A SUMMER TRAINING PROJECT REPORT

ON
WORKING CAPITAL MANAGEMENT

AT
HINDALCO INDUSTRIES LTD.

Submitted in partial fulfillment of the two years (F/T) PGDM programme 2008-10
BY
AMIT KUMAR SINGH
PG/14/012
Under the guidance of Submitted to
Industrial Guide Academic Guide
Mr. VIMAL RAHEJA Mr. Shyam Lal Dev Panday
DY.MANAGER (Accounts Dept.) Sr.Lecturer
HINDALCO INDUSTRIES LTD. SCHOOL OF MANAGEMNT SCIENCES

SCHOOL OF MANAGEMENT SCIENCES, VARANASI

1
 DECLARATION
I, hereby state that the Project Report titled” Working Capital
Management of Hindalco Industries Ltd.”Is an original work done
entirely by me and is based on my own observations. The facts presented
here are true to the best of my knowledge

Amit kr. Singh

Place:

Date:

2
 PREFACE

It is a great privilege for me to place this report before the readers. The
report is concerned with “Working Capital Management Of Hindalco
Industries Ltd.”This report is proposed in a very simple and
understandable language. I would also like to state that although every
possible care has been taken to make this report error free but still the
possibility of some errors creeping in inadvertently cannot be ruled out. I
shall feel highly obliged to all the readers if the same are brought to my
notice. Critical evaluation and suggestions for improvement are most
welcome and shall be greatly acknowledged. I sincerely express my
gratefulness to all those who have directly or indirectly helped us in
preparing this report. I firmly believe that this direction from all readers
which will be thankful acknowledged.

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 ACKNOWLEDGEMENT
This project is an authenticated work on Summer Training Project at
Hindalco Industries Limited, Renukoot, Uttar Pradesh. I would like to
take this opportunity to thank all the people, who extended their immense
help to complete my project. I would like to express our gratitude to Mr.
Vimal Raheja, DY.Manager, Accounts Dept., Hindalco Industries
Limited who spent his valuable time to discuss about the project and his
continuous co- operation helped to get on with the project on a full swing
without much hassles.

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 TABLE OF CONTENTS

• Introduction-----------------------------------1-12

• Company Profile -----------------------------13-22

• Objectives --------------------------------------23

• Research Methodology ----------------------24

• Working Capital Management-------------35-60

• Data Analysis and Interpretation--------- 61-72

• Conclusions-------------------------------------73-74

• Suggestions and Limitations----------------75

• Bibliography ----------------------------------76

• Annexure ----------------------------------77-78

5
Global Aluminium Market
Background:
Aluminium is a lightweight, durable and corrosion resistant metal that can be extruded,
rolled, formed and painted for use in a wide range of applications. According to the
International Aluminium Institute, approximately 66% of global consumption is used
in the construction, transportation and packaging sectors while the remaining 34% is
used in consumer, capital goods and electricity transmission.
Aluminium is produced from alumina, which is refined from bauxite, a mineral found
in various parts of the world. There are several types of bauxite with alumina content
ranging from 35% to 60%. Bauxite is refined to produce alumina predominantly
through what is known as the Bayer process, although this process varies depending
on the type and quality of bauxite. Alumina is then converted into aluminium metal
using an electrolytic process.
The global aluminium industry has experienced Global demand for primary
aluminium has grown consistently at a compounded annual growth rate of 5.1%
between 1999 and 2004. Global primary aluminium consumption was approximately
30.3 million metric tons in 2004 as compared to 27.5 million metric tons in 2003.
Driven by strong demand in end-use markets, global demand is expected to rise to
31.7 million metric tons by 2005, before increasing further to 37.8 million metric tons
in 2009.
Significant consolidation in recent years, including the recent merger of Pechiney
with Alcan. In 2004, the top five producers accounted for approximately 42% of
world primary aluminium production, with the largest producer, Alcan, accounting for
12% of global production. The other large producers are Alcoa, Russian Aluminium,
Norsk Hydro and BHP Billiton, who together accounted for 30% of global primary
aluminium production in 2004.
Increasing Asian Aluminium Consumption:
The following table sets forth the actual and estimated regional consumption of
aluminium from 2003 to 2009.

6
In the above table:
In the 2004, North America, Western Europe and China together accounted for
approximately 66% of global primary aluminium consumption. North American
demand has been led by the United States, which in 2004 accounted for 21% of global

7
demand. Asia has shown the largest annual increases in consumption of primary
aluminium over the last five years, driven largely by increased demand from China
and Japan, which have emerged as the second and third largest aluminium consuming
nations, accounting for 20% and 8%, respectively, of global primary aluminium
demand in 2004.
Increasing Deficit in Asian market:
According to the International Aluminium Institute, primary aluminium production
has grown at a compounded annual growth rate of 4.7% per annum between 1999 to
2004. Historically, industrialized nations accounted for a large share of global
production. However, changing dynamics in energy availability and the rising cost of
alumina have resulted in a shift in aluminium production to countries with access to
greater bauxite supplies and affordable sources of power.
One region which is emerging as an attractive destination for aluminium smelting is
Asia. From 1997 to 2004, the proportion of global primary aluminium production
carried out in Asia (excluding the Middle East) increased from 13% to 26%, while the
proportion of global primary aluminium production carried out in North America and
Western Europe in aggregate declined from 43% to 33%. Notwithstanding the rise in
aluminium production and capacities in the region, aluminium supplies in Asia have
lagged behind demand, resulting in a supply deficit of 4.2 million metric tons during
2004. During this period, China witnessed a marginal surplus and the rest of Asia
witnessed a deficit of 4.8 million metric tons. Given expectations of continued strong
growth in China and other Asian markets, the demand-supply gap is likely to widen
and is estimated to reach a high of 5.5 million metric tons by
2

8
According to Metal Bulletin Research, the global deficit of alumina in 2004
was 338,000 metric tons, which was approximately 0.6% of global alumina
consumption for the same period. However, the overall deficit was larger in Asia
primarily due to the demand and supply dynamics in China. While Asia
Accounted for 26% of global metallurgical grade alumina production during the same
period, according to Metal Bulletin Research. This indicates a sharp rise in aluminium
smelting capacity in Asia without a commensurate increase in alumina refining
capacities. More significantly, alumina imports accounted for approximately 45% of
total metallurgical grade alumina consumption in China in 2004, with approximately
56% of the total imports being sourced from Australia. Going forward, China will
remain the key driver of demand growth in the region with a projected demand of
approximately 18.0 million metric tons for metallurgical grade alumina in 2007,
growing at a compounded annual growth rate of 10.9%. Furthermore, China will
continue to be primary aluminium production in 2004, it accounted for only 16.5% of
global dependent on imports to meet its domestic alumina consumption.
Pricing:
Aluminium is traded on the LME. While prices are determined by LME price
movements, producers also charge a regional premium that generally reflects the cost
of obtaining the metal from an alternative sourceThe following table sets forth the
movement in the aluminium price from 1995 to 2004.

9
Alumina, however, is priced on the basis of negotiations, but usually determined with
reference to the LME price for aluminium. Negotiated agreements generally take the
form of long-term contracts, but fixed prices can be negotiated for shorter periods and
a relatively small spot market also exists.
Indian Aluminium Market
Background:
The aluminium industry in India has grown progressively, tracking the country’s
economy over the years. According to CRU estimates, domestic primary aluminium
production will increase to a high of 943,000 metric tons in calendar 2005, compared
to 860,000 metric tons in calendar 2004. CRU estimates production to reach
1,113,000 metric tons by calendar 2006.
According to the Indian Minerals Yearbook 2003, India is home to the sixth largest
bauxite deposit in the world with a reserve base of 1,400 million metric tons. Bauxite
deposits are spread across the states of Orissa, Andhra Pradesh, Jharkhand,
Chhattisgarh, Gujarat and Maharashtra. Indian bauxite is of superior
Quality and is largely located on a single plateau, thus making bulk mining possible
and resulting in significant cost advantages.
In the past, Indian producers suffered from high power costs, but with privatization of
coal mines by the government of India, new avenues have opened up for securing cost
effective power for Indian producers. Backed by abundant, good quality bauxite and
coal, as well as lower cost labour, Indian companies have emerged as low cost
producers of aluminium. The domestic aluminium industry consists of three primary
producers: Hindalco, National Aluminium Company Limited, or NALCO, and
Vedanta Resources Plc, which controls Bharat Aluminium Company Limited, or
BALCO, and Madras Aluminium Company Limited, or MALCO, all of whom are
integrated producers with a presence ranging from bauxite mining to aluminium metal
production. In fiscal 2005, Hindalco was the market leader with a 40% market share
in India, while NALCO and Vedanta Resources Plc accounted for approximately 23%
and 15%, respectively.
Domestic Demand and Consumption Pattern
Domestic demand for aluminium has grown at a compounded annual growth rate of
9.8% between fiscal 2002 and fiscal 2005 to reach a high of 897,000 metric tons in
fiscal 2005, which also includes scrap and metal imports of 201,000 metric tons. More

10
importantly, the last two years have witnessed even stronger growth with annual
growth rates of 20.6% and 9.5% for in fiscal 2004 and 2005 respectively. The power
sector is the largest user segment of aluminium, accounting for 45% of domestic
consumption in fiscal 2005. Historically, the power sector has accounted for a
significant portion of aggregate domestic demand as high voltage current is usually
transmitted through aluminium cables in India. However, as a result of the changing
growth dynamics and increasing acceptance of new applications, the proportion of
aluminium consumed by other user sectors such as transportation, construction and
packaging has increased in recent years. The transportation sector accounted for 21%
of domestic demand in fiscal 2005, benefiting from higher volumes and increased per
vehicle usage of aluminium. The construction and packaging sectors accounted for
8% and 5%, respectively, of domestic demand in fiscal 2005.
Pricing and Tariff:
Domestic aluminium prices track the global price trends as producers usually price the
metal at a marginal discount to the landed cost of imported metal. Though value-
added product prices also track metal price movement, they usually witness relatively
less volatility and command a premium reflecting the degree of value addition and
quality, as indicated by the brand. Aluminium imports are subject to a customs duty of
10% and an additional surcharge on the customs duty at a rate of 2%. This represents
a significant reduction from the 25% customs duty charged as recently as fiscal 2001,
bringing India more in line with customs duties charged by other countries in
Southeast Asia.
Market Outlook:
The domestic aluminium industry is expected to grow in the coming years, supported
by growth in the Indian economy and increased domestic demand in end-user markets.
CRU estimates that primary aluminium consumption in India will increase to
1,209,000 metric tons by 2009.In addition; the government of India is planning to
significantly increase power generation capacity in the next few years. The Ministry
of Power plans to double power capacity to 200,000 MW by 2012. As part of this plan,
cumulative capacity of the transmission links will be enhanced from 4,800 MW to
30,000 MW by 2012. Coupled with the increased demand resulting from the
privatization of electricity transmission

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And distribution and a greater emphasis on improving the existing electricity
distribution infrastructure in India, especially in rural areas, the power sector is
expected to boost domestic aluminium demand.
This growth is also likely to be supported by increased use of aluminium in
automobile and two-wheeler manufacturing as well as a potential growth in
automotive component exports as major automotive manufacturers begins to look to
India as a sourcing base for their operations. The construction sector is also expected
to witness continued growth for the foreseeable future. While the
Housing segment has benefited from improved availability of more affordable
financing; this sector is likely to get a further boost from the opening up of the real
estate sectors to foreign direct investment in India. Backed by increasing acceptance
of aluminium as an alternative to wood, demand from this sector is
Poised to grow in the coming years. Moreover, the long term potential for the
domestic markets is encouraging with the Indian per capita consumption growing
from approximately 627 grams in fiscal 2002 to 830 grams in fiscal 2005, as
compared to 4,598 grams in China and 21,286 grams in the United States in calendar
2004.
Global Copper Market
Background:
Copper is a non-magnetic metal with high conductivity, tensile strength and resistance
to corrosion. Copper consumption can be divided into three main product groups:
copper wire rods, copper products and copper alloy products. According to Brook
Hunt, over the last 10 years, the predominant intermediate use of copper has been the
production of copper wire rods, which accounted for approximately half of total
copper production in 2004. Copper wire rods are used in wire and cable products such
as energy cables, building wires and magnet wires. Copper alloy products were the
next largest users of copper in 2004, accounting for 17% of total demand, followed by
copper tubes at 11%. In addition, copper has several non-electrical applications such
as tubes for air conditioners and refrigerators, foils for printed circuit boards and other
industrial and consumer applications. In 2004, the construction sector accounted for
37% of copper consumption, followed by the electrical and electronic sectors at 26%,
industrial machinery and equipment at 15%, transportation equipment at 11% and
consumer products at 11%. In addition to direct applications, copper is also used in a

12
number of alloys, including brass (copper and zinc), bronze (copper and tin), nickel
silver, phosphor bronze and aluminium bronze. The copper industry can be divided
into three broad categories:
• Copper mining which uses mined ore to produce copper concentrates, usually
containing 25% to 40%copper;
• Copper custom smelting which smelts and refines copper from the concentrates
obtained from copper mines; and
• Integrated copper producers, who undertake mining, smelting, and refining or
leaching to produce copper. Integrated copper producers account for a large part of
the copper capacity in the world.
Copper Consumption:
Global consumption of refined copper has grown consistently at a compounded
annual growth rate of 3.8% between 1994 and 2004. The consumption of 16.8 million
metric tons in 2004 reflects an increase of 8.8% over 2003. The key growth drivers
are the continuing demand from the construction and power sectors. Global demand
for refined copper is expected to reach 17.0 million metric tons in 2005, and to
increase gradually to an estimated 19.6 million metric tons by 2009. Western Europe,
China, North America and the rest of Asia (including Japan and the Middle East)
together accounted for nearly 88% of global refined copper consumption. Europe and
North America accounted for over 50% of refined copper consumption during the
1980s, but robust growth in Asia, led by China and Japan, has resulted in a significant
change in global consumption patterns during the last decade.
With a compounded annual growth rate of 6.6% between 1994 and 2004, Asia has
been amongst the fastest growing copper market in the world. Driven by continuing
growth in China and other regional markets, Asia is likely to witness continued strong
growth over the next five years with regional consumption of refined copper
estimated to reach 10.1 million metric tons by 2009. The following table sets forth the
regional consumption pattern of refined copper from 2003 to 2009 (estimated):

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Copper Supply:
Global mine production is the principal source of copper, with scrap recycling
accounting for only 11% to 13% of aggregate supplies. The five largest copper mining
countries are Chile, USA, Peru, Australia and Indonesia, which together accounted for
64% of global copper mine production in 2004. Nearly one third of global mine
production is sold in the custom smelting market, with the rest being used for
integrated production. Integrated copper production is concentrated in countries such
as Chile, Peru, Canada and Australia, which together account for 25% of global
smelter copper production and 29% of global refined copper production. The major
custom smelting locations include China, Japan, South Korea, India, and Western
Europe, which together accounted for 42% of global smelter production in 2004 and
thus are major importers of copper concentrate.
Refined copper production has grown at a compounded annual growth rate of 3.5%
between 1995 and 2004. Global production currently stands at 15.9 million metric
tons, reflecting a growth of 4.5% in 2004. Traditionally, the Americas and Western
Europe accounted for a majority of copper production, though their share has been on
the decline in recent years. Asian markets have witnessed strong growth in capacities
during this period. In 2004, China and the rest of Asia (including Japan and the
Middle East) accounted for 13% and 19%, respectively, of global refined copper
production while the Americas and Western Europe accounted for 37% and 12%,
respectively. In spite of strong production growth, Asian markets witnessed a supply

14
deficit of 2.3 million metric tons in 2004. Of this, the supply deficit in China was 1.4
million metric tons.
The following table sets forth the actual and estimated regional demand - supply
balance from 2003 to 2009:

Pricing:
Copper is traded on the LME. Although prices are determined by LME price
movements, producers normally charge a regional premium that is market driven. The
following table sets forth the movement in copper prices from 1995 to 2004.

For custom smelters, TcRc has a significant impact on profitability as prices for
copper concentrate and prices of finished products are LME price net of TcRc or plus
a premium, respectively. A significant proportion of concentrates are sold under frame
contracts and TcRc is negotiated annually. The TcRc rates are influenced by the

15
demand-supply situation in the concentrate market, prevailing and forecasted LME
prices and mining and freight costs.
Indian Copper Market
Background:
The Indian copper industry primarily consists of custom smelters as there are limited
quality copper deposits in the country. The available deposits are owned by the
government-owned Hindustan Copper Limited, which was the only producer in India
until 1995. However, the industry has transformed significantly since then with the
entry of Birla Copper, now owned by Hindalco Industries Limited, and Sterlite
Industries, part of Vedanta Resources Plc., who together accounted for 89% of
domestic production in calendar 2004. Reflecting this transformation, over the last 8
years, industry capacity has also grown approximately 8 times from a modest 72,000
metric tons in 1997 to 566,000 metric tons in 2004.
Consumption Pattern:
Domestic refined copper consumption has grown at a compounded annual growth rate
of only 7.2% between 1999 and 2004. Overall growth has been hampered due to a
sharp decline in domestic demand from the jelly filled telecom cables, or JFTC, sector,
the largest user of copper in India. The deeper penetration of the cellular industry as
well as a decrease in optic fiber prices led to a slowdown in JFTC demand from
government-owned purchasers, which in turn impacted copper consumption adversely.
Supported by strong growth in other user segments such as winding wires, power
cables and other user applications, industry demand has rebounded strongly during the
last few years. CRU has estimated the aggregate refined copper consumption at
325,000 metric tons in 2004, a growth of 5.9% from 307,000 metric tons reported in
2003.
Pricing and Tariff:
Domestic copper prices track the global prices as the metal is priced on the basis of
the landed costs of imported metal. Copper imports are subject to a customs duty of
10% and an additional surcharge of 2% of the customs duty. The customs duty has
been reduced from 15% to 10% in 2005. Domestic producers are also able to charge a
regional premium, which is market driven.

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 Market Outlook
The Indian market outlook is expected to remain positive with strong growth in key
user segments such as power, construction and engineering. According to CRU,
domestic consumption of refined copper is expected to increase from 325,000 metric
tons in 2004 to an estimated 378,000 metric tons by 2009, reflecting a compounded
annual growth rate of 3.1% between 2004 and 2009. This growth is significantly
lower than the historical averages, largely on account of negative growth in the
telecom cable segment which continues to suffer from increasing penetration of the
cellular telecommunication and low prices of optic fibers in the international markets.
Indian producers, however, benefit from attractive opportunities in the regional
markets, which had reported an aggregate supply deficit of 2.8 million metric tons in
2004. According to CRU, the Asian deficit is likely to widen further over the next few
years, which offers promising prospects for exports.

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 Hindalco-Overview
‘Hindalco’ was set up in collaboration with Kaiser Aluminium & Chemicals
Corporation USA, in a record time of 18 month. The plant started its commercial
production in the year 1962 with a capacity of 20,000 TPA. It has since grown to
become the largest integrated aluminium producer in India.
The company has grown manifold and is managed by board of directors, with shri
Kumar Mangalam Birla as the chairman of the board of directors.
Hindalco Industries Limited, the metals flagship company of the Aditya Birla Group,
is an industry leader in aluminium and copper. A metals powerhouse with a
consolidated turnover in excess of US$ 14 billion, Hindalco is the world's largest
aluminium rolling company and one of the biggest producers of primary aluminium in
Asia. Its Copper smelter is the world's largest custom smelter at a single location.
Company's principal products comprise of Aluminium Ingots, Aluminium Billets,
Aluminium Wire Rods, Sheet Products, Extrusions, Aluminium Foils and Aluminium
Alloy Wheels. The Company's by products include Gallium Metal, Vanadium Sludge
and Aluminium Dross Established in 1958, Hindalco commissioned its aluminium
facility at Renukoot in Eastern U.P. in 1962. Later acquisitions and mergers, with
Indal, Birla Copper and the Nifty and Mt.Gordon copper mines in Australia,
strengthened the company's position in value-added alumina, aluminium and copper
products, with vertical integration through access to captive copper concentrates.
In 2007, the acquisition of Novelis Inc. a world leader in aluminium rolling and can
recycling marked a significant milestone in the history of the aluminium industry in
India. With Novelis under its fold Hindalco ranks among the global top five
aluminium majors, as an integrated producer with low cost alumina and aluminium
facilities combined with high-end rolling capabilities and a global footprint in 12
countries outside India. Its combined turnover of US$ 14 billion, places it in the
Fortune 500 league.
Hindalco, at Renukoot, houses a fully integrated plant, comprising of 3 main plants i.e.
the Alumina, Smelter & Fabrication Plants. Each plant employs varying Technology.
With integrated facilities, output from various plants is used by next, along with
varying raw materials. Company has its own captive power plant at Renusagar (30
Km away from Renukoot ) with installed capacity of 741.7 MW and 78 MW of Co
Generation Plant at Renukoot itself.

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Alumina Plant: It was commissioned with an initial capacity of 40,000 MTPA,
which has now increased, to 700000 MTPA. The plant has been expanded in phases
using new technology from time to time for energy efficiency and capacity
enhancement. It employs the basic Bayer’s process and the major raw materials for
the plant are Bauxite, Steam, Caustic Soda and Furnace oil.
Aluminium Smelter: It has 11 Pot lines with 2067 Pots installed with annual
production capacity of 3,45,000 MT. The Smelter employs the Hall Heroult
Electrolysis Process for the extraction of Aluminium from Alumina. Basic raw
materials for the smelter are Alumina, Power, Anodes and Aluminium Fluoride.
Fabrication Plant: The Fabrication Plant at Renukoot comprises of 4 Main
Sections Remelt Shop, Cast House, Rolling Mills, Extrusion & Conform which
produce Wire Rod, Sheets, Coils and Extruded Products.
Hindalco, an ISO 14001, ISO 9001:2000 and OHSAS 18001 Company. Recently
these three systems have integrated as IMS (Integrated Management System).
Today Hindalco occupies a place of pride in the global aluminium scenario with its
most efficient working in all areas of operations. The company has kept pace all along
with latest development in aluminium technology and has occupied its manufacturing
facilities. Hindalco has bagged 14 prestigious International & National Awards for
Business Excellence, Quality, Energy Conservation and its efforts for preserving the
Environment in FY 05-06.
Hindalco Today
Aluminium has turned out to be the wonder metal of the industrialized World. No
other single metal can do so many job’s so well, and so Economically also.
Aluminium growth rate is the highest amongst the major basic metals today. Hindalco
ranks as the largest aluminium producer in India and contributes about 40 % share in
total production of the country. The company’s fully integrated aluminium operations
consists of the Mining of bauxite, conversion of bauxite in to alumina, production of
primary aluminium from alumina by electrolysis and production of Properzi redraw
roads, rolled products, extructions and value added products like foil wheel at silvasa.
Hindalco integrated operations and operational efficiency has enabled the company to
be one of world’s lowest cost producers of aluminium. The company’s cost
efficiency has helped it to record an outstanding performance in the face of adverse

19
market conditions. Hindalco also owns a large captive thermal power plant at
renusager that Meets the power requirment of the company very efectively, has a
current Generation units . Hindalco currently has primary aluminium capicity of 3,
50,000 MTPA.
Some recent milestones:

In May 2007, Novelis became a Hindalco subsidiary with the completion

of the acquisition process. The transaction makes Hindalco the world's
largest aluminium rolling company and one of the biggest producers of
primary aluminium in Asia, as well as being India's leading copper
producer.

In May 2006, the company signed an MoU with the Government of

Madhya Pradesh for setting up a greenfield aluminium smelter and a
captive power plant. The company also entered into a joint venture with
Essar Power (M.P.) Ltd. to develop and operate coal mines at Mahan,
Madhya Pradesh. The joint venture will supply coal to the proposed
aluminium smelter and power complex in Madhya Pradesh

In May 2006, the company's copper mining subsidiary Aditya Birla

Minerals Limited (formerly Birla Mineral Resources Pty Ltd.) came out
with an equity offering and subsequent listing on the Australian Stock
Exchange (ASX)

In March 2006, the company acquired an aluminium rolling mill and wire
rods facility, from Asset Reconstruction Company (India) Limited
(ARCIL), belonging to Pennar Aluminium Company Limited

In January 2006, the company concluded 4:1 rights issue of its shares on
partly paid basis. It was the largest ever rights issue in the history of
corporate India and first one to issue partly paid instruments

In September 2005, the company split its shares in ratio of 10:1 in order to
enhance liquidity and to encourage participation from retail investors

In April 2005, the company signed an MoU to establish a world class

integrated aluminium project in the state of Orissa

20

In April 2005, the company entered into MOUs with the Orissa and
Jharkhand governments for setting up a greenfield alumina facility and
aluminium facility respectively, in the states

Hindalco Business
Hindalco in India enjoys a leadership position in aluminium and copper. The
company's aluminium units across the country encompass the entire gamut of
operations from bauxite mining, alumina refining, aluminium smelting to downstream
rolling, extrusions, foils and alloy wheels, along with captive
power plants and coal mines. The Birla Copper unit produces copper cathodes,
continuous cast copper rods along with other by-products, including gold, silver and
DAP fertilizers.

Hindalco is the world's largest aluminium rolling company and one of the biggest
producers of primary aluminium in Asia. In India, Hindalco enjoys a leadership
position in speciality alumina, primary aluminium and downstream products.

Hindalco's major products include standard and speciality grade aluminas and
hydrates, aluminium ingots, billets, wire rods, flat rolled products, extrusions, foil and
alloy wheels

indalco's Birla Copper unit at Dahej in Gujarat is the world's largest single location
custom copper smelter with 500,000 tpa capacity. The plant is backed by captive
power plants, oxygen plants, as also by product facilities for fertilisers and precious
metals. A captive jetty with cargo handling capacity of over four million tpa,
facilitates easy input of copper concentrate and other imported raw materials.

21
The two copper mines in Australia were acquired in 2003. Birla Nifty mine consists of
an open-pit mine, heap leach pads and a solvent extraction and electro winning
(SXEW) processing plant, which produces copper cathode. Birla Nifty's copper
cathode capacity is 25,000 tpa. A copper sulphide deposit is located at the lower
levels of the Nifty open pit mine and an underground mine and concentrator have
been developed to mine and process ore from this deposit. The Nifty sulphide
operation commenced ore production from stoping in December 2005 and concentrate
production in March 2006. With the start-up of the Nifty sulphide operation and its
progressive ramp up during FY2007, Aditya Birla Minerals (ABML) is entering a
period of rapid growth.

22
 Hindalco Vision:

“To strengthen our position as a premium aluminium company, sustaining domestic

leadership and global competitiveness through innovation, quality and value added
growth.”

Hindalco Mission:

“To pursue the creation of value for our customers, shareholders, employees and
society at large.”

Hindalco Values:

Integrity
Honesty in every action

Commitment
On the foundation of integrity, doing whatever it takes to deliver, as promised.

Passion
Missionary zeal arising out of an emotional engagement with work

Seamlessness
Thinking and working together across functional silos, hierarchy levels, businesses
and geographies.

Speed
Responding to stakeholders with a sense of urgency

Hindalco Strategy:

Efficiency focus

To be one of the lowest cost producers globally

Effectiveness focus

To continue to remain the market leader domestically

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Growth focus

To pursue value adding growth opportunities in aluminium

THE MARKET LEADER

Hindalco is a leading domestic player in two metals business segments — aluminium
and copper. The aluminium division's product range includes alumna chemicals,
primary aluminium ingots, billets, and wire rods, product extrusions, foils and alloy
Wheels.The Company has a significant market share in all the segments in which it
operates. It enjoys a domestic market share of 42 per cent in primary aluminum, 63
per cent in rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per
cent in wheels.
As a step towards expanding the market for value-added products and services,
Hindalco has launched several brands in recent years, which include Aura for alloy
wheels, Fresh Rapp for kitchen foil and Ever last for roofing sheets. Our exclusive
showroom, The Aluminium Gallery, seeks to promote Hindalco products to its
customers. It is a platform for the company to showcase quality products to a quality
audience in an appropriate ambience. The exhibits include products like windows,
doors, furniture, ladder, roofing sheets and ceiling and cladding panels.
Hindalco products are well received not only in the domestic market, but also in the
international market. The company's metal is accepted for delivery under the high-
grade aluminium contract on the London Metal Exchange (LME). The company
exports about 17 per cent of its total sales volume of Aluminum.The Company’s
alumna chemical business is a leader in manufacturing and marketing of specialty
alumna and alumna hydrate products in the country. It has a market share of 90 per
cent in the country. These specialty products find wide usage in diversified industries
including water treatment chemicals, refractory, ceramics, cryolite, glass, fillers and
plastics, conveyor belts and cables, among others. The company also exports these
alumna chemicals to over 30 countries covering North America, Western Europe and
the Asian region

24
Birla Copper, Hindalco's copper division at Dahej in
Gujarat enjoys a leadership position in India, having
built over 40 per cent of the domestic market share
within three years of its commissioning. It has also
made successful forays into the export markets of the
Middle East, Southeast Asia, China, Korea and
Taiwan.

The copper plant produces world-class copper

cathodes, continuous cast copper rods and precious
metals. Sulphuric acid, phosphoric acid, DI-
ammonium phosphate, other phosphate fertilizers and
phosphor-gypsum are also produced at this plant.

SWOT ANALYSIS OF HINDALCO INDUSTRIES LIMITED

STRENGTHS:

 Strong brand recognition

 Internet sales

 Growing international presence

 Superior research and development department

 Strong financial returns

 Strong sense of culture in the working environment

 Successful experience being competitive

 Effective Leadership

 Cost leadership

25
  Prestigious Client Base

 Customer Loyalty

 Diversified Business

 Product innovation capabilities

 Technological excel.

 Good corporate image

WEAKNESSES:

• Complexity of operation

• Lengthy processing chain

OPPORTUNITIES:
• Growth of core sector industries

• Rapid integration with global economy

• Booming construction business in Asia

• Growing e-commerce’s business.

• Increasing urbanization

THREATS:

• Entry of global players

• Take over possibilities

• Political threats

• The impact of foreign currency fluctuation and interest rates.

• Loss of sales to substitutes

26
COMPETITORS

1. Domestic:

Textiles Copper Auminum Cement Telecommunication

Reliance Vedant group Ambuja Bharti airtel

Raymond Essar Unitech Reliance

Mayur Sail Vodafone

Tata
Nalco BSNL

2. International:
• ALCOA Inc.
• ALCAN Inc.
• Russian Aluminium
• NORSK HYDRO

27
OBJECTIVES

1. To know about the current assets and current liabilities position of Hindalco
Industries Ltd.

2. To determine the ratios relating to the working capital.

3. To find out the Gross Working Capital position of Hindalco Industries Ltd.

4. To know about the net working capital position of Hindalco Industries Ltd.

28
 METHODOLOGY OF THE PROJECT
The methodology followed in this project involved the following Phases:

• Collection of Data
• Type of the project
• Analysis of Data
• Conclusion & Recommendation

Collection of Data:
Data required for the project e.g. Balance Sheet, statement of Profit & Loss Account
etc. were collected from the annual reports of Hindalco period of 2005-06, 2006-07,
2007-08. Besides for Explanation of several issues, different articles, Internet data’s,
books etc were consulted. The data collected are Secondary Data.
Type of the project:
The project is descriptive and analytical in nature.
Analysis:
For the comparative analysis ratios were used along with graphs, charts, and
necessary diagrams. The current year i.e., 2008-09 has not been taken into calculation
because, at that time of preparation of this report annual closing accounting of the
Company was going on.
Interpretation & Recommendation:
After completion of the entire analysis, interpretation & recommendation were made
on the basis of figures and diagrams. Statistical tools like Tables, Charts, Bar
graphs used for representation of data.

29
 Working Capital Management
“More business fails for lack of cash than for want of profit”. Efficient
management of working capital is one of the pre-conditions for the success of an
enterprise. Efficient management of working capital means management of various
components of working capital in such a way that an adequate amount of working
capital is maintained for smooth running of a firm and for fulfilment of twin
objectives of liquidity and profitability. While inadequate amount of working capital
impairs the firm’s liquidity. Holding of excess working capital results in the reduction
of the profitability. But the proper estimation of working capital actually required, is a
difficult task for the management because the amount of working capital varies across
firms over the periods depending upon the nature of business, production cycle, credit
policy, availability of raw material, etc.
Thus efficient management of working capital is an important indicator of sound
health of an organisation which requires reduction of unnecessary blocking of capital
in order to bring down the cost of financing.
Meaning of Working Capital:
Working capital is the amount of capital that a business has available to meet the day-
to-day cash requirements of its operations, or more specially, for financing the
conversion of raw material into finished goods, which the company sells for payment.
Funds are also needed for short-term purposes for the purpose of raw materials,
payment of wages and other day-to-day expenses, etc. These funds are known as
working capital.In simple words, working capital refers to that part of the firm’s
capital, which is required for financing short-term or current assets such as cash,
marketable securities, debtors and inventories. Working capital is a valuation metric
that is calculated as current assets minus current liabilities. Working capital is also
known as operating capital.
Current Assets
This is any cash or assets that can be quickly turned into cash. Current assets are
assets, which can be converted into cash within an accounting year.
Constituents of Current Assets:
• cash in hand and bank balance
• bills receivables
• Sundry debtors (provision for bad debts)

30
 • Short tern loans and advances
• Inventories of stocks.
• Raw material.
• Work in progress.
• Stores and spares.
• Finished goods.
• Prepaid expenses.
• Accrual incomes.etc
Current Liabilities
Current liabilities are those claims of outsiders, which are expected to mature for
payment within an accounting year.
Constituents of current Liabilities:
• Bills payable
• Sundry creditors or account payable
• Short term borrowings
• Dividend payable
• Bank overdraft
• Provisions
• Outstanding expenses
• Unaccrued income
Determinants of working capital:
Working capital requirements of a concern depends on a number of factors, each of
which should be considered carefully for determining the proper amount of working
capital. It may be however be added that these factors affect differently to the
different units and these keeps varying from time to time. In general, the determinants
of working capital which re common to all organization’s can be summarized as under:
Nature of business:
Need for working capital is highly depends on what type of business, the firm in. there
are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc.
public utilities like railways, electricity, ete., need much less inventories and cash.
Manufacturing concerns stands in between these two extends. Working capital
requirement for manufacturing concerns depends on various factors like the products,
technologies, marketing policies.

31
Production policies:
Production policies of the organization effects working capital requirements very
highly. Seasonal industries, which produces only in specific season requires more
working capital. Some industries which produces round the year but sale mainly done
in some special seasons are also need to keep more working capital.
Size of business:
Size of business is another factor to determines the need for working capital
Length of operating cycle:
Operating cycle of the firm also influence the working capital. Longer the orating
cycle, the higher will be the working capital requirement of the organization.
Credit policy:
Companies; follows liberal credit policy needs to keep more working capital with
them. Efficiency of debt collecting machinery is also relevant in this matter. Credit
availability form suppliers also effects the company’s working capital requirements. A
company doesn’t enjoy a liberal credit from its suppliers will have to keep more
working capital
Business fluctuation:
Cyclical changes in the economy also influencing the working capital. During boom
period, the tendency of management is to pile up inventories of raw materials and
finished goods to avail the advantage of rising prove. This creates demand for more
capital. Similarly during depression when the prices and demand for manufactured
goods. Constantly reduce the industrial and trading activities show a downward
termed. Hence the demand for working capital is low.
Current asset policies:
The quantum of working capital of a company is significantly determined by its
current assets policies. A company with conservative assets policy may operate with
relatively high level of working capital than its sales volume. A company pursuing an
aggressive amount assets policy operates with a relatively lower level of working
capital.
Fluctuations of supply and seasonal variations:
Some companies need to keep large amount of working capital due to their irregular
sales and intermittent supply. Similarly companies using bulky materials also
maintain large reserves’ of raw material inventories. This increase the need of
working capital. Some companies manufacture and sell goods only during certain

32
seasons. Working capital requirements of such industries will be higher during certain
season of such industries period.
Other factors:
Effective co ordination between production and distribution can reduce the need for
working capital. Transportation and communication means. If developed helps to
reduce the working capital requirement.
EXCESS OR ADEQUATE WORKING CAPITAL
Every business concern should have adequate working capital to run its business
operations. It should not have either redundant / excess working capital or
inadequate/ shortage of working capital. Both excess as well as shortage of working
capital situations are bad for any business. However, out of the two, inadequacy or
shortage of working capital is more dangerous from the point of view of the firm.
Disadvantages of Redundant or Excess Working Capital:
1.Idle funds, non-profitable for business, poor ROI.
2. Unnecessary purchasing & accumulation of inventories over required level.
3. Excessive debtors and defective credit policy, higher incidence of B/D.
4.Overall inefficiency in the organization.
5. When there is excessive working capital, Credit worthiness suffers.
6. Due to low rate of return on investments, the market value of shares may fall.
Disadvantages or Dangers of Inadequate or Short Working Capital:
1Can not pay off its short-term liabilities in time.
2. Economies of scale are not possible.
3. Difficult for the firm to exploit favorable market situations.
4. Day-to-day liquidity worsens.
5. Improper utilization the fixed assets and ROA/ROI falls sharply.
Need for working capital
The basic objective of financial management is to maximize shareholder’s wealth. For
this it is necessary to generate sufficient profits. The extent to it, which the profit can
be earned, largely depends on the magnitude of sales. However sales do not convert
into cash instantly. There is invariable the time gap between the sales of goods and
receipts of cash. There is, therefore, a need for working capital in the form of Current
Assets to deal with the problem arising. Out of the lack of immediate realization of

33
cash again goods sold. Therefore, sufficient working capital is necessary to sustain
sales activity.
Working capital is needed for the following purpose:
1. For the purchase of raw material, components and spares.
2. To incur day to day expenses and overhead costs such as fuel, power and
office expenses, etc.
3. To meet selling costs as packing, advertisement etc.
4. To provide credit facilities to the customers.
5. To maintain the inventories of raw material, work in progress, stores and spare
and finished goods.
6. To pay wages and salaries.
Meaning of working capital management
Working Capital Management is concerned with the problems that arise in attempting
to manage the Current Assets, Current Liabilities and the inter-relationship that exists
between them.
Working Capital Management means the deployment of current assets and current
liabilities efficiently so as to maximize short-term liquidity. Working capital
management entails short term decisions - generally, relating to the next one year
periods - which are "reversible"
Steps involved in working capital management
I. Forecasting the Amount of Working Capital
II. Determining the Sources of Working
Objectives of Working Capital Management
I. Deciding Optimum Level of Investment in various WC Assets
II. Decide Optimal Mix of Short Term and Long Term Capital
III. Decide Appropriate means of Short Term Financing
Forecasting /Estimation of Working Capital Management
Requirement
Factors to be considered:
• 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 WIP, i.e., the time taken for conversion
of raw material into finished goods.

34
• 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
Nature of Working Capital Management

Profitability,
Risk&
Liquidity

Working
Capital
Management

Composition Composition
& Level of &Level of
CA CL

35
 Working Capital Cycle
The working capital requirement of a firm depends, to a great extent upon the
operating cycle of the firm. The operating cycle may be defined as the time duration
starting from the procurement of goods or raw material and ending with the sales of
realization. The length and nature of the operating cycle may differ from one firm to
another depending upon the size and nature of the firm. In a trading concern, there is a
series of activities starting from procurement of goods (saleable goods) and ending
with the realization of sales revenue (at the time of sale itself in the case of cash sales
and at the time of debtors realization in case of credit sales).similarly in case of
manufacturing concern, this series starts from the procurement of raw materials and
ending with the sales realization of finished goods. In both the cases, however, there is
a time gap between the happening of the first event and the happening of the last
event. This time gap is called the operating cycle.
Thus, the operating cycle of a firm consists of the time required
for the completion of the chronological sequences of some or all of the following:

1. Procurement of raw material and services.

2. Conversion of raw material into work-in-progress.
3. Conversion of work-in-progress into finished goods.
4. sale of finished good(cash or credit)
5. Conversion of receivable into cash.

36
 Raw- WIP
Material

Cash Finished
Foods

Accounts Sales
Receivabl
e

The working capital cycle

(Operating cycle)

Operating cycle period

The length or time duration of the operating cycle of any firm can be defined as the
sum of its inventory conversion period and the receivable conversion period.
1. Inventory conversion period:
It is the time required for the conversion of raw material into finished goods sales. In a
manufacturing firm the inventory conversion period is consisting of raw material
conversion period (RMCP), work-in-progress conversion period (WPCP) and finished
goods conversion period (FGCP).
Raw material conversion period refers to the period for which the raw material is
generally kept in stores before it is issued to the production department.
The work-in-progress conversion period (WPCP) refers to the period for which the
raw material remains in the production process before it is taken out as finished units.

37
The finished goods conversion period refers to the period for which finished units
remains in stores before being sold a customer.
2. Receivable conversion period (RCP):
It is the time required to convert the credit sales into cash realization. It refers to the
period between the occurrence of credit sales and collection from debtors.
The total of Inventory conversion period (ICP) and Receivable conversion period
(RCP) is also known as total operating cycle period (TOCP).the firm might be getting
some credit facilities from supplier of raw material, wages earners etc.This period for
which the payment to these parties are deferred or delayed is known as deferred
period (DP).the net operating cycle (NOC) of the firm is arrived at by deducting the
DP from TOCP.
NOC=TOCP-DP
=ICP+RCP-DP
For calculating total operating cycle period (TOCP) and net operating cycle (NOC),
the following formula is being used:
RMCP = Average Raw material stock
×365
Total Raw material consumption
WPCP=Average Work-in-progress
×365
Total cost of production
FGCP= Average Finished Goods
×365
Total Cost of goods sold
RCP=Average Receivable
×365
Total Credit sales

DP=Average Creditors
×365
Total Credit purchase

38
*The average value in the numerator is the average of opening balance and closing
balance of the respective item. However, if only the closing balance is available, then
even the closing balance may be taken as the ‘average’.
*The figure ‘365’represents number of days in a year. However, there is no hard and
fast rule and sometimes even 360 days are considered.
*The ‘Total’ figure in the denominator refers to the value of the item in a particular
year.
Time and Money concept in Working Capital Cycle
Each component of working capital (namely inventory, receivables and payables) has
two dimensions .TIME and MONEY, when it comes to managing working capital.
Time is Money:
If we can get money to move faster around the cycle (e.g. collect money due from
debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory
levels relative to sales), the business will generate more cash or it will need to borrow
less money to fund working capital. As a consequence, we can reduce the cost of bank
interest or will have additional free money available to support additional sales
growth or investment. Similarly, if we can negotiate improved terms with suppliers
e.g. get longer credit or an increased credit limit; we effectively create free finance to
help future sales.

If we Then
Collect receivables (debtors) faster We release cash from cycle
Collect receivables(debtors) faster Our receivables soak up cash
Get better credit(in terms of duration or We increase our cash resources
amount from suppliers)
Shift inventory(stocks)faster We free up cash
Move inventory(stocks) slower We consume more cash

39
 TYPES OF WORKING CAPITAL

WORKING CAPITAL

BASIS OF BASIS OF TIME

CONCEPT

Permanent / Temporary /
Gross Net
Fixed WC Variable WC
Working Working
Capital Capital

On the basis of concept

1. Gross working capital: the gross working capital refers to the firm’s
investment in all the assets taken together. The total of investment in all the individual
current assets is the gross working capital.
For example: if a firm has a cash balance of Rs. 50,000 ,debtors of Rs.70,000 and
inventory of raw material and finished goods has been assessed at Rs.1,00,000,then
the gross working capital of the firm is Rs.2,20,000(i.e.,Rs
50,000+Rs.70,000+Rs.1,00,000).
2. Net working capital: the term net working capital may be defined as the
excess of total current assets over total current liabilities. Current liabilities refer to
those liabilities which are payable within a period of 1 year.
The net working capital may either be positive or negative. If the total current assets
are more than total current liabilities, then the difference is known as positive net
working capital, otherwise the difference is known as negative net working capital.
The net working capital measures the firm’s liquidity. The greater the margin, the
better will be the liquidity of the firm.

Net working capital= total current assets – total current liabilities

40
A financial manager must consider both (gross and net working capital) because they
provide different interpretation. The gross working capital denotes the total working
capital or the total investment in current assets. This will help avoiding 1.the
unnecessarily stoppage of work or chance of liquidation due to insufficient working
capital, and 2.effects on profitability (over flowing working capital implies cost).The
gross working capital also gives an idea of total funds required for maintaining
current assets.
On the other hand, net working capital refers to the amount of funds that must be
invested by firm, more or less, regularly in current assets. The net working capital also
denotes the net liquidity being maintained by the firm.
On the basis of time
1. Permanent /fixed working capital: Permanent working capital may be
defined as the minimum level of current assets, which is required by a firm to carry on
its business operations. Every firm has to maintain a minimum level of raw materials,
work-in-progress, finished goods and cash balances.
For example-extra inventory of finished goods will have to be maintained to support
the peak periods of sale. Permanent working capital is permanently needed for the
business and therefore, it should be financed out of long term funds.
2. Fluctuating /variable working capital: It is the extra working capital
needed to support the changing production and sales activities of the firm. The
amount of temporary working capital keeps on fluctuating on time to time on the basis
of business activity.
Both kind of working capital – permanent and fluctuating (temporary) are necessary
to facilitate production and sales through the operating cycle. The amount over and
above permanent working capital is temporarily variable or fluctuating.

41
Permanent and temporary working capital of a stable
firm

Amt.

Of

W C Temporary

Permanent W C

Time

In the above figure, it is shown that permanent working capital is stable over time,
while temporary working capital is fluctuating –some times increasing and sometimes
decreasing.

42
Permanent and temporary working capital of a Raising
Firm: In the case of an expanding firm the permanent W C line may not be
horizontal. This is because the demand for permanent Current Assets might be
increasing or decreasing to support a rising level of activities. In that case line should
be raising one as follows:

Amt.

Of Temporary W C

WC

Permanent W C
Sources of working capital
The company can choose to finance its current assets by
1. Long term sources
2. Short term sources
3. A combination of them.
Long term sources of permanent working capital include equity and preference
shares, retained earning, debentures and other long term debts from public deposits
and financial institution. The long term working capital needs should meet through
long term means of financing. Financing through long term means provides stability,
reduces risk or payment. And increases liquidity of the business concern. Various
types of long term sources of working capital are summarized as follow:

43
1. Issue of shares:
It is the primary and most important sources of regular or permanent working capital.
Issuing equity shares as it does not create and burden on the income of the concern.
Nor the concern is obliged to refund capital should preferably raise permanent
working capital.
2. Retained earnings:
Retain earning accumulated profits are a permanent sources of regular working capital.
It is regular and cheapest. It creates not charge on future profits of the enterprises.
3. Issue of debentures:
It crates a fixed charge on future earnings of the company. Company is obliged to pay
interest. Management should make wise choice in procuring funds by issue of
debentures.
4. Long term debt:
Company can raise fund from accepting public deposits, debts from financial
institutution like banks, corporations etc. the cost is higher than the other financial
tools.
5. Other sources: sale of idle fixed assets, securities received from employees and
customers are examples of other sources of finance.
Short term sources of temporary working capital
Temporary working capital is required to meet the day to day business expenditures.
The variable working capital would finance from short term sources of funds. And
only the period needed. It has the benefits of, low cost and establishes closer
relationships with banker.
Some sources of temporary working capital are given below:
1. Commercial bank:
A commercial bank constitutes significant sources for short term or temporary
working capital. This will be in the form of short term loans, cash credit, and
overdraft and though discounting the bills of exchanges.
2. Public deposits:
Most of the companies in recent years depend on this source to meet their short term
working capital requirements ranging fro six month to three years.

44
3. Various credits:
Trade credit, business credit papers and customer credit are other sources of short
term working capital. Credit from suppliers, advances from customers, bills of
exchanges, etc helps to raise temporary working capital
4. Reserves and other funds:
Various funds of the company like depreciation fund. Provision for tax and other
provisions kept with the company can be used as temporary working capital.The
company should meet its working capital needs through both long term and short term
funds. It will be appropriate to meet at least 2/3 of the permanent working capital
equipments form long term sources, whereas the variables working capital should be
financed from short term sources. The working capital financing mix should be
designed in such a way that the overall cost of working capital is the lowest, and the
funds are available on time and for the period they are really required.
SOURCES OF ADDITIONAL WORKING CAPITAL
Sources of additional working capital include the following-
1. Existing cash reserves
2. Profits (when you secure it as cash)
3. Payables (credit from suppliers)
4. New equity or loans from shareholder
5. Bank overdrafts line of credit
6. Long term loans
If we have insufficient working capital and try to increase sales, we can easily over
stretch the financial resources of the business. This is called overtrading. Early
warning signs include
1. Pressure on existing cash
2. Exceptional cash generating activities. offering high discounts for clear cash
payment
3. Bank overdraft exceeds authorized limit
4. Seeking greater overdrafts or lines of credit
5. Part paying suppliers or there creditor.
6. Management pre occupation with surviving rather than managing.

45
 Trade - Off between Profitability and Risk
In evaluating the firm’s working capital position an important consideration is
the trade-off between profitability and risk. In other words, the level of NWC
has a bearing on profitability and risk. The term profitability used in this
context is measured by profit after expenses. The term risk is defined as the
profitability that a firm will become technically insolvent so that it will not be
able to meet its obligation when they become due for payment.It is assured that
greater amount of NWC, the less risk prone the firm is, or greater the NWC, the
more liquid is the firm, and therefore the less likely it is to become technically
insolvent. Conversely lower level of NWC and liquidity are associated with
increasing level of risk.A firm must have adequate WC. It should neither be
excessive nor inadequate. Excessive WC means the firms has idle funds, which
are in no profit for the firm. This situation decreases both risk and profitability
of the firm. Inadequate WC means the firm doesn’t have sufficient funds for
running its operation which ultimately results in production interruption, and
lowering down the profitability. Lower level of WC increases the risk but has
the potentiality of increasing the profitability also.
The above principle is based on the following assumption:
1. There is direct relationship between profitability and risk.
2. Current assets are less profitable than fixed assets
3. Short term funds are less expensive than long term funds.

Effect of level of CA on Profitability-Risk Trade Off

The effect of level of CA’s on profitability risk trade-off can be shown using
the ratio of CA to TA. This ratio indicates the percentages of TA’s that are in
form of CAs.An increase in the ratio will lead to decline in profitability because
CAs is less profitable than FAs. It would also increase risk of technical
insolvency because increase in CA assuming no change in CL will increase
NWC. Conversely a decrease in ratio will result in increase in profitability as
well as risk.

46
 Effect of level of CL on risk profitability trade-off:
The effect of CL can be demonstrated by using the ratio of CL to TAs. This portion
of short term financing which is less expensive as compared to long term financing.
These will therefore, be a decline in cost and corresponding rise in profitability.
The increased ratio will also increase risk because assuming no change in CA, this
would decrease in NWC. The consequence of decrease in the ratio is exactly
opposite to the result of an increase. Thus it will lead to decrease in profitability
and risk
Different Aspects of Working Capital Management
• Management of Inventory
• Management of Receivables/Debtors
• Management of Cash
• Management of Payables/Creditors
MANAGEMENT OF INVENTORY
Inventories constitute the most significant part of current assets of a large majority
of companies. On an average, inventories are approximately 60% of current assets.
Because of large size, it requires a considerable amount of fund.
The inventory means and includes the goods and services being sold by the firm
and the raw material or other components being used in the manufacturing of such
goods and services.
Nature of Inventory:
The common type of inventories for most of the business firms may be classified
as raw-material, work-in-progress, finished goods.
• Raw material: it is basic inputs that are converted into finished products
through the manufacturing process. Raw materials inventories are those
units which have been purchased and stored for future productions.
• Work–in–process: Work-in-process is semi-manufactured products. They
represent products that need more work before they become finished
products for sale.
• Finished goods: These are completely manufactured products which are
ready for sale.
Stocks of raw materials and work-in-process facilitate
production, while stock of finished goods is required for smooth marketing

47
operations. Thus inventories serve as a link between the production and
consumption of goods.The levels of three kinds of inventories for a firm depend on
the nature of business. A manufacturing firm will have substantially high levels of
all the three kinds of inventories. While retail or wholesale firm will have a very
high level of finished goods inventories and no raw material and work-in-process
inventories.
Need to hold inventories
Maintaining inventories involves trying up of the company’s funds and incurrence
of storage and holding costs. There are three general motives for holding
inventories:
Transactions Motive: IT emphasizes the need to maintain inventories to
facilitate smooth production and sales operation.
Precautionary Motive: It necessitates holding of inventories to guard against
the risk of unpredictable changes in demand and supply forces and other factors.
Speculative Motive: It influences the decision to increase or reduce inventory
levels to take advantage of price fluctuations.
Objectives of inventory management
The aim of inventory management should be to avoid excessive and inadequate
levels of inventories and to maintain sufficient inventory for smooth production
and sales operations.
An effective inventory management should:
• To ensue a continuous supply of raw material to facilitate uninterrupted
production.
• To maintain sufficient stocks of raw materials in the periods of short supply
and anticipate price changes.
• To maintain sufficient finished goods inventory for smooth sales operation,
and efficient customers service.
• To Minimize the carrying cost and time ,and
• To Control investment in inventories and keep it at an optimum level.
Effect of Excess or Inadequate inventory
If too much inventory is held, the organization wastes money through a
variety of factors.

48
 • Money is held up in stock when it could be put to better use.
• There are superfluous warehousing and storage costs.
• Inventory may deteriorate.
• There is potentially greater risk of theft.
On the other hand, too little inventory can lead to stock-out which can:
• Halt activity.
• Lose income.
• Cause discomfort or distress to Clint.
Inventory Management Technique
IN managing inventories, the firm’s objective should be in consonance with the
shareholder wealth maximisation principle. For this, the firm should determine the
optimum level of inventory. Efficiently controlled inventories make the firm flexible.
Inefficient inventory control results in unbalanced inventory and inflexibility-the firm
may sometimes run out of stock and sometimes may pile up unnecessary stocks. This
increases the level of investment and makes the firm unprofitable.
To manage inventories efficiently, the following two questions should be kept in
mind:
1. How much should be ordered?
2. When should be ordered?
To answer the above two questions, we must calculate Economic
Order Quantity and Re-Order Point.
Economic Order Quantity (EOQ)
The Economic Order Quantity model attempts to determine the order size that will
minimize the total inventory cost. It assumes that total inventory cost =total carry
cost +total ordering cost.
The EOQ model as a technique of inventory management defines three
parameters for any inventory:
1. Minimum level of inventory of that item depending upon the usage rate of that
item, time leg in procuring that item and unforeseen circumstances, if any.
2. The re-order level of that item ,at which next order for that item must be
placed to avoid any chance of a stock –out ,and
3. The re-order quantity for which each order must be placed.

49
 Assumptions: The EOQ model is based on the following assumptions:

1. The total usage of a particular item for a given period (usually 1 year) is
known with certainty and that the usage rate is even through out the period.
2. That there is no time gap between placing an order and getting its supply.
3. The cost per order of an item is constant and the cost of carrying inventory is
also fixed and is given as % of average value of inventory.
4. That there are only two costs associated with the inventory, and these are the
cost of ordering and the cost of carrying the inventory.

EOQ may be presented as follows

EOQ= 2AO
C

Where,
EOQ=Economic quantity per order.

A=Total annual requirement for the item

O=Ordering cost per order of that item

C=Carrying cost per unit per annum.

Ordering cost: The term ordering costs is used in case of raw materials (or
supplies) and includes the entire costs of acquiring raw material. It includes
requisitioning, purchase ordering, transporting
, receiving, inspecting and storing. Ordering cost increase in proportion to the number
of order placed. Thus, the more frequently inventory is acquired, the higher the firm’s
ordering cost. On the other hand, if the firm maintains large inventory level, there will
be few orders placed and ordering costs will be relatively small.

50
 Total ordering cost = (Annual requirement ×per order cost)

Order size

TOC= AO
Q
Carrying cost: Costs incurred for maintaining a given level of inventory are called
carrying cost. It includes storage, insurance,
Taxes, deterioration and obsolescence. Carrying costs very with inventory size.
Carrying cost decline with increase in inventory size.
Total cost
Costs
(Rs.) Carrying cost

Order cost

O
EOQ

It is shown that the total ordering cost for any particular item is decreasing as the size
per order is increasing. It is just because of the increase in the size of the order; the
total no. of orders for a particular item will decrease resulting in decrease in the total
order cost. The total annual carrying cost is increasing with the increase in order size.
This will happen because the firm would be keeping more and more items in stores.
The total cost of inventory initially reduces with the increase in the size of order but
then increases with the increase in the size of order. The trade-off of these two costs is
attained at the level at which the total annual cost is the least.

51
The order point: The re-order level is the level of inventory at which the fresh
order for the item must be placed to procure fresh supply. The re-order point depends
on Lead time, Average usage, Economic Order Quantity.
Lead time is the time normally taken between the placement of an order and
receiving the supply.
Average usage is the rate at which the inventory is being used up.
Reorder point=Lead time× Average usage
Safety stock: safety stock is the minimum level of inventory desired for an item
given the expected usage rate and the expected time to receive an order.
If an order is placed when the inventory reaches 150 units instead of 100 units, the
additional 50 units constitute the safety stock. The firm expects to have 50 units in
stock when the new order arrives. The safety stock protects the firm from stock –outs
due to unanticipated demand for the item or to slow deliveries. The level of inventory
investment is increased by the amount of the safety stock. The safety level is
ascertained and introduced as a part of inventory management because there is always
an uncertainty involved with respect to the time lag, usage rate or any other factor.
The unexpected variations in both the time lag and the demand for the product affect
the level of safety. The more certain are the patterns of movement of stock, the less is
the safety stock required.
For better stock/inventory control:
• Review the effectiveness of existing purchasing and inventory systems.
• Know the stock turn for all major items of inventory.
• Apply tight controls to the significant few items and simplify controls for the
trivial many.
• Sell off outdated or slow moving merchandise - it gets more
• Difficult to sell the longer you keep it.
• Consider having part of your product outsourced to another manufacturer
rather than make it yourself.
• Review your security procedures to ensure that no stock is going out the back
door.
Management of Receivables/Debtors
The Receivables (including the debtors and the bills) constitute a significant portion of
the working capital. The receivables emerge whenever goods are sold on credit and

52
payments are deferred by customers. A promise is made by the customer to pay cash
within a specified period. The customers from whom receivable or book debts have to
be collected in the future are called trade debtors and represents the firm’s claim or
assets. Thus, receivable is s type of loan extended by the seller to the buyer to
facilitate the purchase process.
Receivable Management may be defined as collection of steps and procedure
required to properly weight the costs and benefits attached with the credit policy. The
Receivable Management consist of matching the cost of increasing sales (particularly
credit sales) with the benefits arising out of increased sales with the objective of
maximizing the return on investment of the firm.
Nature
The term credit policy is used to refer to the combination of three decision variables:
1. Credit standards: It is the criteria to decide the type of customers to
whom goods could be sold on credit. If a firm has more slow –paying
customers, its investment in accounts receivable will increase. The firm will
also be exposed to higher risk of default.
2. Credit terms: It specifies duration of credit and terms of payment by
customers. Investment in accounts receivable will be high if customers are
allowed extended time period for making payments.
3. Collection efforts: It determine the actual collection period. The lower the
collection period, the lower the investment in accounts receivable and vice
versa.
Goals: A firm may follow a lenient or a straight credit policy. The firm following a
lenient credit policy tends to sell on credit to customers on very liberal terms and
standards. Credits are granted for long longer period even to those customers whose
creditworthiness is not fully known or whose financial position is doubtful.
A firm following a straight credit policy sells on credit on a highly selective basis
only to those customers who have proven creditworthiness and who are financially
strong. In practice, firms follow credit policies ranging between stringent to lenient.
Costs and Benefits of Credit Policy: There are various costs and
benefits attached with a credit policy.

53
Costs:
Cost of financing: the credit sales delays the time of sales realization and therefore
the item gap between incurring the cost and the sales realization is extended. This
results blocking of funds and the company has to arrange funds to meets its obligation.
These funds are to be procured at some explicit or implicit cost. This is known as the
cost of financing the receivables.
Administration cost: A firm will have to incur various costs in order to maintain the
record of credit customers both before and after the credit sales.
1. Delinquency costs: The firm may have to incur additional cost as delinquency
costs, if there is delay in payment by a customer. it includes reminders, phone
calls,postage,legal notice etc.More over ,there is always an opportunity cost of
the fund tied up in the receivable due to delay in payment.
2. Cost of default by customers: If any default is made by the customers in
payment, partly or wholly, it will termed as bad debts. It becomes cost to the
firm.
Benefits:
1. Increase in sales: The sales can be increased by credit sales. This will attract
more customers to the firm resulting in higher sales and growth of the firm.
2. Increase in profit: Increase in sales will help the firm to easily recover the
fixed expenses and attaining break –even level and increase the operating
profit of the firm. In a normal situation, there is a positive relation between the
sales volume and the profit.
3. Extra profit: Sometimes, the firm make the credit sales at a price which is
higher than the usual cash selling price. It brings an opportunity for the firms
to make extra profits.
Trade- off on Receivables:
The trade –off on receivables can be applied to find out whether to liberalize the credit
terms or not. More liberal credit terms may be expected to generate higher sales
revenue and higher profit. But they increase the potential cost also in the form of bad
debts and a decrease in liquidity of the firm. If the net benefit expected from
liberalizing the credit terms is positive, the firm may offer such terms, otherwise not.
On the other hand, a stringent credit policy reduces the profitability but may increase
the liquidity of the firm.

54
 Profitability

Costs
and
Benefits

Liquidity
Optimum

Stringent Credit policy Liberal policy

Policy

Credit Policy, Profitability and Liquidity of a Firm

It is clear from the above figure that as the firm takes its credit policy towards more
and more liberal; its liquidity decreases whereas the profitability increases. On the
other hand, if the firm makes its credit policy more and more stringent, the liquidity
may increase but profitability will go down.
Thus, a firm should try to frame its credit policy in such a way as to attain the best
possible combination of profitability and liquidity.
Credit Evaluation: Credit evaluation involves determination of the type of
customers who are going to qualify for the trade credit. Evaluation of credit
worthiness of a customer is a two fold steps procedure:
1. Collection of information
2. Analysis of information

55
Collection of information: In order to make better decisions, the firm may collect
information from various on the prospective credit customers. The following are
sources of information which can provide sufficient data or information about the
credit worthiness of a customer:
1. Bank Reference: The bank may be asked to comment on the financial
position of a particular customer. The customer may also be required to ask his
bank to provide necessary information in this respect.
2. Credit Agency Report: There are certain credit rating agencies which provide
independent information on the credit worthiness of different parties. These
credit agencies gather information on the credit history and see it to the firm
which want to extend credit.
3. Published information: The published financial statements of the customers
for few preceding years may also be taken as a source of information. Various
ratios calculated on the basis of these financial statements may throw light on
the profitability, liquidity and debt service capacity of a customer.
4. Credit scoring: If the credit request is large enough, then the firm can send its
own representatives/employees to collect information about the customer. In
this case, the customer may be evaluated through the use of credit scoring
which involves the numerical evaluation of each new customer who receives a
score based on his answer to a simple set of questions. This score is then
evaluated according to a pre-determined standard; it’s relative to the standard
determining whether credit should be extended.
Analysis of Information: Once all the available credit information about a
potential customer has been gathered, it must be analyzed to reach at some conclusion
regarding the credit worthiness of a customer. A firm should go for further
information and analysis only if required. If it is evident at any stage that the customer
has satisfactory credit worthiness, then there is no need to go for costly exercise of
further ananlysis.In case of those customers who are marginally creditworthy. In such
situation, the financial manager must attempt to balance the potential profitability
against the potential loss from the default.

56
Control of receivables
Once the credit has been extended to a customer as per the credit policy, the next
important step in the management of receivables is the control of these receivables. In
this reference, the efforts may be required in the two directions as follow:
I. The collection procedure: once a firm decides to extend credit and defines
the terms of credit sales, it must develop a policy for dealing with delinquent or
slow paying customers. The overall collection procedure of the firm should
neither be too lenient nor too strict. A strict collection policy can affect the
goodwill and damage the growth prospect of sales. If a firm has a lenient credit
policy, the customer may become slower in payments. Thus, the objective of
collection procedure and policies should be to speed up the slow paying customers
and reduce the incidence of bad debts.
II. Monitoring of Receivables: in order to control the level of receivables, the
firm should apply regular checks and there should be a continuous monitoring
system. The finance manager should keep a watch on the credit worthiness of all
the individual customers and the total credit policy of the firm. For this ,number of
measures are available as follows:
1. Average collection period: A common method to monitor the receivables is the
collection period or number of day’s outstanding receivables. The average collection
period may be as follows:
Debtors ×360
Credit sales
The collection period so calculated is compared with the firm’s stated credit period to
judge the collection efficiency.
There are 2 limitations to this method.
• It provides an average picture of collection experience and it is based
on aggregate data.
• It is susceptible to sales variations and the period over which sales
and receivables have been aggregated.
2. Aging schedule: the aging schedule removes one of the limitations of the average
collection period. It breaks down receivables according to the length of time for which
they have been outstanding.

57
For example: the receivables of a firm, having a normal credit period of 30 days, may
be classified as follows:

Age Group % of total outstanding Receivables

(No. of Days)

Less than 30 days 60%

31-45 days 20%
46-60 days 10%
61 and above 10%
It may be noted that ,the firm has a credit period of 30 days and 60% of the total
receivables are less than 30 days old.20 % of the receivables are over due by 15
days,10 % are over due by 30 days and 10 % are over due by more than 30 days.
This aging schedule provides early warning suggesting:
1. Deterioration of receivables quality
2. Where to emphasize the appropriate corrective actions.
When compared with the past aging schedule done by the same firm or done by other
comparable firms, this may provide an indication of whether the firm should start
worrying about its collection procedures. By comparing the aging schedules for
different periods, the financial manager can get an idea of any required changes in the
collection procedure and can also point out those customers which require special
attentions. However, a basic shortcoming of the aging schedule is that it is influenced
by the change in sales volume.
3. Lines of credit: another control measures for receivables management is the line of
credit which refers to the maximum amount a particular customer may have as due to
the firm at any time. Different lines of credit may be allowed to different customers.
The lines of credit must be reviewed periodically for all the customers.
4. Accounting Ratios: accounting information may be useful in order to control the
receivables.2 accounting ratios may be calculated to find out the changing pattern of
receivables.
 Receivables Turnover Ratio
 Average Collection Period.

58
 Management of Cash
Cash management refers to management of cash balance and the bank balance and
also includes the short terms deposits. Cash is the important current asset for the
operations of the business. Cash is the basic input needed to keep the business running
on a continuous basis. It is also the ultimate output expected to be realised by selling
the service or product manufactured by the firm. The term cash includes coins,
currency, and cheque held by the firm and balance in the bank accounts.
Factors of Cash Management: cash management is concerned with the
managing of 1.cash flows into and out of the firm 2.cash flows within the firm and
3.cash balance held by the firm at a point of time by financing deficit or investing
surplus cash.

Cash collection

Business operation

Deficit Borrow

Surplus
Invest

Information &
control
Cash payments

Cash Management Cycle

Sales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit has to borrow. Cash management seeks to accomplish this cycle at a
minimum cost and it also seeks to achieve liquidity and control.

59
Facets of Cash Management: In order to resolve the uncertainty about
cash flow prediction and lack of synchronisation between cash receipts and
payments .the firm should develop appropriate strategies regarding the following four
facets of cash management:
Cash Planning: Cash inflows and outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should be
prepared for this purpose.
Managing the cash flows: The flow of cash should be properly managed. The
cash flow should be accelerated while the cash outflows should be decelerated.
Optimum cash level: The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be matched to
determine the optimum level of cash balances.
Investing surplus cash: The surplus cash balances should be properly invested
to earn profits. The firm should decide about the division of such cash balance
between alternative short –term investment opportunities such as bank deposits,
marketable securities, or inter-corporate lending.
The idea cash management system will depend on the firm’s product, organisation
structure, competition, culture and options available. The task is complex and
decisions taken can affect important areas of the firm. For example-to improve
collections if the credit period is reduced, it may affect sales.
Motives of holding cash
A distinguishing feature of cash as an asset is that it does not earn any substantial
return for the business. Even though firm hold cash for following motives:
Transaction motive: This refers to the holding of cash to meet routine cash
requirement to finance. The transactions, which a firm carries on in the ordinary
course of business.
1. Precautionary motive: This implies the needs to hold cash to meet
unpredictable contingencies such as strike, sharp increase in raw materials
prices. If a firm can borrow at short notice to pay them unforeseen contingency,
it will need to maintain relatively small balances and vice-versa.
2. Speculative motives: It refers to the desire of the firm to take advantage
of opportunities which present themselves at unexpected movements and
which are typically outside the normal course of business.

60
 3. Compensatory motive: Bank provides certain services to their client free
of cost. They therefore, usually require client to keep minimum cash balance
with them to earn interest and thus compensate them for the free service so
provided.
Objectives of cash management
There are two basic objectives of Cash Management:
Meeting cash disbursement:
This is the first basic objective of cash management, according to which the firm
should have sufficient cash to meet the various requirement of the firm at different
time period. Cash has been described as “Oil to lubricate the ever turning wheels if
business, without it the process grinds to a stop.”
Minimising funds locked up as cash balances:
In this process the finance manager is confronted with two conflicting aspects. A
higher cash balance ensures power savings with all its advantages. But this will result
in a large balance of cash remaining idle. Low level of cash balance may result in
failure of the firm to meet the payment schedule. The finance manager should,
therefore try to have an optimum cash balance.
Managing your cash balances is one of the most important parts of working capital
management. If an organization runs out of cash resources it will have to stop
operating immediately .There may not even be the money to pay the salaries at the end
of the month, and the banks might have started dishonouring cheques. Furthermore,
the trustees or directors could stand charged with wrongful or fraudulent trading,
which could entail personal liability or even imprisonment.
If the organization has too much liquidity in the long term, it may well be invested in
fairly low return areas, such as bank deposit accounts. Long term surplus should be
invested in making the organization grow.
Cash planning: Cash planning is a technique to plan and control the use of cash. It
helps to anticipate the future cash flows and needs of the firm and reduces the
possibility of idle cash balances and cash deficits. Cash planning protects the financial
conditions of the firm by developing a projected cash statement from a forecast of
expected cash inflows and outflows for a given project. Cash plans are very crucial in
developing the overall operating plans of the firm. Cash planning may be done on

61
daily, weekly or monthly basis. The period and frequency of cash planning generally
depends upon the size of the firm and philosophy of management.
Cash forecasting and Budgeting: cash budget is the most significant device to
plan for and control cash receipts and payments. A cash budget is a summery
statement of the firm’s expected cash inflows and outflows over a projected time
period. It gives information on the timing and magnitude of expected cash flows and
cash balances over the projected period. This information helps the financial manager
to determine the future cash needs of the firm, plan for the financing of these needs
and exercise control over the cash and liquidity of the firm. The time horizon of a cash
budget may differ from firm to firm. A firm whose business is affected by seasonal
variations may prepare monthly cash budgets. Daily or weekly cash budgets should be
prepared for determining cash requirement if cash flows show extreme fluctuations.
Cash flows for a longer intervals may be prepared if cash flows are relatively stable.
Importance and Significance of Cash Budget
Cash budget is an effective tool of cash management and it may help the management
in the following ways:
1. Identification of the period of cash shortage so that the financial manager may
plan well in advance about arranging the funds at an appropriate time.
2. Identification of cash surplus position and duration for which surplus would be
available so that alternative investment of this excess liquidity may be
considered in advance.
3. Better coordination of the timing of cash inflows and outflows in order to
avoid chances of shortages or surplus of cash.
Cash forecasts are needed to prepare cash budgets. Cash forecasting may be done on
short or long –term basis. Generally, forecasts covering periods of one year or less are
considered short term. Those extending beyond one year are considered long –term.
Short – term Cash Forecast: It is comparatively easy to make short- term cash
forecasts. The important functions of carefully developed short – term cash forecasts
are:
• To determine operating cash requirements.
• To anticipate short – term financing.
• To manage investment of surplus cash.

62
 The short – term forecast helps in determining the cash requirements for
predetermined period to run a business. One of the significant roles of the short –
term forecasts is to pinpoint when the money will be needed and when it can be
repaid.
Other uses:
• Planning reductions of short and long –term debt.
• Scheduling payments in connection with capital expenditure programmes.
• Planning forward purchase of inventories.
• Checking forward purchase of inventories.
• Taking advantage of cash discounts offered by supplies.
• Guiding credit policies.
Long – term Cash Forecasting: Long –term cash forecasts are prepared to
give an idea of the company’s financial requirements in the distant future. They are
not as detailed as the short –term forecasts are. A Company can the impact of new
product development or plant acquisitions on the firm’s financial conditions. The
major uses of the long – term cash forecast are:
• It indicates as company’s future financial needs, especially for its working
capital requirement.
• It helps to evaluate proposed capital projects. It pinpoints the cash required to
finance these projects as well as the cash to be generated by the company to
support them
• It helps to improve corporate planning. Long – term cash forecasts compel
each division to plan for future and to formulate projects carefully.
Long – term cash forecast may be made for two, three or five years. Long –term
cash forecasting reflects the impact of growth, expansion or acquisitions. It also
indicates problems arising from these developments.
Control Aspects: After preparation of cash budget, the Financial Manager should
also ensure that there are no significant difference between the expected cash flows
and the actual cash flows. This requires controlling and reviewing of the whole
exercise on a regular basis.

63
 Management of Payables/Creditors
Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position. Purchasing initiates cash outflows and an
over-zealous purchasing function can create liquidity problems. Consider the
following:
• Who authorizes purchasing in our company-is it tightly managed or spread
among a number of people?
• Are purchase quantities geared to demand forecasts?
• Do we use order quantities which take account of stock-holding and
purchasing costs?
• Do we know the cost to the company of carrying stock?
• Do we have alternative source of supply?
• How many of ours suppliers have a returns policy?
• Are we in a position to pass on cost increases quickly through price increase?
• If a supplier of good or service lets you down can you charge back the cost
of delay?
• Can we arrange delivery of supplies staggered or on a just-in-time basis?
Trade credit: Trade credit refers to that credit that a customer gets from suppliers
of goods in the normal course of business. This deferral of payments is a short –term
financing called trade credit. It is a major source of financing for firms. It is mostly
an informal arrangement and is granted on an open account basis. open account
trade credit appears as sundry creditors on the buyer’s balance sheet.
Credit terms: Credit terms refer to the conditions under which the supplier sells
on credit to the buyer and the buyer is required to repay the credit. These conditions
include the due date and the cash discount given for prompt payments. Due date is
the date by which the supplier expects payments. Cash discount is the concession
offered to the buyer by the supplier to encourage him to make prompt payments.
Benefits and costs of Trade Credit: Trade credit is normally available to a
firm. As the volume of the firm’s purchase increases, trade credit also expands.
The major advantages of trade credits are as follows:
Easy availability: unlike other sources of finance, trade credit is relatively easy to
obtain. Except in the case of financially very unsound firms, it is almost automatic
and does not require any negotiations.

64
Flexibility: Trade credit grows with the growth in firm’s sales. The expansions in
the firm’s sales cause its purchase of goods and services to increase which is
automatically financed by trade credit.
Informality: it does not require any negotiations and formal aggrement.it does not
have the restrictions which are usually parts of negotiated sources of finance.Trade
credit involves implicit cost. The cost of credit may be transferred to the buyer via
the increased price of goods supplied to him. The user of trade credit should be
aware of the costs of trade credit to make use of it intelligently. Most of the time the
supplier passes on all or part of costs to the buyer implicitly in the form of higher
purchase price of goods and services supplied. Credit terms sometimes include cash
discount if the payment is made within a specified period. The buyer should take a
decision whether or not to avail it. If the buyer takes discount, he benefits in terms
of less cash outflow, but then he foregoes the credit granted by the supplier beyond
the discount period. In case of stretching accounts payable the firm has to forgo the
cash discount and may also be required to pay penalty interest charges.
Monitoring credit control
The ratio to watch here is the average number of day’s credit you take from
your suppliers. Take too little and you may be paying extra costs like bank
overdraft interest and charges unnecessarily. Take too much and you risk your
suppliers demanding cash on delivery or worse cash with order. Try to keep the
figure same each year or cautiously increase it.

65
 Ratios associated with Working Capital Management
Activity or Turnover ratio
Ratio
S.N. 2007-08 2006-07 2005-06 2004-05
1 Inventory turnover 7.02 Times 5.75 Times 5.03 Times 7.41 Times
ratio
2 Debtor turnover ratio 12.26 12.17 9.13 Times 12.09
Times Times Times
3 Creditor turnover ratio 5.85 5.00 Times 3.50 Times 3.44 Times
Times
4 Average collection 30Days 30Days 39Days 30Days
period
5 Average payment 61Days 72Days 103Days 104Days
period
6 Working capital 4.83 Times 4.88 Times 2.75 Times 4.86 Times
turnover ratio
8 Current asset turnover 2.45 Times 2.35 Times 1.56 Times 2.13 Times
ratio

Data used:

Rs in million 2007-08 2006-07 2005-06 2004-05

Opening stock 24649.04 22167.99 11805.03 8151.21
Closing stock 28066.89 26606.87 22167.99 10707.69
Average stock 27357.9 24387.43 16986.51 9429.45
Net sales 192010.27 183129.88 113964.76 95231.17
Gross profit Or 33602.26 42998.15 28475.42 25373.96
EBIT
Cost of goods 158947.91 140131.73 85489.34 69857.21
sold
Sundry debtors 15650.22 15045.02 12484.01 7873.67

66
Sundry 20386.63 22866.93 19745.3 14274.60
creditors
Net purchase 119384.06 114383..06 69134.06 49175.90
Working capital 40508.81 37508.2 41500.46 19582.32
Current asset 78516.69 77783.4 73027.74 44764.25

Formula used:
Inventory turnover ratio
Debtor turnover ratio
Creditor turnover ratio
Average collection period
Average payment period
Working capital turnover ratio
Current asset turnover ratio
Net sales/ Avg. Inventory
Net sales/ Sundry debtors
Net purchase/Sundry creditors
360/ debtor turnover ratio
360/creditors turnover ratio
Net sales / working capital
Net sales/current asset

Current Ratio: The current ratio of the company is increasing in all the years, with
the highest increase in the year 2005-2006. This is due to increase in the current assets
of the company namely sundry debtors, cash & bank balance and the loans and the
advances made by the company. Again in the current year it is increasing which is
2.06.

67
Liquid / Quick Ratio: Sundry debtors and loan and advances also affect the
quick ratio of the company. The increase in these sundry debtors and the loans and
advances may decrease the profitability of the company. Usually, a high acid test ratio
quick ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time. As a rule of thumb is 1:1 is considered satisfactory. In FY 2004-05
the quick ratio is 0.83, so we can say that this is not completely satisfactory. It may
not be able to meet its current liabilities on time. Whereas in the FY 2005-06 it is 1.02,
which can be considered satisfactory and in the FY 2006-07 it is 0.86 as well as in
2007-08 it is 0.72 which again can be considered non satisfactory. It may not be able
to meet its current liabilities on time, which is not good sign for the enterprises.

68
Inventory turnover ratio: The inventory turnover ratio shows how rapidly the
inventory is turning into receivables through sales. This ratio has been continuously
increasing since FY 2005-06 compared to the 2004-05. A high inventory turnover
indicates the efficient management of inventory because more frequently the stocks
are sold. So we can say that enterprises have a very good turnover ratio. Thus
Hindalco has a very good inventory management.

Debtors Turnover Ratio: The Debtors turnover ratio, which shows that the
number of times the debtors are turned over during a year. But the debtor of the

69
company is reducing which shows that the company is not properly managing its
debtors. There is no rule of thumb, which may be used as a norm to interpret the ratio,
as it may be different from firm to firm depending upon the nature of the business.

Current Turnover Ratio: It is establish the relationship between net sales and
current asset indicating how efficiently they have been used in achieving the sales. It
measures the efficiency with which current asset employed. A high ratio indicates a
high degree of efficiency in current asset utilisation and vice-versa.
In the FY 2004-05, 2005-06, 2006-07, 2007-08 it is 2.13, 1.56, 2.35 & 2.45
respectively. So it seems that although in the FY 2005-06 it is not good, but it is good
in the previous year and next year, i.e. In the 2004-05 and 2006-07 the ratio is very
good and in the FY 2007-08 it is also increased. So it means that although in the firm
has staggered a bit but still it again managed to regain and recovered. In the FY 2007-
08 current assets is being utilised in much better way compared to the FY 2006-07.

70
Working Capital Turnover Ratio: In the FY 2004-05, 2005-06, 2006-07,
2007-08 it is 4.86, 2.75, 4.88 and 4.83 respectively. So, it seems that although in the
FY 2005-06 it was not good but in the year previous of 2005-06 and also after 2005-
06 it is good, i.e. in the FY 2004-05, FY 2006-07, FY 2007-08 the ratio is very good.
So it means that although in the mid the firm staggered a bit but still it again managed
to regain and recovered.

Average Collection Period: it is the relationship between no. Of days in a year

(360) and debtor turnover ratio Here in the FY 2004-05, FY 2005-06, FY 2006-07 and
FY 2007-08 it is 30days, 39days, 30days and 30days. In the FY2005-06 it is increased
but in the other FY it is same. This is again good sign for the enterprise.

71
 Average payment period

120

100

80
Days

60 Average payment period

103 104
40 72
61
20

0
2007-08 2006-07 2005-06 2004-05
years

Average payment period: It is clear that that the average payment period is less
in year 2007-08 as compared to earlier years. It is continuously decreasing .It shows
that the company has sufficient liquidity for the payment.
Current Assets and Current Liabilities

(Rs. In millions) 2007-08 2006-07 2005-06 2004-05

Current asset 78516.69 77783.40 73027.74 44764.25
Current liabilities 77783.40 40275.20 31527.28 25181.93

Current Asset

78516.69 77783.4 73027.74

80000
70000
60000 44764.25
50000
Value(Rs.in
40000 Current Asset
millions)
30000
20000
10000
0
2007-08 2006-07 2005-06 2004-05

72
It is clear that in the year 2007-08, the total investment in current assets is 7816.69
million and it is higher than years 2006-07, 05-06 and 04-05.

Current liabilities
77783.4

80000
70000
60000 40275.2
50000 31527.28
Value(Rs. in 25181.93
40000
millions)
30000 Current liabilities
20000
10000
0
2007-08 2006-07 2005-06 2004-05
Years

It is clear that Current Liabilities are increasing year by year. It means that the
company is expending business year by year. In the year 2007-8 the total Current
Liabilities is Rs.77783.4 million, which is much higher than any previous years.

(Rs. In millions) 2007-08 2006-07 2005-06 2004-05

Current asset 78516.69 77783.40 73027.74 44764.25

Gross Working Capital

Current asset(Rs.in millions)

78516.69 77783.4 73027.74

80000
70000
60000 44764.25
50000
Value 40000
Current asset(Rs.in
30000
millions)
20000
10000
0
2007-08 2006-07 2005-06 2004-05
Years

73
It is clear that Gross Working Capital has increased heavily as compared to year
2004-05.if we compare the Gross Working Capital of the years 2006-07 and 2007-08,
there is slightly difference. It denotes the total working capital or total investment in
current assets. Sufficient working capital helps the company to avoid stoppage of
work and effects on profitability. The company can also get an idea about the required
funds for maintaining current assets.
Net Working Capital
(Rs. In millions) 2007-08 2006-07 2005-06 2004-05
Current asset 78516.69 77783.40 73027.74 44764.25
Current liabilities 77783.40 40275.20 31527.28 25181.93
Net Working 733.29 37508.2 41500.46 19582.32
Capital
(CA –CL)

Net Working Capital

37508.2 41500.46
45000
40000
35000
30000 19582.32
25000
Values
20000
15000
10000 733.29
5000
0
2007-08 2006-07 2005-06 2004-05
Years

It is clear from above that the situation of Net Working Capital is fluctuating from
very high to very low. The year 2007-08 has lowest Net Working Capital as compared
to earlier years. The Net Working Capital measures the liquidity of the firm. The
greater the margin, the better will be the liquidity of the firm.

74
Debtors Management

Rs in million 2007-08 2006-07 2005-06 2004-05

Sundry 15650.22 15045.02 12484.01 7873.67
debtors

Sundry debtors
15650.22
15045.02

16000 12484.01
14000
12000 7873.67
10000
Values 8000
6000 Sundry debtors
4000
2000
0
2007-08 2006-07 2005-06 2004-05
Years

It is clear that sundry debtors are increasing year by year. It means that the company is
selling its product on credit. It will affect the liquidity of the company.
Inventory management
Rs in million 2007-08 2006-07 2005-06 2004-05
Inventories 5,097.91 4,315.31 4,095.09 2,374.52

Inventories

5,097.91
6,000.00 4,315.31
4,095.09
5,000.00

4,000.00 2,374.52
Values 3,000.00
Inventories
2,000.00

1,000.00
0.00
2007-08 2006-07 2005-06 2004-05
Years

75
It is clear that the company is increasing investment in inventories year by year. It
shows that the company is preparing itself for any kind of situation and maintain
sufficient inventory for smooth production and sales operations.

Cash management

Years 2007-08 2006-07 2005-06 2004-05

Cash and Bank 1469.77 6654.96 9172.85 4009.69
balances(in
millions)

Cash and Bank balances

9172.85
10000
9000 6654.96
8000 Cash and Bank balances
7000
6000 4009.69
Value 5000
4000
3000 1469.77
2000
1000
0
2007-08 2006-07 2005-06 2004-05
Years

It is very clear that the cash and bank balance of the company is very low in year
2007-08 as compared to previous years. The highest cash and bank balance held by
the company is in the year 2005-06.
Creditor’s management

Years 2007-08 2006-07 2005-06 2004-05

Sundry 20386.63 22866.93 19745.3 14274.60
creditors

76
 Sundry creditors

22866.93
25000 20386.63 19745.3

20000
14274.6

15000
Value
10000 Sundry creditors

5000

0
2007-08 2006-07 2005-06 2004-05
Years

It is clear from the above that the company has low sundry creditors balance,
Rs.0386.63 in year 2007-8 as compared to previous year 2006-7. The company has
highest creditors balance in year 2007-08.

77
 Conclusion
• It can be observed that Current Ratio of Hindalco varied between 1.7776 to
2.0658 during the period from 2005-2002008-2007. It is evident that, on an
average, per one rupee of current liabilit y, the company has been maintaining
2.0216 rupee of current assets as a cushion to meet the short- term liabilities.
Usually, a Current Ratio of 2:1 is considered to be the standard to indicate sound
liquidity position, and Hindalco has been successfully maintaining as a rule of thumb
is 1:1 is considered satisfactory. In 2007-08 it is 0.72 which again can be
considered non satisfactory. It may not be able to meet its current liabilities on
time, which is not good sign for the enterprises.

• The inventory turnover ratio shows how rapidly the inventory is turning into
receivables through sales. This ratio has been continuously increasing since
FY 2005-06 compared to the 2004-05. A high inventory turnover indicates the
efficient management of inventory because more frequently the stocks are sold.
So we can say that enterprises have a very good turnover ratio. Thus Hindalco
has a very good inventory management.

• Working Capital Turnover Ratio indicates the efficiency of the firm in

utilizing the working capital in the business. It varies between 2.74 times and
4.89 times. This ratio signifies that on an average, a rupee of working capital
generate Rs. 4.3107 worth of business/sales of the firm, which is excellent for
the management of the firm.

• The Debtors Turnover Ratio was highest (12.2688 times) in 2007-2008 and
lowest (9.1288 times) in 2006-2005 and average is 11.416 times. Debtors and
Receivables management appears to be excellent. More the number of times
debtors' turnover, better the liquidity position of the firm. The combined
effect of better management of inventory and debtors & receivables has
enabled the firm to generate reported business of the firm.

• Average Collection Period is the relationship between no. Of days in a year

and debtor turnover ratio. Here in the FY 2004-05, FY 2005-06, FY 2006-07
and FY 2007-08 it is 30days, 39days, 30days and 30days. In the FY2005-06 it
is increased but in the other FY it is same. This is again good sign for the
enterprise.

78
• The current assets and liabilities are increasing year by year. It means the
company is investing in current assets and expending its business.

• Gross Working Capital has increased heavily as compared to year 2004-05.if

we compare the Gross Working Capital of the years 2006-07 and 2007-08,
there is slightly difference. It denotes the total working capital or total
investment in current assets.

• Net Working Capital is fluctuating from very high to very low. The year 2007-
08 has lowest Net Working Capital as compared to earlier years. The Net
Working Capital measures the liquidity of the firm.

79
 Suggestions

• The year 2007-08 has lowest Net Working Capital as compared to earlier
years. The company must increase its NWC. The greater the margin, the better
will be the liquidity of the firm.
• The company should maintain the low level of creditors because the company
can pay them easily whenever required.
• The company has 2 nd highest market capitalization after NALCO. The
company should try to increase productivity and produce products at lower
rate.
• The company should maintain a proper inventory management system, so the
unnecessary blockage of money can be avoided.
• The company must have adequate cash and bank balance to face any situations.
The company has low cash and bank balance in the year 2007 -08.

Limitations

 Time is definitely the main Constraint. Time was not sufficient enough to
assess all processes and policies of an organization of the stature of
HINDALCO INDUSTRIES LTD.
 Inadequacy of data is another problem.

80
 Bibliography
Books:

• Payday I.M.,”Financial Management,”7th edition; New Delhi: Vikas

Publishing House Pvt. Ltd; 1995.
• Rustagi R.P.,”Fundamentals of Financial Management,”3rd edition; New Delhi:
Galgotia Publishing Company; 2002.
Annual Reports:
Annual Report of F Y 2005 -06, 2006 -07 and 2007 -08 of Hindalco Industries Ltd.
Internet Source:
• www.hindalco.com
• www.workingcapital.com

81
 Annexure

Profit & Loss Account

Rs. In million FY 08 FY 07 FY 06 FY 05
Income
Gross sales 210219 199201 124764 104803
Less: excise duty 18209 16071 10799 9572
Net sales and 192010 183130 113965 95231
operating revenue
Other income 4929 3700 2439 2701
196940 186830 116404 97932
Expenditure
(increase)/decrease -1370 -4425 -10338 -2556
in stock
Raw material 159370 110783 66033 46394
consumed & goods
purchased
Payments to and 6212 5196 4628 4116
provision for
employees
Other operating 143788 31426 27591 24512
expenses
Interest and finance 2806 2424 2252 1700
charge
Depreciation & 5878 6380 5211 4633
impairment
166684 151784 95377 78799
Profit before 30256 35046 21027 19133
extraordinary
item & tax
extraordinary item - - -30 91
Profit before tax 30256 35046 21027 19133
Provision for 6064 9841 3241 5705
current tax
Provision for 876 -551 1159 759
deferred tax
FBT 114 113 101 -
Provision for - - - -716
deferred tax for
earlier years written
back
Net profit 28609.39 25643 16556 13294

82
Balance Sheet

Rs. In million FY 08 FY 07 FY 06 FY 05
Sources of fund

Shareholders fund

Share capital 1226 1043 986 928

Reserve and surplus 171737 123137 95077 75738

Loan funds
Secured loan 62054 64102 28480 29523
Unsecured loan 21232 9584 20554 8477

Deferred tax 13237 11258 12333 11297

liability(net)
Total 270881 209124 157430 125963
Application of funds
Fixed funds
Gross block 126085 112526 104183 87728
Less: depreciation & 46368 42459 36355 31693
impairments
Net block 78093 70067 67828 56035
Capital work in progress 11198 14764 8329 13230

89292 84831 76157 69265

Investments 141080 86753 39713 37021
Current asset, Loan &
advances
Inventories 50979 43153 40951 23745
Sundry debtors 15650 15045 12484 7874
Cash and bank balance 1470 6655 9173 4010
Other Current asset, 10418 12930 10420 9136
Loan & advances
78517 77783 73028 44765
Less: current liabilities
and provision
Current liabilities 28948 27434 21996 16484
provisions 9060 12841 9532 8698
38008 40275 31528 25182
Net current asset 40509 37508 41500 19583
Misc expenditure - 32 60 94
Total 270881 209124 157430 125963

83
84