Working capital management in Indian steel Industry

RESEARCH PROJECT REPORT

Submitted to

Veer Bahadur Singh Purvanchal University, Jaunpur

In partial fulfillment of the requirements of the degree of
BACHELOR OF BUSINESS ADMINISTRATION

Submitted by:

Under the Supervision of:

Avnish Kumar Rai

B.B.A. 6th Semester
Roll Number 8033
Enrollment No. PU011/058

Mr. Jatindar Kumar

Assistant professor,
Department of Business Administration

2014

Technical Education & Research Institute

Post-Graduate College, Ravindrapuri
Ghazipur-233001
4

Certificate
This is to certify that Avnish Kumar Rai, pursuing BBA6th Semester
from this institute, has prepared the research project report entitled
Working capital management in Indian Steel Industry in partial
fulfillment of the requirements of the degree of Bachelor of Business
Administration from Veer Bahadur Singh Purvanchal University,
Jaunpur during the session 2013-2014.
This report is based on research project undertaken by Avnish Kumar
Rai under my supervision during the course of sixth semester and
fulfills the requirements of regulations relating to the nature and
standard of BBA course of V.B.S. Purvanchal University.
I recommend that this project report may be sent for evaluation.

Rahul Anand Singh

Jatinder Kumar

Associate Professor & Head ,

Assistant professor,

Dept. of Business Administration

Dept. of Business Administration

Declaration
I, Avnish Kumar Rai, hereby declare that this research project
report entitled Working capital management in Indian Steel
Industry has been prepared by me on the basis of research done
during the course of my sixth semester of B.B.A programme under the
supervision of Mr. Jatindar Kumar, Assistant Professor, Department
of Business Administration, TERI, Ghazipur.
This research project report is my bonafide work and has not
been submitted in any form to any University or Institute for the
award of any degree or diploma prior to the under mentioned date. I
bear the entire responsibility of submission of this project report.

15thNovermber 2014
Avnish Kumar Rai
BBA 6th semester
Department of Business Administration
Technical Education & Research Institute
P.G. College, Ghazipur

INDEX OF CONTENTS
Preface
Acknowledgement
CHAPTER -1
Introduction to the topic.1
CHAPTER-2
Objective44
Scope..45
CHAPTER-3
Research Methodology 46
CHAPTER-4
Data Analysis & Interpretation ..59
Finding & Recommendations79
CHAPTER-5
Conclusion.82

Suggestions83

Bibliography84

Preface
The first real insight of an organization for management student comes only during his
preparation of project work because student first interacts with real practical work. This is
first introduction to industry and its working. This project work synthesize the theoretical
concept learn in the class room and its practical orientation in organization.
In my project I have studied the Working capital management in Indian steel Industry.
The First chapter deals with the introduction of the topic, It also describes the profile and
history of Indian steel Industry.
FIRST CHAPTER:The Introductory stage of this survey report is based on introduction of the comparative study
of General Insurance service provided, , company profile and history of these Insurers.
SECOND CHAPTER:Second chapter is objective and importance.
THIRD CHAPTER:Dealt with Research Methodology. The process of carrying out the whole research is defined
in it. It constrains information about the methods of data collection, sampling, sample
designI.
FOUR CHAPTER:Data analysis & interpretation. Table, Graph and chart also included in this chapter

Is finding and recommendation. Contains the findings and recommendation of the study. This
based on the data analyzed and interrelated in previous chapters. This is the most important
section of the report, for repot is evaluated on the validity and correctness of its findings.
depicted recommendation which concludes the whole repot, that is, gives a brief description
of the process employed so far. It also showed annexure which contains a format of the
questionnaire used for the purpose of data collection.
FIVE CHAPTER:one title conclusion contains the list of sources from where the matter and information is
collected this chapter is Bibliography. It contains the list of books, author, volume number,
issue year, publisher etc.

Acknowledgement
Completing the work assigned by a single hand is not always possible. The same was here
and this is an opportunity to thank all of them who directly or indirectly shared their efforts to
complete task give to me.
I would like to express my heart felt thank to Mr. Rahul Anand Singh (HOD Department of
Business Administration), Ghazipur.
This research report could not have been taken shape without the able guidance given by Mr.
Jitendra kumar Assistant Professor, T.E.R.I. P.G College Ghazipur.
Lastly, I would like to express my thanks to my parents & friends for their encouragement &
support through out the duration of Research.

Avnish Kumar Rai

BBA 6th semester
Department of Business Administration
Technical Education & Research Institute
P.G. College, Ghazipur

10

INTRODUCTION
THE GLOBAL STEEL INDUSTRY
The current global steel industry is in its best position in comparing to last decades. The price
has been rising continuously. The demand expectations for steel products are rapidly growing
for coming years. The shares of steel industries are also in a high pace. The steel industry is
enjoying its 6th consecutive years of growth in supply and demand. And there is many more
merger and acquisitions which overall buoyed the industry and showed some good results.
The subprime crisis has lead to the recession in economy of different countries, which may
lead to have a negative effect on whole steel industry incoming years. However steel
production and consumption will be supported by continuous economic growth.

CONTRIBUTION OF COUNTRIES TO GLOBAL STEEL INDUSTRY

11

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. 118m 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 chunk of the whole growth.

STRUCTURE OF INDIAN STEEL INDUSTRY

The steel industry in India is concentrated in the east, south and west of the country. The
integrated foundries are located in the east, while electric steel is produced predominantly in
the south and west. In the future the east will see rapid expansion as more integrated
capacities are being built in Orissa and other eastern states due to its raw materials. Although
India is now one of the worlds top ten steel producers, its domestic output is insufficient to
meet the demand in all segments. Imports increased in2005 by 8% and it is likely that India
will continue to import in many segments over the medium term. According to Deutsche
Bank Research,1 the three biggest steelmakers in India have a combined output of almost 20
million tons and have a domestic market share of 51%. Their domestic competitors are
numerous me-dium-sized and smallish companies and more mergers can be expected
between these companies as these firms need to improve their position with regard to the
powerful suppliers of raw materials.

CONSUMPSION OF STEEL IN INDIA

Driven a booming economy and concomitant demand levels, consumption of steel has grown
by 12.5 per cent during the last three years, well above the 6.9percent envisaged in the
National Steel Policy.Steel consumption amounted to 58.45 mt in 2006-07 compared to 50.27

12

mt in2005-06, recording a growth rate of 16.3 per cent, which is higher than theworld
average. During the first half of the current year, steel consumption hasgrown by 16 per cent.
A study done by the Credit Suisse Group says that India'ssteel consumption will continue to
grow by 17 per cent annually till 2012, fuelled by demand for construction projects worth
US$ 1 trillion. The scope for raising the total consumption of steel in the country is huge, as
the per capita steel consumption is only 35 kgs compared to 150 kg in the world and 250 kg
in China. With this surge in demand level, steel producers have been reporting encouraging
results. For example, the top six companies, which account for 70per cent of the total
production capacity, have recorded a year-on-year growth rate of 13.4 per cent, 15.7 per cent
and 11.7 per cent in net sales, operating profit and net profit, respectively, during the second
quarter of 2007-08We expect strong demand growth in India over the next five years, driven
by aboom in construction (43%-plus of steel demand in India). Soaring demand bysectors
like infrastructure, real estate and automobiles, at home and abroad, hasput India's steel
industry on the world steel map.

YEAR WISE DEMAND OF INDIAN STEEL INDUSTRY

Graphical Representation Of Growth And Demand Of Indian Steel industry.

13

MAJOR CONSUMERS OF INDIAN STEEL INDUSTRYSupport from dynamic economy India is the economic region that has enjoyed the worlds
most sustained boom. The Deutsche Bank Research Formel-G econometric model forecasts
average real GDP growth of 5.5% p.a. for India between 2006 and 2020 O followed by
Malaysia (5.4%) and China (5.2%). In all, the analysis covered34 economies that generate
some 85% of global GDP. The growth driversare population growth, human capital, opening
of the economy and rising investment. Despite the sharp increase in Indias population, percapita GDP in purchasing power parity terms should rise by nearly 4% peryear until 2020.
Since the model does not take sufficient account of the countrys major initiatives in the
infrastructure area, average growth until2020 might turn out to be even closer to 6%. In fact,
by the end of the decade India could replace Japan as the worlds third biggest economy after
the US and China.

14

Positive stimuli from construction industry

The steel companies are pinning their hopes largely on the expanding construction industry.
The industry is one of the key drivers of Indias economic growth. Up to 10 million new
homes need to be built each year until 2030. Strong population growth, rising incomes and
decreasing household sizes are forcing comprehensive measures to be taken in the housing
sector. The pent-up demand for housing is estimated at around 20million units by the Indian
Construction Association; the Ministry for Urban Development and Poverty Alleviation
claims that no less than 31 million dwellings are needed. The hosting of the Commonwealth
Games in New Delhi in 2010 should generate additional stimulus for the construction
industry and thus boost demand for steel. In addition to the sports facili-ties, accommodation
for competitors and visitors is planned. The government has announced that some 40 hotels
with a total of 15,000 beds areto be built. The Indian office market is benefiting from the
ongoing off shoring activities of industrial nations. Indian insurers are concentrated inthe
software development and software product segments. Their second main business area is
assuming the responsibility for entire support processes, or business process outsourcing
(BPO). These segments stilllook set for growth.6 Furthermore, the construction sector is
benefitingfrom major infrastructure projects. Capital expenditure is to be focused onroad
building and the rail network, as well as on the construction and ex-pansion of ports and
airports

Strong growth in mechanical engineering

Mechanical engineering output has increased some 10% p.a. over the pastfive years. Thanks
to the march of technological progress the prospects fordomestic suppliers should improve

15

going forward, while import growth isslightly crimped. Demand is greatest for building
machinery andplastic-moulding machines as well as machine tools and textile
machinery.Since the domestic textile and apparel industry, for example, is focusingfurther up
the value chain, firms have to make numerous investments inmodernising and expanding
their machinery portfolios Makers of building machinery are benefiting from the large-scale
infrastructure projects planned by the Indian government, while machine-tool makers are
beingbuoyed by the upturn in the automobile and auto parts industries forexample. Exports
by the Indian mechanical engineering industry roserecently by nearly 30% to USD 10 bn. By
comparison, German mechanicalengineering firms exported products worth close to USD 117
bn, includingmachinery to the value of about USD 1 bn to India. Germany claims
aparticularly large share of Indian imports of Woodworking machinery andmachine tools as
well as pumps and compressors. The demand for foreign machinery comes from customers
requiring especially high standards of performance and precision. The Engineering Exports
Promotion Council(EEPC) forecasts that Indian exports will be worth USD 30 bn (+32%
p.a.)by 2008; nevertheless the volume is still very low by international standards.

Booming automobile industry

The automotive industry may consume a relatively small proportion of steel output, but its
growth rate is the highest of the most important clients for the steel industry. In India a small
but flourishing automobile industry has now developed that sees its future primarily in the
budget price segment and views the domestic market and other emerging nations as
potentialmarkets.7 Vehicle ownership (cars and trucks) in India at 11 per 1,000inhabitants are
even less widespread than in China with its very low figureof 21. The growth of the Indian
automobile industry is being driven byhealthy domestic demand. The consumption minded,

16

fast-growing middleclass is a major factor. The continuing increase in incomes and lowcostfinancing facilities are boosting sales. However, it is not uncommon forcars to be used for
20 years (Western Europe: 12 years), with vehicles that have been taken off urban roads often
being driven for longer in ruralareas.
The populations steadily growing demand for mobility and sharply rising traffic volumes
will continue to generate strong demand for cars inthe future. At the same time Indias
automobile sector is establishing itself as an exporter to international markets. Hyundai, for
example, uses the country as an export base for small cars, and Ford manufactures vehicles
there for South Africa and other markets. However, competition between automakers has
intensified markedly. Whereas in 1995 there were just five carmakers in India the figure has
now reached 10. The biggest are Maruti Udyog Ltd., Hyundai Motor India and Tata
Engineering (Telco). The Tata group is even trying to gain a foothold in the European market
with new models. India currently produces a total of 711,000 cars each year (Germany: 5.4
million).

17

SUPPLY OF STEEL IN THE INDIAN MARKET

Over the past ten years Indias crude steel output rose nearly 7%per year to55.3 million tons ,
while global crude steel output increased by 4% (Germanymanaged an increase of just under
1%p.a.) Although India is the worlds eighthlargest steel producer, its3%-plus share of global
steel output is still very low; itis roughly the same as Ukraines share of world steel
production. China, theworlds biggest steelmaker, produces nearly ten times as much as
India.In 2005Indias crude steel output of 46.5 million tons was 8%higher than in 2004;
onlyin China was the growth rate considerably higher at 15%. By contrast, produc-tion
volumes fell in the US and the EU-25 by nearly 5% and roughly 4% respec-tively. In the first
five months of 2006 Indian steel production continued to ex-pand unabated, rising 10%
yoy.We forecast a significant increase in output by the Indian steel industry over themedium
term. The entire industrys contribution to gross domestic product should rise in the coming
years to more than 30% compared to just under27% at present. The growth drivers are the
expanding client industries Automotive engineering (production up 16% p.a. between 2000
and 2005),mechanical engineering (up 10% p.a.) and construction (up 6% p.a.).

Global Scenario

In 2013 the world crude steel production reached 1606 million tonnes (mt) and
showed a growth of 3% over 2012. (Source: World Steel Association or WSA)

China remained the worlds largest crude steel producer in 2013 (779 mt) followed by
Japan (111 mt), the USA (87 mt) and India (81 mt) at the 4th position.

18

WSA has projected Indian steel demand to grow by 3.3% in 2014 as compared to
global steel use growth of 3% and Chinese growth of 3.1%. For 2015, further recovery is
projected for world (3.3%) and India (4.5%) and a slowing down for China (2.7%).

Per capita finished steel consumption in 2013 is estimated at 225 kg for world and
515 kg for China.

Domestic Scenario
The Indian steel industry has entered into a new development stage from 2007-08,
riding high on the resurgent economy and rising demand for steel.
Rapid rise in production has resulted in India becoming the 4 th largest producer of
crude steel and the largest producer of sponge iron or DRI in the world.
As per the report of the Working Group on Steel for the 12 th Plan, there exist many
factors which carry the potential of raising the per capita steel consumption in the
country, currently at 59.2 kg. These include among others, an estimated infrastructure
investment of nearly a trillion dollars, a projected growth of manufacturing from
current 8% to 11-12%, increase in urban population to 600 million by 2030 from the
current level of 400 million, emergence of the rural market for steel currently
consuming around 10 kg per annum buoyed by projects like Bharat Nirman, Pradhan
Mantri Gram Sadak Yojana, Rajiv Gandhi Awaas Yojana among others.
At the time of its release, the National Steel Policy 2005 had envisaged steel production
to reach 110 million tonnes by 2019-20. However, based on the assessment of the

19

current ongoing projects, both in greenfield and brownfield, the Working Group on
Steel for the 12 th Plan has projected that the crude steel steel capacity in the county is
likely to be 140 mt by 2016-17 and has the potential to reach 149 mt if all requirements
are adequately met.
The National Steel Policy 2005 is currently being reviewed keeping in mind the rapid
developments in the domestic steel industry (both on the supply and demand sides) as
well as the stable growth of the Indian economy since the release of the Policy in 2005.
Production

Steel industry was delicensed and decontrolled in 1991 & 1992 respectively.

Today, India is the 4 th largest crude steel producer of steel in the world.

In 2013-14, production for sale of total finished steel (alloy + non alloy) was 87.67
mt.

Production for sale of Pig Iron in 2013-14 was 7.95 mt.

India is the largest producer of sponge iron in the world with the coal based route
accounting for 88% of total sponge iron production in the country.

Last five year's production for sale of pig iron, sponge iron and total finished steel
(alloy + non-alloy) are given below:

20

Demand - Availability Projection

Demand Availability of iron and steel in the country is projected by Ministry of

Steel in its Five Yearly Plan documents.

Gaps in availability are met mostly through imports.

Interface with consumers by way of a Steel Consumers Council exists, which is

conducted on regular basis.

Interface helps in redressing availability problems, complaints related to quality.

Steel Prices

Price regulation of iron & steel was abolished on 16.1.1992. Since then steel prices
are determined by the interplay of market forces.

21

Domestic steel prices are influenced by trends in raw material prices, demand
supply conditions in the market, international price trends among others.

An Inter-Ministerial Group (IMG) is functioning in the Ministry of Steel, under the

Chairmanship of Secretary (Steel) to monitor and coordinate major steel investments in
the country.

The Government earlier took various fiscal and other measures for stabilizing steel
prices like significant reduction in import duties on steel, major raw materials, including
mineral products and ores and concentrates in last few years. Also, excise duty for steel is
currently at 12% and there is no export duty on steel items. The government has also
imposed export duty of 30% on all forms of iron ore and 5% on iron ore pellets in order
to control ad-hoc exports of the mineral and conserve it for long term requirement of the
domestic steel industry.

For ensuring quality of steel several items have been brought under a quality control
order issued by the Government.

Further, a Steel Price Monitoring Committee has been constituted by the Government
with the aim to monitor price rationalization, analyze price fluctuations and advice all
concerned regarding any irrational price behavior of steel commodity.

Imports

Iron & steel are freely importable as per the extant policy.

Last five years import of total finished steel (alloy + non alloy) is given below:

22

Exports

Iron & steel are freely exportable.

Last five years export of total finished steel (alloy + non alloy) is given below:-

Levies on Iron & Steel

SDF levy

This was a levy started for funding modernisation, expansion and development of
steel sector. The Fund, inter-alia, supports :
1.

Capital expenditure for modernisation, rehabilitation, diversification, renewal

& replacement of Integrated Steel Plants.

23

2.

Research & Development

3.

Rebates to SSI Corporations

4.

Expenditure on ERU of JPC

The SDF levy was abolished on 21.4.94

Cabinet decided that corpus could be recycled for loans to Main Producers

Interest on loans to Main Producers is set aside for promotion of R&D on steel etc.

An Empowered Committee has been set up to guide the R&D effort in this sector.

EGEAF Was a levy started for reimbursing the price differential cost of inputs used for
engineering exporters. Fund was discontinued on 19.2.96.
Opportunities for growth of Iron and Steel in Private Sector
The New Industrial Policy Regime
The New Industrial policy opened up the Indian iron and steel industry for private investment
by (a) removing it from the list of industries reserved for public sector and (b) exempting it
from compulsory licensing. Imports of foreign technology as well as foreign direct
investment are now freely permitted up to certain limits under an automatic route. Ministry of
Steel plays the role of a facilitator, providing broad directions and assistance to new and
existing steel plants, in the liberalized scenario.
The Growth Profile

24

(i) Steel : The liberalization of industrial policy and other initiatives taken by the Government
have given a definite impetus for entry, participation and growth of the private sector in the
steel industry. While the existing units are being modernized/expanded, a large number of
new steel plants have also come up in different parts of the country based on modern, cost
effective, state of-the-art technologies. In the last few years, the rapid and stable growth of
the demand side has also prompted domestic entrepreneurs to set up fresh greenfield projects
in different states of the country.
Crude steel capacity was 102 mt in 2013-14 and India, the 4 th largest producer of crude steel
in the world, has to its credit, the capability to produce a variety of grades and that too, of
international quality standards. The country is expected to become the 2 nd largest producer
of crude steel in the world by 2015-16, provided all requirements for creation of fresh
capacity are adequately met.
(ii) Pig Iron: India is also an important producer of pig iron. Post-liberalization, with setting
up several units in the private sector, not only imports have drastically reduced but also India
has turned out to be a net exporter of pig iron. The private sector accounted for 93% of total
production for sale of pig iron in the country in 2013-14. The production for sale of pig iron
has increased from 1.6 mt in 1991-92 to 7.95 mt in 2013-14.
(iii) Sponge Iron: India is the worlds largest producer of sponge iron with a host of coal
based units, located in the mineral-rich states of the country. Over the years, the coal based
route has emerged as a key contributor and accounted for 88% of total sponge iron
production in the country. Capacity in sponge iron making too has increased over the years
and stands at around 45 mt.

25

INTRODUCTION TO THE INDUSTRY

Indian Economy-

In the beginning of the year 2008 the economy was on a higher growth path with the macroeconomic fundamentals inspiring confidence and a general optimism about the medium to
long term prospects of the economy. The economy was expected to slow down marginally
from the three years of 9% plus growth in real GDP reflecting a cyclical downturn in the
global economy and expectations were that the growth would be around 8.5%. High oil prices
and domestic inflation and worsening of international financial crisis which had surfaced in
2007 have been definite areas of concern. But the global situation deteriorated massively after
mid-September 2008 following collapse of series of investment banks in the US. This
resulted in choking of credit and global crash in stock markets. Crisis of this magnitude in
industrialized countries has impact around the world especially in the emerging market
countries like India. The Indian economy which started with a strong economic performance
lost the momentum once the ripple effects of the gloom in the global economy set in. Sensex
in January 2008 was all time high at 21206, came down to around 9000 towards the end. The
high cost of crude oil around US$ 150 per barrel in August, 2008 added to the countrys woes
in terms of higher import bill. Rupee weakened against dollar sliding down from Rs.39 in the
beginning of the year to Rs.48 towards the end.

26

According to the estimates released by Central Statistical Organisation (CSO) the real GDP
growth was 7.6% in the second quarter of 2008-09 as compared to 9.3% of the corresponding
quarter of 2007-08, reflecting deceleration in growth of industry and services. The
agricultural production was below the estimate. The index of industrial production recorded
3.9% as compared to 9.2% in the previous year. Indias balance of payments position
witnessed widening of trade deficit. The crisis in global financial markets deepened since mid
September, 2008 exerting pressure on financial markets and crashing of equity markets
leading to wide spread volatility. The global turmoil in the financial markets spilled over the
emerging markets. This has finally affected the manufacturing sector. As a result, authorities
in several countries embarked upon an unprecedented way of policy initiatives to contain
systematic risk, arrest the plunge in asset prices and shore of the confidence in the
international banking system. This has brought about some level of stability. The Indian
Government has not lagged behind. It has been successful in bringing down inflation from
12.9% in August, 2008 to around 6% towards the end of the year. The challenges of high
growth and now global recession have become more complex especially with increased
globalization of world economy and growing influence of global developments, economic
and no economic. Upgrading infrastructure such as energy, roads, inflation management,
promoting growth of industrial sector, stability in financial market, containing deficit, both
domestic and external, promoting exports amidst global recession are the major challenges
that are faced by Indian economy.

27

28

WORKING CAPITAL MANAGEMENT

CONCEPTUAL FRAMEWORK
Introduction to working capital

Working Capital is the Life-Blood and Controlling Nerve Center of a

business
The working capital management precisely refers to management of current assets. A firms
working capital consists of its investment in current assets, which include short-term assets
such as:
Cash and bank balance,
Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets and current
liabilities.

Working Capital = Current Assets-Current Liabilities

There are two major concepts of working capital:

Gross working capital
Net working capital

29

 Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets, which can be converted
into cash with in a financial year. The gross working capital points to the need of arranging funds to
finance current assets.
Net working capital:
It refers to the difference between current assets and current liabilities. Net working capital can be
positive or negative. A positive net working capital will arise when current assets exceed current
liabilities. And vice-versa for negative net working capital. Net working capital is a qualitative
concept. It indicates the liquidity position of the firm and suggests the extent to which working
capital needs may be financed by permanent sources of funds. Net working capital also covers the
question of judicious mix of long-term and short-term funds for financing current assets.

Significance Of Working Capital Management

IN C R E A S E
IN FIX
ASSETS

IN C R E A
SE
E FFE C IE
NY

IN C R E A S E
DEBT
C A PAC IT Y

D IV ID E N D
D IS T R IB U T IO N

EASY
LO A N
FRO M
BANKS

S IG N IFIC A N --C E
O F W O R K IN G
C A PITA L

PAYM E N T 30
TO
S U P P LIE
RS

The management of working capital is important for several reasons:

For one thing, the current assets of a typical manufacturing firm account for half of its total
assets. For a distribution company, they account for even more.
Working capital requires continuous day to day supervision. Working capital has the effect on
company's risk, return and share prices,
There is an inevitable relationship between sales growth and the level of current assets. The
target sales level can be achieved only if supported by adequate working capital Inefficient
working capital management may lead to insolvency of the firm if it is not in a position to meet
its liabilities and commitments.

Liquidity Vs Profitability: Risk - Return trade off

Another important aspect of a working capital policy is to maintain and provide sufficient liquidity
to the firm. Like the most corporate financial decisions, the decision on how much working capital
be maintained involves a trade off- having a large net working capital may reduce the liquidity risk
faced by a firm, but it can have a negative effect on the cash flows. Therefore, the net effect on the
value of the firm should be used to determine the optimal amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They are the determination
of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support this investment
in current assets, a firm should decide whether or not it should use short-term financing. If
short-term financing has to be used, the firm must determine its portion in total financing.
Short-term financing may be preferred over long-term financing for two reasons:
The cost advantage
Flexibility

31

short-term financing is more risky than long-term financing. Following table will summarize our
discussion of short-term versus long-term financing

Maintaining a policy of short term financing for short term or temporary assets needs (Box 1) and
long- term financing for long term or permanent assets needs (Box 3) would comprise a set of
moderate risk profitability strategies. But what one gains by following alternative strategies (like
by box 2 or box 4) needs to weighed against what you give up.

32

CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified as follows:

GOTSRPN
ORNKEASGM
YONIRUET
TISDLNVAFW
H
WD
SESWLRO
KWOR
CBOK
ORKF
ARKCI
SKTNW
NIGSO
GSCOR
COPAF
AFKTPC
PTNLTIO
TILANG
AMLC
LEC
A
PP
TT

On the basis of time

On the basis of concept

E E PE E
C E SR AI
N/ L
V
I EA X B
O
I
ON
AI
N
R
ALI
A II
A
IA
A I
A I

MR

A N
T

P
A

P
P

E L

/
R
RG
G

E
I

A
L

33

T
I

Types of Working Capital Needs

Another important aspect of working capital management is to analyze the total working capital
needs of the firm in order to find out the permanent and temporary working capital. Working capital
is required because of existence of operating cycle. The lengthier the operating cycle, greater would
be the need for working capital. The operating cycle is a continuous process and therefore, the
working capital is needed constantly and regularly. However, the magnitude and quantum of
working capital required will not be same all the times, rather it will fluctuate.
The need for current assets tends to shift over time. Some of these changes reflect permanent
changes in the firm as is the case when the inventory and receivables increases as the firm grows
and the sales become higher and higher. Other changes are seasonal, as is the case with increased
inventory required for a particular festival season. Still others are random reflecting the uncertainty
associated with growth in sales due to firm's specific or general economic factors.
The working capital needs can be bifurcated as:
Permanent working capital
Temporary working capital
Permanent working capital:
There is always a minimum level of working capital, which is continuously required by a firm in
order to maintain its activities. Every firm must have a minimum of cash, stock and other current
assets, this minimum level of current assets, which must be maintained by any firm all the times, is
known as permanent working capital for that firm. This amount of working capital is constantly and
regularly required in the same way as fixed assets are required. So, it may also be called fixed
working capital.
Temporary working capital:

34

Any amount over and above the permanent level of working capital is temporary, fluctuating or
variable working capital. The position of the required working capital is needed to meet fluctuations
in demand consequent upon changes in production and sales as a result of seasonal changes.

The permanent level is constant while the temporary working capital is fluctuating increasing and
decreasing in accordance with seasonal demands as shown in the figure. In the case of an expanding
firm, the permanent working capital line may not be horizontal. This is because the demand for
permanent current assets might be increasing (or decreasing) to support a rising level of activity. In
that case line would be rising. \
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS
There are many factors that determine working capital needs of an enterprise. Some of these factors
are explained below:

Nature or Character of Business.

The working capital requirement of a firm is closely related to the nature of its
business. A service firm, like an electricity undertaking or a transport corporation,
which has a short operating cycle and which sells predominantly on cash basis,
has a modest working capital requirement. Oh the other hand, a manufacturing

35

concern like a machine tools unit, which has a long operating cycle and which
sells largely on credit, has a very substantial working capital requirement.
Sintech is a manufacturing concern so this requires them to keep a
very sizeable amount in working capital.
Size of Business/Scale of Operations.
Sintech has a good position in its segment and they are also spending their
operations in the domestic market as well as in foreign market. The scale of
operations and the size it holds in the market makes it a must for them to hold
their inventory and current asset at a huge level
Rate of Growth of Business.
The rate of growth of sales indicates a need for increase in the working capital
requirements of the firm. As the firm is projected to increase their sales by 69%
from what it was in 2009, it is required to guard them against the increasing
requirements of the net current asset by way of efficient working capital
management. The sales and projected sales level determine the investment in
inventories and receivables.
Price Level Changes.
Changes in the price level also affect the working capital requirements. It was the
reduced margins in the price of the raw materials that had prompted them to go for
bulk purchases thus making on additions to their net current assets. They might
have gone for this large-scale procurement for availing discounts and anticipating a
rise in prices, which would have meant that more funds are required to maintain the
same current assets.

SOURCES OF WORKING CAPITAL

36

Sintech has the following banks available for the fulfillment of its working capital requirements in
order to carry on its operations smoothly:

Banks:
These include the following banks
o Indian Bank
o Syndicate Bank

NAME OF THE BANK

FUND BASED

NON-FUND BASED

INDIAN BANK

300

250

SYNDICATE BANK

200

100

TOTAL

500

350

WORKING CAPITAL CYCLE

The upper portion of the diagram below shows in a simplified form the chain of events in a
manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank through
which funds flow. These tanks, which are concerned with day-to-day activities, have funds
constantly flowing into and out of them.

37

RAW MATERIAL
CASH
OPERATING CYCLE

& BILLS RECEIVABL-ES

SALES

WORK IN PROGRESS

FINISH GOODS

The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the stock, and it
will become part of the firms work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished product.
As production progresses, labor costs and overheads need have to be met.
Of course at some stage trade creditors will need to be paid.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.

38

Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash (positive or
negative) and trade creditors can be viewed as tanks into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of cash.

The business will have to make payments to government for taxation.

Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash
Dividends may be paid

Long-term loan creditors (existing or new) may provide loan finance, loans will need to
be repaid from time-to-time, and
Interest obligations will have to be met by the business
Unlike, movements in the working capital items, most of these non-working capital cash
transactions are not every day events. Some of them are annual events (e.g. tax payments, lease
payments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. new equity
and loan finance and redemption of old equity and loan finance) would typically be rarer events.

39

INVENTORY MANAGEMENT

Inventories
Inventories constitute the most important part of the current assets of large majority of
companies. On an average the inventories are approximately 60% of the current assets in
public limited companies in India. Because of the large size of inventories maintained by the

40

firms, a considerable amount of funds is committed to them. It is therefore, imperative to

manage the inventories efficiently and effectively in order to avoid unnecessary investment.
Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale and
components make up of the product. The various forms of the inventories in the
manufacturing companies are:

Raw Material: It is the basic input that is converted into the finished product
through the manufacturing process. Raw materials are those units which have been
purchased and stored for future production.
Work-in-progress: Inventories are semi-manufactured products. They represent
product that need more work they become finished products for sale.
Finished Goods: Inventories are those completely manufactured products which are
ready for sale. Stocks of raw materials and work-in-progress facilitate production,
while stock of finished goods is required for smooth marketing operations. Thus,
inventories serve as a link between the production and consumption of goods.
Inventory Management Techniques
In managing inventories, the firms objective should be to be in consonance with the
shareholder wealth maximization principle. To achieve this, the firm should determine the
optimum level of inventory. Efficiently controlled inventories make the firm flexible.
Inefficient inventory control results in unbalanced inventory and inflexibility-the firm may
sometimes run out of stock and sometimes pile up unnecessary stocks.

41

 Economic Order Quantity (EOQ): The major problem to be resolved is how much
the inventory should be added when inventory is replenished. If the firm is buying
raw materials, it has to decide lots in which it has to purchase on replenishment. If
the firm is planning a production run, the issue is how much production to schedule.
These problems are called order quantity problems, and the task of the firm is to
determine the optimum or economic lot size. Determine an optimum level involves
two types of costs: Ordering Costs: This term is used in case of raw material and includes all the
cost of acquiring raw material. They include the costs incurred in the
following activities:
Requisition
Purchase Ordering
Transporting
Receiving
Inspecting
Storing
Ordering cost increase with the number of orders placed; thus the more
frequently inventory is acquired, the higher the firms ordering costs. On the
other hand, if the firm maintains large inventorys level, there will be few
orders placed and ordering costs will be relatively small. Thus, ordering costs
decrease with the increasing size of inventory.

Carrying Costs: Costs are incurred for maintaining a given level of

inventory are called carrying costs. These include the following activities:
Warehousing Cost
Handling
Administrative cost
Insurance
Deterioration and obsolescence

42

Carrying costs are varying with inventory size. This behavior is contrary to
that of ordering costs which decline with increase in inventory size. The
economic size of inventory would thus depend on trade-off between carrying
costs and ordering cost.

ABC System:
ABC system of inventory keeping is followed in the factories. Various items are
categorized into three different levels in the order of their importance. For e.g. items
such as memory, high capacity processors and royalty are placed in the A category.
Large number of firms has to maintain several types of inventories. It is not desirable
the same degree of control all the items. The firm should pay maximum attention to
those items whose value is highest. The firm should therefore, classify inventories to
identify which items should receive the most effort in controlling. The firm should be
selective in approach to control investment in various types of inventories. This
analytical approach is called ABC Analysis. The high-value items are classified as
A items and would be under tightest control. C items represent relatively least
value and would require simple control. B items fall in between the two categories
and require reasonable attention of management.

43

CASH MANAGEMENT
Sources of Cash:
Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit.
Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the
financial resources of the business. This is called overtrading.
Early warning signs include:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts for early cash
payment
Bank overdraft exceeds authorized limit.
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors

44

 Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages, pending receipt
of a cheque).

CASH MANAGEMENT IN SINTECH PRECISION PRODUCT LTD.

The cash management system followed by the SINTECH is mainly lock box system.
Cash Management System involves the following steps:

1. The branch offices of the company at various locations hold the collection of cheques
of the customers.
2. Those cheques are either handed over to the CMS agencies or bank of the particular
location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing house to make them
realized. These cheques can be local or outstation.
4. The CMS agencies or bank send information to the central hub of the company
regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per the agreed
agreements.
6. The CMS agencies or concerned bank provides the necessary MIS to the company as
per requirement.
In cash management the collect float taken for the cheques to be realized into cash is irrelevant and
non-interfering because banks such as Standard Chartered, HDFC and CitiBank who give credit on
the basis of these cheques after charging a very small amount. These credits are given to immediately
and the maximum time taken might be just a day. The amount they charge is very low and this might
cover the threat of the cheque sent in by two or three customers bouncing. Even otherwise the time

45

taken for the cheques to be processed is instantaneous. Their Cash Management System is quite
efficient.

RECEIVABLES MANAGEMENT
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed.... how
long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses whom
can least afford it. If you don't manage debtors, they will begin to manage your business as
you will gradually lose control due to reduced cash flow and, of course, you could
experience an increased incidence of bad debt.
The following measures will help manage debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the
priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially largerones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank
references, industry sources etc.
6. Establish credit limits for each customer and stick to them.

46

7. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10.Consider charging penalties on overdue accounts.
11.Consider accepting credit /debit cards as a payment option.
12.Monitor your debtor balances and aging schedules, and don't let any debts get too old.
Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention. Look for the warning signs of a future bad debt. For example..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed terms.
3. Evidence of customers switching to additional suppliers for the same goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.
Here are few ways in collecting money from debtors: -

Develop appropriate procedures for handling late payments.

Track and pursue late payers

Get external help if you own efforts fail.

Dont feel guilty asking for money .. its yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction.

In difficult circumstances, take what you can now and agree terms for the remainder, it

47

lessens the problem.

When asking for your money, be hard on the issue but soft on the person. Dont give
the debtor any excuses for not paying.

Make that your objective is to get the money, not to score points or get even.

MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity
problems.
Consider the following:

Who authorizes purchasing in your company - is it tightly managed or spread among a number
of (junior) people?

Are purchase quantities geared to demand forecasts?

Do you use order quantities, which take account of stock holding and purchasing costs?

Do you know the cost to the company of carrying stock?

How many of your suppliers have a return policy?

Are you in a position to pass on cost increases quickly through price increases to your
customers?

If a supplier of goods or services lets you down can you charge back the cost of the delay?

48

There is an old adage in business that "if you can buy well then you can sell well". Management of
your creditors and suppliers is just as important as the management of your debtors. It is important
to look after your creditors- slow payment by you may create ill feeling and can signal that your
company is inefficient (or in trouble!).

Remember that a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.

Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to make investment
in current assets.
Long term financing:
It includes ordinary share capital, preference share capital, debentures, long term
borrowings from financial institutions and reserves and surplus.
Short term financing:
It is for a period less than one year and includes working capital funds from banks, public
deposits, commercial paper etc.
Depending on the mix of short and long term financing, the company can follow any of
the following approaches.
Matching Approach
In this, the firm follows a financial plan, which matches the expected life of assets with the
expected life of source of funds raised to finance assets. When the firm follows this
approach, long term financing will be used to finance fixed assets and permanent current
assets and short term financing to finance temporary or variable current assets.
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary current assets with
long term financing. In the periods when the firm has no need for temporary current assets,
49

the long-term funds can be invested in tradable securities to conserve liquidity. In this the
firm has less risk of facing the problem of shortage of funds.
Aggressive Approach
In this, the firm uses more short term financing than warranted by the matching plan. Under
an aggressive plan, the firm finances a part of its current assets with short term financing.

The Problems
In the management of working capital, the firm is faced with two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the optimal
amounts of cash, accounts receivable and inventories that a firm should choose to maintain?

2. Second, given these optimal amounts, what is the most economical way to finance these
working capital investments? To produce the best possible results, firms should keep no
unproductive assets and should finance with the cheapest available sources of funds. Why? In
general, it is quite advantageous for the firm to invest in short term assets and to finance shortterm liabilities.

50

OBJECTIVE OF STUDY

The objectives of this project were mainly to study the inventory, cash and receivable at
SINTECH PRECISION PRODUCT LTD., but there are some more and they are The main purpose of our study is to render a better understanding of the concept of
Working Capital Management.
To understand the planning and management of working capital at TATA Steel.
To measure the financial soundness of the company by analyzing various ratios.
To suggest ways for better management and control of working capital at the concern.

51

SCOPE OF THE STUDY

This project is vital to me in a significant way. It does have some importance for the
company too. These are as follows

This project will be a learning device for the finance student.

Through this project I would study the various methods of the working capital
management.
The project will be a learning of planning and financing working capital.
The project would also be an effective tool for credit policies of the companies.
This will show different methods of holding inventory and dealing with cash and
receivables.
This will show the liquidity position of the company and also how do they maintain

52

a particular liquidity position.

RESEARCH METHODOLOGY
METHODOLOGY
Research is a common language refers to a search of knowledge. Research is
scientific & systematic search for pertinent information on a pacific topic, infect research is
an art of scientific investigation. Research methodology is a scientific way to solve research
problem. It may be understood as a science of studying how research is doing scientifically.
In it we study various steps that are generally adopted by research by research in studying
hair research problem it is necessary for researchers to know not only know research method
techniques but also technology.

The scope of Research Methodology is wider than of research methods.

The research problem consists of series of closely related activities. At a times the
first step determines the native of the last step to be undertaken, why a research has been
defined what data has been collected and what a particular methods have been adopted and a
host of similar other questions are usually answered when we talk of research methodology
concerning a research problem or study. The project is a study where focus is on the
following points:

Research Design
A research design is defined, as the specification of methods and procedures for
acquiring the information needed. It is a plant or organizing framework for doing the study

53

and collecting the data. Designing a research plan requires decision all the data sources,
research approaches, Research instruments, sampling plan and contact methods.

Research design is mainly of following types:

Exploratory research

Descriptive studies

Casual studies

EXPLORATORY RESEARCH
The major purposes of exploratory studies are the identification of problems,
the more precise formulation of problems and the formulation of new alternative
courses of action. The design of exploratory studies us characterized by a great
amount of flexibility and ad hoc veracity.

DESCRIPTIVE RESEARCH
Descriptive research in contrast to exploratory research is marked by the prior
formulation of specific research Questions. The investigator already knows a
substantial amount about the research problem, perhaps as a Result of an exploratory
study, before the project is initiated; Descriptive research is also characterized by a
preplanned and structured design.

CASUAL OR EXERIMENTAL RESEARCH

A casual design investigates the cause and effect relationships between
two or more variables. The hypothesis is tested and the experiment is done.
There are following types of casual designs:

54

I.
II.
III.
IV.
V.
VI.

After only design

Before after design
Before after with control group design
Four groups, six studies design
After only with control group design
Consumer panel design

SECONDARY DATASources of Secondary Data. Following are the main sources of

secondary data:

55

DATA SOURCES:
The following sources have been sought for the preparation report:

Primary sources such as business magazines, current annual reports, book on

Financial Management by various authors and internet websites the imp amongst
them

being

www.sintechpumps.com,

www.indiainfoline.com,

www.studyfinance.com .
Secondary sources like previous years annual reports, CMA Data, reports on
working capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash management,
receivables management, inventory management and short term financing was
required.
This data was gathered through the companys websites, its corporate intranet,
Sintechs annual reports and CMA Data of the last three years.
A detailed study on the actual working processes of the company is also done
through direct interaction with the employees and by timely studying the
happenings at the company.
Also, various text books on financial management like Khan & Jain, Prasanna
Chandra and I.M.Pandey were consulted to equip ourselves with the topic.

PRESENTATION AND ANALYSIS OF DATA:

56

Working Capital Analysis of TATA STEEL Ltd.

Working capital is a financial metric which represents the amount of day-by-day operating
liquidity available to a business. Also known as operating capital, it is calculated as current
assets minus current liabilities. A company can be endowed with assets and profitability, but
short of liquidity, if these assets cannot readily be converted into cash. It is a two edged
sword where excess of working capital implies blockage of fund and low working capital
gives a fear of falling into liquidity crunch therefore it is rightly said that

Never cross the border, wisdom says, there is fire beyond the border
Amount in Rupees Lakhs in this Table

Particular

Gross

2002

to 2003

to 2004

to 2005

to 2006

2003

2004

2005

2006

2007

12 Month
3186.93

12 Month
3804.84

12 Month
3632.73

12 Month
3742.32

12 Month
4408.73

2257.50

1708.00

1502.89

555.45

Working
Capital
Net Working 1544.3
Capital

57

to

The figures above shows that the company has managed to bring down the working capital which is a
positive sign. A detailed analysis of the various constituents of the working capital has been done to
learn the intricacies which have been managed to get the result.

The figure above shows that Gross Working Capital has an increasingtrend whereas net
working capital is going down and in the year 2006-07it has decreased too much.
But prima facie
it suggests that investment in current assets has increased much and the liabilities have also
not been fixed to a great extent. There may be several reasons which will be discussed later in
detail

58

OPERATING CYCLE OF TATA STEEL:

Working capital statement of TATA STEEL till 2007 showing below:

The operating cycle shows an irregular trend. It was increasing all the way but all of a
sudden it went down in 2006-07. The main reason behind this is that debtors collection
period has decreased and creditors payment period has increased a lot. The credit period
granted by customers is generally 90 days but since the company is running on loss

59

sometimes it cannot pay the amount in stipulated time, this has led to the increase in credit
period availed from customer and thus decreased the operating cycle to such an extent.

INVENTORY MANAGEMENT
In clarity and confusion, imagination and emotion Creation Proceeds towards
Perfection
For a long time inventory management remained everybodys concern but nobodys
responsibility. Every organizational unit along the productive distributive channel of an
enterprise wants to have full control over the inventory it deals in: the purchasing department
for materials inventory; production department for work in process, and marketing
department for finished goods inventory. Although the distribution appears to be logical,
inherent in it is the tendency to maximize individual goals at the cost of organizational goals.
Thus the process of sub-optimization begins which leads to disastrous results forth enterprise
and put inventory management in disarray

Worldwide the corporate failures during and after the Second World War and lately during 70s, led the
corporate thinkers to redefine the goals of inventory management as a part of overall materials
management of the enterprise. Materials requirement planning (MRP) which emerged as a new
discipline, attempted to define inventory management as an integral part of MRP whose broad goals
are: (1) to minimize investment in inventory: (2) to ensure smooth and efficient operation of the plant
and, (3) to maximize customer service and satisfaction. The TATA STEEL Limited has varied product
line.[which includes Long tubes, Semis, Hot Rods, Cold rods, Galvanized Tubes]. A number
of materials small and big are used in the production process. Their efficient management is very
much required to use the resources profitably. A manufacturer is required to hold almost all the three
types of inventories namely raw materials, work in process and finished goods. Inventory problems
are most complex here because of the complexity of products (e.g. a project or finished goods),

processes (e.g. continuous or intermittent) and distribution (e.g. geographical locations)

60

Products (e.g. a project or finished goods), processes (e.g. continuous or intermittent) and
distribution (e.g. geographical locations).

Inventory Strategy:
Inventory strategies vary with the kind of focus strategy and the product market. For a cost
focus strategy, make to stock could be ideal. For focused premium market segment the
strategies could partly be make to stock and partly assemble to order. Focused differentiation
in custom based products may follow inventory strategy of make to order or engineer to
order. In both the cases production would not start until anode is received. The consultancy
Element is greater in the latter than in the former strategy, which requires designing and/or
developing prototype according to customer requirement and then producing it. Customer
wait time is therefore, longer in engineer to order strategy than in make to order strategy. The
TATA STEEL [tubes division] uses
Just - In - Time Purchases system
For its inventory and
TOC (theory of constraints)
. The company runs on
The system makes to order. Production is made on the basis of order received or expected orders to be
received. The marketing department makes an estimation of the order to be received and accordingly
issues directions to the shop floor for the production requirement. The shop floor on the basis of
above requisitions check out its materials in stock and accordingly issues requisition for purchase of
raw materials to purchase department.

61

Price of raw materials from its sales. The price of raw material has increased a lot from 2002 to 2007
but due to stiff competition in the market it cannot be recovered by increasing the sale price so that the
company should not lose its market share. The increase in inventory may pertain to wrong estimation
of executable orders based on which purchases were made which added on to the stock.

Manufacturing Process (Production Phase):

It is the process by which raw material or semi finished goods are converted into finished
goods by doing some processing on them or adding something to them. Given below is the

62

five-year data. To calculate its effect on working capital requirement work in progress in
operating days is calculated for the following five years.

PRODUCTION PHASE
of the TATA STEEL showing in table 2

Work in Progress (Holding Period 2002 to 2007) showing in graph 3.

The data above shows that both cost of goods produced and work in progress have increased
during the period. Work in progress holding period has also increased which should be taken
care of. Since cost of goods produced per day and average work in progress has increased
Withholding period has increased

63

RECEIVABLES MANAGEMENT:
Collection of Receivables from Debtors:
Accounts receivables of a firm are created on both sides of the productive system. On one
side of this system, the firm may make advance payments to the suppliers of inventories (raw
materials) tonsure timely supply, particularly when the suppliers hold monopolistic position
in the market place, or when materials are in short supply, or simply to develop a captive
supply base. A firm may also be motivated to make advance payments for pure short term
financial and profitability considerations. Any one or a combination of them will create
accounts receivable on the left side of the productive system which may replace the box for
supply creditors or hinge parallel to it. On the other side of the productive system, a firm
creates accounts receivables when it sells its outputs on credit. These are popularly. Termed
as sundry debtors by the English to distinguish it from other forms of accounts receivables.
Sundry Debtors constitute nearly 60percent of accounts receivables of an enterprise. Many of
the considerations that weigh in the minds of a seller are similar to that of making advance
payment for supply of materials, though often on the opposite direction. But there are more to
it than this, which will be discussed later.
Size of accounts receivable
Although accounts receivable does not find much place in economics literature because of its
non-existence in national accounting framework and the assumption of perfect financial
market, its enormity as financial variable cannot be ignored at the firm level when we find
that even in an advanced economy, like the United States, it constitutes more than 20 % of the
total assets of manufacturing firms. In India, it is about26%.

64

Trade Credit Marketing Finance Trade Off :

Whatever way we look at it, accounts receivables imply trade credit, and the decision to grant
trade credit may either be part of marketing strategy or pure finance strategy, but mostly it is
a trade-off between marketing and finance strategies of a business.

An important goal of marketing is matching of the demand of a market segment with

adequate and timely supplies. Choice of a correct distribution system or channel is chosen is
therefore, key to achieving such a goal. The decision to pick up a particular channel has a
long term effect on the business. Once a channel is chose it is difficult to alter it in short term
because of commitments made to a large number of people and to independent firms whose
principal business is distribution. It often takes years to develop a distribution channel which
may remain external to the enterprise, but gets integrated so much with it that it takes up the
character of a total business system. Any attempt to snap even a small part of this chain may
have the effect of ultimately blocking the inventory flow through the system.

Distribution Channels:
Choice of a particular distribution channel has a direct impact on inventory holding and level
of receivables. Even when an enterprise does not desire to own the entire channel, working
capital requirement does not change except marginally. Such is the importance of correct
65

choice of a distribution channel. Direct marketing or owning a marketing channel(which is

also called zero level channel) is best from the point of view of receivables management. As
the manufacturer has direct control over the distribution system, receivables are closely
monitored resulting into lower level of receivables holding. There is also less distortion in
marketing and credit information flow to the business. While marketing research information
enables the firm to understand quickly the changing consumer needs and product behavior,
the credit information helps it understand credit behavior of customer, which forms the basic
input to decide whom to grant trade credit and the degree of monitoring required for a
particular customer or a group of customers owing to any change in their creditworthiness.
As more and more cash is received from the debtors the liquid funds available for the
working of the company increases. In TATA STEEL debtors are given a credit period of 90
days. However to encourage an early payment customers are being given a discount of 3 %
on payment within 15 days and 1 % on payment within 30 days, with the condition that
they should not have any old outstanding account which is due for more than 60 days. Given
below is the data for receivables of the company

Table 16 showing debtor from 2002 to 2007.

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Conclusion:
The debtor figures show a mix of ups and downs. Debtors balance has increased and
decreased although the sales have remained almost at the same level. This shows that the
company is trying to hold the customers by giving relaxations in credit terms and sometimes
stringent credit terms were used to avoid liquidity crunch. A significant decrease in average
collection period can be seen from 97 days to 73days which is a good sign and depicts
efficient receivables management by the company. A decrease in debtors means more funds
release forth company from working capital and hence no need to borrow funds as working
capital.

Management of Accounts Payable:

Accounts payable includes trade credit and accrued expenses which together provide finance
to the operations of a business on an ongoing basis. Accounts payable is the opposite face of
accounts receivable. The former exists because of the latter. The dominant part of accounts
payable is trade credit which is first offered by the seller of goods which, when accepted by
the buyer, creates accounts payable in the books of accounts of the latter. TATA STEEL used
to get a credit period of 0 to 90days. However their average payment period stands at 100
days.
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Average Payment from creditors from 2002 to 2007 showing by Graph 8.

Conclusion:
The creditor figures have increased in the long during the period. From 2004-05 to 2005-06
there have been an increase of almost82%. This is due to fact that average payment period
has increased from73 days to 100 days. It means the company is utmost utilizing the credit
period given to it. However a careful look into the profit and loss account of the company
suggests that the company is running under loss and issuffering from the liquidity crunch so
that may have been the reason for increase in average payment period.

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Comparative Analysis of Working Capital through Ratios:

Various ratios of working capital has been discussed here and compared with the competitors
to analyze the working capital position of the company.

CU RREN T RATIO:
The liquidity of working capital is an important aspect to be analyzed by the management for
maintaining proper liquid resources to meet operational needs. Current Ratio indicates
firms commitment to meet its short term liabilities & is calculated by the formula:
Current Assets / Current Liabilities.

Rationale:
Higher the ratio, larger is the amount available per Rupee of current liability, the more the
firms ability to meet current obligations &greater the safety of funds of short term creditors.
Thus current ratio.
Measure the margin of safety creators. Graph below compare current ratio of past five years
with the competitor.

CURRENT RATIO:

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Interpretation:
Conventionally the ideal current ratio is 2:1, but in practice ideal ratio varies significantly
from industry to industry or company to company.
The current Ratio Tata Steel is varied from 2.46 to 1.44. It has been fluctuating between two.
How seems to be decreasing. Thus it can be the margin of safety for creditors in company
liquidity position is detraining but when it is compared to its competitors JINDAL and
OTHERS Ltd., it has still maintained a good position. Hence the decline may be an
implication of market forces because its competitors are also facing the same situation. Only
OTHERS Ltd. has managed to improve its current ratio. It means as compared to the other
two, Other Ltd. has a strong liquidity position whereas the liquidity position of TATA STEEL
and JINDAL are declining.
Quick Ratio:
This is the most rigorous and absolute test of liquidity position of business unit. It shows
what extent cash is available with firm its meet to current liability.

The quick ratio of TATA STEEL INDUSTRY showing a declining trend.From1.5 in 2002 to .72
in 2007 it has dipped almost 50.if we compare its quick ration Jindal and OTHER they are in
better position. Other ltd has the strong ratio the three of 1.16.
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This means that the liquidity position of TATA STEEL is not that good. It is showing
insufficiency of funds. Since the company is running into losses it must have been affected
the liquidity position. It is very important for the company to have a good liquidity position
because it may suffer various bottlenecks. From the ratios available for TATA STEEL Ltd., it
is apparent that it is toeless than the std norm but seeking the kind of industry and its
aggressive policy for utilization of its current assets the ratio seems sufficient but if we
compare current ratio and acid test ratio, then it can be implied that funds are blocked in slow
moving inventory. Both the current and quick ratios should be considered in relation to
industry average to infer whether the firms short term financial position is satisfactory or not.

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Means that it is efficiently managing its inventory to convert

them into sales.
EOQ [Economic Order Quantity] Analysis
The TATA STEEL Ltd. maintains its stock on
Just In Time Purchases and TOC. The company produces on make to order rather than
make to stock. In this preview the company should have low inventory but the inventory level
of the company is quite high and it has shown an increasing trend over past few years.
Moreover the inventory turnover ratio has also gone down from 10.18 in 2001 to 6.44 in
2006, a fall of almost 40%.If we consider the storage period the raw material storage period
has increased from 22.38 days from 2001-02 to 26.94 in 2005-06, work in progress storage
period has increased from 5.02 days to 11.19 days forte same period. It has almost doubled.
And the finished goods storage period has also doubled. It rose from 9.64 days to 20.57 days.
Thus the storage period of the entire inventory has increased. Storage of unnecessary or idle
stock costs a lot in terms of opportunity cost, and the cost of handling those items. An EOQ
analysis can reduce these extra costs associated with the stock. But the company does not
follow EOQ system.EOQ system will decrease the ordering and holding cost to minimum
without having any stock out cost which will thus benefit the company both in terms of total
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purchasing cost and providing liquidity and efficient management of inventory. I analyzed
some of the companys raw materials on EOQ basis to check whether the current inventory
technique is suitable for the company or whether EOQ is more beneficial to it. Since the
company does not having any details regarding ordering cost and holding cost per unit per
annum the analysis is made to minimize inventory level without increasing the purchasing
workload.

Chapter 3
CONCLUSION

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CONCLUSION
The working capital position of the company is sound and the various sources through
which it is funded are optimal.
The company has used its purchasing, financing and investment decisions to good effect
can be seen from the inferences made earlier in the project.
The debts doubtful have been doubled over the years but their percentage on the debts has
almost become half. This implies a sales and collection policy that get along with the
receivables management of the firm.
The various ratios calculated are an indicator as to the fact that the profitability of the firm
and sales are on a rise and also the deletion of the inefficiencies in the working capital
management.
The firm has not compromised on profitability despite the high liquidity is commendable.
Sintech Precision Product Ltd. has reached a position where the default costs are as low
as negligible and where they can readily factor their accounts receivables for availing
finance is noteworthy.
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Chapter 4
SUGGESTIONS

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SUGGESTIONS AND RECOMMENDATIONS

The management of working capital plays a vital role in running of a successful business.
So, things should go with a proper understanding for managing cash, receivables and
inventory.
Tata Steel Ltd. Precision Product Ltd. is managing its working capital in a good manner, but
still there is some scope for improvement in its management. This can help the company in
raising its profit level by making less investment in accounts receivables and stocks etc.
This will ultimately improve the efficiency of its operations. Following are few
recommendations given to the company in achieving its desired objectives:

The business runs successfully with adequate amount of the working capital but the
company should see to it that the cash should not be tied up in excessive amount of

working capital.
Though the present collection system is near perfect, the company as due to the
increasing sales should adopt more effective measures so as to counter the threat of
bad debts.
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The over purchasing function should be avoided as it could lead to liquidity

problems.
The investment of cash in marketable securities should be increased, as it is very

profitable for the company.

Holding of excessive and insufficient stock must be avoided as it creates a burden
on the cash resources of a business and results in lost sales, delays for customers, etc
respectively.

BIBLIOGRAPHY
Following sources have been sought for the preparation of this
report:
Corporate Intranet
Financial Statements (Annual Reports)
CMA Data
Direct interaction with the employees of the company
Internet ---o www.tata steel.co.in
o www.scribd.com
o www.indianpumpsindustry.com
Textbooks on financial management I.M.Pandey
Khan and Jain

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