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FINANCIAL MANAGEMENT
INTRODUCTION:
Entails planning for the future of a person or a business enterprise to ensure a positive
cash flow. It includes the administration and maintenance of financial assets. Besides, financial
management covers the process of identifying and managing risks.
The primary concern of financial management is the assessment rather than the
techniques of financial quantification. A financial manager looks at the available data to judge
the performance of enterprises. Managerial finance is an interdisciplinary approach that
borrows from both managerial accounting and corporate finance.
Financial management is broadly concerned with the acquisition and use of funds by a
business firm. It deals with
How large should the firm be and how fast should it grow?
What should be the composition of firms level?
What should be the mix of the firms financing?
How should the firm analysis, plan and control its financial affairs?
While the first three questions express Ezra Solomons conception of
financial management as discussed in his clerical worlds. The Theory of financial
management. The forth one represents an addition that is very relevant in the light of the
responsibilities shouldered by finance managers in practice.
MEANING:
Some experts refer to financial management as the science of money management. The
primary usage of this term is in the world of financing business activities. However, financial
management is important at all levels of human existence because every entity needs to look
after its finances.
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NATURE OF FINANCIAL MANAGEMENT:
Financial management is that managerial activity which is concerned with the
planning and controlling of the financial resources. Though it was branch of economics till
1890,as a separate activity of discipline it is of recent origin still, it has no unique body of
knowledge of its own and draws heavily on economics for its theoretical concepts even today.
SCOPE AND FUNCTIONS OF FINANCIAL MANAGEMENT:
The scope and functions of financial management is divided into two categories
. The traditional approach
The modern approach
THE TRADITIONAL APPROACH:
The traditional approach of the scope of the financial management refersto its subjects matter. The scope of the finance function was treated by the traditional approach
in the narrow sense of procurement of funds by corporate to meet their financing needs.
The institutional agreement in the form of financial institution, which
comprise the organization of the capital market.
The financial instrument through which funds are raised from the capital markets and
the related aspects of practices and the procedural aspects of capital markets.
The legal and accounting relationships between a firm and its sources of funds.
The first argument against the traditional approach was based in its emphasis
on issues relating to procedural of funds by corporate enterprises.
MODERN APPROACH:
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The modern approach views the term financial management is a broad
sense and provides a conceptual and analytical framework for financial decision making
Accounting to it the finance functions covers both acquisitions of funds as well as their
allocation. Thus apart from the issues involving in acquiring external funds, the main concern
of financial management is the efficient and wise allocation funds to various as a defined in a
broad sense, it is viewed as an integral part of overall management. Financial management in
the modern sense of the term can be broken down into three major decisions as functions of
finance.
INTRODUCTION OF WORKING CAPITAL MANAGEMENT
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Working capital management is one of the financial management. An organizations
success wholly depends on the operating efficiency and optimum utilization of the scarce
capital and other resources. In this process financial management plays a crucial role in
channeling the funds in proper direction and in reducing the wastages within the firm. As the
public sector undertakings plays a crucial role in the economy, its financial management
matters a lot for the diverse interests associated with it.
Balance sheet and profit and loss accounts at the end of the year does not give the
strengths and weakness of the company. So an estimation of working capital management is
used to determine the financial statement and data. so that a forecast may be made for the
purpose of future earnings and ability of the company.
MEANING AND DEFINITION OF WORKING CAPITAL:
MEANING:
Every enterprises has to arrange for adequate funds for meeting day to day operations
and expenses to keep it as a going concern so ordinary speaking working capital refers to the
flow of ready funds necessary for working of enterprise.
DEFINITION:
Working capital refers to a firms Investment in short-term assets, cash, short-term
securities, accounts Receivables Inventories According to Hoagland: capital is description of
that capital which is not fixed. But the more common use of working capital to consider it as
the different between the work value of current assets and current liabilities.
.. Weston & Brigham
Every Business needs funds for 2 purposes:
For its establishment and to carryout the day to day operations the funds needed.
For short term purchase of Raw materials, payment of wages & other day-to-day expense etc,
these funds are known as working capital.
CONCEPTS OF WORKING CAPITAL:
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There are two concepts in working capital:
1 .GROSS WORKING CAPITAL:
Gross working capital simply called as working capital .Refers to the firms Investments in
current assets. Current assets are the assets, which can convert into cash with in an
accounting year (or operating cycle includes cash, short term securities, debtors, bill
receivables and Inventories. Gross working capital concepts focus Attention on 2 aspects of
current assets management.
1. Optimum investment in current assets
2. Financing of current assets management.
2. NET WORKING CAPITAL:
Net concepts is also called as net working capital it refers to the difference between
current Assets and Current Liabilities are those clines of outsiders that are expected to
nature for the payment within an accounting year. Net working capital being the difference
between current assets. And current liabilities are a quantitative concept.
It indicates the liquidity position of the firm and suggests extents to which working capital
is needed.
NEED FOR THE STUDY
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The study is conducted for the following needs.
1. Management of funds, particularly working capital decides not only liquidity and
solvency but also operating efficiency of the organization.
2. RASHTRIYA ISPAT NIGAM LIMITED needs more working capital and its
management to keep the pace of its financial growth.
3. To study the working capital needs and strengths of the organization in meeting and
managing working capital of the organization.
4. To review the element of working capital and importance in operating the activities in
the organization.
OBJECTIVES OF THE STUDY
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To know procurement and inspection procedure in Visakhapatnam steel plant.
To know the frequency of procuring inventory in Visakhapatnam steel plant.
To study how working capital management is maintained at Visakhapatnam steel plant.
To study working capital management techniques that is applied in Visakhapatnam
steel plant.
To offer suggestion for better management of working capital management in
Visakhapatnam steel plant.
METHODOLOGY OF THE STUDY
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The analysis of the project was based on the available information. Any information about the
topic is called the data. The data was gathered from various sources i.e., Primary and secondary
sources
Types of data:
1. Data Primary Data
2. Secondary
1. PRIMARY DATA:
Any information which is collected afresh and for the first time is called
primary data .The primary data happen to be original in character. The information isgathered from concerned employees .The employees and manager of the financial
department have provided the information needed for the study.
2. SECONDARY DATA:
Information which has already been collected by somebody else or some other agency
with definite purpose and which has already been proposed is called secondary data .The
secondary data for the study have been gathered from the balance sheets, profit and loss
accounts, annual reports and other books and manuals of the RASHTRIYA ISPAT NIGAM
LTD.
LIMITATIONS OF THE STUDY
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Though the project is completed successfully a few limitations may be Limitation.
Although every effort has been made to study the working capital management in
detail, in an organization of VSP size, it is not possible to make an exhaustive study
in a limited duration of 6weeks.
Apart from the above constraint, one serious limitation of the study is that it is not
possible to reveal some of the financial data owing to the policies and procedures
laid down by VSP. However the available data is analyzed with great effort to get
an insight into Working Capital Management in VSP.
INDUSTRY PROFILE
INTRODUCTION:
Steel is a versatile, constantly developing material that underpins all manufacturing
activity. If a product is not made from steel, then it is certainly made using steel at some point
in the manufacturing process.
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OVERVIEW OF IRON AND STEEL INDUSTRY:
HISTORICAL PERSPECTIVE:
The finished steel production in India has grown from a mere 1.1 million tonnes in
1951 to 29.27 million tonnes in 2000-2001. During the first two decades of planned economic
development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel production
exceeded 8%. However, this growth rate could not be maintained in the following decades.
During 1970-80, the growth rate in steel production came down to 5.7% per annum and picked
up marginally to 6.4% per annum during 1980-90, which increased to 6.65% per annum during
1990-2000. Though India started steel production in 1911, steel exports from India began only
in 1964. Exports in the first five years were mainly due to recession in the domestic iron and
steel market. Once domestic demand revived, exports declined. India once again started
exporting steel only in 1975 touching a figure of 1 million tonnes of pig iron export and 1.4
million tonnes of steel export in 1976-77. Thereafter, exports again declined to pick up only in
1991-92, when the main producers exported 3.87 lakhs tonnes, which rose to 2.79 million
tonnes in 1995-96. The steel exports in 1999-2000 were 2.36 million tonnes and in 2000-01 it
was 2.57 million tonnes. The growth in the steel sector in the earlier decades since
Independence was mainly in the public sector units set up during this period. The situation haschanged dramatically in the decade 1990-2000 with most of the growth originating in the
private sector. The share of public sector and private sector in the production of steel during
1990-91 was 46% and 54% respectively, while during 2000-01 the same was 32% and 68%
respectively. This change was brought about by deregulation and decontrol of the Indian iron
and steel sector in 1991. A number of policy measures have been taken since 1991 for the
growth and development of the Indian iron & steel sector. Some of the important steps are
THE INDIAN STEEL SECTOR AFTER LIBERALISATION
The Indian steel sector was the first core sector to be completely freed from the
licensing regime and the pricing and distribution controls. This was done primarily because of
the inherent strengths and capabilities demonstrated by the Indian iron and steel industry.
During 1996-97, finished steel production shot up to a record 22.72 million tonnes with a
growth rate of 6.2%, while in 1997-98, the finished steel production increased to 23.37 million
tonnes, which was 2.8% more than the previous year. The growth rate has drastically decreased
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in 1997-98 and 1998-99 being 2.8% and 1.9% respectively as compared to 20% in 1995-96 and
6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy 9.60% with the total
production touching 29.27 million tonnes. The production of finished steel during 2001-02 has
been 30.61 million tonnes, which means a lower growth rate of about 4.5% compared to the
previous year. This fall in the growth rate of steel production has been brought about by several
factors that, inter-alia, include general slow down in the industrial production and construction
activities in the country coupled with lack of growth in major steel consuming sectors.
APPARENT CONSUMPTION OF STEEL:
Apparent consumption of steel is arrived at by subtracting export of steel from the total
of domestic production and import of steel in the country. Change in stock is also adjusted in
arriving at the consumption figures. It is also treated as the actual domestic demand of steel in
the country. The year-wise apparent consumption of finished steel since 1990-91, is given in
the table in the annexure.
PROJECTIONS OF FINISHED STEEL:
In order to have a long-term perspective and planning, a Sub-Group on Steel and Ferro
Alloys was constituted for steel sector under the aegis of Planning Commission. The iron and
steel sector has experienced slow down from the year 1997 to 2001.
The growth of the steel sector is dependent upon the growth of the economy in general
and the growth of industrial production and infrastructure sectors in particular. The major
reasons for the slow growth in the steel sector during the last few years include: -
(a) Sluggish demand in the steel consuming sectors Steel being the basic raw material for
the construction industry, the capital goods and engineering goods industry, as also the
auto sector and white goods sector, its growth is dependent upon the demand for steel
by these segments of the industry. Since no major infrastructure or construction projects
have been implemented in the last few years, demand for steel has remained low. No
major projects in the oil sector, power sector, fertilizer sector, where intensity of steel
consumption is high, have come up in the recent past.
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(b) Overall economic slowdown in the country. All major core sectors of the economy have
been facing an economic slowdown. These include, power, coal, cement, industry,
mining and steel. The slow down phenomenon is not restricted to the steel sector alone.
Only when the overall economy of the country picks up, the steel sector would also
show signs of revival.
(c ) Lack of investment by Government/private sector in major infrastructure projects Due
to budgetary constraints, no major construction activity in mega projects including
fertilizer, power, coal, railways etc. have been planned by the Government. Despite
liberalization of the economy and relaxation in the investment norms, private sector
investment is yet to materialize in the core sectors of the economy. This has also
contributed to slowing down demand for steel.
(d) Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal
prices etc. have been under the administered price regime. These rates have been
frequently enhanced, thereby contributing to the rise in input costs for steel making.
MARKET SCENARIO:
After liberalization, with huge scale addition to steelmaking capacity, there is no
shortage of iron and steel materials in the country. Apparent consumption of steel increased
from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-02. During 2001-2002, due
to economic slowdown, certain sector like power and fertilizer projects, auto sector and white
goods sector have shown a slump in demand for steel. Steel Industry has been facing a
slowdown in the level of demand due to slow down of the domestic economy and that of the
major steel-consuming sector. Efforts are being made to boost demand particularly in rural
areas and also to increase exports. Prices of iron and steel have declined in 2001-02 in tune
with global trends, while input cost have gone up. However, of late, there has been resurgence
in the price level mainly of flats and demand has also witnessed an upward trend. In 2003-2004
steel sector market demand increased mainly because of massive construction activity taken up
in China.
PRODUCTION:
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Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India is
8th largest producer of steel in the world. In 2001-02, finished steel production was 30.61
million tonnes. Pig iron production in 2001-02 was 3.95 million tonnes. Sponge iron
production was 5.66 million tonnes in 1999-2000. In 2001-02, nearly 51% of crude steel
production was by public sector the remaining 49% was by private sector. In 2001-02, the
integrated steel plants produced 42% of finished steel and the remaining 58% was by the
secondary producers. Interface with consumers by way of Steel Consumer Council exists,
which is conducted on regular basis. Interface helps in redressing availability problems,
complaints related to quality.
PRICING & DISTRIBUTION :
Price regulation of iron & steel was abolished on 16.1.1992. Distribution controls on
iron & steel removed except 5 priority sectors, viz. Defense, Railways, Small Scale Industries
Corporations, Exporters of Engineering Goods and North Eastern Region. Development
Commissioner for Iron & Steel makes allocation to priority sectors. Government has no control
over prices of iron & steel. Open Market Prices have been generally stable, though fluctuations
have been noticed. Price increases of late have taken place mostly in long products than flat
products. In the current financial year the long product prices have increased by about 20%because of raise in demand internationally.
IMPORT AND EXPORT OF IRON AND STEEL:
India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a rise in
domestic demand, the import of saleable steel in 1996-97 reached a level of 1.80 million
tonnes. The incidence of import was mainly in hot rolled coils, cold rolled coils and semis.
Import of carbon steel during 2000-01 was about 1.41 million tonnes, which was about 12%
less than the import in 1999-2000. The total imports of carbon steel during six years up to
2001-02 are given in enclosed chart.
MEASURES ON IMPORTS OF IRON & STEEL:
Iron & Steel are freely importable as per the Exim Policy. India has been annually
importing around 1.5 Million Tonnes of steel. Imports have largely dropped, partly an
indication of greater self-sufficiency and partly the ability to control inflow of seconds and
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defectives. To check unbridled imports of cheap/seconds & defective steel, several measures
have been put in place, like; The Government has fixed floor prices for seven items of finished
steel viz. HR coils, HR sheets, CR coils, Tinplates.
The other notable measure in this regard is that imports of certain types of steel have
been subject to mandatory compliance of quality standards as specified by the Bureau of Indian
Standards (BIS). Adherence to BIS norms imply supplying information like name and address
of the importer, generic or common name of the commodity, net quantity in terms of standard
units of weights and measures, month and year of packaging and maximum retail sale price.
Moreover all manufacturers/exporters of the listed products shall be required to register
themselves with the BIS.
MEASURES FOR EXPORT OF IRON & STEEL:
Iron & Steel are freely exportable and India is a net exporter of steel. Advance
Licensing Scheme allows duty free import of raw materials for exports. Duty Exemption Pass
Book Scheme also facilitates exports. Indian steel exports have been subject to anti-
dumping/anti-subsidy duties actions by the stronger economies over the last few years. These
include:
Canada has covered pipes, hot rolled, cold rolled and galvanized products in the
AD/CVD actions. China has recently imposed a safeguard duty on the import of steel, which
ranges from 7-26%. The country-wise details are yet to be worked out. The rising trend in
Indian steel exports that was being witnessed in the last couple of years was halted due to these
anti dumping actions initiated by the advanced, developed nations of the world, which led to
the loss of major markets for the Indian steel exporters.
GLOBAL SCENARIO:
The global production of crude steel increased from 777 million tonnes in 1998 to 785
in 1999. The world steel consumption has also increased by 1%. The international steel trade
constituted around 279.6 million tonnes or 39.8% of the production. World steel industry
witnessed major ups and downs in the last two decades and especially over the past five years.
The pattern of trade has been upset by two important developments. These are the collapse of
the Soviet Union and the severe financial crisis in most South East Asian countries as well as in
Korea and Japan. After the Asian crisis, the region got transformed into a net exporter of steel.
The world steel industry is today characterized by excess capacity and poor demand. It is in this
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global context that the Indian steel industry will have to cast its future role. World production
of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest monthly total in
over a decade. The total of the 3 months to date was 226.8 million tonnes, 8.8% higher than the
January to March period in 2002.
Crude steel production in the USA is still rising, up by 5.4% in March 2003, bringing
the first quarter total up by 6.5% to 23.1 million tonnes. Mexican production is also improving
with March production up 21.4% and the 3 months total up 29.6% to 3.8 million tonnes, almost
equal to the Spanish first quarter total. Canadian steel production, on the other hand, fell by
3.6% in March and by 3.5% in the year to date to 4.0 million tonnes.
In the first two months and there was a very large tonnage exported to both China and
Singapore in February 2003. Net shipments of steel reported by the AISI were 7.5% up in the
two months at almost 16.5 million tonnes, with most of the increase going to the home market.
In March 2002 the US President announced imposition of temporary safeguard measures on
import of key steel products into USA. In retaliation to the US action EU has also imposed
provisional safeguard measures against import certain steel products. China, Canada and
Thailand are some of the other countries that have initiated safeguard investigations against
import of steel products into their countries. On the pricing front the steel prices have been
spiraling up especially since mid 2002 mainly due to the shortfall in supply. This can be
attributed to the facts.
Cessation of gas supply in Venezuela stopped about 6 million tonnes of
annualized production of steel.
Ukraine has imposed export duty on scrap steel, which is a raw material.
THE GROWTH PROFILE AFTER LIBERALISATION:
The liberalization of industrial policy and other initiatives taken by the Government
have given a definite impetus for entry, participation and growth of the private sector in the
steel industry. While the existing units are being modernized/expanded, a large number of
new/Greenfield steel plants have also come up in different parts of the country based on
modern, cost effective, state of-the-art technologies.
In pig iron also, the growth has been substantial. Prior to 1991, there was only one unit
in the secondary sector. Post liberalization, the AIFIs have sanctioned 21 new projects with a
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total capacity of approx 3.9 million tonnes. Of these, 16 units have already been commissioned.
The production of pig iron has also increased from 1.6 million tonnes in 1991-92 to 3.94
million tonnes in 2001-02. The share of Private/secondary sector has increased over time and is
currently around 74% of total production.
COMPANY PROFILE
INTRODUCTION:
Steel occupies the foremost place among the materials in use today and pervades all
walks of life. All the key discoveries of the human genesis, for instance, steam engine, railway,
means of communication, automobile, aero plane and computers are in one way or other,
fastened together with steel and with its sagacious and multifarious application steel is a
versatile material with multitude of useful properties, making its indispensable for furthering
and achieving continual growth of the economy be it construction, manufacturing,
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infrastructure or consumables. The level of steel consumption has long been regarded as an
index on industrialization and economic maturity attained by a country. At the time of
independence India had only three integrated Steel Plants-Iron $ Steel Company at Burnout,
Tata Iron And Steel Company at Jamshedpur, Iron $ Steel Company in the erstwhile princely
state of Mysore. Keeping in view the importance of steel, the following integrated steel plants
with foreign collaborations were set up in the public sector in the post-independence era.
BACKGROUND
To meet the growing domestic needs of steel Government of India decided to set up an
integrated steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR in
1979 for cooperation in setting up 3.4 MT integrated steel plant at Visakhapatnam. The
foundation stone for the plant was laid by the then Prime Minister on 20th January 1971.
The project was estimated to cost Rs. 3897.22 Crores based on prices as on 4 th quarter
of 1981. However on completion of construction and commissioning of the whole plant in
1992, the cost escalated to around 8500 Cores. Visakhapatnam Steel Plant is one of the most
modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992
by the then Prime Minister Sri P.V. Narasimha Rao.
The consultant, m/s M.N. Dastur and company ltd., submitted a techno-economic
feasibility report for the plant, with an annual capacity of about 3.4 million tones of liquid steel,
in October 1977.
The erstwhile Ussr government examined the detailed project report prepared by
Dastur & company and offered technical and economic co-operation for the same. The govt. of
India and erstwhile Ussr signed an agreement on June 12th 1979, for co-operation in setting up a
3.4 million tones integrated steel plant at Visakhapatnam. The u.s.s.r agreed to provide
financial assistance of 3.4 million ruble credit to GOI specifically for setting up the steel plant.
In terms of this agreement, soviets and Indian design organization revised the earlier detailedproject report of Dastur co., jointly and a comprehensive revised detailed project report for vsp
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1 Durgapur Steel Plant British
2 Bhili Steel Plant Erstwhile USSR
3 Bokhara Steel Plant Erstwhile USSR
4 Rourkela Steel Plant German
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was submitted in November 1980. A new company i.e. Rashtriya spat enigma ltd. (RINL) was
incorporated for faster implementation of the project.
MAJOR SOURCE OF RAW MATERIALS:
Iron ore lumps and fines Bailadilla, MP
BF lime stone Jagayyapeta, AP
SMS lime stone Jaisalmer, Rajasthan
BF Dolomite Dubai
SMS Dolomite Madharam, AP
Manganese Ore Chipurupalli, AP
Boiler coal Talc her, Orissa
Coking coal Australia
POWER SUPPLY:
operational power requirement of 180 to 200 MW is being met through
Captive Power Plant. The capacity of the Power plant is 286.5 MW. VSP is exporting 60 MW
power to APTRANSCO.
MAJOR UNITS:
Department Annual cap 000 T Units (3.0 MT stage)
Coke ovens 22613 Batteries each of 67 ovens and 7 Meterheight
Sinter Plant 5256 2 Sinter machines of 213 m2 grate area each
Blast furnace 3400 2 Furnaces of 3200 m3 volume each
Steel melt shop 30003 LD converters each of 150 m3 volume andstrand bloom casters
LMMM 710 3 Stand finishing mill
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WRM 850 2 x 10 stand finishing mill
MMSM 860 6 stand finishing mill
MAIN PRODUCTS OF RINL:
By products
Angles Granulate slag
Billets Lime fines
Channels Coal tar
Beams Anthracite acid
Squares HP Naphthalene
Flats Benzene
Round Toluene
Rebars Byline
Wire rods Wash oil
RINL TECHNOLOGY:
o 7Metre tall Coke oven batteries with coke dry quenching
o Biggest Blast furnaces in the country
o Bell less top charging system in Blast furnace
o 100% slag granulation at the BF cast house.
o Suppressed combustion LD gas recovery system.
o 100% continuous casting of liquid steel.
o Tempcore and Stelmor cooling process in LMMM & WRM.
o Extensive waste heat recovery systems.
o Comprehensive pollution control measures.
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CORPORATE PLAN OF RINL:
VISION:
To establish as an excellent corporate citizen and ensure optimal return on investment.
Harness our growth potential and sustain profitable growth
Deliver high quality and cost competitive products and be the first choice of customers
Create an inspiring work environment to unleash the creative energy of people.
Achieve excellence in enterprise management.
Be respected corporate citizen, ensure clean and green environment and develop vibrant
communities around us.
MISSION:
To attain 16 (MT) million tones liquid steel capacity through technological up gradation,
operational efficiency and expansion; augmentation of assured supply of raw materials to
produce steel at international standards of cost and quality; and to meet the aspirations of the
stakeholders.
OBJECTIVES:
Towards growth Expand the plant capacity to 6 MT by 2009-10, 8 MT by 2014-15
and 10 MT by 2018-19.
Towards Profitability Achieve net profits continuously from 2002-03.
Towards Stakeholders Make VSP the company of choice.
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Towards Technology Continuously upgrade technology to operate at international
efficiency levels.
Towards Safety, Environment and Society Continue efforts towards safety of
employees, conservation of environment and be socially responsive.
Expand plant capacity to 6.3 Mt by 2011-12 with the mission to expand further in
subsequent phases as per Corporate Plan.
Revamping existing Blast Furnaces to make them energy efficient to contemporary
levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity to
7.5 Mt.
Achieve higher levels of customer satisfaction.
Vibrant work culture in the organization.
Be proactive in conserving environment, maintaining high levels of safety & addressing
social concerns.
CORE VALUES:
Value foresight is crucial in todays competitive businesses climate VSP values
Commitment
Customer satisfaction
Continuous improvement
Concern for environment
VSP POLICES:
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HR POLICY:
In Visakhapatnam Steel Plant, believe that employees are the most important
resources. To realize the full potential of employees, the company is committed to:
Provide work environment that makes the employees committed and motivated for
maximizing productivity
Establish systems for maintaining transparency, fairness and equality in dealing the
employees
Empower employees for enhancing commitment, responsibility and accountability
Encourage teamwork, creativity, innovativeness and high achievement orientation
Provide growth and opportunities for developing skill and knowledge
Ensure functioning of effective communication channels with employees.
HRD POLICY:
In Visakhapatnam Steel Plant, are committed to create an organizational culture
which nurtures employees potential for the prosperity of the organization. To accomplish this:
Identify development needs of the employees on a regular basis, provide the necessary
training and continually evaluate and monitor the effectiveness of the training so that
the quality of the training also gets upgraded
Provide inputs to the employees for developing their attitude towards work and for
matching their competencies with the organizational requirements
Create an environment of learning and knowledge sharing by providing the means and
facilities and also access to the relevant information and literature
Facilitate the employees for continuous development of their knowledge base, skills,
efficiency, innovativeness, self-expression and behavior so that they contribute
positively with commitment for the growth and prosperity of the organization while
maintaining a high level of motivation and satisfaction
Prepare employees through appropriate development programs for taking up higher
responsibilities in the organization
Fulfill social obligations by providing training to the students of educational institutions
and to the trainees of other organizations
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CUSTOMER POLICY:
VSP will endeavor to adopt a Customer-focused approach at all times with
transparency
VSP will strive to meet more than the Customer needs and expectations pertaining to
Products, Quality, Value for Money and Satisfaction
VSP greatly values its relationships with Customers and would make efforts at
strengthening these relations for mutual benefit
ENERGY POLICY:
In Visakhapatnam Steel Plant, are committed to optimally utilize various forms of energy in a
cost-effective manner to effect conservation of energy resources. To accomplish this:
Monitor closely and control consumption of various forms of energy through an
effective Energy Management System
Adopt appropriate energy conservation technologies
Maximize the use of cheaper and easily available forms of energy
I.T POLICY:
RINL/VSP is committed to leverage Information Technology as the vital enabler in improving
the customer-satisfaction, organizational efficiency, productivity, decision-making,
transparency and cost effectiveness, and thus adding value to the business of steel making.
Towards this, RINL shall
Follow best practices in Process Automation & Business Processes through IT by in-
house efforts / outsourcing and collaborative efforts with other organizations / expert
groups / institutions ofhigher learning, etc, thus ensuring the quality ofproduct and
services at least cost
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Follow scientific and structured methodology in the software development processes
with total user-involvement, and thus delivering integrated and quality products to the
satisfaction ofinternal and external customers
Install, maintain and upgrade suitable cost-effective IT hardware, software and other
IT infrastructure and ensure high levels ofdata and information security
Enrich the skill-set and knowledge base ofall related personnel at regular intervals to
make employees knowledge-employees
Periodically monitor the IT investments made and achievements accrued to review their
cost effectiveness
CARE FOR SOCIETY:
The Company has committed Rs.12.75 Crores for the year 2009-10, as against Rs.
38.83 Crores in the previous year, towards Corporate Social Responsibility activities.
The reduction is largely due to the reduced PAT for the year.
CORPORATE GOVERNANCE:
Company is committed to conforming to the highest standards of corporate governance
by ensuring transparency, disclosures, and reporting as required under the Corporate
Governance Guidelines issued by the Department of Public Enterprises.
HUMAN RESOURCE MANAGEMENT:
Human resource initiatives at VSP are clearly linked to the corporate strategy of theorganization. VSP has exemplary industrial relations where the entire workforce works as a
well knit team for the progress of the Company. The productive environment prevailing in the
Company fosters an atmosphere of growth, both for the employees and for the Company. VSP
has introduced multi skilling concept since inception and the employees are trained as per this
concept. VSP has adopted a system of overlapping shifts, the first of its kind, in the industry.
TRAINING AND HUMAN RESOURCE DEVELOPMENT:
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Training and HRD are given due emphasis at VSP. Each year, a minimum of 1/3rd of the
employees undergo various training sessions either at Training and Development Centre or at
Centre for HRD for sharpening their skills on the technical and management related issues.
Training is also given in the area of safety, fire prevention, and occupational health besides on
the job at the shop floor.
SWOT ANALYSIS:
SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be avoided,
opportunities that should be banked, and threats that should be faced & yet survive in the
business.
STRENGTHS:
State of the art technology:
VSP was built with the co-operation of USSR and claims to be one of the most modern
steel plants in the country. VSP employs highly sophisticated technology, large-scale
computerization & automation in the production.
Location advantages:
VSP was rendered with additional advantages due to its location. The location
aspect has helped the VSP in easy procurement of raw materials as most of the raw
materials are imported from Andhra itself, apart from Orissa & M.P which are
located nearby.
More over the existence of Visakhapatnam port makes it easy in procurement of
raw materials like cooking coal from Australia. Also exports to various countries
can be made directly from Visakhapatnam port.
Self-Sufficiency in power: VSP has its own power generation unit with a total
capacity of 286.5 MW. VSP requires power of 180 MW to 200 MW. VSP, after
meeting its requirement exports power to APSEB.
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High commitment on part of employees:
The productive environment prevailing in the company fosters an atmosphere of
growth both for employees & for the company. The labour productivity is
currently262 tonnes/man/year unparallel in the public sector steel industry.
Strong commitment to conserve environment:
VSP is forefront of Indian industry in area of pollution control, equipment &
measures. The total cost of these measures works out at Rs.4600 million which
forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified
company (certificate for environment protection & pollution control measures).
ISO 9002 Certification:
VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO
certification gives an edge for VSP over other companies & depicts the
competency of Vizag steel to compete with the global steel producers.
Land and layout for expansion up to 16mt with proximity to port.
Quality producer image.
High standing for customer service.
Committed workforce.
Ability to raise fund.
WEAKNESS:
High intake of employees: VSP employs 17,500 employees including both
administrative and plant. When compared to international standard companies like
POSCO and other major steel producers, VSP employs 50% more for the same
capacity. Hence the salaries of these employees, medical & other facilities will raise
cost further which may disturb the cost effectiveness achieved in the production front.
Low return product mix: The product mix of VSP is small. VSPs long products like
billets, wire rods, structural are facing less demand due to the crisis in South East Asian
nations.
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Inadequate port facilities: The berthing facilities at VSP are not adequate relative to the
requirements of VSP.
No in-house key raw materials-iron ore/coal.
Lack of level playing field.
Single location company-Only long products, exposed to cyclic market.
Major capital repairs and modernization- New overdue.
High cost of servicing huge equity.
Consumption of coking coal contracted at higher cost in 2008-09.
OPPORTUNITIES:
Sizeable export markets: China is the biggest importer of Indian steel. China is
going to have huge requirements of steel in next 5 years due to Olympics (in 2008), shanghai
expo (in 2010).Reconstruction work in Iraq requires huge amounts of steel where RINL can
play a significant role.
Other promising factors are-
Proximity to southern market.
Strong economy.
Possibility of new markets.
A slow but steady increase in domestic steel demand.
Potential for growth in domestic steel demand- Low per capita consumption in India.
Huge investment planned in infrastructure in 11th plan.
THREATS:
Global steel majors like POSCO & Mittal steel are venturing into steel production very soon (in
Orissa). This may pose a problem to VSP in the procurement of raw materials as it is dependent
on Orissa for these materials. Input costs are increasing due to the increasing cost of raw
material. Also the demand for coal & coke is escalating.
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High raw material prices & shift of value chain towards raw materials.
Oligopolistic coal supply side.
Single Iron ore supplier Located in disturbance prone areas.
Predominant secondary sector in long products.
VSP High earning island.
MARKETING NETWORK:
The Company markets its products through headquarters marketing office and anetwork of regional offices, branch offices and stockyards located all over the country. It also
takes the help of consignment agents and consignment sales agents for the marketing of its
products. The exports are carried out by the export wing of marketing division with the help of
different agencies. The Company is recognized as Star Trading House by the Director
General of Foreign Trade, Ministry of commerce, Government of India.
The end users of the steel products manufactured at the plant include amongst other
construction industry, automobile industry, engineering industry, re-rolling industry, forging
industry, cable industry, wire drawing industry, fastener industry, electrode manufacturers and
railways. The Company is ideally located to serve the southern Indian market. Regional
SMangers/Branch managers meet at Head quarters regularly to assess the market situation and
decide market strategies.
RECENT TRENDS:
RINL BECOMES NAVARATNA COMPANY:
Considering the turn around and the excellent physical and financial performance in the
last 4 years vsp has been awarded NavaRatna status by the GOI in the year 2010. This confers
more autonomy to vsp management in financial and policy matters. The B.O.D also will be
strengthened with more independent non-executive directors.
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VSP EXPANDING ITS CAPACITY:
Vsp has undertaken expansion of capacity from 3-million tone liquid steel to 6.3
million tone liquid steel at a cost of rs.8692cr. Their entire expansion is scheduled to be
completed within a period of 4 years from October 2006. The honorable prime minister of india
has inaugurated the expansion project by laying foundation stone on 20th may 2006. Vsp will be
producing special grade long products required for automobile, railways and other special
applications in the new mills which are going to be installed. Due to some un avoidable reasons
this project is getting delayed by around 2 years resulting cost escalation to more than Rs14000
Crores.
JOINT VENTURES:
Vsp does not own any mines for extracting much required iron ore and low ash
metallurgical coal for its production. Vsp depends on m/s. National mineral development
corporation for meeting its iron ore requirements and import sources (Australia) for low ash
metallurgical coal. These sources have been increasing their prices disproportionately in recent
times due to very high demand because of capacity additions taking place in large scale. In
order to have raw material security and control over prices vsp has embarked upon acquiring
interest in coal mines and iron ore mines through joint ventures in India and abroad.
IMPLEMENTATION OF ADDITION MODIFICATION ANDREPLACEMENT:
In order to improve productivity, constantly upgrade the technology and reduce the cost
of production to become one of the worlds lowest cost producers vsp is implementing number
of arm schemes on a continuous basis since last 5 years. Vsp is spending substantial amount of
funds in the arm schemes which are yielding incremental benefits year after year.
CONSERVATION OF WATER:
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Vsp has taken up a number of projects for conservation of precious water. This is
carried out in three methods.
Reduce the consumption of water in the process.
Treat the drainage and sewerage water and reuse where ever possible.
To construct check dams for diverting rainwater to underground.
FINANCIAL PERFORMANCE OF VSP:
HISTORY:
In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP), VisakhapatnamSteel Plant (VSP) stands as a monument of advanced technology. VSP is the first shore based
integrated Steel Plant in the country.
The decision of Government of India to set up an integrated steel plant at
Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in Parliament on 17th
April, 1970 followed by foundation stone laying by her. The initial project cost was sanctioned
at Rs. 2256 Crores with an Internal Rate of Return (IRR) 4.20%. The Indian government and
USSR signed an agreement on 12th June 1979 for cooperation in setting up the 3.4 million
tonne integrated steel plant at Visakhapatnam.
Thereafter the project has undergone three revisions as detailed below.
First revision Second revision Third revision
Date of sanction by GOI 30.07.1982 24.06.1988 12.07.1995
Capital asset. Rs.3897.28 Cr. Rs. 6849.70 Cr. Rs.8593.29 Cr.
Financial IRR 5.40% 6.56% 5.30%
Liquid steel capacity (in MTper annum)
3.40 3.00 3.00
The broad reasons for revisions were:(1) Non-availability of funds on time
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(2) Price escalation
(3) Enhanced currency exchange rates
(4) Revision in taxes and duties
(5) Change in ocean freight.
REASONS FOR TIME OVER RUN:
(1) Inadequate fund flow & its delay
(2) Midway revision of project concept
(3) Dislocation of Soviet equipment suppliers
(4) Delay in supplies made by major PSUs.
(5) Delay in providing water by AP Government
RATIONALISED CONCEPT:
The construction of the plant started in 1981 and scheduled to be completed in 4 to 6
years in two stages. However, due to inadequate funds availability, there was a threat to project
continuance. In order to contain project cost, a Rationalised Project Concept was evolved
where while retaining the Hot Metal capacity, the liquid steel capacity was brought down to 3.0
MT from 3.4 MT by dropping one SMS converter and uprating the capacity of other converter.
Further on the finishing line, Universal Beam Mill was dropped. The Rationalised Concept
helped in reducing the project cost by Rs. 1497 Crores. Details of major production facilities
under original concept and revised concept are given at annexure.
The plant was commissioned in two stages. The 1st BF viz., Godavari was commissioned
in March 1990. The 2nd BF viz Krishna was commissioned in March 1992 and finally the
plant was dedicated to the Nation by the then Honourable Prime Minister Sri PV Narasimha
Rao in August 1992.
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CAPITAL RESTRUCTURING:
FIRST CAPITAL RESTRUCTURE:
Long gestation period in commissioning the plant and escalation of the project cost to
Rs. 8593.29 crores (3.8 times over the original estimate) necessitated capital restructuring, in
order to ensure viability and to prevent from becoming potentially sick under Sick Industrial
Company (Special Provisions) Act 1985. Action was taken for restructuring the capital base
even before the Company became totally commercially operational. The first capital
restructuring took place in July 1993.
BENEFITS FROM CAPITAL RESTRUCTURING:
Reduction of loss by Rs. 432.47 crores annually on account of interest saving
due to conversion of loans to equity capital, Preference Capital and Interest free
loan.
Reduction of loss by Rs. 149.40 crores on account of interest saving due to
waiver of penal interest.
SECOND CAPITAL RESTRUCTURE:
The second capital restructuring was approved in May 1998, whereby Rs. 542.47 crores
of Government loan was converted into 7% non-cumulative preference share capital
redeemable after ten years from the date of release of these loans. Further, conversion of Rs.
791 crores interest free loan to 7% non-cumulative preference capital was also agreed to.
Benefits from this capital restructuring was a reduction of loss by Rs. 235.85 crores on account
of interest saving and an annual interest saving of Rs. 88.47 crores. While approving second
capital restructure, government of India-Inter-alia desired to appoint a financial consultant of
repute to suggest a turnaround strategy for the organisation.
FINANCIAL AND PHYSICAL PERFORMANCE :
FINANCIAL PERFORMANCE:
The financial performance of the organisation against the set targets right from 1990-91
to 2002-03 is placed at Annexure. From this table it can be seen that the Company was gaining
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considerable gross margin which reflects the satisfactory performance of the plant for all the
years except during the year 1998-99 and 1999-2000 when there was a major set back to Coke
ovens. Further it had also secured reasonable cash profits barring those two years and initial
period up to 1992-94.
The Company had again gained its momentum during 2000-01 when it made a cash
profit of Rs. 153 crores and turned around during the year 2002-03 making a Net Profit of
around Rs. 520crores for the first time. During the last few years, the Company had taken a
number of steps like major capital repairs to Coke ovens, BF capital repairs, austerity measures
to cut down the cost, restrictions on capital expenditure etc. It may need a special mention that
a special drive took place to cut down the interest cost on term loans and working capital
arrangements.
PHYSICAL PERFORMANCE:
The details of physical performance as against the targets set right from 1990-91 to
2002-03 are placed at annexure. From the table it can be seen that the targets set were
reasonably met by the organization, up to 1999-2000 and far exceeded the targets from the year
2000-01 onwards.
PRESENT PERFORMANCE:
The Company turned around during the year 2002-03, making for first time Net Profit
of Rs. 520 crores, achieving Gross sales/turnover of Rs. 5059 Crores. The financial year 2002-
03 is a happy note in VSPs diary because of its remarkable performance in all fronts. On the
production front, the Company far exceeded the targets set. The performance of the Company
for the year 2002-03 is placed at Annexure.
At the beginning of the financial year 2002-03, the Company was having total term
loans to the tune of Rs. 1373.98 crores. UTI (Rs. 590.29 Crores, LIC Rs. 580.80 crores and
Bonds Rs. 175 crores) are the major outstanding. Apart from this the utilization of working
capital limits from the banks were Rs. 600 crores (CC Rs. 96 crores, WODL Rs. 395 Crores in
the form of FCNR (B) DL Rs. 267 cores, DCDL Rs. 128 crores and EPC Rs. 109 corers).
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STEPS TAKEN TO REDUCE DEBT BURDEN:
The significant steps taken by the Company to reduce debt burden include restructuring
of dept through prepayment of high interest loans out of internal resources, swapping of high
cost loans with borrowings from banks at lower interest rates, swapping off high cost working
capital demand loans with FCNR borrowings and commercial paper at cheaper rates of interest.
The Company due to the above initiatives could prepay the entire term loan of Rs. 590
crores from UTI during the year 2002-03 from out of internal resources and by swapping with
bank loans. 15% working capital demand loan of Rs. 400 crores was also substituted with
commercial paper with an average interest rate of 7% and FCNR demand loan at an average
interest rate of 3.4% to 10.09T.
The above steps resulted in brining down outstanding term loans to Rs. 773.37 crores as
at the end of the year 2002-03 (debt free on date) and utilization of working capital to the extent
of only Rs. 368 crores. The above steps resulted in containing the interest expenditure to Rs.
135 crores for the year 2002-03 as against the previous year level of Rs. 290 crores as shown in
Annexure.
PRODUCTION PERFORMANCE (000 TONNES):
YEAR HOT
METAL
LIQUID
STEEL
SALEABLE
STEEL
2006-2007 4,046 3,606 3,290
2007-2008 3,913 3,322 3,074
2008-2009 3,546 3,145 2,701
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2009-2010 3,900 3,399 3,167
COMMERCIALPERFORMANCE (RS. CORS):
YEAR SALES
TURNOVER
DOMESTIC SALES EXPORTS
2006-2007 9131 8487 4242007-2008 10433 9878 5552008-2009 10411 10333 78
2009-2010 10662 10444 68
FINANCIAL PERFORMANCE (Rs. In Crores)
Year Gross margin Cash profit Net profit
2006-07 2632 2584 2222
2007-08 3001 2977 26862008-2009 2355 2267 1336
2009-2010 1603 1525 797
WORKING CAPITAL MANAGEMENT
INTRODUCTION:Working capital management is concerned with the problems that
arise in attempting to manage the current assets, the current liabilities and the inter relationship
that exists between them .The term current assets refer to those assets which in the ordinary
course of business can be, or will be, converted into cash within one year without undergoing a
diminution in value and without disrupting the operations of firm.
The major current assets are cash, marketable securities, accounts
receivable and inventory. Current liabilities are those liabilities which are intended, at theirinception, to be paid in the ordinary course of business, within a year, out of the current assets
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or earning of the concern. The basic current liabilities are account payable, bills payable; bank
over draft, and outstanding expenses, the goal of working capital management is to manage the
firms current assets and liabilities in such way that a satisfactory level of working capital is
maintained.Working Capital is the Life-Blood and Controlling Nerve Center of a business
Definition:
Working capital is the amount of funds necessary to cover the operating the
enterprise.
SHUBIN
Working capital means current assets of a company that are changed in the
ordinary course of business from one form to another as for example, from cash to inventories,
inventories to receivable, into cash.
GENE STENBERG
OPERATING / WORKING CAPITAL CYCLE OF
MANUFACTURING FORM:
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CLASSIFICATION OF WORKING CAPITAL:
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Working capital can be classified into two ways.
On the basis of concept
On the basis of time.
1.ON THE BASIS OF CONCEPT:
Net operating cycle (NOC) is the difference between gross operating cycle and payables
deferral period.
Net operating cycle = Gross operating cycle - Creditors deferral period
NOC = GOC - CDP
2 .ON THE BASIS OF TIME:
On the basis of time, it may be classified as
a) Permanent working capital
b) Temporary working capital
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PARMANENT WORKING CAPITAL:
Permanent working capital is the amount invested in all current assets which
is required at all times to carry out minimum level of business activities. It grows with the size
of the size of the business. It is permanently needed for the business and therefore be financed
out of long term funds.
VARIABLE WORKING CAPITAL:
Variable working capital is the excessive amount over permanent working capital.
This keeps on fluctuating from time on the business activities. It is further divided into
Seasonal working capital
Special working capital
Seasonal working capital is required to meet the seasonal demands of busy periods
occurring at stated intervals. Whereas special working capital is 5required to meet
extraordinary needs for contingencies.
FOCUSING ON MANAGEMENT OF CURRENT ASSETS:
The gross working capital concept focuses attention on two aspects of current assets
management: (1) how to optimize investment in current assets? (2)How should current assets
be financed?
The consideration of the level of investment in current assets should avoid two danger
points- excessive or inadequate investment in current assets. Investment in current asset should
be just adequate to the needs of the business firm. Excessive investment in current asset should
be avoided because it impairs the firms profitability, as idle investment earns nothing. On the
other hand inadequate amount of working capital can threaten solvency of the firm because of
its inability to meet its current obligations. It should be realized that the working capital needs
of the firm may be fluctuating with changing business activity. This may cause excess or
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shortage of working capital frequently. The management should be prompt to initiate an action
and correct imbalances.
OPERATING AND CASH CONVERSION CYCLE:
Operating cycle is the time duration required to convert into sales, after the conversion of
resources into inventories and cash. The operating cycle of a manufacturing company involves
three phases:
Acquisition of resources such as raw material, labour power and fuel etc.,
Manufacture of the product which includes conversion of raw material into work-in-
progress into finished goods.
Sale of the product either for cash or on credit, Credit sales create account receivable
for collect The length of operating cycle of a manufacturing firm is the sum of
inventory conversion period (ICP), and debtors (receivable) conversion period (DCP).
The inventory conversion period is the total time needed for producing
and selling the product. It includes raw material conversion period (RMCP), work-in-
progress conversion period (WIPCP) and finished goods conversion period (FGCP).
The debtor conversion period is the time required to collect the
outstanding amount from the customers.
The net operating cycle also represents the cash conversion cycle (CCL).
It is the net time interval between cash collection 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 firms operations.
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GROSS OPERATING CYCLE (GOC):
The firms gross operating cycle can be determined as inventory
conversion period (ICP) plus debtor conversion period (DCP). Thus GOC is given as follows:
Gross operating cycle = Inventory conversion period + debtor conversion period
GOC = ICP + DCP
Inventory conversion period (ICP) is the sum of raw material conversion period(RMCP), work-in-progress conversion period (WICP), and finished good conversion period
(FGCP).
ICP = RMCP + WICP + FGCP
1. RAWMATERIAL CONVERSION PERIOD (RMCP):
It is the average time period taken to convert raw material in to work-in-progress.
RMCP depends on raw material consumption per day and raw material inventory. Raw
material consumption per day is given by the total raw material consumption divided by the
number of days in the year (say 360). The raw material conversion period is obtained when raw
material inventory is divided by raw material consumption per day.
Rawmaterial conversion period (RMCP) = (Raw material consumption)/360
RMCP = RMI360
RMC
2. WORK IN PROGRESS CONVERSION PERIOD (WIPCP):
It is the average time taken to complete the semi-finished or work-in-progress.
Work-in-progress conversion period = Work-in-progress inventory
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(Cost of production)/360
3. FINISHED GOODS CONVERSION PERIOD (FGCP):
It is the average time taken sell the finished goods.
Finished goods conversion period = Finished goods inventory
(Cost of goods sold)/360
FGCP = FGI360
CGS
3. DEBTOR CONVERTION PERIOD (DCP):
It is the average time taken to convert debtors in to cash. DCP represents the
average collection period.
DCP = debtors 360
Credit sales
CASH CONVERSION OR NET OPERATING CYCLE (NOC):
Net operating cycle (NOC) is the difference between gross operating
cycle and payables deferral period.
Net operating cycle = Gross operating cycle - Creditors deferral period
NOC = GOC - CDP5.
CREDITORS DEFERRAL PERIOD (CDP):
it is the average time taken by the firm in paying its suppliers
(creditors).
CDP = Creditors360
Credit purchases
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DETERMINANTS OF WORKING CAPITAL IN RINL:
It is understood that working capital is the vital component for future growth of the firm.
Financial manager has to maintain adequate level of working capital. There are several factors
influence the determinants of working capital. It is necessary to know those factors which
identifying the optimum size of working capital. In RINL working capital is generally deter
mind by these factors.
They are:
1. Market Coverage
2. Manufacturing Cycle
3. Advances
4. Growth of the firm
5. Seasonal fluctuations
6. Global Market boom
7. Expansion Chances
8. Credit Policy
The Management of working capital in RINL encompasses the following problems:-
1. To decide upon the optimal level of investment in various current assets.
2. To decide upon the optimal mix of short-term funds high relation to long term capital.
3. To locate the appropriate means of short-term financing.
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THE DANGERS OF EXCESSIVE WORKING CAPITAL:
It results in unnecessary accumulation of inventories. Thus chances of inventorymishandling, waste, theft and losses increase.
It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts results, which adversely affect
profit.
Excessive working capital makes management complacent which degenerates in
to managerial efficiency.
Tendencies of accumulating inventories tend to make speculative profits grow.This may tend to make dividend policy liberal and difficult to cope with in
future when the firm is unable to make speculative profits.
THE DANGERS OF INADEQUATE WORKING CAPITAL:
It becomes difficult for the firm to undertake profitable projects for non
availability of working capital funds.- It becomes difficult to implement operating plans and achieve the firms
profit target.
Operating in inefficiencies creep in when it becomes difficult even to meet
day to day commitments.
Fixed assets are not efficiently utilized for the lack of working capital funds.
Thus the firms profitability would deteriorate.
Paucity of working capital funds render the firm unable to avail attractivecredit opportunities etc.
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DIFFERENT WORKING CAPITAL RATIOS:
Although working capital management particularly its receivable component, apparently
takes on a short term approach, commitment to a particular receivables policy and the customer
relation ship that emanates from it are long term in nature. Hence, the credit manager must take
a long term as well as short term view of the business to which he is going to commit him self.
It is not important to have a strong accounting background to make intelligent use of financial
statements. A credit manager is required to calculate and interpret certain key ratios which will
tell him where his account receivables are in danger or not.
Classification of ratio:
Liquidity ratio
Solvency ratio
Profitability ratio
LIQUIDITY RATIO:
This ratio measures the ability of a business organization to pay short term
obligations in time. The liquidity ratio can be sub classified into two groups.
Liquidity study
Efficiency study
LIQUIDITY STUDY:
The liquidity study can be further classified in to three categories.
Current ratio
Quick ratio(acid test ratio)
Absolute liquid ratio
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EFFICIENCY STUDY:
The efficiency study can be further classified in to three categories.
Inventory turn over ratio(ITR)
Debtor turn over ratio(DTR)
Creditors turn over ratio(CTR)
CURRENT RATIO:
It establishes the relationship between the current assets and current liabilities.
Mathematically,
Current ratio=current assets/ current liabilities
Rule of thumb: The standard fixed for current ratio is 2:1
The current ratio is a crude measure of liquidity.
QUICK RATIO:
It establishes the relationship between liquid asset and current liability.
Mathematically,
Quick ratio=liquid assets /current liabilities
It is the absolute measure of liquidity.
Rule of thumb: The normal standard fixed for the quick ratio is 1:1
It is a rigorous measure of examining the liquidity of a business concern. Its other name is
also acid test ratio.
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ABSOLUTE LIQUID RATIO:
It establishes the relationship between absolute liquid assets and current liabilities.
Mathematically,
Absolute liquid ratio=absolute liquid assets/current liability
Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2
A rare measure of liquidity used under certain special circumstances.
INVENTORY TURN OVER RATIO:
ITR measures the relationship between cost of goods sold and the average inventory
during the period.
Mathematically,
ITR=cost of goods sold/average inventoryOr
Sales / average inventory
Its main objective is to measure the movement of stock. It is an absolute measure of
movement of stock or inventory.
DEBTOR TURNOVER RATIO (DTR):
It measures or establishes a relationship between the net sales and the average debtor.
Mathematically,
DTR=net sales/average debtors
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It measures the conversion of debtors in to the cash.
It is an absolute measure of measuring the turn over or conversion of debtors.
There is a relative measure also namely average collection period.
Average collection period=365/DTR (days)
CREDITORS TURNOVER RATIO (CTR):
While receivables turn over ratio of the customer organization measures the vulnerability of
the sources from which payables of the vendor-organizations are satisfied, the creditors turn
over ratio indicates the actual payment behavior of the customer organization.
CTR=purchases/trade creditors (payables)
Conversion of this ratio in number of days = 365/CTR
CONSTITUENTS OF CURRENT ASSETS:
1) Cash in hand and bank balances
2) Bills receivable
3) Sundry debtors(less provision for bad debts)
4) Short term loans and advances
5) Inventories of stock as:
a. Raw materials
b. Work-in-progress
c. Stores and spares
d. Finished goods
6) Temporary investments of surplus funds
7) Prepaid expenses
8) Accrued income
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In narrow sense the term working capital refers to the net working capital. Net
working capital is the excess of currents assets over current liabilities
Gross working capital= Current assets total
Net working capital=Current assets-Current liabilities
Current Liabilities are those, which are expected to fall due or nature of payment in
short period of one year, and they represent short-term sources of funds they include
1. Short-term borrowings: include bank borrowings other than those against own
debentures and other mortgages.
2. Trade creditors and other liabilities Sundry creditors, outstanding expenses and
advances received.
Provisions for taxation, dividends and other current provisions
CONSTITUENTS OF CURRENT LIABLITIES:
1. Bills payable
2. Sundry creditors (or) Accounts payable
3. Accrued or outstanding expenses
4. Short-term loans, advances and deposits
5. Dividends payable
6. Bank overdrafts
7. Provision for taxation.
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THE NEED FOR WORKING CAPITAL:
A firm has to make profit to maintain its image in the capital market the investors will also
be looking forward to the continuous growth of profitability gradual increase in profit will
result in capital growth of the firm. To earn substantial profit, sales volume has to be increased.
It is observed that sale of goods will not immediately be converted in to cash. When the
sale transactions are more credit in nature to have uninterrupted business operations the amount
will be looked up in the current assets like accounts receivables, stock, etc., This actually
happens due to the cash cycle by the time the cash is converted back to the cash.
The firm needs extra funds and hence the need for working capital. If this is not provided
the business operations will be effected to a greater extent and hence this past of finance has to
be managed well.
THE WORKING CAPITAL NEED FOR THE FOLLOWING
PURPOSES:
1. The purchase of raw materials, components and spares
2. To pay wages and salaries.
3. To incur day-to-day expenses and overhead cost such as fuel, power and office
expenses, etc.,
4. To meet the selling costs as packing, advertising etc,.
5. To provide credit to the customers.
6. To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.
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IMPORTANCE OF WORKING CAPITAL:
Working capital is the life blood and nerve center of a business, just as circulation of blood
is essential in the human body for maintaining life, working capital is very essential to maintain
the smooth running of a business. No business can run successfully without an adequate
amount of working capital.
The main advantages of maintaining adequate amount of working capital are as follows:
Solvency of the business.
Goodwill.
Easy loans.
Cash discounts.
Regular supply of raw material.
APPROACHES FOR FINANCING WORKING CAPITAL:
There are two sources of financing working capital requirements:
LONG TERM SOUECES:
Long term sources such as share capital, debentures, public deposits, Pouching back of
profits, loans from financial institutions.
SHORT TERM SOUECES:
Short term sources such as commercial banks, indigenous bankers, traders creditors,and installment credit, advances, and accounts receivables and so on.
There are three basic approaches for determining an appropriate Working capital financing
mix.
Hedging approached
Conservative approach
Aggressive approach
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1. HEDGING APPROACH:
The firm can adopt a financial plan which matches the expected life of assets with the
expected life of the source of funds raised to finance assets. The firm follows matching
approach. It suggests that the permanent working capital requirements should be financed
with funds from long term sources while temporary working capital requirements should be
financed with funds from short term funds
2. CONSERVATIVE APPROACH:
This approach suggests that the entire estimated investments in current assets should
be financed from long term sources and the short term sources should be used only for
emergency requirements. The distinct features of this approach are:
Liquidity is severally greater
Risk is minimized
The cost of financing is relatively more as interest has to be paid even on seasonal
requirements for the entire period.
3. AGGRESSIVE APPROACH:
The aggressive approach suggests that the entire estimated requirements of current asset
should be financed from short term sources and even a part of fixed asset investments be
financed from short term sources. This approach makes the finance mix more risky, less costly
and more profitable.
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ADVANTAGES OF ADEQUATE WORKING CAPITAL:
Working capital is the life blood and center of a business. Working capital is very
essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital .Some of the advantages of working capital
management is as follows.
SOLVENCY OF THE BUSINESS:
Adequate working capital enables helps in maintaining solvency of the business by
providing the uninterrupted flow of production.
GOODWILL:
Sufficient working capital enables a business concern to make prompt payments and
hence help in creating and maintaining goodwill.
EASY LOANS:
A concern having adequate working capital, high solvency and good credit standing can
arrange loans from banks and others on easy and favorable terms.
CASH DISCOUNTS:
Adequate working capital also enables a concern to avail cash discounts on the
purchases and hence it reduces costs.
REGULAR SUPPLY OF RAW MATERIALS:
Sufficient working capital ensures regular supply of raw materials and continuous
production.
REGULAR PAYMENTS:
Regular payment of salaries, wages and other day to day commitments. A company
which has sample working can make regular payment of salaries, wages and other day to day
commitments which raises the moral of its employees, efficiency and enhances production and
profits.
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DETERMINANTS OF WORKING CAPITAL:
The need for working capital is not always the same; it varies from year to year or even
month to month depending upon a number of factors. There is no set of rules or formulate to
determine the working capital needs of the firm. Each factor has its own importance and the
importance of the factors changes for a firm over a time.
In order to determine the proper amount of working capital of a concern, the following
factors should be considered carefully.
NATURE OF THE BUSINESS:
The amount of working capital is basically related to the nature and volume of the
business concern where the cost of the raw materials to be used in the manufacturing of a
product is very large in proportion to its total cost of manufacturing the requirements of
working capital will be very large.
SIZE OF THE BUSINESS UNIT:
The size of the business unit has an important impact on its working capital needs. Size
may be measured in terms of operations. A firm with large scale of operation will need more
working capital then a small firm.
SEASONAL VARIATION:
Seasonal industries require more working capital to stock the raw materials during theseason. In peak season
TIME CONSUMED IN MANUFACTURING:
The average time taken in the process of manufacturing is also an important factor in
The process of manufacturing is also an important factor in determining the amount of working
capital .The longer the period of manufacturing the larger the inventory required.
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TURN OVER OF CIRCULATING CAPITAL:
Rapidly of turnover determines the amount of working capital .The faster the sales the
larger the turnover hence less working capital.
MANUFACTURING/PRODUCTION POLICY:
Each enterprise in the manufacturing sector has its own production policy, some follow
the policy of uniform production even if the demand varies from time to time, and others may
follow the principle of demand based production in which production is based on the demand
during that particular phase of time. Accordingly, the working capital requirements vary for
both of them.
OPERATIONS:
The requirement of working capital fluctuates for seasonal business.
The working capital needs of such business may increase considerably during the busy season
and decrease during the slack season. Ice creams and cold drinks have a great demand during
summers, while in winter the sales are negligible.
MARKET CONDITION:
If there ids high competition in the chosen product category, then one shall need to
offer sops like credit, immediate delivery of goods etc. For which the working capital
requirement will be high. Otherwise, if there is no competition or less competition in the
market then the working capital requirements will be low.
AVAILABILITY OF RAW MATERIAL:If raw material is readily available then one need not maintain a large stock of the same,
thereby reducing the working capital investment in raw material stock. On the other hand, if
raw material is not readily available then a large amount of working capital is required.
TERMS OF PURCHASE AND SALE:
Terms of purchase and sales affect the amount of working capital .The practice of
cash purchases with credit sales requires more working capital.
INVENTORY TURNOVER:
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With a better inventory control, a form is able to reduce its working capital
requirements. If the inventory turnover is high the working capital requirements will be low.
GROWTH AND EXPANSION:
Growing concerns requires more working capital than the forms that are static. It is
logical to expect larger amount of working capital in a growing concern to mean its growing
needs of funds.
LEVELS OF WORKING CAPITAL INVESTEMENT:
The overall policy considers both the level of working capital investment and its financing. In
practice, the firm has to determine the joint impact of these two decisions upon its probability
and risk. The size and nature of a firms investment in current assets is a function of a number
of different factors, including the following:
The type of products manufactured.
The length of the operating cycle.
The sales levels.
Inventory polices.
Credit policies.
How efficiently thefirm manages current assets.
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INVENTORY MANAGEMENT:
Every enterprise needs inventory for smooth running of its activities. It serves as a link
between production and distribution process. There is, generally a time lag between the
recognition of a need and its fulfillment. Greater the time lag the higher the requirements for
inventory. The unforeseen fluctuations in the demand and supply of goods also necessitate the
need for inventory. It also provides a cushion for future price fluctuations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings. Thus it is very essential to have proper
control and management of inventories. The purpose of inventory management is to ensure
availability of materials in sufficient quantity as and when required and also to minimize
investment in inventories. Inventories include all types of stocks. For effective working capital
management, inventory needs to manage effectively. The level of inventory should be such that
the total cost of ordering and holding inventory is the least. Simultaneously, stock out costs
should also be minimized. Business, therefore, should fix the minimum safety stock level, re-
order level and ordering quantity so that the inventory cost is reduced and its management
becomes efficient.
The meaning of inventory is Stock of goods or a list of goods. In accounting language it
may mean Stock of finished goods only. In a manufacturing concern it may include raw
materials, work in process and stores etc.
PURPOSE OF INVENTORY MANGEMENT:
Every firm needs to maintain inventories
To facilitate continuous production and timely execution of sales orders
To meet the unpredictable changes in demand and supplies of material
To reduce ordering costs and avail quantity discounts etc. For taking advantages of
price fluctuations, saving in reordering costs.
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NEED TO HOLD INVENTORIES:
There are three general motives for holding inventories.
1. The Transaction Motive:
Which emphasis the need to maintain inventories to facilitate smooth production and
sales operation.
2. The Precaution Motive:
This necessitates holding of inventories to guard against the risk of unpredictable
changes in demand and supply forces and other factors.
3. The Speculative Motive:
This influences the decision to increase or reduce inventory level to take advantage of
price fluctuation.
OBJECTIVIES OF INVENTORY MANAGEMENT:
The main objectives of inventory management are operational and financial. The
operational objectives mean that the materials and spears should be available in sufficient
quantity so that work is not disrupted for want of inventory. The financial objective means that
investments in inventories should not remain ideal and minimum working capital should be
locked in it. The objectives of inventory manageme