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(A GOVT.

OF INDIA UNDERTAKING UNIT)

SUMMER PROJECT
WORKING CAPITAL MANAGEMENT
OF
BOKARO STEEL PLANT (BSL)

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SUBMITED TO:- SUBMITED TO:-

Mr. R.B.SHARMA MOKIM ANSARI

(Jr.Manager ,F&A) Rill No:- 95342239695

Bokaro Steel Plant YEAR:-(2009-2011)

SAIL

ACKNOWLEDGEMENT

At the very outset, I wish to express my heartly gratitude to all those who extended their help,
guidance and Suggestion and without their help it was not possible for me to complete this
Project Report.

I am deeply indebted to my guide Mr. R.B.Sharma (Jr. Manager), Miss Poonam (Dy.
Manager), Mr. Jitendra Kumar (Dy. Manager), Mr. S.K.Roy (Dy. Manager), U.S.Bhaskar
(Dy. Manager), & Mr.Vishal Jain (Jr. manager) for his valuable and enlightened guidance as
well as freedom he had offered to me during the project work.They ever prepared to feed
Necessary information and guidance.

I am also thank full to all the employee who provide the practical information about the
production process, practical show the working criteria of the plant.

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CERTIFICATE

This is to certify that the project entitled “WORKING CAPITAL MANAGEMENT” at


BOKARO STEEL PLANT has been carried out by MOKIM ANSARI from 07th June to 17th
July 2010, under my supervision in partial fulfillment of his Master of Business
Administration at SWAMI VIVEKANAND COLLEGE OF MANAGEMENT, RAM
NAGAR BANUR, CHANDIGARH.

I am satisfied with his sincere performance and study conducted by him in BOKARO STEEL
PLANT.

I recommend to submit the project report. I wish him all success in life.

This is also certified that the project work is original and has not been submitted to any other
place.

DATE: Mr. R.B.SHARMA


(Jr. Manager, F& A)
Bokaro Steel Plant
SAIL

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DECLARATION

I Mokim ansari ,, Roll No. 95342239695 hereby declare that “A PROJECT ON


WORKING CAPITAL MANAGEMENT IN BOKARO STEEL LIMITED, SAIL”
submitted to SWAMI VIVEKANAND COLLEGE OF MANAGEMENT RAMNAGAR
BANUR, Affiliated to punjab technical university, Approved by A.I.C.T.E. Ministry of H.R.D.
Government of India in partial fulfillment for the award of Degree in MASTER OF BUSINESS
ADMINISTRATION (MBA) and that the project has not previously formed the basis for the
award of any other Degree, Diploma, Associate-ship, Fellowship or other title.

MOKIM ANSARI

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INDEX

Contents page no.

1. Executive summary 5

2. Introduction
Global Steel Scenario and Indian Steel Industry 6

SAIL 12

BSL 13

3. Review of literature 34

4. Research Methodology 37

5. Working Capital – Overall View


Cash Management 38

Inventory Management 48

Receivable Management 61

6. Financial Statements and Ratio Analysis 66

7. Flow chart of sales process followed in BSL 79

8. Conclusions 81

9. Suggestion 82

10. Bibliography ` 83

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EXECUTIVE SUMMARY

Steel Authority of India Limited (SAIL) is the leading steel making company in India. It is fully
integrated iron and steel maker, producing both basic and special steel for domestic construction
engineering, power, railway automotive and defense industries and for safe in export markets.
Bokaro Steel Plant – The fourth integrated plant in the public sector taking shape in 1965 in
collaboration with the Soviet Union.

It was originally incorporated as a limited company on 29thJanuary 1964, and was later merged
with SAIL first as a subsidiary and then as a unit through the public sector iron & steel
companies act1978. Working capital management is concerned with the problem that arises in
attempting to manage the current assets, current liabilities and the interrelationship between them.
Its operational goal is to manage the current assets and current liabilities in such a way that a
satisfactory level of working capital is maintained.

The working capital ratio is calculated as:


Positive working capital means that the company is able to pay off its short-term liabilities.
Negative working capital means that a company currently is unable to meet its short-term
liabilities with its current assets (cash, accounts receivable and inventory).
Working capital also gives investors an idea of the company’s underlying operational efficiency.
Money that is tied up in inventory or money that customers still owe to the company cannot be
used to pay off any of the company’s obligations.

To measure efficiency we have used ratio analysis as a technique and the main ratio we have
used are liquidity ratio and activities ratio. One more tool we have used is calculation of
operating cycle which shows\how effectively the firm is using its resources or how much time its
take to convert its investment back into cash. By looking previous data we came to know BSL
have done a great job in this field operating cycle by 30% in just three financial years.

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GLOBAL STEEL SCENARIO AND INDIAN STEEL INDUSTRY

INTRODUCTION

Though evidences indicate that iron and steel have been used by for almost 6000 years, the

modern form of iron and steel industry came into being only during the 19th century. The growth
and development of Iron and Steel Industry in the world until the Second World War was
comparatively slower. But the industry has grown very rapidly after the Second War was. World
production of steel, which was only 28.3 million tones (MT) in 1900, rose to 695 MT by 1992.
The oil crisis of the seventies affected the entire economy of the world including the steel
industry. The position started improving after 1983 and peaked at 780 MT in 1989. It starred
declining till 1994 (723MT), picked up again to 755.8 in 1995. The World Steel production is
around 1132 MT in 2005, registering a growth of 6% over 2004.

HISTORICAL BACKGROUND

The antiquity of man’s use of iron attested by references to that metal both in fragmentary writing
& inscriptions that survived ancient civilization of Babylon, Mexico, Egypt, China, India, Greece
& Rome. However, it is believed that most of the iron used by pre–historic people might have
been obtained by fragment of meteorites and it remained a rare metal for many centuries.

For many years after man learned how to extract iron from its ores, the product probably was so
relatively soft and unpredictable, that bronze continued to be preferred for many tools and
weapons. Eventually iron replaced the non–ferrous metal for these purposes when man learned
how to master the difficult arts of smelting, forging, hardening and tempering iron. Archeological
findings in Mesopotamia and Egypt have proved that iron or steel has been in the service o
mankind for nearly 6000 years. The origin of the methods used by early man for extracting iron
from its ores is unknown. Some have suggested that many learned the method accidentally.

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Iron, in the beginning was smelted by charcoal made from wood. Later coal was discovered as a
great source of heat. Subsequently, it was converted into coke, which was found to be ideal for
smelting of iron. Iron kept its dominant place for 200 or more years after the Saugus works that
was the first successful Iron Works in America founded in 1646, with the advance of Industrial
Revolution, iron formed the rails for newly invented railroad trains. It was also used to amour the

sides of the fighting ships. About the mid 19th century the new age of steel began with the
invention of Bessemer process (1856) making steel available in large quantities at reasonable
cost.

INDIAN HISTORY

Indian history is also replete with references to the usage of iron and steel. Some of the ancient
monuments like the famous iron pillar near New Delhi or the massive beams used in the Sun
Temple at Konark bear ample testimony to the technological excellence of the Indian
metallurgists.

The history of iron in India goes back to the ancient era. Our ancient literary sources like Rig
Veda, the Atharva Veda, the Puranas and other Epics are full of references to iron and its uses in
peace and war. According to one of the studies, iron has been produced in India for over 3000
years.

GLOBAL SCENARIO

WORLD STEEL PRODUCTION REPORT


ISSB Monthly World I & S Review
WORLD STEEL REVIEW, JUNE 2008

Production of crude steel for the 66 countries reporting to the IISI in April was estimated to be
116.4 million tones, an increase of 5.6% over April 2007. The total of the 4 months to date was
457.3 million tones, 5.7% above the January to April period in 2007. Excluding China, which

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accounted for 37% of world production in the first four months of 2008, the rise in April was
only 2.9%, with the four months total only up by 3.7%. Global trade in steel was 440 million tons
in 2007 (including internal EU trade), 5% higher than in 2006. China increased its exports by one
third to 68 million tones, almost double the Japanese total.

In the European Union 27, crude steel production was flat in April at 18.2 million tones
compared to April 2007, and fell by 0.7% in the 4 month to date to 71.6 million tonn4es. Monthly
production in Germany decreased by 1.3% in April, and by 1.9% in the January to April period to
16.1 million tones. Steel production in France fared even worse dropping by 9% in the month,
and by 7.9% in the four months to date to 6.5 million tones.

However, Italian crude steel production increased by 7.2% in April, and by 1.5% in the year to
date to 11.2 million tones. Spanish production rose by 1% in April, while the year to date was up
2.5% to 6.4 million tones. In the UK, production fell by 10.3% in April, bringing the 4 months
total down 0.8% to 4.8 Million tones. In the rest of Europe Turkish production increased by 2.7%
in April and by 8.2% in the four months to 9.2 million tones.

The four months total for Serbia was up 14.1% to 664 thousand tones. Crude steel production in
the CIS countries only rose by 0.3% in April, with Russian production down 0.4%, bringing the
year to date for the CIS up 3.0% with Russia four month total up 3.6% to 25.3 million tones.
Ukrainian steel production increased by 2.7% in April, with the year to date total up 3.3% to 14.7
million tones. Kazakhstan steel production fell by 12.4% in the four months to 1.3 Million tones.

In 2007 the Ukraine overtook Russia as the third largest exporter of steel after China and Japan,
and it has remained third into 2008. In the first four months of 2008 Ukraine exported to 10.9
million tones of steel, up 6.2% on the same four months in 2007. Exports of semis rose by 13.5%
to 4.6 million tones, with hot rolled plate lengths up 20.7% to 1.6 million tones. Exports of hot
rolled wide coil fell slightly to 1.1 million tones. The large increase in semis was primarily in
semis over 0.25% carbon, with some increase in slabs until 0.25% carbon. The rise in plate
exports was mostly in plate over 10mm thick, with some increase in the 4.75 to 10mm range.

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In terms of markets, the Middle East was the destination for 20% of total Ukrainian exports in the
first four months of 2008, up 48% from the previous year. The next largest market was the EU 27
at 17.5%, with Italy by far the largest recipient, although the EU total was down 12% from 2007.
The other CIS countries received a further 15% of Ukrainian exports, with the tonnage to the Far
East more than doubling to 14% of the total. Turkey remained the largest single market at 1.3
million tones, followed by Russia at one million tones.

On the North American continent US steel production increased by 1.1% in April, bringing the
year to date total up 6.5% to 33.8 million tones. Canadian steel production rose by 3.7% in April,
while the four months total was up 3.0% to 5.6 million tones. Mexican steel production, however,
increased by 10.5% in April, with the year to date total up 10.4% to 6.3 million tones.

Crude steel production in South America showed an increase with Brazilian production up 7.1%
in April and by 7.8% in the year to date to 11.5 million tones. Steel production in Venezuela fell
by 2.1% in April, while the four months total was down 13% to just under 1.5 million tones.
Argentinean production, however, rose by 5.9% in April, while the year to date total was up 9.9%
to 1.9 million tones.

In Africa and the Middle East, South African production rose by 0.5% in April, although the year
to date total was down 2.6% to 3 million tones. Egypt’s steel production, however, increased by
1.7% in April, while the four months total was 14.% up at 2.3 million tones. Iranian production
increased by 3.1% in the month, although the year to date total was down 1.1% to nearly 3.4
million tones.

Turning to the Far East, Chinas steel production increased by 10.2% in April to 44.7 million
tones, and by 9.1% in the four months to 1679.8 million tones. Japanese crude steel production
was up 4.2% in April, while the January to April total increased by 4.4% to 41 million tones.
South Korean production fell by 0.4% in April with the year to date total at 17.5 million tones,
3.7% up on the same period in 2007. In India, production showed a rise of 12.7% in April,
bringing the four months total up by 7.7% to 19 million tones. Crude steel production in Taiwan
was up 12.2% in April, while the year to date total was up by 11.2% to 7.6 million tones.

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Japanese steel exports increased by 15.7% to 13.4 million tones in the first four months of 2008
compared to 2007. Hot rolled coil exports were 3.1 million tones, up 15.4%, semis were 1.8
million tones, up 16.2%, and galvanized steel exports were just below 1.8 million tones, up
10.5%. Some 84% of Japanese exports in 2008 went to other far eastern countries with 3.5
million tones to South Korea, up 19%, 2.3 million tones to China, up 12%, 1.5 million tones to
Thailand, up 9%, and 1.3 million tones to Taiwan, up 18.5%. These four countries a counted for
64% of Japanese exports, the same percentage as in the previous year.

OUTLOOK FOR THE INDIAN ECONOMY

After witnessing rapid strides during the years after the liberalization process was set in motion,
India’s GDP grew at an average rate of 5.2 % during the period 1998–99 to 2002–03. However,
there was a break from the trend in 2003–04, during which the economy is estimated to have
grown at more than 8%. The economy of India, measured in USD exchange – rate terms, is the
twelfth largest in the world, with a GDP of around $1 trillion (2008). It recorded a GDP growth
rate of 9.0% for the fiscal year 2007 – 2008 which makes it the second fastest high emerging
economy, after China, in the world. The economy is expected to continue on a high growth path
with continued macroeconomic stability.

Over the years there has been a downward trend in interest rates accompanied by moderate
inflation and adequate liquidity in economy. In April 2003, the Bank Rate was reduced to 6%,
which was a 30 – years low. Commercial Banks have also resorted to sub–PLR lending. With sub
PLR lending and reduction in maximum spread over PLR, lending rates have effective come
down Infrastructure development has been a focus area for the Government in recent years. In the
road and highway network, India is witnessing development of multiple–lane, safe and well
designed interstate highways. Recently the Government has announced a planned outlay for the
rural road and highway network development. The Golden Quadrilateral Project is an ambitious
project that would connect the four major metros via state of the art highways. The East–West

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and North – South corridors would link up the remotest parts of the country. The Government is
also planning to facilitate investments in seaports and airports in a major way.

STEEL DEMAND SCENARIO

India’s steel production is likely to surpass the domestic requirement by 2011–12, easing pressure
on prices of the alloy, which has been adding to the spiraling inflation.
“We shall achieve 124 million tons of steel capacity by 2011–12, well exceeding the requirement
that would be to the tune of about 110 million tons at that point of time,” Steel Minister Paswan
said.

Steel prices shot up by over 50 percent since January, adding to the woes of the UPA
government, which is battling a seven–year high inflation of 8.75 percent in its last year. The
annual demand for steel in India has been rising by about 13 per cent, but production is growing
by over 6 percent, according to official sources. Last fiscal, the country’s crude steel production
stood at 53.9 million tons, of which about 5 million tons were exported. To bridge the demand –
supply mismatch, India had to import nearly 7 million tons of steel. Steel Secretary R S Pandey
while endorsing India becoming a net steel importer from being a net exporter till a few years
ago, said the trend is likely to continue for some time as increase in capacity takes at least three to
four years.

As per official figures, country’s finished steel import went up by over 300 percent from 1.6
million tons in 2002–03 to nearly 7 million tons in 2007–08 (provisional). In view of the growing
demand, the government plans to scale up steel production to over 290 million tons by 2020. It
has also envisaged that the sector will see an investment of Rs. 8, 70,640crore by that time.

Going by an estimate of Rs. 4,000-crore outlay per million tones of additional capacity, an
investment of Rs. 2, 76,000crore is likely to take place by 2012 and Rs. 8, 70,000crore by 2020.
As of now, both domestic and foreign steel players have signed 193 memoranda of understanding
with states for setting up new units with a total planned capacity of around 243 million tons and a
total proposed investment of over Rs. 5, 14,000crore.

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Private and public sector steel companies have also embarked on capacity expansion, Steel
Authority of India Limited plans to take up its hot metal production to 26.13 million tons by 2010
from the present 12.84 million tons. Private steel majors including Tata, JSPL, ISPAT and JSW
Steel have also lined up expansion of their existing production strength.

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Satisfaction Customer

Aspiration Unlimited

Improvement Continual

Leadership Market

VISION

To be a respected world class corporation and the leader in Indian steel business in quality,
productivity, profitability and customer satisfaction.

CREDO
We build lasting relationships with customers based on trust and mutual benefit.
We uphold highest ethical standards in conduct of our business.
We create and nurture a culture that supports flexibility, learning and is proactive to change.
We chart a challenging career for employees with opportunities for advancement and rewards.
We value the opportunity and responsibility to make a meaningful difference in people's lives.

BACKGROUND & HISTORY

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A Rich Heritage

The Precursor

SAIL traces its origin to the formative years of an emerging nation - India. After independence
the builders of modern India worked with a vision - to lay the infrastructure for rapid
industrialization of the country. The steel sector was to propel the economic growth. Hindustan
Steel Private Limited was set up on January 19, 1954. The President of India held the shares of
the company on behalf of the people of India.

Expanding Horizon (1959-1973)

Hindustan Steel (HSL) was initially designed to manage only one plant that was coming up at
Rourkela. For Bhilai and Durgapur Steel Plants, the preliminary work was done by the Iron and
Steel Ministry. From April 1957, the supervision and control of these two steel plants were also
transferred to Hindustan Steel. The registered office was originally in New Delhi. It moved to
Calcutta in July 1956 and ultimately to Ranchi in December 1959.

A new steel company, Bokaro Steel Limited, was incorporated in January 1964 to construct and
operate the steel plant at Bokaro. The 1 MT phases of Bhilai and Rourkela Steel Plants were
completed by the end of December 1961. The 1 MT phase of Durgapur Steel Plant was
completed in January 1962 after commissioning of the Wheel and Axle plant. The crude steel

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production of HSL went up from .158 MT (1959-60) to 1.6 MT. The second phase of Bhilai Steel
Plant was completed in September 1967 after commissioning of the Wire Rod Mill. The last unit
of the 1.8 MT phase of Rourkela - the Tandem Mill - was commissioned in February 1968, and
the 1.6 MT stage of Durgapur Steel Plant was completed in August 1969 after commissioning of
the Furnace in SMS. Thus, with the completion of the 2.5 MT stage at Bhilai, 1.8 MT at Rourkela
and 1.6 MT at Durgapur, the total crude steel production capacity of HSL was raised to 3.7 MT
in 1968-69 and subsequently to 4MT in 1972-73.

Holding Company

The Ministry of Steel and Mines drafted a policy statement to evolve a new model for managing
industry. The policy statement was presented to the Parliament on December 2, 1972. On this
basis the concept of creating a holding company to manage inputs and outputs under one
umbrella was mooted. This led to the formation of Steel Authority of India Ltd. The company,
incorporated on January 24, 1973 with an authorized capital of Rs. 2000 crore, was made
responsible for managing five integrated steel plants at Bhilai, Bokaro, Durgapur, Rourkela and
Burnpur, the Alloy Steel Plant and the Salem Steel Plant. In 1978 SAIL was restructured as an
operating company.

Since its inception, SAIL has been instrumental in laying a sound infrastructure for the industrial
development of the country. Besides, it has immensely contributed to the development of
technical and managerial expertise. It has triggered the secondary and tertiary waves of economic
growth by continuously providing the inputs for the consuming industry.

JOINT VENTURES

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SAIL has promoted joint ventures in different areas ranging from power plant to e-commerce.
The important joint ventures of the company, among others, are:-

COMPANY LOCATION JV PARTNER EQUITY PROFILE

NTPC-SAIL NEW NTPC 50:50 Operates & manages the captive power
Power Company DELHI plants of durgapur, Rourkela & Bhilai
Pvt. Ltd

Bokaro Power BOLARO DVC 50:50 Manages 302MW power generation


supply company 660tonnes per hour steam generation
Pvt. Ltd facilities at Bokaro steel plant.

M- Junction KOLKATA TATA Steel 50:50 Promotes e-commerce activities in


services Ltd. steel and related areas.

SAIL & MOIL BHILAI MANGANESE 50:50 Production of ferro -manganese and
Ferro Alloys Pvt. ORE (INDIA) silicon – Manganese at Bhilai with
Ltd. LIMITED furnace operation at Nandini/ Bhalai

Bhilai jaypee SANTNA & Jaiparkash 26:74 To set up and operate a cement plant of
cement limited BHILAI 2.2 million tones per annum capacity at
Associates Ltd.
split location at satna & Bhilai, using
slag generated during blast furnace .

Bokaro jaypee BOKARO Jaiparkash 26:74 To set up and operate a cement plant
cement Ltd. of 2.1 million tones per annum
Associates Ltd.
capacity, utilizing generated slag
during Blast furnace operation at BSL.

MEMORANDUM OF UNDERSTANDINGS

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to set up, develop, manage and own captive/independent power plant (s) at
suitable location/s to meet future power requirements of SAIL. The scope of
Larsen & Toubro Ltd. agreement also includes exploration of opportunities to own captive thermal
coal blocks to cater to the power plant requirements.

Shipping corporation of to promote a Joint Venture Company, which shall primarily provide
India. shipping related services to SAIL for imported coking coal and also
participate in world wide dry bulk shipping trade.

Government of Kerala to increase production from the existing facilities at Steel Complex Limited
(SCL), Calicut and also set up, develop & manage a 50,000 TMT Rolling
Mill along with its balancing facilities and auxiliaries at SCL, Calicut.

POSCO to collaborate in a wide range of strategic business and commercial areas of


mutual interest.

Rashtriya Ispat Nigam to jointly explore and develop low silica limestone mines in the Sultanate of
Ltd. (RINL) Oman.

Mineral Exploration for exploration by MECL at all SAIL mines for assessing the reserves and
Corporation Ltd. (MECL) quality of ore available. It has already started exploratory work in Gua and
Chiria mines.

Heavy Engineering for equipment/spares required for modernization/expansion.


Corporation (HEC)

Bharat Earth Movers for supply of crucial equipment.


Limited (BEML)

Rajasthan State Mines & for long-term supply of low-silica limestone.


Minerals Limited
(RSMML)

IIM, Ahmedabad and Knowledge sharing.


Management
Development Institute
(MDI), Gurgaon

for procurement of high power locomotives

Indian Railways

PRESENT & FUTURE

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SAIL Today

SAIL today is one of the largest industrial entities in India. Its strength has been the diversified
range of quality steel products catering to the domestic, as well as the export markets and a large
pool of technical and professional expertise.

Today, the accent in SAIL is to continuously adapt to the competitive business environment and
excel as a business organization, both within and outside India.

SAIL - Into the Future

Modernisation and Expansion Plan of SAIL Corporate Plan-Expansion Plan, 2010

The Corporate Plan, 2012 was reviewed by Hon’ble Minister of Steel in Jul’06, wherein it was
decided to take up the Expansion of Integrated Steel Plants and Special Steel Plant in one go
based on Composite Project Feasibility Report (CPFR).

By that time Expansion of IISCO Steel Plant and Salem Steel Plant was already approved “in-
principle” based on the Techno-Economic Feasibility Report (TEFR) of MECON. For the
Expansion of other four integrated Steel Plants, MECON was assigned the job of Preparation of
CPFR in Aug’06. The CPFR for the four integrated steel plants was prepared by MECON.

‘In principle’ approval has been accorded by SAIL Board for the expansion plans of IISCO Steel

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Plant (Jul’06), Salem Steel Plant (Jun’06), Bokaro Steel Plant (Dec’06), Bhilai Steel Plant
(Apr’07), Rourkela Steel Plant (May’07) and Durgapur Steel Plant (Jul’07).

Item 2006-07 Capacity as per


(Actual) Expansion Plans
2010
Hot Metal 14.61 26.18
Crude Steel 13.51 24.59
Saleable Steel 12.58 23.13

Plant-wise Capacity Envisaged After Expansion (Mtpa)

Plant Hot Metal Crude Steel Saleable Steel

BSP 7.5 7.0 6.53

DSP 3.5 3.0 2.83

RSP 4.5 4.2 3.8

BSL 7.44 7.00 6.53

ISP 2.91 2.5 2.37

SSP - 0.18 0.34

ASP - 0.48 0.43

VISL 0.33 0.23 0.22

Total 26.18 24.59 23.13

Objective of Growth Plan

• 100% production of steel through Basic Oxygen Furnace (BOF) route


• 100% processing of steel through continuous casting
• Value addition by reduction of semi finished steel
• Auxiliary fuel injection system in all the Blast Furnaces

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• State-of-art process control computerization/ automation
• State-of-art online testing and quality control
• Energy saving schemes
• Secondary refining
• Adherence to environment norms

The investment for modernization and expansion programme of SAIL is


estimated at about Rs.54,333 crores.

Sustenance/
Plant Expansion Total
on-going
BSP 11,262 1,716 12,978
DSP 5,549 114 5,663
RSP 7,668 1,121 8,789
BSL 8,952 2,167 11,119
ASP 49 49
SSP 1,902 - 1,902
VISL 121 121
ISP 12,743 494 13,237
MINES 195 195
OTHERS 280 280
TOTAL 48076 6257 54,333
% 88 12 100

Plant-wise Expenditure in Expansion (Rs. Crore)


2007-08 2008-09
Plant Total
Actual RE Actual
BSP 12.66 35.95 66.63 79.29
DSP - 10.00 16.09 16.09
RSP - 20.00 36.85 36.85
BSL 12 11.17 28.92 40.92
ISP 72.69 340.00 495.70 568.39
SSP 3.26 40.00 35.75 39.01
ASP - - - -

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VISL - - - -
TOTAL 100.61 457.12 679.94 780.55

BOKARO STEEL PLANT - A PARTNER IN NATION BUILDING

Bokaro Steel Plant - the fourth integrated plant in the Public Sector - started taking shape in 1965
in collaboration with the Soviet Union. It was originally incorporated as a limited company on
29th January 1964, and was later merged with SAIL, first as a subsidiary and then as a unit,
through the Public Sector Iron & Steel Companies (Restructuring & Miscellaneous Provisions)
Act 1978. The construction work started on 6th April 1968.

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The Plant is hailed as the country’s first Swadeshi steel plant, built with maximum indigenous
content in terms of equipment, material and know-how. Its first Blast Furnace started on 2nd
October 1972 and the first phase of 1.7 MT ingots steel was completed on 26th February 1978
with the commissioning of the third Blast Furnace. All units of 4 MT stage have already been
commissioned and the 90s' modernization has further upgraded this to 4.5 MT of liquid steel.

The new features added in modernization of SMS-II include two twin-strand slab casters along
with a Steel Refining Unit. The Steel Refining Unit was inaugurated on 19th September, 1997
and the Continuous Casting Machine on 25th April, 1998. The modernization of the Hot Strip
Mill saw addition of new features like high pressure de-scalers, work roll bending, hydraulic
automatic gauge control, quick work roll change, laminar cooling etc. New walking beam
reheating furnaces are replacing the less efficient pusher type furnaces.

A new hydraulic coiler has been added and two of the existing ones revamped. With the
completion of Hot Strip Mill modernization, Bokaro is producing top quality hot rolled products
that are well accepted in the global market.
Bokaro is designed to produce flat products like Hot Rolled Coils, Hot Rolled Plates, Hot Rolled
Sheets, Cold Rolled Coils, Cold Rolled Sheets, Tin Mill Black Plates (TMBP) and Galvanized
Plain and Corrugated (GP/GC) Sheets. Bokaro has provided a strong raw material base for a
variety of modern engineering industries including automobile, pipe and tube, LPG cylinder,
barrel and drum producing industries.

People - The moving force

Bokaro Steel values its people as the fulcrum of all organizational activities. The saga of Bokaro
Steel is the story of Bokaro erecting a gigantic plant in the wilderness of Chhotanagpur, reaching
milestones one after another, staving off stiff challenges in the liberalized era, modernizing its
facilities and innovating their way to the top of the heap.

Directions

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Bokaro Steel is working towards becoming a one-stop-shop for world-class flat steel in India.
The modernization plans are aimed at increasing the liquid steel production capacity, coupled
with fresh rolling and coating facilities. The new facilities will be capable of producing the most
premium grades required by the most discerning customer segments.

Brand Bokaro will signify assured quality and delivery, offering value for money to the
customers.

BOKARO STEEL PLANT – FACILITIES

Raw Materials & Material Handling Plant

The Raw Materials and Material Handling Plant receives, blends, stores and supplies different
raw materials to Blast Furnace, Sinter Plant and Refractory Materials Plant as per their
requirements. It also maintains a buffer stock to take care of any supply interruptions.

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Some 9 MT of different raw materials viz. Iron ore fines and lumps, Limestone (BF and SMS
grade), Dolomite lumps and chips, hard Coal and Manganese ore are handled here every year.

Iron ore and fluxes are sourced from the captive mines of SAIL situated at Kiriburu,
Meghahataburu, Bhawanathpur, Tulsidamar and Kuteshwar. Washed coal is supplied from
different washeries at Dugda, Kathara, Kargali and Giddi, while raw coal is obtained from Jharia
coalfields.

Coke Ovens & By-product Plant

The Coke Oven Complex at Bokaro converts prime coking coal from Jharia, Dugda and
Moonidih and medium coking coal form Kargali, Kathara and Mahuda, blended with imported
coal, into high quality coke for the Blast Furnaces, recovering valuable by-products like
Anthracene Oil, Benzene, Toluene, Xylene, Light Solvent Naphtha, Ammonium Sulphate and
Extra-hard Pitch in the process. Bokaro is situated in the prime coal belt of the country.

The Coke Oven battery has 8 batteries with 69 ovens each, maintained meticulously in terms of
fugitive emission control, use of phenolic water and other pollution control measures.

Blast Furnaces

Bokaro has five 2000-cubic metre Blast Furnaces that produce molten iron - Hot Metal - for steel
making. Bell-less Top Charging, modernised double Cast Houses, Coal Dust Injection and Cast
House Slag Granulation technologies have been deployed in the furnaces. The process of iron-
making is automated, using PLC Charging System and Computer Controlled Supervision
System. The wastes products like Blast Furnace slag and gas are either used directly within plant
or processed for recycling / re-use.

Steel Melting Shops

Hot Metal from the Blast Furnaces is converted into steel by blowing 99.5% pure Oxygen
through it in the LD converter. Suitable alloying elements are added to produce different grades
of steel.

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Bokaro has two Steel Melting Shops - SMS-I and SMS-II. SMS-I has 5 LD converters of 130T
capacity each. It is capable of producing Rimming steel through the ingot route. SMS-II has 2 LD
converters, each of 300 T capacities, with suppressed combustion system and Continuous Casting
facility. It produces various Killed and Semi-Killed steels.

Continuous Casting Shop

The Continuous Casting Shop has two double-strand slab casting machines, producing high
quality slabs of width ranging from 950 mm to 1850 mm. CCS has a Ladle Furnace and a Ladle
Rinsing Station for secondary refining of the steel. The Ladle Furnace is used for homogenizing
the chemistry and temperature. The concast machines have straight moulds, unique in the
country, to produce internally clean slabs.

Argon injection in the shroud and tundish nozzle prevent re-oxidation and nitrogen pick-up,
maintaining steel quality. The eddy current based automatic mould level control, unique in the
country, gives better surface quality. The air mist cooling and continuous straightening facilities
keep the slabs free from internal defects like cracks. The casters are fully automated with
dynamic cooling, on-line slab cutting, de-burring and customized marking. The shop is equipped
with advanced Level-3 automation and control systems for scheduling, monitoring and process
optimization.

CCS produces steel of Drawing, Deep Drawing, Extra Deep Drawing, Boiler and Tin Plate
quality. It also produces low alloy steels like LPG, WTCR, SAILCOR and API Grade.

Slabbing Mill

Slabbing Mill transforms ingots into slabs by rolling them in its 1250 mm Universal Four-High
Mill. The rolling capacity of the Mill is 4 MT per annum. The shop has Hot and Cold Scarfing
Machines and 2800 T Shearing Machine. Controlled heating in Soaking Pits, close dimensional
accuracy during rolling and hot and cold scarfing help produce defect-free slabs.

Hot Strip Mill

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Slabs from CCS and Slabbing Mill are processed in the state-of-the-art Hot Strip Mill. The fully
automatic Hot Strip Mill with an annual capacity of 3.363 million tonnes has a wide range of
products - thickness varying from 1.2 mm to 20 mm and width from 750 mm to 1850 mm. The
mill is equipped with state-of-the-art automation and controls, using advanced systems for
process optimisation with on-line real time computer control, PLCs and technological control
systems.

Walking Beam Reheating Furnaces provide uniform heating with reduction in heat losses,
ensuring consistency in thickness throughout the length. High-pressure De-scaling System helps
eliminate rolled-in scale. Edger in the roughing group maintain width within close tolerance. The
roughing group has a roughing train of a Vertical Scale Breaker, one 2-high Roughing Stand and
four 4-high Universal Roughing Stands. The finishing group consists of a Flying Shear, Finishing
Scale Breaker and seven 4-high Finishing Stands. Hydraulic Automatic Gauge Control system in
the finishing stands ensures close thickness tolerance. The Work Roll Bending System ensures
improved strip crown and flatness. The rolling speed at the last finishing stand is between 7.5-
17.5 meters per second. The Laminar Cooling System is a unique feature to control coiling
temperature over a wide range within close tolerance. The Hydraulic Coilers maintain perfect coil
shape with On-line Strapping system. On-line Robotic Marking on the coil helps in tracking its
identity.

Hot Rolled Coil Finishing

All the Hot Rolled coils from the Hot Strip Mill are received in HRCF for further distribution or
dispatch. HR Coils rolled against direct shipment orders are sheared and finished to customer-
required sizes and dispatched to customers. The material is supplied as per Indian specifications
and many international/ foreign specifications. The shop has two shearing lines with capacities of
6, 45,000 Tonnes/ year and 4, 75,000 Tonnes/ year respectively.

Cold Rolling Mill

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The Cold Rolling Mill at Bokaro uses state-of-the-art technology to produce high quality sheet
gauge material, Tin Mill Black Plate and Galvanized Products. Cold rolling is done to produce
thinner gauge strips of very smooth and dense finish, with better mechanical properties than hot
rolling strips. Rolling is done well below re-crystallization temperature without any prior heating
of the material. The products of CRM are used for deep drawing purposes, automobile bodies,
steel furniture’s, drums and barrels, railway coaches, other bending and shaping jobs and coated
steels. The CRM complex comprises of two Pickling Lines (including a high speed Hydrochloric
Acid Pickling Line with re-generation facilities), two Tandem Mills, an Electrolytic Cleaning
Line, a Continuous Annealing Line, Bell Annealing Furnaces, two Skin-Pass Mills, a Double
Cold Reduction Mill (DCR), Shearing Lines, Slitting Lines and a packaging and dispatch section.
The 5-stand Tandem Mill is capable of rolling sheet gauges up to 0.15 mm thickness. It has
sophisticated Hydraulic Automatic Gauge Control, computerized mill regulation and optimisation
control.

Hot Dip Galvanizing Complex

The Hot Dip Galvanizing Complex integrated with the CRM produces zinc-coated Cold Rolled
strips resistant to atmospheric, liquid and soil corrosion. The Continuous Coil Corrugation Line
in the HDGC produces corrugated sheets and the Galvanized Sheet Shearing Line produces
galvanized plain sheets for a variety of applications. The first shop of Bokaro Steel to get the
ISO-9001 certification way back in 1994, this complex has maintained a high-standard of coating
quality and its SAILJYOTI branded products enjoy a loyal market.
This complex made certain innovations for higher productivity to help re-build earthquake
ravaged Gujarat.

Services - a valuable support network

The service departments like Traffic, Oxygen Plant, Water Management and Energy
Management provide invaluable support to this gigantic plant. Bokaro Steel has a vast networked
of railway tracks and over 40 diesel locos to smoothly run its operations. The Oxygen Plant
provides Oxygen, Nitrogen and Argon for processes like steelmaking and annealing. Water

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Management looks after the huge water requirements of the plant and the township, providing
different grades of water and taking care of recycling needs. Energy Management juggles the
supply and demand of by-product gases and their demand as process fuel.

Maintenance Departments

Bokaro has centralised maintenance departments for large-scale electrical and mechanical
maintenance, in addition to shop-based maintenance wings for running repairs and maintenance.
These facilities are capable of executing massive capital repairs, supported by the fabrication
facilities of the auxiliary shops.

Auxiliary Shops

To meet its needs for maintenance and repairs, Bokaro has a cluster of engineering shops such as
Machine Shop, Forge Shop, Structural Shop, Steel Foundry, Ingot Mould Foundry, Cast Iron and
Non-Ferrous Foundry, Electrical Repair Shop and Power Facilities Repair Shop in addition to
shop-specific Area Repair Shops. Most of the repairs and maintenance requirements of the plant
are met in-house.

The auxiliary shops and maintenance wings of Bokaro Steel, aided by in-house design teams,
have executed a number of highly sophisticated procurement-substitution, productivity
enhancement and quality improvement jobs, saving revenues and enhancing equipment
availability.

The expertise and operational scale of these departments, along with the service departments,
makes Bokaro a truly integrated plant, housing many virtual enterprises within Bokaro Steel.

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BOKARO STEEL PLANT - Community

Peripheral Development

Bokaro Steel is striving to reach the glow and warmth of its furnaces to people living at the
periphery of this thriving steel city. All villages and residential settlements within a radius of 20
kilometers are covered under the peripheral development programmes that benefit some 3 lakh
persons. In recent years, the stress has been on developing basic and infrastructure facilities like
roads, bridges, and schools, primary health centre’s, wells, pumps etc. and renovating the existing
facilities.

Regular health camps are organized to reach immunization and free medicines to people. Free
medicines are also supplied to Asha Dan, a hospital for the lepers, and to government hospitals in

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the event of natural calamities.

Bokaro Steel pitched in with its share in the relief of victims of natural calamities like the Orissa
cyclone, Gujarat earthquake and Bihar floods.

For a number of years, Bokaro Steel has been sponsoring a First Aid camp during Shravani Mela
for the Kanwariyas walking with holy water from Sultanganj in Bihar to Deoghar in Jharkhand -
a holy journey of some 100 kilometers.

Community Care

In a uniquely sensitive gesture of social care, Bokaro Steel has adopted children belonging to the
primitive Birhor tribe that has a very limited population. These children live under the love and
care of Bokaro Steel, getting free board, lodging, dresses and education. They are getting
developmental opportunities of the modern world, without having to shun their own cultural
moorings.

Encouraging Ancillaries

The ancillaries under the Bokaro Industrial Area Development Authority symbolise the spill-over
of economic activities due to Bokaro Steel. The Plant aids these industrial units by providing
testing facilities, technical support for modernization and up gradation, and preferential
procurement orders in their areas of strength that match Bokaro Steel's requirements.

To keep them abreast of the prevailing quality assurance standards, Bokaro Steel has been giving
free consultations to these units for developing their ISO 9001 QA Systems.

Bokaro Mahila Samiti

Founded in 1964, Bokaro Mahila Samiti is a leading philanthropic organisation of the spouses of

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steel men, giving succor to needy people and creating opportunities for skill enhancement and
self-employment. The Samiti runs a number of schools for poor children and for uneducated
elderly and a children's library. The training centre and Udyog Kendra with wings for making
spices, flour, safety gloves, soap, shawls, apparel and embroidered clothes, provide livelihood to
a number of women. Free medical consultation for neonates and their mothers and mobile
dispensary play a key role in providing primary healthcare to needy persons. The Samiti
organises aid drives for lepers, victims of natural calamities, children from poor families and
other resource-constrained people.

BOKARO STEEL PLANT - PRODUCT BASKET


Mill Capabilities
Shop Products Facility Annual Thickness Width Length
Capacity range (mm) range (metre)
(,000 (mm)
Tonnes)
HSM HR Coils/ Sheets/ Plates Continuous Mill 3955 1.6 -16 900-1850
HRCF HR Sheets/ Plates Shearing Line-I - 5-10 1800 2.5-12
HR Sheets/ Plates Shearing Line-II 1.6-4 1500 1.5-4.5
HR Coil Slitting Line
CRM 1660
CR Coils/ Sheets CRM-I complex 0.63-2.5 700-1850
CR Coils/ Sheets CRM-II complex 0.63-1.6 650-1250
CR Coils/ Sheets, TMBP DCR Mill 100 0.22-0.8 650-1040
GP Coils & Sheets GC HDGL 170 0.3-1.6 650-1250
Sheets

By-products

Nitration-grade Benzene Anthracene Oil Pitch Creosote Mixture


Nitration-grade Toluene Extra-hard Pitch BF Granulated Slag
Light Solvent Naphtha Hard-medium Pitch (solid/ liquid) Liquid Nitrogen

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Still Bottom Oil Ammonium Sulphate Phenol Fraction
Hot Pressed Naphthalene

Special Grades of Steel

Special Steel Grades Application


SAE 1541 Automobile Industry
MC 11 Cycle Industry
SPC 370/390 Cycle Industry
C 15 Cycle Industry
API X-42, X-46, X-52, X-56, X-60 (SAILAPI) Pipe Line

SAILCOR (corrosion resistant) Railways


SAILMEDSi (Medium Silicon Steel) Heavy Electrical Winding
SAILPROP Propeller Shaft
Strapping Steel (for internal use only) Strapping Finished Products
Full-hard Galvanised Coil Extra hard roof of houses
Cold Rolled Medium Electrical Steel Transformer core
Extra-low Carbon Extra Deep Drawing (HR & CR) White goods
DMR 249A Grade Steel Defence Research Development Organisation
(DRDO) for fabrication of Submarine parts
(import substitution)
E460/E500/E550 Floating bridges for Defence. For M/S BEML;
for making. (import substitution)
IS8500 Fe 540B high strength low alloy steel with Kolkata fly-over
UTS value in excess of 540 Mpa
Low Carbon, Low Manganese, High Strength Structural purposes. Thermo-mechanically
Structural Steel without microalloying (Carbon 0.10%) Controlled Processing.

REVIEW OF LITERATURE

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Working Capital management is the management of assets that are current in nature. Current
assets, by accounting definition are the assets normally converted in to cash in a period of one
year. Hence working capital management can be considered as the management of cash, market
securities receivable, inventories and current liabilities. In fact, the management of current assets
is similar to that of fixed assets in the sense that is both in cases the firm analyses their effect on
its profitability and risk factors, hence they differ on three major aspects:

1. In managing fixed assets, time is an important factor discounting and compounding


aspects of time play an important role in capital budgeting and a minor part in the
management of current assets.

2. The large holdings of current assets, especially cash, may strengthen the firm’s liquidity
position, but is bound to reduce profitability of the firm as ideal car yield nothing.

3. The level of fixed assets as well as current assets depends upon the expected sales, but it
is only current assets that add fluctuation in the short run to a business.

To understand working capital better we should have basic knowledge about the various aspects
of working capital. To start with, there are two concepts of working capital:

 Gross Working Capital


 Net working Capital

Gross Working Capital: Gross working capital, which is also simply known as working capital,
refers to the firm’s investment in current assets: Another aspect of gross working capital points
out the need of arranging funds to finance the current assets. The gross working capital concept
focuses attention on two aspects of current assets management, firstly optimum investment in
current assets and secondly in financing the current assets. These two aspects will help in
remaining away from the two danger points of excessive or inadequate investment in current
assets. Whenever a need of working capital funds arises due to increase in level of business
activity or for any other reason the arrangement should be made quickly, and similarly if some
surpluses are available, they should not be allowed to lie ideal but should be put to some effective
use.

Net Working Capital: The term net working capital refers to the difference between the current
assets and current liabilities. Net working capital can be positive as well as negative. Positive
working capital refers to the situation where current assets exceed current liabilities and negative
working capital refers to the situation where current liabilities exceed current assets. The net

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working capital helps in comparing the liquidity of the same firm over time. For purposes of the
working capital management, therefore Working Capital can be said to measure the liquidity of
the firm. In other words, the goal of working capital management is to manage the current assets
and liabilities in such a way that a acceptable level of net working capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the business. It has
been emphasized that a business should maintain sound working capital position and also that
there should not be an excessive level of investment in the working capital components. As
pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy or mis-management of
working capital is one of a few leading causes of business failure.

Current assets, in fact, account for a very large portion of the total investment of the firm.
Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business. There are a
number of factors affecting the working capital requirement. These factors have different
importance in different businesses and at different times. So a thorough analysis of all these
factors should be made before trying to estimate the amount of working capital needed. Some of
the different factors are mentioned here below:-

Nature of business: Nature of business is an important factor in determining the working capital
requirements. There are some businesses which require a very nominal amount to be invested in
fixed assets but a large chunk of the total investment is in the form of working capital. There
businesses, for example, are of the trading and financing type. There are businesses which require
large investment in fixed assets and normal investment in the form of working capital.

Size of business: It is another important factor in determining the working capital requirements
of a business. Size is usually measured in terms of scale of operating cycle. The amount of
working capital needed is directly proportional to the scale of operating cycle i.e. the larger the
scale of operating cycle the large will be the amount working capital and vice versa.

Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand
for their goods and services. These fluctuations affect the business with respect to working
capital because during the time of boom, due to an increase in business activity the amount of
working capital requirement increases and the reverse is true in the case of recession. Financial
arrangement for seasonal working capital requirements are to be made in advance.

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Production Policy: As stated above, every business has to cope with different types of
fluctuations. Hence it is but obvious that production policy has to be planned well in advance
with respect to fluctuation. No two companies can have similar production policy in all respects
because it depends upon the circumstances of an individual company.

Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the level
of book debts. The credit term is fairly constant in an industry but individuals also have their role
in framing their credit policy. A liberal credit policy will lead to more amount being committed
to working capital requirements whereas a stern credit policy may decrease the amount of
working capital requirement appreciably but the repercussions of the two are not simple. Hence a
firm should always frame a rational credit policy based on the credit worthiness of the customer.

Availability of Credit: The terms on which a company is able to avail credit from its suppliers
of goods and devices credit/also affects the working capital requirement. If a company in a
position to get credit on liberal terms and in a short span of time then it will be in a position to
work with less amount of working capital. Hence the amount of working capital needed will
depend upon the terms a firm is granted credit by its creditors.

Growth and Expansion activities: The working capital needs of a firm increases as it grows in
term of sale or fixed assets. There is no precise way to determine the relation between the amount
of sales and working capital requirement but one thing is sure that an increase in sales never
precedes the increase in working capital but it is always the other way round. So in case of
growth or expansion the aspect of working capital needs to be planned in advance.

Price Level Changes: Generally increase in price level makes the commodities dearer. Hence
with increase in price level the working capital requirements also increases. The companies
which are in a position to alter the price of these commodities in accordance with the price level
changes will face fewer problems as compared to others. The changes in price level may not
affect all the firms in same way. The reactions of all firms with regards to price level changes
will be different from one other.

RESEARCH METHODOLOGY
Research Design:

Data Collection: Data has been collected through secondary approach.

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Data Sources
The research involved gathering Secondary data. Lot of data has been pooled from Bokaro
Steel Plant to use in the study.

Scope of the Study

The data has been collected from the secondary sources comprising Annual Reports of the firm,
other journals and periodicals.

Apart from conducting this research work on the basis of this information, various techniques of
financial management e.g., comparative statement and ratio analysis etc. were used in the present
study. To present a broad view so far the purpose of the analysis and to make it easy to
understand the problem/concept of a few graphs and tables shall also be presented. In each
chapter, the analysis has been compared with actual management practices of the company under
study. The project is strictly on financing the companies for their day to day transactions. The
broad parameters being current assets ratio, quick test ratio etc.

Limitation of the Study

 The present study is limited to Bokaro Steel Plant.


 The authenticity of the suggestions and recommendations depend upon the rationality of
the data provided to me.
 Have to rely upon the data supplied.
 Executives are not ready to part with the information beyond a limit.

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WORKING CAPITAL- OVERALL VIEW

CASH MANAGEMENT

Cash is the important current asset for the operations of the business. Cash is the basic input
needed to keep the business running on a continuous basis It is also the ultimate output expected
to be realized by selling the service or product manufactured by the firm. The firm should keep
sufficient cash, neither more nor less. Cash shortage will disrupt the firm’s operations while
excessive cash will simply remain idle, without contributing anything towards the firm’s
profitability. Thus a major function of the Financial Manager is to maintain a sound cash
position.

Cash is the money which a firm can disburse immediately without any restriction The term cash
includes currency and cheques held by the firm and balances in its bank accounts. Sometimes
near cash items, such as marketable securities or bank time deposits are also included in cash.
The basic characteristics of near cash assets are that they can readily be converted into cash. Cash
management is concerned with managing of:

i) Cash flows in and out of the firm

ii) Cash flows within the firm

iii) Cash balances held by the firm at a point of time by financing deficit or inverting surplus
cash.

Sales generate cash which has to be disbursed out. The surplus cash has to be invested while
deficit cash has to be borrowed. Cash management seeks to accomplish this cycle at a minimum
cost. At the same time it also seeks to achieve liquidity and control. Therefore the aim of Cash
Management is to maintain adequate control over cash position to keep firm sufficiently liquid
and to use excess cash in some profitable way.

The Cash Management is also important because it is difficult to predict cash flows accurately,
particularly the inflows and that there is no perfect coincidence between the inflows and outflows
of the cash. During some periods cash outflows will exceed cash inflows because payment for
taxes, dividends or seasonal inventory etc., build up. On the other hand cash inflows will be more
than cash payment because there may be large cash sales and more debtors’ realization at any
point of time. Cash Management is also important because cash constitutes the smallest portion
of the current assets, yet management’s considerable time is devoted in managing it. An obvious
aim of the firm now-a-days is to manage its cash affairs in such a way as to keep cash balance at

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a minimum level and to invest the surplus cash funds in profitable opportunities. In order to
resolve the uncertainty about cash flow prediction and lack of synchronization between cash
receipts and payments, the firm should develop appropriate strategies regarding the following
four facets of cash management.

1. Cash Planning: - Cash inflows and cash outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should prepared for this
purpose.

2. Managing the cash flows: - The flow of cash should be properly managed. The cash
inflows should be accelerated while, as far as possible decelerating the cash outflows.

3. 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.

4. Investing surplus cash: - The surplus cash balance should be properly invested to earn
profits. The firm should decide about the division of such cash balance between bank deposits,
marketable securities and inter corporate lending.

The ideal Cash Management system will depend on the firm’s products, organization structure,
competition, culture and options available. The task is complex and decision taken can affect
important areas of the firm.

Functions of Cash Management:

Cash Management functions are intimately, interrelated and intertwined Linkage among different
Cash Management functions have led to the adoption of the following methods for efficient Cash
Management:

 Use of techniques of cash mobilization to reduce operating requirement of cash


 Major efforts to increase the precision and reliability of cash forecasting.
 Maximum effort to define and quantify the liquidity reserve needs of the firm.
 Development of explicit alternative sources of liquidity
 Aggressive search for relatively more productive uses for surplus money assets.
The above approaches involve the following actions which a finance manager has to perform.

1. To forecast cash inflows and outflows

2. To plan cash requirements

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3. To determine the safety level for cash.

4. To monitor safety level for cash

5. To locate the needed funds

6. To regulate cash inflows

7. To regulate cash outflows

8. To determine criteria for investment of excess cash

9. To avail banking facilities and maintain good relations with bankers

Motives for holding cash:

There are four primary motives for maintaining cash balances:

1. Transaction motive

2 .Precautionary motive

3. Speculative motive

4. Compensating motive

1. Transaction motive: - The transaction motive refers to the holding of cash to meet
anticipated obligations whose timing is not perfectly synchronised with cash receipts. If the
receipts of cash and its disbursements could exactly coincide in the normal course of operations,
a firm would not need cash for transaction purposes. Although a major part of transaction
balances are held in cash, a part may also be in such marketable securities whose maturity
conforms to the timing of the anticipated payments.

2. Precautionary motive: - Precautionary motive of holding cash implies the need to hold
cash to meet unpredictable obligations and the cash balance held in reserve for such random and
unforeseen fluctuations in cash flows are called as precautionary balances. Thus, precautionary
cash balance serves to provide a cushion to meet unexpected contingencies. The unexpected cash
needs at short notice may be the result of various reasons as: unexpected slowdown in collection
of accounts receivable, cancellations of some purchase orders, sharp increase in cost of raw
materials etc. The more unpredictable the cash flows, the larger the need for such balances.
Another factor which has a bearing on the level of precautionary balances is the availability of
short term credit. Precautionary cash balances are usually held in the form of marketable

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securities so that they earn a return.

3. Speculative motive: - It refers to the desire of a firm to take advantage of opportunities


which present themselves at unexpected movements and which are typically outside the normal
course of business. The speculative motive represents a positive and aggressive approach. Firms
aim to exploit profitable opportunities and keep cash in reserve to do so. The speculative motive
helps to take advantage of: opportunity to purchase raw materials at a reduced price on payment
of immediate cash; chance to speculate on interest rate movements by buying securities when
interest rates are expected to decline; delay purchases of raw materials on the anticipation of
decline in prices; etc.

4. Compensation motive: - Yet another motive to hold cash balances is to compensate banks
for providing certain services and loans. Banks provide a variety of services to business firms,
such as clearances of cheques, supply of credit information, transfer of funds, etc. While for some
of the services banks charge a commission of fee for others they seek indirect compensation.
Usually clients are required to maintain a minimum balance of cash at the bank. Since this
balance can not be utilized by the firms for transaction purposes, the bank themselves can use the
amount for services rendered. To be compensated for their services indirectly in this form, they
require the clients to always keep a bank balance sufficient to earn a return equal to the cost of
services. Such balances are compensating balances. Compensating balances are also required by
some loan agreements between a bank and its customer.

Cash Management: Objectives

The Basic objective of cash management is twofold:

(a) To meet the cash disbursement needs (payment schedule);

(b) To minimize funds committed to cash balances. These are conflicting and mutually
contradictory and the task of cash management is to reconcile them.

Meeting the payments schedule: A basic objective of the cash management is to meet the
payment schedule, i.e. to have sufficient cash to meet the cash disbursement needs of the firm.
The importance of sufficient cash to meet the payment schedule can hardly be over emphasized.
The advantages of adequate cash are : (i) it prevents insolvency or bankruptcy arising out of the
inability of the firm to meet its obligations; (ii) the relationship with the bank is not strained; (iii)
it helps in fostering good relations with trade creditors and suppliers of raw materials, as prompt
payment may also help their cash management; (v) it leads to a strong credit rating which enables
the firm to purchase goods on favorable terms and to maintain its line of credit with banks and

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other sources of credit; (vi) to take advantage of favorable business opportunities that may be
available periodically; and (vi) finally the firm can meet unanticipated cash expenditure with a
minimum of strain during emergencies, such as strikes , fires or a new marketing campaign by
competitors.

Minimizing funds committed to cash balances: The second objective of cash management is to
minimize cash balances. In minimizing cash balances two conflicting aspects have to be
reconciled. A high level of cash balance will, ensure prompt payment together with all the
advantages, but it also implies that large funds will remain idle ultimately results less to the
expected. A low level of cash balances, on the other hand, may mean failure to meet the payment
schedule that aim of cash management should be to have an optimal amount of cash balances

Cash Management Techniques & Processes

The following are the basic cash management techniques and process which are helpful in better
cash management:

Speedy cash collection: In managing cash efficiently the cash in flow process can be accelerated
through systematic planning and refined techniques. These are two broad approaches to do this
which are narrated as under:

Prompt payment by customer: One way to ensure prompt payment by customer is prompt billing
with clearly defined credit policy. Another and more important technique to encourage prompt
payment the by customer is the practice of offering trade discount/cash discount.

Early conversion of payment into cash: Once the customer has makes the payment by writing its
cheques in favor of the firm, the collection can be expedited by prompt encashment of the
cheque. It will be recalled that there is a lack between the time and cheque is prepared and mailed
by the customer and the time funds are included in the cash reservoir of the firm.

Concentration Banking: In this system of decentralized collection of accounts receivable, large


firms which have a large no. of branches at different places, select some of these which are
strategically located as collection centers for receiving payment for customers. Instead of all the
payments being collected at the head office of the firm, the cheques for a certain geographical
areas are collected at a specified local collection centers. Under this arrangement the customers
are required to send their payments at local collection center covering the area in which they live
and these are deposited in the local account of concerned collection, after meeting local expenses,
if any. Funds beyond a predetermined minimum are transferred daily to a central or disbursing or
concentration bank or account. A concentration banking is one with which the firm has a major

43
account usually a disbursement account. Hence this arrangement is referred to as concentration
banking.

Lock-Box System: The concentration banking arrangement is instrumental in reducing the time
involved in mailing and collection. But with this system of collection of accounts receivable,
processing for purposes of internal accounting is involved i.e. sometime in elapses before a
cheque is deposited by the local collection center in its account. The lock-box system takes care
of this kind of problems, apart from effecting economy in mailing and clearance times. Under
this arrangement, firms hire a post office box at important collection centers. The customers are
required to remit payments to lock-box.

The local banks of the firm, at respective places, are authorized to open the box and pick up the
remittance received from the customers. Usually the authorized bank picks up the cheques
several times a day and deposits them in the firm’s account. After crediting the account of the
firm the banks send a deposit 4epo slip along with the list of payments and other enclosures, if
any, to the firm by way of proof and record of the collection.

Slowing disbursements: A basic strategy of cash management is to delay payments as long as


possible without impairing the credit rating/standing of the firm. In fact, slow disbursement
represents a source of funds requiring no interest payments. There are several techniques to delay
payment of accounts payable namely (1) avoidance of early payments; (2) centralized
disbursements; (3) floats; (4) accruals.

Avoidance of early payments: One way to delay payments is to avoid early payments. According
to the terms of credit, a firm is required to make a payment within a stipulated period. It entitles a
firm to cash discounts. If however payments are delayed beyond the due date, the credit standing
may be adversely affected so that the firms would find it difficult to secure trade credit later. But
if the firm pays its accounts payable before the due date it has no special advantage. Thus a firm
would be well advised not to make payments early i.e. before the due date.

Centralized disbursements: Another method to slow down disbursements is to have centralized


disbursements. All the payments should be made by the head office from a centralized
disbursement account. Such an arrangement would enable a firm to delay payments and conserve
cash for several reasons. Firstly it involves increase in the transit time. The remittances from the
head office to the customers in distant places would involve more mailing time than a
decentralized payment by a local branch. The second reason for reduction in operating cash
requirement is that since the firm has a centralized bank account, a relatively smaller total cash
balance will be needed. In the case of a decentralized arrangement, a minimum cash balance will

44
have to be maintained at each branch which will add to a large operating cash balance. Finally,
schedules can be tightly controlled and disbursements made exactly on the right day.

Float: A very important technique of slow disbursements is float. The term float refers to
amount of money tied up in the cheque that have been written, but have yet to be collected and
encashed. Alternatively, float represents the difference between the bank balance and book
balance of cash of a firm. The difference between the balance as shown in the firm’s record and
the actual bank balance is due to transit and processing delays. There is time lag between the
issue of a cheque by the firm and its presentation to its bank by the customer’s bank for payment.
The implication is that although a cheque has been issued cash would be required later when the
cheque resented for encashment. Therefore, a firm can send remittance although it does not have
cash in its bank at the time of issuance of cheque. Meanwhile, funds can be arranged to make
payments when the cheque is presented for collection after a few days. Float used in this sense is
called cheque kitting.

Accruals: Finally, a potential tool for stretching accounts payable is accruals which are defined as
current liabilities that represent a service or goods received by a firm but not yet paid for. For
instance, payroll, i.e., remuneration to employees, who render services in advance and receive
payment later. In a way they extend credit to the firm for a period at the end of which they are
paid, say, a week or month. The longer the period after which payment is made, the greater the
amount of free financing and the smaller the amount of cash balances required. Thus, less
frequent payrolls, i.e. monthly as compared to weekly, are important sources of accruals. They
can be manipulated to slow down disbursements.

Determining the optimal level of cash balance:

Cash balance is maintained for the transaction purposes and additional amount may be
maintained as a buffer or safety stock.

The Finance manager should determine the appropriate amount of cash balance. Such a decision
is influenced by trade-off between risk and return. If the firm maintains small cash balance, its
liquidity position becomes week and suffers from a paucity of cash to make payments. But a
higher profitability can be attained by investing released funds in some profitable opportunities.
When the firm runs out of cash it may have to sell its marketable securities, if available, or
borrow. This involves transaction cost.

On the other hand if the firm maintains a higher level of cash balance, it will have a sound
liquidity position but forego the opportunities to earn interests. The potential interest lost on

45
holding large cash balance involves opportunities cost to the firm.

Thus the firm should maintain an optimum cash balance, neither a large nor a small cash balance.

To find out the optimum cash balance the transaction cost and risk of too small balance should be
matched with opportunity costs of too large a balance should be matched with opportunity cost of
too large a balance. Figure shows this trade-off graphically. If the firm maintains larger cash
balances its transaction cost would decline, but the opportunity cost would increase. At point X
the sum of two costs is minimum. This is the point of optimum cash balance. Receipts and
disbursement of cash are hardly in perfect

synchronization.

Despite the absence of synchronization it is not difficult to determine the optimum level of cash
balance.

If cash flows are predictable it is simply a problem of minimizing the total costs - the transaction
cost and the opportunity cost.

The determination of optimum working cash balance under certainty can thus be viewed as an
inventory problem in which we balance the cost of too little cash ( transaction cost) against the
cost of too much cash( opportunity cash)

Cash flows, in practice, are not completely predictable. At times they may be completely random.
Under such a situation, a different model based on the technique of control theory is needed to
solve the problem of appropriate level of working cash balance.

With unpredictable variability of cash flows, we need information on transaction costs,


opportunity costs and degree of variability of net cash flows to determine the appropriate cash
balance. Given such data the minimum and maximum of cash balances should be set. Greater the
degree of variability, higher the minimum cash balance. Whenever the cash balance reaches a
maximum level, the differences between maximum and minimum levels should be invested in
marketable securities. When balance is falls to zero, marketable securities should be sold and
proceed should be transferred to the working cash balances.
PRACTICE OF CASH MANAGEMENT IN BOKARO STEEL CITY

Cash management of Bokaro Steel Plant is totally governed at Corporate Level. Here fund are
provided from Corporate Office after every 10 to 15 days as per requirement by BSL.

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YEARS CASH & BANK TOTAL CURRENT % OF CASH & BANK BALANCE
BALANCE (IN LAKHS) ASSETS (IN LAKHS) TO CURRENT ASSETS

2007 3790 182611 2.08

2008 4108 186244 2.21

2009 4400 183588 2.40

2010 4660 231202 2.02

Figure 1: Composition of Cash & Bank Balance in Total Current Assets

47
MANAGEMENT OF INVENTORY

Inventories are the stock of the product made for sale by the company or semi finished goods or
raw materials. Inventory of finished goods which are ready for sale is required to maintain
smooth marketing operation. The inventory of raw material and work in progress is required in
order to maintain an unobstructed flow of material in the production line. These inventories serve
as a link between the production and consumption of goods.

The aspect of management of inventory is especially important in respect to the fact that in
country like India, the capital block in terms of inventory is about 70% of the current assets. It is
therefore, absolutely imperative to manage efficiently and effectively in order to avoid
unnecessary investment in them. Although to maintain low inventories may prove to be profitable
but to maintain very low inventories may prove risky on the contrary.

This aspect of management if tackled in a proper way may prove to be a boon its effective and
efficient management would result in the maintaining of optimum level of inventories. At this
level the profitability of the organization will not be jeopardized at the cost of inventory.

Now from the above stated facts it is clear that maintaining of optimum level of inventory
involves huge cost, so why should keep the inventories at all. Basically there are three main
reasons for which inventories are stocked and they are:-

1. Transaction Motive: This motive lays emphasis on maintaining of inventories in order to


maintain a smooth and unobstructed supply of materials for the sales and production operations.

2. Precautionary Motive: This motive emphasizes on the stocking goods in order to guard
against the uncertainties of future i.e. unpredictable changes in the forces of demand, supply and
other forces.

3. Speculative Motive: This motive influences the decisions regarding the increase or
decrease in the level of inventory in order to take advantage of price fluctuations.

A company should maintain adequate stock of materials for a continuous supply to the factory for
an uninterrupted production. It is not possible for a company to procure raw material
instantaneously whenever needed. A time lag exists between demand and supply of material.
Also, there exists an uncertainty in procuring raw material in time at many occasions. The
procurement of materials may be delayed because of factors beyond company’s control e.g.
transport disruption, strike etc. Therefore, the firm should keep a sufficient stock of raw material

48
at a time to have streamline Other factors which may incite us to keep stock of inventories is the
quantity discounts, expected rise is price.

The work in process inventory builds up because of the production cycle. Production cycle is the
time span between the introduction of raw material in to the production and the emergence of
finished goods at the completion of production cycle. Till the production cycle completes, the
stock of work in process has to be maintained.

Efficient firms constantly try to make the production cycle smaller by improving their production
techniques.

The stock of finished goods has to be held because production and sales are not instantaneous. A
firm cannot produce immediately when goods are demanded by customers. Therefore to supply
finished goods on regular basis, their stock has to maintain for sudden demand of customers, in
case the firm sales are seasonal in nature, substantial finished goods inventory should be kept to
meet the peak demand. Failure to supply products to customer, when demanded, would mean loss
of the firm’s sales to the competitors.

The basic objective in holding raw material inventory is separate purchase and production
activities and in holding finished goods inventory is to separate production and sales activities. If
raw material inventory is not held, purchase would have to be made regularly at the time of
usage. This would mean production interruptions and high cost of ordering.

A sufficiently large inventory has to be maintained of finished goods so as to meet the fluctuating
demands. If a close link is maintained between the sales and the production department then an
organization can do with a small inventory also. In the process, inventory is also necessary
because production cannot be instantaneous. But it should be seen that the size of production
cycle should be small.

Objectives Of Inventory Management

In the modern business world there is practically nothing that is done without objective. The
objective is also one that would help the organization in reaching its goals in a better way. Hence
it can be inferred that the importance given to management of inventory in the business world is
not devoid of a concrete reasons behind it.

The two main reasons behind all this are, firstly, to maintain a inventory big enough that the
production and sales operation are carried on without any hindrance and secondly, to minimize
the investment in inventory, in order to maximize the profits. Both, excessive as well as

49
inadequate inventory level is not good. They are the two danger points that a company should try
to avoid and should always try to maintain optimum level of inventory. The excessive investment
in the inventory has the following drawbacks:

 Unnecessary tie up of firm’s fund and loss of profit.


 Excessive carrying cost.
 The risk of liquidity.
The over investment of funds in inventory eat up the precious funds which could have been put to
some profitable use. The carrying cost incurred, can not be ignored, this is the cost of storage,
handling insurance, recording and inspecting. These all costs incurred in order to have large
inventories impair the profitability of the firm. Another danger of carrying excessive inventory is
the deterioration, obsolescence and pilferage of raw materials.

Maintaining inadequate inventory is also dangerous. The consequences of under investment in


inventory are

 Production hold ups;


 Failure to meet commitment
If the inventory of finished goods is not adequate than the demand of customer is peak periods
may be left unmet and it the under investment is in the area of raw materials that is likely that the
production process may be held up frequently.

The aim of inventory management thus should be to avoid excessive and inadequate level of
inventory and to maintain sufficient inventory for smooth production and sales operation efforts
should be made to place an order at the right time to right source to acquire right amount at the
right price and for right quantity. The aspects of a effective inventory management should take
care of are

 Ensure continuous supply of material to facilitate uninterrupted production.


 To maintain sufficient stocks of raw material in the periods of short supply and evident
price rise.
 To maintain sufficient inventory of finished goods for smooth sales operation.
 Minimize carrying cost and time.
 Control investment and keep it to the optimum level.
Before discussing the inventory control technique, here is the discussion of the various terms
such as economic order quantity, carrying cost etc.

1. Economic Order Quantity: It is the inventory level which minimizes the total of ordering

50
and carrying cost. Determining economic order quantity involves two types of costs i.e. ordering
cost and carrying cost.

2. Ordering Cost: This is used especially in the case of raw materials and is included in the
cost incurred in acquiring the raw material. It is proportional to the number of orders and
inversely proportional to the size of inventory. Apart from the cost of acquired raw material this
also includes requisitioning, purchasing order, transporting receiving, inspecting and sorting cost.

3. Carrying Cost: This is used in the case of all types of inventories. There are the costs
which are incurred for holding a given amount of inventory, they include opportunity cost of
funds invested is inventories insurance, taxes, storage cost and the cost of deterioration and
obsolescence. It is directly proportional to the size of inventory.

4. Reorder Points: Reorder point is the inventory level at which an order must be placed to
replenish the inventory and evade the risk of running out of raw material. To determine the
reorder point under uncertainty we should know the lead time, the average usage, economic order
quantity etc.

5. Safety Stocks: It is difficult to predict usage and the lead time accurately. The demand for
material is never constant. Similarly the actual delivery time may be different firm the normal
lead time. In case of increased usage or delivery delayed, there is bound to be problem of stock
out. Stock out can prove to be costly affair for a company. Therefore in order to guard against the
stock out, the company may keep some buffer stock as a cushion against expected increased
and/or delay in delivery .This buffer stock is called as safety stock.

The various techniques or approaches used in the management of inventory by different firms to
calculate the economic order quantity are here given below: -

1). Trial and Error Approach: This is the technique to resolve the economic order quantity
problem. In this technique we take the annual requirement, purchasing cost per unit, ordering cost
per order and carrying cost per unit for the computation of economic order quantity. We suppose
a constant usage and then considering different sizes of orders and calculate the different total
costs. The order corresponding to the minimum total cost has the economic order quantity.

2). EOQ Model: This is quite an easy approach to calculate the economic order quantity than
the trial and error approach. Here we find the economic order quantity with the help of the
formula

EQ = Sqrt (2AO / C)

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Where A -> Total Annual Requirement

O -> Ordering cost order

C -> Carrying cost per unit

3). Graphic Approach: Here the economic order quantity is found out with the help of a
graph. We take the order size on horizontal axis and cost incurred on the vertical axis. Now we
plot the graph regarding the carrying cost and the ordering costs. Now with the help of these two
we draw a graph of minimum total cost. The economic order point is the point at the lowest value
of the total minimum costs.

PRACTICE OF INVENTORY MANAGEMENT IN BOKARO STEEL CITY


In case of raw materials, ABC analysis is followed on consumption pattern and XYZ analysis is
followed on stock available at the end of year. For optimum utilization of inventory a proper
blend between ABC & XYZ analysis is used.
AP MANAGEMENT
When common items are put under centralized procurement then Automatic Procurement
Management come into action. It is helpful in maintaining the uniqueness of an item.
Management of AP Items
AP items shall have the following characteristics:-
1. It should be a general consumable with standard specification.
2. It should be generally required by more than one department. However, items required by
only one department shall also be included into AP list as recommended by the Standing
AP Committee and approved by Head of Maintenance & Head of Material Management.
For such cases, Stock control may also obtain approval of Head of Material Management
for inclusion into AP without routing through the committee depending upon the
exigency.
3. It should have regular consumption pattern.
The objective of Stock Control is to make AP items available.
Standing Committee On AP
There shall be a standing committee for AP items constituted with the approval of Head of
Maintenance. The Standing Committee shall review the AP items every three years for up
gradation of specifications with possible vendor base where felt necessary. However, any issue
relating to specification shall be referred to the Standing Committee for revision.

52
The Standing Committee for AP shall review the list for deletions/ additions of items into list.
The item shall be deleted/ added into AP list after the recommendation of the Standard
Committee is approved by Head of Maintenance & Head of Materials. The list for addition/
deletion shall be put up to the Standing Committee every year by Stock Control.
Raising Of MPRs
All MPRs for AP items shall be raised through Computer. Since intending is based on an
approved logic, no screening shall be done for AP indents.
All AP items shall be classified into vital & non-vital categories. Vital items are those which
directly affect production & shall be identified with the help of users.
The AP items shall be classified into ABC category based on consumption value during the
previous financial year:-
Top 10% = A class
Next 20% = B class
Last 70% = C class
Lead Time is the time taken from MPR to the receipt of materials. Lead time data shall be up
dated once in every financial year on the basis of last two financial year’s data.
Safety Stock shall be the stock to take care of variation in demand and supply. Safety stock for
each class of AP items shall be as follows:
AV = 3 months (V= vital)
ANV = 1 month (NV= non-vital)
BV = 4 months
BNV = 3 months
CV = 6 months
CNV = 4 months
Maximum Level shall be the highest level of Stock permissible for an item under normal course.
It is Annual quantity + Lead time consumption + safety stock.
Annual Quantity = Weighted average of last three years consumption with the latest year
consumption having weight of 50% & previous two years having weight of 25% each.
There are total 39 groups under which all items are classified. There will be CALANDER for
MPR raising for each group of items. MPR for one group of items shall be raised at a time.
MPR quantity shall be = maximum level-Stock-Dues in.

53
Dues in shall be pending MPR or pending Purchase Order after giving due consideration to bad
dues in.
Bad dues in shall not be considered for calculation of outstanding supply.
Items of same group, similar nature & same vendor base shall be combined & indented against
single MPR as far as possible.
Continuous Review
Apart from annual review, continuous review of stock and dues in shall be done every 15 days &
if the stock falls below the reorder level, MRP shall be raised for the quantity equal to the
consumption between annual review calendar period and current period. Additional requirement
for capital repair etc shall be taken care of.
Follow Up & Review
Status Report shall be obtained from system once a month and information given to purchase for
making available Nil stock and critical stock items.
The vital item shall be reviewed once a week.
The daily position of certain selected vital items shall be monitored for replenishment and to
avoid stock out.
There shall be a structured follow-up with Purchase Department.
An annual report of slow moving/ non-moving AP items shall be submitted to standing
committee on AP for consideration of deletion of these items from AP list.
A weekly report of items having less than Safety Stock shall be send to purchase department for
timely follow up to avoid stock out.
A weekly report of stock out items shall be sent to Purchase Department for intensive follow up.
Bad Dues In: Bad dues in are quantities supply against which are not expected in normal course.
In case supplies against had dues in are received, same should be taken care in the next cycle of
planning. Bad dues in shall not be taken into account while calculating MPR quantity. Following
cases shall be treated as bad dues in:-
1. MPRs more than 12 months old, either part or full.
2. Purchase Order more than 18 months old.
3. Outstanding Purchasing Order quantity > 10% of the original Purchase Order quantity &
last supply is more than six month old.
4. MPR& Purchase Order against which supplies are not likely to materialized on account of
any dispute.
In consultation with purchase, the bad dues in shall be reviewed and dropped/ closed/ short
closed wherever felt necessary.

54
Delivery: Delivery schedule shall be decided depending upon nature & criticality of the item.
Estimated Value: Estimated value shall be based upon the last purchase price (LPP) obtained
against a normal MPR. LPP against an emergency MPR shall not be considered.
MPRs for Specific Requirement like Capital Repair, planned special repair etc. shall be
received only with the approval of HOD (not below the rank of E7). Approval of Head of Stores
shall be obtained for raising MPRs for such requirements.
Proprietary Approval: An item to be procured on proprietary basis shall have the approval of
Head of Maintenance & General Manager (Material Management). The proprietary status after
approval shall be incorporated into system. Separate approval every time at the time of indenting
shall not be required. However, proprietary item shall be reviewed every year by the Standing
Committee on AP item.
Emergency MPR: Emergency MPR shall be raised with the approval of competent authority as
per Department of Purchase.
Short Closure Of Purchase Order/ MPR: The outstanding supply against MPR and Purchase
Order shall be reviewed once in 6 months and closed/ short closed wherever felt necessary.
Release Of Materials: Stock Control shall be the releasing agency unless otherwise specified.
Materials shall be released on the basis of consumption trend, stock in hand and any other
relevant information i.e. special repair etc. The details of releasing agencies are given below:

Group of items Releasing Agency

Safety items Safety Engg. Deptt.


Electrodes, Lifting Tools & tackles R&R
Wire Ropes Crane Inspection
Electrical items Standardization Cell (Elec.)
Paints CED
Ammonia Paper Plant Design

Procurement Process: Being indenter of AP items. Stock Control shall be associated in


finalization of cases for procurement in areas like Vendor Selection, Mode of Tendering, TC,
Negotiation, TR whenever felt necessary.
Technical Recommendation: For AP items being of Standard specification, Technical
recommendation by Stock Control shall not be required. However, in case of any doubt or
clarification, the cases shall be referred to Stock Control for TR. Help of centralized agencies or
main user may be obtained for TR wherever felt necessary.

55
Figure 2: Graphical presentation of EOQ model of Automatic Procurement item

Minimum Level (Safety Stock) = 3 months

Buffer Stock = 6 months

Reorder Level = 9 months of NOMC (No. of Monthly Consumption)

Procurement Lead Time = 6 months

ROLE OF STORE & PURCHASE DEPTT. IN PURCHASING PROCESS


The most important function of public procurement is to maintain transparency which not only
ensure a level of playing field to the suppliers/ contractors but also result in qualitative
improvement in material/ services received due to increased competition.
CMO (Central Marketing Organization) places an order with specification to Bokaro Steel Plant
as per demand. Now inside plant, Production Planning Control & Sales Co-ordination department
makes production planning for different department.

Raising Of Indents or MPR


Now according to production planning, the indents for purchase of materials called MPR
(Material Purchase requisition) shall be raised by the department(s) concerned or designated
centralized agencies. These Indents shall be prepared in the prescribed format (to be designed by
each Plant/ Unit). The indent shall be signed by the Head of the Department (HOD). The Plant/

56
Unit shall devise a proper system of numbering the Indents initially and their processing
reference at different stages to facilitate cross reference. Suitable Index registers shall also be
maintained for such numbering/ references at different stages for control purposes.

It will be the prime responsibility of the Indentor to prepare judicious estimate of the current
value of the Indent. The Indentor shall take the help of Engineering Services and other
Centralized Agencies, if so required, for the preparation of judicious estimate using scientific/
technical methods. The estimated value of each and every item to be procured/each and every
item of work to be executed will be filled in the appropriate column in the indent. The detailed
estimate signed by the Head of the Indenting Department will be enclosed with the indent.
The names of the suggested registered manufacturers/ suppliers/ traders/ contractors, as the case
may be, may be indicated by the Indentor in the Indent on the basis of past experience of parties
along with order references, if any.

In case, it is desired to split the order on more than one of the above, the Indentor shall specify so
in the Indent giving the maximum number of suppliers/ contractors desired to be engaged,
justifying the reasons for the same. In such case, a minimum of X+2 offers should have been
received (‘X’ is the number of supplier/ contractor on whom order is to be placed) during
opening of the tenders. The dealing executive will inform the Tender Opening Cell, the minimum
number of offers required in each case. In case of 2/3 part quotation, for opening the price bids,
there should be minimum X+2 techno-commercially acceptable offers in all cases provided that:
(a) In case of open/ global tenders, if less than the specified (X + 2) numbers of offers are
received; same can be processed without going for re-tender/ TOD Extension with the
approval of the authority one stage higher than the authority competent to approve the
enquiry proposal or Chief Executive.

(b) In case of LTE, if less than specified X + 2 numbers of offers are received in the first
attempt, a second attempt may be made by inclusion of new venders or extension of due
date if there is no scope of adding new vendors. In case adequate number (X + 2) of offers
are not obtained even in response to the second attempt, the offers received shall be
processed with the approval of the authority, one stage higher than the authority
competent to approve the enquiry proposal. Where the approving authority of Enquiry
proposal is the Chief Executive of the Plant/ Unit, the approving authority for processing
the case where offers received are less than X + 2 shall also be the Chief Executive of
Plants/ Units, who shall have full powers to approve such proposals.

In case there are certain quantifiable factors required to be considered/ loaded while evaluating
the prices quoted by the tenderers, such factors in clear quantifiable terms should be mentioned in
the Indent by the Indentor.

In case the tenderers are required to submit samples along with the quotation, the same should be
clearly mentioned in the Indent itself. However, no sample should be called for the items for
which detailed/standard specifications are available. For procurement of clothing and textile
items detailed specifications may be mentioned & no sample shall be called. However, if
required, provision for submission of an advance sample by successful bidder(s) may be
stipulated for indeterminable parameters such as, shade/tone, size, make-up, feel, finish and
workmanship, before giving clearance for bulk production of the supply.

57
The Indents for purchase of material shall be scrutinized by the Screening Committee constituted
by the Competent Authority for the nature of the items concerned, comprising the representatives
of the related departments such as Centralized Maintenance, Central Workshop, Indentor, MM
Deptt., Finance, etc. The executives nominated for the Screening Committee shall be in the rank
of E-5 and above. The Screening Committee shall scrutinize the Indent within a week of the
receipt by it.

Scrutiny of indents:
In case of computer generated indents of automatic procurement (AP) items, based on the re-
order level, screening is not required by the Screening Committee.
Indents value below Rs. 5 Lacs, covering the annual requirement (excluding
Proprietary items and Non-Proprietary STE items) need not be scrutinized by the screening
committee and shall be cleared by the Head of Indenting department for further processing by the
MM Deptt.

The scrutinized Indent, found complete in all respects, shall be sent to the MM Deptt/ Contract
Cell after obtaining approval of the Competent Authority.
On receipt of the Indent by the MM Deptt./ Contract Cell, an entry will be made in the Indent
Register/Computer and a case-file opened. While processing the indent for tendering, if any
discrepancy is found, the MM Deptt./ Contract Cell shall return the indent to the Screening
Committee/ Indentor for compliance/ clarification by either Screening Committee or by Indentor,
on such discrepancies.

Considering the nature of item / job, its value / cost involved, knowledge of suppliers/
contractors, prevailing market scenario, etc., the mode of tendering for indent value Rs. 5 Lacs
and above shall be suggested by the respective Screening Committee and for indents valuing
below Rs.5 Lacs, covering the annual requirement (excluding Proprietary items and Non-
Proprietary STE items) need not be scrutinized by the screening committee and shall be cleared
by the Head of Indenting department, the mode of tendering shall be suggested by the MM
Deptt./ Contract Cell., for approval of Competent Authority.

Mode of Tendering
After screening process is complete, Purchase department will now issue a purchase order.
The recommended modes of tendering for placement of orders are as under:
(a) Open Tender/ Global Tender,
(b) Limited Tender Enquiry (LTE),
(c) Single Tender for Proprietary items (Original Equipment Manufacturers).
(d) Single Tender (other than Proprietary item)

Open/Global tender: Tender is open for everyone. Open/ Global tenders are to be considered
under the following circumstances:

• When reliable manufacturers/ suppliers/ traders/ contractors as well as latest technology


are not clearly known.
• When it is felt that advertising may elicit better response.

58
• For any other commercial consideration i.e. as a policy, DOP/ estimated value of
purchase/ job contract, formation of cartel/ ring like situations etc.

Limited tender enquiry: Tender is issued to limited parties; those were registered to Bokaro Steel
Plant. LTE should be issued only when reliable manufacturers/ suppliers/ traders/ contractors are
known. For this purpose, the MM Deptt./ Contract Cell shall maintain a list of registered parties
Single tender enquiry: Tender is issued to only one specific party because that party may enjoy
monopoly.
Proprietary (Original Equipment Manufacturers - OEM) Enquiry: Enquiries for Proprietary items
(OEM) should be issued with the approval of Competent Authority as per the DOP. Such
Proprietary items should be purchased from their manufacturers or their authorized dealers only,
where he manufacturer does not supply the equipment directly. In case there is more than one
dealer authorized to sell a particular proprietary item, to Plant/ Units, discount may be possible
through Limited Tender Enquiries, therefore LTE may be issued to the authorized dealers.

Single Tender Enquiry (Other than Proprietary Items): Single Tender Enquiries should be issued
as an exception only. Such enquiries should be processed, after recording reasons and indenter
should take approval of Chief Executives of the Plant/ Unit in all cases except procurement from
PSUs/ State Government Undertakings where approval of Competent Authority shall be
obtained.

After winning the tender supplier now sends the order as per contract, which will receive by
stores department and DCR (Daily Collection Report) is issued. On DCR, an inspection is done
by CRS (Central Receiving Section). After finding every thing correct CRS will issue GRN
(Goods Receipt Note) to Finance department. On basis of GNR, Finance department will pay for
the consignment to the supplier.
During purchase of raw materials reverse auction is adopted, where that party will get the tender
who will meet the specification and quote the minimum price. In case of selling finished/semi-
finished product forward auction is adopted, where product is selling to that party who will quote
the maximum price.

Year Inventories (in crore) Total current assets % of inventories to

59
current assets

2008 1365.6 1826.1 74.78

2009 1185.5 1835.9 64.59

2010 1755.02 2312.02 75.87

2500
2000
1500 INVENTORIES (in
crore)
1000 TOTAL CURRENT
500 ASSETS

0
2008 2009 2010

Figure 3: Contribution of Inventories in Total Current Assets

MANAGEMENT OF RECEIVABLES

The term receivables are defined as ‘debt owed to the firm by customers arising from sale of
goods or services in the ordinary course of businesses’. Receivables management is also called
trade credit management. Trade credit, the tool which as a bridge for movement of goods through
production and distribution stages to customer, is a force in the present day business and an
essential device. Trade credit is granted with a motive of protecting the sale from ones,
competitors and attaching more of the potential customers. Trade credit is said to be extended to
a customer when a firm sell its services or goods and does not receive the payment for them
immediately. Thus trade credit creates receivable which refer to the amount which a firm is
expected to collect in near future.

The book debt or receivable which arise a result of trade credit have the following features:

 It involves a element of risk and hence should never to be fiddled with. As credit sale
leave a sum to be recovered in future and future can never be the certainty, hence it is risky.
 It is based on economic value, while for the buyer, the economic value in goods passes

60
immediately at the time of purchase, while the seller expects an equivalent value to be
received later on.
 It represents futurity. The cash payments for the goods or services received by the buyer
will be made in future.
The management of receivable gain more importance in the view of the fact that more than one
third of the total current assets is blocked in the form of trade debtors. The interval between the
date of sale and the date of payment is financed by working capital. Thus trade debtors represent
the investment. As substantial amount are tied up as trade credit hence it requires careful analysis
and proper management.

Goals of Management of Receivables

As all other aspects of management, this also aims at the maximization of wealth by a beneficial
trade off between liquidity risk and profitability. The main aim of management is not to
maximize sales or minimize bad debt risk but in a way it is to expand sale to the extent that the
bad debt risk remained within the limits. So in a effort to maximize the wealth, the goals of
management of receivable are:

 To obtain optimum value of sales


 To control the cost of credit and keep it to the minimum level.
 To maintain investment in debtors at optimum level.
Sales maximization is not the purpose of credit management but an effective and efficient credit
management helps in expanding sales and acts as a marketing tool. A good and well administered
credit means profitable credit accounts.

In order to maximize the wealth of the firm, the cost involved in the credit and its management
has to be controlled within the acceptable limits. These costs can brought to zero level but that
would adversely affect the sales, therefore the objective should be to keep receivable to the
minimum level. A dynamic credit policy and its management will help to optimize the sale at a
minimum cost.

Debtors involve funds, which have an opportunity cost. Therefore the investment in debtors
should be never be excessive. Extending liberal credit pushes the sale and results in higher
profitability but the increase in level of investment in debtors result in increased cost. Thus we
are to bring the investment at a optimum level by doing trade off between the costs and benefits.
The level of debtors to a large extent depends on external factors such an industry norms, level of
activity, seasonal variations etc. But there are lot of internal factors which affects the firm’ credit
policy. These factors include credit terms, standard, limits and collection procedures. The internal

61
factors should be well administered to optimize the investment in debtors.

Optimum Credit Policy

The whole set of decision variables that affects the investment in receivable is termed as credit
policy. Generally, we can divide the credit policy into two types

• Lenient Credit Policy


• Stringent Credit Policy
The firms following Lenient Credit Policy tend to sell on credit to its customers very readily,
without even knowing the credit worthiness of the customers. The firms with lenient credit policy
will have more sales and higher profits. But they can also incur high bad debts losses and face the
problem of liquidity. The firm which follows Stringent Credit policy is very selective in
extending credit, and credit is extended to those customers only whose credit worthiness is well
proven. These firms follow tight credit standards and terms as a result, minimize cost and
chances of bad debts.

The stringent credit policy never poses the problem of liquidity but restrict the sale and profit
margins.

Extension of credit increases the sale of the firm. The number of customers purchasing the firm’s
goods and services increases as it makes its credit policy liberal. If the cost do not increase at a
greater rate, the increased revenue will increase the profit of the firm. As a consequence, the
market value of firm’s share will rise.

The extent to which the sales will be affected by pursuing a particular credit policy can not be
gauged with accuracy. Sales forecast with respect to a particular credit policy can be made with
regards to prevailing economic condition. However, cost benefit analysis has to be done in order
to anticipate the acceptability of a credit policy.

Credit extension involves cost, the incurred cost can be of many types such as bad debt losses,
production and selling costs, administrative expenses, cash discounts, opportunity cost etc.

Bad debt losses are incurred when a firm is unable to collect the book debts. Bad debt losses are
more if the credit policy is lenient. This never means that a company should its credit policy, in
case the profit generated by additional sales are more than corresponding costs the firm should
surely go in for credit policy relaxation.

The additional sales resulting from the relaxed credit policy will increase the production and
selling costs. Only the incremental production or selling costs should be estimated. Similarly, the

62
expenses incurred in the administration of credit should be included in the costs of extending
credit. The cost of administration generally includes the credit supervision costs and collection
costs. Again, these costs will be nil if the credit policy simply utilize the idle capacity of the
credit department.

The opportunity cost is the cost of foregone profits of the amount blocked as trade credit to
customers in order to sustain or increase sales. As a result of the funds tied up in credit accounts
often the firms have to go in for credit from banks in order to sustain their operations.

In order to collect the trade credits at an early date, often cash discounts have to be extended. As
a result of these cash discounts firms are not in a position to collect the remuneration for their
sales in full. This is essentially a tool to bring the trade credit to an optimum level.

Aspects of Credit Policy:

The important aspects of credit policy should be identified before establishing an optimum credit
policy. The important decision variables of the credit policy are:

 Credit Terms: Credit terms are the conditions or stipulations under which the firm extends
credit. The terms and conditions can be clubbed according to the period for which they
are extended and according to the amount of discount offered thereby there are two
important components of trade credit namely cash period and cash discounts. Credit terms
can be effectively used as a tool to boost sales. The most desirable credit terms which
increases the overall profitability of the firm, should be offered to the customers cost
benefit trade off between credit terms should be done to choose the best one. If the action
of relaxation of the credit terms is followed by the competitors. Then the firm may have
to pay instead of gaining anything.
The time duration for which the credit is extended to the customers is referred to as
credit period. Usually the credit period of the firm is governed by the industry norms, but
firms can extend credit duration to stimulate its sales. If the firm’ bad debts build up, it
may tighten up its credit policy as against the industry norms.

Cash discounts are the offer made by the firm to customer to pay less if the required
amount is paid earlier. The cash discount terms indicate the rate of discount and the
period for which discount has been offered. If the customer does not avail this offer, he
is expected to make the payment by the due date.

 Credit Standards: The credit standards followed by the firm have an impact on sales and
receivable. The sales and receivable levels are likely to be high if the credit standards of

63
the firm are relatively loose. In contrast, if the firm has relatively tight credit standards,
the sales and receivable are expected to be low. The credit standards are governed by
various aspects such as the willingness of customer to pay, the ability of customer to pay
in the economic conditions etc.
 Collection Policy: The need to collect the payments early gave rise to a policy regarding
it, called as the collection policy. It aims at the speed recovery from slow payers and
reduction of bad debts losses. The firm has to very cautious while it goes in for collection
from slow payers. The various aspects such as willingness, capabilities, and external
conditions should be taken care of before you go in collection procedure. The optimum
collection policy will maximize the profitability and will be consistent with the objective
of maximizing the value of the firm.

Credit Procedure

A clear cut guiding policy regarding the granting of credit to individual customers and the
collection from individual account should be laid down. The collection procedure of the firm
differs from customer to customer. The credit evaluation procedure before extending of credit is
done in the following ways:

1) Credit Information: In extending credit to customers, the firm would ensure that the
receivable are collected in full and on due date. To ensure this, the firm should have credit
information concerning each customer to whom credit is given. Collection of credit information
involves expenses. The cost of collecting information should therefore be less than the potential
profitability. In addition to the cost, the time required to collect information should be
considered. This information can be collected from financial statement, bank references, trade
references, credit bureau reports etc.

2) Credit Investigation: After the collection of credit information the firm needs to go in for
further investigation. These investigations are different for different people and depend upon the
type of customers, customer’s background, nature of our product, size of the other, firm’s credit
policy etc.

Credit investigations involve cost. But a credit decision without adequate investigations can be
more expensive in terms of excessive collection costs and possible bad debts losses. Therefore
credit investigations should be cared so long as the savings, in terms of speedy collection and
prevention of bad debts losses, from it exceed the cost incurred in the process.

64
3) Credit Analysis: In the credit procedure, the next step is of credit analysis. The appraisals
regarding the financial strength, nature of business, type of management with respect to the other
party are to be considered. The decision to extend credit to the customers will basically depend
upon the judgment of the credit analyst, although numerical, credit evaluation systems exist, if it
is expected that more and more of qualitative systems will evolve in near future.

4) Credit Limits: Once the decision regarding the extending of credit has been taken then the
decision regarding the duration and the amount of credit are to be taken. The credit limit is to be
periodically reviewed and alterations, continuously done. The decision on the magnitude of credit
will depend upon the amount of contemplated sale and the customer’s financial strength.

5) Collection Procedure: A clear cut and well administered collection procedure will speed
up the rate of dues collection if collection is delayed then the chances of bad debts also increases.
The procedure of collection can not be same for everyone, it has to down according to the
relation of the firm with its customer the responsibility of follow up and collection should be
clearly designated. To speed up the process of collection after we use discount schemes etc.

PRACTICE OF RECEIVABLE MANAGEMENT IN BOKARO STEEL CITY

In Bokaro Steel Plant all finished/ semi-finished and by-products are sold on the basis of advance
payment made by party, so there is no receivable management is practiced here.

FINANCIAL STATEMENTS AND RATIO ANALYSIS

65
WORKING CAPITAL STATUS OF BSL
Rs.
Lakhs
PARTICULARS 2006-07 2007-08 2008-09 2009-10
(A) CURRENT ASSETS
CASH & BANK BALANCES 3790 4108 4400 4660
RAW MATERIALS 25621 25113 16828 28811
STORES &SPARE PARTS 34129 37846 46798 54047
FINISHED/SEMI-FINISHED PRODUCTS 76806 77790 54948 92644
SUNDRY DEBTORS 1251 895 774 903
LOANS & ADVANTAGES 39118 39090 58745 49296
OTHER CURRENT ASSETS 1896 1402 1095 841

TOTAL 182611 186244 183588 231202

(B) CURRENT LIABILITIES & PROVISIONS


SUNDRY CREDITORS 30572 32507 43268 45387
SECURITIES & OTHER DEPOSITES 4291 6768 2369 13189
ADVANCES RECEIVED 2427 2568 10404 2789
OTHER LIABILITIES 38824 38204 35706 28049
PROVISIONS (EXCLUDING PROVISIONS FOR VRS,
GRATUITY & ACCUMULATED LEAVES) 9482 9151 60254 111898

TOTAL 85596 89198 152001 201312

WORKING CAPITAL (A-B) 97015 97046 31587 29890

INCREASE/DECREASE IN WORKING CAPITAL OVER


PREVIOUS YEAR 44566 31 -65459 -1697

NOTE:-ITEMS ON CAPITAL ACCOUNT HAVE BEEN EXCLUDED

66
Table 1

Figure 4

Figure 5: Four year comparative studies between current assets, current liabilities and
working capital of Bokaro Steel Plant

67
100%

90%

80%

Other Current
70% Assets

Loans &
Advantages
60%
Sundary Debtors
Current Assets

50% Finished/Semi-
Finished
Products
Stores & Spare
40% Parts

Raw Material

30%
Cash & Bank
Balances

20%

10%

0%
2006-7 2007-8 2008-9 2009-10

Year

Figure 6: Four year comparative studies between current assets composition

68
100%

90%

80%

70% Provisions

Other Liabilities
60%
Current Liabilities

Advances Received

Securities & Others


50% Deposites
Sundary Creditors

40%

30%

20%

10%

0%
2006-07 2007-08 2008-09 2009-10
Years

Figure 7: Four year comparative studies between current liabilities composition

TRADE-OFF BETWEEN PROFITABILITY AND RISK

69
In evaluating a firm’s NWC position, an important consideration is the trade-off between
profitability and risk. The term profitability used in this context is measured by profit after
expenses. The term risk is defined as the probability that a firm will become technically insolvent
so that it will not be able to meet its obligations when they become due for payment.

In evaluating the profitability-risk trade-off related to the level of NWC, three basic assumptions,
which are: (a) that we are dealing with manufacturing firm; (b) that current assets are less
profitable than fixed assets; and (c) that short-term funds are less expensive than long-term funds.

Effect of the level of current assets on the profitability-risk trade-off

This effect can be shown by using the ratio of current assets to total assets.

Effect of increase/higher ratio: An increase in the ratio of current assets to total assets will lead to
a decline in profitability because current assets are assumed to be less profitable than fixed assets.
A second effect of the increase in the ratio will be that the risk of technical insolvency would also
decrease because the increase in current assets, assuming no change in current liabilities, will
increase NWC.

Effect of decrease/lower ratio: A decrease in the ratio of current assets to total assets will lead to
an increase in profitability as well as risk. The increase in profitability will primarily be due to
the corresponding increase in fixed assets which are likely to generate higher returns. Since the
current assets decrease without a corresponding reduction in current liabilities, the amount of
NWC will decrease, thereby increase risk.

Effect of the level of current liabilities on the profitability-risk trade-off

Effect of increase/higher ratio: An increase in the ratio of current liabilities to total assets will
lead to a increase in profitability. The reason for the increased profitability lies in the fact that
current liabilities, which are a short term sources of finance will be reduced. As short term
sources of finance are less expensive than long-run sources, increase in the ratio will, in effect,
mean substituting less expensive sources for more expensive sources of financing. There will,
therefore, be a decline in cost and a corresponding rise in profitability.

The increase in the ratio will also increase the risk. Any increase in current liabilities, assuming
no change in current assets, would adversely affect the NWC. A decrease in NWC leads to an
increase in risk. Thus, as the current liabilities-total assets ratio increases, profitability increases,
but so dose risk.

Effect of decrease/lower ratio: A decrease in the ratio of current liabilities to total assets will lead
to decrease in profitability as well as risk. The use of more long term funds which, by definition,
are more expensive will increase the cost; by implication, profits will also decline. Similarly, risk
will decrease because of the lower level of current liabilities on the assumption that current assets
remain changed.

70
Rs. Lakhs

2008-09 2009-10
Current Assets 183588.00 231202.00
Fixed Assets 265877.00 342467.00

Total Assets 449465.00 573669.00

Current Liabilities 152001.00 201312.00

Current Assets/Total
Assets (% age) 40.85 40.30

Current Liabilities/Total
Assets (% age) 33.82 35.09

SAIL/BOKARO STEEL PLANT


Profit & Loss Account for the year ended 31st March, 2010
Year ended Year ended
31st March, 31st March,

71
2010 2009
(Rupees in
crores)
INCOME
Sales 11857.69 12037.57
Less : Excise duty 1394.90 10462.79 1660.95 10376.62
Finished products internally consumed 37.41 42.59
Interest earned 24.71 16.85
Other revenues 133.79 115.68
Provisions no longer required written back 20.09 12.59
Stock transfer to other units 427.03 719.47
11105.82 11283.80

EXPENDITURE
Accretion(-)/Depletion to stocks -392.29 188.88
Raw materials consumed 5458.55 3672.82
Purchase of finished / semi-finished
products 0.00 0.00
Employees' Remuneration & Benefits 1930.04 1956.93
Stores & Spares Consumed 824.79 845.37
Power & Fuel 933.36 857.52
Repairs & Maintenance 120.08 96.01
Freight outward 143.63 168.18
Other expenses 400.32 360.56
Share of expenditure over income
- Corporate Office 199.23 115.56
- CMO 67.68 63.45
- CCSO 2.07 2.82
Interest & finance charges 52.77 40.41
Depreciation 246.74 246.70
Total 9986.97 8615.21
Less : Inter Account Adjustments 167.65 9819.32 161.84 8453.37
1286.50 2830.43
Adjustments pertaining to earlier years 6.28 0.00
Profit /Loss(-) before Tax 1292.78 2830.43
Balance brought Forward 16187.50 13357.07
Less: Extraordinary items 0.00 0.00

Amount available for appropriation 17480.28 16187.50

APPROPRIATIONS
Balance carried over to Balance Sheet 17480.28 16187.50

72
17480.28 16187.50
Significant Accounting Policies and Notes on Accounts
Schedules 2 and 3 annexed hereto, form part of the Profit & Loss Account.

SAIL/BOKARO STEEL PLANT


Balance Sheet as at 31st March, 2010
As at 31st As at 31st
March, 2010 March, 2009
(Rupees in
crores)
SOURCES OF FUNDS
Shareholders' Fund
Reserves and Surplus 17480.32 17480.32 16187.54 16187.54

Loan Funds
Secured Loans 89.26 69.42
Unsecured Loans 0.00 89.26 0.00 69.42

Inter Unit Current Account 4538.70 2602.88


22108.28 18859.84

APPLICATION OF FUNDS
Fixed Assets
Gross Block 7226.17 7072.41
Less: Depreciation 4980.46 4790.17
Net Block 2245.71 2282.24
Capital Work-in-Progress 1178.96 3424.67 376.53 2658.77

Investments 0.10 0.10

Current Assets, Loans & Advances


Inventories 1755.02 1185.74
Sundry Debtors 9.03 7.74
Cash & Bank Balances 46.60 44.00
Interest Receivable/Accrued 8.41 10.95
Loans & Advances 492.96 587.45
2312.02 1835.88
Less: Current Liabilities & Provisions
Current Liabilities 1066.36 1024.56
Provisions 2512.13 1870.81

73
3578.49 2895.37
Net Current Assets -1266.47 -1059.49
Miscellaneous Expenditure 0.00 14.81
(to the extent not written off or adjusted)
Inter Unit Current Account 19949.98 17245.65
22108.28 18859.84
Significant Accounting Policies and Notes on Accounts
Schedules 1 and 3 annexed hereto, form part of the Balance Sheet.

RATIO ANALYSIS:

LIQUIDITY RATIO:
Liquidity ratio shows the firm’s short term solvency and its ability to pay off the liabilities. It has
been devised to keep a track of their firm’s exposure the risk that it will not be able to meet its
short term obligations. It provides a quick measure of liability of the firm by establishing a
relationship between its current assets and its current liabilities.

Some of the liquidity ratio:

a) Current ratio:
The current ratio gives the margin by which the value of the current assets may go down without
creating and payments the firms. The total current assets include prepaid expenses and short term
investments. Whereas the current liability includes all types of liability which will mature for
payments within a period of one year e.g. bank overdraft, bills payable, trade creditor,
outstanding etc. the current ratio throw light on the firms ability to pay its currents liabilities out
of its currents assets.

The current ratio is compared with the standard ratio of two times for 2: 1

b) Quick ratio / Acid test ratio / Liquid ratio:


This ratio establishes relationship between quick current assets and current liabilities. A current
assets is considered to be liquid if it I convertible into cash without loss of time and value.
Therefore

Liquid assets = currents assets – (inventory + prepaid expenses)

The inventory is singled out of the total current assets as the inventory is considered to be the
potential illiquid. The reason for keeping inventory out is that it may become absolute, un
saleable or out of fashion and always requires time for realizing into cash. Generally a quick ratio
of 1:1 is considered to be satisfactory because this mean that the quick assets of the firm are just
equal to the quick liability and there has not been seen to be a possibility of default in payments
by the firm.

c) Net Working Capital Ratio:


It indicates the firms’ potential reservoir of fund.

74
Net Working Capital Ratio= Net Working Capital/ Net Assets

ACTIVITY / TURNOVER / PERFORMANCE RATIO:


It is measure of movement and thus indicates as to how frequently an account has moved over
during a period. It shows as to how efficiently and effectively the assets of the firm are being
utilized. These ratios are usually calculated with references to sales / cost of goods sold and its
expressed in terms of rate or times.

a) Working capital turnover ratio:


The WCT ratio studies the velocity or utilization of the working capital of the firm during a year.
The WC here refers to the net working capital which is equal to the total current assets less total
current liabilities.

The higher the WCT ratio the lower is the investment in the working capital and higher would be
the profitability. A high WCT ratio reflects the better utilization of the WC of the firm. However,
a high WCT ratio implies a low net working capital in relation to the sales volume and therefore
implies over trading by the firm in relation to its net WC.

b) Fixed assets turnover ratio:


This ratio shows the contribution of average fixed assets to net sales. Higher the ratio better will
be the sales per unit of fixed assets.
FA turnover ratio = (net sales) / average fixed assets

c) Capital turnover ratio:


Capital turnover ratio = (net sales) / average capital employed.

I. Ratio Analysis Calculations (2008–09)

Liquidity position:

a) Current Ratio:
Current assets = Rs. 1835.88 crore
Current liability & provisions = Rs. 1520.01 crore.
Current ratio = current assets / current liabilities
= 1835.88/1520.01
= 1.21 times

b) Quick Ratio:
Inventory = Rs. 1185.74 crore
Quick ratio = (total CA – inventory)/total current liabilities
= (1835.88 – 1185.74)/1520.01
= 650.14/1520.01
=0.43 times.

c) Net Working Capita Ratio:


Net Working Capital = 315.87

75
Total Assets = Fixed Assets + Current Assets =1835.88+ 2658.77=4494.65
Net Assets = Total Assets - Current Liabilities =4494.65-1520.01 =2974.64
Net Working Capital Ratio= Net Working Capital/ Net Assets
=315.87/2974.64
= 0.11

Activity Ratio:

a) Capital turnover ratio:


Net sales = Rs. 12037.57 crore
Working Capital = Total CA – Total CL
= Rs. 315.87 crore

Net capital employed = Net block + working capital


(Here Net block = gross block – depreciation)

= 2282.24 + 315.87
= Rs. 2598 .11 crore

Capital turnover Ratio = net sales / net capital employed


= 12037.57 / 2598.11
= 4.63 times

b) Working capital turnover ratio:


Net sales = Rs. 12037.57 crores
Working capital = Rs. 315.87 crores

Working capital turnover ratio = Net sales / W.C.


= 12037.57 / 315.87
= 38.11 times

c) Fixed Turnover Ratio:


Net sales = Rs. 12037.57 crore
Net fixed assets = Rs. 2658.77

Fixed turnover ratio = Net sales / net fixed assets


= 12037.57/ 2658.77

= 4.53 times

II. Ratio Analysis Calculations (2009–10)

Liquidity position:

76
a) Current ratio:
Current assets = Rs. 2312.02 crore
Current liability = Rs 2013.12 crore
Current ratio = current assets / current liabilities
= 2312.02 / 2013.12
= 1.15 times

b) Quick Ratio:
Inventory = Rs. 1755.02 crore
Quick ratio = (total CA – inventory) /total current liabilities
= [2312.02 – 1755.02]/2013.12
= (557)/ 2013.12
= 0.28 times

c) Net Working Capita Ratio:


Net Working Capital = 298.90
Total Assets = Fixed Assets + Current Assets =3424.67+ 2312.02 =5736.69
Net Assets = Total Assets - Current Liabilities = 5736.69-2013.12=3723.57
Net Working Capital Ratio= Net Working Capital/ Net Assets
=298.90 /3723.57
=0.08

Activity Ratio:

a) Capital turnover ratio:


Net sales = Rs. 11857.69 crore
Working capital = total CA – Total CL
= Rs. 298.90 crore
Net capital employed = Net block + working capital
= 2245.71 + 298.90
= Rs. 2544.61 crores

Capital turnover Ratio = net sales / net capital employed


= 11857.69 / 2434.15
= 4.66 times

b) Working capital turnover ratio:


Net sales = Rs. 11857.69 crore
Working capital = Rs. 298.90
Working capital turnover ratio = net sales / W.C
= 11857.69 / 298.90
= 39.67 times

c) Fixed turnover ratio:


Net sales = Rs. 11857.69 crore
Net fixed assets = RS. 3424.67
Fixed turnover ratio = Net sales / net fixed assets

77
= 11857.69/3424.67
= 3.46 times

YEAR 2008-09 2009-10

CURRENT RATIO 1.21 1.15

QUICK RATIO 0.43 0.28

NET WORKING CAPITAL RATIO 0.11 0.08

CAPITAL TURNOVER RATIO 4.63 4.66

WORKING CAPITAL TURNOVER RATIO 38.11 39.67

FIXED TURNOVER RATIO 4.53 3.46

Interpretation
 Current ratio is decreasing because of increase in provisions (mainly due to pay revision),
security & other deposits (by contractors involve in different projects) and decrease in
loans & advances (due to change in policies).
 Quick ratio is decreasing because of increase in inventory and provisions.
 Net working capital ratio is decreasing because of decrease in working capital (i.e.
increase in provisions) and huge investment in fixed assets.
 Capital turnover ratio is slightly increased because of decrease in net block and working
capital.
 Working capital turnover ratio is increasing because of decrease in working capital (i.e. in
provisions, security & other deposits).
 Fixed turnover ratio is decreasing because of huge investment in fixed assets.

SALES PROCESS OF PRODUCTS MANUFACTURED IN BOKARO STEEL PLANT

PLANT

Sales Stock Transfer


78

Plant
SalesDirect
Direct
of Sales
Sales
Secondary CMO
SalesProducts
of Direct
Primary Sales
Product BSO A, B,CMO
C ……….. Sister Plants
IPT A, B …...
Transfer
Party A, B, C, DSales
Export …………………… Stockyard Transfer
79
CMO: Central Marketing Organization
IPT: Inter Plant Transfer
BSO: Branch Sales Office (there are total 45 BSO of SAIL situated in different States of India)
Primary Product: Product made or manufactured as per specification.
Secondary Product: These are effective items but not meeting the specification.

80
CONCLUSIONS

Summer internship has given lot of practical experiences from on the job culture to theoretical
implications at different levels. There is a great learning in financing to corporate.

During 2009–10, profit before tax of Bokaro Steel Plant is Rs. 1286.50 which is less as compared

to profit before tax of 2008-09 that is Rs. 2830.43, although production has been increased. It is

because of decrease in price of flat product in domestic and global market due to recession.

Although the market is dull, BSL is able to make profit which shows the continuous

strengthening of the company’s financial fundamentals. This was the outcomes of multi-pronged

strategy – including increase in production and sales volume, improvement in product mix, cost

reduction major, reduction in borrowing coupled with buoyancy in the steel market.

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SUGGESTION
In view of the analysis and with the change in industrial scenario it is felt that a company must
reorient its policies for betterment. BSL produces flat product and now a days there is tough
competition in the market of flat product. Hence company needs certain best policies for
competition with its competitor in domestic as well as global market.
In brief the following suggestions are:-

 Company use perpetual inventory, which is very costly. Hence the company should use
both perpetual and periodic inventory.

 Besides automatic procurement items there is no specific system for calculating reorder
level, minimum and maximum level. A proper system for different items should be
developed.

 Lead time for receipt of stores and spare items is around 6 months, which is very high.
The lead time should be brought down by decreasing the time duration in paper work.
 As understood from the explanation of the management, there is huge volume of non-
moving and obsolete stores and spare items which are yet to be disposed of.

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BIBLIOGRAPHY

BOOKS& REFERENCES:

 M.Y. Khan and P.K.Jain., Financial Management


 I.M.Pandey Financial Management
 Annual Reports 2006-07
 Purchase/ Contract Procedure-2006

WEBSITES:
www.sail.co.in
www.google.co.in

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