CHAPTER-1

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EXECUTIVE SUMMARY

Working capital is the capital required for maintenance of day to day business operations. The present day competitive market environment calls for an efficient management of working capital. The reason for that is attributed to the fact that an infective working capital management may force the firm to stop its business operations, may even lead to bankruptcy. Hence the goal of working capital management is not just concerned with the management of current assets& current liabilities but also in maintaining a satisfactory level of working capital. Holding of current assets in substantial amount strengthens the liquidity position & reduces the riskiness but only at the expense of profitability. Therefore achieving risk-return trade off is significant in holding of current assets. While cash outflows are predictable it runs contrary in case of cash inflows. Sales program of any business concern does not bring back cash immediately. There is a time lag that exists between sale of goods & sales realization. The capital requirement during this time lag is maintained by working capital in the form of current assets. The whole process of this conversion is explained by the operating cycle concept. This study gives in detail the working capital management practices in VSP. Management of each current asset, namely inventory management, cash management, accounts receivable management is studied permanent to VSP. Similarly management of account payable is studied to understand the managing of current liabilities. A part from this concept of operating cycle is studied. The research methodology adopted for this study is mainly from secondary sources of that which include annual reports of VSP, & website of the company. The use of primary sources is limited to interviews with few of the employees in finance department. The study of working capital management has shown that VSP has a strong working capital position (from 2002-till date) since its inception in 1992. The company is also enjoying reasonable profits from 2003. VSP employs forex funds instead of domestic loans & W.C facilitates. VSP sales position is also very good. Its excellent performance is attributed to reduce cost of production.
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The overall position of VSP is good & the same is expected by continuum of existing management policies, checking exchange rate risk, competing with domestic and global players in terms of quality & quantity.

INTRODUCTION Capital is essential for the setting up and smooth running of any business. Investments made on fixed assets will yield excess cash inflows apart from the Payback amount and are spread over a longer period of time .hence the cash inflows(Or) benefits associated are not immediate but are expected in the future. Cash Inflows and outflows occur on continuous basis in case of current assets. Credit Forms an essential feature in the business (credit given to customers & credit from suppliers). Since there is some time lag from the time of sales & sales realization current assets & current liabilities, wish together constitute the net working capital, supports the business in its normal of operations. This calls for an efficient management of working capital. The policies, procedures and measures taken for managing of working capital gain further importance in an organization like VSP where the working capital requirements runs in cores of rupees. Any mismanagement on the part of authority will not just cause loss but may even impair business operations. It is in this context working capital has gained importance. The growth of any organization depends on overall performance of all the departments. A firms financial performance reflects its strength, weaknesses, opportunities and threats of the organization with respect to profit earned, investments, sales realization, turnover, turn on investment, net worth of capital efficient management of financial resources and analysis of financial results are prerequisite for success of an enterprise in that working capital management is one of the management area of financial management. Managing of working capital implies managing of current assets of company like cash, inventory, accounts receivable, loans and advances and current liabilities likes sundry creditors, interest payment and provision.

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PURPOSE OF THE STUDY: The main aim of any firm is to maximize the wealth of shareholders. This can be achieved only by a study flow of profits. Which in turn depend on successful sales activity? To generate sales, investment of sufficient funds in current assets is required. The need of current assets should be emphasized, as the sales dont convert into cash immediately by involved a cycle of operations, namely operating cycle. VSP is multi-product manufacturing unit with varying cycle for each product. The capital requirement for each department in an organization of VSP is large which (depends on the product target for the particular year) calls for an effective working capital management. Monitoring the operation on cycle duration is an important aspect of working capital. Some prominent issues that are to be addressed are, Duration of raw material stage (depends on regularity of supply, transaction time) Duration of working progress (depends on length of manufacturing cycle, consistency in capacity utilization). Duration at the finished goods state (depends on pattern of production and sale). Thus a detailed study regarding the working capital management in VSP is to be done to consider the effectiveness of working capital management, identify the short coming in management and to suggest for improvement in working capital management. OBJECTIVES OF STUDY: To study in general the working capital management procedure in VSP, Visakhapatnam. To analyze and apply operating cycle concept of working capital in VSP, Visakhapatnam. To know how the working capital being financed. To know the various methods to be followed by VSP for inventory and accounts receivables. To give suggestions, if any, for better working capital management in VSP.

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Research methodology:
Research methodology used for study includes both primary & secondary source of data. However most of study is conducted based on secondary sources. Secondary sources of data mainly include annual reports of VSP .Statement of changes in working in capital for the past 5 years is done using the data taken from these financial reports. Similarly time series analysis of operating cycle and calculations of ratio are done. Apart from this, the website of RINL is referred to know the products, product facilities, net work etc. Industry analysis is done based on the information gathered from newspapers and websites of Indian steel ministry & other sector related websites. The use of primary sources is limited to interviews with some of the employees in finance department. The reason being, it is against the companys policies & producers to reveal the sensitive financial information.

Limitations of the study:

Although every effort has been made to study the Working Capital Management in detail, in an organization of VSP size, it is not possible to make an exhaustive study in a limited duration of 2 months. Apart from the above constraint, one serious limitations of the study is that it is not possible to reveal some of the financial data owing to the policies and procedures laid down by VSP. However the available data is analyzed with great effort to get an insight into Working Capital Management in VSP.

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CHAPTER-2

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VISAKHAPATNAM STEEL PLANT

BACK GROUND: The government of India has decided to set up an integrated steel plant at Visakhapatnam to meet the growing domestic needs of steel. The decision of government to set up an integrated steel plant was laid down by then Prime Minister Mrs. Indira Gandhi. The prime minister laid down the foundation stone on 20th Jan 1971. Consultant, M/s. M.N.Dastus & Co (pvt) Ltd., submitted a techno economic feasibility report in Feb. 1972 & detailed project report for the plant, with an annual capacity of 3.4MT of liquid steel. The Govt. of India and VSP signed an agreement on 12th June 1979 for the cooperation in setting up 3.4 MT integrated steel plant. The project was estimated to cost to Rs. 3,897.28 Cr based on prices as on 4th Q of 1981. However, on completion of the construction & commissioning of the whole plant in 1992, the cost escalated to Rs. 8,755 Cr based on prices as on 2nd Q of 1994. The plant was dedicated to the nation on 1st Aug 1992 by the then PM, Mr. P.V. Narasimha Rao. The man power in VSP has been limited to 17,500 employees. The plant has the capacity of producing 3.0 MT of liquid steel & 2.656 MT of saleable steel. It has set up two major Blast Furnaces, the Godavari, & the Krishna, which are the envy of any modern steel making complex.

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PROFILE: Steel comprises one of the most important inputs in all sectors if economy. Steel is basic input for the automobiles, construction, machine building, and fabrication and transportation industries. Keeping in view, the government of India constituted VSP in 1982 by Prime Minister Mrs. Indira Gandhi with the collaboration of Russia. Its process is to reduce a range of steel products. Its a subsidiary of Rashtriya Ispat Nigam Limited. VSP has come a long way before becoming debt-free company in October 2003 (for the first time since its inception in 1992). VSP is now poised at 4th position among Indian steel majors (Ranked no. 69 among global steel makers) after passing through a turbulent phase & crisis that had threatened its very existence The success story of VSP is depicted in its efficient capacity utilization & good labor productivity. The positive trends in VSPs performance are expected to wipe out the plants accumulated losses completely by 2006-07.

Location: The plant is located on the coast of Bay of Bengal, 16 km to the south west of the Visakhapatnam port. It lies between the northern boundaries of the national highway No.5 from Madras to Calcutta and 7 km to the south-west of Howrah Madras railway line.

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PRODUCT MIX: Visakhapatnam steel plant products angles, channels, bars, wire rods and billets for re-rolling. The plant also produces pig iron & 1.44 MT of granulated slag, besides normal by-products from the coke oven and Coal Chemical Plant.

VSP TECHNOLOGY: 7m tall coke oven batteries with coke dry quenching. Biggest Blast Furnace in the country. Bell less top charging system in Blast Furnace. 100% slag granulation at the BF cast house. Suppressed combustion LD gas recovery system. 100% continuous casting of Liquid Steel. Tempcore & Stelmore cooling process in LMMM & WRM. Extensive waste heat recovery systems. Comprehensive pollution control measures.

MAJOR PLANT UNITS

VSP has the following major production facilities: 3 Coke oven batteries of 67 ovens each having 41.6 m3. 2 sinter machines of 312-m2 area. 2 Blast furnace of 3200-m3 usual volume. Steel melt shop with 3 L.D converters of 150T capacity each and 6 Nos of 4 strand continuous bloom casters. Light and medium merchant mill of 7,10,000 tonnes per year capacity. Wire rod mill of 8,50, 000 tonnes per year capacity. Medium & merchant & structured mill of 8,50,000 tonnes per year capacity.

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Extensive facilities have been provided for repair and maintenance as well as manufacture of spare parts. A power plant, captive mines for flux, oxygen plant, acetylene plant, and compressed air plant also forms parts of the plant facilities. A part from the above works departments, the non-works departments in VSP are personnel, Training & development center, purchase, Marketing, Finance, Design & Engineering & Township Administration.

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MAJOR SOURCES OF RAW MATERIAL: TABLE 2.1

Raw Materials

The places where the steel Plant is getting it supplies of raw materials

Iron or lumps & fines BF Line stone SMS Line stone BF Dolomite SMS Dolomite Manganese Ore Boiler coal Coking coal Medium Coking coal (MMC)

Bailadill, M.P Jaggayapeta, A.P. UAE Madharam, A.P. Madharam, A.P. Chipuripalli, A.P. Talcher, Orissa Australia Gidi/Swang/Rajarappa/ Kargila

WATER & POWER SUPPLY: Operational water requirements are met from yeluru water supply scheme of AP state government. Power requirements are met by captive power plant having 3 No.s of 60 MW sets and from APSEB grid.

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VISION MISSION & OBJECTIVES

RINL MISSION: Attain 16 million ton liquid steel capacity through technological up gradation, operational efficiency and expansion. Produce steel at international standards of cost & quality. Meet the aspiration of the stake holders. RINL VISSION: Become a continuously growing world class company. To harness the growth potential & sustain profitable growth. To deliver high quality & cost competitive products & to be the first choice of customers. Create an inspiring work environment to unleash the creative energy of people Achieve excellence in enterprise management. Be a respected corporate citizen, ensure clean & green environment & develop vibrant communities.

CORE VALUES: Commitment Customer satisfaction Continuous improvement Concern for environment Creativity & innovation

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OBJECTIVES: Expand the plant capacity to 6.3MT by 2011-12 with the mission to expand further in subsequent phases as per Corporate Plan Revamping existing Blast Furnaces to make them energy efficient to contemporary levels and in the process increase their capacity by 1Mt, thus total hot metal capacity to 7.5Mt. Be amongst top five lowest cost liquid steel producers in the world Achieve higher levels of customer satisfaction Vibrant work culture in the organization Be proactive in conserving environment, maintaining high levels of safety and addressing social concerns

POLICIES & RULES OF RINL/VSP:

VSP takes all necessary actions for the fulfillment of regulatory requirements. In this regard VSP follows the following policies. 1. Quality policy: Continuously improve the quality of all materials processes and products, services for customers. 2. Environment policy: Maintain a high level of environmental consciousness among employees and prevention of pollution by minimizing emissions and discharge 3. Energy policy: By adopting appropriate energy conservation technologies, VSP controls the consumption of various forms of energy. 4. OSHAS policy: VSP is committed to occupational health and safety of employees and contract workers. 5. HR policy: VSP believe that their employees are the most important resource, so it provides good working environment makes the employees committed and motivated for maximizing the productivity.

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ACHIEVEMENTS AND AWARDS : Rashtriya Ispat Nigam Limited (RINL), also known as Vizag Steel, is an Indian governmentowned steel producer. Based in Visakhapatnam, RINL has been awarded the Navaratna status, with accompanying autonomy of operations, due to its strong financial performance.

Award 1st Steel Minister's Trophy for the year 2006-07 'Best Management Practices' Award by Govt. of AP

Purpose VSPs excellent Overall performance In recognition of VSPs performance in the areas of Production, Productivity, Labor Practices, Industrial Relations and Corporate Social Responsibility For effective implementation of Rajbhasha, Hindi in VSP 2010

Year

2010

'Indira Gandhi Rajbhasha shield' given by His Excellency Vice President of India Dr. Hamid Ansari 5S "Strong Commitment" Award by CII Viswakarma Rashtriya Puraskar Awards, 6th time in a row

2010

for 5 S Excellence

2010

National level awards instituted by Ministry of Labor, Govt. of India for the workmen in industries. Recognition for the innovative suggestions resulting in higher efficiency, productivity, quality, safety & working conditions, house-keeping and import substitution at enterprise level. Given annually to the excellently performing

2010

5 No.s of the prestigious Prime Minister Shram Awards, 1'Shram

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2010

Bhushan' and 4 'Shram Veer' awards, presented by Ministry of Labor and Welfare 'National Sustainability Award'

workers

Second prize amongst the integrated steel plants given by the Ferrous Division of Indian Institute of Metals for Excellence in Water Management- 2010 at National level "Change Agent & Leadership Award" in Global HR Excellence Awards 2010-11 given by World HRD Congress at Mumbai

2010

"Excellent Water Efficient Unit" award by CII

2010

Global HR Excellence award by World HRD Congress

2010

National Awards by Public Relations Society of India (PRSI)

1. The trilingual in-house 2010 magazine 'Ukkuvani' bagged the First and Second prize under the Best Newsletter category for different entries. 2. First Prize for VSPs website under the 'Corporate Website' Category VSP has established World Class Training infrastructure since inception and continuously improved training facilities For his well known leadership and contribution to HRD and for being a role model as a thinker, a doer and a believer in change and for his strategic and 2010

Gold Award for Outstanding Achievement in Training Excellence by Greentech Foundation, New Delhi

Strategic Leadership Award For CMD of RINL by Asia Pacific Human Resource Management congress , New Delhi

2010

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iconic stature Global Human Resource Development Award of International Federation of Training and Development Organization, London In recognition of outstanding performance in setting up of high standards in HRD and focus on initiatives that would motivate and Empower employees to do their best For his outstanding contribution in making VSP turn around to a blue chip company and for being the architect of special purpose vehicle for global acquisition of mines For inspiring Trust among its Employees, for instilling Pride in them and creating an environment in the work place that promotes camaraderie For its exemplary Performance in Implementation of Official language For Organizational Excellence in Suggestion Schemes, (in steel units category) 2010

Udyog Ratan Award for CMD of RINL By National Industrial Conclave-2010, Ranchi

2010

Great Places to Work Award By Great Places to work Institute and Economic Times, Mumbai

2010

Town Official Language Implementation Committee Award, Visakhapatnam

2010

INSSAN AWARD

2010

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PERFORMANCE OF RINL AT A GLANCE

PRODUCTION PERFORMANCE: Achieving new targets year in production has become a part of the work culture. The production performance of VSP in the last four years is as follows: TABLE 2.2

LIQUID YEAR HOT METAL METAL

SALEABLE STEEL

2005-06

4153

3603

3237

2006-07

4046

3606

3290

2008-09

3546

3145

2701

2009-10

3900

3399

3167

2010-11

3830

3424

3077

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COMMERCIAL PERFORMANCE: The commercial performance of VSP for the past four years is as follows TABLE 2.3 SALES YEAR TURNOVER DOMESTIC SALES CASH PROFIT

2005-06

068469

8026

443

2006-07

079126

8702

425

2007-08

088881

7412

1469

FINANCIAL PERFORMANCE: VSP had to bear to burn of huge project cost right from the day of its inception. This has affected the companys balance sheet due to very high interest burden. The company, in spite of making operating profit every year had to report net loss during all financial years. This on the other hand had resulted in making VSP to take great care in planning the financial resources.

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The financial performance of VSP for the past ten years is as follows: TABLE 2.4 CASH YEAR SALES PROFIT GROSS MARGIN NET PROFIT

2005-6 2006-7 2007-8 2008-9 2009-10 2010-11

8491 9151 10433 10411 10635 11517

2369 2633 3515 2355 1602 1412

2338 2584 3483 2267 1524 1247

1252 1363 1943 1336 797 658

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BOARD OF DIRECTORS

CHAIRMAN-CUM-MANAGING DIRECTOR AS & FA, MoS. & DIRECTOR

Shri A.P. Choudhary

Shri S. MachendraNathan

JT. SECY(STEEL), MoS & DIRECTOR

Dr. Dalip Singh

DIRECTOR (FINANCE)

Shri P. Madhusudan

DIRECTOR (PERSONNEL)

Shri Y.R. Reddy

DIRECTOR (COMMERCIAL)

Shri T.K. Chand

DIRECTOR (OPERATIONAL)

Shri Umesh Chandra

DIRECTORS

Shri A.P.V.N. Sarma Shri Swashpawan Singh Dr. U. D. Choubey

COMPANY SECRETARY

Shri P. Mohan Rao

OFFICE

Administrative building Visakhapatnam steel plant Visakhapatnam -530001

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CHAPTER-3

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INDUSTRY ANALYSIS
Economic stability of nation depends on the strong industrial base it enjoys. The business environment in the financial year 2010-11 had been very challenging. While there was a sign of global economy recovery, the debts crisis in Europe, the political turbulence in the Middle East and the recent developments in American economy impacted the markets across the globe, effect of which was also felt by Indian economy. The year 2010-11 was a challenging year, as the raw material costs increased by 1500 crores while the sales price remained stagnant. In spite of maximizing the Special steel component, the prices did not support the surge in raw material cost. VSP Steel Plant exhibited its credential and capability in unforeseen difficult conditions by improving its quality and Value Added Still products, which reached a record level of 79% of Saleable Steel neutralizing impact of rise in raw material prices partially. The result is an enriched product mix and sustained profitability contributing to the company recording its best ever Sales turnover of 11517 Crs in the year. The following literature looks into the global & Indian steel sector scenario on brief.

Global scenario:
Global Crude steel production during the year 2010 was higher than 2009 by 184 Million tones, driven by growth in China and recovery in the developed world. Sharp rise in input cost, once again drove Steel companies for paying much attention, to cost of production and improvement in operating efficiency. While in the developing countries, steel makers are trying to capture the Quality market, Steel makers of the developed countries are trying to consolidate their position. A significant challenge facing the Steel Industry today, relates to the situation prevalent in raw material markets. The global upturn in steel production resulted in significant tightening in the steel making raw materials, thereby sending the prices of some key raw materials to historically high levels. 2010-11 was a year of two phases as far as Steel market concerned. One is that stabilization and the other is that of recovery.

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INDIAN STEEL SECTOR: The Indian steel Sector stood 4th largest steel producing country in the world. This has been achieved due to thrust on infrastructure and housing sectors. Steel accounts for about 7% of GDP and employs about 1.5 million people directly. With continued emphasis on infrastructure building and several Greenfields projects under execution, the growth story is likely to gather momentum in the years to come. The Gross Domestic Product of India is estimated to have grown at 8.5% in 2010-11 in real terms. Backed by this, the finished steel consumption registered a growth of 11% in 201011. Indias recovery from the global economic crisis was based on its strong domestic demand. The industry now looks ahead with a new resolve & determination. Reaping the benefits of globalized markets calls for utmost vigilance from all stakeholders, producers, consumers and state. The industry should capitalize the opportunities and mitigate the dangers of synchronized global trends. SWOT ANALYSIS: SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be avoided, opportunities that should be banked, and threats that should de faced & yet survive in the business.

Strengths:
State of art technology: VSP was built with the co-operation of USSR and claims to be one of the most modern steel plants in the country. VSP employs highly sophisticated technology, large-scale computerization & automation in the production. Location advantages: VSP was rendered with additional advantages due to its location. The location aspect has helped the VSP in easy procurement of raw materials as most of the raw materials are imported from Andhra itself, apart from Orissa & M.P which are located nearby.

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More over the existence of Visakhapatnam port makes it easy in procurement of raw materials like cooking coal from Australia. Also exports to various countries can be made directly from Visakhapatnam port. Self sufficiency in power: VSP has its own power generation unit with a total capacity of 286.5 MW. VSP requires power of 180 MW to 200 MW. VSP, after meeting its requirement exports power to APSEB. High commitment on the part of employees: The productive environment prevailing in the company fosters an atmosphere of growth both for employees & for the company. The labor productivity is currently 262 ton/man/year unparallel in the public sector steel industry. Strong commitment to conserve environment: VSP is forefront of Indian industry in area of pollution control, equipment & measures. The total cost f these measures works out at Rs.4600 million which forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified company (certificate for environment protection & pollution control measures). ISO 9002 Certification: VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO certification gives an edge for VSP over other companies & depicts the competency of Vizag steel to compete with the global steel producers.

Weakness:
High intake of employees: VSP employs 17,829 employees including both administrative and plant. When compared to international standard companies like POSCO and other major steel producers, VSP employs 50% more for the same capacity. Hence the salaries of these employees, medical & other facilities will raise cost further which may disturb the cost effectiveness achieved in the production front.

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Low return product mix: The product mix of VSP is small. VSPs long products like billets, wire rods, structural are facing less demand due to the crisis in South East Asian nations.

Inadequate port facilities: The berthing facilities at VSP are not adequate relative to the requirements of VSP.

Opportunities:
Sizeable export markets: China is the biggest importer of Indian steel. Reconstruction work in Iraq requires huge amounts of steel where RINL can play a significant role. Other promising factors are Proximity to southern market. Strong economy. Possibility of new markets. A slow steady increase in domestic steel demand.

Threats:
Global steel majors like POSCO & Mital steel are venturing into steel production very soon (in Orissa). This may pose a problem to VSP in the procurement of raw materials as it is dependent on Orissa for these materials. Input costs are increasing due to raw material. Also the demand for coal & coke is escalating. No captive iron ore mine: VSP is the only steel major in the country without a captive iron ore mine. This may present a difficult situation when the demand supplies equation for the iron ore changes. Other disturbing trends include-

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Weak domestic market. Liberalization & decontrol. Sensitive to exchange rate risk. Excise duty continues to be high.

TISCOs rod mill 3,00,000 tap capacity is a major threat for marketing VSPs wire rods.

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CHAPTER-4

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WORKING CAPITAL MANAGEMENT

DEFINITION: In the words subbing, Working Capital is the amount of funds necessary to cover the cost of operating the enterprise. According to Gene Stenberg, Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables, receivables into cash. Every business needs investment to procure fixed assets, which remain in use for a longer period. Money invested in these assets is called 'Long term funds 'or' fixed capital'. Business also needs funds for short term purposes to finance current operations. Investments in short term assets like cash, inventories, debtors etc., are called 'Short term funds' or 'Working capital'. Working capital can be categorized as funds needed for carrying out day-to-day operations of the business smoothly.

The management of the working capital is equally important as the management of long-term financial investment. every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without (1) adequate supply of raw materials for processing; (2) cash to pay for wages, power and other costs; (3) creating a stock of finished goods to feed the market demand regularly and, (4) the ability to grant credit to its customers. All these require working capital. Working capital is thus like the life blood of a business. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. Working capital cycle involves conversions and rotation of various components of the working capital. Initially 'cash is converted into raw materials. Subsequently with the usage of fixed assets resulting in value
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additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus the working capital cycle involves rotation of various constituents of the working capital. Working capital is the firms holdings of current assets such as cash, receivables, inventory & marketable securities. Every firm requires working capital for its day to day transactions such as purchasing raw material, for meeting salaries, wages, rents, rates, advertising etc.

Significance of working capital:

The world in which real firms function is not perfect, it is characterized by the firms considerable uncertainty regarding the demand, market price, quality & availability of its own products and those suppliers. While the firm has many strategies available to address these circumstances, strategies that utilize investment or financing with working capital accounts often offer a substantial advantage over the other techniques. The importance of working capital management is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities like

Arranging short term financing. Negotiating favorable credit terms. Controlling the movement of cash. Administering accounts receivables.

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Monitoring investment in receivables.

Decision concerning the above areas plays a vital role in maximizing the overall value of the firm. Once decisions concerning these areas are reached, the level of working capital is also determined in active decision sense, but falls out as residual from the decision just made. The management of working capital plays an important role in maintaining the financial health during the normal course of business. This critical role can be enunciated by examining the flow of resources through the firm. By far the major flow is the working capital cycle.

This is the loop (previous page) which starts at the cash and the marketable securities account, goes through the current account as direct labor and materials which are purchased and use to produce inventory, which in turn is sold and generates accounts receivables, which are finally collected to replenish cash. The major point to notice about this cycle is that the turnover or velocity of resources through this is very high related to the other inflows and outflows of the cash account.

MANAGEMENT OF WORKING CAPITAL CYCLE

While managing the working capital, two characteristics of current assets should be kept in mind like (1) short life span, and (2) swift transformation into other form of current asset. Each component of current asset has comparatively very short life span. Investment remains in a particular form of current asset for a short period. The life span of current assets depends upon the time required in the activities of procurement; production, sales and collection and degree of synchronization among them. A very short life span of current assets results into swift

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transformation into other form of current assets for a running business. These characteristics have certain implications.

Decision regarding management of the working capital has to be taken frequently and on a repeat basis.

The various components of working capital are closely related and mismanagement of any one component adversely affects the other components too.

The difference between the present value and the book value of profit is not significant. The working capital has the following components, which are in several forms of current assets:

Stock of cash Stock of raw material.

CLASSIFICATION OF WORKING CAPITAL:

Working capital can be classified into two ways.

(a). On the basis of concept

(b). On the basis of time.

On the basis of concept: working capital is classified as gross working capital and net working capital. On the basis of time, it may be classified as permanent working capital and temporary working capital.

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Gross working capital: Gross Working Capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an Operating Cycle time or within an accounting year i.e., within 12 months. This includes cash, short term securities, debtors bills receivable, and inventory. This Gross Working Capital concept is also called Economist Concept.

The gross working capital concept focuses attention on two aspects of current assets management.

a) Optimum investment in current assets and

b) Financing of current assets

The consideration of the level of investment in current assets should avoid two danger pointsexcessive and inadequate investments in current arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activity or for any other reason arrangement should be made quickly.

Net working capital:

Net working capital 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 exceeds current liabilities. 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 concept also covers the question of judicious mix of long term and short term funds for financing current assets. The level of NWC has a bearing on the Companys
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Profitability as well as the risk, in the sense that it affects the ability or otherwise of the firm to meet its obligations as and when they become due. Therefore, a tradeoff between profitability and risk is an important element in evaluation of the level of NWC. In general, the higher the NWC the lower is the risk and profitability and vice versa.

Net Working Capital = Current assets - Current liabilities

Permanent working capital:

Permanent working capital is the amount invested in all current assets which is required at all times to carry out minimum level of business activities. It grows with the size of the size of the business. It is permanently needed for the business and therefore be financed out of long term funds.

Variable working capital:

Variable working capital is the excessive amount over permanent working capital. This keeps on fluctuating from time on the business activities. It is further divided into

(a)Seasonal working capital

(b)Special working capital

Seasonal working capital is required to meet the seasonal demands of busy periods occurring at stated intervals. Whereas special working capital is required to meet extraordinary needs for contingencies.

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Approaches for financing working capital:

There are two sources of financing working capital requirements:

(1). Long term sources such as share capital, debentures, public deposits, loans from financial institutions, and

(2). Short term sources such as commercial banks, indigenous bankers, trade credits, installment credit, advances, accounts receivables and so on.

There are three basic approaches for determining an appropriate working capital financing mix.

Hedging approach Conservative approach Aggressive approach

Hedging approach:

The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source of funds raised to finance assets. The firm follows matching approach. It suggests that the permanent working capital requirements should be financed with funds from long term sources while temporary working capital requirements should be financed with funds from short term funds

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Conservative approach:

This approach suggests that the entire estimated investments in current assets should be financed from long term sources and the short term sources should be used only for emergency requirements. The distinct features of this approach are:

Liquidity is severally greater Risk is minimized The cost of financing is relatively more as interest has to be paid even on seasonal requirements for the entire period.

Aggressive approach:

The aggressive approach suggests that the entire estimated requirements of current asset should be financed from short term sources and even a part of fixed asset investments be financed from short term sources. This approach makes the finance mix more risky, less costly and more profitable.

Working Capital Management Goal:

The goal of working capital management is to manage the firms Current Assets and Current Liabilities in such a way that a satisfactory level of working capital is maintained. This is so because if the firm cannot maintain a satisfactory level of working capital, it is likely to become insolvent and may even be forced into bankruptcy. Sometimes, a Company may have tremendous potential for profitability in the long run, but may languish due to inadequate liquidity. The basic goal of working capital management is to manage each of the funds current

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assets and current liabilities in such a way that an acceptable level of net working capital is always maintained in the business.

There are number of methods to determine the working capital needs. They are

By determining the amount of current assets and current liabilities Cash forecasting methods Balance sheet method Profit & loss adjustment method Working capital as a percentage of sales Working capital as a percentage of fixed assets

Advantages of adequate working capital:

Working capital is the life blood and center of a business. Working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. Some of the advantages of working capital management are as follows.

Solvency of the business:

Adequate working capital enables helps in maintaining solvency of the business by providing the uninterrupted flow of production.

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Goodwill:

Sufficient working capital enables a business concern to make prompt payments and hence help in creating and maintaining goodwill.

Easy loans:

A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms.

Cash discounts:

Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. Regular supply of raw materials:

Sufficient working capital ensures regular supply of raw materials and continuous production.

Regular payments:

There are regular payment of salaries, wages and other day to day commitments. Company which has sample working can make regular payment of salaries, wages and other day to day commitments which raises the moral of its employees, efficiency and enhances production and profits.

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High moral:

Adequacy of working capital creates an environment of security confidence, high moral and creates overall efficiency in a business.

DETERMINANTS OF WORKING CAPITAL:

The need for working capital is not always the same, it varies from year to year or even month to month depending upon a number of factors. There is no set of rules or formulate to determine the working capital needs of the firm. Each factor has its own importance and the importance of the factors changes for a firm over a time.

In order to determine the proper amount of working capital of a concern, the following factors should be considered carefully.

Nature of the business:

The amount of working capital is basically related to the nature and volume of the business concern where the cost of the raw materials to be used in the manufacturing of a product is very large in proportion to its total cost of manufacturing the requirements of working capital will be very large.

Size of the business unit:

The size of the business unit has an important impact on its working capital needs. Size may be measured in terms of operations. A firm with large scale of operation will need more working capital then a small firm.

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Seasonal variation:

Seasonal industries require more working capital to stock the raw materials during the season. In peak season

Time consumed in manufacturing:

The average time taken in the process of manufacturing is also an important factor in the process of manufacturing is also an important factor in determining the amount of working capital .The longer the period of manufacturing the larger the inventory required.

Turnover of circulating capital:

Rapidly of turnover determines the amount of working capital .The faster the sales the larger the turnover hence less working capital.

Operations:

The requirement of working capital fluctuates for seasonal business. The working capital needs of such business may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winter the sales are negligible.

Manufacturing/Production policy:

Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of demand based production in which production is based on the demand
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during that particular phase of time. Accordingly, the working capital requirements vary for both of them.

Market condition:

If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. Availability of raw material:

If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large amount of working capital is required.

Business cycle fluctuations:

Working capital required more in boom period and less in depression period.

Terms of purchase and sale:

Terms of purchase and sales affect the amount of working capital. The practice of cash purchases with credit sales requires more working capital.

Inventory turnover:

With a better inventory control, a form is able to reduce its working capital requirements .If the inventory turnover is high the working capital requirements will be low.
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Growth and expansion:

Growing concerns requires more working capital than the forms that are static. It is logical to expect larger amount of working capital in a growing concern to mean its growing needs of funds.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL:

Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital

Implementation of operating plans may become difficult and consequently the profit goals may not be achieved.

Cash crisis may emerge due to paucity of working funds.

Optimum capacity utilization of fixed assets may not be achieved due to non-availability of the working capital.

The business may fail to honor its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure.

The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely.

Non-availability of stock due to non-availability of funds may result in production stoppage.

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While under assessment of working capital has disastrous implications on business, over assessment of working capital also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL:

Over assessment of working capital causes more consequences.

Excess of working capital may result in unnecessary accumulation of inventories. It may lead to offer too liberal credit terms to buyers and very poor recovery system and Cash management.

It may make management complacent leading to its inefficiency. Over investment in working capital makes capital less productive and may reduce return on invest

CASH MANAGEMENT
Cash management:

Cash is one of the current assets of working capital. A business concern should always keep sufficient cash for meeting its obligations. The term cash with reference to cash management is used in two senses. In a narrow sense it is used broadly to cover currency and generally accepted equivalence of cash such as cheques, drafts and demand deposits in banks. The broader view of cash also includes near cash assets such as marketable securities and time deposits in banks. The main character of these in that they can be readily sold and converted into cash.

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Motives for holding cash:

Keynes has identified five motives for cash holding those are:

Transaction Motive:

A firm needs cash for making transactions in the day to day operations. The cash is needed to make purchased, pay expenses, taxes, and dividend, etc. The cash needs arise due to the fact that there is no complete synchronization between cash receipts exceeds cash payments or Vice-Versa. The transaction needs of cash can be anticipated because the expected payments in near future can be estimated.

Precautionary Motive:

A firm is required to keep cash for meeting various contingencies. Though cash inflows are anticipated but there may be variations in these estimates.

Speculative Motive:

The speculative motive relates to holding of cash for investing in profitable opportunities and when they arise. Such opportunities do not come in a regular manner. These opportunities cannot be scientifically predicted but only conjectures can be made about their occurrence. For example, the prices of shares and securities may be low at a time with expectations that these will go up shortly.

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Objectives of Cash Management:

Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and unproductive when not use.

Cash management deals with the following:

Cash inflows and out flows.

Cash flows within the firm.

Cash balances held by the firm at a point of time.

Cash management needs strategies to deals with various facts of cash. Following are some of its facts.

Cash Planning:

Cash planning is a technique to plan and control the use cash. A projected cash flow statement may be prepared based on the present business conditions and anticipated future actives. The cash inflows from various sources may be anticipated and cash out flows will determine the possible uses of cash.

Cash forecasts and Budgeting:

The cash budget is the most important device for the control of receipts and payment of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time it is an analysis of flow of cash in a business over a future, short or long period of time.

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Cash budget is prepared with the help of cash forecasting of both inflow and outflows. These cash forecast may be two types.

a)

Short- term forecasting b)

Long- term forecasting

a)

Short- term forecasting :

The short-term forecasts can be made with the help of cash flow projections. It covers a period of less than or equal to a year. 2 techniques are followed in this are:

Receipts and disbursements method

Adjusted net income

b)

Long term Forecasting:

The long-term cash forecasts are also essentials for proper cash planning this estimates may be for three, four, five, or more years. Long-term forecasts indicate companys future financial needs for working capital projects, etc;

Receipts and disbursements method

Adjusted net income

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CHAPTER-5

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WORKING CAPITAL MANAGEMENT IN VSP

Management efforts over the few years have been to inculcate cash consciousness through constant emphasis on working capital, mainly inventory and book debtors. In all these, it is to be kept in mind that VSP is a multi product undertaking, were management decisions affecting working capital are taken at managerial level.

Sources of funds:
Visakhapatnam steel plant raises its working capital by multiple banking arrangements with 10 Banks. The following are the ten banks, where funds for working capital are raised: 1. State bank of India 2. Canara bank 3. UCO bank 4. Bank of Baroda 5. Andhra bank 6. Indian Overseas Bank 7. State of Bank of Hyderabad 8. Allahabad Bank 9. IDBI Bank Ltd. 10. HSBC Ltd. 11. IndusInd bank 12. Deutsche bank 13. Axis bank 14. Citi Bank 15. Standard Chartered Bank 16. Bank of Tokyo

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In VSP working capital requirement is assessed by Fixing the target production Preparation of Budget(in rupees)

Working capital requirement are prepared taking into account: Actual value of the previous two years working capital Projected value for the next two years

Limits: Visakhapatnam steel plant is having fund-based limits of Rs.570.65 crores and Non-fund based limits up to Rs.1231 crores. Procedure for procurement of funds: Visakhapatnam steel plant applies a credit monitoring and appraisal (CMA) report (a 40page document). The document consists of historical data about the company and profit and loss account, balance sheet, current assets current liabilities, working capital assessment, fund flows etc., SBI subscribes the maximum working capital limit(up to extent of 38%) of the entire working capital assessed. The other banks of the under the multiple banking arrangement above provide the rest of working capital limits.

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WORKING CAPITAL LIMITS (UNDER MULTIPLE BANKING ARRANGEMENT) (Rs in Crs) Fund Based Sl.no Name of Bank CC (a)3 1. 2. 3. 4. 5. State Bank of India Canara Bank Bank of Boroda UCO Bank State Bank of Hyderabad 6. 7. 8. 9. 10. Allahabad Bank HSBC Ltd. IDBI Ltd. Andhra Bank Indian Overseas Bank Total 8.30 25.00 0.00 0.00 14.00 0.00 12.83 0.00 0.00 0.00 21.00 100.00 21.13 25.00 0.00 0.00 35.00 100.00 9.17 15.00 0.00 0.00 11.50 0.00 30.30 40.00 0.00 0.00 46.50 100.00 36.00 90.00 50.00 50.00 45.00 100.00 1.00 5.00 0.00 0.00 3.00 0.00 37.00 95.00 50.00 50.00 48.00 100.00 67.30 135.00 50.00 50.00 94.50 200.00 36.00 30.00 13.54 5.00 WCDL Total (b) 44.00 45.00 20.31 20.00 (c=a+b) 80.00 75.00 33.85 25.00 EPC (d) 60.00 45.00 20.00 15.00 Total (e=c+d) 140.00 120.00 53.85 40.00 Non-Fund based LC (f) 450.00 270.00 50.00 35.00 BG (g) 25.00 15.00 1.00 5.00 Total (h=f+g) 475.00 285.00 51.00 40.00 Total (i=e+h) 615.00 405.00 104.85 80.00

131.84 263.14

394.98

175.67 570.65

1,176.00 55.00

1,231.00 1,801.65

WCDL :Working Capital Demand Loan CC EPC LC BG :Cash Credit :Export Packing Credit :Letter of Credit :Bank Guarantee

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Types of working capital source: 1. Fund based limits: under this source, Visakhapatnam steel plant can obtain working capital finance by bank borrowing in the form of cash credit of export packing credit. 2. Non-fund based limits: Visakhapatnam Steel Plant receives non-fund based working capital in the form of letter of credit or bank guarantee

YEARS

GROSS WORKING CAPITAL

NET WORKING CAPITAL

Amount (Rupees)

Change Percentage

Amount (Rupees)

Change Percentage

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

8252.00 10448.10 11804.59 11859.32 9595 7672

+26.611 +12.93 +0.457 -19.09 -20.04

6664.14 8343.80 8612.97 7678.00 9595 3065

+25.192 3.214 -10.8 +24.967 -68.056

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Interpretation: The above table indicates that working capital is highest for the year 2005.
The net working capital has shown a gradual increase from 2003 till 2005. Statement of changes in working capital is done in the pages that follow to give the complete picture of variations in working capital

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Statement of changes in working capital for the year 2006-2007

(in crores) Particulars 2006 march Current Assets Inventories Sundry debtors Cash & Bank Other current assets Loans & Advances Total C.L(A) Current Liabilities Liabilities Provision Total C.L (B) Net Working Capital (A-B) Net Increase in Working Capital Total 8343.8 8343.8 2211.21 2211.21 1593.94 1593.94 785.77 716.37 1502.14 6749.86 1011.53 1092.77 2104.3 8343.8 225.76 376.4 8252 10448.1 1061.32 1518.9 457.58 1218.35 166.27 5621.7 184.36 1203.24 216.8 7194.68 314.48 50.53 1572.98 130.12 15.11 2007 March Increase Decrease

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Interpretation: There is a significant increase in net working capital, which amounts to 1593.94 crores. There noticeable increase in net working capital is due to increase in cash & bank balances. The increase in cash is1572.98 cores positive growth is observed in loan & advances and other current assets. The increase is offset by the increase in total current assets. The net effect of the above changes has brought about the increased working capital.

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Graphical Representation: (2006-2007)

8800 8600 8400 8200 8000 7800 7600 7400 7200 1 2

2007

2006

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Statement of changes in working capital for the year 2007-2008

(in crores) Particulars 2007 march Current Assets Inventories Sundry debtors Cash & Bank Other current assets Loans & Advances Total C.L(A) Current Liabilities Liabilities Provision Total C.L (B) Net Working Capital (A-B) Net Increase in Working Capital Total 8612.97 8612.97 1501.93 1501.93 269.17 269.17 1011.53 1092.77 2104.3 8343.8 1610.15 1581.47 3131.62 8612.97 598.62 488.7 10448.1 11804.59 1518.9 1958.49 439.59 1203.24 216.8 7194.68 314.48 1761.15 93.41 7699.11 292.43 504.43 22.05 557.91 123.39 2008 March Increase Decrease

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Interpretation: There is a significant increase in net working capital, which amounts to 269.17 crores. There noticeable increase in net working capital is due to increase in cash & bank balances .The increase in cash is 504.43 crores. A positive growth is observed in loan & advances and other current assets. The increase is offset by the increase in total current assets. The net effect of the above changes has brought about the increased working capital.

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Graphical Representation: (2007-2008)

8800 8600 8400 8200 8000 7800 7600 7400 7200 1 2

2008

2007

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Statement of changes in working capital for the year 2008-2009

(in crores) Particulars 2008 March Current Assets Inventories Sundry debtors Cash & Bank Other current assets Loans & Advances Total C.A(A) Current Liabilities Liabilities Provision Total C.L (B) Net Working Capital (A-B) Net Increase in Working Capital Total 8612.97 8612.97 1551.99 2486.96 934.97 934.97 1610.15 1581.47 3191.62 8612.97 2560.79 1620.53 4181.32 7678.00 950.64 39.06 11804.59 11859.32 1958.49 1569.69 388.8 1761.15 93.41 7699.11 292.43 3215.28 191.27 6624.17 258.91 1454.13 97.86 1074.94 33.52 2009 March Increase Decrease

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Interpretation: There is a significant decrease in net working capital, which amounts to 934.97 crores. There noticeable decrease in net working capital is due to decrease in cash & bank balances .The decrease in cash is 1074.94 crores. A negative growth is observed in loan & advances and other current assets. The net effect of the above changes has brought about the decreased working capital.

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Graphical Representation: (2008-2009)

8800 8600 8400 8200 8000 7800 7600 7400 7200 1 2

2008

2009

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Statement of changes in working capital for the year 2010-2011

(in crores) Particulars 2010 march Current Assets Inventories Sundry debtors Cash & Bank Other current assets Loans & Advances Total C.L(A) Current Liabilities Liabilities Provision Total C.L (B) Net Working Capital (A-B) Net Increase in Working Capital Total 5287 5287 1957 3488 2222 2222 2871.95 1435.89 4308 5287 3271.43 1336.06 4607 3065 399 99 9595 7672 1408.63 2013.14 605 2451.52 181.18 5415.54 137.40 3254.71 330.61 1998.89 75.96 803.19 150.43 3416.65 62 2011 March Increase Decrease

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OPERATING CYCLE ANALYSIS: The level of current assets needed for a business significantly depends upon the length of the operating cycle. The longer the operating cycle, larger will be the working capital requirement of the firm for funds needed at different stages of operating cycle and vice-versa.

Net working capital:

The net working capital of Visakhapatnam steel plant shows an increasing trend from 1993-98 and decreasing trend from 1997-98 to 2000-01. It is showing a positive figure after that till 200405. The main reason for the decreasing trend in the years is due to the increasing creditors year after year. If also indicates a weak cash balance to meet the liabilities. The current liability of the company to pay the creditors is also evident from the reducing net operating cycle period. The operating cycle period has reduced continuously form 138 days during to 42 days during year 200-01 against decreasing trends in the previous years. The increase in working capital is due to better sales and full capacity utilization. This has resulted in reduction of cost of production. The net working capital of VSP for the past 10 years is depicted in the table

Current ratio:
A current ratio of 2:1 is considered to do ideal. The ration is an indicator of the firms commitment to meet its short-term liabilities. It indicates the rupees of current assets available for each rupee of current liability. The higher the current ratio the higher the funds available for a rupee of current liabilities. As a convention rule a current ratio of 2:1 or more is considered satisfactory. The higher the current ratio the higher the funds available for a firm. Current ratio=current assets/current liabilities. YEAR 2008-09 2009-10 2010-11
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CURRENT RATIO 1.5 2.2 4.2

Interpretation: The current ratio was around 1.5 in 1998-99. the current ratio is poised around 1.4 from 19992000 to 1200-2993. the ratio has started increasing from there on and is at 4.2 in 2004-05. this shows that there is drastic increase is firms current assets which shows the high liquidity position of the firm.

Working capital turnover ratio:

Working capital turnover ratio is ratio of sales to net working capital. It is indicator of efficiency of working capital management. Higher the ratio greater is the efficiency. The working capital turnover ratio has constantly increased from 1998-99 to till date. This is mainly due to increased sales and delay in payment to creditors. Working capital turnover ratio=net sales/average working capital. The turnover ratio for the last 10 accounting periods is as shown: YEAR WORKING CAPITAL TURNOVER RATIO 2008-09 2009-10 2010-11 8 4.2 1.8

Note: here current assets are taken as working capital;

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INVENTORY MANAGEMENT IN VSP

VSP is multi-product, integrated steel plant with 3.0 M.T capacities. This makes VSP to store, handle and process of huge quantity of material. Also VSP being a process industry running 365 days throughout the year 24 hrs a day it material. This calls from efficient inventory management the part of VSP. VSP holds three types of inventory, they are: 1. raw materials 2. stores, spares and scrap 3. semi/finished goods. Different sections carry out the procurement, storage and control of these inventories. Raw materials: The raw materials are produced and stored by raw materials department. The basic principle followed by VSP in holding raw materials inventory is to hold indigenous raw material for 10 days.

Stores and spears: the stores and spares are procured and stored by central stores
departments(a part of purchase department). The store and spares re-categorized as 1. automatic recoupment items: 2. department specific items

Automatic recoupment items: A.R items are those, which are general consumables with standard specification and required by more than one department. The main objective of stock control is to make available vital items all time. The AR items are classified as a class, b class and c class as per value given below. a. annual consumption value more than rs.100,000 b. annual consumption value between rs.100,000-50,000 c. annual consumption value less than rs.50,000
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the stocks of these items are maintained as per their vitality, consumption frequency, automatic indenting of the items done once the level of stock comes to recumbent level foxed for each item. Department specific items: user departments based on approval given by top management for level of inventory to hold indents department specific items. The amount is fixed based on consumption of a particular item in the previous years. These items are also stored by stored department and are released against stores indent note issued by department.

Inventory control:
Inventory control is major responsibility of stores department in VSP. It adopts following procedure for inventory control: 1. The stores department generates data periodically on the inventory status and conducts analysis of it. The same is circulated to all departments once in a quarter. 2. XYZ analysis of all items is carried out and circulated to all departments. Categorization is based on values of item contributing to total value of stock.\ 3. Identification of non-moving and slow moving items on regular basis and intimating it to user departments and thereby reducing the indent quantity. 4. Identification of absolute and surplus items which are of no use and disposal of the same after receiving clearance from top management. 5. Standardization of general store material and spares and reduce the number of items. 6. Conduct ABC analysis on consumption pattern items and submit the same to purchase department for regulation of supplies.

Semi/finished goods: the semi-finished goods comprise blooms and billets and finished goods are the various products mentioned in product mix of VSP. The semi-finished goods are stocked and controlled by production planning and monitoring department. They chart plans based on inputs from marketing department for holding inventory of various grades. They generally hold stock for 10 days production, the finished goods are held at central stockyard within plant and at various stockyard spread all over India.

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The split of raw material, spares and stores and semi/finished goods inventory, their percentage and total inventory are given in the table. (figures in crores)

Semi finished

Raw material

Spares and stores

YEAR

Value

% of total

Value

% of total Value

% of total Total Inv. Value

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

472.30 448.54 791.71 1708.36 1293.10 1825.33

38.75 37.27 44.95 53.13 52.746 56.08

470.61 454.66 686.10 1194.32 865.03 1137.66

38.72 37.786 38.957 37.14 35.28 34.95

275.44 300.04 283.34 312.60 293.48 291.72

22.63 24.93 16.08 9.72 11.97 8.963

1218.35 1203.24 1761.15 3215.28 2451.52 3254.71

The above table clearly shows that the contribution of spares and consumables to total inventory is varying from 10-30%, which is very high. One of gray areas in VSPs management is inability to control inventory of non-moving, obsolete and surplus items.

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The main reason for such a high quantity of inventory is due to spares and consumables indented irrationally during construction phase. One of the top priorities of VSP now is to either consume the non-moving items or dispose it at the earliest. Inventory turnover ratio: Inventory turnover ratio is ratio of sales to average inventory, the turnover ratio of VSP is between 2 and 8. This is however a low value, indicating huge quantity of funds locked up in stock. As mentioned earlier the reason for low turnover is due to large quantity of nonmoving spares and stores. The inventory turnover ratio of VSP for the past 10 accounting periods is shown in the table.

YEAR

Total Sales

Avg.Inventory

Inv.Turnover ratio

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

8491 9151 10433 10411 10635 11517

1218.35 1203.24 1761.15 3215 2451 3254

6.97 7.6 5.92 3.24 4.34 3.54

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CASH MANAGEMENT IN VSP

Method of cash management:

In VSP cash requirement is planned and arrived at in the following manner: 1. the chairman cum managing director of VSP in consultation with board of directors decides the production schedule for the following year. 2. the production schedule as approved by the directors is then circulated to all departments, after which production target for each month is set. 3. the heads of each of 35 budgets, the directors formulate a master budget allocation for each section. 4. after receiving all the budgets, the directors formulate master budget for the particular year and the monthly budget allocation for each section. 5. at the end of each of month, the actual versus the projected budget is put up to the management and directors discuss the reason for the variances. Any deficit in the inflow is adjusted buy pushing the sales in the following month. Initially cash section of the finance department prepares the cash budget. They forecast monthly and weekly requirements of cash. The forecast of information regarding cash inflows which include the cash from customers, export incentive export credit, etc, cash outflows which include purchase of raw materials, spares, excise duty, sales tax, personnel payments customs duty, railway freight etc. Source of funds: The main source of funds is sales realization. Sales are carried out at head quarters and at various branches located throughout India. The funds collected are received at the head quarter in such a way to minimize the delays in remittance of funds from the place of collection to head quarter.

The sales realization in head quarters includes both domestic and export sales receipts. Domestic receipts are directly credited to cash credit accounts of VSPs and the export sales realizations are credited to VSPs packing credit account with the negotiating banks.

Polling of funds:

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As mentioned earlier the major source of fund to VSP is the sales realization at the various branch sales offices located throughout India. As all payments are effected through the head quarters, a need to pool all the funds to head quarters account is imminent. In order to achieve this, collection accounts are opened with banks are in turn instructed to remit the proceeds immediately on realization to VSPs account at head quarters. The collection accounts of V are with SBI, SBH, BOB and Canara bank who are the major providers of working capital. Cash section has a system of closely monitoring the receipts of the accounts of the above-mentioned banks at their head quarters, which enables the release of payment. The major objective of cash section is to avoid delays between the time of deposition of funds in the banks at collection centers and the time at which the same are received at head quarters. To achieve this is need continuous liaison between the banks, collection centers and head quarters are a must. Management of cash credit limit: As the company is maintaining cash credit account with multiple banking arrangements with 10 banks. It does not maintain cash balance except for some petty cash expenses. The company maintains two types of accounts at the branches and head quarters viz, collection account and imprested account for petty expenses. Therefore, the question of managing surplus cash does not a rise. However the management has to keep an eagles eye on fund flow and working capital limit. They have to see that the balance will not go out of the limits given by the banks. At the same time they should be position of utilize funds to the extent of the limits available. As regards to information reports the cash section generates dailya. Daily collection at various banks with branch-wise break up b. Daily position as regards to utilization of cash credit/packing credit limits with various consortium member banks financing their working capital requirements. c. Statement showing the details of payments released in the day, d. Statement showing the details of payments outstanding at the end of the day after taking into account the payments released on the. e. Monthly cash flow statement showing the actual cash flow in the month with the projected expenditure of the ensuing month.

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From the above it can be seen that the section interacts with numerous agencies such as the various other departments of the organizations, consortium of banks, branch collection centers, suppliers and customers. As many critical decisions are made based on the reports generated at the cash section, accuracy of the same assumes significance. Cash ratio: Cash ratio is ratio of cash held by a firm to current liabilities. VSP is a maintaining almost an average cash of around 0.13 except for the past three accounting periods. This is because as mentioned earlier cash holding is kept at minimum except for some petty cash needs. The increase in cash ratio indicates the significant increase in cash and bank balances in the total current assets.

Cash ratio = cash in hand (or bank)/ current liabilities.

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Cash ratio for the past few years is as shown.

Year

cash in hand

current liabilities

cash ratio

2006-07 2007-08 2008-09 2009-10 2010-11

7194.68 7699.11 6624.17 5415.54 1998.89

2104.30 3191.62 2560.79 2871.95 3271.43

3.41 2.41 2.58 1.88 0.61

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RECEIVABLES MANAGEMENT IN VSP Procedure of receivables management: VSP sells its product directly to its customers. It has 27 marketing officers spread through the country. The marketing and the finance department and top management at the lead quarter formalize the price of different products and different branches jointly. The price list for cash product in their religion is circulated to all branch offices. The sales and billing are done at the individual branches and the record of the daily transactions is maintained. The cash deposits are done at one of the respective banks and are the entire sum is in turn transferred to the banks at Visakhapatnam through telegraphic transfer. Credit policy of VSP: The credit policy of VSP is strict in one sense and flexible in other. As VSP has got a wide network of marketing offices numbering 27 there is always a possibility of increased credit sales by the branch sales offices, resulting in liquidity crunch if proper control is not maintained. Therefore, all regions and branches are given a limit for credit sales beyond which they cannot sell on credit without prior approval of competent authority. At any given point of time credit sales should not exceed the limit given. At the same time branch sales offices are given the freedom to give interest bearing credit which they can decide depending upon the level of finished goods inventory in their stockyard and other aspects of customer. Collection policy of VSP: VSP follows two types of credit sales of its products. They are : 1) Secured credit sales 2) Unsecured credit sales Secured sales backed by securities, which can be a) Letter of credit : letter of credit is an arrangement whereby the banks opens letter of credit of its customers in favor of suppliers and undertakes the responsibility of payment obligation of its client. b) Bank guarantee : bank guarantee is like issuance letter of credit where by the customers bank gives the guarantee to VSP to undertake responsibility of payment obligation of its credit. Secured credit sales are primarily done with private customers. Facility is extended to the customer based on the credit worthiness of the party. The average collection period of VSP is 30 days. VSP stock holding period in 30 days. In case of no satisfactory reply from the customer
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VSP issues investigation notice to banker who guaranteed the customer and the banker has to pay the money to VSP. Facility for such customers for all further sales stands cancelled.

Unsecured sales are made mostly to government agencies. There will be no security in such cases. Credit period varies from 15 = 60 days. Generally, VSP cannot compel government agencies for prompt release of payments due unlike private parties since they are also part of government undertakings. Interest charges for credit sales: Penal interest on violation of credit period

Type of Customer

secured

unsecured

Project Other

15% 16%

17% 18%

2% 2%

Receivable turnover ratio: Receivable turnover ratio is defined as ratio of total sales to average receivables. This ratio indicates number of times the management is able to convert the receivables in to sales and it indicates the efficiency with which receivable are managed. The receivables turn over ratio of VSP fro past 10 accounting years are given in the table.

Receivables turnover ratio = sales/ avg. receivables Interpretation: The receivables turnover ratio has been around 21=23 almost every year. The turnover ratio for VSP is high and this shows that bulk of VSPs sales is cash sales throughout the last accounting periods. The increase turn earlier was due to cash constraint in VSP, which necessitated the need for VSP to go only for cash sales the decrease in trend in last year is due to sluggish market conditions. Which prompted all steel manufactures to push sales through credit sales and also due to good cash position of VSP, which allowed it go for credit sales.

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PAYABLE MANAGEMENT IN VSP

In VSP all payments are then through the cash section of finance department in the head quarters. Cash sections monitor the cash position on a daily basis and prioritize the payments. Cash section prepares cash report every morning and checks with the banks for cash balance. Based on the balance available in the banks and prioritized of payments, cheques are issued to the parties. Payments are prioritized so as to optimize the cost. Prioritized is done based on the financial implication of non-payment of the due. The financial implications considered by VSP for non-payment of due are 1. Interest cost penal and over due 2. Penalties and fines in case of statutory obligation 3. Impact of production and sales in case of payment is for critical item.

Close liaison is maintained between purchase department, bill-passing section of finance department and cash section for efficient management off account payable. The major payments of the plant are towards:

1. 2. 3. 4. 5. 6. 7.

Purchase of raw material Purchase of stores and spares Employee wages Freight payments Interest on loans including working capital Repairs and loans including working capital Statutory duties like excise and sales tax.

The company pays: 1. 2. 3. 4. 5. 6. 7. 8. Excise duty - 2 crores/day Sales tax 12 crores/ month Custom duty - 12 crores/month Employees salary 35 crores/month Iron ore 15 crores/month Coal blast 70 crores/month Railway freight 50 crores/month Ocean fright 15 crores/month

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Payable turnover ratio: Payables turnover ratio is ratio of total purchase to avg. payable. It indicates the number of times management is able to convert accounts payables into purchase. Payable turnover ratio = purchases/avg. payable. Interpretation : The turnover ratio is maintained between 2.0 and 3.0 this was mainly possible due to improved sales cost reduction purchase value reduction and better cash position. FINDINGS: The total sales of VSP are showing a positive trend despite cut down in steel prices across the globe. enriched product mix and sustained profitability contributing to the company recording its best ever Sales turnover of 11517 Crs in the year. 1. 2. 3. 4. The gross margin of VSP is 1412 crores in 2010-11 which is less when compared to previous year 2009-10 The payable turnover ratio is maintained on an average at 3.0 from 1998 onwards. The consumption at raw material stage has increased from 5535 crores in 2009-10 to Rs 7188 crores in 2010-11. All units in VSP have achieved their rates capacity during the year 2000-01 and poised to exceed the same current year. This has resulted in a. Reduction in cost of production of scalable steel. The cost of production of VSP 1 following a decreasing trend over the past few years. This is evident from following table given overleaf. b. The reduction is cost of production has increased the leverage to extend cash discount to push sales. This is one of the major reasons for cap to register impressive sales figures in spite of huge dumping from international players. VSP has started making net profits from 2002-03. The net profit during 2010-11 is 658 crores. VSP was able to raise working capital funds at an interest rate of less than 4%. This has resulted in the increase in net working capital significantly.

5. 6.

7. The current ratio of VSP is being maintained at 4.2. it shows a very high degree of short term liquidity position of the firm. 8. The dues payment by VSP is able to pay its dues early and cleared all term loans ahead of schedule time.

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SUMMARY AND SUGGESTIONS The concept of working capital is used in two ways i.e., gross and net. Gross working capital refers to the firms investments in current assets. Net working capital means the difference between current assets and current liabilities, and therefore represents the position of current assets, which is financed either from long term funds or banks borrowings. Cash is required to meet a firms transactions and precautionary needs. A firm needs cash to make payments for acquisitions of resources and services for normal conduct of business. Cash is also held to meet emergency situations. Some firms hold cash to take advantage of speculative changes in prices of input and output. Management of cash involves three things. a) Managing cash flows in and out of a firm b) Managing cash flows within a firm c) Financing deficit or investing surplus cash And thus, controlling cash balance sat any point of time. Firms prepare cash budget to plan and control and cash flows. Cash budget can serve its purpose only when firm can manage its collection and payments within the allowed limits. A firm should hold optimum amount of cash at any time and invest the temporary excess amount in short term securities. Trade credit creates book debts accounts receivable. It issued as a marketing tool to expand or maintain the firms sales. A firms investment on account receivable depends on volume of credit sales and collection period through credit policy. Credit policy includes credit terms and collection efforts the firms credit policy will be considered optimum at the three methods monitor book debts. They are : a) Average collection period b) Ageing schedule c) Collection experience matrix The first two methods are based on the showing payments patterns and hence do not provide meaningful information for collecting book debts. The third approach uses the desegregated data and it is better method than first two methods. Inventories constitute about 60% of current assets to public limited companies of India. The manufacturing companies hold inventories in the form of raw materials work in process and finished goods. They are three motives for holding inventories. They are transaction motive, precautionary motive and speculative motive.
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VSP is a multi product manufacturer unit with varying cycle time for each product. The capital required by each manufacturing unit of VSP depends on the individual products cycle of each item. The department wise capital whose capital requirement coupled with their production target for a year invites and effective working capital management. In finance, working capital is synonymous with current assets; VSP is a multi product large organizations with huge capital turnover where the working capital requirement depends on the level of operation and length of operation cycle monitoring the duration of the operating cycle is an important aspect of current assets management and control. *scope of enhancing: during the year 2010-11 the turnover is Rs 1157 crores and profit is Rs658 crores. In such situation the company goes for expansion, such as production enhancement system, so that the company comes to a position for further increasing its profits. *During the financial year 2010-11 the companys average cost of interest is 3-4%, which the company has acquired by forex funds replacing domestic loans and working capital facilities. Company utilizes the forex funds where ever it is possible i.e., whenever the payment is made in Indian rupees of foreign currency such as ocean freight, other music payments like suppliers. The company will be in position to take a better advantage to increase the profits. *Currently the companys payables towards raw material are replaced with buyers credits/ suppliers credit in the form of forex funds. The company has tried to nullify the exchange risk by going for forward cover considering Indias dependency on other countries in exchange. Better risk monitoring would be required at the expansion stage when the quantum of import rises. *The steel industries are having very good time but VSP could not able to take full of its advantage due to the constraints, primarily raw materials. Unlike any other steel company, VSP is not having its own sources of raw material i.e. coal mine. These are very basic needs as the company always depends on its supplier for its raw material. Had the company always depends on its supplier for its raw material had the company utilized its 2-3 half% of working capital limits for acquisition of mines, purchasing of mines, etc. It could have been a favorable situation. *The company is getting all its funds i.e. day zero(0) when the rates are compared, the company is investing surplus funds atb8-8.5% and paying at 7-8% to get the funds on zero(0) day. This spread should be maintained during the time of expansion also. *The company has already accumulated funds in excess of Rs.5402 Crores and can look forward to bigger investment in building up capacities as compared to the proposed 7.3 Million tons. *VSP should invest its short investments in short term, low risk and medium return instruments rather than in the fixed deposits which it is presently employing for surplus funds, this would help the company manage its funds better at the time of expansion when the liquidity would be at premium.
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CONCLUSIONS: 1) The year 2010-11 was a challenging year, as the raw material costs increased by 1500 crores while the sales price remained stagnant. In spite of maximizing the Special steel component, the prices did not support the surge in raw material cost. VSP Steel Plant exhibited its credential and capability in unforeseen difficult conditions by improving its quality and Value Added Still products, which reached a record level of 79% of Saleable Steel neutralizing impact of rise in raw material prices partially. The result is an enriched product mix and sustained profitability contributing to the company recording its best ever Sales turnover of 11517 crores in the year. 2) Higher profit realization by selling the produces in higher margins will eventually result in higher cash accrual and hence higher credit rating .Higher credit rating results in reduction in interest rates. Hence the company should either try to enhance the production facilities or better investment opportunities other than fixed deposits what the company currently is using for investing surplus funds. 3) The non moving inventory is one of the gray areas inVSPs working capital management. They account for 1/3 rd of value total inventory. This is really a critical area where VSPs management should focus to bring down the level of non moving inventory. VSP has to identity areas for using inventory to dispose it. Also identification of such items will help in preventing procurement of such items on future. 4) The other main area where VSP has tremendous scope for improvement is in manufacturing value an added product. This will result in better sales realization and higher profit. 5) The export sales of VSP are only 12% of total sales during 2003-04. Present scenario of steel industry indicates the need for more steel even with the cause of lower production facilities. The company should now give more importance to exports because it provides good net sales realization but also export benefits. The following table the contribution of export sales and the justification for the above suggestions. Considering the fact that the margins in the export sales are low, but have the potential to raise in the near future, the company can maintain a minimum level of presence in the global market.

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THANK YOU

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