a report

A REPORT

ON

Working capital management at RSP

By

Kamal preet singh

A Project Interim Report submitted in partial fulfilment of the requirements of

MBA program of:IIPM SCHOOL OF MANAGEMENT,KANSBHAL

Distribution list:

Company Guide: Mr. R.K.PRASAD Manager (Finance &

Accounts) Sales Accounts

1

Acknowledgement:

I would like to acknowledge with thanks the assistance received from some people in completing this report.

The completion of this work would not have been possible without the help of my company guide, Mr. R.K.PRASAD Manager (Finance & Accounts) Sales Accounts, who has always been there to assist me, and guide me throughout my project. He has helped me understand the objective of the company for giving this project. I sincerely thank him for his kind assistance and patience.

I would also like to thank my faculty guide, Prof.SASMITA GIRI without her assistance and guidance I could not have even thought of doing this project. I sincerely thank him for imparting his wisdom and giving me timely feedback whenever I needed it.

I would also like to thank the entire staff of the organization for their constant support and guidance towards accomplishment of my project goal.

Lastly, I would like to acknowledge my gratitude to IIPM-SOM for giving me the opportunity to work on this project and to all my friends and colleagues with whom I have worked as a team during the last 45 days.

2

DECLARATION

I, kamalpreet singh MBA student of IIPM SCHOOL OF MANAGEMENT under BIJU PATNAIK UNIVERSITY OF TECHNOLOGY (BPUT). Here by declare that summer project report on “Working Capital Management” with special emphasis on “Rourkela Steel Plant” is being submitted by me to iipm school of mgmt, kansbhal in my own field work, research and analysis.

It is only for academic purpose and it has not been published or presented any where else. The findings and analysis are original and are true to the best of my knowledge.

I bear full responsibility for information given in this report.

KAMALPREET SINGH Roll No.- 0906262033

3

CONTENTS EXECUTIVE SUMMARY COMPANY PROFILE INTRODUCTION TO THE STUDY LITERATURE REVIEW OBJECTIVE ,SCOPE &PROBLEM IDENTIFICATION RESEARCH METHODOLOGY ANALYSIS &INTERPRETATION

WORKING CAPITAL MANAGEMENT AT RSP

Concept of Working Capital Classification of Working Capital Working Capital financial policies Determinants of Working Capital

DATA ANALYSIS AND INTERPRETATION WORKING CAPITAL MANAGEMEN

4

EXECUTIVE SUMMARY

The major objective of the study is to understand properly the working capital of RSP & to

suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the

purpose like raw materials, payment of wages and other day to day expenses are known as

working capital. Decisions relating to working capital (Current assets-Current liabilities) and

short term financing are known as working capital management. It involves the relationship

between a firm’s short-term assets and its short term liabilities. By definition, working capital

management entails short-term definitions, generally relating to the next one year period. The

goal of working capital management is to ensure that the firm is able to continue its operation

and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming

operational expenses. Working capital is primarily concerned with inventories management,

Receivable management, cash management & Payable management.

Inventories management at RSP:

RSP is a large scale manufacturing company involved in production of steel. Therefore, it

has to maintain large quantity of inventories at production units for its smooth running and

functioning.

Cash management at RSP:

RSP has been accumulating huge cash surpluses over last several years, which enables the

organization to maintain adequate cash reserves and to generate required amount of cash.

Receivables management at RSP:

RSP has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New

Delhi, Chennai.This marketing office obtains sales order from steel users in India as well as

globally. On the basis of order received for different products it marks production planning of

different HR Plates, HR Coils, SW Pipes, Galvanised Sheeets etc.

5

COMPANY PROFILE OF ROURKELA STEEL PLANT

Rourkela Steel Plant

The growth of Rourkela from a tiny unknown village to one of the most modern temple of Steel Technology has been a history of trails and tribulation inter spread with moments of stress and period of success and glory having all the ingredients of a complete human drama. Rourkela Steel Plant , the first integrated steel plant in the Public sector in India, was set up with German collaboration with an installed capacity of 1 million

tones.

The plant was modernized in the mid 1990s with a number of new units with state-of-the-art facilities. Most of the old units have also been revamped for effecting substantial improvement in the quality of product, reducing the cost and ensuring cleaner environment.

It all started in 1948, just one year after Independence when Government of India appointed three consultants to survey and study problems connected with setting up of a modern steel plant. This was followed by an agreement on December 31, 1953 between Government of India and a consortium consisting of Essen & Damage Aktiengeseliscaft, Duisburg to set up a steel plant of initial capacity of 0.5 MT. Subsequently a supplementary agreement was signed in July, 1955 to set up a 1.0 MT plant. The Cokeoven battery No. 1 was commissioned on 3rd December, 1958 and first of the three Blast Furnace was commissioned on 3rd February, 1959.

RSP was the first plant in India to incorporate LD technology of steel making. It is also the first steel plant in SAIL and the only one presently where 100% of the slabs rolled are produced through the cost effective and quality centered continuous casting route. RSP is the only plant in SAIL to produce silicon steels for the power sector, high quality pipes for the oil and gas sector and tin plates for the packaging industry. Almost all major units of the plant are covered under ISO: 9002 certification, while its Silicon Steel Mill and Sintering Plant II have been awarded ISO: 14001 certification for Environment Management.

The plant is being modernized in two phrases. After modernization ,the plant would produce 2 million toes of hot metal,1.9 million tones of liquid steel and 1.67 million tones of saleable steel.

6

LOCATION

Rourkela Steel Plant is situated at an altitude of 219 meters above the sea level and at the point of 84.9 longitude and 22.2 degree latitude, at Rourkela in the district of Sundergarh which is well known as the industrial belt of Orissa. The Rourkela is situated at a distance of 413 Kms .from Kolkata on Howrah-Mumbai main line and near National Highway –23.

Rourkela is flanked by the river Brahmani on the southern side and river Koel a tributary to Brahmani on the northern side .Rourkela Steel Plant is situated in the left bank of river Brahmani .The steel township is situated on the left bank of river Koel. Both the river Sankh and Koel are flowing from Jharkhand meet at a point called Vedvyas- a place of historic importance and situated in the state of Orissa at a distance of 8-10 Kms from Rourkela.

Values and Beliefs of Rourkela Steel Plant

The company values honesty and truthfulness above everything else in all its interaction. Our thoughts, words and action shall be the same .we shall try our utmost to fulfill promises and honor commitment. The company seems to be restless-always seeking new horizons of opportunity.

Their goal is to first catch up with the best of Indian standards in all areas, then raises those standards to global levels and finally compete with the worlds

► Going Beyond The company only way to find the limits the possible is by going beyond them to the

impossible .No wonder; RSP earned the distinction of being the first steel plant in the country

7

to cast CRNO steel. More important is the fact that the prime acceptance of CRNO steels a high-value item, increased substantially from 76% to 94%

► Swing Accent The most important outcome of this new-formed realization is the swing in the accent

in production from quantity to quality. In short the employees have become much more change driven.

► Innovation

The company values innovative thinking, innovative approaches and innovative solutions in

our regular work life .we will always look for better ways of doing things. We will seek new

ideas to solve problems; we will experiment with new concepts, ideas and solution.

► Excellence The company values highly all efforts that lead to high standards in everyday work

and results .We shall attempts to be the best-in-class in anything we choose to work on. We shall encourage any individual or collective effort in promoting excellence.

► Trust The company believes that trust is an important ingredient for effective functioning

within the organization and with the outside world. While we shall protect our legitimate business interests, we would also approach the people issues and association with straight forward ness, optimism and positive outlook.

► Self Motivation

The company endorses that the employees actually want to participate in the overall functioning .Left to them; more often than not they take the possible decision. According to the management managers only have to steer a bit and provide support whenever needed. That’s what employees like .they not only feel that they are running the show –in fact they are.

► Technological Edge The dramatic improvement in the productivity could be attributed to the new

technology. Moreover the increasing use of concast slabs has provided a much needed technological edge to RSP .They can satisfy their customer requirements in much more convincing manner.

► Aligning with the market

To leverage its access to technology and pursue its turnaround process to a logical

conclusion, RSP is revving up its marketing strategy in consultation with the office of the sale

8

(SRM) of SAIL’s Central Marketing Organization (CMO).The focus is on aligning the production process with the marketing plan

► Leadership

Our company believes that sustained progress and growth are achieved through leadership characterized by inexhaustible personal energy and exceptional ability to energies others .we shall promote leaders within the ranks who unleash latent energy with in the organization.

► Adaptability

Our company believes that flexibility and adaptability are essential conditions to survive and thrive in chaotic fast moving world. While we hold true to our basic beliefs and values, we shall continuously introspect and reassess the needs for change in the way we do business

The overriding objective of all the changes being brought about in RSP centers around total customer satisfaction .The Company is certainly on a much sounder footing getting prepared to deliver a performance of international standards-a promise that would set the wheel of success rolling.

SPECIAL FEATURES OF RSP

First Steel Plant in Asia to adopt LD process of steel making

India’s first public sector integrated steel plant of SAIL unit to produce all it’s

through the continuous casting route.

First Steel Plant in the SAIL family to produce 100% of steel through the cost

effective and quality centered continuous casting route

First Steel Plant in India to adopt external desulphurization of hot metal by calcium

carbide injection process

Only Plant producing large diameter API grade Pipes conforming to must rigid

standards

Only Plant SAIL producing Cold Rolled Non Oriented (CRNO) sheets for use in the

electrical industries

9

First plant to adopt vacuum degassing metallurgy primarily for production of silicon

steel for the CRNO sheets

All the major production department and some service departments and some service

department certified with ISO 9001:2000 QMS

Silicon Steel Mill, Environment Engineering Department and sinter Plant-II, Hot

Strip Mill & Plate Mill certified with ISO 14001:2004.

ORGANISATION

► Main Plant and other Units of RSP:

a) Coke Ovens 3 Batteries of 70 ovens each and 2 Batteries of 80 ovens eachb) Blast Furnaces 3 BFs of 1130M3 useful volume and 1 BF of 1658 M3 useful volumec) Steel Melting Shop I 3 mixers of 1100 Ton each, 2 LDs of 60/66 Tons / blow and 1 single strand

slab caster of 0.305 MT of slabs per yeard) Steel Melting Shop II 2 mixers of 1300 Ton each, 2 LDs of 150 Tons each and 2 single strand

slab casters of 1.355 MT of slabs per yeare) Sinter Plant I 2 sinter machines of 1.5 MT per yearf) Sinter Plant II 1 sinter Machine of 1.57 MT per yearg) Hot Strip Mill 2 Pusher Furnaces of 100 ton per hour each

2 Walking beam furnaces of 225 ton / hr each3 Stand Roughing Mill and 4 hi 6 stand Finishing Mill

h) Plate Mill 1 Walking beam furnace of 100 Ton / hr3.1 meter wide and 4 hi Reversing Mill of 3,40,000 Tons of plates per year.

i) Pipe Plants * ERW Pipe Plant of 75,000 tons per year with high frequency welding ( 400 KHz)

j) Cold Rolling Mill 2 Pcikling lines1 Cold Reversing Mill1 Five Stand Tandem MillHood Annealing continuous Annealing2 Skin Pass MillSheet Shearing LineContinuous Galvanising Line of 1,60,000 tons per year

k) Silicon Steel Mill 4 hir Revewrsing Mill of 73,000 Tons per year of CRNOl) Captive Power Plant-I 5 units to produce 128 MW of powerm) Personnel & Admn. Deptt.n) Finance Departmento) Materials Management Deptt.p) Medicalq) Town Servicesr) Human Resource Development Centre.

10

► PRODUCTS The main product Mix of Rourkela Steel Plant is: -

PRODUCT – MIX TONNE/ANNUMPlate Mill Plates. 4,89,820HR Plates 3,15,323HR Coil 7,63,105

ERW Pipes 75,000SW Pipes 55,000CRSheets 4,33,000Galvanizing Sheets (GP &GC) 1,60,000

Electrolytic Tin Plates 65,000Silicon Steel Sheets 80,689Total Salable steel 24,43,248

MODERNISATION AREA OF RSP The survival of any industry depends on continuous upgradation of technology. The modernization of Rourkela Steel Plant has been a conscious effort at upgrading technology. Making trained personnel available at the right time and establishing a productive work-culture has been very important role yielding expected results from modernization.The modernization area of RSP covers the following areas.

STEEL MELTING SHOP-II TONNAGE OXYGEN PLANT-II SINTER PLANT-II CALCINING PLANT-II ORE BEDING & BLENDING PLANT.

MARKET SCENARIO

After liberalization, with huge scale addition to steel making capacity, there is no

shortage of iron and steel materials in the country.

Apparent consumption of steel increased from 14.84 million tones in 1991-92 to

30.265 million tones in 2003-04.

The production of steel in 2003-04 is 36.193 million tones as against 33.67 million

tones in 2002-03 thereby registering an increase of 7.5%.

The demand of steel has been firmed up both at home as well as internationally.

11

Efforts are being made to boost demand particularly in rural areas and also to

increase exports.

World Steel Scenario

year 1991 2001 2002 2003 2004

GLOBAL STEEL

727 mt 780mt 829mt 868mt 906mt

CHINA STEEL

70 174 211 232 255

INDIAN STEEL

20 27 29.5 32.5 34

PRESENT STATUS AND FUTURE PLANS OF SAILPRESENT STATUS AND FUTURE PLANS OF SAIL

SAIL today is one the largest industry entities in India. Its strength has been the diversified range of quality steel products catering to the domestic as well as the export market and a large pool of technical and professional expertise. The total turnover of the company is around Rs.72, 178 crore during 2007-08. The strategy includes a divestment of non-core activities restructuring of marketing functions and a focus on pruning cost of operation. The goal for the company is to emerge as one of the lowest cost producer in the global steel market. Quality steel products from SAIL have fixed a position for themselves in the global steel market. The company aims at making its global presence felt through export, joint ventures and strategic alliances with internationally reputed steel makers in a fast turnaround, which include financial restructuring and business restricting to focus on core business of making carbon steel and withdrawing from non-core and non viable activities, making focus on market requirement, ensuring greater involvement of plants on marketing initiative, achieving cost leadership through accurate cost cutting drive and rationalizing manpower to bring down the total no. of employee to competitive levels are some other facets of the strategy. SAIL’s ability to continuously grow in different market conditions reflected the inherent strength of the company to manage its operations under varying and fast changing business environment over a long span of time

12

SAIL - INTO THE FUTURE

SAIL’s Growth Plan 2010

Much has happened ever since SAIL’s Corporate Plan was announced in 2004. Investment

plans for the three specialty steel plants have been firmed up. Company has grown in size

with the amalgamation of IISCO (now renamed as IISCO Steel Plant). Production targets

have been revised from 19 million tonnes (MT) of steel to about 24 MT. Estimated investment

has increased from Rs 25,000 crore to around Rs 40,000 crore. And the time period has been

squeezed by two years, bringing the targeted year of completion of major projects from 2010

to 2012.

Saleable Steel Capacities (MT)

PLANT 2010

Bhilai Steel Plant 6.21

Durgapur Steel Plant 2.85

Rourkela Steel Plant 2.90

Bokaro Steel Plant 6.50

IISCO Steel Plant 2.37

Alloy Steels plant 0.43

Salem Steel Plant 0.36

Visvesvaraya Iron & Steel Plant 0.22

13

SAIL: Shareholding Patternn (% of Equity)

GDR, 0.07%

Banks, 0.15%

Mutual Funds, 1.35%

FII's, 1.58%Companies,

1.59%

Individuals, 4.46%

Financial Institutions,

4.98%

Govt. Of Inida, 85.82%

GDR Banks FII's

Mutual Funds Companies Individuals

Financial Institutions Govt. Of Inida

CENTRAL MARKETING ORGANIZATION

All SAIL ‘s products except alloy, special steels and stainless steels are marketed directly by

CMO through units in co-ordination with rail, roads and shipping sector to ensure quality

and promote dispatch of products. The main functions of CMO are as follows;

Marketing of Steel products and fertilizers

Production planning and dispatch co-ordination with plants.

Export of steel.

Import of coal and other consumables.

Market research.

Information System.

3.5 OWNERSHIP AND MANAGEMENT

The Government of India owns about 86% of SAIL's equity and retains voting control of the Company. However, SAIL, by virtue of its "Navratna” status, enjoys significant operational and financial autonomy. Otherwise government of India runs the SAIL under the management of Chairmen and Board of director.

14

RSP PRODUCTS

HR COILS

Available in Indian standard or equivalent international specification for wide range of

engineering and also to suit specific requirements such as tube making and cold rolling of

low carbon DD and EDD quality, medium carbon, high carbon hot rolled coils for strap

making after cold reduction etc.

Hot rolled coils are also used for general purpose sheet applications like telephone poles.

Light plates in 5 & 6 mm thickness are available in Indian Standard specifications for

diverse engineering applications including railway coaches and auto body components.

PLATES

Available in Indian standard and equivalent international specifications for welded and

riveted structural applications, fired and unfired pressure vessels or low temperature

15

application, high strength needs, abrasion resistant usages, automobile chassis and almost

every other general purpose requirement.

GALVANISED SHEETS

Available in a variety of coating light range according to IS – 227 specifications and also

our own Rougal specification. The galvanised sheets find extensive usage in roofing,

panelling, industrial sheeting, air conditioning ducts and structural applications. GP sheets

are also available in lock forming quality.

ELECTROLYTIC TIN PLATES

TIN PLATE LINE

16

Available in equal and differential coating range from 5.6 gm/m2 to 22.4 gm/m2 coating

weight and a variety of tempers suitable for the manufacture of beautifully printed and plain

containers for packaging of all kinds of products.

ERW PIPES

Available in API and other international specifications and also works tested commercial

qualities fro applications ranging from high pressure crude oil and petroleum products

transportation to water supply systems and also for the tube wells and irrigation purposes.

The ERW pipe plant has high frequency welding system and seam normalizing facility.

ELECTRICAL STEEL

17

The Silicon Steel mill designed for the manufacture of Cold Rolled Non-Oriented and Cold

Rolled Grain Oriented. High Silicon steel sheets are now complete and the products are

being manufactured with the know-how of ARMCO Steel Corporation, U.S.A Electrical

Steels from this new mill are available in the form of full width coils, slit coils, and cut sheets

in coated condition (C4/C3) in case of CRNO and C5 over C2 in case of CRGO.

Available in hot rolled condition as per customer’s requirement and in a range of watt loss

from 4.00 watt/kg to 9.00 watt/kg at 1.5 tesla and 50 HZ. For works specification the

material is tested at 1.0 tesla and watt loss from 1.70 to 5.00 w/kg.

COLD ROLLED COILS/SHEETS

Available in Indian standards or equivalent international specifications for steel furniture,

refrigerator bodies, automobile bodies, drums, barrels and many other applications.

SPECIAL STEELS

18

The broad spectrum of flat and tubular products from RSP has widened perceptively with the

addition of various special quality steels giving it the distinction of a bulk producer of special

purpose steel.

SAIL –MA STEEL

These are specially developed high strength micro-alloyed steel, with a higher strength to

weight ratio as compared to ordinary structural steel. Due to its higher strength combined

with good formability and improved toughness it can be put to use for special design

requirements.

ROUCLAD

Production of rouclad steel is a step forward for import substitution. The clad steel is a

composite of stainless steel and mild steel. These steels are available as single clad plates,

double clad coils.

Hot metal produced at Rourkela.

PROCESS FLOW CHART: ROURKELA STEEL PLANT

19

CORPORATE OBJECTIVES

Business Vision

“To be a respected world-class corporation and the leader in Indian steel business in quality, productivity, profitability and customer satisfaction”. At RSP, the efforts have always been to put the employees first and by involving they create road maps for growth and development. The Mission of the organization was evolved by feeling their collective pulse.

Business Mission

“The future of our steel plant lies in our own hands. It is our individual and collective responsibility to rebuild our plant into a profitable, harmonious and vibrant organization. We will do whatever things are necessary which are good for our plant. We shall never do anything that hurts our plant.”The mission was synergized by distinctive value termed as Samskar, which seeks to motivate and inspire the workforce with the objective of building a harmonious and vibrant organization.

Business Samskar

“We have to create and sustain a peaceful work environment where every employee can contribute to the plant in assigned area of work, with full freedom and dignity and without fear.”

Business Sankalpa

“We the employees of Rourkela Steel Plant have full faith in our unlimited potential and we resolve to sustain our Samskar and commit ourselves to achieving Total Safety, Perfect Quality, Optimum cost and Maximum Productivity. It is our Sankalpa to spread Samridhi in our Steel Plant, Steel Township and in the region.”

Quality Policy

“We the employees of RSP will provide defect-free products and services to our internal and external customers on time, every time through continual improvement of our processes and system.”

21

INTRODUCTION TO THE STUDY

Working Capital:-

The life blood of business, as is evident, signified funds required for day-to-day operations of

the firm. The management of working capital assumes great importance because shortage of

working capital funds is perhaps the biggest possible cause of failure of many business units

in recent times. There it is of great importance on the part of management to pay particular

attention to the planning and control for working capital.

Capital required for a business can be classified under two main categories i.e.

i) Fixed Capital

ii) Working Capital

Fixed Capital – It is to invest in fixed assets like building, plant and machinery which tends

not to vary in the short term, tends only to be volatile when major investment decisions are

made for eg. when assets are purchased or sold.

Working Capital – it refers to that part of the firm’s capital which is required for financing

short term or current assets such as cash, debtors etc. or In the words of Shubin “ Working

capital is the amount of funds necessary to cover the cost of operating the enterprise.”

Every business needs fund for two purposes – for its establishment and to carry out

its day-to-day operations. Working Capital is also known as revolving or circulating capital.

Working Capital is based on two concepts i.e.

A) Balance Sheet concept

B) Operating Cycle or Circular Flow concept

Balance Sheet Concept

There are two interpretations of Working Capital under balance sheet concept i.e.

i) Gross Working Capital – In broad sense, the term working capital refers to gross

working capital. It represents the amount of funds invested in current assets.

ii) Net Working Capital – In narrow sense, the term working capital refers to net

working capital. It is the excess of current assets over current liabilities.

Operating Cycle or Circular Flow Concept

22

The cycle starts with the purchase of raw materials and other resources and ends with the

realization of cash from the sale of finished goods. It involves purchase of raw materials and

stores, its conversion into stock of finished goods through work-in-progress with progressive

increment of labour and service costs, conversion of finished stock into sales, debtors and

receivables and ultimately realization of cash and this cycle continues again from cash to

purchase of raw material and so on. The speed/ time duration required to complete one cycle

determines the requirement of working capital. Longer the period of cycle, larger is the

requirement of working capital.

The net working capital of a firm may be positive or negative. When the total current

assets exceed the current liabilities the working capital is positive and the negative working

capital results when the current liabilities are more than the current assets.

Relevance of the Study Working Capital is a financial metric which represents operating liquidity available

to a business. Working capital is the life blood and nerve centre of a business unit, 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.

Positive working capital is required to ensure that a firm is able to continue its

operations and that it has sufficient funds to satisfy both maturing short term debt and

upcoming operational expenses. The management of working capital involves managing

inventories, accounts receivable and payable and cash.

The main importance or advantages of maintaining adequate amount of working

capital are as follows:

It helps in maintaining solvency of the business.

It helps in maintaining and creating goodwill.

A concern having adequate working capital, high solvency can arrange loans from

banks on easy and favourable terms.

Adequate working capital enables a concern to avail cash discount on the purchases

and hence it reduces cost.

Sufficient working capital ensures regular supply of raw materials.

Company having sufficient working capital can make regular payment of salaries,

wages and other day-to-day commitments.

23

Concerns with adequate working capital can exploit favourable market conditions

such as purchasing its requirements in bulk when the prices are low and by holding its

inventories for higher prices.

Adequate working capital enables a concern to face business crisis in emergencies.

Sufficiency of working capital enables a concern to pay quick and regular dividends

to its investors.

Importance of good working capital management

From a company’s point of view, excess working capital means operating

inefficiencies. Money i.e. tied up in inventory or money that customers still owe to the

company cannot be used to pay off any of the company’s obligations. So if a company is not

operating in the most efficient manner it will show up as an increase in the working capital.

This can be seen by comparing the working capital from one period to another; slow

collection may signal an underlying problem in the company’s operations.

Importance in optimizing working capital management

Poor working capital can lead to –

Over capitalization

Over trading

Over Capitalization - Over capitalization are excessive stocks, debtors and cash, low return

on investment with long term funds tied up in non-earning short term assets.

Over Trading - Over trading leads to escalating debtors and creditors and if unchecked

ultimately to cash starvation

LITERATURE REVIEW

Every business needs investment to procure fixed assets, which remain in use for a

longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’.

Business also needs funds for short-term purposes to finance current operations. Investment

24

in short term assets like cash, inventories, debtors etc., is called ‘Short-term Funds’ or

‘Working Capital’. The ‘Working Capital’ can be categorized, as funds needed for carrying

out day-to-day operations of the business smoothly. The management of the working capital

is equally important as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully

equipped with all types of fixed assets required is bound to collapse without

o adequate supply of raw materials for processing;

o cash to pay for wages, power and other costs;

o creating a stock of finished goods to feed the market demand regularly; and,

o The ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a business. The

business will not be able to carry on day-to-day activities without the availability of adequate

working capital. Working capital cycle involves conversions and rotation of various

constituents.

Components of the working capital. Initially ‘cash’ is converted into raw materials.

Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get

converted into work in process and then into finished goods. When sold on credit, the

finished goods assume the form of debtors who give the business cash on due date. Thus

‘cash’ assumes its original form again at the end of one such working capital cycle but in the

course it passes through various other forms of current assets too. This is how various

components of current assets keep on changing their forms due to value addition. As a result,

they rotate and business operations continue. Thus, the working capital cycle involves

rotation of various constituents of the working capital. While managing the working capital,

two characteristics of current assets should be kept in mind viz. (i) short life span, and (ii)

swift transformation into other form of current asset. Each constituent of current asset has

comparatively very short life span. Investment remains in a particular form of current asset

for a short period. The life span of current assets depends upon the time required in the

activities of procurement; production, sales and collection and degree of synchronization

among them. A very short life span of current assets results into swift transformation into

other form of current assets for a running business.

These characteristics have certain implications:

25

Decision regarding management of the working capital has to be taken frequently and

on a repeat basis.

The various components of the working capital are closely related and

mismanagement of any one component adversely affects the other components too.

The difference between the present value and the book value of profit is not

significant.

The working capital has the following components, which are in several forms of current

assets:

o Stock of Cash

o Stock of Raw Material

o Stock of Finished Goods

o Value of Debtors

WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES:

Funds thus invested in current assets keep revolving fast and are being constantly converted

in to cash and this cash flows out again in exchange for other current assets. Thus it is known

as revolving or circulating capital or short term capital.

Constituents of Current Assets and Current Liabilities

Current Assets

Inventories – Raw materials and components, Work in progress, Finished goods,

other.

Trade Debtors.

Loans and Advances.

Investments.

Cash and Bank balance.

26

Current Liabilities

Sundry Creditors.

Trade Advances.

Borrowings.

Provisions.

Factors Determinants of Working Capital

Nature of business

Market and demand

Technology and manufacturing policy

Credit policy

Supplies’ credit

Operating efficiency

Earning capacity and Dividend policy

Rate of growth of business

OBJECTIVE, SCOPE & PROBLEM IDENTIFICATION

Objectives:

The objective of working capital is to maintain the optimum balance of each of the working

capital components. The need for working capital cannot be over emphasized. The need for

working capital arises due to the time gap between production and realization of cash from

sales. Thus the objectives of working capital are as follows:

i) For the purchase of raw materials, components and spares.

ii) To pay wages and salaries.

iii) To incur day-to-day expenses and overhead costs such as fuel, power and office

expenses etc.

iv) To meet the selling costs as packing, advertising etc.

v) To provide credit facilities to the customers.

27

vi) To maintain the inventories of raw materials, work-in-progress, stores and spares

and finished stock.

vii) To determine the amount of working capital requirement and to calculate various

ratios relating to working capital.

viii) To make an item wise study of the components of the working capital.

ix) To suggest the steps to be taken to increase the efficiency in management of

working capital.

SCOPE OF THE STUDY

Every business concern should have adequate working capital to run its business

operations. It should have neither excess working capital nor shortage of working capital.

Both excess as well as short working capital positions are bad for any business.

A new concern requires a lot of liquid funds to meet initial expenses like

promotion, formation etc. These expenses are called preliminary expenses and are

capitalized. The amount needed as working capital in a new concern depends primarily upon

its size and the ambitions of its promoters. Greater the size of the business unit, generally,

larger will be the requirements of working capital. The amount of working capital needed

goes on increasing with the growth and expansion of business till it attains maturity. At the

time of maturity the amount of working capital needed is called normal working capital.

Management of working capital therefore, 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. In other words it refers to administration of both

current assets and current liabilities. The basic goal of working capital management is to

manage the current assets and current liabilities of a firm in such a way that a satisfactory

level of working capital is maintained, i.e., it is neither inadequate nor excessive. Working

capital management policies of a firm have a greater effect on its profitability, liquidity and

structural health of the organization. Working capital management is three dimensional in

nature:

i) Dimension I is concerned with the formulation of policies with regard to

profitability, risk and liquidity.

ii) Dimension II is concerned with the decisions about the composition and level

of current assets.

28

iii) Dimension III is concerned with the decisions about the composition and level

of current liabilities.

Working Capital Cycle of a Manufacturing Concern

.

29

FINISHED GOODS

WORK-IN-PROCESS

RAW MATERIALS

CASH

DEBTORS

RESEARCH METHODOLOGY

This study is basically done with the collection of data from the secondary sources.

Studies previously made by others for their own purposes represent secondary data.

Secondary data are an integral part of a larger research study or of a research report to justify

having by passed the costs and benefits of doing primary research. Secondary data may be

used as the sole basis for a research study, since in many situations one cannot conduct

primary research because of physical, legal or cost influences. Secondary sources can usually

be found more quickly and cheaply than primary data. Most research on past events also has

to rely on secondary data sources. Similarly, data about distant places often can be collected

more cheaply through secondary sources.

Sources of secondary data which is used for the study are as follows:

Internal sources - These include employees of the company, company’s database,

accounting and management information system (MIS), departmental reports,

production summaries, financial and accounting reports, and marketing and sales

studies.

External sources – These sources are created outside the organization and more varied

than internal sources. These include worldwide network called Internet, Online public

access catalogs (OPAC) and other computerized files, reference books etc.

30

STATEMENT OF WORKING CAPITAL AT RSP

(Rs. In Lakhs)

PARTICULAR 31-3-05 31-03-06 31-03-07 31-3-08 31-3-09

31-3-10BGT

A.CURRENT ASSETS:-

Cash and bank balances

Raw materials

Stores and spares

Finished and semi-finished products

Sundry debtors

Loans & advances

Other current assets

1575

12232

16656

21156

1244

19593

254

1722

12261

20208

39342

1460

21272 247

1879

17456

27867

42433

1296

23094

183

2066

17331

30064

39618

1166

24315

150

2244

22547

37600

62709

1332

25724

141

2200

30612

31000

101552

1918

26067

0

TOTAL C.A. 72710 96512 114208 114718 152297 193349

B.CURRENT LIABILITIES AND PROVISIONS:-

Sundry creditors

Security & other deposits

Others current liabilities

Provisions(Excl. Leave encashment, Gratuity, Medical benefits)

23889

3450

12735

5052

292

2708

16077

4957

29223

3272

15958

8006

30794

3325

19859

32709

33684

4377

22006

59373

36184

8812

20671

53946

TOTAL C.L. 45126 47046 56459 86687 119440 119613

31

NET WORKING CAPITAL (A-B)

27584 49466 57749 28031 32857 73736

NOTES:

Items of capital account have been excluded.

Current liabilities also exclude provision for gratuity, leave encashment, retirement benefits.

Fig-1 Current assets and current liabilities

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Total C.A 72710 96512 114208 114718 152297 193349

Total C.L 45126 47046 56459 86687 119440 119613

Statement change in working capital

(2004-2005 to 2005-2006) Rs. In Lakhs

Particular 2004-2005 Rs.

2005-2006 Rs.

Effect on Working capitalIncrease Rs.

Decrease Rs.

32

Current Assets: Cash and bank balance

Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance

Other Current Assets

Total Current Assets

Current Liabilities:

Sundry Creditor

Security deposits

Other Liabilities

Provision

Total Current Liabilities

Working Capital

1575

12232

16656

21156

1244

19593

254

72710

23889

3450

12735

5052

45126

27584

1722

12261

20208

39342

1460

21272

247

96512

23304

2708

16077

4957

47046

49466

147

29

3552

18186

216

1679

585

742

95

7

3342

33

(C.A-C.L)

Net Increase In Working Capital 21882 21882

49466 49466 25231 25231

Interpretation:1. The liquidity position has not brought a significant change as the there is only 147

lakhs increase in cash position.2. The overall inventory level has improved but much improvement is been noticed in the

case of finished goods as it is nearly doubled.3. Better credit policy lead to increase in debtors’ level.4. Good credit standing position of the firm shows increase in loan amount.5. Sundry creditors and security position has fallen.6. Other liability have increased to 26.24%* WORKING CAPITAL HAS SHOWN AN INCREASE WHICH SHOWS A GOOD SOLVENCY POSITION.

34


(2005-2006 to 2006-2007) Rs. In Lakhs

Particular 2005-2006 Rs.

2006-2007 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


1722

12261

20208

39342

1460

21272

247

96512

23304

2708

16077

4957

47046

1879

17456

27867

42433

1296

23094

183

114208

29223

3272

15958

8006

56459

157

5195

7659

3091

1822

119

164

64

5919

564

3049

35

Working Capital (C.A-C.L)

Net Increase In Working Capital 8283

49466

8283

57749

57749 57749 18043

18043

Interpretation:1. A little increase in the cash position is seen like the previous year.2. Raw materials, stores and spares and finished goods level have increased.3. Other liabilities have shown an increase of about 8.56%4. Sundry creditors have increased due to increase in raw materials and stores and

spare even which shows that the purchase has been more or less on credit.5. Provisions has also increased nearly 61.51%

* WORKING CAPITAL HAS BROUGHT A SMALL RISE.

36


(2006-2007 to 2007-2008) Rs. In Lakhs

Particular 2006-2007

Rs.

2007-2008 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


1879

17456

27867

42433

1296

23094

183

114208

29223

3272

15958

8006

56459

2066

17331

30064

39618

1166

24315

158

114718

30794

3325

19859

32709

86687

187

2197

1221

125

2815

130

25

1571

53

3901

24703

37

Working Capital (C.A-C.L)

Net Decrease In Working Capital 29718

57749 28031

29718

57749 57749

33323 33323

Interpretation:1. There is a gradual rise been observed in the level of cash of about 187 lakh.2. The closing stock of raw material and finished goods of this year is low compared to

last year reveals that this year there is decrease in purchase level of raw materials and healthy sales lead decrease in the level of finished goods.

3. As the sales level has increased the company to promote sales employed better cash discounts and trade discounts which lead to rise in the level of debtors.

4. Loans and advances and other current assets have increased to level of 5.28% and 13.67% respectively.

5. Creditors level rise shows that creditor are offering lucrative offers which is been utilized by the company.

6. Provisions have shown a remarkable rise also the security deposits.

THE RISE IN THE CURRENT LIABILITY AMOUNT WAS HIGHER THAN THE RISE IN CURRENT ASSETS LEVEL, WHICH LEADS TO FALL IN WORKING CAPITAL

38


(2007-2008 to 2008-2009) Rs. In Lakhs


Rs.

2008-2009 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


Working Capital

2066

17331

30064

39618

1166

24315

158

114718

30794

3325

19859

32709

86687

28031

2244

22547

37600

62709

1332

25724

141

152297

33684

4377

22006

59373

119440

32857

178

5216

7536

23091

166

1409

17

2890

1052

2147

26664

39

(C.A-C.L)

Net increase In Working Capital 48264826

32857 32857 37596 37596

Interpretation:-1. There is a little increase seen in the cash position like the previous year.2. The closing stock of raw material and finished goods in this year has increased as

compared to last year.3. Loans and advances and Sundry debtor have increased to level of 5.7% and 14.2%

respectively.4. Sundry creditors have increased due to increase in raw materials which comparhows

that the purchase has been more or less on credit.5. Provisions have shown a remarkable rise also the security deposits.

6. The major contribution towards increase in working capital is due to rise in stock of finished goods.RSP should work on marketing of primary products to clear off the stocks.

THE RISE IN THE CURRENT ASSETS WAS HIGHER THAN THE RISE IN CURRENT LIABILITY LEVEL, WHICH LEADS TO RISE IN WORKING CAPITAL

40


(2008-2009 to 2009-2010) Rs. In Lakhs


Rs.

2009-2010 Rs.


Decrease Rs.


Raw Material

Stores and Spares

Finished products

Sundry Debtors

Loan & Advance




Sundry Creditor

Security deposits

Other Liabilities

Provision


Working Capital

2244

22547

37600

62709

1332

25724

141

152297

33684

4377

22006

59373

119440

32857

2200

30612

31000

101552

1918

26067

0

193349

36184

8812

20671

53946

119613

73736

8065

38843

586

343

1335

5427

44

6600

141

2500

4435

41

(C.A-C.L)

Net increase In Working Capital 4087940879

73736 73736 54599 54599

Interpretation:-1. Cash balance for the present year is expected to fall .

2. Loans and advances and Sundry debtor have increased to level of 1.3% and 43.9% respectively.Rise in debtors shows that company is expecting a rise in sales.

3. Sundry creditors have increased due to increase in raw materials which shows that the purchase has been more or less on credit.

4. Provisions have shown a remarkable rise also the security deposits.

5. Other liab and provision is expected to decrease which will amount to increase in working cpital.

THE RISE IN THE CURRENT ASSETS WAS HIGHER THAN THE RISE IN CURRENT LIABILITY LEVEL, WHICH LEADS TO INCREASE IN WORKING CAPITAL

COMPARATIVE FINANCIAL RATIOS:

( Rs. In crores)

PARTICULARS AS ON

31.3.05

AS ON

31.3.06

AS ON

31.3.07

AS ON

31.3.08

AS ON

31.3.09

AS ON

31.3.10

(BGT)

42

Sales to Gross Block (%)

Net sales Realisation to Gross sales (%)

Stock of Semi/finished Products to

Turnover (%)

Stock of Semi/Finished products in

number of months’ sales

Net profit to Gross Block (%)

Net profit to Turnover (%)

Net profit to Capital Employed (%)

Current Assets to Current Liabilities

(excl.prov.)

Quick Assets to Current Liabilities

Working Capital to Cost of Sales

Working Capital to Net Block

Working Capital to Turnover

Labour cost to turnover

Cost of Sales to Turnover (%)

Inventories (Opn.) to value of

Production

78.03

86.97

4.47

0.54

17.23

22.08

29.76

1.54

0.45

0.09

0.09

0.06

0.13

64.89

0.12

73.52

0.26

73.50

82.68

8.49

1.03

7.88

10.72

13.37

1.93

0.47

0.15

0.15

0.11

0.13

71.97

0.18

86.86

0.32

101.18

84.54

6.64

0.08

21.14

20.90

37.58

2.05

0.45

0.14

0.19

0.09

0.12

63.64

0.16

75.18

0.20

113.27

84.73

5.36

0.65

21.49

18.98

44.27

1.71

0.39

0.06

0.10

0.04

0.15

65.75

0.14

76.78

0.16

115.22

87.37

8.10

0.99

15.05

13.06

32.04

1.76

0.32

0.06

0.12

0.04

0.16

74.20

0.13

84.13

0.17

88.82

90.88

14.55

1.75

5.11

5.75

9.23

1.15

.34

.12

.20

.11

.16

85.12

.26

93.66

.27

43

Cost of Production to Value of

Production (%)

Sundry Debtors to Turnover (%)

Gross profit to Capital Employed (%)

Gross Profit to Turnover (%)

Stock of Raw Materials in terms of No.

of months, consumption

Stock of stores & spares in terms of no.

of months, consumption

Stock of Finished /Semi finished

products to cost of sales (%)

42.03

31.57

1.15

6.68

6.89

24.45

19.80

0.88

6.54

11.80

46.63

26.17

0.98

8.12

10.43

56.40

24.38

0.90

7.47

8.16

44.63

18.48

0.87

9.19

10.92

20.67

12.89

1.13

8.29

17.10

NOTES:

1. Quick assets represent total current assets excluding inventories and sundry debtor.

2. Provisions have been excluded from current liabilities for calculation of quick ratio.

3. Cost of sales means net sales realization less net profit plus net loss4. Cost of production is net expenses less CMO, HO share, freight, excise duty other

revenue and stock accretion/secretion.

44

LIMITATIONS OF WORKING CAPITAL

Every business concern should have adequate working capital to run its business

operations. It should have neither redundant or excess working capital nor inadequate nor

shortage of working capital. However, out of the two, it is the inadequacy of working capital

which is more dangerous from the point of view of the firm.

Disadvantages of Redundant or Excessive Working Capital

Excessive Working Capital means idle funds which earn no profits for the business

and hence the business cannot earn a proper rate of return on its investments.

It may lead to unnecessary purchasing and accumulation of inventories causing more

chances of theft, waste and losses.

It implies excessive debtors and defective credit policy which may cause higher

incidence of bad debts.

It may result into overall inefficiency in the organization.

When there is excessive working capital, relations with banks and other financial

institutions may not be maintained.

Due to low rate of return on investments, the value of shares may also fall.

It gives rise to speculative transactions.

Disadvantages of Inadequate Working Capital

A concern having inadequate working capital cannot pay its short-term liabilities in

time. Thus it will lose its reputation and shall not be able to get good credit facilities.

It cannot buy its requirements in bulk and cannot avail of discounts, etc.

It becomes difficult for the firm to exploit favorable market conditions.

The firm cannot pay day-to-day expenses of its operations, which increases costs and

reduces the profits of the business.

It becomes impossible to utilize efficiently the fixed assets due to non-availability of

liquid funds.

The rate of return on investments also falls with the shortage of working capital.

45

RECOMMENDATION & SUGGESTIONS

The recommendation and suggestions for effective management of working capital at RSP

are given below:

RSP should set planning standards for stock days, debtor & creditor days.

Install an understanding amongst the staff that working capital management produces

profit.

Inventory management is a great concern for RSP especially stores and spares. The

purchases manager must take certain steps for proper procurement of inventories.

Keep stock levels as low as possible, consistent without not running out of stocks and

not ordering stock in uneconomically small quantities. Just-in-stock management is

fine, as long as it is JIT and never fails to deliver on time.

Short-term credit period availed must be reduced and sundry creditors should be paid

faster.

Proper planning of production should be made and communicated to all the concerned

departments so as to determine the exact need of materials and prevent unnecessary

blockage of useless materials.

Reassess all significant customers periodically. Stop supplying existing customers

who are poor payers. After all RSP is for quality of business rather than quantity of

business.

Plant should be given freedom in deciding the credit policies, cash discount or credit

rating.

46

CONCLUSION

RSP has not only addressed itself to the country’s need for self sufficiency in Steel,

but has also given the country, the technology edge in producing strategic material. Besides

being the leader in the domestic primary steel market excluding the semi-finished products,

RSPhas also earned a good name in the domestic market in manufacture of crude steel . With

its consistent track record in capacity utilization, technology absorption, quality assurance

export performance, servicing of loans, internal source generation and posting of profits, RSP

has chartered a course of confidence among its stake holders.

RSP is a well known public sector unit in the Steel sector in India. It shows how a

well managed company achieves the mission of the company and gives much more profit.

Just as circulation of blood is essential in human body for maintaining life like that working

capital is also an important aspect and can be a main contributor to a company’s profit if

managed efficiently.

47

BIBLIOGRAPHY

1. Audited Annual Reports of RSP for the year , 2004,

2005, 2006 and 2007, 2008,2009.

2. BOOKS:

a) Financial Management – I.M.Pandey

b) Management Accounting – R.K.Sharma & S.K.Gupta

c) Financial Management – P.C.Chandra

d) Working Capital Management – V.K.Bhalla

3. WEBSITES:

a) www.google.com

b) www.sail.co.in

48

http://www.google.com/

A

0

20000

40000

60000

80000

100000

120000

Rs in Lakhs

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

Total C.A

Total C.L


0

10000

20000

30000

40000

50000

60000

Rs. in Lakhs

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Year

Net W.C

Net W.C

49

a report

Documents

working capital of rsp

inventories management

receivable management

receivables management

production of steel

company guide

steel users

project goal