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PRACTICAL FILE

OF

WORKING CAPITAL
SUBMITTED IN PARTIAL FULFILLMENT FOR AWARD OF DEGREE OF
BACHELORS OF BUSINESS ADMINISTRATION

Submitted to:

Submitted by:

Divya Preet

Aaqib Iqbal
(1353167)
BBA Sem 6th

CERTIFICATE

This is to certify that this project has been made by Aaqib Iqbal
of class B.B.A Sem 6th on the topic Working Capital under the
guidance of our incharge Divya Preet and have been completed
it successfully.
Signature:
Date:

(1.1)INTRODUCTION:STEEL
Steel is crucial to the development of any modern economy and is considered to be the backbone
of human civilization. The level of per capita consumption of steel is treated as an important
index of the level of socio economic development and living standards of the people in any
country. It is a product of a large and technologically complex industry having strong forward
and backward linkages in terms of material flows and income generation. All major industrial
economies are characterized by the: been largely shaped by the strength of their steel industries
in their initial stages of development. Steel industry was in the vanguard in the liberalization of
the industrial Sector and has made rapid strides since then. The new Greenfield plants represent
the latest in technology. Output has increased, the industry has moved up in the value chain and
exports have raised consequent to a greater integration with the global economy. The new plants
have also brought about a greater regional dispersion easing the domestic supply position notably
in the western region. At the same time, the domestic steel industry faces new challenges. Some
of these relate to the trade barriers in developed markets and certain structural problems of the
domestic industry notably due to the high cost of commissioning of new projects. The domestic
demand too has not improved to significant levels. The litmus test of the steel industry will be to
surmount these difficulties and remain globally competitive.

(1.2)HISTORY OFSTEEL
Steel was discovered by the Chinese under the reign of Han dynasty in 202 BC till 220 AD. Prior
to steel, iron was a very popular metal and it was used all over the globe. Even the time period of
around 2 to 3 thousand years Before Christ is termed as Iron Age as iron was vastly used in that
period in each and every part of life. But, with the change in time and technology, people were
able to find an even stronger and harder material than iron that was steel. Using iron had some
disadvantages but this alloy of iron and carbon fulfilled all that iron couldnt do. The Chinese
people invented steel as it was harder than iron and it could serve better if it is used in making
weapons. One legend says that the sword of the first Han emperor was made of steel only. From
China, the process of making steel from iron spread to its south and reached India. High quality
steel was being produced in Southern India in as early as 300 BC. Most of the steel then was
exported from Asia only. Around 9th century AD, the smiths in the Middle East developed
techniques to produce sharp and flexible steel blades. In the 17th century, smiths in Europe came
to know about a new process of cementation to produce steel. Also, other new and improved
technologies were gradually developed and steel soon became the key factor on which most of
the economies of the world started depending.

(1.3)OVERVIEW OF INDUSTRY
1.3.1 INDUSTRY OVERVIEW- GLOBAL SCENARIO
Economic meltdown during the year under report has adversely affected the production and
demand globally. Inventory built up has caused global steel demand slowdown. It is estimated
that global steel production during the year 2010 is expected to be about 1350 million tonnes of
crude steel. The current year growth may not be in tune with the past few years due to economic
slowdown world over, which has also affected Asian continent and developing countries to some
extent.
Basic raw material i.e. coal and iron ore witnessed increase in prices resulted into volatile in
price trend. Steel process during the year under report remained highly volatile. Due to recession
and crisis in prices, unexpectedly created problem for many steel-consuming industries.
Inventories were piled up. The Steel demand, which is on a decline in recent time, is expected to
pick up in the medium to long term due to higher than historical GDP growth, integration of
economies and convergence in GDP of developing countries like China, India and Brazil with
the developed economies.

Contribution of Countries to Global Steel Industry


The countries like China, Japan, India and South Korea are in the top of the above in steel
production in Asian countries. China accounts for one third of total production i.e. 419m ton,
Japan accounts for 9% i.e. 118 m ton, India accounts for 53m ton and South Korea is accounted
for 49m ton, which all totally becomes more than 50% of global production. Apart from this
USA,

BRAZIL,

UK

accounts

for

the

major

1.3.2 Country Wise Crude Steel Production


Country
China
Japan
United states
Russia
South Korea
Germany
Ukraine
Brazil
India
Italy

Crude steel production (MTPA)


272.5
112.7
98.9
65.6
47.5
46.4
38.7
32.9
32.6
28.4

chunk

of

the

whole

growth.

(1.4)OVERVIEW OF INDIAN STEEL INDUSTRY.


Government has been supporting the Indian Steel industry to improve the consumption per capita
and production of steel. The National Steel Policy 2005 has projected an annual steel
consumption growth of 7 percent based on GDP growth rate of 7to 7.5 percent and production of
110MMT of crude steel by 2019-20. Nonetheless, with the current rate of ongoing Greenfield
and Brownfield projects, the Ministry of Steel has projected that these growth trends are likely to
be exceeded and it is envisaged that in the next five years demand will grow at higher annual
average growth rate of over 10 percent as compared to around 7 percent growth achieved
between 1991-92 and 2005-06
As per estimate of the Ministry of Steel, Govt. of India, the crude steel production capacity in the
country by 2011-12 will be nearly 124MMT.
The Indian Steel industry recorded a crude steel production of 70.13MMT in 2009 and expected
to grow by 107.86MMT by 2011-12. The growth in the Indian steel industry in the earlier years
had been backed by strong economic growth with GDP growth of above 7 %. The industry,
which is presently witnessing a slowdown and is estimated to grow at a rate of 4-6% per annum
as there is a strong correlation between GDP growth and steel consumption and Indian economy
(i.e. GDP) is projected to grow at a rate of 7 % per annum. In Union Budget 2010-11, the
government has allocated US$ 37.4 billion to the infrastructure sector and has increased the
allocation for road transport by 13% to US$ 4.3 billion which will further promote the steel
industry.

Despite many obstacles, Indian steel industry still enjoys significant competitive and natural
advantages to emerge as a key player in global steel, which lends it a competitive edge to emerge
as a location of choice for steel manufacturer. Abundant deposit of iron ore, particularly in the
eastern region located in Orissa, Jharkhand and Chhattisgarh is prime destination of steel
industry. Your company visualizes the potential growth in steel sector.
Secondary steel manufacturers have played vital role and has been contributing around 60-65%
of total countrys finished steel production that consume Hot Rolled Coil as a major input.
India has emerged as the fifth largest producer of steel in the world and is likely to become the
second largest producer of crude steel by 2015-16. India will become the worlds second largest
steel producer by 2012, more than double of its present capacity to 124MT as part of the push
being given to assist over all infrastructure development.
Indias steel consumption rose 8 per cent in the year ended March 2010, over the same period a
year ago on account of improved demand from sectors like automobile, infrastructure and
housing. The countrys steel consumption increased to 56.3MT in the 12 months to March 2010
from 52.3MT in the previous year, as per the Ministry of Steel.

(1.5)OVERVIEW OF INDIAN POWER SECTOR


Power sector for the Indian steel industry plays pivotal role to its competitive edge and price
reduction. Waste heat recovery process has been recognized the competitive generation cost of
power. In the Indian scenario, electricity sector is predominantly controlled by Public Sector
Undertakings of Govt. of India in generation of electricity, which includes NTPC, NHPC and
NPCI. Nuclear-based power generation in the near future in the country shall bridge the gap of
generation and demand of power sector. State level corporations are also involved in the
generation of electricity. The intra state distribution is managed by the State Electricity Boards
(SEBs) and private companies. Power Grid Corporation of India is responsible for the inter-state
transmission of electricity and the development of national grid.
India is worlds 6th largest energy consumer, accounting for 3.4 per cent of global energy
consumption. Due to Indias economic rise, the demand for energy has grown at an average of
3.6 per cent per annum over the past 30 years. More than 50 per cent of Indias commercial
energy demand is met through the countrys vast coal reserve. About 75 per cent of the electricity
consumed in India is generated by thermal power plants, 21 per cent by hydroelectric power
plants and 4 per cent by nuclear power plants. The country has also invested heavily in recent
years on renewable sources of energy such as wind energy.

(1.6)Steel Companies in India


Steel Authority of India Limited (SAIL) [TURNOVER Rs. 45,555 crores is the leading steelmaking company in India. It is a fully integrated iron and steel maker, producing both basic and
special steels for domestic construction, engineering, power, railway, automotive and defense
industries and for sale in export markets. The Government of India owns about 86% of SAIL's
equity and retains Management Control of the Company. However, SAIL, by virtue of its
"Navratna" status, enjoys significant operational and financial autonomy. Major units of SAIL
are as under:
Integrated Steel Plants:

Bhilai Steel Plant (BSP) in Chhattisgarh

Durgapur Steel Plant (DSP) in West Bengal

Rourkela Steel Plant (RSP) in Orissa

Bokaro Steel Plant (BSL) in Jharkhand

Special Steel Plants:

Alloy Steels Plants (ASP) in West Bengal

Salem Steel Plant (SSP) in Tamil Nadu

Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Subsidiaries:

Indian Iron and Steel Company (IISCO) in West Bengal

Maharashtra Elektrosmelt Limited (MEL) in Maharashtra

Bhilai Oxygen Limited (BOL) in New Delhi

10

Other major steel producers are:

TISCO (Tata Iron and Steel Corporation Ltd.) [TURNOVER Rs. 19,693.28 crores]

JSW Steel Ltd (Formerly JISCO i.e. Jindal Iron and Steel Company a merged entity of
JISCO and JVSL i.e. Jindal Vijaynagar Steels Ltd.) [TURNOVER Rs. 12,628.91 crores]

Essar Steel. [TURNOVER Rs. 11,926.87 crores]

Vizag Steel (also known as Visakhapatnam Steel Plant) [TURNOVER Rs. 10433 crores]

Ispat Industries Ltd. [TURNOVER Rs. 9401.67 crores]

Jindal Steel and Power Ltd. [TURNOVER Rs. 5459.87 crores]

Bhushan Steel Ltd.[TURNOVER Rs. 4202crores]

Bhushan Power and Steel Ltd. [TURNOVER Rs. 3873 crores]

Uttam Galva Steels Ltd. [TURNOVER Rs. 3288.47 crores]

Lloyds SteeI Industries Ltd [TURNOVER Rs. 2474.36crores]

Sesa Goa Ltd [TURNOVER Rs. 2279.52crores]

Mukand Ltd. [TURNOVER Rs. 1,926.79 crores]

Electro Steel Castings Ltd. [TURNOVER Rs. 1384.42crores]

Kalyani Steel Ltd. [TURNOVER Rs. 1173.37 crores]

Mahindra Ugine Steel Company Ltd.[TURNOVER Rs. 924. 94 crores

11

(1.7)Company History
Bhushan Limited, a closely held Company of erstwhile Bhushan Group, is a merged entity of
Bhushan Industries Limited (BIL), BhushanMetallics Limited (BML) and Dcor Steel Limited,
under a Scheme of Amalgamation, which came into effect with effect from 1 st April 1999. These
companies were closely held companies with almost three decades old track record of profitable
operations, and dividend payment prior to their fusion into Bhushan Limited. BIL and BML were
incorporated almost 36 years ago on 24th September 1973 and DSL was incorporated on 3rd April
1980. The merged Companies were carrying on business of producing Steel and manufacturing
Steel products.
Shri B BSinghal, father of Shri Sanjay Singhal in early 1970s as a small unit-manufacturing door
hinges, commenced the business venture. For initial years the group continued to operate on a
very small level. In 1980 Shri Sanjay Singhal joined the business. The progress journey of these
companies commenced at a steady pace lead by vision and dynamic and committed leadership of
Shri Sanjay Singhal. With step-by-step highly conservative growth strategy, the Company earned
a place for itself in Indian Steel Industry, defying the gloom witnessed in general.
It would be pertinent to mention here that another company, from the promoters family,
Bhushan Steel and Strips Limited (BSSL) came into Steel Cold Rolling and Galvanizing industry
with manufacturing facilities in Sahibabad UP, around 1990. Shri Sanjay Singhal has also been
associated with that company too as a part of the promoters family. However since around
November 2002, Mr Sanjay Singhal is exclusively managing the Bhushan Limited and the other
company BSSL is being managed jointly by Shri B BSinghal and ShriNeerajSinghal, the father
and younger brother of Shri Sanjay Singhal.

12

As stated earlier, Operations in the Company were started way back in 1970 with starting of
operations of manufacturing door hinges. In late 1970s capacities for manufacturing of Railway
track fasteners was set up and with the increase in demand capacity additions took place from
time to time. The Companys stride towards growth came in 1981, with the setting up of mill for
long product re-rolling. Later on in 1985 steel melting facilities were set up as part of backward
integration.
In the following year mini steel plant was upgraded with continuous casting and ladle refining
furnace facilities. In mid 1980s, facilities were created for manufacturing of Black Pipes and GI
Tubes. All these facilities were built up in large capacities.
In 1988 Company moved to production of flat products with commissioning of narrow width
(upto 500mm) cold rolling facilities at Chandigarh (in BIL) with a total capital outlay of Rs 65
crores. In 1998 Company commissioned a state of the art, with many firsts in Indian industry,
viz. ERW Precision Tube and a Cable Tape unit with a total cost of Rs 28 crores.
The growth of the company continued and a significant milestone was achieved in the year 2000
with setting up of a large investment of Rs. 300 crores in setting up a cold rolling and
galvanizing unit at Bangihatti near Kolkata. The project was set up in a record time of 14
months. A narrow width Cold Rolling Mill was set up in the year 2002 to make Companys
product more economical in narrow width segment applications. The Company moved forward
for further capacity enhancement of cold rolling facilities by setting up of 3 rd 6 HI cold rolling
mills which had been commissioned during FY 2004 in a record time of 10 months.
The company has set up an integrated steel plant at Rengali, District Sambalpur, Orissa in
phases. Phase-I and II have already been implemented and are in operation, Phase III is in early
stage of implementation and Phase IV of the project is on papers.

13

The company had commissioned Phase I of its Orissa Project successfully in November 2005 by
installing 0.30 MMTPA capacity of crude steel at a cost of around Rs. 829.7 crore. It had
commissioned Phase II of its Orissa Project successfully in December 2007 by installing 0.92
MMTPA capacity of crude steel at a cost of around Rs. 2,900 crore. It is currently implementing
Phase III of its Orissa Project by installing 0.32 MMTPA of crude steel and development of
Jamkhani coal block at a cost of Rs. 2,978 crore. For all these three phases, the company has
raised a total debt of around Rs.4,476crore from 25 Indian banks.

Major products of Bhushan Power and Steels ltd.

HR COIL

STEEL BILLETS

ALLOY
ROUNDS

WIRE RODS

PIG IRON

SPONGE IRON

14

STEEL TOR STEEL

POWER

CR COILS

NARROW
COILS

CABLE TAPES

BLACK PIPE

CR CR SHEETS

GI PIPES

GP CORRUGATED
SHEETS

Geographical Network of Plants

Industrial area, Chandigarh


o Plot no. 3
o Plot no. 71
o Plot no. 83
o Plot no. 141-142

Derabassi, Punjab

Hooghly, Serampur, West Bengal


15

PRECISION
TUBES
(ERW and CEW)

GP
COILS
SHEETS

Rengali, Sambalpur, Orisa

Marketing Network
1. Andhra Pradesh

: Hyderabad, Vijayawada

2. Assam

: Guwahati

3. Bihar

: Patna, Gulabbagh

4. Chandigarh

: Chandigarh

5. Delhi

: Delhi

6. Gujarat

: Ahmedabad , Rajkot

7. Haryana

: Faridabad, Panchkula, Manesar

8. Himachal Pradesh : Baddi, Parwanoo, Kullu, Una


9. Jammu and Kashmir : Jammu
10. Karnataka

: Banglore

11. Maharashtra

: Mumbai, Pune, Aurangabad

12. Madhya Pradesh : Indore


13. Orissa

: Bhubaneswar, Sambalpur

14. Punjab

: Amritsar, Derabassi, MandiGobindgarh, Ludhiana, Jalandhar

15. Tamil Nadu

: Chennai, Hosur

16. Uttar Pradesh : Ghaziabad


17. West Bengal

: Kolkata, Siliguri
16

18. Jharkhand

: Jamshedpur

FOREIGN NETWORK

17

Product Mix
18

19

20

21

(2.1)OBJECTIVES OF STUDY
22

Working capital is synonymous with current assets. There is no denying the fact that working
capital is one of the most important tool in the hands of the company for the successful
operation of the business. It is imperative for the finance manager to properly assess the
future requirements of working capital in the company. Keeping in view this objective in
mind, I want to estimate the future needs of working capital of the company. The project
itself speaks for the importance of the study:A) To calculate the current working capital working position of the company.
B) To know the future requirements of working capital of the company.
C)

To give suggestions regarding the proper management of the working capital to

the

company.

(2.2)SCOPE OF THE STUDY


Working capital for the purpose of study has been taken as net working capital. This analysis
covers year 2008-09, 2009-10 and 2010-11. Analysis will be made of working capital and its
various components with the help of ratio analysis. This study reveals the liquidity strength and
weakness of organization and analysis the co. over the year.

RESEARCH DESIGN:
This study is descriptive in nature. It describes the functioning of the company including
working capital & financial analysis.
Data collection method :
The data is collected for the report work through secondary sources.
Primary Data:
This data is based upon personal discussion with managers, officers and other employees
working in various sections of Finance Department, BPS LTD.
Secondary Data:
It is mainly based upon office records, Cost-sheets and other published documents of BPS
LTD.CHANDIGARH.

(2.3) TYPES OF RESEARCH USED IN THIS ANALYSIS:23

This research employed following type of research: - Descriptive Research


DESCRIPTIVE RESEARCH OR EX-POST FACT RESEARCH:Descriptive research has been conducted to describe the various characteristics related to
working capital. It includes the facts finding inquiries of different kinds. It has done to know the
following facts:

What is the position of working capital in BPS LTD?

What is the position of different expenditure and what effect they are putting on
working capital requirement?

What are the various sources of raising the funds are adopted by the company?

What is the working capital financing mix of the company?

(2.4) LIMITATIONS

The biggest limitation for carrying out analysis was the unavailability of the data due to
security reasons.

It was felt that period of six to eight weeks for analysis of working capital management
was too short.

The contribution of companys staff is less due to their busyness.

Some areas of research which need to be studied have been overlooked by me.

WORKING CAPITAL
24

The term working Capital refers to net working capital .Net Working Capital is the excess of
current assets over current liabilities.
NET WORKING CAPITAL=CURRENT ASSEST-CURRENT LIABILITIES
A firm needs fixed capital as well as working capital for its operations while the fixed capital is
invested in fixed assets and the working capital is in the form of current assets. The management
of current assets differs from fixed assets in the following three ways: 1. First is managing fixed assets time is very important factor in fixed assets but significant in
current assets.
2. Secondly the large holdings of current assets strengthen the firms liquidity positions but also
reduce the overall profitability.
3. Third, level of fixed as well as current assets depends upon expected sales, but it is only
current assets, which can be adjusted with sales fluctuation in short run.
CONCEPT OF WORKING CAPITAL
There are two basic interpretations of working concept

Balance sheet concept

Operating cycle concept


CONCEPT OF WORKING CAPITAL

Balance sheet

Net working
capital

Operating cycle

Gross working
capital

25

(1) BALANCE SHEET CONCEPT : there are two types of working capital under this
concept

1. Gross working capital: It refers to firms investments in current assets. Thus


Gross working capital includes the total current assets.

2. Net working capital: It refers to difference between current assets and current liabilities i.e.
NWC = current assets - current liabilities
It can be negative or positive. The positive net working capital will arise when current assets
exceed current liabilities. A negative net working capital occurs when current liabilities exceed
current assets.
(2) OPERATING CYCLE CONCEPT: A company operating cycle typically consists of 3
primary activities: purchasing resources, producing the product and distributing the product.
Operating cycle is the time duration to convert sales, after the conversion of resources into
inventories into cash. It involves three phases.
1. Acquisition of resources
2. Manufacture of product
3. Sale of the product either for cash or on credit.

Operating cycle of manufacturing company:(a)Acquisition of resources:-It includes new material, labour and fuel.
(b)Manufacturing of the product:-It includes the conversion of raw material into work-inprogress and then into finished goods.
(c)Sales of product:-It includes sales of cash or on credit.

26

Debtors

Finished Goods

Cash

Raw Materials

Work-in-Progress

The length of the operating cycle of a firm is the sum of:

Inventory conversion period

Receivables conversion period

Payable deferred period

cash conversion period

Classification of working capital


The working capital can be classified into ways:

on the basis of concept

on the basis of time

On the basis of concept it is classified into two i.e. GWC and NWC
On the basis of time it is classified into permanent and fixed working
capital and temporary or working capital.

Permanent working capital : it is the minimum amount , which is to


insure effective utilization of fixed facilities and for maintaining the circulation
of current assets . there is always a minimum level of current assets , which is
continuously required by the enterprise to carry out its normal business
operation. this minimum level of working capital is known as permanent
working capital as this capital is permanently blocked in the of current assets.
27

Temporary working capital : temporary working capital is amount of

working capital , which is required to meet the seasonal demands and some
special exigencies . the temporary working capital can be further classified as
seasonal working capital . most of enterprise has to provide additional working
capital to meet the seasonal and special needs.
NEED OF WORKING CAPITAL
The need of working capital arises due to time gap between production and realization of cash
from sales. There is an operating cycle involved in the sales and realization of cash. There are
time gaps in the purchase of materials and production; production and sales; and sales and
realization of cash. Thus working capital is needed for the following purpose:

For the purchase of raw material, components and spare.

To pay wages and salaries

To incur day to day expenses and overhead costs such as fuel, power and
office expenses, etc.

To meet the selling cost as packing advertising etc.

To provide credit facilities to the costumers.

To maintain the inventories of the raw material, work in progress, stores and
spares and finished goods.

ESTIMATING WORKING CAPITAL NEEDS


The most appropriate method of calculating working capital needs of a firm is the concept of
operating cycle. Following are the other three approaches which can be applied to estimate
working capital needs .
1) Current assets holding period: To estimate working capital requirements on the basis of
average holding period of current assets and relating them to cost based on the companys
experience in the previous year.
2) Ratio to sales: To estimate working capital requirements as a ratio of sales on the
assumption that current assets change with sales.
28

3) Ratio of fixed assets: sometimes working capital may be estimated as the percentage of
fixed assets.

IMPORTANCE OF ADEQUATE WORKING CAPITAL


Working capital is the life, blood and nerve of a business. Just as circulation of blood is essential in
human body for maintaining life, working capital is very essential to maintain the smooth running
of the business. No business can run successfully without an adequate amount of working capital.
The main advantages of an adequate amount of working capital are,
1. Solvency of Business an adequate solvency of business working capital helps in
maintaining solvency of business by providing an uninterrupted flow of production
2. Goodwill sufficient working capital enables a business concern to make prompt
payments and hence helps and maintaining and creating goodwill.
3. Regular supply of raw materials sufficient working capital ensures a regular supply of
raw materials and continuous production.
4. Regular payment of salaries , wages and other day to day commitments- a company
which has an ample working capital can make regular payment of salaries , wages and other
day to day commitments which raise the morale of its employees , increases their efficiency ,
reduces wastages and costs and enhances production and profits.
5. Ability to face crisis- adequate working capital enables a concern to face business crisis in
emergencies such as depression because during such periods, generally, there is much
pressure on working capital.
6. Quick and regular return on investment- every investor wants a quick and regular
return on his investments. sufficiency of working capital enables a concern to pay quick and
regular dividends to its investors, as there may not be much pressure to plough back profits .,
this gains the confidence of its investors and creates a favorable market to raise additional
funds in the future .

29

Every business concern should have an adequate working capital to run its
operations. it should have either redundant or excess working capital nor inadequate nor
shortage of working cap[ital . both excess as well as short working capital positions are bad
for any business . however , out of the two, it is the inadequacy of working capital , which is
more dangerous of point of view of the firm

VARIOUS CONSTITUENTS OF WORKING CAPITAL


The two constituents of working capital are as follows :

current assets

current liabilities

Current assets : these are the assets, which can be converted onto cash with in an accounting
year or are held for short period of time.
The major components of current assets include
inventories

cash and bank balance

accounts receivables

loans and advances

short term investment

Current liabilities :there are short term debates and obligations due to outside parties. The
major components of current liabilities includes

trade credit

bank loans overdrafts and cash

short term loans from FI

tax payment due

30

APPROACHES TO FINANCE CURRENT ASSETS


The approaches followed by a company may be referred to as :
1. Matching approach
2. conservative approach
3. aggressive approach

1) Matching approach : under this approach long term financing will be used to finance fixed
assets and permanent current assets and short term finance for temporary or variable current assets.
More can be understood from following graph.

Temporary
current assets
Short term financing
Long term financing
Assets.

Permanent current assets


Fixedassets
Time

31

2). Conservative approach : Under this policy a firm is said to be conservative when it
depends more on long-term funds for financing needs . Under a conservating approach. A firm
finances its permanent assets and also a part of current assets with long term financing.
Temporary current assets
Short term financing
Long term financing
Assets

Permanent current assets


Fixed assets
time

3). Aggressive Approach : A firm may be aggressive in financing its assets. A aggressive
policy is said to be followed to by the firm when it uses more short-term financing than matching
plan.Under an aggressive policy, the firm finances a part of its permanent current assets with
short term financing. Some extremely aggressive firm may even finance a part of their fixed
assets with short term financing. This can be more understood by the following figure.
Temporary current assets
Short term financing
Long term financing
assets

Permanent current assets


Fixedassets
Time

32

MANAGEMENT OF WORKING CAPITAL


Working capital, in general practice, refers to the excess of current assets over current
liabilities. 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 all aspects of 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. This is so because both inadequate as well as excessive
working capital positions are bad for any business. Inadequacy of working capital may lead a
firm to insolvency and excessive working capital implies idle funds, which earn no profits for the
business. Working capital management policies of a firm have a great effect on its profitability,
liquidity and structural health of the organization. In this context, working capital management is
three dimensional in nature:

Dimension I is concerned with the formulation of the policies with regard to profitability, risk
and liquidity.
Dimension II is concerned with the decisions about the composition and level of current assets.
Dimension III is concerned with the decisions about the composition and level of current
liabilities.
There is a definite inverse relationship between the degree of risk and profitability. A
conservative management prefers to minimize risk by maintaining a higher level of current assets
while a liberal management assumes greater risk by reducing working capital. However, the goal
of the management should be to establish a suitable tradeoff between profitability and risk.

33

The management of working capital includes:

Cash management.

Receivables management.

Inventory management.

CASH MANAGEMENT

Cash is the important current asset for the operations of the business. Cash is the lifeblood of a business
firm; it is needed to acquire supplies, resources, equipment, and other assets used in generating the product
and services provided by the firm. Cash is the medium of exchange which allows management to carry on
the various activities of the business firm from day to day. As long as the firm has the cash to meet these
obligations, financial failure is improbable. Without cash, or at least access to it, bankruptcy becomes a
grim possibility. Such is the emerging view of modern corporate cash management. Near cash items like
marketable securities are also included in cash. The modern day business comprises new numerous units
spread over vast geographical areas. It is the duty of finance manager to provide adequate cash to each of
the units. The firm should keep sufficient cash, neither more nor less, to meet various needs. Cash
shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle
without contributing anything towards the firms profitability..

34

Motives For Holding Cash:


The firms needs for cash may be attributed to the following needs: Transaction motive,
Precautionary motive and speculative motive.

1. Transaction motive
A firm needs cash for making transactions in the day to day operations. The cash is needed to
make purchases, pay expenses, taxes, dividend etc. The cash needs arise due to the fact that there
is no complete synchronization between cash receipts and payments. Sometimes, cash receipts
exceed cash payments or vice versa. The transaction needs of cash can be anticipated because the
expected payments in near future can be estimated. The receipts in future may be anticipated but
the things do not happen as desired. If more cash is needed for payments than receipts, it may be
raised through bank overdraft.

2. Precautionary motive
A firm is required to keep cash for meeting various contingencies. Though cash inflows and
outflows are anticipated but there may be variations in these estimates. In some situations, cash
receipt will less than expected and cash payments will be more, as purchases may have to be
made for cash instead of credit. Such contingencies often arise in business. A firm should keep
some cash for such contingencies or it should be in a position to raise finances at a short period.
The cash maintained for contingency needs is not productive or it remains idle

3. Speculative motive
The speculative motive relates to holding of cash for investing in profitable opportunities as and
when they arise. Such opportunities do not come in regular manner. These opportunities cannot
be scientifically predicted but only conjectures can be made about their occurrence. The primary
motive of a firm is not to indulge in speculative transactions but such investments may be made
at times.

35

4. Compensation motive
One more motive to maintain cash is to compensation for providing free services by bank to
business. As banks provides a number of services to its customers like clearance of cheques,
transfer of funds etc. and for this purpose they wish their customer to maintain minimum cash
balance. This balance is not used by firm but banks can use it to earn profits and thus compensate
itself for the cost of services to the customer.

CASH MANAGEMENT CYCLE

Business
operations

Cash
collections

Information
and control

Deficit

Borrow

Surplus

Invest

Cash
payments

Cash management seeks to accomplish this cycle at a minimum cost and at the same time, it
also seeks to achieve liquidity and control. Sales generate cash which has to be disbursed out.
The surplus cash has to be invested while deficit has to be borrowed cash management seeks
to accomplish this cycle at a minimum cost. At the same time, it also seeks to achieve
liquidity and control.
The management of cash is also important because it is difficult to predict cash flows
accurately, particularly the inflows and there is no perfect coincidence between the inflows
and outflows of cash. During some periods cash outflow exceeds cash inflow. The main aim
of the cash management is to manage its cash balance at minimum profitable investment
opportunities.

36

(1)Cash planning:
Cash planning is technique to plan and control the use of cash. A projected cash flow statement
may be prepared based on the present business operations and anticipated future activities. The
cash inflows from various sources may be anticipated and cash outflows will determine the
possible uses of cash.

(2) Cash forecasting and budgeting:


(a)Cash forecasting:

Short term forecast:

The short-term forecasts can be made with the help of

cash flow projections. Financial manager will make estimates of likely receipts
in the near future and the expected disbursements in that period. Though it is not
possible to make exact forecasts even than estimates of cash flows will enable
the planners to make arrangement for cash needs. One should keep in mind the
sources from where he will meet short-term needs. He should also plan for

productive use of surplus cash for short periods.


Long term forecast: The long-term cash forecasts are also essential for proper
cash planning. Long term forecasts indicate companys future financial needs for
working capital, capital projects etc.

(b) Cash budgeting:A cash budget is an estimate of cash receipts and disbursements of cash during a future period of
time. It is a device to plan and control the use of cash. The cash budget pinpoints the period
when there is likely to be excess or shortage of cash. Thus, a firm by preparing a cash budget can
plan the use of excess cash and make arrangements for the necessary cash as and when required.

(3)Report for control:


Cash reports providing a comparison of actual developments with forecast figures, are helpful in
controlling and revising cash forecasts on a continual basis. Several types of cash reports may be
prepared like daily cash report, monthly cash report etc.

37

RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is the
process of establishing and interpreting various ratios for helping in making certain decisions.
However, ratio analysis is not an end itself. It is only a means of better understanding of financial
strength and weakness of a firm. Calculation of ratios does not serve any purpose, unless several
appropriate ratios are analyzed and interpreted. There are a number of ratios which can be
calculated from the information given in the financial statements, but the analyst has to select the
appropriate data and calculate only a few appropriate ratios from the same keeping in mind the
objective of analysis
The following are four steps involved in the ratio analysis: Selection of relevant data from financial statement depending upon objective of
analysis.
Calculation of the appropriate ratios from the above data.
Comparison of the calculated ratios with the ratio of same firm in the past, or the
ratios developed from projected financial statements or the ratios of some other
firms or the comparisons with ratios of the industry to which the firm belongs.

Interpretation of the ratios:Ratio analysis is one of the most powerful tools of financial analysis. It is used as a device
to analyze and interpret the financial health of enterprise. It is with help of ratios that the
financial statements can be analyzed more clearly and decisions made from such analysis.
The use of ratios is not confined to financial managers only. There are different parties
interested in the ratio analysis for knowing the financial position of a firm for different
purposes. The supplier of goods on credit, banks, financial institutions, investors,
shareholders and management all make use of ratio analysis as a tool in evaluating the
financial position and performance of a firm for granting credit, providing loans or making
investments in the firm. With the use of ratio analysis, one can measure the performance of
the firm is improving or deteriorating. Thus, Ratios have wide applications and are of
immense use today.

38

The two main types of ratios that have been analyzed in this topic are as follows:

1. LIQUIDITY RATIO
The importance of adequate Liquidity in the sense of the ability of a firm to meet current or short
term obligation when they become due for payment can hardly be over stressed. In fact, liquidity
is a prerequisite for the very survival of a firm. The short term creditors of a firm are interested in
the short term solvency or liquidity of a firm. But liquidity implies, from the view point of
utilization of the funds of the firms that funds are idle or they earn very little. A proper balance
between the two contradictory requirements that is liquidity and profitability is required for
efficient financial management. The liquidity ratios, measure the ability of a firm to meet its
short term obligations and reflect the short term financial strength or solvency of the firm.
The ratios that indicate the liquidity of a firm are:
Current Ratio
Liquid Ratio
Cash Ratio

2. ACTIVITY RATIOS
Funds are invested in various assets in business to make sales and earn profits. The efficiency
with which assets are managed directly effect the volume of sales.
The better the management of assets, the larger is amount of sales and profits. Activity ratios
measures are efficiency or effectiveness with which a firm manages it resources or assets. These
ratios are also called turnover ratios because they indicate the speed with which Assets all are
converted into sales. Depending upon the purpose, a number of turnover ratios can be calculated.
Following are the activity ratios:

Stock Turnover Ratio

Inventory Conversion Ratio

Debtors Turnover Ratio

Average Collection Period

Creditors Turnover Ratio

Average Payment Period

Fixed Asset Turnover Ratio


39

Working Capital Turnover Ratio

1. CURRENT RATIO
Current ratio or working capital ratio is the ratio which expresses the relationship between
current assets and current liabilities. The Current Ratio measures the ability of a firm to maintain
solvency over a short run. Current Ratio is not only a measure of solvency but can index of
working capital available to the enterprise.
CURRENT RATIO

CURRENT ASSETS
CURRENT LIABILITIES

PARTICULARS

2008-09

2009-10

2010-11

Current assets
Current liabilities

769778840

1007100541

438735762
1.75

525942353
1.91

673296147
338735655

Current Ratio

1.98

CURRENT RATIO
2

CURRENT RATIO

1.8
1.6
2008-09

2009-10

2010-11

Interpretation
According to rule of thumb current ratio should be 2:1. However, the rule should not be blindly
followed. According to the above figures we can find out that in last three years ratio of company
is 1.75, 1.91 and 1.98 which is a good sign for the company but still the company either needs to
increase its current assets or reduce its current liability.

40

2. QUICK RATIO
Quick ratio or liquid ratio is the real test of liquidity of an enterprise. It is another important ratio
for the measure of the extent to which the liquid assets are available to meet the immediate
liabilities. This ratio attempts to measure the ability of the firm to meet its obligations relying
solely on its liquid Current Asset such as Cash and Accounts Receivable. It is for this reason that
the quick ratio is also known as acid test ratio.
QUICK RATIO

QUICK ASSETS
CURRENT LIABILITIES

PARTICULARS
Quick assets
Current liabilities
Quick Ratio

2008-09

2009-10

233393836

302970197

438735762
0.53

525942353
0.57

2010-11
222932823
338735655
0.65

QUICK RATIO
0.8
0.6

QUICK RATIO

0.4
0.2
0
2008-09

2009-10

2010-11

Interpretation
As a rule of thumb quick ratio of 1:1 is considered satisfactory. As we see that company quick
ratio is not the benchmark in any of the years, hence it is not a good sign for the company. The
companys last three years ratio is 0.53, 0.57 and 0.65 which is not good. Although it is rising as
compare to previous year.
41

3. ABSOLUTE LIQUID RATIO


It establishes the relationship between absolute quick assets and current liabilities.
ABSOLUTE LIQUID RATIO= Cash& bank balance + market. securities
Current liabilities

PARTICULARS
Cash & Bank balances
Current liabilities
Absolute Liquid Ratio

2008-09

2009-10

60268163

56881975

438735762
0.14

525942353
0.10

20010-11
47441959
338735655
0.14

ABSOLUTE LIQUID RATIO


0.15

ABSOLUTE LIQUID
RATIO

0.1
0.05
0
2008-09 2009-10 2010-11

Interpretation
The thumb rule for this ratio is 0.5:1.The absolute liquid ratio for the year 2009 is 0.14 and
for the year 2010 it is 0.10 and for the year 2011 is 0.14. The ratio is not satisfactory for firm
as the firm did not have sufficient cash.

42

4. INVENTORY OR STOCK TURNOVER RATIO


This ratio measures the efficiency of the manufacturing function in scheduling the production,
and the efficiency of the marketing function in disposal of outputs of an enterprise by constantly
feeding the distribution channel. Interpreted properly, this ratio will also indicate the presence of
unresolved conflict between the marketing management and financial management, the former
trying to keep the distribution channel overstocked for fear of stock-outs and the latter trying to
minimize it for fear of high interest cost involved in carrying these inventories.
INVENTORY TURNOVER RATIO =

COST OF GOODS SOLD


AVG. INVENTORY

PARTICULARS

2008-09

2009-10

2010-11

Cost of goods sold


Inventory

4035572520

5232096970

224904080.5
17.94

281650419.5
18.57

5240440101
289333718

I. T. R

INVEN. TURNOVER RATIO


18.8
18.6
18.4
18.2
18
17.8
17.6

INVEN. TURNOVER
RATIO

2008-09

2009-10

2010-11

43

18.11

Interpretation
Inventory turnover ratio measures the times of conversion of stock into sales within a year.
Usually, a high stock turnover indicates efficient management of inventory. The ratio of last two
years is mostly same of the company. The fall in ratio is not good for company.

5. DAYS OF HOLDING INVENTORY


It indicates the number of days the inventory kept in stores before sales.
Days of holding inventory:-

365 DAYS
I.T.R

PARTICULARS
I.T.R
Days of holding

2008-09
17.94
20

2009-10
18.57
20

2010-11
18.11
20

inventory

DAYS OF HOLDING INVEN.


30
DAYS OF
HOLDING INVEN.

20
10
0
2008-09

2009-10

44

2010-11

Interpretation
Days of holding inventory tells for how many days company holds the inventory. The inventory
conversion period of last two years is same and satisfactory. The conversion period of the
company is 20 days.

6. DEBTORS OR RECEIVABLE TURNOVER RATIO


Among all the working capitals this one is most important to the vendor firm because it is from
realization of debtors that the accounts payable of the applicant firm is met. This ratio has to be
simultaneously interpreted along with finished goods inventory turnover ratio.
Increasing volume of receivables without a matching increase in sales is reflected by a low (high
number of days) receivable turnover ratio. It is an indication of slowing down of collection
machinery or an extended line of credit being allowed by the customer organization.
DEBTORS TURNOVER RATIO =

SALES
AVG. DEBTORS

PARTICULARS

2008-09

Sales
Debtors
Debtors turnover ratio

2009-10

6193159238

7588016557

110998776
56

138610478
55

2010-11
8038969705
136884871
59

Interpretation
It indicates the number of times debtors turnover each year. Generally the higher value of
debtors turnover the more efficient is the management. In fact in last three fiscal years, this ratio
has been excellent for the company. It indicates that its vendors are loyal and pays on time.

45

7. AVERAGE COLLECTION PERIOD


The average collection period represents the average number of days for which a firm waits
before its receivables are converted into cash.
AVERAGE COLLECTION PERIOD =

365 DAYS
D.T.R

PARTICULARS
D.T.R
ACP

2008-09

2009-10

56
6.5

55
7

2010-11
59
6

AVG. COLLECTION PERIOD


8

AVG. COLLECTION
PERIOD

7
6
5
2008-09

2009-10

2010-11

Interpretation
Generally, the shorter the average collection period the better is the quality of debtors as a short
collection period implies quick payment by debtors. Hence, the period is short in all the years i.e.
6.5 days, 7 days, 6days etc. which represents good quality of debtors.

46

8.CREDITORS TURNOVER RATIO


In the course of business operations, a firm has to make credit purchases and incur short-term
liabilities. The creditor is interested in finding how much time the firm is likely to take in
repaying its trade creditors. So the ratio indicates the velocity with which the creditors are turned
over in relation to purchases.
The ratio is calculated by dividing Purchases by Creditors.
CREDITORS TURNOVER RATIO=

PURCHASES
AVG. CREDITORS

PARTICULARS
Purchases
Creditors
CTR

2008-09

2009-10

5620506186

6809208460

139694892
40.23

164318822
41.43

2010-11
6653795996
141874119.5
46.89

C. T . R
50

CREDITORS
TURNOVER RATIO

45
40
35
2008-09

2009-10

2010-11

Interpretation

47

Generally lower the ratio better is the liquidity position of the firm and higher the ratio, less
liquid is the position of the firm. The creditor turnover ratio of the firm is on an increasing trend
in the last 3 years. It has increased from 40.23 to 46.89 to 12.21 which is good for the company.
.

9. AVERAGE PAYMENT PERIOD


It indicates about in how many days company pays to its creditors.

AVERAGE PAYMENT PERIOD:-

365 days
CTR

PARTICULARS

2008-09

2009-10

2010-11

C.T.R

40.23

41.43

46.89

A.P.P

AVG. PAYMENT PERIOD


9.5
9

AVG. PAYMENT
PERIOD

8.5
8
7.5
2008-09

2009-10

2010-11

48

Interpretation
Generally lower the ratio better is the liquidity position of the firm and higher the ratio, less
liquid is the position of the firm. The average payment period has been decreased as compared to
last year. It means company pays to its creditors earlier than before. Average period is on a
continuous decline since last 3 years which is a good sign for the company.
.

10. WORKING CAPITAL TURNOVER RATIO


It indicates the velocity of utilization of net working capital and also number of times the
working capital is turned over in the course of a year. Net working capital is computed by
deducting the current liabilities from the total current assets.
WORKING CAPITAL TURNOVER RATIO:-

COST OF GOODS SOLD


NET WORKING CAPITAL

PARTICULARS

2008-09

2009-10

2010-11

C.O.G.S

4035572520

5232096970

5240440101

NET W.C

331043078

481158188

334560492

W.C.T.R

12.19

10.87

15.66

49

W.C. TURNOVER RATIO


20
15
10
5
0

W.C. TURNOVER
RATIO

2008-09 2009-10 2010-11

Interpretation
As the ratio indicates the number of times in which the working capital is turned during the
period of one year. The higher the ratio the better it is. The ratio is on a fluctuating trend since in
2010 it decreased as compared to 2009 but in 2011 it has increased which is a good sign for the
company.

SCHEDULE OF CHANGES IN WORKING CAPITAL


PARTICULARS

PREVIOUS

CURRENT

INCREASE IN

DECREASE IN

YEAR

YEAR

W.C

W.C

(Amount)

(Amount)

CURRENT ASSETS &


LOANS & ADV.
Inventories
Stores and spare parts
Raw material in tanks
50

Raw material at port


Work in process
Finished products
By- products
Sundry Debtors
Due to more than 6 months
Others
Cash & Bank balances
Cash &cheque in hand & in
transit
With scheduled banks
Unpaid equity dividend
Loans & advances
Advances
Advance tax & TDS
Balance with excise
authorities
Total current Assets (A)
CURRENT LIABILITIES
& PROVISIONS
Acceptances
Sundry Creditors
Other liabilities
Unpaid equity dividend
Interest accrued
Prov. for doubtful debts
Prov. for income tax
Prov. for dividend on equity
sh.
Prov. for dividend on pref.
sh.
Total current liabilities(B)
Net working capital (A)(B)
Net increase in working
capital
TOTAL
51

WORKING CAPITAL MANAGEMENT AT BHUSHAN POWER AND


STEEL CO. LTD.
An Introduction
The working capital basically suggests the liquidity position of the company. To analyse the
working capital of the company, the various short-term items would be studied and also its effect
would be seen. The study of various items for the last two years would be studied. The various
current assets of the company over the years have been sundry debtors, cash in hand and at bank,
loans and advances and inventory. On the other hand, the current liabilities are basically
creditors, unpaid interest and various provisions. As the company is into FMCG sector therefore
it is highly necessary to ensure optimum level of current assets. The optimum level ensures that
company is not facing any liquidity problem.
These various items would be studied individually in the next part and interpreted respectively.
For the batter understanding of the working capital management of BPS, the working capital
study is divided into five broad categories:

Schedule of changes working capital of the company

Sundry Debtors of the company

Inventory Management of the company

Cash Management of the company

Sundry Creditors of the company


52

Management of Individual Components


1)Schedule

of changes of working capital of BPS Ltd.

PARTICULARS

YEAR 2008-09

YEAR 2009-10

INCREASE

DECREASE IN

(Amount)

(Amount)

IN W.C

W.C

CURRENT ASSETS
& LOANS & ADV.
Inventories
Stores and spare parts
Raw material in tanks
Raw material at port
Work in process
Finished products
By- products
Sundry Debtors
Due to more than 6
months
Others
Cash & Bank balances
Cash &cheque in hand

32743401
163469989
115785255
49788337
172997141
1600881

40955134
229857871
94402859
67004436
267721452
4188593

2684779

2621057

110998776

166222190

55223404

123437

10577352

10453915

& in transit
53

8211733
66387882
21382396
17216099
94724311
2587712
63722

With scheduled banks


Unpaid equity

60144726

46086187
218476

218476

10584862
7156147

dividend
Loans & advances
Advances
Advance tax & TDS
Balance with excise

59539156
2585876
1865

70124018
9742023

authorities
Total current Assets

772463619

1009721598

226749774
139694892
51940456

284210950
188942751
40607496
218476

14058539

1865

(A)
CURRENT
LIABILITIES &
PROVISIONS
Acceptances
Sundry Creditors
Other liabilities
Unpaid equity
dividend
Interest accrued
Prov. for doubtful

1443792
2684779

57261176
49247859
11332960
218476

1293021
2621057

150771
63722
6608177
1429011

debts
Prov. for income tax
Prov. for dividend on

6608177
10043315

8614304

equity sh.
Prov. for dividend on

2055356

2055356

pref. sh.
Total current

441420541

528563410

liabilities(B)
Net working capital

331043078

481158188

(A)- (B)
Net increase in

150115109

working capital
TOTAL

481158188

150115109
481158188

54

313411482

313411482

WORKING CAPITAL
600000000
400000000
200000000
0

WORKING
CAPITAL

Interpretation:
The working capital of the company has been increased by rupees 150115109 (481158188331043078)as compared to last year. It means company manages its working capital more
efficiently as compared to last year. And companys assets are also increased.
PARTICULARS

YEAR 2009-10

YEAR 2010-11

INCREASE IN

DECREASE IN

(Amount)

(Amount)

W.C

W.C

CURRENT ASSETS
& LOANS & ADV.
Inventories
Stores and spare parts
Raw material in tanks
Raw material at port
Work in process
Finished products
By- products
Sundry Debtors
Due to more than 6
months
Others
Cash & Bank balances
Cash &cheque in hand
& in transit
With scheduled banks

40955134
229957871
94402859
67004436
267721452
4188593
2621057

20181788
110477111
79951470
32144179
203912994
3695782
2811879

166222190

106561535

10577352

19469846

46086187

27494618
55

20773346
119480760
14451389
34860257
63808458
492811
190822
59660655
8892494
18591569

Unpaid equity

218476

dividend
Unclaimed preference
redemption amount
Loans & advances
Advances
Advance tax & TDS
Balance with excise
authorities
Total current Assets

70124018
9742023

403085

184609

74410

74410

63551996
4391306

6572022
5350717

1009721598

675917204

333804394

284210950
188942751
40607496
218476

175557895
94805488
38037059
403085

(A)
CURRENT
LIABILITIES &
PROVISIONS
Acceptances
Sundry Creditors
Other liabilities
Unpaid equity
dividend
Unclaimed preference

108653055
94137263
2570437
184609

74410

redemption amount
Interest accrued
Prov. for doubtful

1293021 969686
2621057 1825852

debts
Prov. for income tax
Prov. for dividend on

5918327
8614304 12921457

equity sh.
Prov. for dividend on

2055356

74410
323335
795205
5918327
4307153
2055356

pref. sh.
Total current

528563410 340561507

188001903

liabilities(B)
Net working capital

481158188 335355697

145802491

(A)- (B)
Net decrease in
working capital
TOTAL

145802491
481158188

481158188
56

363679477

363679477

WORKING CAPITAL
600000000

500000000

400000000
WORKING CAPITAL
300000000

200000000

100000000

0
2009-10

2010-11

2) Sundry Debtors of the company


They occur from the normal working of the business. These are covered under the head of
Current Assets under Schedule G CURRENT ASSETS, LOANS & ADVANCES.
57

The debtors of the company are unsecured and are divided into two categories:
(a)

Due for more than six months: These are those debts which are to be recovered after a
period of six months. these are further divided into:

(i)

Considered Good: The company is almost sure to recover these debts on the
appropriate date as fixed earlier. Therefore no provision has been maintained for them. On the
basis of study of last two years, the figure for this amount has been decreasing and it is not a
good sign for the company as these are considered good by the company.

(ii)

Considered Doubtful: These debts are not considered to be recovered in 100% by


the company and therefore a provision is maintained so that the company should not suffer from
a big loss at one moment. The amount of this debt is increasing. It
states that those debt which company is not fully sure to recover is increasing and hence not in
favour of the company.

(iii)

Provision for doubtful debts : The company makes provision so that the loss can be
reimbursed and it should not face liquidity problem at the end of the day. The company maintains
100% provision for doubtful debts which is satisfactory decision by the company.

(b)

Others (considered good) : These are debts other than the above said. These are
considered good by the company and hence no provision is maintained for these. The amount of
this type of debt is increased from past year.

3) Inventory Management of the company

58

Inventory is stock of a company, which is manufacturing for sale and component that make up
the product. Inventory means a schedule of items held at a particular point of time.
These are covered under the head of Current Assets under Schedule G CURRENT ASSETS,
LOANS & ADVANCES.
The inventory of the company is divided into 5 parts:

Stores and Spare parts

Goods in transit

Work in process

Finished products and by products

4) Cash Management of the company


Cash section is an important section of finance and accounts department. It deals with the
employees, contractors and suppliers for their payments. Corporate office plays a dominant role
in cash management. The corporate office allocates different amount of each to different
coalmines as per its requirements. Corporate office acts as a linkage between the BPS and main
book. Cash balance represents the aggregate of cash in hand, cheques in hand, remittances in
transit, and balances with banks in current accounts and in fixed deposits with others.
Year

Cash & Bank

Currents Assets

% to Current
Assets

Balances
2008-09

60268163

769778840

7.8%

2009-10

56881975

1007100541

5.6%

2010-11

47441959

673296147

7.05%

In last three years the percent of cash to total current assets is 7.8%, 5.6% and 7.05%. There is
increase in percent because companys current assets as well as cash is decreased as compared to

59

previous year. Company should have more percent of its current assets in form of cash to meet its
day-to-day expenses as well as emergency situations.

5) Sundry Creditors of the company


The creditors are managed at plant level only. Mostly the creditor comprises of contractors to
whom payment are to be given and the capital works. This is basically done as per terms and
condition with respective parties. In case of small-scale industries it is done within 30 days if the
dues are above 1 lakh. There is also a scheme of earnests money deposits for the registered small
scale industries. The schemes allow having a security deposits which is refundable at the end of
contract. In case of statutory payment that is the income tax, excise tax one month due is there.
The sundry creditors of the company are divided into two parts:
(i)Small Scale Industries: These basically include those industries from which the company
purchases secondary raw material or items necessary in production. These are decreasing and are
good for the company.
(ii) Others: These include those industries from which the company purchases its primary raw
material, without which it is not able to start its production. These have shown a consistency in
the last three years and the changes have been almost negligible.
This states that the company has been paying off its creditors on due dates as well as has
maintained good relations with them.

OPERATING CYCLE

60

Operating cycle is the time duration required to convert sales, after the conversion of resources
into inventories, into cash. The operating cycle of a manufacturing company involves three
phases:

Acquisition of resources such as raw material, labors and fuel etc.

Manufacture of the product which includes conversion of raw material into work in
process into finished goods.

Sales of the product either for cash or on credit.

Raw
materi
al

Ca
sh

WorkinProcess

Sal
es
FINDINGS OF THE STUDY
61

The company has a good reputation and image. It has been observed from companys

annual reports.
Sale of the company has been increased as compared to last year. Companys sale has

been increased by 5.6% this year.


Liquidity position of the company is not so good as the liquidity ratios of the company

are less than thumb rule of the ratios..


Major part of companys current assets is constituted by the stock. The company has

more raw materials in transit than in stores.


The cash in hand has been reduced as compared to last year which may not be good for

company.
The net increase in working capital indicates more increase in its current assets than its
current liabilities. It represents the good working capital management by the company.

RECOMMENDATIONS
The company should retain more cash in hand to meet its day to day expenses.
The company should try to improve its liquidity position either by increasing its current
assets or by reducing its current liabilities.
The company should also improve its current assets for improving in its working capital
position.

CONCLUSION

62

BPS Ltd. is growing at a fast pace as it can be seen through the increase in sales. The
Company is effectively using its resources of men, material and machinery, which

led to the

decrease in cost of goods sold despite increase in sales. The liquidity position of the firm has
shown a detrimental trend in relation to previous year because of greater increase in current
liabilities than current assets but still the liquidity position is satisfactory which can be seen from
the liquidity ratios. The Company has been doing good business and earning profits as it is
evident from the Profit & Loss A/C of the company ratios. Moreover the company is efficiently
using its fixed assets and working capital for generating sales.
The Company is into a lot of modernization and expansion for the growth of the
Company and to increase its sales. The firm should also invest some funds outside the business
to increase its earnings. The company should keep more cash for the liquidity position of the
company.
The various turnover ratios indicate sound management policies of the company
overtime. The company has very well managed its debtors and also has good policies to recover
its debts. The increasing sales indicate that demand of the product would go still high in the near
future. The inventory has also been very well managed by the company. The changes in the
sundry creditors of the company has almost been negligible, which states that the debts are being
paid-off by the company on time and the relations with the parties have also been very good. The
unnecessary expenses have also been under control by the company. The company is also
fulfilling its social responsibilities by giving business to small scale industries as well as going
by the laws of the government. Hence it can be said that on overall basis the company is on
sound and profitable track.

BIBLIOGRAPHY
63

Annual Reports of the financial year 2008-09, 2009-10 and 2010-11 of BPS Ltd.
Books
Shashi K. Gupta & R.K. Sharma, Financial Management, New Delhi
Kalyani Publisher
I.M. PANDEY : Financial Management, New Delhi
Vikas Publications;
PRASANA CHANDRA : Fundamentals of Financial Management, Theory and
practices

Websites

www.bpsl.net
www.scribd.com
www.nseindia.com
www.bhushanpowersteel.com

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