Tata Steel
Tata Steel
Tata Steel
PROJECT REPORT
ON
“WORKING CAPITAL MANAGEMENT”
AT
TATA REFRACTORIES LIMITED,
BELPAHAR, ORISSA
SUBMITTED BY
JINESH J. TANNA
MASTER OF BUSINESS ADMINISTRATION
2007-2009
UNIVERSITY OF PUNE
ACKNOWLEDGEMENT
At the prime outset I owe my sincere gratitude to the management and allied
discipline of TRL, Belpahar for giving me an opportunity to undergo training for a
period of 2 month.
Jinesh J. Tanna
M.B.A (2007-08)
VIM, Pune
Page88
TO WHOM IT MAY CONCERN
This is to certify that Mr. Jinesh J. Tanna student of M.B.A 2nd Year from
Vishwakarma Institute of Management, Pune under University of Pune has
undergone Vocational Training from to and prepared a Project
Report on “WORKING CAPITAL MANGEMENT” at TATA Refractories Ltd,
Belpahar.
Page88
DECLARATION BY THE CANDIDATE
Page88
TABLE OF CONTENTS
1. EXECUTIVE SUMMARY
05
2. METHODOLOGY
06
3. OBJECTIVES OF STUDY
07
4. INDUSTRY ANALYSIS
08
5. COMPANY ANALYSIS
16
7. RECEIVABLE MANAGEMENT
43
8. INVENTORY MANAGEMENT
55
9. CASH MANAGEMENT
62
12. BIBLIOGRAPHY
Page88
80
13. APPENDIX
81
EXECUTIVE SUMMARY
Primary data – Information gathered from discussion with officers in the finance
department and materials department on various aspects of working capital formed
the primary source of data for the analysis.
The following steps have been taken while preparing the report:
Page88
OBJECTIVES OF THE STUDY
Page88
CHAPTER-1
INDUSTRY ANALYSIS
REFRACTORY INDUSTRY
REFRACTORY INDUSTRY LINKED TO IRON AND STEEL
INDUSTRY
INDIAN REFRACTORIES INDUSTRY
SIZE OF THE INDUSTRY
CRITICAL APPRECIATION OF DOMESTIC REFRACTORIES
INDUSTRY
Page88
REFRACTORY INDUSTRY
Refractories are a term given to a class of materials which are produced from
non-metallic mineral and possess capability to withstand heat and pressure. These
are products that confer properties like high temperature insulation, resistance to
corrosive and erosive action of hot gases, liquids and solids at high temperatures in
various kilns, furnaces, driers, gas fires and reformers.
Sources: www.irmaindia.org
Page88
REFRACTORY INDUSTRY LINKED TO IRON AND STEEL
INDUSTRY
The fortunes of the refractory industry are considerably linked to the growth of
iron and steel sector which consumes a massive 75% of the Refractories produced.
Demand for steel continues to be strong in emerging markets of the BRIC countries.
Stupendous growth in the steel sector is being witnessed with the announcement of
ambitious capacity expansion plans by SAIL, TISCO, Essar Steel, JSW Steel and
many other players in the private sector.
Sources: www.irmaindia.org
Page88
Sources: www.irmaindia.org
Page88
INDIAN REFRACTORIES INDUSTRY
It’s been a long journey for the Indian refractory industry since the first factory
line production of Refractories started in Kolkata – or Calcutta as the city was called
then – in the year 1874.
Today, the industry comprises over 100 established units, with 11 large
plants, 24 medium-scale units and the rest in the small-scale sector. However, while
the refractory industry in India took off in the late 19th century, the real growth came
in th e late 1950s when the public sector steel plants were set up and Tata Steel
embarked upon its expansion plans.
About 75 per cent of the Refractories that are manufactured find application in
the steel industry, 12 per cent in the cement industry, 5-6 per cent in non-ferrous
industries, three per cent in the glass industry and the balance in other industries.
Necessarily, Refractories are used either where high temperature or high rate
of abrasion / corrosion/erosion is involved. Traditionally, Refractories are made of
naturally-occurring minerals, such as bauxite, kyanite, magnetite, fireclay, chrome
Page88
ore, etc. Lately, however, the industry has been using man-made raw materials,
such as brown-fused alumina, tabular alumina, fused magnesia, silicon carbide,
magnesia alumina, etc.
SIZE OF THE INDUSTRY
The size of the Indian refractory industry has been pegged at Rs 2,300 crore
and it is stated to be growing at 8-10 per cent per annum. Although the specific
consumption of Refractories has gone down from 30 kg per tone of steel about 20
years ago to 12-13 kg on an average for the steel industry as a whole and as low as
7-8 kg in the case of some more efficient steel units, the scope for growth is good in
view of the continuing growth in the Indian economy and the government’s focus on
infrastructure development.
Says Dr J.J. Irani, Director of Tata Sons and Former Managing Director of
Tata Steel: “With the government aiming to invest more and more on infrastructure
development, the steel industry in the country is slated to grow to, possibly, 120
million tones or even up to 150 million tones by 2015. According to most reports, the
cement, aluminum and other industries are also to grow to unprecedented heights.
This should be good news for refractory producers in India”.
This is partly due to an easing of the cash flow problems of the steel industry,
which accounts for 75 per cent of the total domestic refractories consumption. But,
perhaps, a more important reason is the significant export performance. In fact, the
export prospects have never been so encouraging for the refractory makers in the
past. Standing the refractory makers in good stead also is the reduction, after
repeated pleas to the Finance Ministry, in the import duty on important refractory raw
materials and thereby correcting the anomalous situation in which raw materials had
been attracting more import duty than finished refractories. Further, the Centre has
revised the DEPB entitlement for export of certain high alumina and alumina carbon
refractories.
The decline in the fortunes of the steel industry in the last three years has had
an adverse impact on the finances of the refractory makers; for there was total
uncertainty about payments against supplies made.
In view of their cash flow problems, the steel plants took recourse to what
may be termed as the recognized practice of issuing credit notes for steel supply to
the refractory manufacturers who, in turn, were giving it to dealers at a discount of
2.5 to 3 per cent, depending on the products, to realize their dues.
This factor also applies to the other refractory consuming industries, such as
cement, glass and non-ferrous metals, which, like steel, also have not seen much
growth in recent years.
Page88
Judging by the orders already received and expected, the industry is hoping
to register exports worth Rs 100 crore in 2002-03. Its assessment is that if the trend
persists, Rs 200 crore worth of exports will be a reality, say, by the terminal year of
the Tenth Plan.
The volume of exports and unit realization in 1998-99 were 23,682 tones and
Rs 23,500 respectively. The figures in 2001-02 were 29,912 tones and Rs 29,000
respectively.
Page88
CHAPTER-2
COMPANY ANALYSIS
TATA GROUP
TATA REFRACTORIES LIMITED
SWOT ANALYSIS
FINANCIAL OVERVIEW OF TRL
Page88
TATA GROUP
5 % of India’s GDP
Total Sale Represent
US $ 1.42 Billion
India’s Largest Foreign Exchange Earner
PURPOSE
Improve the quality of life through leadership in targeted sectors of national economy
significance.
GROUP AS A PIONEER
Tata Refractories limited is one of India most modern plants, was promoted
as joint Venture of TATA STEEL & DIDIER WERKEA.G, of Germany. The plant is
situated at Belpahar in Jharsuguda district of Orissa with an installed capacity Of 1,
49,000 tones of refractories per annum & is equipped with a modern research &
development laboratory & a pilot plant. The production activities extended to
Jamshedpur & Chennai to meet customer requirements. Besides TRL has its own
sintering plant at KARUPPUR, TAMILNADU, for dead burnt magnetite & non-plastic
fire clay mines at TALBASTA, ORISSA.
TRL product range includes various types of fire clay & high alumina bricks,
coke oven, silica bricks, various types of basic bricks like magnesite bonded mag
chrome bricks, burnt mag-dole bricks with & without tar imprenation. Special product
likes slide gate refractory (basic & high alumina slide plates) & its accessories
zirconia nozzles mullite, zircon. With technical know –how from KUROSAKI
refractories company limited (KRC), One of the largest manufacturers of hi tech
refractories in JAPAN, TRL is now producing improved variety of magnesia carbon
bricks, basic gunning mixes, superior grade well blocks for various applications. TRL
has in hand an expansion programmed which will include production of dolomite
bricks & continues costing refractories.
It major client are integrated mini & other steel plant & various non-ferrous,
Glass, petro chemical & fertilizer industries. TRL also extends technical services to
its customers 7 helps in designing & application of refractories.
TRL is the first associate company of the TATA group to sign BEBP
(Business Excellence Branch Promotion) agreement with TATA sons and has been
authorized to use the new TATA market. It has adopted TBEM (TATA Business
Excellence Model) since last seven year and has been recognized for “serious
adoption” in 2003-04 and for active promotion 2004-05 for ethical business
practices, it flows TATA code of conduct and encourages all its stakeholders.
VISION
MISSION
VALUES
• Customer delight
• Leadership by example
• Integrity and transparency
• Fairness
• Furthering excellence
QUALITY POLICY
MAJOR PRODUCTS
• Basic bricks
• High Alumina bricks
• Silica bricks
• Dolomite bricks
• Monolithic refractories
• Flow control products.
MAJOR SERVICES
• Total refractories solution for equipment for making steel, copper, aluminum,
glass etc.
• Total refractories management i.e. providing running maintainces of
customers’ equipment such as ladles, kilns, Furnaces etc.
Page88
SWOT ANALYSIS
Strength:
Weakness:
Opportunity:
• Cost control.
• Increased efficiency.
• Quality product.
• Increased profit
Threats:
COMPETITORS OF TRL:
ORISSA CEMENT – It has the turnover of 200 crore & the export worth RS
25 crore. Presently they are trying to establish the production & quality of
ladle tundish shrouds. OCL is capturing order of the mini steel plant for well
blocks in LCC 90 quality & feedback report form mini steel plant is very good.
ACC CEMENT – It has turnover for the year was 179 crore. Along with other
Page88
competitors, acc is also making his presences in domestic market.
IFGL REFRACTORIES
VISHUVYAS REFRACTORIES.
POTENTIAL THREAT:
TRL competitors M/S oil operating from china is a major threat in the
Southeast Asia & the Far East. As they available to supply basic bricks at a very low
price in view of raw material availability & freight advantages they have already get
the order from NAT STEEL (Singapore) & PT ISPAT (INDONESIA) for the
magnesia is carbon for supply from there china plant.
In spite of all these competition TRL is the leading company in the field of
Refractories within country & now trying already to expand its wing in the
international market also.
Page88
FINANCIAL OVERVIEW OF TRL
Firstly, imports of critical raw materials from China have become extremely
difficult not only due to exorbitant price increases but also because of export
restrictions imposed by the Chinese government. This has adversely effected
production and profitability of the company.
Fourthly, due to closer of all gas producers and Silica tunnel Kiln on account
of pollution problem, not only Silica bricks production had to be stopped for about
four months, excess energy costs had also to be incurred due to substitution of gas
by oil.
Despite the above adverse situations the company has achieve highest ever
performance in terms of production, sales and revenues, there by the company
continued to retain its leadership position in the Indian Refractories Industry. This
was possible because of the inherent strengths of the company in aspects such as
technological advancement, innovation capabilities professional competence,
financial stability and above all determination of employees to face adverse
situations with full commitment.
For the year 2007-08 the revenues of the company- at Rs 587 Crores on
stand alone basis-were higher by Rs 66 Crores compared to previous year,
establishing an all time record. The consolidated revenues of the company along
with those of TRL China were Rs. 610 Crores, a new milestone in the 50-year
history of the company.
The company achieved the highest ever export turn over of Rs. 68 Crores, i.e.
an increase of 21% company to that of previous year.
Page88
Performance
Exports
Driven by the capital flows in the system, the Indian rupees appreciated by
13.25 against the U.S dollar in T-O-Y basis as on December, 2007 thus adversely
affecting India’s exports. Despite this adverse condition the company has achieved
the highest ever exports of Rs. 68 Crores compared to Rs. 56 Crores of the previous
year; an increase of 21% . at present the company is exporting to more than 30
countries, our exports account for over 23% of the total Refractories exported from
India, and 12% of company’s total turnover comes from exports. The company has
taken several measures to strengthen its presence in international markets.
Subsidiary companies
The company has two subsidiary companies viz. TRL Asia Private Limited
(special Purpose vehicles and TRL China Limited, a 100% subsidiary of TRL Asia
Private Limited is 88%. TRL China started commercial operations from 28 th
December 2006. TRL China has earned a profit during the first full year of its
operation itself. It has achieved a turn-over of Rs.67 Crores and PBT of Rs.0.63
Crores. Profitability of TRL China has been, however, seriously affected due to
withdrawal of VAT benefits by the Chinese government as well as by the
strengthening of Chinese currency (RMB) against the dollar. In order to meet market
demands, TRL China is undertaking the phase-II expansion of its production
facilities at an estimated capital expenditure of Rs. 14.95 Crores. The funds required
for phase-II expansion shall be raised by TRL China Limited itself through loans and
internal generations.
Page88
Form for disclosure of particulars with respect to
Technology Absorption
4. Expenditure on R & D
Page88
CHAPTER-3
INTRODUCTION
CONCEPT OF WORKING CAPITAL
OPERATING CYCLE
ISSUES IN WORKING CAPITAL MANAGEMENT
Page88
INTRODUCTION
Working capital is the life blood and every manager’s primary task is to help
to keep it managing. Good management of working capital generate cash and helps
to improves profits and reduce risk. In other words working capital is the current
asset the management of which is different from fixed asset. For example the
discounting and compounding techniques, in capital budgeting is not required in
WCM. Another difference is a large amount of working capital strengthen firm’s
liquidity position but at the same time it also reduces the over all profitability. Current
asset can be adjusted with sales fluctuations in the short run. Thus the firm has a
greater degree of flexibility in managing current or working capital.
Each components of working capital has two dimensions. One is time and
another is money. When it comes managing working time of money, if M/S TRL can
get money to move faster around the cycle or reduce the amount of money tied up,
the business will generate more cash or it will need to borrow less money to found
working capital. As a consequence it will reduce the cost of bank interest. There are
two concepts of working capital—ggross working capital and Net working capital.
The table below shows the gross working capital of TRL from 2005 to 2008
i.e. of four accounting years.
The table below shows the net working capital of TRL from 2005 to
2008 i.e. of four accounting years.
CAPITAL(Net
Current Assets) 1,240,307,946 913,294,610 822,689,296 678,376,575
Sources: Annual Report, TRL
OPERATING CYCLE
The need for working capital to run the day to day to day business activities
cannot be over emphasized. The firm has to invest enough funds in current assets
for generating sales. Current assets are needed because sales don’t convert in to
cash instantaneously. There is always an operating cycle involved in the conversion
of sales into cash.
Operating cycle is the time duration required to convert sales, after the
conversion of resources into inventories, into cash. The operating cycle of TRL
includes three phases:
Acquisition of resources, such as raw materials, labour, power, and fuel etc.
Manufacture of the product which includes conversion of raw material into
work-in-progress in to finished goods.
Sale of the product either for cash or credit. A credit sale creates accounts
receivable for collection.
Page88
The above cycle is the TRL’s operating cycle which shows different stages of
conversion of raw materials into cash. The length of the operating cycle of TRL is the
sum of inventory conversion period and debtor conversion period. The inventory
conversion period is the total time taken for producing and selling the product.
Typically it includes, raw material conversion period, work-in-progress conversion
period, stores and spares conversions period, fuel conversion period, and finished
goods conversion period. The debtor conversion period is the time required to collect
the outstanding amount from the customer. The total of inventory conversion period
and debtors conversion period is refers to as gross operating cycle (GOC).
15 DAYS COST OF
WIP PROD. 20.03 13.47 -6.56
Page88
( 15 ( 11
DAYS ) DAYS )
120 DAYS OF
STORES & SPARES CONSMN. 2.52 5.15 2.63
(120 (246
DAYS ) DAYS )
15 DAYS OF
FUEL CONSMN. 2.41 3.56 1.15
( 15 (23 DAYS
DAYS ) )
30 DAYS COST OF
FINISHED GOODS PROD. 44.85 39.66 -5.19
( 30 ( 27
PLUS E.D. DAYS ) DAYS )
TOTAL CURRENT
254.87 249.87 -5
ASSETS
NORM AS ON .
31.03.2
006
17.6
DEBTORS 60 DAYS OF SALES 86.12 103.75 3
( 60 ( 73
DAYS ) DAYS )
30 DAYS OF
RAW MATERIAL CONSMN. 16.39 19.02 2.63
( 30 ( 35
DAYS ) DAYS )
15 DAYS COST OF
WIP PROD. 17.66 14.06 -3.6
( 15 ( 12
DAYS ) DAYS )
90 DAYS OF
STORES & SPARES CONSMN. 2.52 3.82 1.3
( 90 (137
DAYS ) DAYS)
15 DAYS OF
FUEL CONSMN. 1.96 2.68 .72
( 15 (21
DAYS ) DAYS )
-
30 DAYS COST OF 14.5
FINISHED GOODS PROD. 40.08 25.52 6
( 30 ( 18
PLUS E.D. DAYS ) DAYS )
TOTAL CURRENT
201.73 205.85 4.12
ASSETS
Rs.
Crores
ACTUAL
AS PER AS ON DIFF
ITEMS NORMS
NORM 31.03.2 .
006
35 DAYS OF
RAW MATERIAL CONSMN. 22.30 25.27 2.97
( 45 ( 51
DAYS ) DAYS )
15 DAYS COST OF
WIP PROD. 14.42 15.39 0.97
( 15 ( 16
DAYS ) DAYS )
90 DAYS OF
STORES & SPARES CONSMN. 4.66 3.42 -1.24
( 90 ( 66
DAYS ) DAYS )
15 DAYS OF
FUEL CONSMN. 1.57 1.05 -0.52
( 15 (10
Page88
DAYS ) DAYS )
30 DAYS COST OF
FINISHED GOODS PROD. 24.09 22.56 -1.53
( 30 ( 24
PLUS E.D. DAYS ) DAYS )
TOTAL CURRENT
227.08 230.25 3.17
ASSETS
43.19 63.35 -
CREDITORS 45 DAYS COST OF 20.1
( OPERATION ) PROD. 6
( 45 ( 66
DAYS ) DAYS )
Rs.
Crores
ACTUAL
AS PER AS ON DIFF
ITEMS NORMS
NORM 31.03.2 .
006
) DAYS )
35 DAYS OF 10.8
RAW MATERIAL CONSMN. 19.48 30.31 3
( 45 DAYS ( 70
) DAYS )
15 DAYS COST OF
WIP PROD. 9.75 14.07 4.32
( 15 DAYS ( 18
) DAYS )
90 DAYS OF
STORES & SPARES CONSMN. 4.40 3.91 -0.49
( 90 DAYS ( 80
) DAYS )
15 DAYS OF
FUEL CONSMN. 1.13 0.68 -0.45
( 15 DAYS (9 DAYS )
)
30 DAYS COST OF
FINISHED GOODS PROD. 24.09 19.28 -4.81
( 30 DAYS ( 24
PLUS E.D. ) DAYS )
37.03 65.02 -
CREDITORS 45 DAYS COST OF 27.9
( OPERATION ) PROD. 9
( 45 DAYS ( 79
) DAYS )
Rs.
Crores
ACTUAL
AS PER AS ON DIFF
ITEMS NORMS
NORM 31.03.2 .
006
-
10.4
DEBTORS 70 DAYS OF SALES 60.25 49.82 3
( 70 ( 58
DAYS ) DAYS )
35 DAYS OF 11.7
RAW MATERIAL CONSMN. 12.19 23.97 8
( 35 ( 68
DAYS ) DAYS )
15 DAYS COST OF
WIP PROD. 9.75 11.64 1.89
( 15 ( 18
DAYS ) DAYS )
90 DAYS OF
STORES & SPARES CONSMN. 4.26 3.67 -0.59
( 90 ( 78
DAYS ) DAYS )
15 DAYS OF
FUEL CONSMN. 1.00 0.92 -0.08
( 15 (14
DAYS ) DAYS )
30 DAYS COST OF
FINISHED GOODS PROD. 22.62 20.42 -2.20
( 30 ( 27
Page88
TOTAL CURRENT
135.08 135.45 0.37
ASSETS
-
CREDITORS 45 DAYS COST OF 11.3
( OPERATION ) PROD. 29.25 40.61 6
( 45 ( 62
DAYS ) DAYS )
• Seasonality of operation
• Market conditions
• Present position of Refractories market
• Condition of supply
• Nature business
There is a direct relationship between an firm’s growth and its working capital
needs. As sales grow company needs to invest more in inventories and debtors. As
the firm’s out put and sales increases, the need for current asset increases, but
current asset don’t increase in direct proportion to output.
TRL’s sales for five years are shown below. The amount of current asset in
relation to current asset in not a function of direct proportionality. These figures are
shown below in table and graph.
Page88
Current asset Turnover Ratio
Year Sales Current Assets Ratio
2007-2008 584,59,23,088 2097826344 2.79
2006-2007 516,75,44,869 1723093153 3
2005-2006 455,70,76,293 1492941308 3.05
2004-2005 400,54,21,306 1441954776 2.78
2003-2004 317,07,24,228 1126367562 2.81
aggressive policy indicates higher risk and poor liquidity. Moderate current asset
policy fall in the middle of conservative and aggressive policy.
CURRENT ASSETS FINANCING POLICY
Current Fixed
Years Assets Assets CA/FA
249,72,17,8 330,64,06,4
2007-08 31 53 0.75526
254,66,60,2 325,62,44,3
2006-07 34 72 0.78208
230,24,50,9 313,00,95,0
2005-06 05 09 0.73558
185,44,90,2 225,08,14,4
2004-05 92 88 0.82391
135,45,16,5 185,84,04,0
2003-04 43 64 0.72886
Measuring Profitability.
Page88
Measuring Solvency.
Methodology used for working capital analysis
i) Liquidity Ratios –
Liquidity ratios measure the ability of the firm to meet its current
obligations (liabilities). In fact, analysis of liquidity needs the preparation of
cash budget and cash fund flow statement; but liquidity ratios, by establishing
a relationship between cash and other current assets to current obligations,
provide a quick measure of liquidity.
LIQUID RATIOS
2007- 2006- 2005- 2004-
Ratios 08 07 06 05 2003-04
Current Ratio 2.446 2.128 2.227 1.888 2.082
Quick Ratio 2.35 2.04 2.16 1.83 2.71
Cash Ratio 0.076 0.042 0.052 0.1215 0.055
Interval Measure 155.474 139.59 142.741 159.8 155.57
ACTIVITY RATIO
2007- 2006- 2005- 2004- 2003-
Page88
Ratios 08 07 06 05 04
Inventory Turnover Ratio 5.623 7.168 5.498 4.764 4.431
Debtors Turnover Ratio 5.341 4.98 5.832 6.007 6.364
Net Asset Turnover Ratio 1.673 1.554 1.512 2.155 2.209
Current Asset Ratio 2.787 2.99 3.052 2.778 2.815
Working Capital Turnover
Ratio 4.713 5.658 5.539 5.904 5.416
Sources: Annual
Report, TRL
Page88
CHAPTER-4
RECEIVABLES MANAGEMENT
INTRODUCTION:
ASPECTS OF CREDIT MANAGEMENT
MODE OF PAYMENT BY DEBTORS
MONITORING RECEIVABLES
FACTORING
Page88
INTRODUCTION
A firm grants trade credit to protect it sales from the competitors and to attract
the potential customers to buy its product at favorable terms. Trade credit creates
accounts receivable or trade debtors that the firm is expected to collect in the
near future. The customer from whom receivable or book debt have to be collected
in the future are called trade debtors or simply as debtors and represents the firm’s
claim or asset. A credit sale has three characteristics.
Interpretation: If we evaluate the gross current asset of TRL we can very well
observe that about 49% of it is represented by debtors in the financial 7year 2006-
2007, which are Rs 102.507 corers more than its norms. However it may be
observed that in subsequent years TRL has reduced the gap and brought the
debtors position at par level of norms. As debtors plays a vital role in working capital
management, TRL has properly analyzed in details how exactly debtors are
managed here.
sales and the collection period. So it is also essential to find out the collection period
to know the system of collection on time. It is finding by the following formula i.e.
Average collection period (ACP) = Debtors/Credit Sales x 360
So in above table the average collection period i.e. ACP determines the
speed of payment by customers. It measures the number of days for which credit
sales remains outstanding. The longer the ACP, the higher the firm’s investment in
account receivable. Page88
Sources: Annual Report, TRL
Interpretation : So here we are seeing that in financial year 2006-2007 the average
collection period is very high that means TRL’s investment in account receivable is
also higher.TRL has setup a task force comprising of members from marketing and
finance department. The task force is mostly set to identify the loc mina in the
system of collection on time and also given more attention for collecting the old
dues.
ASPECTS OF CREDIT MANAGEMENT
1. Terms of payment
100% advance.
30 days credit.
60 days credit.
Letter of credit.
Payment on the basis of performance
4. Credit-granting decision
DOUBTFUL
Sources: Annual
Report, TRL
So while seeing on the above table we can conclude that TRL has
taken some major steps to control doubtful debts.
1. Advance Payment
Contents of LC:
Terms
Conditions
Procedures
Issuer
Applicant
Beneficiary
Advising bank
Page88
Confirming Bank
Basically LC is win- win situation for both the parties.
Steel plants are the major customers of the company and they have
generally makes the payment for the credit allowed to them in 30 days. For
Other customers the credit payment is 30 days or 60 days.
Aging Schedule shows the outstanding amount with a limited credit period
which is remains uncollected that period. It breakdown the receivables according to
the length of time for which they have been outstanding.
The Aging Schedule of TRL for the financial year 2006-2007 has been shown below.
DEBTORS OUTSTANDING AS ON 31.03.2007
(Rupees in Lakhs )
Bills
Bills Bills Bills Bills Bills more
within 3 3-6 6-9 9-12 12-24 than 24
Customer’s code and name BG Balance months mths mths mths mths mths
10 1,806.5 1,658.2
D20001 TATA STEEL LIMITED 0 1 2 43.64 51.34 24.80 28.51 0.00
10
D20002 SAIL - BHILAI STEEL PLANT 0 233.10 149.18 21.69 34.76 13.33 14.13 0.00
10
D20003 SAIL-ROURKELA STEEL PLANT 0 348.21 248.28 32.44 67.49 0.00 0.00 0.00
10
D20004 SAIL-BOKARO STEEL PLANT 0 182.35 174.62 7.74 0.00 0.00 0.00 0.00
20
D20005 SAIL-DURGAPUR STEEL PLANT 0 90.71 53.92 13.49 0.05 3.89 12.75 6.60
10
D20006 SAIL - ALLOY STEEL PLANT 0 21.72 15.36 1.36 0.31 4.70 0.00 0.00
30
D20007 INDIAN IRON & STEEL CO. LTD., 0 9.29 9.21 0.08 0.00 0.00 0.00 0.00
20
D20009 RASHTRIYA ISPAT NIGAM LTD,(RIN 0 468.35 110.98 69.32 90.53 99.38 98.15 0.00
3,160.2 2,419.7
Total 4 7 189.76 244.48 146.10 153.54 6.60
Tata International Ltd 45.24 2.41 0.00 37.93 0.00 4.91 0.00
Direct Export 755.37 635.27 65.38 45.64 0.00 9.08 0.00
10
D10007 AARTI STEELS LIMITED 0 12.01 12.01 0.00 0.00 0.00 0.00 0.00
60
D16041 ACTION ISPAT & POWER (P) LTD 0 32.57 32.43 0.00 0.00 0.14 0.00 0.00
30
D15122 ADHUNIK METALIKS LTD 0 12.05 12.05 0.00 0.00 0.00 0.00 0.00
20
D21009 ADITYA COKE PVT. LTD 0 13.19 13.19 0.00 0.00 0.00 0.00 0.00
30
D07244 AIA ENGINEERING LTD 0 12.34 9.25 3.08 0.00 0.00 0.00 0.00
10
D10006 AMBICA STEELS LIMITED 0 60.96 60.96 0.00 0.00 0.00 0.00 0.00
40
D95025 APEX TRADING AGENCY 0 19.71 17.60 0.51 1.32 0.28 0.00 0.00
40
D96009 ARORA REFRACTORIES 0 15.93 15.72 0.21 0.00 0.00 0.00 0.00
30
D07239 ASSOCIATED INDUSTRIAL FURNACES 0 55.60 49.81 5.79 0.00 0.00 0.00 0.00
10
D10033 BANIAN & BERRY ALLOYS PVT. LTD 0 43.76 43.76 0.00 0.00 0.00 0.00 0.00
20
D58005 BHARAT ALUMINIUM COMPANY LIMIT 0 41.18 31.13 3.68 0.00 0.01 5.14 1.22
30
D07002 BHARAT HEAVY ELECTRICALS LIMIT 0 10.33 4.74 0.00 5.24 0.35 0.00 0.00
30
D97092 BHAWANI INDUSTRIES LTD 0 11.56 11.56 0.00 0.00 0.00 0.00 0.00
30
D15120 BHUSHAN POWER & STEEL LIMITED 0 54.04 54.04 0.00 0.00 0.00 0.00 0.00
60
D15078 BHUSHAN STEEL & STRIPS LTD., 0 137.91 137.91 0.00 0.00 0.00 0.00 0.00
60
D07182 BHUTAN FERRO ALLOYS LTD. 0 18.84 0.00 0.00 6.65 12.19 0.00 0.00
40
D04003 BRIJ LAL PAWAN KUMAR 0 19.40 18.44 0.96 0.00 0.00 0.00 0.00
30
D05019 ELETROTHERM (INDIA) LTD 0 244.06 241.49 2.57 0.00 0.00 0.00 0.00
10
Page88
D20011 ESSAR STEEL LIMITED 0 141.09 106.05 35.02 0.00 0.01 0.00 0.00
50
D10003 FACOR STEELS LIMITED 0 328.63 301.02 23.43 4.18 0.00 0.00 0.00
D10032 GEE ISPAT PVT. LTD 10 20.66 20.66 0.00 0.00 0.00 0.00 0.00
0
30
D07243 GLOBAL HITECH INDUSTRIES LIMIT 0 30.94 30.94 0.00 0.00 0.00 0.00 0.00
10
D10008 HARYANA STEEL & ALLOYS LIMITED 0 18.77 15.13 3.64 0.00 0.00 0.00 0.00
10
D50001 HINDALCO INDUSTRIES LTD. 0 283.04 250.60 3.03 2.94 5.00 21.46 0.00
40
D16003 HITECH SERVICES 0 47.75 34.94 4.34 3.94 4.43 0.00 0.10
30
D96001 IFGL REFRACTORIES LIMITED 0 74.00 74.00 0.00 0.00 0.00 0.00 0.00
40
D95020 INTEGRATED SERVICES 0 83.28 83.28 0.00 0.00 0.00 0.00 0.00
30
D15005 ISMT LIMITED 0 23.23 19.03 4.19 0.00 0.00 0.00 0.00
10
D20012 ISPAT INDUSTRIES LIMITED 0 265.02 265.02 0.00 0.00 0.00 0.00 0.00
30
D07014 JAMSHEDPUR ENGG.& MACHINE 0 16.08 5.93 10.15 0.00 0.00 0.00 0.00
50
D07175 JAYASWALS NECO LIMITED 0 18.56 0.00 0.00 0.00 12.60 5.96 0.00
10
D50007 JHAGADIA COPPER LIMITED 0 32.33 2.64 3.53 0.00 26.17 0.00 0.00
60
D10031 JINDAL STAINLESS LIMITED 0 96.70 96.70 0.00 0.00 0.00 0.00 0.00
10
D10001 JINDAL STAINLESS LIMITED 0 33.94 29.02 2.96 0.85 0.11 1.00 0.00
30
D15017 JINDAL STEEL & POWER LIMITED-U 0 148.95 31.06 11.69 15.53 17.35 73.31 0.00
20
D20010 JSW STEEL LIMITED 0 54.53 33.75 0.00 17.65 3.14 0.00 0.00
30
D15018 KALYANI CARPENTER SPECIAL STEE 0 24.45 22.09 0.06 0.00 2.29 0.00 0.00
20 1,016.4 1,014.1
D97008 LARSEN & TOUBRO LIMITED 0 4 0 2.34 0.00 0.00 0.00 0.00
10
D15023 MAHINDRA UGINE STEEL CO. LTD., 0 22.37 22.37 0.00 0.00 0.00 0.00 0.00
30
D15024 MARMAGOA STEEL LIMITED 0 33.51 33.51 0.00 0.00 0.00 0.00 0.00
30
D27001 MEENA AGENCY PRIVATE LIMITED 0 533.04 0.07 38.30 46.12 263.15 185.41 0.00
30
D15027 MODERN STEELS LIMITED 0 20.05 19.97 0.00 0.00 0.00 0.01 0.06
40
D95001 MORTEX (INDIA) 0 38.81 38.81 0.00 0.00 0.00 0.00 0.00
10
D15028 MUKAND LIMITED 0 41.18 33.24 2.20 0.65 0.00 0.00 5.10
40
D96066 NAVEEN TRADERS 0 12.36 12.36 0.00 0.00 0.00 0.00 0.00
20
D65009 NEUTRAL GLASS & ALLIED INDS. L 0 11.57 11.57 0.00 0.00 0.00 0.00 0.00
40
D95030 OSWAL HYDRAULICS & PNEUMATICS 0 11.52 11.52 0.00 0.00 0.00 0.00 0.00
40
D95006 PADMAJA INC 0 116.45 104.38 12.08 0.00 0.00 0.00 0.00
5,215.3 4,127.5
Total 0 3 239.14 188.64 347.22 306.28 6.48
8,375.5 6,547.3
Grand Total 4 0 428.90 433.12 493.32 459.82 13.08
FACTORING
The factor is the financial institution that purchases the client’s accounts
receivable and in relation thereto, controls the credit, extended to customers.
Factoring facility is given by TRL only to its green customers.
The factor (bank) which gives service to TRL for bills discounting facility is
HSBC, Bhubaneswar.
Non-Recourse: Under this method book debts are purchased by the factor,
assuming 100% credit risk. The company is protected against the bad debt. In
this customer are required to make payment directly to the factor. The factor
maintains the sales ledger and accounts and prepares age wise reports of
outstanding book debts.
TRL only gives this facility to its holding company which is Tata Steel,
Jamshedpur.
The specimen of factoring of TRL for the financial year 2007-2008 has been
shown below.
Page88
Page88
Page88
CHAPTER-5
INVENTORY MANAGEMENT
INTRODUCTION
Page88
INTRODUCTION
Inventory constitutes about 60 percent of current assets of public limited
companies. The inventories can be in the form of raw materials, work-in-process and
finished goods, fuel, stores and spares.
2. Higher the fluctuation in either of the parameter larger should be the database
that is data to be available for a longer period of time.
In order to reduce the working capital days TRL has to force on inventory
control. In TRL the Baan ERP software system has been implemented. This makes
easier for the control of inventory.
For procurement and control of raw material stock the material management
department in TRL looks at the following in display item data –
Safety stock.
Inventory on hand.
Inventory on hold.
Inventory on order.
Allocated inventory.
Economic stock.
For inventory control EOQ method, max level, min level, reordering level is used.
Definition
Note – The MC for the months of Q2 will be the avg. of consumption during the Q1
quarter month.
High MC- Avg. MC is higher than a days/ shift’s production (Each department to
decide this norm for itself.)
Formulas-
MSL- High MC item= .5MC
Low MC item= MC
ROP- High MC item= MC
Low MC item= 2MC
Note: - In the above formulas lead time has been eliminated for the sake of
simplification to that extent there will be some inaccuracy which can mostly be
corrected after 3months of experience.
Note: - Model 1 is the simplest and model 4 is the most complex. In our case 4 is
normally applicable.
Cost associated with order size:
Carrying cost: warehousing, handling, clerical and staff services, insurance and
taxes. Carrying cost vary with inventory holding. As order size increases,
average inventory holding increases and therefore the carrying cost increases.
For calculating the ROP, ROQ, AMC and MSL, We have taken data from
TRL’s ERP software system. We have taken ten items for calculating the above
mentioned values. Baan ERP uses the formulas for calculating these values. Those
formulas are displayed earlier on the above.
On the date 9th July 2008 the ROP, ROQ, AMC, and MSL for ten items are
given below.
st. MS RO AM AM LT
on Rat Inv. L RO Q ROQ C C in
Descripti Ha e/ val MS val P ROP Qty Value Qty Val da
Item on nd Unit ue L ue Qty Value . . . ue ys
223000 Bearing
35 ball 1211 324.0 5.3 195
K 10 368 0.03 1 0 2.4 878.03 0.88 3 1 6 5
223000 Bearing
40 ball 1213 126 3346.1 820.7 3.9 492
K.TV.C 6 2 0.07 2 0.02 2.65 2 0.65 4 1 4 5
223000 Bearing
55 ball 1218 315 993.0 1.8 595
K.C3 2 4 0.06 0 0.02 1.2 3831.9 0.31 4 8 8 5
223001 Bearing
00 ball 1318 675 13500.
K 3 0 0.2 2 0.13 2 22 0 0 0 0 10
223001 Bearing
60 ball 2308 143 649.5 2.7 389
K 5 5 0.07 4 0.06 5 7153.8 0.45 5 1 7 5
223002 Bearing
50 ball 6004- 2.1
2 RS 8 82 0 2 0 2.3 193.82 0.35 29.36 4 176 5
223003 Bearing
16 ball 6202
ZZ 10 48 0 6 0 6.8 335.94 0.88 43.14 5.3 258 5
Page88
223003
20 Bearing 3.1
ball 6203 11 46 0 10 0 10.5 484.42 0.51 23.92 1 143 5
223003 Bearing
25 ball 6203 1.04 6.2
ZZ 14 59 0 10 0 11.6 688.32 7 62.27 8 373 5
Sources; ERP data base, TRL.
Use a two year data base for monthly consumption and lead time for
determining AMC, ALT, dm and dl.
Recalculate these figures on 1st April and 1st October every year.
We have analyzed the balance sheet of TRL then it can be observe that out
of total current assets major amount is inventory. It is one of the major factors
affecting working capital cycle of TRL in order to reduce working capital days TRL
has to force on inventory control.
TRL has adopted BaaN ERP software system display item data of all the raw
materials forming part of inventory.
CHAPTER-6
CASH MANAGEMENT
INTRODUCTION
CASH PLANNING
MANAGING CASH COLLECTIONS AND DISBURSMENTS
Page88
INTRODUCTION
Cash is one of the most important current assets of the firm. Cash or fund is
the basic input needed to keep the business in a running condition; it is also the
ultimate output expected to be realized by selling the service or product
manufactured by the firm. The firm should keep sufficient cash, neither more nor
less. Cash shortage will disrupt the firm’s manufacturing operations while excessive
cash will simply remain idle, without contributing anything towards the firm’s
profitability. So to effective cash flow inside and outside the firm there should be
effective management of cash. Basically in TRL cash management is known as
funds management.
Percentage of Quick assets over current liabilities of TRL for five years is shown
below in the form of table and graph.
CURRENTASSE CURRENT
YEAR TS LIABILITIES RATIOS
2007-
2008 201,24,59,190 85,75,18,398 2.35
2006-
2007 165,90,90,469 80,97,98,543 2.04
2005-
2006 144,93,73,742 67,02,52,012 2.16
2004-
2005 139,72,99,734 76,35,78,201 1.83
2003-
2004 108,14,21,667 39,96,72,264 2.71
Page88
Sources: Annual Report, TRL
Since we know that cash is the most important liquid asset, so here TRL has
to also examine cash ratio and its equivalent to current liability.
The Ratio of cash over current liabilities of TRL for five years is shown below in the
form of table and graph.
2003-
2004 2,19,89,892 39,96,72,264 0.055
Sources:
Annual Report, TRL
Interpretation: So here TRL don’t have to be worried about the lack of cash
because it’s having a high reserve borrowing power and it also having a credit limit
sanctioned from banks and can easily draw cash in future.
1. Cash flow into and out of the firm – In TRL the cash which comes from
debtors through the sale of product(Bricks) is the cash inflow and the cash
which is paid to creditors for the purchase of raw-materials(Dolomite, Silica,
etc), spares and parts, machinery etc is the cash outflow.
2. Cash flow within the firm – Cash flow within TRL would constitute:
a) TRL is paying wages and salary to their employees and labour.
b) It has made separate department for provident fund (PF) trust.
c) For the payment of gratuity TRL has tie up with LIC gratuity.
d) For super annuation TRL is deducting 15% of basic salary which is
deposited with LIC for 55 years after which a monthly pension is given
to employee for lifetime.
In TRL the management makes 5 year business plan for future, if it requires
they also make 10 year business plan. Taking this into consideration they make
cash planning for annual business plan for one year.
Cash Budgeting
Cash budget is the most significant device to plan for and control cash
receipts and payments. Cash budget is a summary statement of the firm’s expected
cash inflows and outflows over a projected time period. It gives information on the
timing and magnitude of expected cash flows and cash balances over the projected
period.
In TRL the cash budgeting is done for every month for determining cash
requirements if cash flows show extreme fluctuations. It is highly advantageous
because it helps to determine the net cash inflow or outflow so that at the end it can
arrange its funds.
Cash forecasts are needed to prepare cash budgets. In TRL cash forecasting
is done on short term and long term basis. For short term decisions the head of
finance department takes his own decision and for long term board of directors
(BOD) of TRL takes decision.
The cash inflow includes sales realization, export packing credit, short term
loan, term loan, receipt of fixed deposit etc. The cash outflows from the firm are raw
Page88
materials, fuel, salary and wages, gratuity, bonus, stores and spares, repairs, power,
sales tax, income tax, interest capital expenditure (CAPEX) etc. The Projected cash
inflow and cash outflow statement for the financial year 2008-2009 has been
prepared by TRL and it has been shown in the below table
PARTICULARS Apr May June July Aug Sep Oct Nov Dec Jan
2008 2008 2008 2008 2008 2008 2008 2008 2008 2009
IN-FLOW
Sales Realization 51.00 51.00 56.00 58.00 58.00 60.00 60.00 60.00 60.00 60.00
Export Packing Credit 2.00 2.00 2.00 5.00 2.00 2.00 2.00 2.00 2.00 2.00
Miscellaneous Income 0.50 0.50 0.50 0.50 0.50 0.50 1.00 1.00 1.00 1.00
Short Term Loan 20.00 20.00 20.00
Term Loan 10.00 10.00 20.00
Receipt of Fixed Deposits. 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Recourse bill discounting 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
TOTAL IN-FLOW 53.52 58.52 93.52 68.52 65.52 97.52 68.02 68.02 88.02 88.02
OUT-FLOW
Raw Materials 27.00 27.00 28.50 28.50 28.50 28.50 28.50 28.50 28.50 29.75
Fuels 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.50
Salaries & Wages 2.60 2.60 4.10 3.06 3.06 3.06 3.06 3.06 3.06 3.06
Gratuity/Superannuation 0.30 0.30 0.30
Bonus &Cash reward 1.70
Stores, Spares and
Repairs 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40
Power 1.10 1.10 1.10 1.20 1.20 1.20 1.20 1.20 1.25 1.25
Other Expenses 2.50 2.50 2.50 3.13 3.13 3.13 3.45 3.45 3.45 3.45
Freight & Forwarding 2.10 2.10 2.10 2.10 2.10 2.10 2.20 2.30 2.30 2.30
Excise Duty 1.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00 4.00
Sales Tax 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Income Tax 1.86 3.66 3.66
Interest 0.95 0.95 0.95 1.05 1.05 1.05 1.05 1.05 1.05 1.10
Capital Expenditure 0.60 2.05 11.55 2.00 3.26 3.04 1.56 5.00 7.05 15.35
Repayment of F.D. 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Repayment of Packing
Credit 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00
Repayment of TL - CBI 2.50 2.50 2.50
Repayment of TL - SBI 1.00 1.00 1.00
Repayment of STL 20.00 20.00 20.00
Repayment of HSBC 5.00 5.00 2.45 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Friendly Departure
Scheme 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23 0.23
Dividend Tax 11.82
TOTAL OUT-FLOW 55.00 59.45 95.06 74.01 65.15 90.69 62.17 65.71 95.27 77.91
Surplus/(Deficit) for the
month (1.48) (0.93) (1.54) (5.49) 0.37 6.83 5.85 2.31 (7.25) 10.11
Opening Balance (19.73) (21.21) (22.14) (23.68) (29.17) (28.80) (21.97) (16.12) (13.81) (21.06
Closing Balance (21.21) (22.14) (23.68) (29.17) (28.80) (21.97) (16.12) (13.81) (21.06) (10.95
Sanctioned Cash Credit 38.00 38.00 38.00 38.00 38.00 38.00 38.00 38.00 38.00 38.00
Page88
Once the cash budget has been prepared and appropriate net cash flow
established, so TRL should ensure that there does not exist a significant deviation
between projected cash flows and actual cash flows. TRL prepares every year the
projected cash flow for the next financial year. The projected and actual cash flows
are compared and differences are calculated and the variances are highlighted. The
comparison between the projected and actual cash flow for the previous year 2007-
2008 is shown below.
( Rupees in Crores )
Apr'07 to Mar'08 DIFF.
N Projectio
PARTICULARS Actual
o. n
RECEIPT
1 6 (5
. Collection from Debtors 543.56 01.00 7.44)
2
. Miscellaneous Income 12.16 6.00 6.16
3 Recourse bill 4
. discounting 41.84 - 1.84
6 (
TOTAL 597.56 07.00 9.44)
PAYMENT
6 (3
1 Total Payments 572.80 04.57 1.77)
Borrowings, Other than (1
2 CC (Net) 6.31 20.90 4.59)
Repayment of bill 2
3 discounting 29.43 9.43
6 (1
TOTAL 608.54 25.47 6.93)
CASH CREDIT
(
Surplus/(Deficit) 10.98) (18.47) 7.49
ICICI bank charges .05 paisa per thousand per day collection.
TRL is planning to close it’s a/c with ICICI bank and open a new a/c
(CMS a/c) with AXIS bank (charges nil).
As in TRL collection procedure is very fast in same way it also makes prompt
Page88
payment to their suppliers. So TRL does not adopt the policy of stretching
account payables. It pays to their suppliers according to their convenience in
one of the following ways:
ii) At par cheque – The banker issuing this cheque is SBI, Samada and
CBI, Gomadera. No charges are deducted by the bank when encashed.
iii) MICR – The banker issuing this instrument is SBI. In this the clearing
process has been highly automated. Electronic data is used instead of
paper. So TRL have started using MICR to automate the clearing
process. They maintain an account with Reserve Bank of India (RBI)
which is debited for inward clearing and credited for outward clearing.
Note:-TRL does not invest its surplus cash in short term marketable securities. The
surplus cash is used to repay the debts.
Unsecured loan
Secured loan (hypothecation of working capital)
Page88
a. Working capital
b. Termed loan (e.g. Project finance)
Cash credit facility renewal of hypothecation takes once in a year
Demand loan
Short-term loan
LOAN
DEMAND LOAN
A loan which is repayable on demand (i.e. without prior notice), rather than on
a specific date. Certain loan limit is set-aside to the company the loan as and when
required. Generally, the rate of interest of the above said loan is higher than the
short term loan.
TRL takes demand loan from CBI, Gomadera and SBI, Samada. 80% of the
demand loan is payable in a certain period of time while remaining 20% is can be
withdrawn and deposited as per its convenience.
CASH CREDIT
Cash credit means the firm can overdraw up to a certain limit. A bank
provides this type of funding, but only after the required security is given to secure
the loan. Once a security for repayment has been given, the business that receives
the loan can continuously draw from the bank up to a certain specified amount. This
type of financing is similar to a line of credit.
Page88
TRL takes cash credit from CBI, Gomadera having a cash credit limit of 21 Crores
with an interest rate of 13 %.
PACKING CREDIT
You have an extended, flexible finance period – usually 90 days before the
shipment date
The credit covers manufacturing costs such as raw materials and employee
wages
Supports cash flow while goods are being packed and waiting for shipment
Simple pro-rata repayment from Documentary Credit proceeds or buyer
remittance
Credit terms can be structured to suit your business
You can win new business by offering more competitive terms to trading
partners
Purpose: It is given to procure the given raw material, fuel after the placement of the
order.
• Rate of interest will be lesser than the STL as well as Demand Loan.
• It can be avoided both in Rupee as well as any foreign currency.
• The loan is adjusted against export realization.
• Packing credit is available to TRL at an interest rate of 7.5% to 9%.
The loan is usually repayable with in one year. It can be availed for 90 days, 180
days, and 270 days. It can be floating rate or fixed rate. Floating rate means it is
linked to PLR or MIBOR. Fixed rate is fixed for the term loan. It may be a secured or
unsecured loan.
Page88
CHAPTER-7
Page88
INTRODUCTION
External funds available for a period of one year or less are called short term
finance. In TRL, short term funds are used to finance working capital. Two most
significant short term sources of finance for working capital are: trade credit and
bank borrowing. Trade credit as a ratio of current asset is about forty percent. Bank
borrowing is the next important source of working capital finance.
Two other sources of working capital finance which have recently used in TRL
are factoring and commercial paper.
Trade credit
Trade credit refers to the credit that of customer gets from supplier of goods
in the normal course of business. In practice, immediate cash payment is not
required to be made for the purchase. This deferral of payments is a short term
financing called trade credit. Trade credit is mostly an informal arrangement, and is
granted on an open account basis. A supplier sends goods to the buyer on credit
which the buyer accepts, and thus, in effect, agrees to pay the amount due as per
sales terms in the invoice.
Credit term
It refers to the condition under which the supplier sells on credit to the buyer,
and the buyer is required to repay the credit. This condition includes the due date
and the cash discount given for prompt payment. Due date is the date by which
supplier expects payment. Credit term indicate the length and beginning date of the
credit period.
Banks are the main institutional sources of working capital finance. After trade
credit, bank credit is the most is the most important source of financing working
capital requirements. A bank considers a firm’s sales and production plans and the
desirable levels of current assets in determining it’s working capital requirements.
The amount approved by the bank for the firm’s working capital is called credit limit.
Credit limit is the maximum fund which a firm can obtain from the banking system. In
practice banks don’t lends 100 percent of the credit limit, they deduct the margin
money from the amount applied for.
SBI, Samada and CBI, Gomadera deducts 25% margin from short term loans
extended to TRL. It uses following forms of work finance
:
Cash credit
Discounting of bills
Letter of credit
Short term loans
Page88
Security required in Bank Finance
Bank generally does not provide working capital finance without adequate
security. TRL uses following mode of security which a bank may require:
Page88
CONCLUSION AND SUGESSTIONS
Working capital being the life and blood of a company, so it is but natural that
different major departments like production, marketing, purchase, material
management, maintenance along with the finance department have to function
efficiently for maintaining a good working capital management.
Though TRL is trying to overcome its shortcomings at various levels, here are some
suggestions for TRL, which may help to improve the working capital position.
1. TRL has introduced task force to study the drawbacks of method of collecting
money. At one area where TRL is lacking and it has to take immediate action
is regularity in collection from debtors. Many times it has been observed that
the focus on collections is irregular.
2. In the 30 days credit payment M\S TRL actually receives its money by the
end of 55th or 60th day. If possible they can try to reduce the number of credit
days and encourage customers by allowing some discounts or lowering price
of the product.
3. Manufacturing cycle of a product does effect the working capital cycle days. If
individual production department can reduce the manufacturing cycle days by
implementing better technology and proper planning to reduce time.
4. The production departments can try to improve the quality and minimize the
rejections with aid of suitable techniques.
5. The finished stocks should be stored properly other wise some of the
products which get hydrated very fast will be damaged quickly and they will
be treated as non-moving current asset.
Page88
6. Special care should be taken to reduce the non-moving finished stock should
be evaluated and production departments have to plan to minimize
occurrence of such causes.
7. TRL gets coal from MCL which is very near to Belpahar working unit. TRL can
negotiate with MCL and receive coal on regular basis thus stock of coal can
be reduced more.
9. Individual person assigned for different task which directly or indirectly effects
the working capital should be made realize their responsibilities. This can be
done by giving the persons at work more authority, responsibility,
remuneration for increasing their efficiency. All different works relating
persons, as it is needed as together form a team.
10. The work-in-process at different stages kept in the plant is high considering
their cycle time. Steps may by taken to reduce such high stock, which will
help in reducing current assets.
Page88
BIBLIOGRAPHY
Page88
ANNEXURE
5. Loans :
a) Secured 124,34,93,987 113,71,48,864
b) Unsecured 1,69,15,448 2,39,43,000
APPLICATION OF FUNDS
10. Fixed Assets
a) Gross Block 330,64,06,453 325,62,44,372
b) Less : Depreciation 153,77,49,761 137,54,29,725
c) Net Block 176,86,56,692 188,08,14,647
5. Loans :
a) Secured 80,34,24,,189 37,15,94,969 40,86,54,812
b) Unsecured 8,77,10,855 12,95,91,749 12,67,79,147
APPLICATJON OF FUNDS
10. Fixed Assets
a) Gross Block 313,00,95,009 225,08,14,488 185,84,04,064
b) Less : Depreciation 125,49,49,206 116,32,54,660 110,18,68,978
c) Net Block 187,51,45,803 108,75,59,828 75,65,35,086
EXPENDITURE
EXPENDITURE
4. Manufacturing and Other Expenses 354,40,72,995 306,62,56,350 242,00,72,065
5. Depreciation 11,13,17,185 8,15,97,822 8,22,55,900
6. Interest 3,16,49,521 3,37,40,749 4,94,81,837
7. Less : Expenditure included in above
items (other than interest) capitalized (14,47,43,641) (9,61,31,330) (3,18,02,514)
8. Employee Separation Compensation 1,20,63,999 1,10,53,529 2,90,73,092
Total Expenditure 355,43,60,059 309,65,17,120 254,90,80,380
Page88
CASH FLOW STATEMENT FOR THE YEAR END 31st
March (Rs. In Lakhs)
Sl
No. PARTICULARS 2005-06 2004-05 2003-04
A. Cash Flow from Operating Activities
Net Profit Before Tax & Extraordinary Item 5167.15 4665.55 2658.49
Adjustment for Depreciation 1113.17 815.98 822.56
Profit/Loss on Sale of Assets (113.05) (107.53) (57.38)
Profit on Sale of Investment (12.89) (17.76) 0.00
Interest Income (6.46) (8.15) (4.67)
Dividend Income (25.33) (21.90) (17.01)
Miscellaneous Expenses (Amortized) 0.00 0.00 290.73
Interest Charged to P/L Account 316.50 337.41 489.83
Employee Separation Compensation 120.64 110.54 0.00
Refund of Sale Tax 0.00 (40.00) 0.00
Provision for Wealth Tax 1.06 1.25 0.36
TOTAL 1393.64 1069.84 1524.42
Operating Profit before W.C Changes 6560.79 5735.39 4182.91
Trade & Other Receivables (2695.85) (1737.25) (982.30)
Inventories 55.77 (762.77) (913.21)
Trade Payables & Other Liabilities (182.85) 1359.85 1471.23
Cash Generated from Operation 3737.86 4595.22 3758.63
Direct Tax Refund (1811.37) (1818.85) (924.10)
Sales Tax 0.00 40.00 100.25
Cash Flow Before Extraordinary Item 1926.49 2816.37 2934.78
Employee Separation Compensation (358.11) (363.27) (349.42)
Net Cash from Operating Activities (A) 1568.38 2453.10 2585.36
B. Cash Flow from Investing Activities
Purchase of Fixed Assets (9187.65) (4329.04) (2676.50)
Sales of Fixed Assets 312.07 310.34 57.79
Purchase/Sale of Investment 12.89 36.31 0.00
Interest Received 6.46 8.15 4.16
Dividend Received 25.33 21.90 17.01
Net Movement in Creditor (900.95) 1165.74 0.00
Advance of TRL Asia Pvt. Ltd. (608.40) 0.00 0.00
Net Cash from Investing Activities (B) (10340.25) (2786.60) (2597.54)
C. Cash Flow from Financing Activities
Proceeds from Share Application 5770.30 2644.70 0.00
Deferred Payment Credit (585.50) (510.80) 854.44
Borrowings 3899.48 (342.47) (305.27)
Interest Paid (270.76) (379.11) (548.87)
Dividend Paid (621.88) (370.73) (198.51)
Net Cash from Financing Activities (C) 8191.64 1041.59 (198.21)
Net Inc/Dec in Cash & Cash Equivalent(A+B+C) (580.23) 708.09 (210.39)
Page88
1. Registration details :
Registration No. 349/ 8
State Code. 15
Balance sheet date 31st march 2008.
Application of Funds:
Net fixed assets 176,86,56,692
Investments 33,89,34,595
Net current assets 138,70,72,475
4. Performance of Company:
Turnover 584,59,23,088
Total expenditure 493,11,59,802
Profit before tax 36,76,31,781
Profit after tax 21,65,52,279
Earnings per share (EPS) in Rs 10.36
Dividend rate % 35
GRAPHS
Page88