PROJECT REPORT

On

“WORKING CAPITAL MANAGEMENT&

ANALYSIS OF BALANCE SHEET”

CENTER FOR ENGINEERING & TRAINING

(AN INTEGRATED UNIT OF STEEL AUTHORITY OF INDIA LTD.)

MASTER OF BUSINESS ADMINISTRATION DEGREE

SUBMITTED BY :

MOHAMMAD ASIF ROLL. NO. 12MBA01153

REGD. NO. BM0070/12 SESSION: 2012-14

ACKNOWLEDGEMENT

I wish to express my sincere gratitude towards SAIL, RDCIS for giving us an

opportunity to be a part of their esteemed organization for one and half months and

enhance my knowledge by granting permission to do summer training project under

their guidance. Completing the task is never a one-man effort. It is always a result of

invaluable contribution of a number of individual in direct or an indirect manner.

It would be my sense of gratitude towards the , Mr. M. C. Mahato (Finance Dept.),

Steel Authority of India Limited, Research & Development Centre, Ranchi for

sparing his valuable time and also for providing his kind supervision, valuable

guidance through provoking encouragement throughout the project. He has given

valuable advice in the hours of need & provides requisite facilities for the completion

of the project work.

I also thankful to him for providing all necessary information, books, literatures and

explanations in understanding the Working Capital Management in SAIL, RDCIS.

I would also like to express our sincere thanks and gratitude to Mr. Shibaji Dey Dy.

Mgr (HRD) & Mr. D. Dash (Dgm Finance), RDCIS, SAIL, Ranchi for kindly permitting

us to undertake a short term project (of 6 weeks) as Summer Trainees at Steel

Authority of India Limited, Research & Development Centre, Ranchi. We are also

thankful to Prof. Amit Tirkey (Faculty of Finance) , for his guidance , supports ,

encouragements and reviews without whom this project would not have been

success.

MOHAMMAD ASIFROLL. NO. 12MBA01153REGD. NO. BM0070/12 MBA (Institute of Management Studies)SESSION: 2012-14

DECLARATION

I, MOHAMMAD ASIF, HEREBY DECLARE THAT THIS DISSERTATION REPORT ON “WORKING CAPITAL MANAGEMENT & ANALYSIS OF BALANCE SHEET AT “CENTER FOR ENGINEERING & TRAINING (CET)’’ FOR THE PARTIAL FULFILLMENT OF MASTER OF BUSINESS ADMINISTRATION IS MY OWN WORK & HAS NOT BEEN SUMBITTED TO ANY OTHER INSTITUTION OR PUBLISHED ANY WHERE BEFORE. THE PROJECT DURATION WAS FROM 3RD JUNE 2013 TO 17TH JUNE 2013

MOHAMMAD ASIFROLL. NO. 12MBA01153REGD. NO. BM0070/12 MBA (Institute of Management Studies)SESSION: 2012-14

DATE –

PLACE- SIGNATURE

STEEL AUTHORITY OF INDIA LIMITED

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. SAIL is also among the five Maharatnas of the country's Central Public Sector Enterprises.

SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanised sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. The company has the distinction of being India's second largest producer of iron ore and of having the country's second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making.

Sail's wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by Sail's own Central Marketing Organization (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices. Como's domestic marketing effort is supplemented by its ever widening network of rural dealers who meet the demands of the smallest customers in the remotest corners of the country. With the total number of dealers over 2000, Sail's wide marketing spread ensures availability of quality steel in virtually all the districts of the country.

Sail's International Trade Division ( ITD), in New Delhi- an ISO 9001:2000 accredited unit of CMO, undertakes exports of Mild Steel products and Pig Iron from Sail's five integrated steel plants. With technical and managerial expertise and know-how in steel making gained over four decades, Sail's Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide.SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Rancho which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organization at Rancho. Our captive mines are under the control of the Raw Materials Division in Collate.

Major Units Integrated Steel Plants

Bihalia Steel Plant (BSP) in Chhattisgarh Durgapur Steel Plant (DSP) in West Bengal Rourkela Steel Plant (RSP) in Orissa Bokaro Steel Plant (BSL) in Jharkhand IISCO Steel Plant (ISP) in West Bengal

Special Steel Plants

Alloy Steels Plants (ASP) in West Bengal Salem Steel Plant (SSP) in Tamil Nadu Visvesvaraya Iron and Steel Plant (VISL) in Karnataka

Subsidiary

Maharashtra Elektrosmelt Limited (MEL) in Maharashtra

NTPC SAIL Power Company Pvt. Limited (NSPCL): A 50:50 joint venture between Steel Authority of India Ltd (SAIL) and National Thermal Power Corporation Ltd (NTPC Ltd); manages SAIL's captive power plants at Rourkela, Durgapur and Bhilai with a combined capacity of 814 megawatts (MW).

Bokaro Power Supply Company Pvt. Limited (BPSCL): This 50:50 joint venture between SAIL and the Damodar Valley Corporation (DVC) is managing the 302-MW power generating station and 660 tonnes per hour steam generation facilities at Bokaro Steel Plant.

Mjunction Services Limited: A 50:50 joint venture between SAIL and Tata Steel; promotes e-commerce activities in steel and related areas. Its newly added services include e-assets sales, events & conferences, coal sales & logistics, publications, etc.

SAIL-Bansal Service Centre Limited: A joint venture with BMW Industries Ltd. on 40:60 basis for a service centre at Bokaro with the objective of adding value to steel.

Bhilai JP Cement Limited : A joint venture company with Jaiprakash Associates Ltd on 26:74 basis to set up a 2.2 million tonne (MT) slag-based cement plant at Bhilai.

Bokaro JP Cement Limited: Another joint venture company with Jaiprakash Associates Ltd on 26:74 basis to set up a 2.1 MT slag-based cement plant at Bokaro.

SAIL & MOIL Ferro Alloys (Pvt.) Limited : A joint venture company with Manganese Ore (India) Ltd on 50:50 basis to produce ferro-manganese and silico-manganese required in production of steel.

S & T Mining Company Pvt. Limited: A 50:50 joint venture company with Tata Steel for joint acquisition & development of mineral deposits; carrying out mining of minerals including exploration, development, mining and beneficiation of identified coking coal blocks. International Coal Ventures Private Limited: A joint venture company/SPV promoted by five central PSUs, viz. SAIL, CIL, RINL, NMDC and NTPC (with respectively 28.7%, 28.7%, 14.3%, 14.3% and 14.3% shareholding) aiming to acquire

stake in coal mines/blocks/companies overseas for securing coking and thermal coal supplies. SAIL SCI Shipping Pvt. Limited : A 50:50 joint venture with Shipping Corporation of India for provision of various shipping and related services to SAIL for importing of coking coal and other bulk materials and other shipping-related business. SAIL RITES Bengal Wagon Industry Pvt. Limited: A 50:50 joint venture with RITES to manufacture, sell, market, distribute and export railway wagons, including high-end specialised wagons, wagon prototypes, fabricated components/parts of railway vehicles, rehabilitation of industrial locomotives, etc., for the domestic market. SAIL SCL Limited: A 50:50 JV with Government of Kerala where SAIL has management control to revive the existing facilities at Steel Complex Ltd, Calicut and also to set up, develop and manage a TMT rolling mill of 65,000 MT capacity along with balancing facilities and auxilliaries.

SHAREHOLDING PATTER

SHAREHOLDING PATTER AS ON 31.03.2013

Category Equity Share holders

No of Holders

Amount in Rs./Cr

% of Equity

GOI 3304293713 1 3304.29 80.00Financial Institutions 155824968 83 155.82 3.77Banks 295421539 14 295.42 7.15Mutual Funds 38495536 47 38.50 0.93FIIs 198958465 176 198.96 4.82GDRs 454185 2 0.45 0.01Cos. (incl Soc & Tr) 30419239 3190 30.42 0.74Individuals (incl employees) 106657644 398576 106.66 2.58

Total 4130525289 402089 4130.53 100.00

Ownership and ManagementThe Government of India owns about 80% of SAIL's equity and retains voting control

of the Company. However, SAIL, by virtue of its ‘Maharatna' status, enjoys significant operational and financial autonomy

1.Shri C S Verma

ChairmanSteel Authority of India Limited,New Delhi-110003

2.Shri S Machendranathan

Additional Secretary & Financial Adviser to

the Government of India Ministry of Steel, Udyog Bhawan New Delhi-110011

3.Dr. Jagdish Khattar

4. Prof. Subrata Chaudhuri

Dept of Mining Engineering, Indian School of Mines Dhanbad-826004, Jharkhand.

5.

Shri PC Jha

6.

Shri PK Sengupta

7.

Shri Upendra Prasad Singh

Joint Secretary to the Government of IndiaMinistry of Steel, Udyog Bhavan,New Delhi – 110011

8.

Shri Anil Kumar Chaudhary

Director (Finance)Steel Authority of India Limited,New Delhi – 110003

9.

Dr. Isher Judge Ahluwalia

32, Aurangzeb Road New Delhi – 11001

10.

Shri Sujit Banerjee

C-2/97, Sector 36Noida - 201301 (Uttar Pradesh)

11.

Shri Arun Kumar Srivastava

B-3/12, Vishal Khand-3, Gomti NagarLucknow - 226010 (Uttar Pradesh)

12.

Shri SS Mohanty

Director (Technical)Steel Authority of India LimitedNew Delhi-110003

13.

Shri HS Pati

Director (Personnel)Steel Authority of India Limited.New Delhi-110003

14.

Shri TS Suresh

Director (Projects & Business Planning)Steel Authority of India Limited,New Delhi-110003

15.

Shri Kalyan Maity

Director (Raw Material & Logistics)Steel Authority of India Limited,

New Delhi-110003

CET

Centre for Engineering & Technology

Center for Engineering & Technology (CET), an ISO: 9001 certified organization, is the design, engineering & consultancy unit of SAIL. It has its Head Office at Ranchi, Sub Centers at Bhilai, Durgapur, Rourkela, Bokaro, Burnpur & Bhadravati, Unit Offices at Bangalore, New Delhi for formulation of Interplant Standards for Steel

Industry. As a solution provider for all project needs, CET had been rendering complete range of services not only to the Steel Plants under SAIL but also to various clients other than SAIL - both within and outside the country. Some of the important clients other than SAIL include EGITALEC (Egypt), Ashok Steel (Nepal), Chittagong Steel Mills (Bangladesh), Birla Copper, Mukand Ltd., Jindal Vijayanagar Steels Ltd., National Iron & Steel Co., Hindustan Zinc Ltd., National Mineral Development Corporation and Romelt- SAIL (India) Ltd., CET is also the nodal agency for acquisition and lateral transfer of technologies within SAIL plants.

The range of services includes conceptualization, project evaluation & appraisal, project consultancy, design & engineering and project management in the areas of iron and steel making. Apart from this, CET has been providing its services in the related areas like mine planning and development, infrastructure development, industrial piping, industrial warehousing, material handling system, industrial pollution control and environment management systems, water supply and sanitation, town planning, power projects, etc.

CET represents a reservoir of technical & managerial expertise inherited over four decades of Indian Steel Industry. It has kept pace with changing times and made continuous efforts for updating skills of engineers through planned HRD programmes, collaborative arrangements with academia and other professional organization of repute and acquiring up-to-date hardware's & software's for engineering work. All of these are blended with a concern for client's profitability to ensure that the clients get the most cost effective solution, tailor- made for their requirement.

Organisation Structure

CET is a unit of SAIL. The chief executive of CET - Executive Director - reports to Director (Projects) of SAIL. Respective Additional Directors head the three main functional divisions of CET viz. Engineering, Technology and Projects. The branch offices are headed by an Additional Director stationed at the location or report to an Additional Director at Head Office.

The broad functional relationship is pictorially presented below

n

Address:Centre for Research & TrainingSteel Authority of India Limited,Ispat Bhawan, Doranda, Ranchi - 834002,Jharkhand, IndiaPhone : 91 (0651) 2411111 / 2411156 Fax : 91 (0651) 2411156 / 2411118E-mail : tm@sail-rdcis.com/ bcr@sail-rdcis.com

SAIL -CET

Centre for Engineering & Technology(CET) SAIL , RANCHI

The centre for engineering & technology (CET) was set up in the year 1982 inpursuance of decision taken by SAIL Board in its 83rd meeting held on 28thJanuary 1982. An ISO: 9001 certified organization, is the design, engineering& consultancy unit of SAIL. As a solution provider for all project needs, CEThad been rendering complete range of services not only to the Steel Plantsunder SAIL but also to various clients other than SAIL - both within andoutside the country. CET is the nodal agency for acquisition and lateraltransfer of technologies within SAIL plants.

The range of services includes conceptualization, project evaluation &appraisal, project consultancy, design & engineering and projectmanagement in the areas of iron and steel making. Apart from this, CET hasbeen providing its services in the related areas like mine planning anddevelopment, infrastructure development, industrial piping, industrialwarehousing, material handling system, industrial pollution control andCET represents a reservoir of technical & managerial expertise inherited overfour decades of Indian Steel Industry. It has kept pace with changing timesand made continuous efforts for updating skills of engineers through plannedHRD programmes, collaborative arrangements with academia and otherprofessional organization of repute and acquiring up-to-date hardware's &software's for engineering work. All of these are blended with a concern forclient's profitability to ensure that the clients get the most cost effectivesolution, tailor- made for their requirement.

PURPOSE OF FORMING THE CET

CET was formed in 1982 as an in-house consultancy organization of SAIL.Previously all the consultancy work was outsourced to various organizationswhich could be either govt. organizations like MECON or privateorganizations. This led to huge expenditures for SAIL in payment of fees andother expenditures. So it was decided that an in-house consultancy shouldbe developed to save costs for SAIL. Thus CET was formed with headquartersin Ranchi and sub centers in various steel plants across India for bettercoordination. Though CET was formed for the purpose of providingconsultancy services only to the plants of SAIL but it also providesconsultancy services to the other organizations but only on specific requeststo earn additional revenues.

Consultancy for Design, Engineering and Techno-economics

Carrying out detailed technical studies of various scheme / projectsreferred by the Plants / Units or Corporate Office or SAILCON.Preparation or Approach Note / Technical Note / Master Note / StudyReports to enable Plants / Units to take decision for going ahead withparticular scheme and for charting future course of action.Preparation of feasibility reports, detailed project reports covering thetechnical, technological and techno-economic aspects to enable theplants and units to prepare investment proposals / taking investmentdecision.Assisting the plants and units to defend the proposals at the time ofscrutiny by appraising/approving authorities.Providing detailed engineering support, approval of vendor drawings /documents, providing designers supervision etc. for implementing the

sanctioned schemes and proposals.

CET-SAIL(FINANCE DEPATRMENT)o

Duties of Officers and employees in Finance Section:

¥

• Preparation of employee's remunerations & benefits and payments thereof.• Statutory recoveries from employees salary like income tax, PF, SCSBF, EPFetc and their remittances to the respective funds.• Assessment of Income Tax of employees. Provisional estimate forrecoveries & final calculations for issuing certificates.• Passing of contractors / parties bills and payments thereof includingrecoveries of income tax from their bills.• Passing of employee's bills and advances and payment thereof.• Accounting of all transactions, maintenance and scrutiny thereof.• Closing of accounts and audit thereof.• Dealing with Govt. and Internal Audits• Preparation of budgets - Revenue and Capital after considering therequirement of various departments/ Sub-centres/ Unit Offices.• Periodic monitoring and control of all types of budgets• Issue of TDS certificates to employees and contractors.

¥

FIXED AND VARIABLE COSTS FOR FINANCE DEPARTMENT

It can be seen from the role and responsibilities of finance department thatmost of the work done by the finance department involves preparation ofremuneration of employees. Even during the preparation of the budget about85% of the costs are attributed to employee remuneration which contains

2AOC

both executive pay and non executive pay. It comes under fixed costs whileother expenses like travelling expenses, stationary expenses and othermiscellaneous expenses which come under variable costs. One of theimportant responsibilities of the finance department is the preparation ofengineering hour rates for ascertaining and preparing budgets for each year.βValuation of Consultancy Services

Calculation of Engg. hrs RateΩBooking of Engg Hrs

OTHER THINGS LEARNED AT CET SAIL (FINANCE DEPARTMENT)To prepare engineering hour rate for cet sail employee.Preparation of vouchersPreparation of T.A.BILLS (Travelling allowance)Preparation of revenue budget for cet sail.Preparation of renumeration for EMPLOYEES REMUNERATION & BENEFITS BUDGET.

SAIL Consultancy Division (SAILCON)

SAIL, during its existence of over four decades, has acquired a high level of expertise and vast experience in building, operation and maintainence of integrated and mini steel plants and associated facilities encompassing diverse technologies, equipment and products-mix. The knowledge thus gained led to formation of a consultancy and services marketing division - SAIL Consultancy Division (SAILCON), based in Delhi, to provide a wide range of services to the iron & steel and other industries in India and abroad.SAILCON is a single window at SAIL catering to clients across the world,

providing design, engineering, technical, management and training consultancy and services available from various SAIL plants and units. It is an ISO: 9001:2000 certified organization equipped to render quality services from concept to commissioning.

The range of services available include:

Design and Engineering Services

Feasibility studies Bankable Project Proposals Detailed Project Reports Basic Engineering Detail Engineering Tender Specializations Preparations Bid Evaluation Instrumentation and Automation Mine Planning and Development

Project Management Services

Plant Erection and Construction Procurement and Inspection Project Planning, Monitoring and Supervision Start-up, Testing and Commissioning

Technical Services

Plant Operation and Maintenance Technology Up-gradation Quality, Productivity and Performance Improvement Environment Management and Pollution Control Energy Conservation & Audit

HR and Training Services

Training Needs Assessments and Training Module Development Setting up Training Systems and Facilities Training for Operation, Maintenance and Management of Steel and Power plants Engineering and Technical Skills Training Management Development Programmes Training of Trainers Recruitment Services Appraisal and Reward Systems Preparation of Personnel and Training Manuals

Management Services

Total Quality Management and ISO: 9001 Certification Assistance Corporate Planning Benchmarking Corporate Restructuring Marketing and Distribution Software Development and System DesignIn addition to successful completion of a number of assignments in India, SAILCON has satisfied clients in Egypt, Saudi Arabia, Iran, Qatar, Bangladesh

Detail Of department and its Employee

In SAIL-CET Ranchi there are total no. of executives are 275 in which HOD E7 and above are 29 no. and executives working in Finance, Personnel, Admin.., personnel staff etc ipss, project & ED sectt. Are 37 and net executives whose engg. are clockableare 209. There are total 365 days in a year in which Sunday & Saturday are 76 days,CLs, closed and RH are 36 and EL @ 3 % of 253 are 8 days available for the employee of SAIL -CET. By calculating this we get average no of engineering days are 245 and average no of engineering hours available per man in a year are 1960.

Maximum engineering hours clockable in a year are 409640 and engineering hours utilized for development activities which is affliated by ISO:9001, that other administrative job @ 30 % of max. engineering hours clockable is 122892, it means that engineering are not working hours, 30% means 2.4 hours engineer are spending the time in reading the books in library, taking tea etc. so total engineering hours available for assignment are 286748.

.βThe total expenditure of CET are 2011-12 is Rs 67 crores and engineering per hour rate in this year is Rs 2336.55 which is taken in round figure is 2330. Sail shows the total turnover of 45654.03 crores in previous year. More likely it is concerned with proper allocation of resources and production carry out with the year .As per as the financial prospective SAIL utilised its 80% of the total revenue (income) on the labour cost and remaining 20% on its office and administration . In labour cost it include the cost of material, wages and product manufacture .In office and administrative assets like purchase of new software and their maintenances and fruitful result .So all the allocation of fund is to b obtained by a method which is called (engineering machine rate).

.βThe pay roll expenditure of SAIL is about 80%85%Employee remuneration benefit( Towship Medical and Entertainment)Repair and Maintenance 2 to 3% Printing Design and drafting about 7% of total expenditure Tour expenses around 2%

.βSET MAINLY COMPRISES TWO COST

Fixed( employee remuneration )Variable (maintenance repair, tour and printing expenses etc.)

Project Department

The project department see weather the job done or not, job order and allocation of job.

Assignment Approval:

Every Monday and Thursday ED meting take place to take decision assignment is to be taken and start working on the project, after that scheduling and checking the project which is taken to be granted and presentation and discussion taken place.

It also include

how the assignment is done,

how along take place and

how many workers required to finis the works.

Project Approval:Can be calculated on t he basis of engineering hour rate basis

if the rate is up to the mark then it is accepted otherwise it may be rejected or send to the further consideration

Engineering hour rate:

No. Of engineer

Working days (less :leave ,CL and earned leave)

Working hour

Total available hour = 1*2*3

EHR= Total exp/effective hour

Ω

CALCULATION OF ENGINEERING HOURS RATE FOR 2012-13

SL. No. Total No of Executives 274

HOD E7 and above 29

Executives working in finance, Personnel, Admn. 37Personal staff etc ipss, projects & ED sectt,

4. Net Executive whose Engg. 209Hours are clockable (SL. NO. 1-2-3)

No. of days in a year 365

Sundays and closed Saturdays 76

CLs, Closed & RH 36

EL @ 3% of 253 (SL.NO. 5-6-7) 8

Average No Engineering days

Available (SL.NO.5-6-7-8) 245

Average No of Engineering hours available per man a year

(SL. NO. 9×8HRS) 1960

Maximum Engineering Hours clock able

In a year (SL. NO. 4×SL.NO.10) 409640

Engineering hours utilized for development activities, ISO 9001

Other administrative jobs @ 30% of

Maximum engage hours clock able 122892

Engineering hours available for assignments (SL.NO.11-SL.NO.12) 286748

Likely Expenditure of CET for 2012-13 (Rs.) 670000000.00

Engineering Hours Rate(Rs.) 2336.55

Engineering Hours Rate to be adopted (Rs) 2330

EXPENDITURE OF CETTRAVELLING ALLOWANCE:- TRAVELLING ALLOWANCE ENTITEMENT SELECTION OF THESAIL GIVES THE TOUR AND TRAVELL ALLOWANCE TO ITS EMPLOYEE THEY MAY CONSIST OF HOME TOUR (INDEGINOUS TOUR, FOREIGN TOUR, MEDICAL TOUR, OUTSIDE JOB TOUR, TRANSFER DAILY ALLOWANCE )

DAILY ALLOWANCE CALCULATION

Journey more than 6 hours half D.A generates by the SAIL through12-24 hours full D.A generates and aboutLess than 6 hours no D.A

DAILY ALLOWANCE (FOODING)DILY ALLOWANCE (BOARDING)

ALLOCATIONSAIL consist of the following allocation which consist

S1-S7 Rs 2ooE0-E3 Rs 250E4-E6 Rs330 E7-E8 Rs 400 E9 and above Rs 450

Three types of transport can be used.

SAIL MAINLY USES THE THREE MAJOR TYPE OF TRNSPORT AND TRAVEL MEDIUM TO CARRY OUT THE RAW MATERIALTRNSPORTATION AND VISITING AND CONFERENCE FUNCTION

RAILROADAIRWAYS

RAIL : MANAGER AND ABOVE A.C (1 CLASS). OTHER EMPLOYEES A.C (2 TIER).

ROAD: GENERAL MANAGER AND ABOVE OR APPROVAL WITH COMPETENT AUTHORITY

AIRWAYS: MANAGER AND ABOVE.

FINAL BILL DOCUMENT (NORMAL TOUR)SAIL ALSOAPPROVE PROVISION FOR TOUR AND THE FINAL BILL DOCUMENTATION ON THE EXPENSES PAID ON THE TOUR WHICH CARRY THE FOLLOWING

TOUR APPROVAL.ANY SERVICE CHARGE BILL ATTACHED.HOTEL / GUEST HOUSE BILL.TICKETS OF RAIL/ ROAD OR AIRWAYS SHOULD BE GIVEN.

MEDICAL TOUR

This*9th allowance is provided to employee for medical benefit.In medical tour tickets are generate for patient and one attendant to and fro.

DOCUMENT

THE FINANCIAL INSTITUTION LIKE SAIL ALSO NEED SOME OF THE DOCUMENTATION FOR THE REMETTENCE OF ITS DIFFERENT FUNDS AND BILLSWITH REGARD OFDOCUMENTATION AND FUNDS LIKE:-

TICKET AIR BOARDINGAPPOINTMENT LETTER ATTACHREFERRED DOCUMENT

TRANSFER

THERE IS A PROVISION FOR THE TRANSFER WITH A BASIS OF PERSONALLY NO BENEFIT AND IN CASE OF COMPANY TRANSFER 3 FARE ENTITLEMENT.ONE FARE FOR FAMILYAND THEPACKAGING CHARGEMAXIMUM Rs11000 E7 ND ABOVE

Rs 9000 E0-E6 (MANAGER) RS 7000 (NON-EXECUTIVE)

AND TRANSPORTATION OF CAR ACCORDING TO ( K.M) THROUGH INSURED BILLING DONE

DISTURBANCE ALLOWANCE

EDISTRUBANCE ALLOWANCE INCLUDE THEONE MONTH BASIC AND D.A.ANDPAYMENT OF ADVANCE TWO MONTH OF BASIC RECOVER IN INSTALLMENT.

RETIREMENTRetirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours. Many people choose to retire when they are eligible for private or public pension benefits, although some are forced to retire when physical conditions don't allow the person to work any more (by illness or accident) or as a result of legislation concerning their position. In most countries, the idea of retirement is of recent origin, being introduced during the 19th and 20th centuries. Previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death.

Nowadays most developed countries have systems to provide pensions on retirement in old age, which may be sponsored by employers and/or the state. In many poorer countries, support for the old is still mainly provided through the family. Today, retirement with a pension is considered a right of the worker in many societies, and hard ideological, social, cultural and political battles have been fought over whether this is a right. In many western countries this right is mentioned in national constitutions so SAIL has a provision for:-

FINAL SETTLEMENT OF T.KONE WAY FARE (DOCUMANTARY FARE MUST)TRANSPORTATION CHARGE Rs 15/km

HOME T.A IS FOR

There is a special home T.A is given under the following":

TRAININGSEMINAR

THIRD PARTY PAYMENTThe third party payment include the payment of articles under the company law and the guidance:-2% FOR COMPANY, PARTNERSHIP FIRM sec 194(C)1% OTHER THAN COMPANY & PARTNERSHIP FIRM sec 194(C) (T.D.S)10% FOR TECHNICAL AND CONSULTANCY sec 194(J) T.D.S)SERVICE TAX 12.36%LIQUIDITY DAMAGE .5% TO 5%

T.D.S PAYMENTTHE T.D.S PAYMENT IS DONE WITHIN SEVEN OF NEXT MONTH (ONLINE ) AND CHALLAN OF SEC 194(C) (J) WHICH ISQUARTERYL ETDS

SERVICE TAX

To enable Parliament to formulate by law principles for determining the modalities of levying the Service Tax by the Central Govt. and collection of the proceeds thereof by the Central Govt. and the State, the amendment vide Constitution (92nd amendment) Act, 2003 has been made. Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt., collected and appropriated by the Union Govt., and amendment of seventh schedule to the constitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes on services as well as in article 270 of the constitution the clause (1) article 268A has been included.

In this regard SAIL service tax is to be taken consideration on the following basis:-

PAYMENT HALFYEARLY SEPTEMBER AND MARCHBUT NOT ON A SUPPLY JOB.

SALARY CALCULATIONA salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. From the point of a business, salary can also be viewed as the cost of acquiring human resources for running operations, and is then termed personnel expense or salary expense. In accounting, salaries are recorded in payroll accounts

Like the method in SAIL the employee salary can be calculated under the heading of the following headings

BASICP.F C.PFI.TF.DUNION SUBSCRIPTION

GRATUITY

A tip (also called a gratuity) is a voluntary extra payment made to certain service sector workers in addition to the advertised price of the transaction. Such payments and their size are a matter of social custom. Tipping varies among cultures and by service industry. Though by definition a tip is never legally required, and its amount is at the discretion of the patron being served, in some circumstances failing to give an adequate tip when one is expected is a serious faux pas, and may be considered very miserly, a violation of etiquette, or unethical. In some other cultures or situations, giving a tip is not expected and offering one would be considered at best odd and at worst condescending or demeaning

10 LAKH CEILING (EXECUTIVE)11-12 LAKH (NON-EXECUTIVE)UPTO FIRST FIVE - NO GRATUITY

CANTEEN STATUTORY

SAIL provide canteen and statutory facilities to its employee they can get cheap food in the canteen at the reasonable rate and printing and stationary material within the premises.

EXECUTIVES- Rs.1200 (REBATE)NON-EXECUTIVES Rs 700LESS FROM PAYMENT Rs 80

♠ Note: (Within the Service)

PERFORMANCE RELATEDPAYROLL(PRP)

This considers the operation of performance related pay (PRP) within ... employee goals, the synchronization of payroll with company performance, the SAIL has the following provision for this:-

Companies Profit - 5 % to executivesBonus to non executive

LOAN & ADVANCESThe basic loan process is simply that a lender provides a short-term unsecured loan to be repaid at the borrower's next pay day. Typically, some verification of employment or income is involved (via pay stubs and bank statements), but some lenders may omit this.

Individual companies and franchises have their own underwriting criteria. In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower's next paycheck. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person.

SAIL consist the following loan and advances in this contest

Housing LaptopVehicles Advances

Housing Loan

It include the house and accommodation loan given to the employee Upto 1 lakh @ 4 %, 1.1 - 8 lakh @ 6 % and8.1 - 20 lakh @ 9.5 %

Laptop Loan SAIL provide Advances up to Rs 50,000 for laptop loan Vechicle Loan SAIL also gives Up to 3 lakh @ 6 %and 3.1 - 6 lakh @ 9.5 % to its employee for the purchase of new vehicles or motor.

EXECUTIVE SUMMARY

LPG or Liberalization, Privatization and Globalization as it is referred in short

today have changed the scenario of corporate world and management of

enterprises in our country. It has now become more important to not just

manage an organization but to achieve corporate excellence simultaneously

as the future belongs to learning and performing organizations.

As every business concern irrespective of its size, nature, and age needs funds

to carry out business operations such as purchase of raw materials, payment

of wages and other day-to-day expenses, working capital becomes an

important and integral part of business. Working capital is the life blood and

nerve centre of a business because no business can run successfully without

an adequate amount of it. Therefore, to manage working capital in any sector

is a challenging job.

The project report titled “A Comparative Study on Working Capital

Management with special reference to Steel Authority Of India Limited”

deals with this matter and is based on the in-house industrial training at

RDCIS, pertaining to the requirement for the MBA. Unless organization learn

to manage its working capital, success, will be elusive. Thus, the effectiveness

of an organization depends on the strength of its working capital management

as it is core to the whole system. In the context of India’s Steel Industry

working capital management holds a greater significance because steel which

forms the backbone of any infrastructural facility, in recent years has become

more crucial for achieving rapid economic growth of our country.

Keeping this background in view, an attempt is made to examine the working

capital practices in SAIL. The project contain the basic postulates of working

capital, procedures for the analysis of working capital, ratios being used to

define the working capital and the impact of shortcomings in the management

of it . All this had been done to get a clear view of the techniques of working

capital management in SAIL.

OBJECTIVES OF THE STUDY

BROAD OBJECTIVES:

To find out the efficiency of working capital management in RDCIS and selected other major plants of Steel Authority of India.

To have a first hand experience of the functioning of a large PSU Steel Plant.

To have a practical experience of the functioning of the Finance Department of a steel producing company.

To study how working capital management practices plays an important role in supporting other activities of an integrated steel plant.

SPECIFIC OBJECTIVES:

To gain familiarity with the various components of working capital in SAIL.

To judge the success of the management in carrying on the daily transactions of the company.

To gain an in-depth knowledge of the tricks of managing the daily financial activities of RDCIS.

To find out the difference between the theoretical and practical aspect of working capital management.

To study and come out with any solution for improvement of working capital management at SAIL.

METHODOLOGY

The data collected for making project is combination of both primary and

secondary data.

PRIMARY DATA:

This data had been collected through meetings and interviews with various

managers and employees of the finance department located in the

administrative building RDCIS. At the same time I had visited various

departments for collection of data. The departments that had been visited are

as follows:-

Main Cash Department

Billing and Operation Department

Budget Department

Pay Section

Excise Department.

Welfare & Miscellaneous Bill Section

Sales Department

Project Management Department

SECONDARY DATA:

Apart from the primary data certain secondary data were required for this

project. Following are the sources of secondary data:-

Annual Reports

Cost & Budget Reports

Creditors Reports

Debtors Reports

Inventory Reports

Cash Report

Raw Materials Report

Production Reports

Sales Reports

WORKING CAPITAL MANAGEMENT-AN OVERVIEW

INTRODUCTION:

Working capital means the funds which are required to meet the daily

transactions of the business .In other words it refers to that part of the firm’s

capital which is required for financing current assets such as cash, marketable

securities, debtors and inventories.

Thus working capital is very significant facet of financial management. Every

business concern should have adequate working capital to run its operations

smoothly. It should have neither excess working capital nor inadequate

working capital because both of these have adverse effects on firm’s

profitability and liquidity positions. Therefore, business concerns should

maintain adequate working capital.

The basic objective of working capital is to manage the firm’s current assets

and current liabilities in such a way that that a satisfactory level of working

capital is maintained.

Working capital policies have a great effect on a firm’s liquidity and

profitability. Therefore, the working capital should be managed in such a way

which will ensure higher profitability and proper liquidity to the business

concern.

The significance of working capital management is to ensure that the

organization maintains a ‘good fit’ with the changing environment and strives

to build the capability to cope with challenges.

CONCEPTS OF WORKING CAPITAL

There are two concepts of working capital:

Balance sheet concept or traditional concept.

Operating cycle concept.

BALANCE SHEET CONCEPT OR TRADITIONAL CONCEPT

It shows the position of the firm at a certain point of time. It is calculated on

the basis of balance sheet prepared at a specific date. In this method there are

two types of working capital.

Gross working capital

Net working capital

GROSS WORKING CAPITAL

It refers to a firm’s investment in current assets. The sum of the current assets

is the working capital of the business. The sum of the current is quantitative

aspect of working capital which emphasizes more on quantity than on its

quality, but it fails to reveal the true picture of the financial position of the

business because every increase in current liabilities will decrease the gross

working capital.

NET WORKING CAPITAL

It is difference between the current assets and current liabilities or the excess

of total current assets over total current liabilities. It can also be defined as

that part of a firm’s current asset which is financed with long term funds. It

may be either negative or positive. When the current assets exceed the

current liabilities, the working capital is positive and vice-versa.

OPERATING CYCYE CONCEPT

The duration or time required to complete the sequence of events right from

the purchase of raw materials for cash to the realization of sales in cash is

called operating cycle or working capital cycle. The operating cycle consists of

three phases:

In phase 1, cash gets converted into inventory. This would include purchase of

raw materials, conversion of raw materials into work-in-progress, finished

goods and terminate in the transfer of goods to stock at the end of the

manufacturing process. In the case of trading organization, this phase would

be shorter as there would be no manufacturing activity and cash will be

converted into inventory directly. The phase will, of course, be totally absent

in case of service organizations.

In phase 2 of the cycle, the inventory is converted into receivables as credit

sales are made to customers. Firms which do not sell on credit will obviously

not have phase 2 of the operating cycle.

The last phase, phase 3, represents the stage when receivables are collected.

This phase completes the operating cycle. Thus, the firm has moved from cash

to inventory, to receivables and to cash again.

FIXED/PERMANENT WORKING CAPITAL

To carry on business, a certain level of working capital is necessary on a

continuous and uninterrupted basis, for all practical purpose, the requirement

has to be met as with other fixed assets. Permanent working capital

represents the minimum level of raw materials, work-in-progress, finished

goods, stores, accounts receivables and cash which are in circulation to ensure

continuity of production.

Permanent working capital is again divided into two parts: regular working

capital and reserve working capital. The portion of fixed working capital which

is utilized to carry out the cyclical operation of current assets in the form of

conversion of liquid cash into raw materials, raw materials into finished goods,

finished goods into debtors and debtors into liquid cash in a continuous

manner is known as regular working capital. On the other hand, the portion of

fixed working capital, which is preserved for meeting uncertain and emergent

working needs (like sudden price hike, abnormal scarcity in times of war,

natural calamity, etc) is known as reserve working capital.

VARIABLE/TEMPORARY WORKING CAPITAL

Besides fixed working capital, a business may need additional working capital

to meet the growing demands of busy seasons at stated intervals. If the

demand for the products of the business goes up at any time it needs

additional funds to pay for more materials, labour and other expenses and to

meet the requirement of cash balance to be maintained in the changed

situation. This additional working capital needed to feed the operating cycle in

busy business periods is known as variable or temporary working capital. It is

called variable or temporary because the business does not need it always but

it is required according to the need of the situation.

Generally the importance of variable working capital is more acute in business

concern having seasonal market demands. Variable or temporary working

capital may be further sub- divided into (a) seasonal working capital and (b)

special working capital.

The additional working capital required by a concern to carry out its operating

activities in busy seasons of high market demands is known as seasonal

working capital. Businesses which mostly have seasonal demands of their

products like ice- cream, cold drinks, wool and likely products manufacturing

concern may need huge amount of seasonal working capital. In other business

concerns too the market may rise to the peak in some particular time period.

So in all types of business a portion of working capital may be preserved for

meeting seasonal needs. On the other hand, the portion of working capital

that is needed by a concern to meet the extraordinary requirements of special

situations is known as special working capital. This is called special working

capital because it is needed in special situations and not in normal

circumstances.

Diagrammatic representation of the concept of working capital

IMPORTANCE OF WORKING CAPITAL

The adequate reserve of working capital ensures a steady flow of raw materials to the production process.

The adequate reserve of working capital indicates the good solvency position of the concern and helps it to get loan from the market at favorable terms.

The adequate stock of working capital makes it possible for a concern to purchase the trading goods in cash and cash purchase always carries the benefit of getting cash discount.

A strong working capital base is probably the only remedy to overcome the odd situations like dull market conditions, scarcity of raw materials and other components in case of any emergency, sudden market fluctuations, etc.

A business concern can exploit the market opportunities with the help of adequate working capital.

The regular flow of adequate working capital makes possible efficient use of fixed assets, reduces wastage, ensures quick replying of current assets, and establish a well- tuned working environment.

A quick rotation of working capital cycle and an efficient management of working capital reduce cost and increases production and sales. The combined effect of all these favorably add to the profitability of the concern.

The adequate amount of working capital and its quick rotation increases profit. The rate of dividend of the shareholders also increases as a result of such increase in profit.

Sufficient working capital helps in research and development to face the present era of cut throat competition and quick technological advancement.

DETERMINANTS OF WORKING CAPITAL

The total working capital requirement is determined by a wide variety of factors. It should be, however, noted that these factors affect different enterprises differently. They also vary from time to time. In general, the following factors are involved in a proper assessment of the quantum of

working capital required:-GENERAL NATURE OF BUSINESS:

The working capital requirements of an enterprise are basically related to the conduct of the business. According to the nature of business they have to maintain a sufficient amount of cash, inventories and book debts. The industrial concerns require fairly large amounts of working capital though it varies from industry to industry depending on their assets structure.PRODUCTION CYCLE:

Another factor which has a bearing on the quantum of working capital is the production cycle. The term “production or manufacturing cycle” refers to the

time involved in the manufacture of goods. It covers the time-span between the procurement of raw materials and the completion of the manufacturing process leading to the production of finished goods. To sustain such activities the need of working capital is obvious.BUSINESS CYCLE:

The working capital requirements are also determined by the nature of the business cycle. The variations in business conditions may be in two directions:

upward phase when boom conditions prevail, and downward phase when economic activity is marked by a decline.

During the upswing of the business activity the need of working capital is more as opposed to the downward phase of the business.PRODUCTION POLICY:

The requirement of working capital also depends on the production policy of the firm. In manufacturing concerns having mostly seasonal demand for the product the production policy is a significant determinant of working capital.

CHANGES IN PRICE LEVEL:General increase in price level increases working capital need of a firm because the firm has to pay more for maintaining the previous level on

working capital.

GROWTH AND EXPANTION:

As a company grows, it is logical to expect that a larger amount of working capital will be required. The critical fact is however, is that the need for increased working capital funds does not follow the growth in business activities but precedes it.

AVAILABILITY OF RAW MATERIALS:

In case raw materials are easily available on soft terms the firm does not require maintaining a huge inventory of raw materials. Such a firm does not require blocking up huge amount of working capital for this purpose. On the contrary if raw materials are scarce and its supply is irregular and seasonal in nature the firm needs to store a reasonable quantity of raw materials in hand. The working capital need of such a firm is significantly high.

DIVIDEND POLICY:

The payment of dividend consumes cash resources and, thereby, affects working capital to that extent. Conversely, if the firm does not pay dividend but retains the profits, working capital will increase.

DEPRECIATION POLICY:

Depreciation policy also exerts an influence on the quantum of working capital. Depreciation charges do not involve any cash outflow. The effect of depreciation policy on working capital is, therefore indirect.At DSP depreciation is provided on straight line method at the rates specified in schedule- XIV to the companies act, 1956. However where the historical cost of the depreciable asset undergoes a change, the depreciation on the revised amortized depreciable amount is provided prospectively over the residual useful life of the asset based on the rates specified in schedule- XIV to the companies act, 1956. Depreciation on assets installed/ disposed off during

the year is provided with respect to the month of addition/ disposal thereof.

STRUCTURE OF WORKING CAPITAL

The structure of working capital includes a study of the components of current assets and current liabilities.

CURRENT ASSETS:

The list of current assets comprises inventories (including raw materials, work-in-progress and finished goods and spares), sundry debtors including receivables, readily realizable securities and tax reserve certificates, short-term investments, accrued incomes, prepaid expenses (not in the nature of deferred charge), cash at bank, and cash in hand.Current Assets are:

Inventories (stores & spares, raw materials, semi-finished products)Sundry debtorsCash & bank balancesInterest receivable/accruedLoans & advances etc.

CURRENT LIABILITIES:

The list of liabilities includes trade creditors, accounts payable, outstanding or accrued expenses, bank overdraft, outstanding liabilities, short-term loans and borrowings and certain obligations including different provisions, i.e., provision for taxation, proposed dividend etc.

Current Liabilities are:Sundry creditorsAdvances from customersSecurity depositOther liabilities etc.

FACTORS TO BE CONSIDERED WHILE ESTIMATING WORKING CAPITAL

REQUIREMENT

Total costs incurred on materials, wages and overheads.

The length of time for which raw materials remain in stores before they are issued to production.The length of the production cycle or work-in-progress, i.e., the time taken for conversion of raw materials into finished goods. The length of the Sales Cycle during which finished goods are to be kept waiting for sales.The average period of credit allowed to customers. The amount of cash required to pay day-to-day expenses of the business. The amount of cash required for advance payments if any. The average period of credit to be allowed by suppliers. Time-lag in the payment of wages and other overheads.

IMPORTANCE OF WORKING CAPITAL RATIOS

Ratio analysis can be used by financial executives to check upon the efficiency

with which working capital is being used in the enterprise. The following are

the important ratios to measure the efficiency of the working capital. The

following, easily calculated, ratios are important measures of working capital

utilization.

RATIOS Formulae Result Interpretation

Current Ratio Total Current Assets/Total Current Liabilities

=X times

It is the relationship between the amount of current assets and the amount of current liabilities. It measures the short-term liquidity position of the firm.

Acid-Test Ratio Total Current Assets-Inventories/Total Current Liabilities

=X times

Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital Turnover Ratio

Sales/Working Capital

=X times

A Higher Working Capital Ratio means lower investment in working capital and better profitability.

Stock Turnover Ratio (in days)

Sales/Inventory =X days On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management.

Current Assets Turnover Ratio

Sales/Current Assets

=X times

It reflects the efficiency in generating sales by Current assets.

MANAGING WORKING CAPITAL

1. Cash Management

Objectives:

The basic objective of cash management is two fold:

To meet the cash disbursement needs and

To minimise funds committed to cash balances.

These are conflicting and mutually contradictory and the task of the cash

management is to reconcile them.

Meeting Payment Schedule

In normal course of business, firms have to make payments of cash on a

continuous and regular basis to suppliers of goods, employees and so on. At

the same time, there is a constant inflow of cash through collections from

debtors. A basic objective of cash management is to meet the payment

schedule, that is, to have sufficient cash to meet the cash disbursement needs

of a firm.

The advantages of adequate cash are :

it prevents or bankruptcy,

the relationship with banks is not strained,

it helps in fostering good relations with trade creditors and suppliers of

raw materials, as prompt payment may help their own cash

management,

a cash discount can be availed of if payment is made within the due

date,

it leads to a strong credit rating ,

to take advantage of favorable business opportunities that may be

available periodically, and finally

the firm can meet unanticipated cash expenditure with a minimum of

strain during emergencies, such as strikes, fires, or a new marketing

campaign by competitors. Keeping large cash balances, however,

implies a high cost.

Minimising Funds Committed to Cash Balances

The second objective of Cash Management is to minimise cash balances. In

minimizing the cash balances, two conflicting aspects have to be reconciled. A

high level of cash balances will, as mentioned above, ensure prompt payment

together with all the advantages. But it also implies that large funds will

remain idle, as cash is a non earning asset and the firm will have to forgo

profits. A low level cash balances, on the other hand, may mean failure to

meet the payment schedule. The aim of cash management, therefore, should

be to have optimal amount of cash.

Factors Determining Cash Needs

Synchonisation of cash flows : The proper synchronization between the

outflows and inflows should be followed . This is possible by adopting cash

budget technique. The properly prepared budget will pinpoint the

months/periods when the firm will have an excess or a shortage of cash.

Short Costs : The cash budgets reveals the periods of shortage of cash, but,

in addition, there may be some unexpected shortfalls. The expenses incurred

as a result of shortfalls is called as Short Costs.

Excess Cash Balance Costs: The cost of having excessively large cash

balances is known as the excess cash balance cost. If large funds are idle, the

implication is that the firm has missed opportunities to invest those funds and

has thereby lost interest which it would otherwise have earned. This loss of

interest is primarily the excess cost.

Procurement and Management : These are the costs associated with

establishing and operating cash management staff and activities. They are

generally fixed and are mainly accounted for by salary, storage, handling of

securities and so on.

Uncertainty and Cash management : Finally, the impact on cash

management strategy is also relevant as cash flows cannot be predicted with

complete accuracy.

Cash Budget: Management Tool

Cash Budget is the most important tool in cash management. It is the

statement showing the estimated cash inflows and cash outflows over the

planning horizon.

The various purposes of cash budgets are :

to co-ordinate the timings of cash needs,

it pinpoints the period when there is likely to be excess cash,

it assists management in taking cash discounts on its account payables,

it helps to arrange needed funds on the most favorable terms and

prevents accumulation of excess funds.

Preparation of Cash Budget

The principle aim of the cash budget, as a tool is to predict cash flows over a

given period of time, and to ascertain whether at any point of time there is

likely to be excess or shortage of cash.

The first element of cash budget is the selection of the period of time to be

covered by the budget. It s referred to as the planning horizon over which the

cash flows are to be projected.

There is no fixed rule , it varies from firm to firm. The period selected should

be neither too long nor too short. If it is too long, it is likely that the estimates

will be inaccurate. If, on the other hand, the time span is too small many

important events which lie just beyond the period cannot be accounted for

and the work associated with the preparation of the budget becomes

excessive. If the flows are expected to be stable and dependable, such a firm

may prepare a cash budget covering a long period, say, a year and divide it

into quarterly intervals. In the case of firms whose flows are uncertain, a

quarterly budget, divided into monthly intervals, may be appropriate. If the

flows are subjected to extreme fluctuations, even a daily budget may be called

for. The idea behind subdividing the budget period into smaller intervals is to

highlight the movement of cash from one subperiod to another.

The second element of the cash budget is the selection of the factors that

have a bearing on cash flow. Items included in cash budget are only cash

items; non-cash items like depreciation and amortisation are excluded. The

cash budgets are broadly divided into two broad categories: (a)operating and

(b) financial. The former includes cash generated by the operations of the

firms and are known as operating cash flows, the later consists of financial

cash flows.

Operating Cash Flow

Operating Cash Flow Items

Inflows / Cash Receipts Outflows / Disbursements

1. Cash Sales 1. Accounts payable / Payable payments

2. Collection of Accounts Receivables 2. Purchase of raw materials

3. Disposals of Fixed Assets 3. Wages and Salaries

4. Factory Expenses

5. Administrative and selling expenses

6. Maintenance Expenses

7. Purchase of Fixed Assets

Among the operating factors affecting cash flows, are the collection of

accounts

( inflows ) and accounts payable ( outflows ). The terms of credit and the

speed with which the customer pay would determine the lag between the

creation of accounts receivable and their collection. Also, discounts and

allowances for early payments, returns from customers and bad debts affect

cash inflows. Similarly in case of accounts payable relating to credit purchase,

cash outflows are affected by the purchase terms.

Financial Cash Flows

Financial Cash Flow Items

Cash Inflows / Receipts Cash Outflows / Payments

1. Loans / Borrowings 1. Income-tax / Tax payment

2. Sales of Securities 2. Redemption of loan

3. Interest received 3. Repurchase of shares

4. Dividend received 4. Interest paid

5. Rent received

6. Refund of tax

5. Dividend paid

7. Issue of new shares and securities

Preparation of Cash Budget:

After the time span of the cash budget decided and the pertinent operating

and financial factors have been identified, the final step is the construction of

the cash budget. Thus the total cash inflows, cash outflows and the net receipt

or payment is worked out.

C) Cash Management : Basic Strategies:

The cash budget, as a management tool, would throw light on the net cash

position of the firm. After knowing the cash position, the management should

workout the basic strategies to be employed to manage its cash.

The broad cash management strategies are essentially related to the cash

turnover process, that is, the cash cycle together with the cash turnover. The

cash cycle refers to the process by which the cash is used to purchase

materials from which are produced goods, which are then sold to customers,

who later pay the bills. The firm receives cash from customers and the cycle

repeats itself. The cash turnover means the number of times the cash is used

during each year. The cash cycle involves several steps along the way as fund

flows from the firms accounts.

Minimum Operating Cash

The higher the cash turnover, the less is the cash a firm requires. A firm should, therefore, try to maximize the cash turnover. But it must maintain a minimum amount of operating cash balance so that it does not run out of cash. The basic strategies that can be employed to do the needful are as follows:

Stretching accounts payable : In other words, a firm should pay its accounts payable as late as possible without damaging its credit standing. It should, however take advantage of the cash discount available on prompt payment.

Efficient Inventory-Production Management: Increase inventory turnover, avoiding stock-outs, that is, shortage of stocks. This can be done in following ways:

Increasing the raw materials turnover by using more efficient inventory control techniques.

Decreasing the production cycle through better production planning, scheduling and control techniques, it will lead to an increase in WIP inventory turnover.

Increasing the finished goods turnover through better forecasting of demand and a better planning of production.

Speeding Collection of Accounts Receivable : Another strategy for efficient cash management is to collect account receivable as quickly as possible without losing future sales because of high-pressure collection techniques. The average collection period of the receivables can be reduced by changes in (a) credit terms, (b) credit standards, and (c) collection policies.

Combined Cash Management Strategies : We have seen strategies related to (i) accounts receivables, (ii) inventory, and (iii) accounts receivables but there are certain problems for management . First, if the accounts payable are postponed too long, the credit standing of the firm may be adversely affected. Secondly, a low level of inventory may lead to a stoppage of production as sufficient raw materials may not be available for uninterrupted production, or the firm may be short of enough stock to meet the demand for its product, that is, ‘stock-out’. Finally, restrictive credit standards, credit terms and collection policies may jeopardize sales. These implications should be constantly kept in view while working out cash management strategies.

2. Receivables Management

A) Objectives

The term receivables is defined as debt owed to the firm by the customers

arising from sale of goods or services in the ordinary course of business. When

a firm makes an ordinary sale of goods or services and does not receive

payment, the firm grants trade credit and creates accounts receivables which

could be collected in the future. Receivables management is also called trade

credit management. Thus accounts receivable represent an extension of credit

to customers, allowing them a reasonable period of time in which to pay for

the goods received.

The sale of goods on credit is an essential part of the modern competitive

economic systems. In fact, the credit sale and, therefore, the receivables, are

treated as a marketing tool to aid the sale of goods. As a marketing tool, they

are intended to promote sales and obligations through a financial instrument.

Management should weigh the benefits as well as cost to determine the goal

of receivables management. The objective of receivable management is to

promote sales and profits until that point is reached where the return on

investment in further funding receivables is less than the cost of funds raised

to finance that additional credit. The specific costs and benefits which are

relevant to the determination of the objectives of receivables management

are examined below.

Costs: The major categories of costs associated with the extension of credit

and accounts receivable are

Collection Cost: Collection costs are administrative costs incurred

in collecting the receivables from the customers to whom credit

sales have been made.

Capital Cost: The increased level of accounts receivable is an

investment in assets. They have to be financed thereby involving a

cost. It includes the additional funds required to meet its own

obligation while waiting for payment from its customer and also

the cost on the use of additional capital to support credit sales,

which alternatively could be profitably employed elsewhere.

Delinquency Cost: This cost arises out of the failure of the

customers to meet their obligations where payment on credit

sales become due after the expiry of the credit period. Such costs

are called delinquency costs.

Default Costs: Finally, the firm may not be able to recover the

overdues because of the inability of the customers. Such debts are

treated as bad debts and have to be written off as they cannot be

realized. Such costs are treated as default costs associated with

credit sales and accounts receivables.

Benefits: Apart from the costs, another factor that has a bearing on accounts

receivable management is the benefit emanating from credit sales. The

benefits are the increased sales and anticipated profits because of the

more liberal policy. The impact of the liberal trade credit policy is likely to

take two forms. Firstly, it is oriented to sales expansion. Secondly, the

firm may extend credit to protect its current sales against emerging

competition. Here, the motive is sales-retention.

From the above discussion, it is clear that investments in receivables

involve both benefits and costs. The extension of trade credit has a major

impact on sales, cost and profitability. Therefore account receivable

management should aim at a trade off between profit (benefits) and risk

(cost).

While it is true that general economic conditions and industry practices

have a strong impact on the level of receivables, a firms investment in

this type of current assets is also greatly affected by its internal policy. A

firm has little or no control over environmental factors, such as economic

conditions and industry practices. But it can improves its profitability

through a properly conceived trade credit policy or receivables

management.

Credit Policies:

In the preceding discussion it has been clearly shown that the firms objective

with respect to receivables management is not merely to collect receivables

quickly but attention should also be given to the benefit-cost trade-off

involved in the various areas of accounts receivable management. The first

decision area is Credit Policies.

The credit policy of the firm provides the framework to determine (a) whether

or not to extend credit to a customer and (b) how much credit to extend. The

credit policy decision of firm has two broad dimensions:

Credit Standards : The term credit standards represents the basic

criteria for the extension of credit to customers. The quantitative basis

of establishing credit standards are factors such as credit ratings, credit

references, average payment period and certain financial ratios. Since

we are interested in illustrating the trade-off between benefit and cost

to the firm as a whole, we do not consider here these individual

components of credit standards. To illustrate the effect, we have

divided the overall standards into (a) tight or restrictive, and (b) liberal

or non-restrictive. The trade-off with reference to credit standards

covers

Collection Costs: The implications of the relaxed credit standards are (i)

more credit, (b) a large credit department to service accounts

receivable and related matters, (iii) increase in collection costs.

The effect of tightening of credit standards will be exactly the

opposite. These costs are likely to be semi-variable.

Investments in Receivables or the Average Collection Period : The

investment in accounts receivable involves a capital cost as funds

have to be arranged by the firm to finance them till customer

makes payment. Moreover higher the average accounts

receivables, the higher is the capital or carrying cost. A change in

credit standards-relaxation or tightening-leads to a change in the

level of accounts receivable either (i) through a change in sales, or

(ii) through a change in collections.

A relaxation in credit standards, as already stated, implies an

increase in sales which, in turn, would lead to higher average

accounts receivable. Further relaxed standards would mean that

credit is extended liberally so that it is available to even less

credit-worthy customers who will take a longer period to pay

overdues. In contrast, a tightening of credit standards would

signify (i) a decrease in sales and lower average accounts

receivables, and (ii) an extension of credit limited to more credit-

worthy customers who can promptly pay their bills and, thus, a

lower average level of accounts receivable.

Bad Debt Expenses: Another factor which is expected to be affected by

changes in credit standards is bad debt expenses. They can be

expected to increase with relaxation in credit standards and

decrease if credit standards become more restrictive.

Sales Volume: Changing credit standards can also be expected to

change the volume of sales. As standards are relaxed, sales are

expected to increase; conversely, a tightening is expected to cause

a decline in sales.

Credit Analysis:

Besides establishing credit standards, a firm should develop procedures for

evaluating credit applicants. The second aspect of credit policies of a firm is

credit analysis and investigation. Two basic steps are involved in the credit

investigation process :

Obtaining Credit information: The first step in credit analysis is obtaining

credit information on which to base the evaluation of a customer. The

sources of information, broadly speaking, are

Internal: Usually, firms require their customers to fill various forms and

documents giving details about financial operations. They are also required to

furnish trade references with whom the firms can have contacts to judge the

suitability of the customer for credit. This type of information is obtained from

internal sources of credit information. Another internal source of credit

information is derived from the records of the firms contemplating an

extension of credit.

External: The availability of information from external sources to assess the

credit-worthiness of customers depends upon the development of

institutional facilities and industry practices. In India, the external sources of

credit information are not as developed as in the industrially advanced

countries of the world. Depending upon the availability, the following

external sources may be employed to collect information.

Financial Statements: One external source of credit information is the

published financial statements, that is, the balance sheet and the profit

and loss account. They contain very useful information such as applicants

financial viability, liquidity, profitability, and debt capacity. They are very

helpful in assessing the overall financial position of a firm, which

significantly determines its credit standing.

Bank References: Another useful source of credit information is the bank of

the firm which is contemplating the extension of credit. The modus operandi

here is that the firm’s banker collects the necessary information from the

applicants bank. Alternatively, the applicant may be required to ask his banker

to provide the necessary information either directly to the firm or to its bank.

Trade References: These refer to the collection of information from firms with

whom the applicant has dealings and who on the basis of their experience

would vouch for the applicant.

Credit Bureau Report: Finally, specialist credit bureau reports from

organizations specializing in supplying credit information can also be utilized.

Analysis of Credit Information: Once the credit information has been

collected from different sources, it should be analysed to determine the

credit-worthiness of the applicant. The analysis should cover two

aspects:

Quantitative: The assessment of the quantitative aspects is based

on the factual information available from the financial statements,

the past records of the firm, and so on. The first step involved in

this type of assessment is to prepare an Aging Schedule of the

accounts payable of the applicant as well as calculate the average

age of accounts payable. This exercise will give an insight into the

past payment pattern of the customer. Another step in analyzing

the credit information is through a ratio analysis of the liquidity,

profitability and debt capacity of the applicant. These ratios

should be compared with the industry average. Morever, trend

analysis over a period of time would reveal the financial strength

of the customer.

Qualitative: The quantitative assessment should be supplemented

by a qualitative/subjective interpretation of the applicants credit-

worthiness. The subjective judgement would cover aspects

relating to the quality of management. Here, the reference from

other suppliers, bank references and specialist bureau reports

would form the basis for the conclusion to be drawn. In the

ultimate analysis, therefore, the decision whether to extend credit

to the applicant and what amount to extend will depend upon the

subjective interpretation of his credit standing.

Credit Terms:

The second decision area in accounts receivables management is the credit

terms. After the credit standards have been established and the credit-

worthiness of the customer has been assessed, the management of a firm

must determine the terms and conditions on which the trade credit will be

made available. The stipulations under which goods are sold on credit are

referred to as credit terms. The credit terms specifies the repayment terms of

receivables.

The credit terms have three components :

credit period, in terms of duration of time for which trade credit is

extended-during this period the overdue amount must be paid by the

customer;

cash discount, if any, which the customer can take advantage of, that

is, the overdue amount will be reduced by this amount; and

cash discount period, which refers to the duration during which the

discount can be availed of.

The credit terms, like the credit standards, affect the profitability as well as

the cost of a firm. A firm should determine the credit terms on the basis of

cost-benefit trade-off.

The components of credit are here below:

Cash Discount: The cash discount has implications for the sales volume,

average collection period/average investment receivables, bad debt

expenses and profit per unit. In taking a decision regarding the grant of

cash discount the management has to se what happens to these factors

if it initiates increase, or decrease in the discount rate. The changes in

the discount rate would have both positive and negative effects. The

implications of increasing or initiating cash discount are as follows:

The sales volume will increase. The grant of discount implies reduced

prices. If the demand for the products is elastic, reduction in prices

will result in higher sales volume.

Since the customers, to take advantage of the discount, would like to

pay within the discount period, the average collection period would

be reduced. The reduction in the collection period would lead to a

reduction in the investment in receivables as also the cost. The

decrease in the average collection period would also cause a fall in

bad debt expenses. As a result, profits would increase.

The discount would have a negative effect on the profits. This is

because the decrease in prices would affect the profit margins per

unit of sale.

Collection Policies

The third area involved in accounts receivable management is collection

policies. Thy refer to the procedures followed to collect the accounts

receivable when, after the expiry o the credit period, they become due. These

policies cover two aspects:

(i) Degree of Collection Effort: To illustrate the effect of the collection effort,

the credit policies of a firm may be categorised into (i) strict / light, and (ii)

lenient. The collection policy would be tight if very rigorous procedures are

followed. A tight collection policy has implications which involve benefits as

well as costs. The management has to consider a trade-off between them.

Likewise, a lenient collection effort also affects the cost-benifit trade-off. The

effect of tightening the collection is discussed below :

Bad debt expenses would decline.

The average collection period will be reduced.

As a result profit will increase.

Increased collection costs.

Decline in sales volume.

The effect of lenient policy will just be the opposite.

Type of Collection Efforts: The second aspect of collection policies relates to

the steps that should be taken to collect overdues from the customers. A well

established collection policy should have clear-cut guidelines as to the

sequence of collection efforts. After the credit period is over and payment

remains due, the firm should initiate measures to collect them. The effort

should in the beginning be polite, but, with the passage of time, it should

gradually become strict.

The steps usually taken are :

letters, including reminders, to expedite payment;

telephone calls for personal contact;

personal visits;

help of collection agencies; and finally,

legal action. The firm should take recourse to very stringent measures,

like legal actions, only after all other avenues have been fully

exhausted. They not only involve cost but also affect the relationship

with the customers. The aim should be to collect as early as possible;

genuine difficulties of the customers should be given due

consideration.

3. Marketable Securities :

A) Meaning And Characteristics

Once the optimal level of cash balance of a firm has been determined, the

residual of its liquid assets is invested in marketable securities. Such securities

are short term investment instruments to obtain a return on temporarily idle

funds. In other words, they are securities which can be converted into cash in

a short period of time, typically a few days. To be liquid, a security must have

two basic characteristics: a ready market and safety of principal. Ready

marketability minimizes the amount of time required to convert a security

into cash. A second determinant of liquidity is that there should be little or no

loss in the value of a marketable security over time. Only those securities that

can be easily converted into cash without any reduction in the principal

amount qualify for short term investments. A firm would be better off leaving

the balances in cash if the alternative were to risk a significant reduction in

principle.

B) Selection Criterion:

A major decision confronting the financial managers involves the

determination of the mix of cash and marketable securities. In general, the

choice of the mix is based on a trade-off between the opportunity to earn a

return on idle funds during the holding period, and the brokerage costs

associated with the purchase and sale of marketable securities.

There are three motives for maintaining liquidity and therefore for holding

marketable securities: transaction motive, safety motive and speculative

motive. Each motive is based on the premise that a firm should attempt to

earn a return on temporarily idle funds. An assessment of certain criteria can

provide the financial manager with a useful framework for selecting a proper

marketable securities mix. These considerations include evaluation of :

Financial Risk: It refers to the uncertainty of expected returns from a

security attributable to possible changes in the financial capacity of the

security issuer to make future payments to the security owner. If the

chances of default on the terms of the investment is high, then the

financial risk is said to be high and vise versa.

Interest Rate Risks: The uncertainty associated with the expected

returns from a financial instrument attributable to changes in interest

rates is known as interest rate risk. If prevailing interest rates rise

compared with the date of purchase, the market price of the securities

will fall to bring their yield to maturity in line with what financial

managers could obtain by buying a new issue of a given instrument, for

instance, treasury bills. The longer the maturity of the instrument, the

larger will be the fall in prices. To hedge against the price volatility

caused by interest rate risk, the market securities portfolio will tend to

be composed of instruments that mature over short period.

Taxability: Another factor affecting observed difference in market

yields is the differential impact of taxes. A differential impact on yields

arises because interest income is taxed at the ordinary tax rate while

capital gains are taxed at a lower rate.

Liquidity: With reference to marketable securities portfolio, liquidity

refers to the ability to transform a security into cash. The financial

manager will want the cash quickly and will not want to accept a large

price reduction in order to convert the securities.

Yield: The final selection criterion is the yields that are available on the

different financial assets suitable for inclusion in the marketable

portfolio. All the four factors listed above, influence the available yields

on financial instruments. The finance manager must focus on the risk-

return trade-offs associated with the four factors on yield through his

analysis.

Marketable Security Alternatives:

Treasury Bills: There are obligations of the government. They are sold

on a discount basis. The investor does not receive an actual

interest payment. The return is the difference between the

purchase price and the face value of the bill. The treasury bills are

issued only in bearer form. They are purchased, therefore,

without the investors name on them. As the bills have the full

financial backing of the government, they are, for all practical

purposes, risk-free.

Negotiable Certificates of Deposits: These are marketable

receipts for funds that have been deposited in a bank for a fixed

period of time. The deposit funds earn a fixed rate of interest. The

CD’s are offered by banks on a basis different from treasury bills,

that is, they are not sold at discount. When the certificate mature,

the owner receives the full amount deposited plus the earned

interest.

Commercial Paper: It refers to short-term unsecured promissory note

sold by large business firms to raise cash. As they are unsecured,

the issuing side of the market is dominated by large companies

which typically maintain sound credit rating. Commercial paper

can be sold either directly or through dealers. Companies with

high credit ratings can sell directly to the investors. They can even

be purchased with varying maturities. For all practical purposes,

there is no active trading in secondary market for commercial

papers although direct sellers of CPs often repurchase it on

request.

Bankers’ Acceptances: These are draft (order to pay) drawn on a

specific bank by an exporter in order to obtain payment for goods

he has shipped to a customer who maintains an account with that

specific bank. They can also be used in financing domestic trade.

The draft guarantees payment by the accepting bank at a specific

point of time. The seller who holds such acceptance may sell it at

a discount to get immediate funds. They serve the wide range of

maturities and are sold on a discount basis, payable to the bearer.

Repurchase Agreements: These are legal contracts that involves the

actual sale of securities by a borrower to the lender with a

commitment on the part of the former to repurchase the

securities at the current price plus a stated interest charge. The

securities involved are government securities and other money

market instruments. The borrower is either a financial institution

or a security dealer.

Units: The units of Unit Trust of India (UTI) offers a reasonably

convenient alternative avenue for investing surplus liquidity as (i)

there is a very active secondary market for them, (ii) the income

for units is tax-exempt up to a specified amount and, (iii) the units

appreciate in a fairly predictable manner.

Intercorporate Deposits: Intercorporate deposits, that is, short-term

deposits with other companies is a fairly attractive form of

investment of short-term funds in terms of rate of return

which currently ranges between 12 and 15 per cent. However,

apart from the fact that one month’s time is required to

convert them into cash, intercorporate deposits suffers from

high degree of risk.

Bill Discounting: Surplus funds may be developed to purchase/

discount bills. Bills of exchange are drawn by seller on the

buyer for the value of goods delivered to him. If the seller is in

need of funds, he may get the bills discounted. Bill discounting

is superior to intercorporate deposits for investing surplus

funds.

Call market: It deals with funds borrowed/lent overnight/one-day (call)

money and notice money for periods up to 14 days. It enables

corporates to utilize their float money gainfully. However the

returns are highly volatile. The stipulations pertaining to the

maintenance of cash reserve ratio (CRR) by banks is the major

determinant of the demand of funds and is responsible for

volatility in call rates. Large borrowings by them to fulfill their

CRR requirements pushes up the rates and a sharp decline

takes place once these funds are met.

4. Inventory Management

A) Objectives

The basic responsibility of the financial manager is to make sure the firms cash

flows are managed efficiently. Efficient management of inventory should

ultimately result in the maximization of the owner’s wealth. As we know that

in order to minimise cash requirements, inventory should be turned over as

quickly as possible, avoiding stock-outs that might result in closing down the

production line or lead to a loss of sales. It implies that while the management

should try to pursue the financial objective of turning inventory as quickly as

possible, it should at the same time ensure sufficient inventories to satisfy

production and sales demands.

The objective of inventory management consists of two counterbalancing

parts:

to minimise investment in inventory, and

meet a demand for the product by efficiently organizing the

production and sales operations.

These two conflicting objectives of inventory management can also be

expressed in terms of cost and benefit associated with inventory. That the

firm should minimise investment in inventory implies that maintaining

inventory involves costs, such that the smaller the inventory, the lower is the

cost to the firm. But inventories also provide benefits to the extent that they

facilitate the smooth functioning of the firm: the larger the inventory, the

better it is from the viewpoint. Obviously, the financial managers should aim

at a level of inventory which will reconcile these conflicting elements. That is

to say, an optimum level of inventory should be determined on the basis of

the trade-off between costs and benefits associated with the levels of

inventory.

B) Costs of Holding Inventory

One operating objective of inventory management is to minimise cost.

Excluding the cost of merchandise, the cost associated with inventory fall into

two basic categories:

Ordering or Acquisition or Set-up costs : This category of cost is associated

with the acquisition or ordering of inventory. Firms have to place orders with

suppliers to replenish inventory of raw materials. The expense involved are

referred to as ordering costs. The ordering costs consist of (a) preparing the

purchase order or requisition form and (b) receiving, inspection, and recording

the goods received to ensure both quantity and quality. The cost of acquiring

materials consists of clerical costs and costs of stationery. It is therefore,

called, a set-up cost. They are generally fixed per order placed, irrespective of

the amount of the order. The acquisition costs are inversely related to the size

of inventory: they decline with the inventory. Thus, such costs can be

minimised by placing fewer orders for a large amount. But acquisition of a

large quantity would increase the cost associated with the maintenance of

inventory, that is, carrying cost.

Carrying costs : The second broad category of costs associated with inventory

are the carrying costs. They are involved in maintaining or carrying inventory.

The cost of holding inventory may be divided into two categories:

Those that arise due to the storing of inventory : The main components of

this category of carrying costs are (1). Storage costs, that is, tax, depreciation,

insurance, maintenance of the building, utilities and janitorial services; (2).

insurance of inventory against fire and theft; (3). Deterioration in inventory

because of pilferage, fire, technical obsolescence, style obsolescence and

price decline; (4). Serving costs, such as, labour for handling inventory, clerical

and accounting costs.

The opportunity cost of funds : This consists of expenses in raising funds

(interest on capital) to finance the acquisition of inventory. If funds are not

locked in inventory, they would have earned a return. This is the opportunity

cost of funds or financial cost component of the cost.

The carrying costs and the inventory size are positively related and

move in the same direction. If the level of inventory increases, the

carrying costs also increase and vice versa.

The sum of the order and carrying costs represents the total cost of

inventory. This is compared with the benefits arising out of

inventory to determine the optimum level of inventory.

C) Benefits of Holding Inventory

The second element in the optimum inventory decision deals with the

benefits associated with holding inventory. The three types of inventory, raw

materials, work-in-progress and finished goods, perform certain useful

functions. The rigid tying (coupling) of purchase and production to sales

schedules is undesirable in the short run as it will deprive the firms certain

benefits. The effect of uncoupling (maintaining inventory) are as follows

Benefits in Purchasing : If the purchasing of raw materials and other goods is

not tied to production/sales, that is, a firm can purchase independently

to ensure the most efficient purchase, several advantages would become

available. In the first place, a firm can purchase larger quantities than is

warranted by usage in production or the sales level. This will enable it to

avail of discounts that are available on bulk purchases. Moreover, it will

lower the ordering cost as fewer acquisitions would be made. There will,

thus, be a significant saving in the costs. Secondly, firms can purchase

goods before anticipated or announced price increases. This will lead to a

decline in the cost of production. Inventory, thus, serves as a hedge

against price increases as well as shortages of raw materials. This is

highly desirable inventory strategy.

Benefits in Production : Finished goods inventory serves to uncouple

production and sale. This enables production at rate different from that

of sales. That is, production can be carried on at a rate higher or lower

than the sales rate. This would be a special advantage to firms with

seasonal sales pattern. In their case, the sales rate will be higher than the

production rate during the part of the year (peak season) and lower

during the off season. The choice before the firm is either to produce at a

level to meet the actual demand, that is, higher production during peak

season and lower (or nil) production during off-season, or, produce

continuously throughout the year and build up inventory which will be

sold during the period of seasonal demand. The former involves

discontinuity in the production schedule while the later ensures level

production. The level production is more economical as it allows the firm

to reduce the cost of discontinuities in the production process. This is

possible because excess production is kept as inventory to meet future

demands. Thus, inventory helps a firm to coordinate its production

scheduling so as to avoid disruption and the accompanying expenses. In

brief, since inventory permits least cost production scheduling,

production can be carried on more efficiently.

Benefits in Work-in-Progress : The inventory in Work-in-Progress performs

two functions. In the first place, it is necessary because production

processes are not instantaneous. The amount of such inventory depends

upon technology and efficiency of production. The larger the steps

involved in the production process, the larger the WIP and vice versa. By

shortening the production time, efficiency of the production process can

be improved and the size of this type of inventory reduced. In a multi-

stage production process, the WIP serves a second purpose also. It

uncouples the various stages of production so that all of them do not

have to be performed at the same time rate. The stages involving higher

set-up costs may be most efficiently performed in batches with WIP

inventory accumulated during a production run.

Benefits in Sales : The maintenance in inventory also helps a firm to enhance

its sales efforts. For on thing, if there are no inventories of finished

goods, the level of sales will depend upon the level of current

production. A firm will not be able to meet demand instantaneously. The

inventory serves to bridge the gap between current production and

actual sales. A basic requirement in a firms competitive position is its

ability vis-à-vis its competitor to supply goods rapidly. If it is not able to

do so, the customer are likely to switch to suppliers who can supply

goods at short notice. Moreover, in the case of firm having a seasonal

pattern of sales, there should be a substantial finished goods inventory

prior to the peak sales season. Failure to do so may mean loss of sales

during the peak season.

To summarise the preceding discussion relating to objective of inventory

management, the two main aspects pertain to the minimisation of investment

in inventory, on the one hand, and the need to ensure that there is enough

inventory to meet demand such that production and sales operations are

smooth. By holding less inventory, the cost can be minimized, but there is a

risk that the operations will be disturbed as the emerging demands cannot be

met. On the other hand, by holding a large inventory, the chances of

disruption of operations are reduced, but, the cost will increase. The

appropriate level of inventory should be determined in terms of a trade-off

between the benefits and cost associated with maintaining inventory.

D) Techniques

There are many sophisticated mathematical techniques available to handle

inventory management problems. We will discuss some of the simple

production-oriented methods of inventory control to indicate a broad

framework for managing inventories efficiently in conformity with the goal of

wealth maximization. The major problem – areas that comprise the heart of

inventory control are:

(i) Classification Problem : A B C System

The A B C System is a widely used classification technique to classify

different types of inventories and to determine the type and degree of

control required for each. This technique is based on the assumption that a

firm should not exercise the same degree of control on all items of

inventory. It should rather keep a more rigorous control on items that are

(a) the most costly, and/or (b) the slowest-turning, while items that are

less expensive should be given less control effort.

On the basis of the cost involved, the various inventory items are classified

into three classes A, B and C. The items included in group A involves largest

investment. Inventory control for such items must be most rigorous and

intensive and most sophisticated inventory control techniques should be

applied to these items. The C group item consists of items of inventory

which involve relatively small investments although the number of items is

fairly large. These items deserve minimum attention. The B group stands

midway. It deserves less attention than A but more than C. It can be

controlled by less sophisticated technique.

(ii) Order Quantity Problem : Economic Order Quantity ( EOQ ) Model

After determining the type of controls for each categories of items ( A B

and C ), question arises regarding the appropriate quantity to be

purchased in each lot to replenish the stock. Buying a large quantity

implies a higher average inventory level which will assure (a) smooth

production/sales operations, and (b) lower ordering or setup costs. But it

will involve higher carrying costs. On the other hand, if the order quantity

is small then the carrying cost is reduced but it will increase the ordering

costs. On the basis of the trade-off between the both the optimum level

of order to be placed should be determined. The optimum level of

inventory is called as economic order quantity (EOQ). The economic order

quantity can be defined as that level of inventory order that minimises

the total cost associated with inventory management.

Assumptions : EOQ model is based on following assumptions:

the firm knows with certainty the annual consumption of a

particular item of inventory.

The rate at which the firm uses inventory is steady over time.

The order placed to replenish inventory stocks are received at

exactly that point in time when inventories reach zero.

There are two distinguishable costs associated with inventories:

cost of ordering and cost o carrying.

Cost of order is constant regardless of the size of the order.

The cost of carrying is fixed percentage of the average value of

inventory.

EOQ Formula :

EOQ =

where

a = annual sales

F = fixed cost per order

P = purchase price per unit

C = Carrying cost

Limitations :

2AOC

The assumption of constant consumption and the instantaneous

replenishment of inventories are of doubtful validity. It is

possible that deliveries from suppliers may be slower than

expected for reasons beyond control. It is also possible that

there may be an unusual and unexpected demand for stocks. To

meet such contingencies additional stock called as safety stock is

kept.

Another weakness of EOQ model is that the assumption of a known

annual demand for inventories is open to question. There is

likelihood of discrepancy between the actual and the expected

demand, leading to a wrong estimate of the economic ordering

quantity.

In addition, there are some computation problems involved. A more

difficult situation may occur when the number of orders to be

placed may turn out to be a fraction

SWOT ANALYSIS - RDCIS

Strengths WeaknessesExpertise across the total spectrum of technology areas in the steel making process from Raw materials to Finishing, under one roof.Multidisciplinary application experience on various plants and processes with quantification of benefits.Modelling based on Lab. Work and simulation.Application of theoretical knowledge and, experience of processes, to day to day operations. Product developmentInfrastructure – Analytical & diagnostic facilities for investigations. Modelling & Simulation facilities and pilot plants.Knowledge and expertise pool in research manpower.

Adverse age-mix.Depleting Technical Knowledge Base. Manpower attrition and knowledge/skill gaps at the Technician level in the Lab. Side.Pressures for growth to the executive cadre from a large, eligible non technical population. Usage of low grade iron ore and Iron ore beneficiation.The Centre has expertise in coal characterisation, blending studies and coke making. More expertise needs to be developed in coal preparation.Inadequate exposure to latest developments in technology.

Opportunities ThreatsThe Modernisation programme – exposure to new technologies and development of the Technology Management role.The decision role in selection of technology will demand great skills at the Assimilation phase to integrate the new technologies. Opportunity for increasing credibility in customer’s eyes through effective Assimilation and Adaptation of the new technologies.Leveraging Infrastructure and knowledge pool for external earnings.. The objective of making SAIL a globally competitive company.

Most technology is being imported and there is greater stress on the role of selection of technology and less on R&DDevelopment of technology hampered by lack of connectivity with Engineering companies to facilitate pilot scale development from scratch.Optimal utilisation of non technical non executive manpower.

CONCLUSION

Finance is the life blood of every business. Without effective financial management a company cannot in this competitive world. A Prudent financial Manager has to measure the working capital policy followed by the company.

SAIL continues to play an important role in the industrial development of country.There is very possibility that SAIL would establish for itself a permanent and unshakable position in the industrial map of India and also in the emerging international market for steel.

BIBLIOGRAPHY

Annual Report of SAIL( 2010-11& 2011-12)

Financial Report-Steel Authority of India( 2010-11& 2011-12)

Annual Statistics-Steel Authority of India( 2010-11& 2011-12)

Financial Management by M.Y.Khan and P.K.Jain

Financial Management by S.Kr.Paul

Financial Statement Analysis by S.Kr.Paul

Financial Management by I M Pandey

www.SAIL.co.in

www.google.com

Thank you.