the railway network developed. By

1900, almost 80% of the country's coal production of 6 million tons came from

Jharia and Raniganj coalfields. In 1975 the government consolidated control over

the coal industry by transferring the ownership & management of all nationalized

coalmines to the newly established coal India limited headquarter in Kolkata

Coal India presently contributes 90% of the total coal production in India. It

is the largest public sector in terms of employment to the tune of

636,000 people producing 250 million tons of coal per year. It operates through

eight subsidiaries.

l. ECL - 1975: Eastern coalfield ltd, comprising of the eastern division of

CMAL with head quarter at Burdwan.

2. BCCL - 1975: Bharat Coking Coal Ltd. Comprising of BCCL together with

Sudanidin & Moonidih mines of NCDC with head quarter at Dhanbad.

3. CCL - 1975: Central coalfield ltd, comprising of the central division of CMAL/

NCDC with head quarter at Ranchi.

4. NCL-1986: northern coal field ltd, with its registered office at Israeli (M.P).

5. WCL-1975: western coalfield ltd, with its registered office at Napery

(Maharastra).

6. SECL-1986: southeastern coalfields ltd, comprising of western division of

CMAL with head quarter at Nagpur.

7. CMPDIL-1975: central mining planning & design institute ltd, with head quarter

at Ranchi.

8. MCL-1992: Mahanadi coalfields ltd, with its registered office at Sambalpur

(Orrisa).

All the shares of above-mentioned subsidiaries are held by the President of India

through the holding company of coal industries holds all the shares of above-

mentioned subsidiaries. Coal India currently operates 449 mines & 15 washeries

spread over nine states to produce & beneficent coal for meeting the demand of the

consumers all over the country. 4 major consuming sector i.e. power, steel, railway

& the organized industrial sector units of varying size numbering about 2000

consume cement. 18% presently consume Seventy five percent of coal. The balance

7% is consumed by a very large no. of consumers viz brick kilns, domestic

consumer etc through coal depots & retail shops.

FORMATION OF COAL INDIA LTD:

Figure: 3 Mono of South Eastern Coal-Field Limited.

With the dawn of independence a greater need for efficient coal production was

felt in the first five-year plan. Coal being the most crucial energy resource, was

considered necessary to expedite development of modernization of the coal

industry. Thus, by the end of 1955-56 our country produced 38.4 million tones.

During the second five-year plan too the coal production was stepped up further to

60 million tonnes per annum. In 1956, National Coal Development Corporation

(NCDC) was formed with 11 collieries belonging to railways as its nucleus. NCDC

was given the task of exploring new coal fields and expediting development of new

coal mines in the out laying coal fields. Subsequently, in the context of

conservation, safety, scientific development of coal reserves, systematic and proper

mining of coking coal and increasing demands from iron and steel industries the

Govt. of India took over all the coking coal mines on 16th

of October 1971 and

nationalized them on 1st of May 1972. A company known as Bharat Coking Coal

Ltd. was formed to manage the coking coal mines.

The Objectives of Nationalization were:

1. Planned development of available coal resources.

2. Improvement of safety standards.

3. Ensuring adequate investment for optimal utilization consistent with

growth.

4. Improving the quality of life of the work force.

5. Prohibiting wasteful, selective and slaughter mining.

With the takeover of coking coal mines by the Govt. as mentioned above, the

private coal mine owners stopped capital investment for renewal of

machineries/equipments as well as for the development of new mines. The living

conditions of the miners remained sub-standard. The private mine owners indulged

in unhealthy mining practices including slaughter mining with the sheer objective

of maximizing their short-term gains. For nearly seven to ten years, the non –

cooking mines were owned by the Coal Mines Authority Ltd. and were managed

through three divisions i.e. Eastern, Western and Central Divisions. On 1st Nov.

1975, Coal India Ltd was formed as a Holding Company with its registered office

at 10, Netaji Subhash Road, Calcutta. 700001. BCCL and NCDC were transferred

to CIL. Coal India Ltd has seven coal producing Subsidiary Companies and one

Subsidiary for planning, designing and research.

Figure: 4 Coal India & Its Subsidiaries.

The Head Quarters of Coal India Ltd and its subsidiary companies are as below:

S. No

Name of the Company

formation

Head Quarters

1. Coal India Ltd. (Holding Co.) 1972 Kolkata (West Bengal)

2. Eastern Coal Fields Ltd. 1975 Sanetoria (West Bengal)

3. Bharat Coking Coal Ltd. 1973 Dhanbad (Jharkhand)

4. Central Coal Fields Ltd. 1975 Ranchi (Jharkhand)

5. Western Coal Fields Ltd. 1975 Nagpur (Maharashtra)

6. South Eastern Coal Fields Ltd. 1986 Bilaspur (Chhattisgarh)

7. Northern Coal Fields Ltd. 1986 Singrauli (Madhya

Pradesh)

8. Mahanadi Coal Fields Ltd. 1992 Sambalpur (Orissa)

History of Coal India Limited

The Indian energy sector is largely dependent on coal as the prime source of

energy. After the Indian independence, a greater need for coal production was felt

in the First Five Year Plan. In 1951 a Working Party for the coal industry was set

up, which suggested the amalgamation of small and fragmented producing units.

Thus the idea of a nationalised, unified coal sector was born.

In the pre-nationalised era coal mining was controlled by private owners, and

suffered from their lack of interest in scientific methods, unhealthy mining

practices and sole motive of profiteering. The miners lived in sub-standard

conditions as well. 1n 1956, the National Coal Development Corporation (NCDC)

was formed with 11 collieries with the task of exploring new coalfields and

expediting development of new coal mines.

Factors leading to the nationalisation of Indian coal industry

Nationalisation of the Indian coal industry in the early 1970s was a fall-out of two

events. The first was the oil price shock, which led the country to take up a close

scrutiny of its energy options. A Fuel Policy Committee set up for this purpose

identified coal as the primary source of commercial energy. Secondly, much-

needed investment for growth of this sector was not forthcoming from the private

sector.

Subsequently, in the context of safety, conservation and scientific development, the

Government of India took over all coking coal mines on October 16, 1971 and

nationalised them on May 1, 1972. Bharat Coking Coal Limited (BCCL) was thus

born. Following the state takeover of non-coking coal mines, Coal Mines Authority

Limited (CMAL) was formed in 1973, leading to the formation of a formal holding

company - Coal India Limited – on November 1, 1975.

Timeline

2008 : Coal India accorded „Navratna‟ status

2007 : Coal India and four of its subsidiaries NCL, SECL, MCL, WCL

accorded „Mini Ratna‟ status

2000 : De-regulation of coal pricing and distribution

1992 : Mahanadi Coalfields Limited (MCL) formed out of SECL to manage

the Talcher and IB Valley Coalfields in Orissa

1985 : Northern Coalfields Limited (NCL) and South Eastern Coalfields

Limited (SECL) carved out of CCL and WCL

1975 :

Coal India Limited formed as a holding company with 5 subsidiaries:

Bharat Coking Coal Limited (BCCL), Central Coalfields Limited

(CCL), Western Coalfields Limited (WCL), Eastern Coalfields

Limited (ECL) and Central Mine Planning and Design Institute

Limited (CMPDIL).

1973 :

Non-coking coal nationalised; Coal Mines Authority Limited

(CMAL) set up to manage these mines; NCDC operations bought

under the ambit of CMAL

1972 :

Coking coal industry nationalised; Bharat Coking Coal Limited

(BCCL) formed to manage operations of all coking coal mines of

Jharia Coalfield

1956 : National Coal Development Corporation (NCDC) formed to explore

and expand coal mining in the Public Sector

1955-56 : Focus on coal industry; capacity up to 38.4 million tonnes

COMPANY PROFILE

(CIL & SECL)

India is the 3rd largest coal producing country.

Figure: 1 Picture of front wing of SECL head office Bilaspur.

SECL is the largest coal producing company. It is one of the subsidaries of Coal India Ltd. A

government of India undertaking under ministry of coal .SECL, the prime coal company of

Coal India ltd, is having 89 coal mines situated in the sate of Madhya Pradesh and

Chhattisgarh. The coal mines are geographically located at the heart of country in CG and in

M.P. inhabited by simple minded hard working people. Ever since the formation in 1986-87

SECL has exceeded its physical and financial targets. Coal mining is the most prominent

industry in C.G. and in M.P. in terms of employment generation and infrastructure

development. The coal mining areas are spread over from Sarguja and Korba district of C.G.

up to Shadol and Umaria district further North west in M.P. due to opening of coal mines in

these region, rail connection, power supply, telecommunication, other industries etc. have

expanded over the past decades.

South eastern coalfields: A Profile

SECL is the largest coal producing company in the country. It is one of the eight

subsidiaries of CIL (A Govt. undertaking under Ministry of Coal). SECL, Coal

India‟s premier coal company is operating its coal mines in the state of Madhya

Pradesh and Chhattisgarh state which is also geographically located at the heart of

the country. Chhattisgarh and Madhya Pradesh inhabited by simple minded and

hard working tribes with a rich cultural heritage. Chhattisgarh is not only the rice

bowl if India but also rich in mineral resources with coal being the prime mineral

resource that is being exploited commercially for about a century.

STATUS OF CAPTIVE MINE BLOCK IN COMMAND AREA OF SECL

A new area known as Dipka Area has been separated from Gevra Area w.e.f. 1st of

April 2006. Coal mining is the most prominent industry in Chhatisgarh in terms of

employment generation, economic infrastructure development and generation of

revenue for the state and the central Govt. Due to opening of coal mines in this

region, rail connections and power supply lines, roads and tele-communication

have expanded over the past decades and a large number of power houses and

other industries have come up. The coal based industry have in turn generated

multiplier effect in the economy of Chhatisgarh and Madhya Pradesh and the

region has become the most important center of industrial economy of Chhatisgarh

and Madhya Pradesh.

The Statewise, type wise composition of those 90 mines is given in Table below:

Type of Mine Chhattisgarh Madhya Pradesh Total

UG Mines 41 29 70

OC Mines 11 08 19

Mixed Mines 01 - 01

Total 53 37 90

Districts where SECL is spreaded:

MADHYA PRADESH

1. SHAHDOL- Sohagpur area

2. UMARIA- Johilla area

3. ANUPPUR- Hasdeo & j&k area

CHHATTISGARH

1. KORBA- Korba, Gevra & Kusmunda

2. RAIGARH- Raigarh area

3. KOREA- Baikunthpur,Chirimiri & Hasdeo area

4. SURGUJA- Bishrampur & Bhatgaon

5. BILASPUR- SECL HQ.

SECL IS THE LARGEST COAL PRODUCING COMPANY IN INDIA.

SECL OPERATES THROUGH 12 ADMINISTRATIVE AREAS.

SECL HAS 92 MINES.

GEOGRAPHICAL COAL RESERVES 44.838 BILLION TES AS ON 1-01-

2008.

MINING RIGHTS OVER 956.41KM.

ALL RIGHTS OVER 259.85KM.

MISSION OF THE COMPANY-

To produce & market the planned quantity of coal efficiency and economically

with due attention to safety, conservation and quality.

Optimum utilization of resources with human value.

To improve the quality of life.

To treats the employees not as recourses, but as a human.

Human touch in behavior at work place.

To enhance the morale of employees though welfare means.

FINANCE DEPARTMENT

Finance department play a major role in any organization. Its main objective to

provide strength and stability to organization. All activities of industries and

concern are fully depending on finance. Therefore, in SECL, all section are

properly arranged and planed. This organization is run by ministry of government

so and this organization is undertaking by SECL.

All plan and procedure of finance is prepared under the authority of SECL. All

sections have one finance department. All fund are decided and polices are making

related to distribution and section of funds.

Finance department of CWS is arranging fund for the each shop which is required

to the fulfill the needs of section of workshop. As per requirement of section fund

is issue by the finance department. Like in planning section fund is issue to

purchase of material, in engine repair shop fund is issue to repair of engine etc.

Financial planning is done annually basis. Generally all financial plans are prepare

with the help of previous year data of each section of shop. Required fund is issue

by the finance manager.

Functions of Finance Department:

1. Construction of bills: This is the main function of Finance department,

under this, the whole project estimation can be done and company makes

necessary fund allocation to those projects.

2. Supply Bill: This section concerned with supply of all necessary inputs

required to the plant.

3. Maintenance Bills: In this, section the whole maintenance of the plant

and machinery.

FINANCE DEPARTMENT CHART

DATA ANALYSIS

LIQUIDITY RATIO

1. Current Ratio

Current Ratio = Current Assets /Current Liabilities

Rs. In Lakhs

Particulars 2007-08 2008-2009 2009-10

Current Assets 7338.08 8942.38 9395.96

Current Liabilities 5685.49 7038.05 7854.99

Current Ratio 1.29 1.27 1.20

Interpretation : From the above figures it is evident that Current Ratio has

decreased from 1.29 to 1.20. The decrease has been on account of decrease

in Cash and Bank balances and Advances. Ideal Current Ratio is taken as 2:1

however it is quantitative rather than qualitative thus despite the Current

Ratio being less than 2 the company’s liquidity position is sound.

2. Quick Ratio

Quick Ratio = Quick Assets / Current Liabilities

Particulars 2007-08 2008-2009 2009-10

Quick Assets 6891.45 8448.16 8730.96

Current Liabilities 5685.49 7038.05 7854.99

Current Ratio 1.20 1.20 1.11

Interpretation :

Generally Quick Ratio / Liquid Ratio of 1:1 is considered satisfactorily. As

we can see the company‟s Quick / Liquid Ratio has decreased from 1.20 to

1.11. This decrease is mainly on account of decrease in Cash and Bank

balance and Loan and Advances

This shows sound liquidity position of the company.

3. Ratio of Inventory To Working Capital

Ratio of Inventory to Working Capital = Inventory / Working Capital

Particulars 2007-08 2008-2009 2009-10

Inventory 518.64 494.24 645.00

Working Capital 1652.59 1904.33 1540.97

Ratio 0.31 0.26 0.42

Interpretation :

Generally the Inventory to Working Capital Ratio less than 1 is considered

satisfactorily. Working Capital has increased from 0.31 in year 2007-08 to 0.42 in

the year 2009-2010, which shows sound working capital position of the company.

Leverage Ratio

( Solvency Ratios)

1. Debt-Equity Ratio –

Dept-Equity Ratio = Debt/Equity or Net Worth +total debt

Particulars 2007-08 2008-2009 2009-10

Debt 337.30 392.18 314.80

Equity 4459.52 4766.81 5397.65

Debt Equity Ratio 0.08 0.08 0.06

Interpretation :

This ratio reflects share of debt in the Net Worth. The company‟s Ratio of 0.06

indicates a moderate level of debt in the company. Reduction of Debt – Equity

Ratio shows that the company has liquidated its debt in time. The Debt-Equity of

0.06 also shows that the company is mainly relying on shareholders fund for doing

the business.

2. Proprietary Ratio

Proprietary Ratio = Shareholders Fund / Total Assets

Particulars 2007-08 2008-2009 2009-10

Shareholders

Fund

4459.53 4766.81 5397.65

Total Assets 10847.60 12831.56 13669.15

Proprietary Ratio 0.41 0.37 0.39

Interpretation :

Creditors loan is safe because Proprietary Ratio is 0.39 as against the satisfactory

ratio of 0.5 times.

3. Debt Ratio –

Debt Ratio = Total Debt / Total Debt + Net Worth

Particulars 2007-08 2008-2009 2009-10

Total Debt

337.30 392.18 314.80

Total Debt +

Net Worth

4796.82 5158.99 5712.45

Debt Ratio 0.07 0.07 0.05

Interpretation :

This ratio reflects share of debt in the Capital Employed. The company‟s ratio of

0.05 in 09-10 indicates a low level of Debt in the company. Reduction of Debt

Ratio from 0.07 in 09-10 to 0.05 in 09-10 shows that the company is continuously

relying on own funds.

4. Capital Employed to Net Worth Ratio

Capital Employed to Net Worth Ratio = Capital Employed / Net Worth

Particulars 2007-08 2008-2009 2009-10

Capital Employed 3814.60 4380.28 4360.76

Net Worth 4459.52 4766.81 5397.65

0.86 0.92 0.81

Interpretation :

This shows that as on 31st March 2010 for every rupee of owner‟s contribution. Re

0.81 is contributed together by Lenders and Owners. This reflects that the company

is not dependent on borrowed capital.

Activity Turnover Ratio

1. Sales to Capital Employed ( Capital Turnover Ratio)

CTR = Net Sales / Capital Employed

Particulars 2007-08 2008-2009 2009-10

Net Sales 7181.59 8485.67 9371.56

Capital Employed 3814.60 4380.28 4360.76

Capital Turnover

Ratio

1.88 1.94 2.15

Interpretation :

This Ratio ensures whether the capital employed has been effectively used or not.

The increase in the ratio to 2.15 in 09-10 from 1.94 in 08-09 shows better

utilization of resources in the year 09-10.

2. Fixed Assets Turnover Ratio –

FA Turnover Ratio = Sales / Net FA

particulars 2007-08 2008-2009 2009-10

Sales 7181.60 8485.67 9371.57

Net Fixed Assets 2162.01 2475.95 2819.78

FA Turnover

Ratio

3.32 3.48 3.32

Interpretation :

As we know in case of Sales to Fixed Assets Ratio that the higher the ratio the

better in the performance. From the above data there is decrease in ratio from 3.48

to 3.32. This means that the utilization of fixed assets is very ineffective.

3. Working Capital Turnover Ratio –

WCT Ratio = Sales / Working Capital

particulars 2007-08 2008-2009 2009-10

Sales 7181.59 8485.67 9371.57

Working Capital 1652.59 1904.33 1540.97

WCT Ratio 4.35 4.46 6.08

Interpretation :

This shows that the company could manage to achieve better result in 08-09 with

less Working Capital. This above ratio also shows that during the year 09-10 the

company could utilize its resources in the better way it is utilized in 08-09.

4. Total Assets Turnover Ratio –

Total Assets Turnover Ratio = Net Sales / Total Assets

Particulars 2007-08 2008-2009 2009-10

Net Sales 7181.59 8485.67 9371.57

Total Assets 10847.60 12831.56 13669.15

Total Assets Turnover Ratio 0.66 0.66 0.69

Total Assets Turnover Ratio

2007-08 0.66

2008-09 0.66

2009-10 0.69

0.6450.65

0.6550.66

0.6650.67

0.6750.68

0.6850.69

0.695

Total Assets Turnover Ratio

Interpretation :

The increase in the ratio in 09-10 shows better utilization of its resources.

5. Inventory Turnover Ratio

ITR = Cost of Sales/Average Stock

C.G.S. = Sales – Gross Profit

Particulars 2007-08 2008-2009 2009-10

Cost of Goods Sold 5092.23 6648.74 6257.40

Average Stock 518.63 494.21 645.01

Inventory Turnover Ratio 9.82 13.45 9.70

Interpretation :

It was observed that Inventory turnover ratio indicates maximum sales

achieved with the minimum investment in the inventory. As such, the

general rule high inventory turnover is desirable but high inventory turnover

ratio may not necessary indicates the profitable situation. An organization, in

order to achieve a large sales volume may sometime sacrifice on profit,

inventory ratio may not result into high amount of profit.

6. Receivable Turnover Ratio –

Receivable Turnover Ratio = Credit Sales /

Particulars 2007-08 2008-2009 2009-10

Cost of Goods Sold

Average Stock

Receivable Turnover Ratio 25.98 42.73 44.13

Interpretation :

It was observed from receivable turnover ratio that receivables turned

around the sales were less than 4 times. The actual collection period was

more than normal collection period allowed to customer. It concludes that

over investment in the debtors which adversely affect on requirement of the

working capital finance and cost of such finance.

Profitability Ratios

1. Gross Profit Ratio

GPR = (Gross Profit/Net Sales)*100

Particulars 2007-08 2008-2009 2009-10

Gross Profit 2089.36 1836.93 3114.17

Net Sales 7181.60 8485.68 4371.57

Gross Profit Ratio 29.09% 21.56% 33.23%

Interpretation :

The increase in the ratio shows the better performance of the company in the year

09-10 as compared to 08-09.

2. Debtors in No. of Months Sales (DMS) –

DMS = Sundry Debtors / per month gross sales .

Per month gross sales = gross sales /12

Particulars 2007-08 2008-2009 2009-10

Sundry Debtors 276.41 198.61 212.35

Per Month Gross Sales 727.34 847.22 934.92

DMS 0.38 0.23 0.23

Interpretation :

The decrease in ratio in the year 2009-10 shows better realization position of the

company against its sales.

3. Stores of Stock & Spares in nos. of Months Consumptions ( Revenue

Mines)

(Inventory of Stores / Consumption of Stores per month)

Particulars 2007-08 2008-2009 2009-10

Inventory of Stores 226.10 226.76 232.22

Consumption per month 78.04 89.21 92.08

Stores in no. of Months 2.90 2.54 2.52

Interpretation :

The reduction in the ratio in 09-10 shows better utilization of fund and better

inventory management of the company. It also shows that the company has

avoided unnecessary locking of its funds in inventory.

4. Net Profit Ratio –

NPR = (Profit after tax / Sales) * 100

Particulars 2007-08 2008-2009 2009-10

Net Profit After Tax 2067.37 1817.93 3063.57

Sales 7181.60 8485.68 9371.57

NPR 28.79% 21.42% 32.69%

Interpretation :

The increase in the ratio shows the better performance of the company in the year

09-10 as compared to 08-09.

Return on Investment = EBIT/Capital Employed

particulars 2007-08 2008-2009 2009-10

EBIT 2089.60 1836.93 3114.17

Capital Employed 3814.60 4380.28 4360.76

RoI 0.55 0.42 0.71

RoI

2007-08 0.55

2008-09 0.42

2009-10 0.71

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Axi

s Ti

tle

Return on Investment

Operating Ratio –

(Net Sales – Net Profit)/ Net Sales

particulars 2007-08 2008-2009 2009-10

Net Sales 5114.23 6667.75 6307.99

Net Profit 7181.60 8485.68 9371.56

Operating Ratio 0.71 0.79 0.67

Working Capital Level and Analysis

W. C. Level

Size of Working Capital

Particulars 2007-08 2008-09 2009-10 A) Current Assets Interest Accrued on Investment

44.49 39.26 34.02

Inventories 518.63 494.21 645.01 Sundry Debtors 276.41 198.61 212.35 Cash and Bank 3996.21 5451.36 6995.23 Loans and Advances 2502.33 2758.94 1509.36 Total(A) 7338.07 8942.38 9395.97 B) Current Liabilities Current Liabilities 4257.89 5657.38 6409.56 Provisions 2090.72 2072.83 1628.84 Total(B) 6348.61 7730.21 8038.40 Net Working Capital (A-B)

989.46 1212.17 1357.57

2. Working Capital Trend Analysis

Particulars 2007-08 2008-09 2009-10 Net Working Capital 989.46 1212.17 1357.57 W.C. Indices 100 122.51 137.20

3. Current Assets Analysis

Size of CA

Particulars 2007-08 2008-09 2009-10 Interest Accrued on Investment

44.49 39.26 34.02

Inventories 518.63 494.21 645.01 Sundry Debtors 276.41 198.61 212.35 Cash and Bank 3996.21 5451.36 6995.23 Loans and Advances 2502.33 2758.94 1509.36 Total 7338.07 8942.38 9395.97 CA Indices 100 121.86 128.04

Composition of Current Assets

Particulars 2007-08 2008-09 2009-10 A) Current Assets Interest Accrued on Investment

7.07 5.53 6.87

Inventories 37.7 2.22 2.26 Sundry Debtors 54.6 60.96 74.45 Cash and Bank 34.10 30.85 16.06 Loans and Advances 0.60 0.44 0.36 Total(A) 100 100 100

4. Current Assets Analysis

Size of Current Assets

Particulars 2007-08 2008-09 2009-10 Current Liabilities Current Liabilities 4257.89 5657.38 6409.56 Provisions 2090.72 2072.83 1628.84 Total 6348.61 7730.21 8038.40 Current Liabilities Indices

100 121.76 126.62

Particulars 2007-08 2008-09 2009-10 Current Liabilities Current Liabilities 67.07 73.90 79.74 Provisions 32.93 26.81 20.26 Total 100 100 100

2008-2009

Current Liabilities 73.19%

Provisions 26.81%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%

Axi

s Ti

tle

Composition of Current Liabilities

Changes in Working Capital

Particulars 2008-09 2009-10 Changes in Working Capital

Increase Decrease

A) Current Assets Interest Accrued on Investment

39.26 34.02 - 5.24

Inventories 494.21 645.01 150.80 -

Sundry Debtors 198.61 212.35 13.75 -

Cash and Bank 5451.36 6995.23 1543.87 -

Loans and Advances

2758.94 1509.36 1249.59

Total(A) 8942.38 9395.97 B) Current Liabilities Current Liabilities 5657.38 6409.56

Provisions 2072.83 1628.84

Total(B) 7730.21 8038.40

Net Working Capital (A-B)

1212.17 1357.57

Net Increase in WC 145.40 145.40

Total 1357.57 1357.57 2152.41 2152.41

Working Capital Leverage

W.C. Leverage =

Return on Capital Employed

Particulars 2007-08 2008-09 2009-10 E.B.I.T 2089.60 1836.93 3114.17

Current Assets 7338.08 8942.38 9395.96

RoCE 0.28 0.21 0.33

Working Capital Leverage

Particulars 2007-08 2008-09 2009-10 % Chance in RoCE -3.45% -27.27% +33.33%

% Change in CA +16.49% +11.54 11.72%

W C Leverage

Working Capital Components

1. Receivables Management

Debtors:

Particulars 2007-08 2008-09 2009-10

Debtors 276.41 198.61 212.35

Indices 100 71.85 76.82

Average Collection Period –

Average Collection Period :

Particulars 2007-08 2008-09 2009-10 Gross Sales 8728.04 10166.61 11219.02

Average Receivables

276.41 198.61 212.35

Receivables Turnover Ratio

31.58 51.19 52.83

Average Collection Period

11.56 Days 7.13 Days 6.91 Days

2. Inventory Management –

Size of Inventory:

Particulars 2007-08 2008-09 2009-10 Raw Material 251.78 236.91 348.25

W.I.P 15.72 14.18 22.01

Finished Goods 25.76 16.76 34.96

Total Inventory 293.26 267.85 405.22

Indices 100 91.33 138.18

Inventory Holding Period –

Particulars 2007-08 2008-09 2009-10 Inventory Turnover Ratio

9.82 13.45 9.70

Days of Holding Inventory

37.17 27.14 37.62

3. Management of Cash –

Size of Indices of Cash

Particulars 2007-08 2008-09 2009-10 Cash and Bank 3996.21 5451.36 6995.23

Indices 100 136.41 175.05

CONCLUSION

Working capital management is important aspect of financial management. The

study of working capital management of Jain Irrigation system ltd. has revealed

that the current ration was as per the standard industrial practice but the liquidity

position of the company showed an increasing trend. The study has been

conducted on working capital ratio analysis, working capital leverage, working

capital components which helped the company to manage its working capital

efficiency and affectively.

· Working capital of the company was increasing and showing positive working

capital per year. It shows good liquidity position.

· Positive working capital indicates that company has the ability of payments of

short terms liabilities.

· Working capital increased because of increment in the current assets is more

than increase in the current liabilities.

· Company‟s current assets were always more than requirement it affect on

profitability of the company.

· Current assets are more than current liabilities indicate that company used long

term funds for short term requirement, where long term funds are most costly then

short term funds.

· Current assets components shows sundry debtors were the major part in

current assets it shows that the inefficient receivables collection management.

· Inventory was supporting to sales, thus inventory turnover ratio was increasing,

but company increased the raw material holding period.

· Study of the cash management of the company shows that company lost control

on cash management in the year 2005-06, where cash came from fixed deposits

and ZCCB funds, company failed to make proper investment of available cash.

RECOMMENDATIONS

Recommendation can be use by the firm for the betterment increased of the

firm after study and analysis of project report on study and analysis of working

capital. I would like to recommend.

1) Company should raise funds through short term sources for short term

requirement of funds, which comparatively economical as compare to long

term funds.

2) Company should take control on debtor‟s collection period which is major

part of current assets.

3) Company has to take control on cash balance because cash is non earning

assets and increasing cost of funds.

4) Company should reduce the inventory holding period with use of zero

inventory concepts.

Over all company has good liquidity position and sufficient funds to repayment of

liabilities. Company has accepted conservative financial policy and thus

maintaining more current assets balance. Company is increasing sales volume per

year.

Bibliography

Books Referred

ß I. M. Pandey - Financial Management - Vikas Publ ishing

House Pvt. Ltd. - Ninth Edition 2006

ß M.Y. Khan and P.K. Jain, Financial management – Vikas

Publishing house ltd., New Delhi.

ß K.V. Smith- management of Working Capital- Mc-Grow-

Hill New York

ß Satish Inamdar- Principles of Financial Management-

Everest Publishing House

Websites References

www.secl.gov.in

www.google.co.in

www.workingcapitalmanagement.com

www.bing.com

www.coalindia.nic.in

Working Notes

Sl.

No.

Terminology Reference

1. Current Assets Balance Sheet (B/S)

2. Current Liabilities Current Liabilities Balance Sheet -Gratuity Sch J

3. Liquid Assets Current Assets (Ref Sl no. 1) – Inventory Sch F

4. Cash Sch H

5. Inventory Sch F

6. Working Capital Refer Sl 1 and 2

7. Total Debt Secured Loans Sch C – I + Unsecured Loan

Sch C-II

8. Net Worth / Shareholders Fund Share Capital Sch A + Reserve & Surplus Sch B

9. Net Fixed Assets Balance Sheet

10. Total Assets Net Fixed Assets (Ref Sl no.9) + Investment Sch

E +

Current Assets (Ref Sl 1)

11. Capital Employed Net Worth (Ref Sl 8) + Total Debt (Ref Sl 7)

12. Net Sales Profit & Loss a/c

13. Sundry Debtors Sch G

14. Gross Sales Sch 1

15. Inventory of Stores Sch F

16. Consumption of Stores (Revenue

Mines)

Sch 6

17. Prior Period Sch 15

18. Extra Ordinary Income and

Expenditure

Interest Sch 4 – Provision for Bad Debts Sch 14

19. Gross Profit (G.P.) (Net Profit as per P & L a/c +Interest Sch

12+Prior Period Exp. Sch 15) – Extra Ordinary

Item ref. Sl no. 18

20. Total Depreciation Depreciation Profit & Loss a/c + Depreciation

Sch 10

21. Gross Margin (G.P. + Total Depreciation ref. Sl no 20)– Extra

Ordinary Item ref. Sl no. 18

22. Profit after Tax Net Profit as per P/L - Extra Ordinary Item ref. Sl

no. 18

23. Operating Expenses Net Sales ref. Sl no. 11 – (Net Profit - Extra

Ordinary Item ref. Sl no. 18)

24. EBIT Gross Profit ref. Sl no.19 - Extra Ordinary Item

ref. Sl no. 18