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The history of the Indian fertilizer industry dates back to 1906, when the first fertilizer
factory opened at Ranipet (Tamil Nadu). Since then, there have been major
developments in terms of both the quantity and the types of fertilizers produced, the
technologies used and the feed stocks employed. The fertilizer industry in India is in
the core sector and second to steel in terms of investment.
India is a country of more than 1 000 million people. It is the seventh largest nation in
the world with a geographical area of 328.7 million hectares. Agriculture is the
mainstay of the Indian economy, contributing about 22 percent of gross domestic
product (ODP) and providing a livelihood to two-thirds of the population. The net
cultivated area has been about 141 million ha for the last 30 years. However, there has
been a progressive increase in the gross cropped area as the cropping intensity has
increased from 118 to 135 percent in the last three decades. The total gross cropped
area is about 190 million ha. Broadly, the climate of India is of the tropical monsoon
type. It has four seasons: winter (January/February), a hot summer (March-May),
rainy southwest monsoon (June-September), and post-monsoon (October-December).
The climate is affected by two seasonal winds: the Southwest monsoon and the
northeast monsoon. The distribution of rainfall is very uneven in terms of time and
space (Table 1). About 72 percent of the area receives an annual rainfall of no more
than 1 150 mm. India has a net irrigated area (land area that receives irrigation from
the different sources) of 54.68 million ha and a gross irrigated area (total area of crops
that are irrigated) of 75.14 million ha (the largest in the world). Surface water and
groundwater resources contribute 46 and 54 percent, respectively, of the total. Food
crops occupy 69 percent of the irrigated area, the remaining 31 percent being under
non-food crops. The land in India suffers from varying degrees of degradation. Soil
fertility depletion is a cause of concern for Indian agriculture. There exists a gap of
about 10 million tons of nutrients (NPK) between the removal of nutrients by crops
and their addition through fertilizers. The use of plant nutrients per hectare is
relatively low and imbalanced, and this is one of the major reasons for low crop yields
in India. There are two main cropping seasons, namely kharif (April-September) and
rabi (October-March). The major kharif crops include rice, sorghum, pearl millet,
maize, cotton, sugar cane, soybean and groundnut, and the rabi crops are wheat,
barley, gram, linseed, rapeseed and mustard. With its good range of climates and
soils, India has a good potential for growing a wide range of horticultural crops such
as fruits, vegetables, potato, tropical crops. Food grain (cereals and pulses) crops
dominate the cropping pattern and account for about 60 percent of total gross cropped
area (Figure 1).
N P N P
PRODUCTION CAPACITY:
The production of fertilizers during 2005-06 was 113.54 LMT of nitrogen and 42.21
LMT of phosphate. The production target for 2006-2007 has been fixed at114.48
LMT of nitrogen and 48.20 LMT of phosphate, representing a growth rate of 0.83%
in nitrogen and 14.19% in phosphate, as compared to the actual production in 2005-
2006. Production target for nitrogenous fertilizer is less than the installed capacity
because of constraints in supply and quality of natural gas for Rashtriya Chemicals
and Fertilizers (RCF), Trombay and Bharamputra Valley Fertilizer Corporation Ltd.
(BVFCL), Namrup. Similarly, the production target for phospahtic fertilizer is less
than installed capacity due to constraints in availability of raw materials/intermediates
which are substantially imported. The production performances of both nitrogenous
and phosphatic fertilizers during 2006-07 were less than the target. For nitrogenous
fertilizers this was mainly due to constraints in supply and quality of natural gas,
equipment breakdowns, and RCF Trombay-V and DIL Kanpur remained under
unscheduled shutdown. In case of phosphate, production in DAP plants was low on
account of shortage of imported phosphoric acid and ammonia. Production of
complexes was higher than the corresponding period of last year. However, taken
together, the production of 'N' and 'P' during the year was higher than that in the
corresponding period of last year.
CAPACITY UTILIZATION:
The domestic fertilizer industry has by and large attained the levels of capacity
utilization comparable with others in the world. The capacity utilization during 2005-
06 was 94.1 % for nitrogen and 74.6% for phosphate. The estimated capacity
utilization during 2006-07 is 93.6% of nitrogen and 82.0% of phosphate. Within this
gross capacity utilization, the capacity utilization in terms of the urea plants was
102.0% in 2005-06 and is estimated to be 99.0% in 2006-07. As for phosphate
fertilizers, apart from the constraints mentioned earlier, the actual production capacity
utilization has also been influenced by the demand trends. The capacity utilization of
the fertilizer industry, particularly in respect of urea, is expected to improve further
through revamping modernization of the existing plants.
Setting up joint venture projects in countries having abundant and cheaper raw
material resources.
Working out the possibility of using alternative sources like liquefied natural gas,
coal gasification, etc., to overcome the constraints in the domestic availability of
cheap and clean feedstock, particularly for the production of urea.
Feedstock Policy:
At present, natural gas based plants account for more than 66% of urea capacity,
naphtha is used for less than 30% urea production and the balance capacity is based
on fuel oil and LSHS as feedstock. The two coal based plants at Ramagundam and
Talcher were closed down due to technological obsolescence and no viability. Natural
gas has been the preferred feedstock for the manufacture of urea over other feedstock
viz. naphtha and FO/LSHS, firstly, because it is clean and efficient source of energy
and secondly, it is considerably cheaper and more cost effective in terms of
manufacturing cost of urea which also has a direct impact on the quantum of subsidy
on urea.
INDIGENOUS IMPORTED
UREA UREA
The rise in fertilizer consumption in India has been quite phenomenal during the
past two and a half decades. To meet the rise in consumption of fertilizers, creation of
additional capacity was also planned. The change in worldwide energy concept and
the rise in oil prices in 1973 forced India to broad base its nitrogenous production by
adopting new and sophisticated technology which could use cheaper sources of raw
materials hitherto not tried in the country.
NFL Vijaipur Unit, during 1998-99, received ISO 14001 Certification in addition
to ISO 9002 Certification already obtained by the Unit. NFL, thus, is the First
Company in Public and Cooperative Sector in the Fertilizer Industry to have both
these Certifications.
NFL has been selected by a panel of judges for Economic Times- Harvard
Business School Association of India Corporate Performance Award for 1994,
among 213 Public Sector Companies in the country.
BATHINDA UNIT
1) National Safety Award to the Unit from the Ministry of Labor, Government of
India for Meritorious Performance in Industrial Safety during 1989.
2) Merit Certificate from NPC to the Unit for performance improvement during 1991-
92.
6) During 2001-02, Bathinda Unit was awarded National Safety Award First Prize for
Largest Accident Free Period' in Fertilizer and Chemical Industry relevant for 1999.
Farmer and other consumers with quality products and services to the benefit of
the national economy
To carry out Rand D activities for increasing plant availability, energy saving,
process improvement-utilizing efficiency in the application of chemical
PRODUCTIVITY
PROFITABILITY
To manage the assets, men and materials in most effective and efficient
manner ensuring,
To provide to the farmers high quality products in right time and in adequate
quantities and with a package of modern agricultural practices, at the same
time, maintaining reputation for fair business practices.
ORGANISATION
Registered on 23.8.1974
The capacity has increased from 13.70 lakh MT Nitrogen to 14.86 lakh MT Nitrogen
consequent upon commissioning of Nanga 1 Unit Revamp Scheme w.e.f. 1.2.2001
and reassessment of capacities of Vijaipur-I and II w.e.f. 1.4.2000. The total capacity
of Urea is 32, 30,700 MT which in term of Nitrogen comes to 14.86lakh MT.
PLANTS RELATED CAPACITIES
TONNES/DAY TONNES/ANNUM
Soil testing services are provided free of cost to the farmers to advocate the balanced
use of fertilizers at economic levels. One mobile soil-testing unit caters to the need of
the remotest of remote farmers in far areas and provides technical guidance to the
farmer at field level.
Other farm services include fertilizer demonstration on cultivator's fields, field days,
fertilizer/farmers Mela, pilot project, adoption of villages etc. NFL also conducts
various training programs to educate the farmers on the balanced use of fertilizer and
its timely application besides providing guidance on pesticides and fungicides.
NFL PRODUCTS
MAIN PRODUCTS
Kisan Urea is a highly concentrated, solid, nitrogenous fertilizer, containing 46.0% .It
is completely soluble in water hence Nitrogen is easily available to crops. It contains
Nitrogen in amide form which changes to ammonia forms and is retrieved by soil
colloids for longer duration. Urea is available in granular form and can be applied by
drill and broadcasting.
Kisan urea is ideally suitable for all types of crops and for foliar spray which
instantly removes nitrogen deficiency. Kisan Urea also has a strong and long lasting
effect on crop resulting in bumper crops Carbonic acid present in Kisan Urea helps in
absorption of other nutrients like phosphate and Potash by roots of crop.
3. Fix Biological Nitrogen in the soil, which is readily available to the plant.
6. Provides plant nutrient at low cost and useful for the consecutive crops.
INDUSTRIAL PRODUCTS:
NFL manufactures and markets the following Industrial Products.
Product Chemical
Formula Specifications Used for/Industry Packaging
Supply
Methanol Minimum 99.8 wt% * Formaldehyde Supplied
(CH3OH) Specific gravity * Automotive antifreeze in Road
Max.0.7928 at 20oC * Chemical Synthesis Tankers
* Aviation Fuel
* Rocket fuel
* Dehydrator for natural
gas
Nitric Acid Dilute HNO3 by wt.54% * Organic Synthesis Road
(HNO3) and 60%concentration. * Photo engraving Tankers
Balance water * Medicine
* Preparation of Nitro
* Compounds
Oxidiser in liquid rocket
propellants
* Refining of Silver
Ammonium Nitrate Flakes 95% concen. * Explosives, Pyrotechnics Flakes in
(NH4NO3) Balance water * Herbicides & Insecticides Polethene
* Nitrous Oxide HDPE
Melt Concen 82-84% * Absorbent for Nitrogen Bags
Balance water Oxides Melt in
* Ingredient for freezing
Stainless
mixtures Steel
* Oxidiser in solid rocket road
properties tankers.
* Nutrient for Antibiotics &
yeast
* Catalyst
Sugar Industry
Steel Manufacturing
Rubber industry
Rubber industry
Aerated Water
NFL is well known for taking up assignments in India and abroad in the fields of
• Special maintenance and repair services for rotator equipment, like pumps,
compressors, turbines etc.
• Laboratory Services
MOU RATING:
YEAR RATING
1991-92 Excellent
1992-93 Excellent
1993-94 Excellent
1994-95 Excellent
1995-96 Excellent
1996-97 Fair
1997-98 Very Good
1998-99 Good
1999-00 Very Good
2000-01 Excellent
2001-02 Excellent
2002-03 Excellent
2003-04 Excellent
2004-05 Excellent
2005-06 Excellent
2006-07 Excellent
2007-08 Excellent
2008-09 Under Evaluation
ENVIRONMENT
NFL has a long tradition of nurturing the environment in and around its
manufacturing Units. At NFL, we believe in sustainable development without
degrading the environment and are fully committed to our responsibility to the
Society. In line with our commitment to this object, we have installed with state of art
effluent treatment facilities at all our Units. At NFL Vijaipur the Company has
adopted cleaner technology to minimize generation of pollutants.
All the pollutants generated in the manufacturing process are treated at source and
pollution control schemes have been incorporated at the inception stage itself.
NFL meets the standards prescribed by the Central and State Pollution Control boards
and ensures that our Pollution Control measures and upgraded from time to time. The
major facilities available at NFL's operating Units are :
c) Facilities for cyanide and chromate treatment of effluent from carbon recovery
and cooling towers sections at Nangal.
The Company has also adopted an extensive Afforestation program and has planted
more than 1.5 lakh trees of different species. The once barren stretch of land around
NFL Vijaipur Unit in Madhya Pradesh is now a lush green belt with about 1.5 lakh
trees-which stands testimony to the Company's Commitment to environment
preservation.
INTRODUCTION TO BATHINDA PLANT
Bathinda unit of National Fertilizers Ltd. is situated in Bathinda Distt. of Punjab
State. The Unit is situated 8 Km away from Bathinda City, on "Sibian Road".
Bathinda as one of the sites for fuel oil based plant was basically chosen from
consumption point of view. The following factors were considered in view by Govt.
of India while selecting the site at Bathinda.
• Availability of land
• Bathinda town being conjunction of Punjab, Haryana and Rajasthan and all
States having potential for fertilizer consumption.
IMPLEMENTATION OF PROJECT:
To take up challenging job for completion of this Project within a period of 36
months from the zero date i.e. from 26.09.1974, the contracts were signed with "Toyo
Engineering Corporation" (TEC) and Engineers India Limited (ElL), well known
Japanese and Indian Consultancy Companies respectively.
Water 13 MGD
Power 28MWH
INTRODUCTION
Working capital management has acquired great importance in recent times.
The brains in every organization is now days spending their previous time to resolve
the problems of working capital. Working capital is an integral part of the overall
financial management. The management of chart assets and chart team sources of
financing is working capital management.
There is always a time gap between value of goods and receipt of cash.
Working Capital is required for this period. The main aim of working capital
management is to manage the firm's current assets and current liabilities. This is
because if firm can't maintain capital **** level of working capital it becomes
insolvent and forced into bankruptcy. The interaction between current assets and
current liabilities is main theme of theory of working capital. Working capital is life
blood and controlling nerve of business.
There are two interpretations of working capital under the balance sheet
concept.
In the broad sense, the term working capital refers to the gross working capital and
represents the amount of funds invested in current assets. Thus, the gross working
capital is the capital invested in total current assets of the enterprise. Current assets
are those assets which in the ordinary course of business can be converted into cash
within a short period of normally one accounting year. Examples of current
assets are:
2 Bills Receivables
5 inventories of stocks, as
(b) Work-in-process
7 Prepaid Expenses.
8 Accrued Incomes.
In a narrow sense, the term working capital refers to the net working capital. Net
working capital is the excess of current assets over current liabilities, or say:
Net working capital may be positive or negative .when the current assets exceed the
current liabilities the working capital is positive and the negative working capital
results when the current liabilities are more than the current assets. ( Current liabilities
are those liabilities which are included to be paid ordinary course of business within a
short period of normally one accounting year out of the current assets or the income
of the business examples of current liabilities are:
1. Bills Payable.
5. Dividends Payable.
6. Bank Overdraft.
The gross working capital concept is financial or going concern concept whereas net
working capital is an accounting concept of working capital. These two concepts of
working capital are not exclusive; rather both have their own merits. The gross
concept is sometimes preferred to the net concept of working capital for the following
reasons:
1. It enables the enterprise to provide correct amount, of working capital at the right
time.
2. Every management is more interested in the total current assets with which it has to
operate than the sources from where it is made available.
3. The gross concept takes into consideration the fact that every increase in the funds
of the enterprise would increase its working capital.
4. The gross concept of working capital is more useful in determining the rate of
'return on investments in working capital.
The net working capital concept, however, is also important for the following reasons:
1. It is a qualitative concept which indicates the firm's ability to meet its operating
expenses and short-term liabilities.
2. It indicates the margin of protection available to the short-term creditors, i.e., the
excess of current assets over current liabilities.
4. It suggests the need for financing a part of the working capital requirements out of
permanent sources of funds.
To conclude, it may be said that, both, gross and net, concepts of working
capital are important aspects of the working capital management. The net concept of
working capital may be suitable only for proprietary from of organizations such as
sole-trader or partnership firms. But the gross concept is very suitable to the company
form of organization where there is divorce between ownership, management and
control.
However, it may be made clear that as per general practice, net working
capital is referred to simply as working capital. In the words of Hoagland, "Working
capital is descriptive of that capital which is not fixed. But the more common use of
the working capital is to consider. It is the difference between the book value of the
current assets and current liabilities.
b) Operating cycle or circular flow concept.
As discussed earlier, working capital refers to that part of firm's capital which
is required for financing short term or current assets such as cash, marketable
securities, debtors and inventories funds, thus invested in current assets keep
revolving fast and are being constantly converted into cash and this cash flow out
again in exchange for other current .assets. Hence, it is also known as revolving or
circulating capital. The circular flow concept of working capital is based upon this
operating or working capital cycle of a firm. The cycle starts with the purchase of raw
material and other resources and ends with the realization of cash from the sale of
finished goods, it involves purchase of raw material and stores, its conversion into
stock of finished goods through work in progress and service costs, conversion of
finished stock into sales, debtors and receivables and ultimately realization of cash
and this cycle continues again from cash to purchase of raw material and so on.
The gross operating cycle of a firm is equal to the length of the inventories and
receivables conversion periods. Thus,
On the basis of concept, working capital is classified as gross, working capital and net
working capital as discussed earlier. This classification is important from the point of
view of the financial manager. On the basis of time working capital may be classified
as:
Figures given below Illustrate the difference between permanent and temporary
working capital in the sense that it is required for short periods and cannot be
permanently employed gainfully in the business figures given below illustrate the
difference between permanent and temporary working capital.
Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run
successfully without an adequate amount of working capital. The main advantages of
maintaining adequate amount of working capital are as follows:
1. Solvency of the business: Adequate working capital helps in maintaining solvency,
of the business by providing uninterrupted flow of production.
3. 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.
4. Cash discounts. Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence it reduces costs.
5. Regular supply of raw material: Sufficient working capital ensures regular supply
of raw materials and continuous production.
8. Ability to lace crisis. Adequate working capital enables a concern to face business
crisis in emergencies such as depression because during such periods, generally, there
is much pressure on working capital.
9. Quick and regular return on investments. Every Investor wants a quick and regular
return on his investments. Sufficiency of working capital enables a concern to pay
quick and regular dividends to its investors as there may not be much pressure to
plough back profits. This gains the confidence of its investors and creates a favorable
market to raise additional funds in the future.
Every business concern should have adequate working capital to run its
business operations. It should have neither redundant or excess working capital nor
inadequate nor shortage of working capital. Both excess as well as short working
capital positions are bad for any business. However, out of the two, it is the
inadequacy of working capital which is more dangerous from the point of view of the
firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING
CAPITAL
1. Excessive Working Capital means idle funds which earn no profits for the business
and hence the business cannot earn a proper rate of return on its investments.
3. Excessive working capital implies excessive debtors and defective credit policy
which may cause higher incidence of bad debts.
5. When there is excessive working capital, relations with hanks and other financial
institutions may not be maintained.
6 Due to low rate of return on investment the value of shares may also that MP of
shares.
1. A concern winch has inadequate working capital cannot pay it’s shun term
liabilities in tune. Thus, it will lose its reputation and shall not be able to gel good
credit facilities.
3. It becomes difficult for the firm to exploit favorable market conditions and
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations mid it creates
inefficiencies, increases costs and reduces the profits of the business.
5. It becomes impossible to utilize efficiently the fixed assets due to non- availability
of liquid funds.
6. The rate of return on investments also falls with the shortage of working capital.
The need for working capital cannot be over emphasized. Every business
needs some amount of working capital. The need for working capital arises due to the
time gap between productions mid realization of, cash from sales. There is an
operating cycle involved in the sales band realization of cash. There are time gaps in
purchase of raw materials and production; production and sales; mid sales and
realization of cash. Thus, working capital is needed for the following purposes:
3.) To incur day-to-day expenses and overhead costs such as fuel, power and office,
expenses, etc.
For studying the need of working capital in a business, one has to study the
business under varying circumstances such as a new concern, as a growing concern
mid as one which has attained maturity. A new concern requires a lot of liquid funds
to meet initial expenses like promotion, formation, etc. These expense's, are called
preliminary expenses mid are capitalized. The amount needed as working capital in a
new concern depends primarily" upon its size and the ambitions of its promoters.
Greater the size of the business unit, generally, larger will be the requirements of
working capital. The amount of working capital needed goes on increasing with the
growth and expansion of business till it attains maturity. At maturity, the amount of
working capital needed is called normal working capital. There are many other factors
which influence the use of working capital in the business. They are discussed later
on.
(I) Changes in the level of sales because of seasonal, cyclical and random factors are
to be adjusted with. Adverse short-run development may cause difficulties to the firm
in its growth.
(II) The value of the firm is to be maximized and efficient working capital
management can contribute to this goal. The level of current assets should not be
beyond a point where marginal returns on additional current assets are less than the
cost of capital required to finance additional current assets.
(I) Time involved. Financial manager has to devote the largest portion of his time in
day to day internal operations of the firm and hence the importance of working capital
management.
(II) Relationship with sales growth. The need to finance current assets is closely and
directly related to growth of sales. If sales increase, more amounts are required to be
invested in accounts receivable. Moreover, in anticipation, greater stocks are to be
kept for the increased sales.
(III) Quantum of investment. In most of the concerns which are not manufacturing,
current assets may be even more than half of the total assets of a business. Large
investment requires careful attention of the finance manager in respect of the current
assets management particularly since the investments lend to be relatively volatile.
(IV) Importance for small firms. A small firm cannot avoid investments in current
assets and, therefore, for it the management of current assets assumes special
significance. It is so because of the difficulty in arranging long-term loans also - the
effect being increased current liabilities on account of short-term loans.
(1) Manufacturing cycle. The production process consumes time right from the
purchase and use of raw materials to the completion of finished goods. The longer the
duration, the greater is the requirement of working capital. The manufacturing cycle
may shorter for certain concerns and longer for others it depends on the type of the
product to be manufactured, work to be done through machine labor and hand Inborn,
degree of rationalization of manufacturing procedure', through lime, motion mid
fatigue studies etc.
(2.) Production Policy: If the production is evenly spread over the entire year,
working capital requirements are greater, because the inventories will lie
unnecessarily accumulated during oil - season period. But if the production schedule
favors a varying production plan as per the seasonal requirements, working capital is
required to a greater extent during a specified season only. The production policies
arc; affected by so many factors-availability of raw materials, labor, stocking facility
etc. and therefore, whatever the production policies are, the firm has to arrange its
working capital requirements accordingly. The decisions of management regarding
automation also affect working capital requirements. In a labor intensive process, the
requirement of working capital will be higher. In case of a highly automatic plant, the
requirements of long-term funds would be greater.
(3) Nature and size of business. Manufacturing firms require less working capital as
compared to trading and financial firms. However, certain manufacturing firms also
require a heavy investment in working capital. Public utility concerns require less
capital. The needs of working capital for a large business are more than those of a
small business. Also, shorter the manufacturing process, lower the requirement of
working capital because inventories are to be maintained at a lower level. Therefore,
highly capital intensive industries require large working capital to run their
sophisticated and long production process.
(4) Seasonal and cyclical fluctuations. On account of market boom, sales increase
and, as a consequence, the requirements of inventories and debtors Increase. Slack
seasons reduce the requirements of investment in working capital.
(5) Credit Policy. Liberal credit policy leads to higher sales and, therefore, more
working capital is required. Even if sales do not grow, liberal policy in respect of
credit period allowed will require more investment in debtors because the collections
would also be slower then. In the same way, an organization which has a very
efficient debt collection system and offers strict credit terms will require lesser
working capital as compared to organization where debt collection system is not so
efficient.
(6) Credit facilities. If the credit period allowed to the company is more, the
requirements of working capital would be less for the company. If the company does
not enjoy liberal credit facilities from its suppliers, it will have to arrange for greater
funds for investment in current assets.
(7) Inventory policies. This has also an impact on working capital requirements since
large amount of funds is normally locked up in inventories. An efficient firm may
stock raw material for smaller period and may require lower working capital.
(9) Dynamic attitudes. If the management of the firm is dynamic and is thinking in
terms of expanding the business or diversifying it, greater funds are required by the
business. The main reason why more funds are required early is that advance planning
is essential if the firm is to expand and grow.
10) Price fluctuations: Price level changes, particularly inflation have a great effect
on the requirements of working capital in periods of rising prices more funds are
required to be invested in working capital. Same level of operations can be conducted
only with greater funds if the value of money falls.
(11) Supply fluctuations. Regular supply of raw materials and labor would cause
lesser working capital requirements, large quantities of raw material are required to be
stored because of fear of non-availability at a later date or on account of increased
prices, and more funds are needed for working capital.
(12) Abnormal Factors. Factors such as strikes and lockouts require additional
working capital. Recessionary conditions require more stock of finished goods while
inflationary conditions require more fund for working capital to maintain same
amount of current assets.
(13) Tax liability. Greater tax liability means greater requirements of working capital.
Tax liability can be reduced by proper tax planning and tax management and thus the
working capital requirements can also be reduced.
MANAGEMENT OF WORKING CAPITAL
(b) Determining the optimal levels of investment in various current assets, and
Examining the latest patients upgrading each element of working capital.
(c) It is obvious that given a constant level production higher the amount of working
capital, the lower will be the return on investment, since capital turnover ratio will be
less. On the other hand, lower the amount of working capital; the higher would be the
amount of the Risk since the company would not have adequate liquidity to meet its
term obligations. In working capital management, therefore, we have to strike a
balance between risk and profitability. We have to find out that level of achievement
in working capital which gives a reasonable amount of liquidity to a good working
capital turnover ratio.
• Cash management
• Receivable management
• Inventory management
INTRODUCTION TO CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is
the basic input needed to keep the business running on a continuous basis; it is also
the ultimate output expected to be realized by selling the service or product
manufactured by the firm. The firm should keep sufficient cash, neither more nor less.
Cash shortage will disrupt the firm's manufacturing operations while excessive cash
will simply remain idle, without contributing anything towards the firm's profitability.
Thus, a major function of the financial manager is to maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any
restriction. The term cash includes coins, currency etc. held by the firm, and balances
in its bank accounts. Sometimes near-cash items, such as marketable securities or
bank time’s deposits, are also included in cash. The basic characteristic of near-cash
assets is that they can readily be converted into cash. Generally, when a firm has
excess cash, it invests it in marketable securities. This kind of investment contributes
some profit to the firm.
(iii) Cash balances held by the firm at a point of time by financing deficit or investing
surplus cash. It can be represented by Cash.
In order to resolve the uncertainty about cash flow prediction and lack of
synchronization between cash receipts and payments, the firm should develop
appropriate strategies for cash management. The firm should evolve strategies
regarding the following four facets of cash management:
Cash planning: Cash inflows and outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should be
prepared for this purpose.
Manage the cash flows: The flow of cash should be properly managed. The cash
inflows should be accelerated while, as far as possible, the cash outflows should be
decelerated.
Optimum cash level: The firm should decide about the appropriate level of
cash balances. The cost of excess cash and danger of cash deficiency should be
matched to determine the optimum level of cash balances.
Investing surplus cash: The surplus cash balances should be properly invested
to earn profits. The firm should decide about the division of such cash balance
between alternative short-term investment opportunities such as bank deposits,
marketable securities, or inter-corporate lending.
The firm's need to hold cash may be attributed to the following three motives
Transaction Motive
The transactions motive requires firm to hold cash to conduct its business in
the ordinary course. The firm needs cash primarily to make payments for purchase*,
wages and salaries, other operating expenses, taxes, dividends etc. The need to hold
cash would not arise if there were period synchronization between cash receipts and
cash payments, i.e. enough cash is received when the payment has to be made. But
cash receipts and payments are not perfectly synchronized. For those periods, when
cash payments exceed cash receipts, the firm should maintain some cash balance to be
able to make required payments. For transactions purpose, a firm may invest its cash
in marketable securities. Usually, the firm will purchase securities whose maturity
corresponds with some anticipated payments, such as dividends, or taxes in the future.
Precautionary Motive:
The precautionary motive is the need to hold cash to meet contingencies in the
future. It provides a cushion or buffer to withstand some unexpected emergency. The
precautionary amount of cash depends upon the predictability of cash flows. If cash
flows can be predicted with accuracy, less cash will be maintained for an emergency.
The amount of precautionary cash is also influenced by the firm’s ability to borrow at
short notice, less the need for precautionary balance.
Speculative Motive:
The speculative motive relates to the holding of cash for investing in profit-
making opportunities as and when they arise. The opportunity to make profit may
arise when the security prices change. The firm will hold cash, when it is expected
that interest rates will rise and security prices will fall. Securities can be purchased
when the interest rate is expected to fall; the firm will benefit by the subsequent fall in
interest rates and increase in security prices. The firm may also speculate on materials'
prices. If it is expected that materials' prices will fall, the firm can postpone materials'
purchasing and make purchases in future when price actually falls.
Cash planning is a technique to plan and control the use of cash. It helps to anticipate
the future cash flows and needs of the firm and reduces the possibility of idle cash
balances (which lowers firm's profitability) and cash deficits (which can cause the
firm's failure).
Cash planning protects the financial condition of the firm by developing a projected
cash statement from a forecast of expected cash inflows and outflows for a given
period. The forecasts may be based on the present operations or the anticipated future
operations. Cash plans are very crucial in developing the overall operating plans of
the firm.
Cash planning may be done on daily, weekly or monthly basis. The period and
frequency of cash planning generally depends upon the size of the firm and
philosophy of management. Large firms prepare daily and weekly Forecasts.
Medium-size firms usually prepare weekly and monthly forecasts. Small firms may
not prepare formal cash forecasts because of the non-availability of information and
small-scale operations. But, if the small firms prepare cash projections, it is done on
monthly "oasis, AS a firm grows and business operations become complex cash
planning becomes inevitable for its continuing success. Cash Forecasting and
Budgeting.
Cash budget is the most significant device to plan for and control cash receipts and
payments. A cash budget is a summary statement of the firm's expected cash inflows
and outflows over a projected time period. It gives information on the timing and
magnitude of expected cash flows and cash balances over the projected period. This
information helps the financial manager to determine the future cash needs of the
firm, plan for the financing of these needs and exercise control ov.er the cash and
liquidity of the firm.
The time horizon of a cash budget may differ from firm to film. A firm whose
business is affected by seasonal variations may prepare monthly cash budgets. Daily
or weekly cash budgets should be prepared for determining cash requirements if cash
flows show extreme fluctuations. Cash budgets for a longer intervals may be prepared
if cash flows are relatively stable.
Cash forecasts are needed to prepare cash budgets, Cash forecasting may be done on
short or long-term basis. Generally, forecasts covering periods of one year or less are
considered short-term; those extending beyond one year are considered long-term.
CASH MANAGEMENT IN N.F.L BATHINDA:-
In N.F.L, Bathinda, a cash budget is prepared which is the summary statement
of firm's expected cash inflow and outflow. For the whole financial year with a month
break up need of exact cash is sent to the head office which is situated at Noida for
approval. The head office sends after approving it. Funds are transferred to Bathinda
plant by head office on weekly basis or in case whenever the need of cash arises.
Reports of fund position are sent to head office on daily basis
In N.F.L Bathinda, ratios analysis has been used as an important tool to make analysis
of cash management as under:
This ratio depicts the percentage of cash in total current assets. The
fluctuations occur due to change in working capital over the years.
This ratio depicts the percentage of current liabilities that can be paid by cash.
Higher the ratio better is the ability to pay. It can be shown by the below table as:
Year Cash Current liabilities Cash ratio
(1) Economic Order Quantity (EOQ).The quantity for which the order should be
placed is known as the economic order quantity. It is the size of the order the gives the
lowest total costs. The costs of inventories are ordering costs and carrying costs:
(i) Ordering cost: The costs of placing an order and obtaining the supplies are known
as the ordering cost. Normally the ordering cost is fixed per order. Hence, if more
orders are placed, ordering cost will have to be incurred. It also applies that the
quantities purchased on each order are smaller.
(ii) Carrying costs. Carrying costs are those costs which are required to be incurred
on account of inventory storage, handling, insurance etc. it also includes the interest
costs on account of investment being locked up in inventories. Such costs are assumed
to be constant per unit of inventory, per unit of time. The total carrying costs for a
period is the carrying costs per unit multiplied by the average number of units of
inventory for the period the average inventory being half of the quantity ordered,
assuming the usage of inventory on a perfectly steady basis over a period of time and
also assuming that there is no safety stock.
Ordering costs decrease while carrying costs increase if more and more
inventories are held and less and less orders are placed, and vice versa. A proper
balance is struck off by a level which gives the minimum total costs. With the help of
a formula, the economic order quantity can be calculated as under:
4. Re-order Level. The optimal order (or re-order) point (or level) is the level of
inventor;' at which the economic order quantity of additional stock should be ordered.
It is the point at which the expected usage of an item of inventory would just exhaust
the existing inventory during the time required in obtaining fresh delivery. Thus the
re-order level can be determined by applying the following formula:
Lead time means the time normally required In getting delivery of goods after
placing an order. Average usage refers to the quantity of inventory to be consumed on
an average during a particular period.
7. ABC Analysis. The basic idea underlying ABC analysis is that every item of
inventory is not equally important from the viewpoint of control. Certain items are
very large in number (in quantitative terms) but are not of a high value, while certain
items are very few in number but are costly ones. The policy of control according to
the value of the items is more effective and less time consuming for the management.
Under ABC analysis, inventories are classified into three categories category A
consists of those items which are very few in number, say 10% of the total quantity
but are more valuable., possessing, say, 70% of the total value. Category B comprise
of items more in number as compared to category A items, but having lesser value
compared to that of category A items. For example, 35% of the total quantity may be
put in category B and the items may be having, say 25% of the total value, under
category C, the items are very large in number, say 55% of the total but their value is
very thin, say 5% of the total. The management would concentrate on Category A
items to the maximum possible extent. Category B items shall be paid less attention
to, and category C items the least.
(i). Fast moving inventories. The inventories which are in great demand are fast
moving -inventories. Such inventories should be especially cared for, so that sales do
not suffer.
(ii) Slow moving inventories. The inventories which are moving at a slow rate are
slow moving inventories. The reasons should be further investigated. If the demand
such products is receding. Their production may be stopped in future. If there seems
to be a scope in the market, step may be taken to boost up sales through advertisement
campaigns etc.
(iii) Dormant Inventories. Inventories which are not in demand are termed as
dormant inventories. As attempt should be made to clear off such inventories as early
as possible though at a loss
(iv). Obsolete inventories. If the inventories have become out of date they are called
obsolete and such inventories should be scrapped forthwith.
INVENTORY MANGEMENT IN N.F.L BATHINDA:
In N.F.L Bathinda, mainly ABC Analysis and XYZ analysis is being used to
manage the inventories. Under ABC analysis ‘A’ categories includes the items which
have a consumption of more than Rs. 1, 00,000 during the year. It includes items like
router, heat exchanger, bulk chemical, pump, gear box etc. Category ‘B’ includes
items like mechanical spares. It includes those whose consumption value is more than
Rs. 20,000 but less than Rs. 1, 00,000 and ‘C’ category includes items like nut bolts,
general tools, painting brush, gloves etc. It includes value less than Rs. 20,000.
Under XYZ analysis, the ‘X’ category includes the items which are high in
units or which had items for more than 100000 units. We can say that it is just the
opposite of ABC Analysis.
From the above data, it can be analyzed that there has been overall decrease in
inventory.
RECEIVABLES MANAGEMENT
The third important component of current assets is the accounts receivable.
The credit and collection polices are to be properly laid down and effectively
implemented to manage the accounts receivable efficiently. The credit policies should
be such which balance the risk on one hand and the profitability on the other. The
investment receivables should be at an optimum level-which can be determined by a
trade-off between the cost of carrying receivables (including debt losses) and the
profit on sales. Collection policies should ensure timely collection of dues so as to
minimize the risk of bad debt losses. The efficiency of a firm's collection policy can
be measured by the rate at which credit sales are converted into cash.
1. Credit Policies. The credit policy of a firm influences the sales significantly. The
credit policy may be liberal or strict-a liberal policy increases the sales but may result
in more bad debts or may involve more costs on account of large investment being
locked up in receivables; a strict credit policy may bring the sales down, but the
chances of bad debts are minimized. The firm has to follow a path which is neither of
a liberal credit policy nor of a strict one. In order to maximize sales with minimum of
investment in receivables and minimum risk of bad debt losses.
2. Volume of Sales. The greater the volume of sales the greater will be the investment
in receivables. The volume of sales is affected by the extent of credit allowed to the
customer’s Liberal credit to more volume of sales and as a consequence the size of
investment in receivables in increases.
(a) Credit Period. If the demand of a product is inelastic the credit period may be
small. However, if product has an elastic demand, the credit period will determine the
quant.um of sales. The credit period is also dependent on the custom in the industry
and the practice followed by various competitors. Credit period is also determined by
availability of funds and the credit risks involved. Also if the credit period is too long,
possibility of bad debts will increase.
The longer the period of credit allowed to customers, the greater will be the
size of investment in receivables. Credit terms are sometimes mentioned as '3/15, net
40'. It means that 3% discount is given if the bill is paid before the 15th day, after the
date of invoice and payment is due by the 40th day, thus the credit period is 40 days.
(b) Cash Discount. Firms allow cash discount to customers so that they are induced
to make payment before the due date. Incentives in this form may reduce the size of
investment in receivables. The firm can see the effect of varying the rates of discount
and duration or discount period on the volume of sales and the size of receivables.
The discount policy should be such which increases the collections in such a way that
the opportunity savings arising there from are more than the cost of the discount.
Thus, the rate of discount to be given should depend upon the cost of carrying debts.
In foreign countries specialized agencies are engaged in the task of providing rating
information regarding individual parties.
6. Collection Policy and Procedures. The procedures followed by a firm to get the
payment of accounts receivables should be effective if the size of investment in
accounts receivables is to be contained. The collection machinery should be so geared
that as soon as the credit period is over, the receivables are converted into cash. The
procedures may include personal letters, telegraphic reminders, telephone calls and at
last legal actions.
RECEIVABLES MANAGEMENT IN N.F.L BATHINDA:
In this unit, there is no receivable management as all are controlled by the
head office, situated at NOIDA. To boost up the sales, the company pays attractive
cash discounts to its customers for early payments so that the credit collection period
is decreased. The credit worthiness of the customer is compared with the credit
standards of the company. It takes into account the promptness of the customer to pay.
For giving credit to a new customer, the financial position of the customer is
investigated. The frequency of payments and cash discount availed helps in forming
an opinion about the customer.
• Trade creditors
• Bank finance
• Share capital
But in N.F.L Bathinda all sources of finances doesn't used. They mainly
dependent on bank finance because other finance act are formed in head office. The
most important source of working capital finance in NATIONAL FERTILIZER
LIMITED BATHINDA is mainly banks.
Banks are the main institutional sources of working capital finance in India.
Banks provide for the working capital needs of the firm in different forms like
overdraft, cash credit, discounting of bills and working capital loans.
N.F.L Bathinda can get cash credit up to Rs 1 crore from STATE BANK OF INDIA
which is their main bank.
CHAPTER-III
ANALYSIS OF OVERALL
LIQUIDITY POSITION
ANALYSIS OF OVERALL LIQUIDITY POSITION:
The short term creditors of a company, like suppliers of goods of credit and
commercial banks providing short term loans, are primarily interested in knowing the
company's ability to meet its current or short- term obligations as and when these
become due. The short term obligations of a firm can be met only when there are
'sufficient liquid assets. Therefore, a firm must ensure that it does not suffer from lack
of liquidity or the capacity to its current obligations. If a firm fails to meet such
current obligations due to lack of good liquidity position, its goodwill in the market is
likely to be affected beyond repair. It will result in a loss of creditor's confidence in
the firm and may even closure of the firm. Even a very high degree of liquidity is not
good for a firm because such a situation represents unnecessarily excessive funds of a
firm being tied up in current assets. Therefore, it is very important to have a proper
balance in regard to the liquidity of the firm.
Current Assets
(in crores)
Current
Liabilities
(in crores)
The working capital in the year 2002-03 was RS.214.549 crore and it
decreased till year 2004-05 to Rs 31.14. The main reason for this as inventory got
decreased and liabilities got increased. But from the year 2005-06 it eventually got
increased due to sudden increase in debtors and it increased % "the year 2006-07 from
Rs 31.14 crore to Rs 276.87 crore.
In 2004-0.5 there is drastic decrease in working capital around Rs 31.14 crore because
suddenly liabilities increased.
From all this information we can analyze that there working capital position is going
sound from the year 2005 to 2006-07.
CHAPTER- IV
CONCLUSION &
RECOMMENDATIONS
SWOT ANALYSIS
STRENGTH:
• Profit making and reputed firm.
• Highly diversified.
WEAKNESS:
• Facing some infrastructure problems.
OPPURTUNITIES:
• Setting up of joint ventures in India/ Abroad.
• Location Advantages as the main production units are located in the main
consumption area.
THREATS:
• Increasing input cost of feed stock i.e. fuel oil/ SHS/ Naptha/ NG.
• The firm should try to improve its sales by marketing at large scale and face
the competition.
• The firm should try to increase its production by bringing in new technology
and reducing its cost of production.
• Reducing working capital turnover ratios shows that the management is unable
to utilize the working capital efficiently. So the firm should increase its
working capital turnover.
• For financing the working capital, the firm is more dependent on the outsider’s
funds, which may prove dangerous in the long run.
• The firm is presently using ABC Analysis and XYZ Analysis. It should use
VED Analysis along with ABC Analysis for better Inventory Management.
CHAPTER- V
BIBLIOGRAPHY
BIBLIOGRAPHY:
• Financial Management by I.M. Pandey. (Vikas Publishing House Pvt. Ltd.)
• Khan, M.Y. and Jain, P.K., Financial management, Tata McGraw Hill.
Financial Management
• Annual Reports
• www.nationalfertilizers.com