A

Report On

At

INDIAN FARMERS FERTILIZERS COOPERATIVE LIMITED

By MAMTA BHAGAT

A report submitted in Partial Fulfillment of the requirements of MBA Program of BANASTHALI VIDYAPITH (WISDOM)

Distribution list: Mr. Praveen Agarwal , Company Guide, IFFCO Mr. Harsh Purohit, Faculty Guide, Banasthali Vidyapith,Rajasthan

ACKNOWLEGEMENTS
I take this opportunity to place on my grateful thanks and sincere gratitude to the organization INDIAN FARMERS FERTILIZERS COOPERATIVE LTD. (IFFCO) for providing me a wonderful chance of working in a prestigious company.

I wish to extend my gratitude to Mr. Kamal Verma, Joint General Manager and Head, Marketing Accounts, IFFCO and also to my Company Guide Mr. Praveen Agarwal, Senior Manager, Marketing Accounts for giving me a lot of their precious time and inputs to make this extensive research report. My study could not have been completed if I had not been able to get all the valuable data and reference materials from the company. I am also immensely grateful to my esteemed Faculty Guide Mr. Harsh Purohit, Senior Lecturer, Banasthali Vidyapith (WISDOM), Rajasthan for his constant support and continued and invaluable guidance at each step of this summer internship program. I would also like to thank the entire marketing accounts department staff that had been very cooperative and helpful during the course of my project study. Last but not the least; I would also like to thank my Family Members for their support.

MAMTA BHAGAT

TABLE OF CONTENTS

Title of the project Acknowledgements List of illustrations Introduction Objectives Methodology Limitations 5 7 7 8 22

1 2 4

ion Profile

r1
Introduction Data Analysis & Interpretation Findings Conclusion & Suggestions

PITAL MANAGEMENT 23 44 62 63 63

Chapter 2
CASH MANAGEMENT Introduction Observations Findings Conclusion & Suggestions 87 65 79

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hy

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LIST OF ILLUSTRATIONS
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Tables & Figures FINANCIAL HIGHLIGHTS OF 2005-2006 SHARE CAPITAL (AS ON 31ST MARCH, 2006) GROWTH IN NUMBER OF MEMBER SOCIETIES TOTAL FERTILIZER PRODUCTION PRODUCTIONWISE PRODUCTION PERFORMANCE TOTAL SALE OF FERTILIZERS IFFCOS PLANT FINANCE PROFIT BEFORE TAX (PBT) TURNOVER RATIO ANALYSIS CASH FLOW STATEMENT FOR THE YEAR ENDING ON 31ST MARCH, 2006 LONG TERM LOANS SHORT TERM LOANS OPERATING INFLOWS OPERATING OUTFLOWS

INTRODUCTION
OBJECTIVES OF THE STUDY
This Research Project covers the TWO most important aspects or features of the functioning of the MARKETING ACCOUNTS DEPARTMENT of Indian Farmers Fertilizers Cooperative Limited (IFFCO). The First Part is both, an analytical as well as an academic study that involves an analysis of the Working Capital And Working Capital Management Policies Of The Organization-IFFCO. The main objectives of this study are: To understand the Working Capital Management policies of the organization. To understand the importance of Working Capital Management. To analyze the liquidity position of the organization. To analyze the short term financing policies and patterns, which affect the working capital of the organization. To study the factors that affects the Working Capital Management at IFFCO. To find out the profitability and operational efficiency of the organization. To analyze the data and information of the previous years to know the actual position of funds, investments and liabilities of the organization. To identify some broad policy measures to improve the working capital position of the organization. To estimate the working capital requirements of the organization in the near future.

The Second Part of the report is also an analytical as well as an academic study that involves an analysis of the Cash Management Practices At The Organization- IFFCO. The main objective of this study are :To understand the process of cash management followed at the organization. To understand the policies adopted by the organization regarding the cash management. To study the factors both intrinsic and extrinsic that influences the cash management at the organization. To study and analyze the changes being brought about the existing cash management system. To study the salient features, methodology and advantages of the new cash management system being implemented at the organization. To suggest some recommendations to the organizations for the improvement of the cash management practices and the new cash management MIS.

METHODOLOGY OF THE STUDY

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The basic type of research used to prepare this report is:Descriptive The major purpose of descriptive research is to give a description of the state of affairs, as it exists in the present. The main characteristic of this method is that researcher has no control over the variables. The researcher can only report what has happened or what is happening. What, Where, When, How are the questions that can be answered by the researcher and not Why. Descriptive Report is that subscription which answers or addresses all these questions. The study is mainly based on the secondary data which refers to that form of information that has already been collected and is available. These include some internal sources within the company and externally these sources include books and periodicals, published reports and data of IFFCO and the annual reports of the company. Interaction with the various employees of the marketing accounts department has also been a major source of information. No primary data has been used as a part of this study. The period of study is Five Years i.e. the data and the financial results of the past five years have been taken into consideration for consideration for analysis and calculations. This is in the case where all the internal data has been used. For inter-company financial statement analysis data of only the last one financial year has been taken.

LIMITATIONS OF THE STUDY

The following are the limitations of this summer project training:The study is limited to five financial years i.e. from 2000-2005. The data used in this study has been taken from the Balance sheet & their related schedules of IFFCO Ltd. New Delhi as per the requirement and necessarily, Somme data are grouped and sub-grouped. Since this study is being done academic purpose the time available does not allow the student to go in depth. Information or the secondary data required for the study is also limited. Some of the information that was essential for this study cannot however be given in this report due to their confidential nature. The scope and area of the study was limited to corporate office of IFFCO (Marketing Division) New Delhi only.

IFFCO THE ORGANIZATION

Company Profile
Our Main Aim

Strengthening management and participatory character of the Indian Cooperative Movement by using duly tested and appropriate consultancy, advisory and technological interventions sourced from within the country and abroad and in accordance of the Cooperative Principles and in harmony with the law and culture of the land.

Indian Farmers Fertilizer Co-operative Limited (IFFCO) was registered on November 3, 1967 as a Multi-unit Co-operative Society engaged in the production of fertilizer to help the farmers of India. During mid- sixties the Co-operative sectoring India was responsible for distribution of 70 per cent of fertilizers consumed in the country. This Sector had adequate infrastructure to distribute fertilizers but had no production facilities of its own and hence dependent on public/private Sectors for supplies. Hence to overcome this lacuna and to bridge the demand supply gap in the country, a new cooperative society i.e. IFFCO came into the picture. The society has grown in strength from a modest membership of 57 societies in 1967-68 to 37424 cooperative societies and 158 Farmers Service Centers of its own spread across 17 states namely, Jammu & Kashmir, Punjab, Haryana, Uttar Pradesh, Jharkhand, Rajasthan, Uttaranchal, Bihar, Madhya Pradesh, West Bengal, Goa, Andhra Pradesh, Tamil Nadu, Kerala, Karnataka, Assam, & Orissa.

Today IFFCO is the largest producer of fertilizers in the country and the only Fertilizer Institution in the country to have surpassed 6 Million MT per annum in terms of production and 8 Million MT per annum in respect of sales. So we can say that IFFCO, to day, is a leading player in Indias fertilizer industry and is making substantial contribution to the efforts of Indian Government to increase foodgrain production in the country. The organization has production facilities at AONLA, KANDLA, PHULPUR, KALOL and the latest one at PARADEEP. Due to the increasing demand of fertilizers all these plants have undergone an expansion of production facilities.

IFFCO S MISSION AND VISION

MISSION
Our Mission
IFFCO's mission is "to enable Indian farmers to prosper through timely supply of reliable, high quality agricultural inputs and services in an environmentally sustainable manner and to undertake other civilities to improve their welfare" To provide to farmers high quality fertilizers in right time and in adequate quantities with an objective to increase crop productivity.

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To make plants energy efficient and continually review various schemes to conserve energy. Commitment to health, safety, environment and forestry development to enrich the quality of community life. Commitment to social responsibilities for a strong social fabric. To institutionalize core values and create a culture of team building, empowerment and innovation which would help in incremental growth of employees and enable achievement of strategic objectives. Foster a culture of trust, openness and mutual concern to make working a stimulating and challenging experience for stakeholders. Building a value driven organization with an improved and responsive customer focus. A true commitment to transparency, accountability and integrity in principle and practice. To acquire, assimilate and adopt reliable, efficient and cost effective technologies. Sourcing raw materials for production of phosphoric fertilizers at economical cost by entering into Joint Ventures outside India. To ensure growth in core and non-core sectors. A true Cooperative Society committed for fostering cooperative movement in the country. Emerging as a dynamic organization, focusing on strategic strengths, seizing opportunities for generating and building upon past success, enhancing earnings to maximize the shareholders' value.

VISION
Our Vision

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IFFCOs vision is "to augment the incremental incomes of farmers by helping them to increase their crop productivity through balanced use of energy efficient fertilizers, maintain the environmental health and to make cooperative societies economically & democratically strong for professionalized services to the farming community to ensure an empowered rural India.

To retain dominant position in Indian fertilizer sector and cost effective technologies. Sourcing raw materials for production of Phosphate Fertilizers at low cost with joint ventures outside India. Emerging as a dynamic organization, focusing on strategies maximizing the shareholders value. To build a culture of trust, openness & mutual concern. Implement diversification in information technologies. Committed to cooperate social responsibilities for sustainable development. Commitment to health, safety, environment & forestry development to enhance quality of community life. A true cooperative society committed to foster cooperative movement in the country.

SHARE CAPITAL (AS ON 31ST MARCH, 2006)

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(Rs Crore) Authorized Share Capital Subscribed and Paid up Capital (All Share Capital by Cooperatives only) : : 1000.00 422.51

GROWTH IN NUMBER OF MEMBER SOCIETIES

(As on 31st March)

PRODUCTWISE PRODUCTION

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YEARS 2001-02 2002-03 2003-04 2004-05 2005-06

COMPLEX 20.6 23.62 21 24.4 27.17

UREA 34.91 36.85 36.01 37.14 37.18

TOTAL 55.51 60.47 67.01 61.54 64.35

PRODUCTWISE PRODUCTION PERFORMANCE

(Lakh MT)

TOTAL FERTILISER PRODUCTION

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(Lakh MT)

MARKETING TERRITORIES OF IFFCO

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MARKETING CHANNELS
Distribution of fertilizers mainly through the Cooperative System: State level Apex Cooperative Marketing Federation Acts as wholesaler Direct supplies to Societies in some States IFFCO-NCDC Cooperative Societies Small quantities to institutional agencies like Agro Industries Corporation etc 158 IFFCO Farmers Service Centers.

DISTRIBUTION AND WAREHOUSING

TRANSPORTATION Both by Rail (87%) and Road (13%) WAREHOUSING Federations & Cooperative Godowns, Central Warehousing Corporation (CWC) and State Warehousing Corporation (SWC)

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TOTAL SALE OF FERTILISERS

(Lakh MT)

IFFCO PLANTS

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FINANCIAL PERFORMANCE
(Rs. Crore)
YEARS TURNOVER PROFIT BEFORE TAX INCOME TAX PROFIT AFTER TAX SHARE CAPITAL RESERVES AND SURPLUS NETWORTH CONTRIBUTION TO EXCHEQUER NET ASSETS EMPLOYED INVESTMENTS 2k1-02 2k2-03 5282 2k3-04 2k4-05 2k5-06 9942.9 481.89 140.54 341.35 422.51 3132.7 3555.4 604.28 9049.2 776.16

6274.92 5090.08 7396.98 512.7 183.04 329.67 461.9 470.92 151.28 319.64 421.31

371.2 807.09 62.77 249.88 308.4 557.21 419.8 444.49 2366 2786 305 3984

2829.02 2647.68* 2879.84 3273.51 3109.58 3301.15 507 501 497

4346.82 4528.94 4369.49 695.08 690.73

266.2 442.22

* Lower due to deferred tax liability of Rs. 4.31 Billion upto

01-04-2003 charged to general reserves.

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PROFIT BEFORE TAX (PBT)

(Rs. Crore)

TURNOVER
(Rs. Crore)

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SERVICE TO FARMERS
Agricultural Extension and fertilizer use Promotion Programmes that are an integral part of the marketing activity. Programmes are conducted at Area/State/Zonal offices under the guidance of agricultural scientists. Programmes undertaken are: Balanced Fertilization Programmes. Adoption of villages for all round socio-economic development. Farmers visit to various agricultural institutes and research farms. Farmers Meetings, Field Days and Crop Seminars. Static/Mobile Soil Testing Laboratories with Audiovisual. Other Social Activities/Development Programmes include:Supply of fodder in draught prone areas Veterinary Checkup and Distribution of Medicines Human Health Checkup and Distribution of Medicines Providing drinking water facilities Assistance to School / School children Watershed development projects

COOPERATIVE RURAL TRUST (CORDET)

DEVELOPMENT

PROMOTED BY IFFCO LOCATIONS: KALOL (GUJARAT), PHULPUR (U.P.), KANDLA(GUJARAT). ACTIVITIES OF CORDET Farmers Training Soil Testing Bio Fertiliser Production Demonstration Farming Seed Multiplication

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INVESTMENTS OUTSIDE IFFCO

Godavari Fertilizers and Chemicals Ltd (GFCL) Paid up share capital : Rs. 32 Crore IFFCOs Equity : Rs. 8.25 Crore Percentage of Equity held : 25.8 % Plant Site : Kakinada Product : DAP Indian Potash Ltd (IPL) IFFCOs Equity Percentage of Equity held Activity : : : Rs. 2.68 Crore 34% Marketing of Potash and imported fertilizers

Industries Chimiques du Senegal (ICS) I & II IFFCOs Equity : Rs 161.53 Crore Percentage of Equity held : 19.47 % Plant Site : Darou, Senegal Product : Phosphoric Acid, NPK Fertilizers IFFCO - TOKIO General Insurance Company Ltd.(ITGI) IFFCOs Equity : Rs. 193.91 Crore Percentage of Equity held : 72.6% Activity : General Insurance Oman India Fertiliser Company (OMIFCO) IFFCOs Equity : Rs. 377.21 Crore Percentage of Equity held : 25% Plant Site : Sur, Oman Product : Ammonia, Urea National Commodity and Derivative Exchange (NCDEX) IFFCOs Equity : Rs. 13.60 Crore Percentage of Equity held : 12% Activity : On Line Trading in Commodity Futures National Collateral Management Services Ltd. (NCMSL) IFFCOs Equity : Rs. 4 Crore Present percentage of : 11.76% Equity held Activity : Collateral Risk Management Solutions

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OTHERS
Indian farm forestry development corporation (IFFDC) Maharashtra State Coop. Bank Ltd. IFFCO Kisan Bazaar Indian Tourism Coop. Ltd. National Films & Fine Arts Coop. Ltd. : Rs.510 Lakhs : Rs. 10 Lakhs : Rs. 5 Lakhs : Rs. 1 Lakh : Rs. 1 Lakh

DIVERSIFICATION:
IFFCO-TOKIO GENERAL INSURANCE CO. LTD.
Diversified into General Insurance due to :Tremendous potential available To serve the insurance needs of farmers IFFCOs Rural Brand Equity Low gestation period The scope includes a mix of following: Rural Insurance Business Fire Insurance Business Marine Insurance Business Miscellaneous Insurance Business Operations began in Dec. 2000

OTHER PROGRAMS BY IFFCO

SANKAT HARAN BIMA YOJANA: With the purchase of each bag of
IFFCO/IPL fertilizer from Cooperative Society/FSC, the buyer is automatically covered against accident up to an amount of Rs. 4000/- for one year. Maximum liability limited to Rs. 0.1 Million irrespective of the number of bags purchased. Respective manufacturer pays premium @ Rs. 1/- per bag. Cash receipt is evidence of insurer cover.

OMAN INDIA FERTILIZER PROJECT: Grassroots ammonia/urea

complex has been set up at Aloha near Sur, Oman. The project comprises two ammonia and two urea plants of 2*1750 MTPD and 2*2530 MTPD respectively. Entire urea production of 1.65 MILLION MT is being purchased by GOI under off take Agreement. Surplus Ammonia is being purchased by IFFCO.

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NELLORE FERTILIZER PROJECT: Environment clearance, Rail transport clearance, Allocation of Naphtha, Water and Power are accorded for the project. Project is kept in abeyance till finalization of long term fertilizer policy. Plant capacities of Urea are 2328 MTPD and Ammonia is 1350 MTPD.

VISION 2010 OF IFFCO

The Society has embarked upon another growth plan titled VISION 2010 to achieve annual turnover of Rs. 15,000 crore (USD 3400 Million) by the year 2010. Society is exploring avenues for diversification into other profitable business areas, apart from fertiliser sector, for sustained growth and adequate return to member shareholders. Vision 2010 would mainly focus on farmer oriented schemes and strengthening of cooperative infrastructure. Broadly identified business activities under the VISION 2010 are :Installation of Ammonia/Urea plants including acquisition of fertiliser units Generation of Power Production and Marketing of micro-nutrients, seeds, biofertilisers, pesticides etc. Value addition to agri-products and marketing Banking and Financial Services Information Technology and IT enabled services Establishments of Retail Chain in urban and semi-urban locations

IFFCO KISAN BAZAR LTD.

IFFCO Kisan Bazar Ltd. was incorporated on 26.02.2004 with an Authorised Equity Capital of Rs. 1 Crore with the objective to set up a chain of Super Stores across the Country .

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Negotiations are in progress for strategic alliance with the prospective Foreign partner for operations of large format Retail Outlets in India.

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WORKING CAPITAL MANAGEMENT

AN ANALYTICAL RESEARCH
Working Capital Management is the interaction between current assets and current liabilities. The current assets refer to those assets, which in ordinary course of business can be, or will be turned into cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. Decisions relating to working capital and short term financing are referred to as Working Capital Management. This involves managing the relationship between a firm's short-term assets and its short-term liabilities. The major thrust is on managing the current assets because a current liability arises in context of current assets. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. The management of current assets is similar to that of fixed assets in the sense that in both cases the firm analyses their effects on its return and risk. However, The management of fixed and current assets differs in THREE ways:In the management of fixed assets, time is very important consequently, discounting and compounding aspects of time element play a significant role in capital budgeting and a minor one in the management of current assets. Large holdings of current assets especially cash strengthen times liquidity (and reduces riskiness) but also reduces overall profitability. The levels of fixed as well as current assets depend upon the expected sales , but it is only the current assets, which can be adjusted with sales fluctuations in short runs. In examining the management of current assets, answers will be sought to the following questions:What is the need to invest funds in the current assets? How much funds should be invested in each type of current assets? What should be the proportion of long term and short term funds to finance current assets? What appropriate sources of funds should be there to finance current assets?

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Working Capital Management is a significant part of financial management. Its importance arises from two reasons: Investment in current represents assets a substantial portion of total management. Investment in current assets and the level of current liabilities have to be geared quickly to changes in sales. To be sure, fixed assets investment and long term financing are also responsive to variations in sales. However this relationship is not as close and direct as it is in the case of Working Capital Management. Hence in this study an attempt has been made to analyze the size and composition of working capital and whether such an investment has increased or declined over a period of time. Financial manager now a day is responsible for shaping the fortunes of the enterprise, and is involved in the most vital decision of the allocation of capital. There is a need to have a broader and farsighted outlook and must ensure that the funds of the enterprise are utilized in the most efficient manner .One of the most important task of financial manager is to select an assortment of appropriate sources of finance for the current assets. Normally the excess of current assets over current liabilities should be financed by long-term sources. Precisely it is not possible to find out which long term sources has been used to finance current assets, but it can be examined as to what proportion of current assets has been financed by long term funds. Therefore, an attempt has been made in this regard. In working capital analysis the direction of change over a period of time is of crucial importance. Not only that, analysis of working capital trends provides a base to judge whether the practice and prevailing policy of the management with regards to the working capital is good enough or an improvement is to be made in managing the working capital funds. Hence in this study, an attempt is made about the trends of the working capital management of selected enterprise. In addition, to have higher profitability the firms may sacrifice solvency and maintained a relatively low of current assets. When the firms do so their profitability will improve and less are tied up in the idle current assets, but their solvency will be threatened. Hence, an attempt is made to study the association of profitability with the working capital ratios. With this view, an effort has been made in this project report to, make an in-depth study of IFFCO in respect of its performance and its working capital management.

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MEANING OF WORKING CAPITAL

Capital required for business can be classified under two main categories: FIXED CAPITAL WORKING CAPITAL Every business needs funds for two purposes for its establishment to carry out its day-to-day operations.

FIXED..CAPITAL
Long term funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land, buildings, furniture, etc. investments in these assets represents that part of firms capital, which is blocked on a permanent or fixed basis and is called fixed capital.

WORKING CAPITAL
Funds are also needed for short-term purpose for the purchase of raw materials, payment of wages and other day-to-day expenses, etc. These funds are known as Working Capital. The term Working Capital refers to the amount of capital, which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). Current Assets are resources, which are in cash or will soon be converted into cash in "the ordinary course of business. Current assets like Liquid Assets (cash and bank deposits), Inventory, Debtors and Receivables, etc. Current Liabilities are commitments, which will soon require cash settlement in "the ordinary course of business". Current Liabilities like Bank Overdraft, Creditors and Payables, Other Short -Term Liabilities.

Thus: WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

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TYPES OF WORKING CAPITAL

Working Capital can be further divided into two types namely: Permanent or fixed working capital Variable or temporary working capital 1) Permanent or Fixed working capital Permanent or Fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation to the current assets, for example: every firm has to maintain a minimum level of raw material, work-in-progress, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital. As the business grows, the requirements of permanent working capital also increase due to the increases in current assets. 2) Temporary or Variable Working Capital Variable working capital can be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part which is required to meet the special exigencies such as launching of extensive marketing campaigns for conducting research etc.. Temporary working capital differs from Permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in the business.

GOOD MANAGEMENT OF WORKING CAPITAL

Good management of working capital is part of good financial management. Effective use of working capital will contribute to the operational efficiency of a department; optimum use will help to generate maximum returns. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies are available for managing specific working capital items. Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to departments.

Objectives Of Working Capital Management

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Liquidity vs. Profitability The basic objective of working capital is to provide adequate support for the smooth functioning of the normal business operations of the company. The quantum of investment in current assets has to be made in such a manner that it not only meets the needs of the forecasted sales but also provides a built in cushion in form of safety stocks to meet unforeseen contingencies. Based on this the companies can follow any of the two approaches or even a combination of both. A company opting for high investment in current assets follows the Conservative Approach i.e. subjected to lower degree of risk. This approach imparts greater LIQUIDITY to the company. The other approach is the Aggressive Approach in which the firm goes for fewer investments in current assets, thus leaving more amounts of funds for investment in more profitable ventures. This approach imparts greater PROFITABILITY to the company. An ideal policy would be the moderate policy, which strikes a balance between the two approaches. Choosing the pattern of financing The management of financing the chosen level of current assets once again takes into consideration the attitude of management towards risk.

Determinants Of Working Capital

The working capital requirements of a concern depend upon a large number of factors. It is not possible to rank them because all such factors are of different importance and the influence of individual factors changes for a firm over time. However the following are the factors generally influencing the working capital requirements: Nature or character of business The working capital requirements of a firm basically depend upon the nature of the business. Public undertakings like electricity, water supply, and railways need very limited working capital because they offer cash sales only and supply services. Trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets, as they need large amount of working capital. The manufacturing undertakings also require sizable working capital along with fixed investments. Size of business

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The working capital requirements of a concern are directly influenced by the size of the business. Greater the size of a business unit, generally larger will be the requirements of working capital. Manufacturing process In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process. Larger the process period of manufacture, larger is the amount of working capital required. The longer the manufacturing time, the raw material and other supplies have to be carried far a longer period in the process with progressive increment of labor and service costs the finished product is finally obtained. Seasonal variations In certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure the uninterrupted flow and process them during the entire year. A huge amount is thus blocked in the form of material inventories during such seasons, which gives rise to more working capital requirements. Rate of stock turnover There is a high degree of inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having low rate of turnover. Firms credit policy A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand the concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital.

Advantages Of Adequate Working Capital:

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The main advantages of maintaining adequate amount of working capital are as follows: Solvency of the business Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Goodwill Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. 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. Ability to face crises Adequate working capital enables a concern to face business crises in emergencies such as depression because during such periods, generally, there is much pressure on working capital. Regular payments of salaries, wages and other day-to-day commitments A company which has ample working capital can make regular payments of salaries, wages and other day-to-day commitments which raise the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. Easy loans A concern having adequate working capital, high solvency and good credit standing can arrange loans from the banks and others on easy and favorable terms. Regular supply of raw materials Sufficient working capital ensures regular supply of raw materials and continuous production

Factors Affecting Working Capital

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Every business concern should have adequate working capital to run its business operations. It should have neither redundant for excess working capital nor inadequate or shortage of working capital. Both Excess, as well as short Working capital positions are bad for any business.

Disadvantages Of Redundant Or Excessive Working Capital

Excessive working capital means idle funds, which earn no profit for the business, and hence the business cannot earn proper rate of return on investments. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more changes of theft, losses and waste. Excessive working capital implies excessive debtors and defective credit policy, which may cause higher incidents of bad debts. When there is excessive working capital, relations with the bank and other financial institutions may not be maintained. It may result into overall inefficiency in the organization and also due to low rate of return on investments, the value of shares may also falls.

Dangers Of Inadequate Working Capital

A concern, which has inadequate working capital, can pay its short-term liabilities in time. Thus, it will loss its reputation and shall not be able to get good credits facilities. It becomes difficult for the firm to exploit favorable market conditions and undertake profitable projects due to lack of working capital. The firm cannot pay day-to-day expenses of its operations and creates inefficiencies, increase costs and reduces the profits if the business. It becomes impossible to utilize efficiently the fixed assets due to non-availability of liquid funds. It cannot buy its requirements in bulk and cannot avail of discounts, etc. and also the rate of return on investments also falls with the falls with the shortage of working capital.

Approaches To Working Capital Management

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The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible, thereby maximizing the interest earned. However, such cash may more appropriately be "invested" in other assets or in reducing other liabilities. Working Capital Management takes place on two levels: Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management The individual components of working capital can be effectively managed by using various techniques and strategies When considering these techniques and strategies, departments need to recognize that each department has a unique mix of working capital components. The emphasis that needs to be placed on each component varies according to department. For example, some departments have significant inventory levels; others have little if any inventory. Furthermore, working capital management is not an end in itself. It is an integral part of the department's overall management. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and non-financial performance. The main purposes of Working Capital Ratio Analysis are: To indicate working capital management performance; and To assist in identifying areas requiring closer management. Three key points need to be taken into account when analyzing financial ratios. These key points are as follows:The results are based on highly summarized information. Consequently, situations, which require control, might not be apparent, or situations, which do not warrant significant effort, might be unnecessarily highlighted. Different departments face very different situations. Comparisons between them, or with global ideal ratio values, can be misleading. Ratio analysis is somewhat one-sided; favorable results mean little, whereas unfavorable results are usually significant. However, financial ratio analysis is valuable because it raises questions and indicates directions for more detailed investigation.

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Sources Of Cash
The various sources of cash that provide the money to fund the working capital include the following:Existing cash reserves Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long term loans Profit or net income

INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets. Inventories are stock of the product, a company is manufacturing for sale and components to make that product. The various forms of inventory in a fertilizer manufacturing company are: Raw Materials are those basic inputs that are converted into the finished products through the process of manufacturing. Work-In-Progress inventories are semi-manufactured products. Finished Goods inventories are completely manufactured products. Stores & Spares, loose tools, chemical catalysts, packing & Construction materials.

Objectives Of Inventory Management

The problems faced by an organization in the context of inventory management are: To maintain a large size of inventory for efficient and smooth production & sales operation. To maintain minimum investment in inventories to maximize profitability. To ensure continuous supply of materials, spares & finished goods. To avoid both overstocking & under stocking of inventory. To eliminate duplication in ordering stocks. This is possible with the help of a centralized purchasing system. To design proper organization for inventory management. Both Excessive & Inadequate Inventories are not desirable. The objective of Inventory Management is to determine & maintain the optimum level of inventory investment. The optimum level of inventory will lie between two danger points of excessive & inadequate inventories. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc..

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The key is to know how quickly the stocks are moving or how long each item of stock sits on shelves before being sold. Average stock holding periods are influenced by the nature of the business. The key issue for a business is to identify the fast and slow stock movers with the objective of establishing optimum stock levels for each category and thereby minimize the cash tied up in the stocks. Factors to be considered when determining the optimum stock levels include:What are the projected sales of each product? How widely available are each component, raw materials, etc.? How long does it take for delivery by the suppliers? Can one remove the slow movers from ones product range without compromising on the best- sellers?

For better stock control, following measures can be adopted:Review the effectiveness of existing purchasing & inventory systems. Know the stock turnover for all major items of inventory. Apply tight controls to the significant few items & supply control for the remaining. Sell off outdated or slow moving merchandise. Consider the idea of outsourcing the manufacturing of the product to another manufacturer. Review security procedures to minimize losses through deterioration, pilferage, wastage & damages. To facilitate furnishing of data for short-term & long-term planning & control of inventory.

Ratios Related To Inventory Management

Inventory Turnover Ratio Inventory to Working Capital Ratio Inventory to Current Assets Ratio Inventory to Sales Ratio

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Inventory Turnover Ratio

The inventory turnover measures that how well the company can manage to sell its inventory. Another way of saying is how efficiently the company turns inventory into sales. The purpose is to ensure the blocking of only required minimum funds in inventory. Importance Of Inventory Turnover If the company can quickly sell its inventory, the inventory turnover will be higher. Conversely, if the company cannot sell its inventory well, then the inventory turnover will be low. One has to watch this figure closely if the inventory ratio climbs too high, then the company may be keeping too little inventory. This could cause lost profits due to customer orders that had to wait until inventory arrived. Inventory Turnover Ratio = Cost Of Goods Sold Average Inventory

Inventory to Working Capital ratio

The inventory to working capital ratio measures how well the company is able to generate cash using working capital at its current inventory level. This ratio shows the relationship between investments made in inventory & the total net investment in working capital. Inventory is an important part of working because of its direct impact on the profits of the organization. The value of inventory is susceptible to changing price levels, fluctuation in business activities, variation in consumer demand, obsolescence & other unpredictable factors that determine the market conditions. Therefore, working capital should be sufficient to provide a cover for the possible losses in inventory value. Importance of Inventory to Working Capital An increasing Inventory to Working Capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much Working Capital invested in Inventory, they may have difficulty having enough Working Capital to make payments on Short-Term Liabilities and Accounts Payable. This is a great ratio to be used with several others to really pick apart the inner workings of a company. Inventory To Working Capital Ratio = Inventory * 100 Working Capital

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Inventory To Current Assets Ratio

Inventory is one of the largest components of the current assets. The position of inventory indicates operational efficiency of organization. The inventory to current assets ratio measures how much percentage of current assets is formed by the inventories. This ratio is essential as inventories are the most illiquid of all current assets as sometimes it becomes difficult to convert inventory ( raw materials, work-in-progress and finished products ) into cash on a short notice. Importance of inventory to current assets An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent & it may be difficult to convert them into cash immediately. On the other hand, if the position of inventory is lower in current assets, it indicates higher operational efficiency of the organization. Normally, less than 50 % of current assets are treated as average position of inventory. Inventory To Current Assets Ratio = Inventory * 100 Current Assets

Inventory To Sales Ratio

The Inventory to Sales ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. Importance Of Inventory To Sales: An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. Viewing this ratio over several periods reveals the important aspect of the company's ability to manage inventory while attempting to increase sales. It is also important to compare this ratio among several companies to gauge how well each one performs, and to compare their ratios to industry averages. Inventory To Sales Ratio = Inventory * 100 Sales

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RECEIVABLE MANAGEMENT
Accounts Receivable refers to the amount owed by the debtors to the business. They are usually created because of trade credit that is given to the customers of the business. These receivables have three characteristics: It involves an element of risk, which should be carefully analyzed. It is based on economic value It implies futurity. To maintain a proper flow of funds in the business in order to make timely payments to the creditors, to buy raw materials & to run the day-to-day activities of the business, it is essential that the debtors make their payments on time. The interval between the date of sale & the date of payment has to be financed out of the working capital. Thus, trade debtors represent investment.

Objectives Of Receivable Management

The objective of Receivable Management is to promote sales & profits until that point is reached where the returns that the company gets from funding receivables is less than the cost that the company has to incur in order to fund these receivables. However, to maintain these receivables the company has to incur certain costs such as: Additional fund requirements for the company When a firm maintains receivables, some of its resources remain blocked in them so to finance the activities during that time gap the firm requires funds. Administrative Costs Collecting Costs Defaulting Costs The size of receivables or investment in Receivable Management is determined by the firms credit policy & level of sales. Receivable management is the process of making the decision of selection of trade debtors in which the funds could be invested or to whom money can be given. Receivable management following aspects: Forming the credit policy Executing the credit policy 40 involves the careful consideration of the

Formulating & executing the collection policy The Credit Policy is the policy followed by the company with respect to the credit standards adopted, any incentive in the form of cash discount offered, and also the period over which the discount can be utilized by the customers & the collection effort made by the company. All these variables underlying a companys credit policy influence the volume of sales and hence the profits of the company.

Ratios Related To Receivable Management

Debtors turnover ratio Average collection period Creditors turnover ratio Average payment period Debtors to current assets ratio Debtors to working capital ratio

Debtors Turnover Ratio

This ratio is also known as Accounts Receivable Turnover Ratio. Accounts Receivable is the amount that customers owe the company. The Accounts Receivable Turnover measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers, just as Average Collection Period measures this in days. Importance of Accounts Receivable Turnover A high or increasing Accounts Receivable Turnover is usually a positive sign showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. A possible negative aspect to an increasing Accounts Receivable Turnover is that the company may be too strict in its credit policies and missing out on potential sales. Accounts Receivable Turnover Ratio = Net Sales Average Accounts Receivables

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Average Collection Period

The Average Collection Period measures the average number of days it takes for the company to collect revenue from its credit sales. The Average Daily Sales is the Net Sales divided by 365 days in the year. The company will usually state its credit policies in its financial statement, so the Average Collection Period can be easily gauged as to whether or not it is indicating positive or negative information. Importance Of Average Collection Period This ratio reflects how easily the company can collect on its customers. It also can be used as a gauge of how loose or tight the company maintains its credit policies. A particular thing to watch out for is if the Average Collection Period is rising over time. This could be an indicator that the company's customers are in trouble, which could spell trouble ahead. This could also indicate the company has loosened its credit policies with customers, meaning that they may have been extending credit to companies where they normally would not have. This could temporarily boost sales, but could also result in an increase in sales revenue that cannot be recovered, as shown in the Allowance for Doubtful Accounts. Average Collection Period = 360 Accounts Receivable Turnover Ratio

Creditors Turnover Ratio

This ratio is also known as Accounts Payable Turnover Ratio. Accounts Payable represents the various amounts owed to vendors and suppliers of the company. When the company buys products and services on credit, these unpaid amounts are totaled as Accounts Payable. The company is then obligated to pay these amounts based on the credit policies agreed between the company and its suppliers. Importance Of Creditors Turnover Creditors turnover ratio or Accounts Payable can fluctuate for many companies, as Accounts Payable often increase and decrease along with sales. If over several periods the percentage of Accounts Payable to sales increases, then one may have to investigate further. This may be a warning sign the company is not paying its bills on time, or the company is increasingly having to spend more to generate the same number of sales.

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Creditors Turnover Ratio =

Net Purchase Average Accounts Payable

Average Payment Period Ratio

The average payment period ratio represents the average number of days taken by the firm to pay its creditors. Importance Of Average Payment Period This ratio reflects how easily the company can pay of its creditors. Lower the ratio, the better is the liquidity position of the company and higher the ratio, less liquid is the position of the firm. But higher payment period may also imply greater credit period enjoyed by the firm & consequently larger the benefit prepaid from credit supplies. Also a higher ratio may imply lesser discount facilities available or higher prices paid for the goods purchased on credit. Average Payment Period = 360 Accounts Payable Turnover Ratio

Debtors To Current Assets Ratio

Debtors to current assets ratio indicates the position of debtors in total current assets. This ratio is calculated by debtors with current assets. Debtors are one of the largest components of current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy on respect of other current assets, it indicates poor recovery of the company. Debtors To Current Assets Ratio = Debtors * 100 Current Assets

Debtors To Working Capital Ratio

Debtors to working capital ratio is one of the important ratios for analysis of working capital management. Working capital is directly related with the position of debtors. If debtors are lower as compared to working capital, it indicates proper and smooth utilization of working capital. But on the other hand, the amount of debtor is very large in that condition, working capital blocked and operational efficiency is directly affected. The ratio is calculated by the following way :-

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Debtors To Working Capital Ratio

Debtors * 100 Current Assets

CASH MANAGEMENT
Cash, the most liquid asset and also referred to as the life blood of a business enterprise and is of vital importance to the daily operations of the business firms. Its efficient management is crucial to the solvency of the business because cash is the focal point of the fund flows in a business. If a business has no cash and no way of getting any cash, it will have to close down. Cash Management is concerned with the managing of :Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash. Cash Management refers to management of cash balance and the bank balance and also short term deposits. The term cash may be used in two different ways :It may include currency, cheques, drafts, demand deposits held by the firm i.e. pure cash or generally accepted cash equivalents. In a broader sense, it also includes near cash assets such as marketable securities and short term deposits with banks. For cash management purposes, the term cash is used in this broader sense i.e. it covers cash, cash equivalents and those assets which are immediately convertible to cash.

Objectives Of Cash Management

The cash management strategies are generally built around two goals :To provide cash needed to meet the obligations, and To minimize the idle cash held by the firm The risk return trade-off of any firm can be reduced to two prime objectives for the firms Cash Management System :-

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Meeting the Cash Outflows : This will help the firm in avoiding the chance to default in meeting financial obligations, otherwise the goodwill of the firm is adversely affected. Also this will further help in availing the opportunities of getting cash discounts by making early or prompt payments and meeting unexpected cash outflows without much problem. Minimizing the Cash Balance

Ratios Related To Cash Management

Working capital ratio or current ratio Liquid ratio or Acid-test ratio Cash to current assets ratio Sales to current assets ratio Working capital turnover ratio Sales to working capital ratio

Working Capital Ratio Or Current Ratio

The working capital ratio (or current ratio) attempts to measure the level of liquidity, that is, the level of safety provided by the excess of current assets over current liabilities. The current ratio compares all the Current Assets of a company to all the Current Liabilities. What this ratio basically tells us is if the company had to sell all its readily available assets, would it be able to pay off its immediate debt? Importance of Working capital ratio or current ratio At a minimum, you would hope the company whose financial performance you are analyzing could meet pay its Current Liabilities if it were to liquidate all its Current Assets. This would translate to a Current Ratio of 1:0 - the point where the Current Assets equal the Current Liabilities. As with all the other performance ratios, the Current Ratio value depends on the industry in which the company is operating. It is also important to know what assets make up most of the Current Assets. Inventory and Accounts Receivable, which are part of the Current Assets, cannot always be counted on as easily transferred to cash. Cash and Marketable Securities comprising the majority of the Current Assets would definitely be favorable. Knowing this, would the company you are analyzing truly be able to meet its financial obligations is it in fact had to sell its Current Assets? The Current Ratio rising over time will be favorable.

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Current Ratio

Current Assets Current Liabilities

Liquid Ratio Or Acid-Test Ratio Or Quick Ratio

Liquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio is a more vigorous test of liquidity than current ratio. The term liquidity refers to the ability of the firm to pay its short term obligations as & when they become due. Current assets include inventories and prepaid expenses, which are not easily converted into cash within a short span of time. So, quick ratio may be referred to as the relationship between quick assets i.e. (current assets inventories) & current liabilities. An assets is said to be liquid if it can be converted into cash within a short span of period without loss of value. Importance Of Liquid Ratio If a company one is analyzing looks good while testing it against the Current Ratio, then the Quick Ratio should be your next test to apply. Companies with steadily rising Inventories may look good with the Current Ratio, but will have a deteriorating effect on the Quick Ratio, since we subtract the Inventory out. The Quick Ratio rising over time is favorable. Liquid Ratio = (Current Assets Inventories) Current Liabilities

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Cash To Current Assets Ratio

This ratio basically measures what percentage of the current assets is formed by the cash component. This is a more stringent measure of liquidity as it considers the most liquid current asset. Importance Of Cash To Current Assets Ratio A high, or increasing Cash to Current Assets ratio is generally a positive sign, showing the company's liquid assets represent a larger portion of its Total Current Assets. It also indicates the company may be better able to convert its non-liquid assets, such as inventory, into cash. Cash To Current Assets Ratio = Cash Current Assets

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Sales To Current Assets Ratio

The Sales to Current Assets ratio measures how well a company is making use of its assets in generating sales. This ratio is most valid in industries where companies hold the majority of their own inventories inhouse, as opposed to having their customers hold their inventory for them. Importance Of Sales To Current Assets The Sales to Current Assets ratio is best measured over several periods compared to industry averages, as the amount of Current Assets varies widely among companies and industries. A decreasing Sales to Current Assets ratio is generally a negative sign, indicating the company may have slowed production, decreasing the amount of inventory and resultantly the Current Assets. Sales To Current Assets Ratio = Sales Current Assets

Working Capital Turnover Ratio

The Working Capital Turnover ratio measures the company's Net Sales from the Working Capital generated. Note that another ratio exists, the Sales to Working Capital Ratio also measures Net Sales to Working Capital. We chose to interchange the usual components of Working Capital (Total Current Assets - Total Current Liabilities) with an alternate method (shown above). With two similar ratios using slightly different methods to compute Working Capital, plotting both of these ratios together to see their differences would be wise. Importance Of Working Capital Turnover A high, or increasing Working Capital Turnover is usually a positive sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio. Working Capital Turnover Ratio = Net Sales Working Capital

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Sales To Working Capital Ratio

The Sales to Working Capital ratio measures how well the company's cash is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. Importance Of Sales To Working Capital An increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods. This ratio can help uncover questionable management decisions such as relaxing credit requirements to potential customers to increase sales, increasing inventory levels to reduce order fulfillment cycle times, and slowing payment to vendors and suppliers in an effort to hold on to its cash. Sales To Working Capital Ratio = Net Sales Working Capital

Loans And Advances:

Loans And Advances are one of the important factors of working capital. In current assets loans and advances play a significant role. When we talk about the working capital management it is necessary to consider Loans & Advances, as they are a major component of Current assets and along with the equity of the company for a source of generating cash in the organization. While analyzing the loans & advances position of IFFCO the following ratios have to be calculated for better understanding i.e. Loans and advances to Current Assets ratio Loans and advances to Working capital ratio

DATA ANALYSIS & INTERPRETATIONS

The data has been collected from the annual reports and many internal records of the organization. Hence, it is all secondary data, which has been analyzed with the help of ratio calculations and plotting of graphs.

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The first set of ratios that have been calculated are the cash management ratios which tend to give a clear picture of the current & past working capital position of the company.

WORKING CAPITAL RATIO

Also known as Current Ratio = Current Assets / Current Liabilities Year Current Assets Current Liabilities Current Ratio=Curre nt Assets / Current Liabilities 2.719 2.631 2.841 2.357 3.488

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 214407 267441 256402 260398 474898

(Rs. In Lakhs) 78866 101632 90244 110484 136159

ANALYSIS:

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Working Capital Ratio is used to analyze the short term solvency of the company. Usually a ratio of 2:1 is considered to be the best ratio of current assets. This however does not mean that a company should always display ratio of 2:1. Higher the ratio , greater is the ability of the firm to meet its short term obligations. Working Capital at IFFCO is always greater than 2 in all 5 years for which data has been analyzed indicating that IFFCO never really face a major problem in meeting its short-term liabilities.

LIQUID RATIO
Also known as Quick Ratio or Acid Test Ratio Year Quick Assets=Current Current Liabilities Assets-Inventories Acid Test Ratio=Quick Assets / Current Liabilities 1.391 1.512 1.71 1.514 2.372

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 109715 153688 154346 167247 322934

(Rs. In Lakhs) 78866 101632 90244 110484 136159

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ANALYSIS:
Position of Liquid ratio is very good. The Liquid Ratio of 1:1 is considered to be satisfactory. This is so because if the quick assets are equal to the current liabilities then the company may be able to meet its entire shortterm obligations pretty conveniently. As Per The Analysis Of Data, the liquid ratio of the company in 2001-02 is 1.391 and it is 2.372 in the year 2005-06. Thus, it is clear from the current ratio and the liquid ratio that inventory at IFFCO forms a major component of the current assets. However, the reason for this is that Fertilizer Sector is a seasonal industry and is greatly affected by the Monsoons and hence, the company has to maintain a large stock of inventory to meet any unforeseen demands.

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CASH TO CURRENT ASSETS RATIO

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Year

Cash (Rs. In Lakhs)

Current Assets Cash To Current Ratio = (Cash/Current Assets)*100 (Rs. In Lakhs) 214407 267441 256402 260398 3.68 8.306 4.422 7.646

2001-02 2002-03 2003-04 2004-05

7890 22213 11339 19910

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2005-06

9823

474898

2.068

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ANALYSIS:
The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of cash at hand & cash bank. Upon analyzing the data of the past 5 years for IFFCO it was observed that the cash balances formed only a very small percentage of the current assets. Even though this percentage showed large variations but it never crossed the 8.5% mark. This is a POSITIVE SIGN as it shows effective utilization of the funds of the organization.

SALES TO CURRENT ASSETS RATIO

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Year

Net Sales(Including Subsidy From Govt.) (Rs. In Lakhs) 528195 627492 509008 739698 994293

Current Assets Sales To Current Ratio = (Cash/Current Assets)*100 (Rs. In Lakhs) 214407 267441 256402 260398 474898 2.464 2.346 1.985 2.841 2.094

2001-02 2002-03 2003-04 2004-05 2005-06

ANALYSIS:
The Sales To Current Assets Ratio is most valid in industries where companies hold the majority of their own inventories in-house. It basically measures how well a company is making use of its assets in generating sales. An increasing sales to current assets ratio is a POSITIVE SIGN as it indicates that the company has a healthy production scenario because of which most of inventory is being converted into sales for the company. IFFCO has shown a consistent growth in its sales to current assets ratio which implies that the company is doing well & inventory is not being held up at any stage in the production process.

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WORKING CAPITAL TURNOVER RATIO

Year Net Sales(Including Subsidy From Govt.) Working Capital=(Curre nt AssetsCurrent Liabilities) (Rs. In Lakhs) 135541 165809 166158 149914 338739 3.897 3.784 3.063 4.934 2.935 Working Capital Turnover Ratio = Net Sales/Working Capital

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 528195 627492 509008 739698 994293

ANALYSIS:

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Working Capital Turnover Ratio indicates how many times working capital was used during the year. This ratio is the measure of the efficiency with which the working capital is being used in the firm. The Working Capital Turnover Ratio measures the companys net sales from the working capital generated. IFFCO has a high working capital ratio. A high, or increasing Working Capital Turnover is usually a Positive Sign, showing the company is better able to generate sales from its Working Capital. Either the company has been able to gain more Net Sales with the same or smaller amount of Working Capital, or it has been able to reduce its Working Capital while being able to maintain its sales. Efforts to streamline the operations of the company will often show favorably in this ratio.

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SALES TO WORKING CAPITAL RATIO

Year Net Sales(Including Subsidy From Govt.) Working Capital=(Curr ent AssetsCurrent Liabilities) (Rs. In Lakhs) 135541 165809 166158 149914 338739 3.897 3.784 3.063 4.934 2.935 Sales to Working Capital Ratio = Net Sales/Working Capital

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 528195 627492 509008 739698 994293

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ANALYSIS:
The Sales to Working Capital ratio measures how well the company's cash is being used to generate sales. Working Capital represents the major items typically closely tied to sales, and each item will directly affect this ratio. An increasing Sales to Working Capital ratio is usually a positive sign, indicating the company is more able to use its working capital to generate sales. Although measuring the performance of a company for just one period reveals how well it is using its cash for that single period, this ratio is much more effectively used over a number of periods. The sales to working capital ratio has been increasing consistently for IFFCO which is good as it implies that the company is generating more & more sales and is able to utilize its working capital more efficiently with the passing years.

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INVENTORY TURNOVER RATIO

Year Cost Of Goods Sold (COGS) Average Inventory Inventory Turnover Ratio = (COGS)/Average Inventory 4.614 4.813 5.055 6.977 7.482

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 463435 525719 545409 680948 916985

(Rs. In Lakhs) 100445 109222 107904 97603 122557

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ANALYSIS: The Inventory Turnover measures that how well the company can manage to sell its inventory. Another way of saying is how efficiently the company turns inventory into sales. If the company can quickly sell its inventory, the inventory turnover will be higher. Conversely, if the company cannot sell its inventory well, then the inventory turnover will be low. A high inventory turnover indicates efficient management of inventory as lesser amount of funds are required to maintain the inventory which is moving out of the company at a good speed. As per the table, The Inventory Turnover Ratio At IFFCO Is very good in position. The Inventory Turnover Ratio has increased from 4.614 in 2000-01 to 7.482 in 2005-06 with an average of 5.788

INVENTORY TO WORKING CAPITAL RATIO

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Year

Inventory

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 104691.85 113752.53 102056.05 93150.65 151964.32

Working Inventory To Capital=Curren Working t AssetsCapital Current Ratio= Liabilities (Inventory / WorkingCap ital)* 100 (Rs. In Lakhs) 135541 165809 166158 149914 338739 77.24 68.605 61.421 62.136 44.862

ANALYSIS: The Inventory To Working Capital Ratio measures how well the company is able to generate cash using working capital at its current inventory level. An increasing inventory to working capital ratio is generally a negative sign, showing the company may be having operational problems. If a company has too much working capital invested in inventory, they may have difficulty having enough working capital to make payments on short term liabilities and accounts payable. From the table, it is clear that inventory to working capital ratio for IFFCO has been decreasing consistently (increasing very marginally in 2004-05) but it has again decreased to 44.862%in the year 2005-06. This is a positive sign for the company.

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INVENTORY TO CURRENT ASSETS RATIO

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Year

Inventory

Current Assets

Inventory To Current Assets Ratio = (Inventory/Current Assets)*100

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 104691.85 113752.53 102056.05 93150.65

(Rs. In Lakhs) 214407 267441 256402 260398 48.829 42.534 39.803 35.772

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2005-06

151964.32

474898

31.999

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ANALYSIS: The Inventory To Current Assets Ratio measures that how much percentage of current assets is formed by the inventories. An increasing inventory to current assets ratio is a negative sign. It means that more & more percentage of current assets is being constituted by the inventories. This indicates poor operational efficiency of the organization. Also it shows that the funds invested in current assets to meet obligations on a short notice are actually illiquid to some extent & it may be difficult to convert them into cash immediately. Normally, less than 50 % of current assets are treated as average position of inventory. IFFCO has shown a decrease in this ratio over the past years & the ratio has never been above 49% , which indicates a GOOD inventory position for IFFCO.

INVENTORY TO SALES RATIO

Year Inventory Net Inventory To Sales Sales(Includ Ratio = ing Subsidy (Inventory/Sal From Govt. es)*100 (Rs. In Lakhs) 528195 627492 509008 739698 19.82 18.128 20.05 12.593

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 104691.85 113752.53 102056.05 93150.65

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2005-06

151964.32

994293

15.284

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ANALYSIS: The Inventory To Sales Ratio measures the percentage of inventory the company currently has on hand to support the current amount of sales. An increasing Inventory to Sales ratio is generally a negative sign, showing the company may be having trouble keeping inventory down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the company may be facing. As per the table of IFFCO, this ratio is falling down consistently (increasing very marginally in 2005-06), which is a POSITIVE sign indicating good movement of inventory.However, IFFCO still needs to take some corrective measures in this direction.

DEBTOR TURNOVER RATIO

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Year

Net Sales(Including Sundry Debtors Subsidy From Govt. (Rs. In Lakhs) (Rs. In Lakhs) 33853 46128 46946 32460 528195 627492 509008 739698

Debtors Turnover Ratio = Sales/Debtors 15.603 13.603 10.842 22.788

2001-02 2002-03 2003-04 2004-05

71

2005-06

994293

47440

20.959

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ANALYSIS: This ratio is also known as Accounts Receivable Turnover Ratio. The Accounts Receivable Turnover measures the number of times Accounts Receivables were collected during the year. This is also a measure of how well the company collects sales on credit from its customers. A high or increasing Accounts Receivable Turnover is usually a Positive Sign showing the company is successfully executing its credit policies and quickly turning its Accounts Receivables into cash. As per the table, the ratio has decreased from 15.603 % in 2001-02 to 10.842% in 2003-04and then it increased to 22.788 % in 2004-05. But now it again decreased to 20.959% in 2005-06.The main reason is the global competition which forced the company to adopt a more liberal credit policy.The growth rate of debtors is very high during this period as compared to growth rate of sales , thereby, directly affecting the ratio.

AVERAGE COLLECTION PERIOD

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Year

Debtors Turnover Average Collection Ratio=(Sales/Debtors) Period=(360/D ebtors Turnover Ratio) (Rs. In Lakhs) Rs. In Lakhs 23.072 26.465 33.204 15.798 17.176 15.603 13.603 10.842 22.788 20.959

2001-02 2002-03 2003-04 2004-05 2005-06

ANALYSIS: The Average Collection Period Represents the average number of days for for which a firm has to wait before its receivables are converted to cash. Also defined as the number of days it takes to collect accounts receivables. It measures the quantity of debtors. The shorter the Average Collection Period , the better is the quality of debtors as a short collection period implies quick payment by the debtors & thus, faster collection of payments. As Per The Table, the Average Collection Period for IFFCO was around 17 days in 2005-06.This is extremely good considering the fact that IFFCO is a fertilizer company, and functions as a cooperative and that this period had risen to a maximum of 33 days in the year 2002-03.

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DEBTORS TO CURRENT ASSETS RATIO

Year Sundry Debtors Current Assets Debtors To Current Assets Ratio=(Debtors/ Current Assets)*100 15.789 17.248 18.31 12.466 9.99

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 33853 46128 46946 32460 47440

(Rs. In Lakhs) 214407 267441 256402 260398 474898

ANALYSIS:

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Debtors To Current Assets Ratio indicate the position of debtors in total current assets. This ratio is calculated by debtors with current assets. Debtors are one of the largest components of current assets. If debtors are average or less than average, it indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect of other current assets, it indicates poor recovery of the company. As Per The Table, the Debtors To Current Assets Ratio for IFFCO increased from 2001-02 to 2003-04 & then decreased in a major way in major way in 2004-05 & 2005-06 which is a healthy sign showing proper realization of debts in 2005-06.

DEBTORS TO WORKING CAPITAL RATIO

Year Sundry Debtors Working Capital=Current Assets - Current Liabilities (Rs. In Lakhs) 135541 165809 166158 149914 338739 24.976 27.82 28.254 21.652 14.005 Debtors To Working Capital Ratio=(Debtors/W orking Capital)*100

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 33853 46128 46946 32460 47440

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ANALYSIS: Working capital is directly related with the position of debtors. If debtors are lower as compared to Working Capital, then it indicates proper and smooth utilization of working capital. But on the other hand, the amount of debtor is very large in that condition, Working capital blocked and operational efficiency is directly affected.

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LOANS AND ADVANCES TO CURRENT ASSETS RATIO

Year Loans & Advances Current Assets Loans & Advances To Current Assets Ratio=(L&A/Cur rent Assets)*100 31.702 31.913 37.465 44.117 55.943

2001-02 2002-03 2003-04 2004-05 2005-06

(Rs. In Lakhs) 67972 85348 96060 114878 265670

(Rs. In Lakhs) 214407 267441 256402 260398 474898

ANALYSIS: As Per The Analysis Of The Data, corresponding to the Loans & Advances as shown in the annual balance sheet, it can be clearly said that the position of the Loans & Advances with respect to current assets is very GOOD for IFFCO. The ratio was around 31.702% in 2001-02 which has now increased to 55.943 % in 2005-06.

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LOANS & ADVANCES TO WORKING CAPITAL RATIO

Year Loans & Advances Working Capital= Loans & Advances To Current Working AssetsCapital Current Ratio=(L&A/Wo Liabilities rking Capital)*100 (Rs. In Lakhs) 135541 165809 166158 149914 338739 50.149 51.474 57.812 76.629 78.429

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 67972 85348 96060 114878 265670

ANALYSIS: This ratio shows how significant Loans & Advances Are To Working Capital and that loans & advances plays an important role in working capital management of IFFCO. This ratio shows that the company has more cash in hand and can utilize these funds as per the company requirement.

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WORKING CAPITAL POSITION

Year Current Assets Current Liabilities Working Capital= Current AssetsCurrent Liabilities 135541 165809 166158 149914 338739

(Rs. In Lakhs) 2001-02 2002-03 2003-04 2004-05 2005-06 214407 267441 256402 260398 474898

(Rs. In Lakhs) 78866 101632 90244 110484 136159

ANALYSIS: Working Capital Position indicates changes in Current Assets & Current Liabilities over the study period and also during a particular year. Working capital position shows operational efficiency & proper utilization of short term resources in an organization. The trend of working capital with respect to Current Assets & Current Liabilities for IFFCO is increasing. This shows a GOOD GROWTH of the company. The Working Capital is managed properly & efficiently by the organization.

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FINDINGS:
After the analysis of the components of current assets & current liabilities and the trends of working capital, we find that :Current assets are increasing more than current liabilities. Cash & Bank Balances have decreased sharply, which indicates proper utilization of funds at IFFCO.

Position of inventory is Very Good in current assets (31.99%). Inventory Turnover Ratio increases consistently, which shows greater degree of utilization of inventory during the study period. Position of Debtors To Current Assets is average (14.760 %). This ratio had increased from the year 2001-02 to 2003-04 showing a liberal credit policy followed by the company. Large part of working capital is involved in maintaining inventory. Working capital of the company increases from 149914 in 2004-05 to 33873 in 2005-06. Inventory as a component of current assets is high (35.78%) as compared to the other components.

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CONCLUSIONS & SUGGESTIONS

Working capital is one of the most important aspects of operational efficiency of business.Working Capital plays a very important role in the functioning of any organization.Both the current assets & current liabilities are very much influencing factors on the working capital of an organization. After the discussion and analysis of the financial position of IFFCO Ltd.., it is clear that the working capital of IFFCO is in sound position. Working capital is not measurable by only current assets & current liabilities but there are some other factors also that have an influence on the working capital. In current assets also, there are two most important factors , that are Debtors and Inventory, that affect working capital. In IFFCO Ltd. Inventory and Debtors are efficiently managed to strengthen the position of the organization both in short term and long terms. After analyzing and interpreting the financial data of INDIAN FARMERS FERTILIZER COOPERATIVE LIMITED with the help of Ratio Analysis, the following suggestions were given to the organization for further betterment & improvement in the working capital: The present status and levels of current assets is extremely good and therefore it requires proper maintenance. The current percentage of inventory is too high which is not good for operational efficiency and sound working capital and thus, it need to be controlled by using various inventory management techniques such as JIT of Kanban. Another alternative would be to have varying stock or inventory levels during the different seasons or even months and ,thereby, altering the production to suit such needs. Cash balances have a lower percentage in current assets. This requires some concern as cash and bank balances are the most liquid of all current assets. To improve the cash balances IFFCO needs to improve its average collection period and also it should invest more money in marketable securities.

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CASH MANAGEMENT
AN ANALYTICAL RESEARCH
Cash, the most liquid asset and also referred to as the life blood of a business enterprise and is of vital importance to the daily operations of the business firms. Its efficient management is crucial to the solvency of the business because cash is the focal point of the fund flows in a business. If a business has no cash and no way of getting any cash, it will have to close down. Cash Management is concerned with the managing of :Cash flows into and out of the firm. Cash flows within the firm Cash balances held by the firm at a point of time for financing deficits or investing Surplus cash. Cash Management refers to management of cash balance and the bank balance and also short term deposits. The term cash may be used in two different ways :It may include currency, cheques, drafts, demand deposits held by the firm i.e. pure cash or generally accepted cash equivalents. In a broader sense, it also includes near cash assets such as marketable securities and short term deposits with banks. For cash management purposes, the term cash is used in this broader sense i.e. it covers cash, cash equivalents and those assets which are immediately convertible to cash.

Motives For Holding Cash

Though cash is the most liquid assets, but it does not earn any substancial return for the business. Nobody earns any income on the cash balance or currency being maintained, however, some interest income may be earned on short term deposits. But still everybody and every firm maintains some cash balance. There are four primary motives for holding cash. They are as follows:-

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Transaction Motive
Business firms as well as individuals keep cash because they require it for meeting demand for cash flow arising out of day-to-day transactions. The firm needs cash primarily to make payments for purchases, wages & salaries, other operating expenses , taxes, dividends, etc. The need to hold cash would not arise if there were perfect synchronization between cash payments and cash receipts, i.e. enough cash is received when the payment has to be made. For those periods, when cash payments exceeds the cash receipts, the firm should maintain some cash balance to be able to make required payments. For transaction purpose, a firm may invest its funds in marketable securities. The Transaction Motive mainly refers to holding cash to meet anticipated payments whose timing is not perfectly matched with cash receipts. In other words, the necessity of keeping minimum cash balance to meet payment obligations arising out of expected transactions is known as Transaction Motive for holding cash.

Precautionary Motive
A firm should maintain larger cash balance tha required for day-to-day transactions in order to avoid any unforeseen situation arising because of insufficient cash. The necessity of keeping cash balance to meet any unforeseen situation or unpredictable obligation is known as Precautionary motive for holding cash. The Precautionary motive for holding cash depends on the predictability of cash flows. The amount of precautionary cash is also influenced by the firms ability to borrow at short notice when the need arises. Stronger the ability of the firm to borrow at short notice , less is the need for precautionary balance. The precautionary balance may be kept in the form of cash or marketable securities. Marketable securiries play an important role here. The amount of cash set aside for precautionary reasons may not earn anything, but if these funds are invested in high liquid marketable securities, then they can give a lot of profits. Hence, the amount of cash, a firm holds for transaction and precautionary depends upon :The expected cash inflows and cash outflows based on the cash budget and forecasts, encompassing long and short range cash needs of the firm i.e. Degree of Predictability of its cash flows. The degree of deviation between the expected and actual cash flows. The efficient planning and control of cash. The firms ability to borrow at short notice in the event of any emergency. The willingness and the capacity of the firm to take risk of running short of cash.

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Speculative Motive
The firms desire to keep some cash balance to capitalize an opportunity of making an unexpected profit is known as Speculative Motive for holding cash.The Speculative Motive provides affirm with sufficient liquidity to take advantage of unexpected profitable opportunities that may suddenly appear (And just as suddenly disappear if not capitalize immediately). However, not many firms engage their funds in speculative motives to a great extent. Thus, the primary motives to hold cash and marketable securities are : Transaction Motive and Precautionary Motive.

Compensation Motive
In order to avail the convenience of current amount, the minimum cash balance must be maintained by the firm and this provides the compensation motive for holding fund. Cash Management, thus deals with optimization of cash as an asset and for this purpose the financial manager has to take various decisions from time to time. He has to deal as the cash flows in the direction of the firm. Even if a firm is highly profitable, its cash inflows may not exactly match the cash outflows. He has to manipulate and synchronize the two for the advantage of the firm by investing excess cash if any as well as arranging funds to cover the deficiency.

Objectives Of Cash Management

The Cash Management Strategies are generally built around Two Goals:To provide cash needed to meet the obligations, and To minimize the idle cash held by the firm. The risk return trade-off of any firm can be reduced to two prime objectives for the firms Cash Management System: Meeting the Cash Outflows : This will help the firm in avoiding the chance to default in meeting financial obligations, otherwise the goodwill of the firm is adversely affected. Also this will further help in availing the opportunities of getting cash discounts by making early or prompt payments and meeting unexpected cash outflows without much problem. Minimizing the Cash Balance

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Factors Affecting The Cash Needs

The various factors that affect cash needs are:Cash Cycle:The term cash cycle refers to the length of the time between the payment for the purchase of raw materials and the receipts of the sales revenue. Cash Inflows and Cash Outflows Cost Of Cash Balance Other Consideration : There may be several subjective considerations such as uncertainties of a particular trade, staff required for cash management etc. , which will have a bearing on determining the cash balance required by a firm.

In order to resolve the uncertainty about cash flow prediction and the synchronization between cash receipts and payments, the firm develop appropriate strategies for cash management. The firm evolve strategies regarding the following four facets of Management:

lack o should should Cash

Cash Planning : Cash inflows and Cash Outflows should be planned to protect cash surplus or deficit for each period of planning. Cash Budget should be prepared for this purpose. Managing The Cash Flows : The flow of cash should be properly managed. The cash inflows should be accelerated , while, as far as possible, decelerating the cash outflows. Optimum Cash Level : The firm should decide about the optimum 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 bank deposits, marketable securities and intercorporate lending.

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CASH MANAGEMENT AT IFFCO

IFFCO, being a large co-operative society and the largest manufacturing organization has been generating large amount of profits over the years from the date of its commercial production. Its internal sources generation has been adequate enough to finance the working capital need besides its other long term commitments though to meet its working capital requirements, IFFCO basically depends on its bankers. The main objective of Cash Management of IFFCO is not different from the basic objective of cash. IFFCO has been effectively managing the cash in the following ways :To measure the cash flow time line and assess the magnitude of savings that could result from the alternative management strategies. To compare the length of timeline with that of other companies in the industry or standard set by the company. To not permit cash to stand idle for as much as a day. To know the requirements of funds at various units at different periods of time. Repayment of loans and debt has been one of the prime objectives. To make every effort to speed up the flow.

Bankers Of IFFCO
Indian Overseas Bank State Bank Of India Bank Of Baroda Standard Chartered Bank The Maharashtra State Cooperative Bank Ltd. The West Bengal State Cooperative Bank Ltd. Madhya Pradesh State Cooperative Bank Ltd. The Karnataka State Cooperative Bank Ltd. The Punjab State Cooperative Bank Ltd. The ICICI Bank The HSBC Bank The IDBI Bank The Corporation Bank

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IMPLEMENTATION OF CASH MANAGEMENT AT IFFCO

In order to effectively manage its cash, so as to sustain liquidity and profitability, IFFCO has chosen to go for a Centralized Cash Management System. The Centralized Cash Management System means that the cash of IFFCO is basically managed from the Head Office situated at New Delhi. In order to smoothly manage the cash, IFFCO takes the service of IOB, its main bank from the consortium of bank. IOB plays the part of maintaining the daily fund position of IFFCO i.e. on a daily basis the cash inflows and outflows are recorded in computer and are daily analysed by the cash and bank section of IFFCO, which also carries out its daily position on the fund statement book. This Centralized Cash Management at IFFCO also helps in to check the idle cash , which would otherwise have a cost structure attaches to it. Through this system, the cash is not allowed to remain idle at various branches and is used by the co-operative giant to pay its short term liabilities, which may arise. This system of centralized cash management gives an added advantage to IFFCO to effectively implement a policy of cash flow timeline management. IFFCO maintains a strict vigil on the movement of funds for collection and payments both. Although manufacturing units are independent enough to issue cheques, but they still have to inform the head office. It also prepares the budgets and forecasts and matches the actual with that, so as to have a proper control over transaction. A very efficient Management Information System has been introduced at IFFCO which facilitates:Forecasting of cash flows on monthly basis or weekly or daily basis, Helps in cash planning. A Consolidated Statement is prepared at the corporate office which forms the main basis for planning of funds flow for the continuing month.

SALES PROCEDURE IN IFFCO

In IFFCO, there are three system of sales:Sales through societies, Sales through Federation, and Sales through IFFCOs own service center.

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Sales Through Societies : In the case of Sales through societies, DD/Cheques are received in advance by IFFCO, i.e. no credit sales are allowed to them. The DD/Cheques are collected from them and then they are either deposited with the concern district bank or are sent ot state office for deposit with the respective bank. Sales Through Federation : In the case of Sales through Federation, the sales are normally made on credit basis with a defined credit period. The payments are normally received by IFFCOs State Office and are deposited with the respective bank. Sales Through IFFCOs Own Service Centre : The sales through IFFCOs own outlets are made on cash basis. The funds are deposited with the bank on daily basis nad are transferred by the bank to IFFCOs state office. In IFFCO, all the realization of sale proceeds is centralized to IFFCOs Delhi Office i.e. the funds are ultimately reaching Delhi for utilization, for IFFCOs manufacturing units. The funds that are sent to Delhi are then again redistributed to the manufacturing units and all the other offices, farmer service centers, cooperative societies etc. for meeting their expenses.

COLLECTION PROCEDURE
There are two systems of collection of remittances and under both the systems, emphasis is given on the fact that the funds should not remain idle at IFFCOs local bank. The systems are as follows :ON-LINE SYSTEM: The funds received at IFFCOs local banks i.e. Area/ State Office, are transferred to IFFCOs Central Bank through the On-Line System or by Telegraphic Transfer System. Under this system the local banks are instructed to transfer the entire amount deposited with them immediately on the date of credit with the central bank at New Delhi. TRANSFER THROUGH CASH MANAGEMENT SERVICES (CMS) : The Cash Management Services(CMS) is a technology driven system in which bank is under contractual obligation to make payment at the designated branch on the stipulated date as agreed in the agreement. Under this system, the bank pick up the DD/Cheques from IFFCOs designated locations and pool the same with them. A High Value Cheque of the consolidated amount is deposited by the collecting bankers in IFFCOs central account for which IFFCO receives the credit the same day. Thus, the amounts which are collected on day zero, are received on IFFCO,s Central Account on day one.

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Costs And Benefits Of CMS

Before the introduction of cash management services, various branches of banks at area offices used to take 2-3 days in transferring the funds to IFFCOs Central Account. But with the coming of the CMS , the amount which are collected (as a high value cheque) on day zero, are received on IFFCOs Central Account on day one. Due to late transfer of funds, late payments were made due to which IFFCO was losing a lot of amount of money in the form of interests and penalties .But now, since the transfer of funds is done through CMS, IFFCO is saving a lot of interest as the cash credit utilization has been reduced to the extent of amount received in that account. With the introduction of CMS, there is a timely remittance of funds and in the case the bank with whom the CMS agreement has been made, fails to make timely remittance, then they are bound to pay interest on late transfer of funds.

CASH MANAGEMENT SERVICES (CMS) AGREEMENT THROUGH THE HSBC BANK AND ICICI BANK
Introduction Of Cash Management Services (CMS)
IFFCO is availing the cash management services of m/s HSBC bank for remittances of sale proceeds in the states of west Bengal, maharashtra, rajasthan, Punjab and haryana, while the services regarding CMS of ICICI bank are being utilized for the state of Uttar pradesh and its various area offices. In all the other states, the remittances are being made through IOB and sale proceeds are being credited in IFFCOs Account at Defence colony branch,New Delhi. The Cash management Services(CMS) is a technology driven system in which bank is under contractual obligation to make payment at the designated branch on the stipulated date as agreed in the agreement. IOB or the INDIAN OVERSEAS BANK was charging Rs. 10.00 for each transfer and approximately Rs. 3.50 Lakhs to Rs. 4.00 Lakhs per month on account of transfer of funds. Added to this, IOB branches at area offices were taking 2-3 days in transferring the funds to IOB, Defence Colony, New Delhi and IOB Lucknow was reluctant to transfer the funds on Friday and on their quarterly, half-yearly and yearly closing days due to which IFFCOs funds get blocked.

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On evaluation of a proposal for U.P , it was found that the total remittance of funds from different state offices to MKCO during the year 2004-05 were Rs. 4016.38 Crores(approx.) out of which Rs. 2328.19 Crores was remitted from state/Area offices of U.P. It was only after the introduction of CMS in maharashtra and West Bangal that IOB started giving timely credit of the amount. Previously, the credits were given under the conventional method of VALUE DATED SYSTEM. In case of this system, it was difficult to verify each and every payment coming in and going out due to the large number of transactions taking place from State/Area Offices and that too when credit was given to an account being operated by the head office. Four banks namely, ICICI Bank, HSBC Bank, IDBI Bank and Corporation Bank submitted their detailed schemes regarding CMS facilities they could offer to IFFCO. Comparative analysis was then made for IOB, Defence Colony, New Delhi vis--vis ICICI, HSBC , IDBI and Corporation Bank with regard to their service charges, pay-out time in IFFCOs IOB Account from the pick-up date and other miscellaneous charges.

SALIENT FEATURES OF THE CASH management SERVICES (CMS) OFFERED BY THE ICICI BANK AND HSBC BANK
Cash Management is the stewardship or proper use of an entitys cash resources. It serves as the means to keep an organization functioning by making the best use of cash or liquid resources of the organization. At the same time, the organization have the responsibility to use timely, reliable and comprehensive financial information systems. Cash Management helps the organization in :Eliminating idle cash balances. Monitoring exposure and reducing risks. Ensuring timely deposit of collections. Properly timing the disbursements. Reducing the interest costs. Improving the liquidity as it reduces the transit time enabling the firm to realize cheques earlier.

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Better accounting and Reconciliations as detailed information on cheques deposited are made available on a daily,weekly/periodically basis, thus simplifying accounting, reconciliation and query resolution. Customized Management Information System (MIS) as per requirements of the firm can also be made available. Interconnectivity with the branch offices increases as these banks provide a host of internet softwares on the CMS account that allows the firm to view current account balances, download statements, view CMS collections, effect payments/receive payments online, plus a host of other activities. Collection Services by these banks ensure quick realization of local and outstation cheques on day zero and provide the funds in a central collection account on day one. A customized MIS provided by ICICI bank & HSBC bank can include :Daily report of deposits made at various locations. Location wise report. Credit Forecast report. Monthly cumulative report-date wise/location wise. Monthly charging statement Monthly cheque return statement. Customized reports as per mutual agreement

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CMS AGREEMENT WITH ICICI BANK

ICICI Bank has offered to pay-out on Day One from the date of pick-up of instrument at Lucknow and at 9 locations ao area offices and on Day Two for one of the location of area offices. ICICI Bank has quoted the lowest service charges considering the impact of interest loss due to late transfer of funds. ICICI Bank has also offered to pick-up the local cheques from different locations at free of cost. There is a saving to the tune of Rs. 85.00 Lakhs to the society. In case of any instrument delivered by IFFCO, is returned unpaid, they levy charges of Rs. 100 per instrument plus interest at their PLR for the period the bank is out of fund. However, as there is a collection of funds on the next day also, the bank is never out of funds and as such IFFCO has not paid any interest to the ICICI Bank for giving funds. Number of Area offices covered by ICICI bank Extent Of Coverage Of IFFCO : 12 Centres/Offices

District / Area offices

Agra, Allahabad, Bareilly, Faizabad,Gorakhpur, Jhansi, Lucknow,Meerut, Moradabad,Kanpur, Saharanpur & Varanasi

Offices covered by ICICI Bank Branches : Agra, Allahabad, Bareilly, Lucknow ,Meerut, Moradabad, Kanpur, Saharanpur & Varanasi Offices covered through Correspondent Bank Network : Gorakhpur Offices yet to be covered : Faizabad & Jhansi.

For Collecting Payment

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Stage I : Current Features DDs collected by the state/area offices are picked up by an authorized agent of ICICI Bank and sent for collection. ICICI Bank also pick up the high value instruments from the UPCB before the high value cut off time, present for clearing and effect the pooling on the same day at the nodal account. ICICI Bank gives credit to the main pooling account on a pre agreed day. The collections are transferred the same day to the cash credit account of IFFCO as per the standing instructions through a high value instrument. ICICI Bank gives detailed management information system report as per the requirements of IFFCO. This collection account is used for funding the disbursement of manufacturing units. Stage II : Proposed Features ICICI Bank shall tie up with various District Cooperative Banks (D.C.B.s) and improve the collection process for sales affected through the village societies. ICICI Bank also proposes to transfer expertise for technology banking to the D.C.B.s. ICICI Bank shall consider a line of funding to UPCB at Lucknow which would enable easy transfer of funds through ELECTRONIC BANKING to ICICI Bank, Delhi.

DISBURSEMENT OF FUNDS
In addition to CMS, IFFCO has an innovative disbursement scheme known as ANYWHERE BANKING OVERDRAFT ACCOUNT facility with IDBI Bank. Under this scheme, the balances of all the state offices maintain zero balance and the deposits are transferred to the Central Account having overdraft facilities. The procedure is as follows :-

Option-I : Debit Sweep Each state office where IDBI Bank has a presence opens a current account.

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Pre-determined debit limits are allocated to each of these offices. At the end of the day, all the debits are transferred to the main pooling account. The debits are then consolidated and liquidated against the days collection. Option II : Anywhere banking (ANB) Facility Operationally, ANB facility offers IFFCO the flexibility of making at par payments across multiple locations by using a single current a/c maintained at Delhi.

ADVANTAGES OF ANB FACILITY

Better Fund Management By Reducing Idle Balances : ANB obviates the need to maintain idle funds at multiple locations leading to better funds management. Minimum Multiple Bank Account : ANB obviates the need for having multiple accounts at different locations. It, thus, reduces the number of bank a/cs at different locations leading to lower administrative load and reduces bank reconciliation.

12 AREA OFFICES (AO) 1 STATE OFFICE (LUCKNOW)

(SO)

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SO AO AO AO AO AO AO AO AO AO AO AO AO

Location Wise Pool Account. Credit is received in Individual Accounts.

Consolidated Figure is derived at Mumbai. Consolidation is done at Mumbai.

Transferred to Respective Locations through High Value Cheques. IDBI Bank then deposit it with IFFCOs Bank Account at IOB, Defence Colony, New Delhi (The Main Head Office Account)

DIAGRAMMATIC REPRESENTATION OF CMS PROVIDED BY IDBI BANK

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OBSERVATIONS
Cash Flow Statement For The Year Ending 31st March, 2006.

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Year 2006 (A) Cash Flow Operating Activities From

Ended

31-03- Year Ended 31-032005

Net Profit Before Tax Adjustment For : Depreciation Interest ( Net) Provision For Doubtful Debts Amount Charged Off/Adjusted Assets Written Off Loss On Sale Of Fixed Assets (Net) Foreign Exchange Fluctuations Dividend Income Liabilities/Provn. No Longer Required Written Back Deferred Revenue Written Off-VRS Prior Period Depreciation Operating Profit Before Working Capital Changes

48189.72 24230.06 11232.49 95.37 25.84 134.75 56.61 335.56 (2153.64) (80322) 392.44 (92.48) 3345378 81643.78 16759.14 2263.99 173.82 33.2 71.72 69.24 (1754.65) (2071.9) (1183.89) (140.24)

47091.86

14220.43 61312.29

Adjustment For: Inventories Trade And Other Receivables Trade Payable And Provisions Cash Generated Operations From (11164.5 1) (58811.6) (165070.41) 2815028 (195731.73) (114088.2 3) (15036.28) 8905.4 (5047.79) 19675.56 23533.17 84845.46

Direct Taxes Paid (Net Of Refunds)

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Contribution To Cooperative Education Fund Amount Paid Towards Cooperative Welfare Fund Payment Towards Voluntary Retirement Scheme/Others Donations Paid Net Cash From Activities (A) Operating

(298.28) (60.12) (1723.27) (18) (13264.18) (127352.41)

(988) (45) (12.97) (16082.25) 68763.21

(B) Cash Flow From Investing Activities Purchase Of Fixed Assets Incl. C.W.I.P. Proceeds From Sale Of Fixed Assets Purchase Of Investments (Net) Dividend Received Interest Received On Loans & Advances Net Cash Used In Investing Activities (B) (296423.55) 1164.15 (16623.86) 1030.14

(8544.96) 2153.64 1137.38

435 2071.9 1137.73 (11949.09)

(300513.34)

(C ) Cash Flow From Financing Activities Proceeds From Issue Of Share Capital Proceeds From Term Loans Deferred Trade Tax Loan 141.7 102950 1605.35 (4059.46) 1005.34

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Increase/(Decrease) Working Capital Borrowings Proceeds/(Repayment) Of Term Borrowings Interest Paid Dividend Paid Exchange Rate Fluctuations Net Cash Used In Financing Activities (C) Net Increase/(Decrease) In Cash And Cash Equivalents(A+B+C) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE CLOSE OF THE YEAR Short

48205.04 286069.77 (12370.37) (8487.6) (335.56) 417778.4

(57109.33) 21420.25 (3401.72) (7853.02) 1754.65 (48243.2)

(10087.35)

8570.83

19910.28

11339.45

9822.93

19910.28

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FINDINGS:
Sales activity in the business of fertilizers is based on Monsoons. The month from April to September ( Known as Kharif Season) and from October to March ( Known as Rabi Season) are the peak consumption months. The demand of fertilizers depends on monsoons and other seasons, due to which the demand varies.

LONG TERM LOANS

The long term borrowings were Rs. 32131 Lakhs in the year 2001-02 and from 2002-03 to 2004-05, the long term loans were zero.This clearly indicates that IFFCO had repaid all its long term loans and borrowings and which sowed that it had made good profits in the previous three years. But now in the year 2005-06, the long term loans have increased to Rs. 250443 Lakhs.This is basically due to the acquisition of new Plant i.e. Paradeep Plant. Years (Rs. In Lakhs) 2001-02 32131 2002-03 0 2003-04 0 2004-05 0 2005-06 250443

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SHORT TERM LOANS

Years (Rs. In Lakhs) 2001-02 80814 2002-03 98457 2003-04 89000 2004-05 53310 2005-06 240092

OPERATING INFLOWS
Sale Of Fertilizers
The product is sold on credit as well as on the cash basis. IFFCO deals with farmers through cooperative societies,federations and IFFCOs own service centers. Years (Rs. In Lakhs) 2001-02 310764 2002-03 353563 2003-04 375339 2004-05 409760 2005-06 535819

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Debtors:
Years (Rs. In Lakhs) 2001-02 33853 2002-03 46128 2003-04 46946 2004-05 32460 2005-06 47440

SUBSIDIES FROM GOVERNMENT

The entire fertilizer industry gets subsidy from the govt. of India. In IFFCO, since the society is dealing in Urea and Phosphate Fertilizer, there are two system of claiming subsidy. The subsidy on urea is received on the retention price fixed for the group of companies.That is, under this the subsidy is given as a difference between the sales price and the retention price. Retention Price includes cost of production (i.e. cost of raw materials,utilities,fixed cost, freight cost, marketing & selling & distribution expenses) plus 12 % post tax return on net worth. The basic intention of following the retention price scheme is to give fertilizers to the farmers at a subsidized rates. Norms which are set in fixing retention price is of government only.Retention price period is normally of 3 years of duration and after that the govt. reviews it. In addition to the retention price subsidy, Equated Freight Subsidy is paid to the manufacturers of controlled fertilizers to cover the cost of transportation from the production plants to the consumption centers. The Phosphatic Fertilizer has been decontrolled, whereby, the company can sell the material without any limitation of Essential Commodity Act (ECA)(i.e. it is the act under which the govt. decides the places where thefertilizer is to be distributed).

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However, in order to make available the fertilizer at a low rate to the farmers, the govt. is allowing subsidy to the manufacturers. This amount is fixed by the govt. every year on the basis of the fertilizer per tonne dispatched by the manufacturers. Years (Rs. In Lakhs) 2001-02 217431 2002-03 273929 2003-04 2004-05 233669 329938 2005-06 458474

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OPERATING OUTFLOWS
Wages And Salary
Years (Rs. In Lakhs) 2001-02 16815 2002-03 21510 2003-04 20268 2004-05 20669 2005-06 22431

Repairs And Maintenance

Years (Rs. In Lakhs) 2001-02 2934 2002-03 2861 2003-04 3319 2004-05 4301 2005-06 5880

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CONCLUSION & SUGGESTIONS

The organization IFFCO is basically a Farmers Organization. It functions in the cooperative sector of India and is owned by the Government of India along with the cooperative societies. IFFCO is one of the most profitable and financially secure fertilizer companies in India, posting an operating margin of between 10-15% during the last five years. The generation of funds through sale is a seasonal factor. This is because the Fertilizer Industry is dependent largely on the Monsoons. The peak consumption months are from April to September ( Known as Kharif Season) and from October to March ( Known as Rabi Season). Due to these reasons the sales of fertilizer products can vary from season to season and year to year.. This can lead to periods of cash deficits & cash surplus in the operating cash cycle. Thus, it becomes imperative for the organization to have such cash management policies and cash management system in place that would enable the organization to plan the excess cash obtained during surplus periods and plough them back into the operations of the organization during deficit periods. The Cash Management System at IFFCO is very sound and efficient. It has enabled the organization to manage its funds in a proper manner resulting in better utilization and availability of funds in cash deficit periods. IFFCO also practices efficient cash management policies. In fact, today, IFFCO is Indias biggest fertilizer production company and also one of the most profitable ones. Today IFFCO has a tie up with banks such as ICICI Bank, HSBC Bank, IDBI Bank And Corporation Bank that are providing IFFCO with facilities such as cash management services, personalized financial MIS to enable IFFCO to accelerate the collection and payment of funds, debit sweep option, Anywhere banking facility, etc. All these facilities have helped IFFCO in having faster, more secure and more reliable collection and payments of funds and cheques from its various Area/State Offices. However, despite all the advantages of this New Cash Management System such as receiving the proceeds from the sale of fertilizers within First day of sale, reduction in the amount of interest loss suffered by IFFCO due to late arrival of payments, daily report of deposits made at various locations, location wise report, credit forecast report, monthly cumulative report date wise/ location wise, monthly charging statement, monthly cheque return statement, customized reports as per mutual agreement etc. the cash management system can be further improved.

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SOME SUGGESTIONS TO IMPROVE MANAGEMENT SYSTEM ARE :-

THE

CASH

By making an analysis of all the collection at other locations and implementing the same at state offices also. By exploring the possibilities of collections at area offices with regard to direct transfer of funds through C.M.S. , instead off transferring/routing the funds through the state offices. At present, the banks with whom the C.M.S. agreements have been made are not the consortium members of IFFCOs Lead bank. In case, these banks are also included as consortium members, IFFCO shall have an additional advantage as they shall be in the position to utilize their payments directly from their Cash Credit Accounts.

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BIBLIOGRAPHY
Books
Annual Reports Of Iffco Ltd. Of 2005-06 Financial Management : By I.M. Pandey Financial Management: By Prassana Chandra Agreement Files Of IFFCO

Websites
www.iffco.nic.in www.investopedia.com www.fert.nic.

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