working capiatal management-durgapur steel plant

TURNOVER IS VANITY, PROFIT IS SANITY BUT CASH IS KING

“A COMPARATIVE STUDY ON WORKING CAPITAL MANAGEMENT

WITH SPECIAL REFERENCE TO DURGAPUR STEEL PLANT”

Submitted by Rudranil Bag ROLL NO A-08-38, 2nd SEMESTER

GRADUATE SCHOOL OF BUSINESS AND ADMINISTRATION GREATER NOIDA,NATIONAL CAPITAL REGION

SAIL, Durgapur Steel Plant

CONTENTS

TOPICS

ACKNOWLEDGEMENT

EXECUTIVE SUMMARY

OBJECTIVE OF THE STUDY

METHODOLOGY

INDIAN STEEL INDUSTRY-A RETROSPECT

AN OVERVIEW OF STEEL AUTHORITY OF INDIA LTD.

DURGAPUR STEEL PLANT-A PROFILE OF THE COMPANY

WORKING CAPITAL MANAGEMENT- AN OVERVIEW

COMPARATIVE ANALYISIS OF WORKING CAPITAL

MAJOR FINDINGS

SHORTCOMINGS AND CONCLUSION

RECOMMENDATIONS

BIBLIOGRAPHY


ACKNOWLEDGEMENT

It was delightful learning experience to be associated with STEEL AUTHORITY OF INDIA LIMITED. The six weeks spent at DURGAPUR STEEL PLANT, one of the integrated production units of STEEL AUTHORITY OF INDIA LIMITED, taught me many things which will be with me throughout my life.

It is with greatest pleasure and pride that I present this report before you. At this moment of triumph it would be unfair to neglect all those who helped me in the successful completion of this project.

First of all, I would like to thank the Dean of Graduate School of Business And Administration Prof. V. N. Rai and my faculty guide Prof.Rashid Khan for the help and guidance rendered for the completion of the project.

It is beyond words to express our immense gratitude to our project guide Mr. S.K. Nayak, Assistant general manager (finance and accounts) for the guidance and inspiration throughout this work. I am also very much thankful to senior managers of all the divisions of finance department for their co-operation while I visited their respective divisions.

Last but not the least I thank my family members for their encouragement and support.

RUDRANIL BAG

(Roll No. A-08-38)


EXECUTIVE SUMMARY

LPG or Liberalization, Privatization and Globalization as it is referred in short today have changed the scenario of corporate world and management of enterprises in our country. It has now become more important to not just manage an organization but to achieve corporate excellence simultaneously as the future belongs to learning and performing organizations.As every business concern irrespective of its size, nature, and age needs funds to carry out business operations such as purchase of raw materials, payment of wages and other day-to-day expenses, working capital becomes an important and integral part of business. Working capital is the life blood and nerve centre of a business because no business can run successfully without an adequate amount of it. Therefore, to manage working capital in any sector is a challenging job. The project report titled “A Comparative Study on Working Capital Management with special reference to Durgapur Steel Plant” deals with this matter and is based on the in-house industrial training at Durgapur Steel Plant, pertaining to the requirement for the Diploma of PGDM from “Graduate School of Business And Administration.” Unless organization learn to manage its working capital, success, will be elusive. Thus, the effectiveness of an organization depends on the strength of its working capital management as it is core to the whole system. In the context of India’s Steel Industry working capital management holds a greater significance because steel which forms the backbone of any infrastructural facility, in recent years has become more crucial for achieving rapid economic growth of our country.Keeping this background in view, an attempt is made to examine the working capital practices in SAIL with special reference to Durgapur Steel Plant. The project contain the basic postulates of working capital, procedures for the analysis of working capital, ratios being used to define the working capital and


the impact of shortcomings in the management of it . All this had been done to get a clear view of the techniques of working capital management in Durgapur Steel Plant.

OBJECTIVES OF THE STUDY

BROAD OBJECTIVES:

To find out the efficiency of working capital management in Durgapur Steel Plant and selected other major plants of Steel Authority of India.

To have a first hand experience of the functioning of a large PSU Steel Plant.

To have a practical experience of the functioning of the Finance Department of a steel producing company.

To study how working capital management practices plays an important role in supporting other activities of an integrated steel plant.

SPECIFIC OBJECTIVES:

To gain familiarity with the various components of working capital in Durgapur Steel Plant.

To judge the success of the management in carrying on the daily transactions of the company.

To gain an in-depth knowledge of the tricks of managing the daily financial activities of DSP.

To find out the difference between the theoretical and practical aspect of working capital management.

To study and come out with any solution for improvement of working capital management at Durgapur Steel Plant.


METHODOLOGY

The data which I have collected for making this project is combination of both primary and secondary data.

PRIMARY DATA:This data had been collected through meetings and interviews with various managers and employees of the finance department located in the administrative building (ISPAT BHAWAN) of Durgapur Steel Plant. At the same time I had visited various departments for collection of data. The departments that had been visited are as follows:-

Main Cash Department Billing and Operation Department Budget Department Pay Section Excise Department. Welfare & Miscellaneous Bill Section Sales Department Project Management Department

SECONDARY DATA:Apart from the primary data certain secondary data were required for this project. Following are the sources of secondary data:-

Annual Reports Cost & Budget Reports Creditors Reports Debtors Reports Inventory Reports Cash Report Raw Materials Report Production Reports Sales Reports


The project report titled “A Comparative Study on Working Capital Management with special reference to Durgapur Steel Plant” required a comparative analysis of working capital patterns followed in various steel plants of SAIL. The following integrated steel plants of SAIL have been considered for comparative analysis of their working capital:-

Durgapur Steel Plant(DSP)

Bhilai Steel Plant(BSP)

Rourkela Steel Plant(RSP)

Bokaro Steel Plant(BSL)This study will assist to evaluate the efficiency of working capital management practices in these plants and Durgapur Steel Plant in particular. This in-depth analysis will help the management of the companies to reduce the unnecessary blockage of funds and make the best possible use of the available funds. Here in this study, working capitals of the four plants have been calculated sequentially and an effort has been made to indentify the trend of working capital in the past four years by analyzing the components of working capital. In addition to this, certain ratios have been derived to give a better picture of the efficiency of the management in dealing with working capital in these plants. The analysis of plants other than Durgapur Steel Plant is based only on financial data provided by balance sheet. But working capital analysis also needs some non-financial details. So this in-depth analysis is confined to Durgapur Steel Plant only. Data of four consecutive years starting from the year 2004-05 of the above steel plants have been included for comparative study. Financial figures of the year 2008-09 have not been taken for study because it is under audit and not available for use.


INDIAN STEEL INDUSTRY-A RETROSPECT

India’s modern iron and steel industry dates back to the first decade of the present century. The Tata Iron and Steel Company Ltd (TISCO) was registered in and production at Jamshedpur commenced in 1911-12.In the years after independence in 1947, the prerogative for the development of the steel industry, however, came to be vested in the Indian State. Indian industry, as discussed earlier had grown in a highly protected and controlled environment with massive tariffs, administrative control over prices, distribution and imports. The centralized planning process allocated resources for the steel industry. However both TISCO and Hindustan Steel Ltd (HSL) the precursor of SAIL did well till the end of 1960s. The Indian Steel industry retained a clear and substantive manufacturing cost competitive advantage with respect to overseas producers, the paramount of state and its apparatus notwithstanding in policy and operational matters. It is also a matter of record that despite state leadership or perhaps because of it ,the Indian steel industry over two decades since the late 1960s steadily lost cost comparative advantage in the world market. It emerged by international standards as a relatively high cost and inefficient industry. Also, the steel consumption in Indian economy was about 5kg in 1950 which increased to a meager 26.2kg in 1991-92, after our four decades of planned growth. Thus in retrospect all early projections during the planning years appeared to have been excessively optimistic. By 1991, the level of apparent steel consumption in India had reached only 15.85MT (Million Tonnes) of finished steel or 20.3MT (Million Tonnes) of crude steel.In this context, it may be correct to conclude that the early planners were seriously wrong in their assessment of India’s ability to industrialize or it may have been the governments’ inability to translate earlier plans. The principle cause for failure was its inability to mobilize necessary resources for public investment. In addition the oil shocks of the 1970s also aggravated the


situation. All these factors along with administered pricing followed a conventional cost plus approach, cushioning the producers from the consequences of their relative inefficiency. These factors contributed to sustenance of the rising trend in domestic cost and price of Indian steel leading to the inability of the industry to meet international standards, not only in terms of product quality, but also of packaging and customer service. All these factors ultimately contributed to the tapering of growth, in the levels of steel consumption as well as manufacturing capacities in India.However, the actual ability of the economy to absorb steel depends on the public policy regarding the rates and strategy of investment and overall pace of development. In fact, the new economic reforms initiated by the government in 1991-92 and the policies attending them argue that the Indian state should in principle largely withdraw from investment and production activities.The domestic as well as global market forces should thereafter guide the production and pattern of investment in the economy. This is necessary in the interest of industry for cost competitiveness and efficient growth of the economy. Here it may be worth mentioning that the same steel industry that was stagnating in the early nineties saw a phenomenal growth in the succeeding years, when the economic reforms were introduced by government of India. With this, companies took a more pro-active step to consolidate their positions in the India as well as global markets. And finally the industry took the challenge head along and looked forward to global markets for future strategies. The result of all this is clearly in front of us ,with companies like SAIL marching again on the road of profitability and productivity and Tata Steel acquiring global steel majors like Corus steel to highlight this consolidation process in recent times.India is the world's fifth largest producer of steel which produces 50 MT of crude steel and 52 MT of finished steel. It is believed that by 2016, India is going to be the second largest producer of steel and its production is going to be around 137 MT.


AN OVERVIEW OF STEEL AUTHORITY OF INDIA LTD.

AN INTRODUCTION:Steel Authority of India Limited (SAIL) is one of the leading Steel manufacturing companies in India. It is fully integrated iron and steel maker, producing both basic and special steel for domestic consumption, engineering, power, railway, automotive and defense industries and for sale in export market.Ranked in top ten public sector companies in India in terms of turnover, SAIL manufactures a broad range of steel products, including hot and cold rolled sheets and coils, galvanized sheets, electrical sheets, railway products, structural, plates, bars and rods, stainless steel and other alloy steel. SAIL produces iron and steel at five integrated plants, and three special steel plants, located principally in eastern and central region of India and situated close to domestic sources of raw material, including the company’s iron ore, limestone and dolomite mines. The company has distinction of being India’s largest producer of iron ore and of having the country’s second largest mines network. This gives SAIL a competitive edge in term of captive availability of iron ore, dolomite, and limestone which are major inputs for steel making.SAIL’s wide range of long and flat steel products is much in demand in domestic as well as International market. This vital responsibility is carried out by SAIL’s own Central Marketing Organization (CMO) and the International Trade Division. CMO encompasses a wide network of 34 branch offices and 54 stockyards located in major cities and towns throughout India.With technical and managerial expertise and know-how in steel making gained over four decades, SAIL’s Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide.SAIL has a well equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel Industry. Besides SAIL has its own in house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and safety Organization at Ranchi. Its captive mines are under the control of the Raw Material Division in Kolkata. The Environment Management Division


and Growth Division of SAIL operate from their head Office in Kolkata. Besides SAIL has a capacity for 700MW of captive power generation. The steel plants of SAIL also produce fertilizers and chemicals.

A BRIEF HISTORY OF SAIL:SAIL was established as a holding company at New Delhi on 24thJanuary 1973 with authorized share capital of Rs.2000 crores. This holding company was formed with four public sector steel plants and the input industries in iron ore, coking coal and scrap. The companies were Hindustan Steel Ltd, Hindustan Steelworks Construction Ltd, Bokaro steel Limited, Salem Steel Ltd, Bharat Coking Coal Ltd, National Mineral Development Corporation. The shares of these companies were held by the President of India and were transferred in March 1973 to SAIL. The paid up capital as on 31st March 1974 was Rs.1326 crores.It was converted into a into a unitary company in 1978 and is now responsible for the management of the five integrated steel plants at Bhilai in Chattisgarh, Bokaro in Jharkhand, Durgapur and Burnpur in West Bengal and Rourkela in Orissa. It is also responsible for the management of four alloy steel plants at Salem in Tamil Nadu, Durgapur in West Bengal, Bhadravati in Karnataka and Chandrapur in Maharastra.

VISION OF SAIL:The vision of SAIL is to achieve market leadership and prosper in business through satisfaction of customer needs by continual improvement in quality, cost, delivery of products and services.

OBJECTIVES OF SAIL: To help in rapid economic growth and industrialization of the country. To create the necessary infrastructure for economic development. To generate different employment avenues in the country. To promote balanced regional development. To assist the development of small scale and ancillary industries.


DURGAPUR STEEL PLANT-A PROFILE OF THE COMPANY

Durgapur Steel Plant was set up in the late 50s with an initial annual capacity of one million tonnes of ingot steel, which was subsequently expanded to 1.6 million tonnes per year. The Colombo Plan mission headed by Sir Geric Coates visited India in 1955 and

recommended Durgapur as the choice for setting up the integrated steel plant, to be built with British Collaboration. The location was considered highly desirable because of its proximity to nearby Coal-mines, Grand Trunk Road, Railways lines connecting Calcutta and New Delhi, Calcutta port, power from Damodar Valley Corporation (DVC) and water from Durgapur Barrage. The first Chief Minister of West Bengal Dr B.C.Roy along with India’s first Prime Minister Pandit Jawaharlal Nehru had played a great role in establishing this plant.Durgapur Steel Plant was the third integrated steel plant of the then Hindustan Steel Limited, the predecessor of today’s Steel Authority of India (SAIL) under the public sector in India. The first two were Rourkela Steel Plant at Rourkela in Orissa and Bhilai Steel Plant at Bhilai in Madhya Pradesh and today Chattisgarh in that order. Hindustan Steel Limited was later merged into Steel Authority of India Limited. Durgapur Steel Plant was incorporated into SAIL on 1st May 1978.It produced its first Steel ingot on 25th April 1960


TECHNOLOGICAL STATUS OF DURGAPUR STEEL PLANT:The Modernized DSP now has state-of-the-art technology for quality steel making. The modernized units have brought about improved productivity, substantial improvement in energy conservation and better quality products. DSP’S steel making complex and the entire mills zone, comprising its blooming and billet mill, merchant mill, skelp mill, section mill and axle plant, are covered under ISI :9002 Quality Assurance Certification.

PRODUCTION ACTIVITY OF THE COMPANY: DSP has seven departments and all the departments are making finished goods individually. The departments and products are shown in the table:-SL NO. DEPARTMENT PRODUCT

1 Wheel & Axle Plant Wheels, Axle and Wheel sets

2 Skelp Mills Skelps and Strips

3 Blooming & Billet Mills Blooms, Billets and Slabs

4 Merchant Mills Plain rounds and TMT Bars

5 Section Mills Angles, Channels and Joists

6 Continuous casting plant Billets

7 Blast Furnace Pig Iron


WORKING CAPITAL MANAGEMENT-AN OVERVIEW

INTRODUCTION:

Working capital means the funds which are required to meet the daily transactions of the business .In other words it refers to that part of the firm’s capital which is required for financing current assets such as cash, marketable securities, debtors and inventories. Thus working capital is very significant facet of financial management. Every business concern should have adequate working capital to run its operations smoothly. It should have neither excess working capital nor inadequate working capital because both of these have adverse effects on firm’s profitability and liquidity positions. Therefore, business concerns should maintain adequate working capital. The basic objective of working capital is to manage the firm’s current assets and current liabilities in such a way that that a satisfactory level of working capital is maintained. Working capital policies have a great effect on a firm’s liquidity and profitability. Therefore, the working capital should be managed in such a way which will ensure higher profitability and proper liquidity to the business concern.The significance of working capital management is to ensure that the organization maintains a ‘good fit’ with the changing environment and strives to build the capability to cope with challenges.


CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital: Balance sheet concept or traditional concept. Operating cycle concept.

BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT

It shows the position of the firm at a certain point of time. It is calculated on the basis of balance sheet prepared at a specific date. In this method there are two types of working capital.

Gross working capital

Net working capital

GROSS WORKING CAPITAL It refers to a firm’s investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current is quantitative aspect of working capital which emphasizes more on quantity than on its quality, but it fails to reveal the true picture of the financial position of the business because every increase in current liabilities will decrease the gross working capital.

NET WORKING CAPITALIt is difference between the current assets and current liabilities or the excess of total current assets over total current liabilities. It can also be defined as that part of a firm’s current asset which is financed with long term funds. It may be either negative or positive. When the current assets exceed the current liabilities, the working capital is positive and vice-versa.


OPERATING CYCYE CONCEPT

The duration or time required to complete the sequence of events right from the purchase of raw materials for cash to the realization of sales in cash is called operating cycle or working capital cycle. The operating cycle consists of three phases: In phase 1, cash gets converted into inventory. This would include purchase of raw materials, conversion of raw materials into work-in-progress, finished goods and terminate in the transfer of goods to stock at the end of the manufacturing process. In the case of trading organization, this phase would be shorter as there would be no manufacturing activity and cash will be converted into inventory directly. The phase will, of course, be totally absent in case of service organizations.In phase 2 of the cycle, the inventory is converted into receivables as credit sales are made to customers. Firms which do not sell on credit will obviously not have phase 2 of the operating cycle.The last phase, phase 3, represents the stage when receivables are collected. This phase completes the operating cycle. Thus, the firm has moved from cash to inventory, to receivables and to cash again.


FIXED/PERMANENT WORKING CAPITALTo carry on business, a certain level of working capital is necessary on a continuous and uninterrupted basis, for all practical purpose, the requirement has to be met as with other fixed assets. Permanent working capital represents the minimum level of raw materials, work-in-progress, finished goods, stores, accounts receivables and cash which are in circulation to ensure continuity of production. Permanent working capital is again divided into two parts: regular working capital and reserve working capital. The portion of fixed working capital which is utilized to carry out the cyclical operation of current assets in the form of conversion of liquid cash into raw materials, raw materials into finished goods, finished goods into debtors and debtors into liquid cash in a continuous manner is known as regular working capital. On the other hand, the portion of fixed working capital, which is preserved for meeting uncertain and emergent working needs (like sudden price hike, abnormal scarcity in times of war, natural calamity, etc) is known as reserve working capital.

VARIABLE/TEMPORARY WORKING CAPITAL


Besides fixed working capital, a business may need additional working capital to meet the growing demands of busy seasons at stated intervals. If the demand for the products of the business goes up at any time it needs additional funds to pay for more materials, labour and other expenses and to meet the requirement of cash balance to be maintained in the changed situation. This additional working capital needed to feed the operating cycle in busy business periods is known as variable or temporary working capital. It is called variable or temporary because the business does not need it always but it is required according to the need of the situation.Generally the importance of variable working capital is more acute in business concern having seasonal market demands. Variable or temporary working capital may be further sub- divided into (a) seasonal working capital and (b) special working capital. The additional working capital required by a concern to carry out its operating activities in busy seasons of high market demands is known as seasonal working capital. Businesses which mostly have seasonal demands of their products like ice- cream, cold drinks, wool and likely products manufacturing concern may need huge amount of seasonal working capital. In other business concerns too the market may rise to the peak in some particular time period. So in all types of business a portion of working capital may be preserved for meeting seasonal needs. On the other hand, the portion of working capital that is needed by a concern to meet the extraordinary requirements of special situations is known as special working capital. This is called special working capital because it is needed in special situations and not in normal circumstances.


Diagrammatic representation of the concept of working capital

IMPORTANCE OF WORKING CAPITAL

The adequate reserve of working capital ensures a steady flow of raw materials to the production process.

The adequate reserve of working capital indicates the good solvency position of the concern and helps it to get loan from the market at favorable terms.

The adequate stock of working capital makes it possible for a concern to purchase the trading goods in cash and cash purchase always carries the benefit of getting cash discount.

A strong working capital base is probably the only remedy to overcome the odd situations like dull market conditions, scarcity of raw materials and other components in case of any emergency, sudden market fluctuations, etc.


A business concern can exploit the market opportunities with the help of adequate working capital.

The regular flow of adequate working capital makes possible efficient use of fixed assets, reduces wastage, ensures quick replying of current assets, and establish a well- tuned working environment.

A quick rotation of working capital cycle and an efficient management of working capital reduce cost and increases production and sales. The combined effect of all these favorably add to the profitability of the

concern. The adequate amount of working capital and its quick rotation increases

profit. The rate of dividend of the shareholders also increases as a result of such increase in profit.

Sufficient working capital helps in research and development to face the present era of cut throat competition and quick technological advancement.

DETERMINANTS OF WORKING CAPITAL

The total working capital requirement is determined by a wide variety of factors. It should be, however, noted that these factors affect different enterprises differently. They also vary from time to time. In general, the following factors are involved in a proper assessment of the quantum of working capital required:-GENERAL NATURE OF BUSINESS : The working capital requirements of an enterprise are basically related to the conduct of the business. According to the nature of business they have to maintain a sufficient amount of cash, inventories and book debts. The industrial concerns require fairly large amounts of working capital though it varies from industry to industry depending on their assets structure.


PRODUCTION CYCLE:Another factor which has a bearing on the quantum of working capital is the production cycle. The term “production or manufacturing cycle” refers to the time involved in the manufacture of goods. It covers the time-span between the procurement of raw materials and the completion of the manufacturing process leading to the production of finished goods. To sustain such activities the need of working capital is obvious.BUSINESS CYCLE:The working capital requirements are also determined by the nature of the business cycle. The variations in business conditions may be in two directions: (i) upward phase when boom conditions prevail, and (ii) downward phase when economic activity is marked by a decline. During the upswing of the business activity the need of working capital is more as opposed to the downward phase of the business.PRODUCTION POLICY: The requirement of working capital also depends on the production policy of the firm. In manufacturing concerns having mostly seasonal demand for the product the production policy is a significant determinant of working capital.

CHANGES IN PRICE LEVEL:General increase in price level increases working capital need of a firm because the firm has to pay more for maintaining the previous level on working capitalGROWTH AND EXPANTION:As a company grows, it is logical to expect that a larger amount of working capital will be required. The critical fact is however, is that the need for increased working capital funds does not follow the growth in business activities but precedes it.AVAILABILITY OF RAW MATERIALS: In case raw materials are easily available on soft terms the firm does not require maintaining a huge inventory of raw materials. Such a firm does not require blocking up huge amount of working capital for this purpose. On the


contrary if raw materials are scarce and its supply is irregular and seasonal in nature the firm needs to store a reasonable quantity of raw materials in hand. The working capital need of such a firm is significantly high.DIVIDEND POLICY:The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital will increase.DEPRECIATION POLICY:Depreciation policy also exerts an influence on the quantum of working capital. Depreciation charges do not involve any cash outflow. The effect of depreciation policy on working capital is, therefore indirect.At DSP depreciation is provided on straight line method at the rates specified in schedule- XIV to the companies act, 1956. However where the historical cost of the depreciable asset undergoes a change, the depreciation on the revised amortized depreciable amount is provided prospectively over the residual useful life of the asset based on the rates specified in schedule- XIV to the companies act, 1956. Depreciation on assets installed/ disposed off during the year is provided with respect to the month of addition/ disposal thereof.

STRUCTURE OF WORKING CAPITAL

The structure of working capital includes a study of the components of current assets and current liabilities.

CURRENT ASSETS:The list of current assets comprises inventories (including raw materials, work-in-progress and finished goods and spares), sundry debtors including receivables, readily realizable securities and tax reserve certificates, short-term investments, accrued incomes, prepaid expenses (not in the nature of deferred charge), cash at bank, and cash in hand.In Durgapur Steel Plant current assets are:


Inventories (stores & spares, raw materials, semi-finished products) Sundry debtors Cash & bank balances Interest receivable/accrued Loans & advances etc.

CURRENT LIABILITIES:The list of liabilities includes trade creditors, accounts payable, outstanding or accrued expenses, bank overdraft, outstanding liabilities, short-term loans and borrowings and certain obligations including different provisions, i.e., provision for taxation, proposed dividend etc. In Durgapur Steel Plant current liabilities are:

Sundry creditors Advances from customers Security deposit Other liabilities etc.

FACTORS TO BE CONSIDERED WHILE ESTIMATING WORKING CAPITAL REQUIREMENT

Total costs incurred on materials, wages and overheads. The length of time for which raw materials remain in stores before they

are issued to production. The length of the production cycle or work-in-progress, i.e., the time

taken for conversion of raw materials into finished goods. The length of the Sales Cycle during which finished goods are to be kept

waiting for sales. The average period of credit allowed to customers.


The amount of cash required to pay day-to-day expenses of the business.

The amount of cash required for advance payments if any. The average period of credit to be allowed by suppliers. Time-lag in the payment of wages and other overheads.

SOURCE OF WORKING CAPITAL FOR DURGAPUR STEEL PLANT

The allocated amount by the registered office of SAIL in New Delhi gets transferred into the cash credit account of Durgapur Steel Plant in State Bank of India, Durgapur. This cash credit account is the source of working capital for DSP. The plant uses this amount to meet its daily expenditure. At the end of the day the balance of this account is transferred back into account of SAIL, New Delhi. This practice is done on a daily basis.

IMPORTANCE OF WORKING CAPITAL RATIOS

Ratio analysis can be used by financial executives to check upon the efficiency with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of the working capital. The following, easily calculated, ratios are important measures of working capital utilization.

RATIOS Formulae Result Interpretation

Current Ratio Total Current =X It is the relationship between the


Assets/Total Current Liabilities

times amount of current assets and the amount of current liabilities. It measures the short-term liquidity position of the firm.

Acid-Test Ratio Total Current Assets-Inventories/

Total Current Liabilities

=X times

Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital Turnover Ratio

Sales/Working Capital

=X times

A Higher Working Capital Ratio means lower investment in working capital and better profitability.

Stock Turnover Ratio(in days)

Sales/Inventory =X days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.

Current Assets Turnover Ratio

Sales/Current Assets

=X times

It reflects the efficiency in generating sales by Current assets.

COMPARATIVE ANALYSIS OF WORKING CAPITAL

CALULATION OF WORKING CAPITAL FOR DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08

CURRENT ASSETS:

INVENTORIES 473.07 539.23 691.51 761.97


SUNDRY DEBTORS 39.09 8.78 10.88 17.43

CASH & BANK 11.36 12.28 13.58 15.64

INTEREST RECEVIABLE 1.46 1.07 0.74 0.57

LOANS & ADVANCES 56.34 77.73 91.54 119.34

TOTAL CURRENT ASSETS 581.32 639.09 808.25 914.95

CURRENT LIABILITIES:CURRENT LIABILITIES 323.36 298.76 358.46 402.99PROVISIONS 27.41 24.65 27.75 24.97

TOTAL CURRENT LIABILITIES 350.77 323.41 386.21 427.96NET WORKING CAPITAL 230.55 315.68 422.04 486.99

CHART SHOWING WC OF DSP:

CALCULATION OF WORKING CAPITAL FOR BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08CURRENT ASSETS:INVENTORIES 1041.68 1505.76 1556.66 1712.9


SUNDRY DEBTORS 19.48 20.53 18.82 13.7CASH & BANK 22.35 33.81 36.8 39.86INTEREST RECEVIABLE 18.89 16.55 13.86 12.6LOANS & ADVANCES 194.82 218.44 325.12 480.72




CHART SHOWING WC OF BSP:

CALCULATION OF WORKING CAPITAL FOR ROURKELA STEEL PLANT

(In crores)



SUNDRY DEBTORS 12.44 14.6 12.96 11.66CASH & BANK 15.75 17.22 18.79 20.66INTEREST RECEVIABLE 2.54 2.47 1.83 1.58LOANS & ADVANCES 195.93 212.72 230.94 243.15




CHART SHOWING WC OF RSP:

CALCULATION OF WORKING CAPITAL FOR BOKARO STEEL

(In crores)



SUNDRY DEBTORS 11.13 12.51 8.95 7.74CASH & BANK 35.77 37.9 41.08 44INTEREST RECEVIABLE 23.14 18.96 14.02 10.95LOANS & ADVANCES 255.87 391.18 390.9 587.45




CHART SHOWING WC OF BSL:

ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL

INVENTORY ANALYSIS:

Inventory in SAIL is composed of the following three things:


Raw Materials Stores and Spares Finished and Semi-finished products

POSITION OF RAW MATERIALS IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08RAW MATERIALS CONSUMED 1462.15 1532.41 1668.75 1856.61RAW MATERIALS INVENTORY 79.83 126.18 123.41 74.67DAILY CONSUMPTION* 4 4.17 4.57 5.07 HOLDIND PERIOD(in days)* 20 30 27 15

ANALYSIS THROUGH CHART:

*Daily consumption=Raw materials consumed/No. of days in a year *Holding period=Raw materials inventory/ Daily consumption

INTERPRETATION:The holding period shows an uneven trend. The holding period in 2005-06 went up by 50% even though there was an increase in consumption. From the year 2006-07 the holding period came down significantly primarily due to the


increase in consumption. This is a good sign for the plant as it means lesser amount of funds blocked. It reflects the initiatives of the management in reducing the holding period. The year 2007-08 has been the best in terms of holding period where the consumption is maximum among the four years and the holding period is the least.

POSITION OF RAW MATERIALS IN BHILAI STEEL PLANT

(In crores)


YEAR 2004-05 2005-06 2006-07 2007-08

RAW MATERIALS CONSUMED 3085.07 4214.3 4302.72 4718.58RAW MATERIALS INVENTORY 324.23 353.99 342.95 284.73DAILY CONSUMPTION* 8.45 11.55 11.79 12.9 HOLDIND PERIOD(in days)* 38 31 29 22



INTERPRETATION:The holding period in BSP shows a decreasing pattern. This decreasing pattern Is a good sign, showing the efficiency of the management in raw materials management. The plant needs to carry on this trend.

POSITION OF RAW MATERIALS IN ROURKELA STEEL PLANT

(In crores)


YEAR 2004-05 2005-06 2006-07 2007-08




INTERPRETATION:The analysis of the above table and chart shows that Rourkela Steel Plant has an uneven trend in holding period of raw materials. While the year 2007-08 is the most favorable among the four years, year 2004-05 shows the highest holding period. Such kind of trend is not desirable for a plant and can be avoided by effective planning and implementation.

POSITION OF RAW MATERIALS IN BOKARO STEEL PLANT


(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08




INTERPRETATION:The holding period in Bokaro Steel Plant is decreasing year after year with the increase in consumption. It is the lowest in the year 2007-08 though the consumption has dipped as compared to the previous year. Decreasing trend will help Bokaro Steel Plant in having a good liquidity position.

POSITION OF STORES AND SPARES IN DURGAPUR STEEL


PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08STORES AND SPARES CONSUMED 264.08 323.62 358.52 382.44STORES AND SPARES INVENTORY 93.47 115.97 138.71 151.2DAILY CONSUMPTION* 0.72 0.89 0.98 1.04HOLDING PERIOD(in days)* 130 130 142 145



INTERPRETATION:

The year 2005-06 is the best in terms of holding period of stores and spares. Higher holding period means blockage of funds which can be used by the company for other business activities. In the year 2006-07 and 2007-08 the consumption has gone up and at the same time the holding period has also risen which reflects poor efficiency of the management. Durgapur Steel Plant should frame plans to reduce the holding period of stores and spares for the

coming period. POSITION OF STORES AND SPARES IN BHILAI STEEL PLANT


(In crores)




INTERPRETATION:Bhilai Steal Plant displays a decreasing trend in holding period of stores and spares from the year 2006-07. The year 2005-06 marks the highest holding period though there has been an increasing in consumption which was reduced in the subsequent years reflecting the fact that the management took proper measures. Bhilai Steel Plant should try to reduce its holding period more in future.


POSITION OF STORES AND SPARES IN ROURKELA STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08STORES AND SPARES CONSUMED 299.14 370.88 438 438.23STORES AND SPARES INVENTORY 166.56 202.08 283.95 300.64DAILY CONSUMPTION* 0.82 1.02 1.2 1.32HOLDING PERIOD(in days)* 203 198 237 228

ANAYSIS THROUGH CHART:


INTERPRETATION:The analysis shows an uneven trend in Rourkela Steel Plant. Though the consumption of stores and spares in Rourkela Steel Plant has been increasing, the holding period has shown fluctuations over the four years. The company should adopt measures to control such a situation because the uneven trend can be harmful for a company in managing the working capital.


POSITION OF STORES AND SPARES IN BOKARO STEEL PLANT

(In crores)




INTERPRETATION:Bokaro Steel Plant shows a similar situation as displayed by Rourkela Steel Plant. While the management was able to bring down the holding period in the year 2006-07 as compared to the previous year but it couldn’t bring it further down in the year 2007-08 when it again rose though the consumption had gone up. Immediate control steps are required to be taken by the company.


POSITION OF FINISHED AND SEMI-FINISHED PRODUCT IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08TURNOVER 4029.21 3760.49 4287.68 5274.74SEMI/FINISHED PRODUCT INVENTORY 299.77 297.08 429.39 536.08DAILY CONSUMPTION* 11.04 10.3 11.75 14.41HOLDING PERIOD(in days)* 27 29 37 37


*Daily consumption= Turnover/No. of days in a year *Holding period=Semi & finished product inventory/Daily consumption

INTERPRETATION:The holding period has increased in the year 2005-06. Reason for the increase has been the turnover which has gone down as compared to the previous year. It reflects the inefficiency of the management. At the same time, the holding period in the year 2007-08 has remained the same as compared to the year 2006-07 though, the turnover has increased and hence shows better performance of the management. Holding huge amount of finished and semi-


finished product in stock is not desirable for the plant. It means unnecessary blockage of capital. POSITION OF FINISHED AND SEMI-FINISHED PRODUCT IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08TURNOVER 11389.2 11217.3 13526.3 16518SEMI/FINISHED PRODUCT INVENTORY 385.73 734.15 769.59 962.42DAILY CONSUMPTION* 31.2 30.73 37.06 45.13HOLDING PERIOD(in days)* 12 24 21 21



INTERPRETATION:BSP reflects the same pattern in holding of finished and semi-finished product as displayed by Durgapur Steel Plant. The company should take serious note of the situation and try to reduce the holding period. Holding stock of finished and semi-finished product is not always bad because it meets the demand in the market even when there is a shortage of raw materials but at the same


time it means blockage of funds. So, the company should try to have an adequate stock of finished/semi-finished product which does not block a huge amount of cash. POSITION OF FINISHED AND SEMI-FINISHED PRODUCT IN ROURKELA STEEL PLANT

(In crores)




INTERPRETATION:The table above shows that there has been a decreasing trend in the last year. The year 2005-06 displays a high holding period among the four years mainly


due to the decrease in sales. But it is good to see that the year 2007-08 has shown lower holding period than the previous year which indicates that the capital blocked in inventory is reducing.

POSITION OF FINISHED AND SEMI-FINISHED PRODUCT IN BOKARO STEEL PLANT

(In crores)




INTERPRETATION: After studying the above table and chart we find that in each year the holding period has decreased than the previous year except in the year 2005-06 where the turnover has gone down resulting in the increase of holding period. The


poor performance of the company and the market demand are both the reasons for lower turnover and thereby higher holding period. The year 2007-08 where the turnover is the highest, had the least holding period.

SUNDRY DEBTORS ANALYSIS:

POSITION OF SUNDRY DEBTORS IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08DEBTS OVER SIX MONTHS 4.45 5.08 6.37 6.6OTHER DEBTS 37.76 7.28 8.27 17.16

42.21 12.36 14.64 23.76LESS:PROVISIONS FOR DOUBTFUL DEBTS 3.12 3.58 3.76 6.33

TOTAL 39.09 8.78 10.88 17.43CHANGE IN AMOUNT …… -30.31 2.1 6.55



INTERPRETATION:After studying the above table we find that the amount of sundry debtors has been the highest in the year 2004-05 which came down in the subsequent years due to lower amount of other debts. The year 2005-06 reflects a negative change in debtors which means cash recovered from debtors which can be used for investment plans.


POSITION OF SUNDRY DEBTORS IN BHILAI STEEL PLANT

(In crores)



TOTAL 19.48 20.53 18.82 13.7CHANGE IN AMOUNT ……. 1.05 -1.71 -5.12



INTERPRETATION:The study of the above table shows that the amount of sundry debtors had been minimum in the year 2007-08 mainly due to huge amount of provision for doubtful debts. The provision for doubtful debts had been minimum in the year 2004-05. The year 2006-07 and 2007-08 shows a negative change in debtors which indicates that cash had been recovered from sundry debtors. POSITION OF SUNDRY DEBTORS IN ROURKELA STEEL PLANT

(In crores)






INTERPRETATION:The analysis of the table shows that from the year 2006-07 the amount of debtors have declined which is an excellent sign for the plant as it reduces the risk of bad debts for the plant. The marginal reduction in the amount of other debts had been one of the reasons for the decline in sundry debtors from the year 2006-07. POSITION OF SUNDRY DEBTORS IN BOKARO STEEL PLANT

(In crores)






INTERPRETATION:There has been a marginal increase in sundry debtors in the year 2005-06 due to increase in other debts after which there has been a continuous decline in sundry debtors which reflects lesser amount of blockage of cash. The plant should try to maintain the same situation in future. The year 2006-07 and 2007-08 shows recovery from debtors and this is quite positive for the plant. CASH AND BANK ANALYSIS:

POSITION OF CASH AND BANK BALANCE IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08CASH AND STAMP IN HAND 0.1 0.12 0.14 0.14CHEQUES 0N HAND 0 0.02 0 0.98WITH SCHEDULED BANK:TERM DEPOSIT 11.26 12.14 13.44 14.52

TOTAL 11.36 12.28 13.58 15.64CHANGE IN AMOUNT …….. 0.92 1.3 2.06



INTERPRETATION:The analysis of the table and chart shows that there has been an increasing trend. The main reason for this increasing trend is the increase in term deposit. Cash and bank is the most liquid asset for any company and it should be maintained at a balanced level. POSITION OF CASH AND BANK BALANCE IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08CASH AND STAMP IN HAND 0.23 0.29 0.33 0.34CHEQUES ON HAND 0.18 1.08 0.01 0WITH SCHEDULED BANK:TERM DEPOSIT 21.94 32.44 36.46 39.52

TOTAL 22.35 33.81 36.8 39.86CHANGE IN AMOUNT .... 11.46 2.99 3.06



INTERPRETATION:The amount of cash and bank balance is the highest in the year 2007-08 which is primarily due to higher amount of fixed deposits. It reflects a healthy liquidity position of the plant. More utilization of cash and bank balance is desirable for the plant.

POSITION OF CASH AND BANK BALANCE IN ROURKELA STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08CASH AND STAMP IN HAND 0.08 0.17 0.15 0.23CHEQUES ON HAND 0 0 0 0WITH SCHEDULED BANK:TERM DEPOSIT 15.59 16.99 18.58 20.36CURRENT ACCOUNT 0.08 0.06 0.06 0.07

TOTAL 15.75 17.22 18.79 20.66CHANGE IN AMOUNT .... 1.47 1.57 1.87



INTERPRETATION:Detailed study of the above figures shows that the plant enjoys a healthy liquidity position. The plant should take measures to utilize the unnecessary cash so that the production level can be improved.

POSITION OF CASH AND BANK BALANCE IN BOKARO STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08CASH AND STAMP IN HAND 0.19 0.21 0.19 0.25CHEQUES ON HAND 0 0 0 0.03WITH SCHEDULED BANK:TERM DEPOSIT 35.58 37.69 40.89 43.72

TOTAL 35.77 37.9 41.08 44CHANGE IN AMOUNT .... 2.13 3.18 2.92



INTERPRETATION:The table shows that the position of cash and bank balance in BSL is similar to the position of previous three years of the plant. The liquidity position shows an improvement year after year. It is both positive as well as negative. Positive because it means good liquidity position and negative because it means unnecessary cash lying with the company. Thus, a balanced level of cash and bank balance should be maintained.

INTEREST RECEIVABLE ANALYSIS:

POSITION OF INTEREST RECEIVABLE IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08INTEREST RECEIVABLE 0R ACCURED:EMPLOYEES 1.46 1.07 0.74 0.57OTHERS 0 0 0 0

1.46 1.07 0.74 0.57LESS:PROVISION FOR DOUBTFUL INTEREST 0 0 0 0

TOTAL 1.46 1.07 0.74 0.57CHANGE IN AMOUNT …… -0.39 -0.33 -0.17



INTERPRETATION:Interest receivable refers to the interest that is due to be received. Durgapur Steel Plant gives short term loan to its employees, suppliers, customers etc. The study shows that there is a decreasing trend in interest receivable in Durgapur Steel Plant. It is a great sign for the plant because it indicates timely collection of interest from the concerned parties. The plant should look forward to keep this kind of trend in future as well.


POSITION OF INTEREST RECIVABLE IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08INTEREST RECEIVABLE 0R ACCURED:EMPLOYEES 18.89 15.34 13.67 10.88OTHERS 0 1.21 0.19 1.72


TOTAL 18.89 16.55 13.86 12.6CHANGE IN AMOUNT ….. -2.34 -2.69 -1.26



INTERPRETATION:After studying four year’s data of interest receivable in BSP we find that there is a decreasing trend which is an indicator of good health for the plant. But there is still further scope of improvement for the plant.

POSITION OF INTEREST RECEIVABLE IN ROURKELA STEEL PLANT

(In crores)

YEAR 2004-05 2005-60 2006-07 2007-08INTEREST RECEIVABLE 0R ACCURED:EMPLOYEES 2.54 1.92 1.44 1.06OTHERS 0.08 0.63 0.47 0.52

2.62 2.55 1.91 1.58LESS:PROVISION FOR DOUBTFUL INTEREST 0.08 0.08 0.08 0




INTERPRETATION:The year 2007-08 marks the lowest amount of interest receivable. The reason for this has been a lower interest receivable from employees and others. There has been a negative change in interest receivable from the year 2005-06 which means interest recovered by the plant. POSITION OF INTEREST RECEIVABLE IN BOKARO STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08INTEREST RECEIVABLE 0R ACCURED:EMPLOYEES 22.72 17.89 13.48 10.41OTHERS 0.42 1.07 0.54 0.54





INTERPRETATION:By analyzing the above table we find that there is a decreasing trend in interest receivable. It displays the fact that the management of the company has been quite effective in lowering the amount of interest receivable. It can be said that the amount of interest receivable would come down more in future which will mean reduction in the blockage of funds.


LOANS AND ADVANCES ANALYSIS:

POSITION OF LOAN AND ADVANCES IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08LOANS:EMPLOYEES 3.42 10 15.49 19.3STORES ISSUED 0.03 0 0 0OTHERS 0.21 0.21 0.21 0.2ADVANCE RECEIVABLE IN CASH OR INKIND OR VALUE TO BE RECEIVED:CLAIMS RECOVERABLE 28.16 37.38 40.59 46.08CONTRACTORS AND SUPPLIERS 11.41 11.29 8.44 7.59EMPLOYEES 0.89 1.11 9.49 8.97INCOME TAX RECEVORABLE 0 0.26 0.36 0.8OTHERS 10.61 10.54 11.59 17.85


DEPOSITS:PORT TRUST, EXCISE DEPT,RAILWAYS ETC 9.01 13.99 11.93 26.4OTHERS 0.08 0.11 0.13 0.11

63.82 84.88 98.23 127.3LESS: PROVISION FOR DOUBTFUL LOAN AND ADVANCES 7.48 7.16 6.69 7.96

TOTAL 56.34 77.73 91.54 119.34CHANGE IN AMOUNT ……. 21.39 13.81 27.8


INTERPRETATION:The position of loan and advances in Durgapur Steel Plant has an increasing trend. This may be considered as a good signal for the plant. The increasing pattern shows that the company is giving advances for the expansion of plant


and machinery which is very important for the better production of steel although company’s cash is blocked.

POSITION OF LOAN AND ADVANCES IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08LOANS:EMPLOYEES 35.91 58.74 83.59 116.71STORES ISSUED 0 0 0 0OTHERS 1.65 0 0 0ADVANCE RECEIVABLE IN CASH OR INKIND OR VALUE TO BE RECEIVED:CLAIMS RECOVERABLE 98.89 101.91 152.35 176.59CONTRACTORS AND SUPPLIERS 21.13 12.24 12.76 36.53EXPORT INCENTIVE 2.8 1.26 1.04 2.22OTHER INCOME TAX RECEVORABLE 0 0 0 0OTHERS 2.72 3.58 0.75 1.63


DEPOSITS:PORT TRUST, EXCISE DEPT, RAILWAYS ETC 22.68 22.41 33.57 83.93OTHERS 71.75 73.24 97.01 119.79

257.53 273.38 381.07 537.4LESS: PROVISION FOR DOUBTFUL LOANS AND ADVANCES 62.71 54.94 55.95 56.67

TOTAL 194.82 218.44 325.12 480.73CHANGE IN AMOUNT ……. 23.62 106.68 155.61



INTERPRETATION:After analyzing it is found that the loan and advances has been increasing mainly due to the increase in loans to the employees and increase in claims recoverable. It is maximum in the year 2007-08. There has been a significant decrease in provision for doubtful loans and advances in the year 2005-06 which is good for the plant.

POSITION OF LOAN AND ADVANCES IN ROURKELA STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08LOANS:EMPLOYEES 10.69 17.02 25.27 31.31STORES ISSUED 0 0 0 0OTHERS 0.93 0.93 0.93 0.93ADVANCE RECEIVABLE IN CASH OR INKIND OR VALUE TO BE RECEIVED:CLAIMS RECOVERABLE 58.87 65.9 68.7 75.9


CONTRACTORS AND SUPPLIERS 16.27 5.5 13.14 12.89EMPLOYEES 0.05 0.12 0.32 0.11INCOME TAX RECEVORABLE 0 0 0 0OTHERS 119.5 128.87 123.74 128.48DEPOSITS:PORT TRUST, EXCISE DEPT, RAILWAYS ETC 6.89 7.22 13.9 10.58OTHERS 16.8 6.95 6.94 10.02

230 232.51 252.94 270.22LESS: PROVISION FOR DOUBTFUL LOAN AND ADVANCES 34.07 19.79 22 27.07

TOTAL 195.93 212.72 230.94 243.15CHANGE IN AMOUNT …… 16.79 18.22 12.21



INTERPRETATION:A detailed study of loan and advances in Rourkela Steel Plant reveals that the increase in loans to the employees, claims recoverable and deposit in port trust, excise department, railways etc has been the prime reason for the increase in the amount of loan and advances over the four years. The increasing trend is a testimony to the fact that the plant is trying to modernize its production resources.

POSITION OF LOAN AND ADVANCES IN BOKARO STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08LOANS:EMPLOYEES 39.56 59.09 80.94 95.26STORES ISSUED 0 0 0 0OTHERS 7.81 5.96 5.23 5.15ADVANCE RECEIVABLE IN CASH OR IN


KIND OR VALUE TO BE RECEIVED:CLAIMS RECOVERABLE 74.79 98.64 142.02 143.71CONTRACTORS AND SUPPLIERS 39.62 57.93 42.02 62.91EMPLOYEES 3.35 7.35 1.99 3.15INCOME TAX RECEVORABLE 0 0 0 0.62OTHERS 53.09 82.97 77.34 121.01DEPOSITS:PORT TRUST, EXCISE DEPT, RAILWAYS 41.99 77.41 37.92 80.43OTHERS 32.75 35.48 39.4 105.25

292.96 425 426.86 617.4LESS: PROVISION FOR DOUBTFUL LOAN AND ADVANCES 37.09 33.82 35.96 29.95

TOTAL 255.87 391.18 390.9 587.45CHANGE IN AMOUNT …… 135.31 -0.28 196.55



INTERPRETATION:Bokaro Steel Plant has an uneven trend in loan and advances. There has been a negative change in the amount of loan and advances in the year 2006-07 and this means recovery of loan and advances which can be useful for the company in other business activities. The continuous decrease in provision for doubtful debt and advances is a positive sign for the plant.

CURRENT LIABILITIES ANALYSIS:

POSITION OF CURRENT LIABILITIES IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08SUNDRY CREDITORS: MICRO AND SMALL ENTERPRISES 0 0 0 0.87 SMALL SCALE INDUSTRIAL UNITS 0.35 0.62 0.54 0 SUBSIDIARY COMPANY 1.53 0 7.17 0.93


OTHERS 155.3 118.91 158.91 156.06ADVANCES FROM: CUSTOMER 22.8 21.03 20.45 23.16 OTHERS 3.62 5.14 2.82 4.52SECURITY DEPOSITS 22.25 22.8 25.42 30.75STORES RECEIVED ON LOAN 0 0 0 0LESS: INVESTMENT RECEIVED AS SECURITY DEPOSIT: 0 0 0 0OTHER LIABILITIES 117.51 130.26 143.15 186.7

TOTAL 323.36 298.76 358.43 402.99CHANGE IN AMOUNT …… -24.6 59.7 44.53



INTERPRETATION:If we analyze the above table then we can see that it follows an uneven trend. The important component of current liabilities here are sundry creditors and other liabilities. In the year 2005-06 it decreased by 8% and then it increased in the next two years. High current liabilities indicate that the company is using credit facilities by creditors.

POSITION OF CURRENT LIABILITIES IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08SUNDRY CREDITORS: MICRO AND SMALL ENTERPRISES 0 0 2.34 2.22 SMALL SCALE INDUSTRIAL UNITS 0.06 0.91 0 0 SUBSIDIARY COMPANY 11.08 0.49 2.83 7.16


OTHERS 570.12 516.68 516.64 651.97ADVANCES FROM: CUSTOMER 10.7 16.89 18.88 31.9 OTHERS 0 1.75 0.2 1.75SECURITY DEPOSITS 44.47 42.13 35.07 37.28STORES RECEIVED ON LOAN 2.98 0.05 4.64 11.6LESS:INVESTMENT RECEIVED AS SECURITY DEPOSIT 0 0 0 0OTHER LIABILITIES 255.16 271.26 329.48 446.71

TOTAL 894.57 850.16 910.08 1190.59CHANGE IN AMOUNT …….. -44.41 59.92 280.51



INTERPRETATION:The status of current liabilities in Bhilai Steel Plant reveals a similar kind of trend as reflected by Durgapur Steel Plant. The company was successful in decreasing its current liabilities in the year 2005-06 as shown by the table. But its current liabilities increased by 31% in the year 2007-08. Clearly, the company failed to continue its good efforts of keeping its current liabilities down.

POSITION OF CURRENT LIABILITIES IN ROURKELA STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08SUNDRY CREDITORS: MICRO AND SMALL ENTERPRISES 0 0 0 0.25 SMALL SCALE INDUSTRIAL UNITS 4.35 3.96 5.11 0


SUBSIDIARY COMPANY 0.08 2.07 1.56 0.01 OTHER 234.54 229.08 287.12 307.69ADVANCES FROM: CUSTOMER 7.75 7.1 7.54 12.37 OTHERS 3.74 2.8 5.72 3.17SECURITY DEPOSITS 25.01 27.11 32.75 33.26STORES RECEIVED ON LOAN 0 0 0 0LESS: INVESTMENT RECEIVED AS SECURITY DEPOSIT 0.35 0.03 0.03 0.01OTHER LIABILITIES 125.7 150.87 146.32 183.05

TOTAL 400.82 422.96 486.09 539.79CHANGE IN AMOUNT ……… 22.14 63.13 53.7



INTERPRETATION:From the above table it is evident that current liabilities in Rourkela Steel Plant follow an increasing trend. This increasing trend is not a good sign for the plant. The company should take steps to bring it down in the coming years. When the companies have minimum liabilities, it creates a better goodwill in the market and hence it is always desirable to maintain a lower level of current liabilities.

POSITION OF CURRENT LIABILITIES IN BOKARO STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08SUNDRY CREDITORS:


MICRO AND SMALL ENTERPRISES 0 0 0 0 SMALL SCALE INDUSTRIAL UNITS 6.95 1.95 0 0 SUBSIDIARY COMPANY 7.83 0 0.5 0 OTHER 328.39 303.77 324.57 432.68ADVANCES FROM: CUSTOMER 35.35 24.16 25.57 30.2 OTHERS 0.04 0.11 0.11 73.84SECURITY DEPOSITS 29.45 42.91 67.68 23.69STORES RECEIVED ON LOAN 0 0 0 0LESS: INVESTMENT RECEIVED ASSECURITY DEPOSIT 0 0 0 0OTHER LIABILITIES 248.06 388.24 382.04 357.06

TOTAL 656.07 761.14 800.47 917.47CHANGE IN AMOUNT …….. 105.07 39.33 117



INTERPRETATION:After a detained analysis of the above table, we can find that the current liabilities in Bokaro Steel Plant also follow an increasing trend. Its current liabilities increased by 16% in 2005-06, 5% in 2006-07 and 15% in 2007-08 mainly due to the growth in other liabilities. Its sundry creditors showed a significant decline in the year 2005-06, after which it started rising in the next two years.

PROVISIONS ANALYSIS:

POSITION OF PROVISIONS IN DURGAPUR STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08


VOLUNTARY RETIREMENT SCHEME 13.01 8.88 5.82 3.67EMPLOYEE FAMILY BENEFIT SCHEME 11.17 12.42 12.83 13.37OTHERS 3.23 3.35 9.1 7.93

TOTAL 27.41 24.65 27.75 24.97CHANGE IN AMOUNT ….. -2.76 3.1 -2.78


INTERPRETATION:If we analyze the above table we can find that it follows an uneven trend. The decrease in provisions for voluntary retirement scheme and others lead to a 10% decline in provisions in the year 2005-06 which in the subsequent year 2006-07 rose by 13%.

POSITION OF PROVISIONS IN BHILAI STEEL PLANT

(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08


VOLUNTARY RETIREMENT SCHEME 12.45 8.92 5.14 3.31EMPLOYEE FAMILY BENEFIT SCHEME 69.13 74.1 74.05 78.94OTHERS 12.4 20.44 0.18 0.17

TOTAL 93.98 103.46 79.37 82.42CHANGE IN AMOUNT ….. 9.48 -24.09 3.05


INTERPRETATION:If we study the above table in a detailed manner it can be concluded that the amount of provisions had increased in almost all years except in 2006-07 when it declined by 23%. While the amount of provisions had been the lowest in the year 2006-07, it had been the highest in the year 2005-06. Failure to follow a standard policy to keep the provisions at a minimum level is probably the reason for such an uneven trend. POSITION OF PROVISIONS IN ROURKELA STEEL PLANT

(In crores)


YEAR 2004-05 2005-06 2006-07 2007-08VOLUNTARY RETIREMENT SCHEME 18.05 12.85 8.88 5.73EMPLOYEE FAMILY BENEFIT SCHEME 32.47 34.97 36.03 39.72OTHERS 0 1.75 5.87 2.9

TOTAL 50.52 49.57 50.78 48.35CHANGE IN AMOUNT ….. -0.95 1.21 -2.43


INTERPRETATION:The fluctuations in provisions for voluntary retirement scheme and others are responsible for the uneven trend in provisions in Rourkela Steel Plant. The company had increased its provisions for employees family benefit scheme over the four years which is important for the benefit of the employees and their families. The year 2005-06 and 2007-08 shows a negative change in amount of provisions.

POSITION OF PROVISIONS IN BOKARO STEEL PLANT


(In crores)

YEAR 2004-05 2005-06 2006-07 2007-08VOLUNTARY RETIREMENT SCHEME 25.28 19.27 14.63 10.12EMPLOYEE FAMILY BENEFIT SCHEME 23.65 24.28 25.3 24.66OTHERS 50.29 51.27 14.06 13.49

TOTAL 99.22 94.82 53.99 48.27CHANGE IN AMOUNT ….. -4.4 -40.83 -5.72


INTERPRETATION:The provisions in Bokaro Steel Plant show a consistent decrease over the four years. More amount of provisions means blockage of funds. So, a lower amount of provisions is always a good sign for the plant. At the same time a balanced level of provisions should be made for the employees and other parties.


WORKING CAPITAL RATIOS

CURRENT RATIO:

This ratio reflects the firm’s ability to pay its current liabilities and the strength of its working capital. The standard of the normal ratio is 2:1 but in most of the companies, standard is taken according to Tandon Committee which is 1.33:1.Current Ratio= Current Assets/Current Liabilities.

YEAR 2004-05 2005-06 2006-07 2007-08

Durgapur Steel Plant

1.66:1 1.98:1 2.09:1 2.14:1

Bhilai Steel Plant

1.31:1 1.88:1 1.97:1 1.78:1

Rourkela Steel Plant

1.61:1 2.04:1 2.13:1 1.95:1

Bokaro Steel Plant

1.69:1 2.13:1 2.18:1 1.90:1

INTERPRETATION:If we analyze the four’s data it can be said that Durgapur Steel Plant has shown an increasing trend. Its financial position has improved in every year and is better than the other plants of SAIL being considered here. Bhilai Steel Plant, Rourkela Steel Plant and Bokaro Steel Plant hold a good position as reflected by the ratios except in the year 2007-08 where the ratio has gone down but is greater than the standard ratio of 1.33:1.


ACID-TEST RATIO:

Acid test ratio is a refinement of current ratio. As it excludes inventory from current assets, it can more effectively measure the short term debt paying ability. The conventional ratio is 1:1 (i.e. every rupee of short term liabilities must be backed by equivalent liquid assets.Acid-Test Ratio= Total Current Assets-Inventories/Total Current Liabilities

YEAR 2004-05 2005-06 2006-07 2007-08


0.31:1 0.31:1 0.30:1 0.30:1

Bhilai Steel Plant

0.26:1 0.30:1 0.40:1 0.43:1


0.50:1 0.52:1 0.49:1 0.47:1

Bokaro Steel Plant

0.43:1 0.54:1 0.53:1 0.67:1

INTERPRETATION:From the above table it is clear that Durgapur Steel Plant does not meet with the standard ratio but it can be said that its liquidity position on an average is stable and the company is required to improve the current position. The liquidity position of Bhilai Steel Plant, Rourkela Steel Plant and Bokaro Steel Plant is sound as well and is on an increasing trend except for the year 2006-07 and 2007-08 when there is a slight fall in the liquidity position of Rourkela Steel Plant.


WORKING CAPITAL TURNOVER RATIO:

This ratio indicates the relationship between sales and working capital. Higher the ratio lower is the investment in working capital and higher is the profitability. On the other hand, a low working capital ratio indicates that the working capital is not efficiently utilized.Working Capital Turnover Ratio= Sales/Net Working Capital

YEAR 2004-05 2005-06 2006-07 2007-08


17.48 11.91 10.16 10.83

Bhilai Steel Plant

36.90 13.33 14.06 16.74


16.95 9.31 10.47 12.94

Bokaro Steel Plant

18.56 9.83 10.92 13.83

(Note:-Figures are in times)

INTERPRETATION:A detailed analysis of above table reveals that Durgapur Steel Plant follows an uneven trend in these four years of study. Working capital ratio has been the highest in the year 2004-05 which came down in later years. The company needs to make better use of its working capital. On the other hand Bhilai, Rourkela and Bokaro Steel Plants show an increasing trend after 2005-06 which means that their investment in working capital is lower and these companies are utilizing more of its profits.


INVENTORY TURNOVER RATIO :

This ratio tells the story by which stock is converted into sales. Usually, a high inventory turnover ratio reveals the liquidity of the inventory, i.e., how many times on an average, inventory is sold during the year. Needless to say that if a firm maintains minimum stock level in order to maximize sales by quick rotation of inventory, no doubt, the profit will be maximized since the holding cost of inventory will be minimal.Inventory Turnover Ratio= Sales/Average Inventory

YEAR 2004-05 2005-06 2006-07 2007-08


9.41 7.42 6.96 7.25

Bhilai Steel Plant

11.50 8.80 8.83 10.10


9.66 7.52 7.94 8.37

Bokaro Steel Plant

11.68 8.22 7.93 9.28


INTERPRETATION:From the above table it is clear that Durgapur Steel Plant has a very inconsistent inventory turnover ratio. While in the year 2004-05 it was the highest, 2006-07 shows the lowest ratio. But in the year 2007-08 the ratio increased by 4% and reached 7.25 times. As there is no standard inventory


turnover ratio, it can be concluded that Durgapur Steel Plant on an average is efficient in converting its stock into sales. Bhilai Steel plant, Rourkela Steel Plant and Bokaro Steel Plant also displays a similar inconsistency in their ratios. The management of these plants needs to take steps to establish a better efficiency in managing their inventories.

CURRENT ASSETS TURNOVER RATIO:

This ratio measures the degree of efficiency in utilizing the current assets. Higher the ratio, the better is the utilization of current assets. In other words, it indicates how much rupee of investment in current assets generates sales. Hence, a lower ratio is not desirable.Current Assets Turnover Ratio=Sales/Current Assets

YEAR 2004-05 2005-06 2006-07 2007-08


6.93 5.88 5.30 5.77

Bhilai Steel Plant

8.78 6.25 6.93 7.31


6.43 4.75 5.55 6.30

Bokaro Steel Plant

7.61 5.22 5.91 6.56


INTERPRETATION:After analyzing the figures of the four years, it can be said that Durgapur Steel Plant has made a much better utilization of current assets than the other three plants of SAIL. Durgapur Steel Plant had a very much stable ratio as compared


to Bhilai Steel Plant, Rourkela Steel Plant and Bokaro Steel Plant which had fluctuations in the current assets turnover ratio over the four years. Its ratio of 6.93 was the highest in the year 2004-05.

MAJOR FINDINGS

YEAR 2004-05 2005-06 2006-07 2007-08

NET WORKING CAPITAL

230.55

By 447%

315.58

By 37%

422.04

By 34%

486.99

By 15%

INVENTORIES 473.07

By 24%

539.23

By 14%

691.51

By 28%

761.97

By 10%

SUNDRY DEBTORS

39.09

By 9%

8.78

By 78%

10.88

By 24%

17.43

By 60%

CASH & BANK BALANCE

11.36

By 109%

12.28

By 8%

13.58

By 11%

15.64

By 15%

LOANS AND ADVANCES

56.34

By 5%

77.73

By 38%

91.54

By 18%

119.34

By 30%

CURRENT LIABILITIES

323.36

By 30%

298.76

By 8%

358.46

By 20%

402.99

BY 12%

PROVISIONS 27.41

By 86%

24.65

By 10%

27.75

By 13%

24.97

BY 10%

(Figures are in crores)

Note:-The above table showing major findings is in respect of Durgapur Steel Plant.


SHORTCOMINGS AND CONCLUSION

The profitability of the plant is getting affected due to the holding of cash as idle which is increasing year after year.

Durgapur Steel Plant follows a good credit policy of debtors but a risk of bad debts is always present in high debtors.

The company has an excellent short-term liquidity position and it should look forward to improve it in the future.

Uneven trend in holding period of raw materials is a problem in Durgapur Steel Plant and this is affecting the liquidity of the company.

DSP has increased its loans and advances over the four years which shows that the plant is engaged in modernization of machinery. It is very essential because it helps the company to compete with other competitors in the market. The Plant should carry on such modernization plans in future as well.

The working capital ratio in Durgapur Steel Plant is low and measures should be adopted to increase it in future.

The management of the plant had been successful in timely recovery of accrued interest from the concerned parties.

The holding period of finished and semi-finished product in Durgapur Steel Plant has increased over the four years though the turnover has gone up. Having such kind of situation of situation further can cause a major impact on the liquidity of the company.


On the whole after this detailed study of the working capital management practices in Durgapur Steel Plant, it can be said that DSP is managing its working capital quite efficiently and its techniques are in sync with the latest practices of the Indian steel industry.

RECOMMENDATIONS

Durgapur Steel Plant should concentrate on JIT (Just-in-time) technique of manufacturing. This will help in minimizing the blockage of funds.

The company should search for more source of raw materials as it will reduce the cost of production and improve the profitability of the plant.

The management of the plant should incorporate TQM (Total quality management), particularly in all departments of production to ensure better sales and reduce the inventory of finished products.

Durgapur Steel Plant should try to fix a standard in respect of holding period of raw materials. This will help DSP to reduce the blockage of funds in raw materials and improve the liquidity of the company. The company should take into account the irregularities in the supply of raw materials while making such standards because fluctuations in supply of raw materials affect the production process.

The company should review its credit policy at frequent intervals which will help it to reduce debtors so that the money can be used for other investment plans.

DSP should try to invest the excess cash balance after keeping the required amount because holding of cash as idle is unproductive for the plant.


The plant must make efforts to follow a decreasing trend in current liabilities keeping the turnover in mind. Since it is a liability, lower the better.

At the same time Durgapur Steel Plant must adopt other initiatives to maximize its sales so that the inventory lying with the company at the end of the year can be reduced which will result more funds being generated by the working capital cycle.

BIBLIOGRAPHY

Annual Report of Durgapur Steel Plant( 2004-05, 2005-06, 2006-07, 2007-08)

Financial Report-Steel Authority of India(2004-05, 2005-06, 2006-07,2007-08)

Annual Statistics-Steel Authority of India(2004-05, 2005-06, 2006-07, 2007-08)

Financial Management by M.Y.Khan and P.K.Jain

Financial Management by S.Kr.Paul

Financial Statement Analysis by S.Kr.Paul

The Management Accountant, Volume 32, No.11

The Management Accountant, Volume 31, NO.9

www.SAIL.co.in

working capiatal management-durgapur steel plant

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