CHAPTER - 1 INTRODUCTION

WORKING CAPITAL CONCEPTS

1.1 Business activity

Business activity is dynamic in character and subject to wide fluxions. The movement from working capital to income and profits and back to working capital is one of the most important characteristics of business administration. This operation is concerned with the deployment of funds with the hope that they will generate returns, rendering an additional amount called profit. If the operations of an enterprise are to run smoothly, proper relation ship between fixed capital and current capital must be maintained. Its main aim is to use business funds in which a manner that earning are maximized. Financial Management provided a framework for selecting a proper

course of action and deciding a viable commercial strategy. This objective can be achieved by :a) b) Profit maximization Wealth maximization Funds are needed for short-term as well long term purposed. In short term we say current operation of the business. For a manufacturing unit payment for raw materials and wages and for meeting routine expenses. All the goods. Which are manufactured in a given time, may not be sold in the period. Naturally funds are blocked in inventory. It is also the fact that all goods may not be sold against ready cash. Some of the goods may be sold on credit basis. The capital is closely related to the term funds and has two meaning. It is used to mean current assets minus current liabilities. In simple words it is the investment needed for carrying out day-to-day operations of the business smoothly. It may be clear that objective of working capital management is to maintain a satisfactory level of working capital. In other words, the current assets should not be sufficient enough to cover the current liabilities but at the same time it should also ensure the reasonable amount of safety margin. This is possible only when the different components of working capital are properly balanced.

Working Capital Concepts There are two concepts of working capital

i. ii.

Gross concept Net concept

Gross working capital concept The term gross working capital, also refers to as working capital, means the total assets that can be converted into cash within an accounting tear and include short-term securities, cash, bills receivables and stock.

Net working capital concept Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders, which are expected to mature for payment with in an accounting year. Networking capital can be positive or negative. A negative working capital means a negative liquidity and may prove to be harmful for the company. It occurs when current liabilities are in excess of current assets. It may be due to mismanagement of current assets. In summary it may be emphasized that gross and net concepts of working capital are two facets of working capital management. The data and problems of each firm is different, so it should be analyzed to determine the amount of working capital and timely action should be taken by management to improve the liquidity position of the firm. Objective of working capital Management The object of working capital management is in the two folds :
i. ii.

Maintenance of working capital and Availability of ample funds at the times of needs.

The basic goal of working capital management is to manage each of the firms current assets and current liabilities in such a way that an acceptable level of net working capital is always maintained in the business. As a matter of fact, a business cannot survive in the absence of a satisfactory ratio between its current liabilities. Management in selling policies with respect to general operation, purchasing, financing, expansion and dividend must work the limitations set by the working capital position. Thus the objective is to ensure the maintenance of satisfactory level of working capital in such a way that is neither inadequate nor excessive. It should not only be sufficient to cover the current liabilities but should ensure a reasonable margin of safety also. Determinant of working capital Working capital management is an indispensable function area of management. The large number of factor influences the total working capital requirements of the firm. It may be however be added that these keeps varying from tome to time. In general the determinants of working capital. Which are common to all organization can be summarized as under: Nature and size of Business One of the basic factors influences the working capital requirements of any unit is the general nature of the business. Many industries are there. Where all the units require a very heavy working capital,

whereas the units in some other industries require comparatively lesser amount of working capital.

Production Cycle Another factor, which has a strong bearing on the quantum of the working capital, is the production cycle. The term Production or Manufacturing Cycle refers to the time lag between the purchase and procurement of raw material into finished product. During this process of converting the raw materials some and the completion of finished product, some funds are inevitably locked up. The longer the time span in the production cycle, the larger shall be the requirement of funds and vice-versa.

Business Cycle The working capital requirements are also effected to a large extent by the nature of the business cycle. The seasonal and cyclical variations tremendously influencing the working capital requirements of the organization especially the shorts term temporary requirements. These variations may be in two direction:
i. ii.

Upward movement during the boom conditions, and Downward movement, when the economic activity is on Decline

Production Policy

Another important factor that has a consider influence on the quantum of working capital is the production policy of the firm. In case of certain industries having seasonal demand for their products that have two options before them.

Credit Policy The credit policy of any unit always influences its working capital requirements from two angles:
a.

Credit terms extended by the business unit to its customers/buyers of goods; and Credit terms available to the unit from its creditors.

b.

Growth and Expansion Generally a larger company needs the larger amount of working capital as compared to small company is the similar trade. This can also be logically taken to imply that as a Company grows or expands, its need for working capital will also grow or expands accordingly. However it is difficult; to determine precisely the relationship between the growth of a company in terms of its volume and the increase in its working capital. But there is no denying the fact that other things remaining same, growing industries require more amount of working capital than those, which are static.

Proper availability of raw materials The regular availability of key raw materials without any interruption is very necessary for any business unit. If there are some materials,

which are not easily available or there supplies are irregular, the business may be forced them for in excess of its genuine production needs to ensure smooth working. This will not only lead to an excessive holing of such materials but also result in increased requirement of working capital.

Profit level The profit generation capabilities differ from unit and so are their profits. In fact the profit generation capabilities of a business firm depend on number of factors such as nature quality of the product, marketing arrangement and hold on the market i.e. monopolistic conditions or otherwise etc. A firm having quality product and enjoying monopoly in the market is definitely likely to earn more profits than a product of average quality in competitive market. High profit margins contribute to the working capital funds of the unit because the amount of net profit is always a source of working capital to the extent: it has been earned in cash. Corporate Taxes Corporate taxes are unavoidable and are required to be paid out of profits as per the rules. Therefore adequate provisions must be made and paid; whenever required to be paid out of profits as per the rules. Therefore adequate provisions must be paid, whenever required. In other words this is short-term liability payable in cash and therefore an important ingredient in the working capital planning. The higher the tax liability, the higher is the working capital requirement and vice-

versa. However lot of savings can be made by proper tax planning and making it an integral part of working capital planning. Dividend Policy Dividend policy of a firm also has an important bearing on the working capital requirements of the unit. Dividends are paid out of cash resources of that unit and therefore are a crunch on working capital funds. Therefore some of the units prefer to issue the bonus share by retaining the cash resources of that unit whereas some other units have the policy of paying dividends to satisfy the expectations of the investors. Dividend policy is thus, a significant component in determining the level of working capital in any business firm.

Above all the amount of working capital that a firm would need is affected not only by the factors associated with the firm itself but is also affected by the economic, monetary and general business environment.

A)COMPANY PROFILE

A) COMPANY PROFILE 1. Steel Authority of India Limited (SAIL)Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defense industries and for sale in export markets. Ranked amongst the top ten public sector companies in India in terms of turnover, SAIL manufactures and sells a broad range of steel products, including hot and cold rolled sheets and coils, galvanized sheets, electrical sheets, structural, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. SAIL's wide ranges of long and flat steel products are much in demand in the domestic as well as the international market. SAILs own Central Marketing Organisation (CMO) and the International Trade Division carry out this vital responsibility. CMO encompasses a wide network of 38 branch offices and 47 stockyards located in major cities and towns throughout India. SAIL has a well equipped Research and Development Center for Iron and Steel (RDCIS) at Ranchi, which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Center for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organization at Ranchi. Our captive mines are under the control of the Raw Materials Division in Calcutta. The Environment Management Division and Growth Division of SAIL operate from their headquarters in Calcutta. Almost all our plants and major units are ISO Certified.

2. SAILs Background and History

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 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. 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.

3. IMPORTANCE OF STEEL Steel has had a major influence on our lives, the cars we drive, the buildings we work in, the homes in which we live and countless other

facets in between. Steel is used in our electricity-power-line towers, natural-gas pipelines, machine tools, military weapons-the list is endless. Steel has also earned a place in our homes in protecting our families, making our lives convenient, its benefits are undoubtedly clear. Steel is by far the most important, multi-functional and most adaptable of materials. The development of mankind would have been impossible but for steel. The backbone of developed economies was laid on the strength and inherent uses of steel. The various uses of steel which in turn is a measure of adaptability of steel can be judged from the following characteristics of steel : - Hot and cold formable - Weldable - Suitable machinability - Hard, tough and wear resistant - Corrosion resistant - Heat resistant and resistance to deformation at high temperatures. Steel compared to other materials of its type has low production costs. The energy required for extracting iron from ore is about 25 % of what is needed for extracting aluminum. Steel is environment friendly as it can be recycled. 5.6 % of element iron is present in earth's crust, representing a secure raw material base . Steel production is 20 times higher as compared to production of all nonferrous metals put together The steel industry has developed new technologies and has strived hard to make the world's strongest and most versatile material even better. There are altogether about 2000 grades of steel developed of which 1500 grades are high grade steels. There is still immense potential for developing new grades of steel with varying properties .The large number of grades gives steel the characteristic of a basic production material Steel has enjoyed an important position in our lives and will continue to do so in the years to come. However, the degree to which it maintains its dominant position will depend on if steel can exploit its potential by developing new higher grades and adaptable grades . This can be achieved by refining the structure and applying alloying techniques and thus furthering its utility value. We will have to find out

ways to use steel and be ready to face a stiff competition from Aluminium in the future.

4. MAJOR UNITS OF SAIL :

Integrated Steel Plants Bhilai Steel Plant (BSP) in Chhattisgarh Durgapur Steel Plant (DSP) in West Bengal Rourkela Steel Plant (RSP) in Orissa Bokaro Steel Plant (BSL) in Jharkhand IISCO Steel Plant (ISP) in West Bengal Special Steel Plants Alloy Steels Plants (ASP) in West Bengal Salem Steel Plant (SSP) in Tamil Nadu Visvesvaraya Iron and Steel Plant (VISL) in Karnataka Subsidiaries Maharashtra Elektrosmelt Limited (MEL) in Maharashtra Joint Venture SAIL has promoted joint ventures in different areas ranging from power plants to e-commerce. NTPC SAIL Power Company Pvt. Ltd Set up in March 2001, this 50:50 joint venture between SAIL and the National Thermal Power Corporation (NTPC) operates and manages the Captive Power Plants-II of the Durgapur and Rourkela Steel Plants, which have a combined capacity of 240 . Bokaro Power Supply Company Pvt. Limited This 50:50 joint venture between SAIL and the Damodar Valley Corporation formed in January 2002 is managing the 302-MW power generation and 1880 tones per hour steam generation facilities at Bokaro Steel Plant.

Bhilai Electric Supply Company Pvt. Limited Another SAIL-NTPC joint venture on 50:50 basis formed in March 2002 manages the 74 MW Power Plant-II of Bhilai Steel Plant which has additional capacity of producing 150 tones of steam per hour. UEC SAIL Information Technology Limited This 40:60 joint venture between SAIL and USX Engineers & Consultants, a subsidiary of the US Steel Corporation, promotes information technology in the steel sector. Metaljunction services Private Limited A joint venture between SAIL and Tata Steel on 50:50 basis, this company promotes e-commerce activities in steel and related areas.

SAIL-Bansal Service Center Ltd. SAIL has formed a joint venture with BMW industries Ltd. on 40:60 basis to promote a service center at Bokaro with the objective of adding value to steel. North Bengal Dolomite Limited A joint venture between SAIL and West Bengal Mineral Development Corporation ltd on 50:50 basis was formed for development of Jayanti Dolomite Deposit, Jalpaiguri for supply of Dolomite to DSP and other plants. Romelt-SAIL (India) Ltd A joint venture between SAIL, National Mineral Development Corporation (NMDC) and Russian promoters for marketing Romelt Technology developed by Russia for reducing of iron bearing a material, which is carried out with carbon in single stage reactor with the use of oxygen.

5. Ownership and Management

The Government of India owns about 86% of SAIL's equity and retains voting control of the Company. However, SAIL, by virtue of its "Navratna" status, enjoys significant operational and financial autonomy. Share holding Pattern of SAIL (% of Equity) : Government of India 85.82 % Financial Institutions 4.37 % Banks 0.11 % Mutual Funds 0.39 % Foreign Institutional Investors (FIIs) 4.23 % Global Depository Receipts (GDRS) 0.05% Companies (including Trusts and clearing members ) 1.17 % Individuals (including Employees and NRIs) 3.86 %

6. MANUFACTURING PROCESS Some of the technological options for converting iron ore to steel products is schematically shown below. Hot metal and crude steel process are also inter linked among themselves as represented by arrows.

7. INTRODUCTION OF BHILAI STEEL PLANT

INTRODUCTION

Mr. J.L. Nehru Jewel in the crown of SAIL described Bhilai Steel Plant. For production of steel an MOU (Memorandum of Understanding) was signed with the Russian government for setting up of the Bhilai Steel Plant. The first phase of 1 MT was completed in 1959 and subsequently capacity was expanded to 2.5 MT and 4 MT Five time winner of prime Ministers Trophy for best integrated steel plant in the country, Bhilai Steel Plant (BSP) is Indias sole producer of rails and heavy steel plates and major producer of structural with an annual production capacity of 3.153MT of saleable steel, the plant also specialized in other products such as wire rods

and merchants products. All saleable products of Bhilai Steel Plant are under the ISO umbrella as per BSPs accreditation with ISO90012000 quality management system standard. The Plate Mill. Dalli Merchandized Mines, Rails Mill and Wire Rod Mill have also received ISO: 14001 certified for their environment management system. Now, Seven times Winner, Bhilai Steel Plant made history in production in the last financial year 2005-06 by becoming the first plant in the country to surpass the 5 million tones (MT) mark in hot metal production and the only steel plant to cross the 5MT mark in crude steel production .The plant has provided 260 meters, long rails to the Indian Railways and special steel plates for manufacture of aircrafts carriers for the Indian Navy. BSP has also developed and supplied corrosion resistant rails to Railways for coastal areas and plates for manufacturing water pipelines for Godavari & Krishna water projects in Andhra Pradesh.

HISTORY AND PRESENCE OF BHILAI STEEL PLANT An agreement was signed in New Delhi on February 2nd 1956 between the Government of India and Soviet Union to set up an integrated Steel Plant at Bhilai With a capacity of 1MT of ingot steel. The plant began its operation on January 31st 1959 when coke battery No 1 was commissioned. Production of pig iron at Bhilai Steel Plant began on Feb 4th 1959 by the commissioning of its 1st Blast Furnace. At the beginning its capacity was 1MT and expands to 2.5 MT ingot steel in year 1967 and currently expended to 4.0 MT stage.

Initially Bhilai Steel Plant was working under the Hindustan Steel Co. Ltd., but after formation SAIL ON January 24th 1973 Bhilai become one of the unit of SAIL. Bhilai Steel Plant was the first plant to produce wide (3600mm) Heavy Plates in India. A major exporter of Steel Products. Bhilai specializes in long products, such as Heavy rails. Heavy Structures, Merchant Product and Wire Rods. This is the only plant producing Rails in India. Bhilai Steel Plant is a big unit of SAIL having 40,000 trained manpower. It has its own township where more than 25,000 employees are accommodated. Bhilai Steel Plant has its own captive Mines for raw materials Rajhara Iron Ore Complex is one of the best Iron Ore Mines in India situaited 100 KM in south direction of Bhilai Steel Plant Rajhara IOC is producing about 10 MT raw material per year to full fill the requirement of Bhilai Steel plant other two mines i.e. Nandini Mines for lime stone & Hirri Mines for Dolomite are also captive mines of BSP. All mines are having their own township and about 7000 trained manpower involved to fulfill requirement of raw materials for Bhilai Steel Plant.

PLANT LAYOUT
And the unit of the plant have been laid in sequential formation according to technological interrelationship so as to ensure un interrupted flow of process material like coke, slag etc. and to minimize the length of various inter plant connection utilities and services.

RAW MATERIALS: BSP is primarily an ore based plant. The requirement of principal of raw material except coal and manganese ore is met from the captive mines of the plant. The plant owns and manages the mechanized and manual iron ore mines at Dalli Rajhara, situated about 100 Kms away

from plant. The plant owns quarries at Hirri, Chhattisgarh (for Dolomite). Over a million tones of minerals of mines annually from the captive mines.
SERVICES & UTILITES

BSP is an integrated steel plant which requires various from of energy like electricity, fuel (solid, liquid and gaseous), stream, oxygen, compressed air, chilled water, air blast, etc. Electricity power is supplied by BESCL (Bhilai Electricity Supply Company Limited) a joint venture between National Thermal Power Corporation and SAIL from Korba 250 km away from Bhilai. Water supply comes from a well-constructed system of water works of the state government- Tandula reservoirs (Maroda Tank 1 & 2) through a well-laid canal, 60km long from BSP. The other utility like gaseous liquid and solid fuels, chilled water, stream, oxygen and compressed air are provided at plant by centralized utility services. There exists an extensive communication system at work place, which includes an auto telephone exchange, dispatch communication system, gas and fire alarm signal, yard communication and automatic signal, yard communication and automatic signaling and blocking system of plant, rail transport facility and shop floor loudspeaker system. MANAGEMENT Initially BSP was under the administrative control of the ministry of Iron and Steel with powers delegated to the chief of the Plant. Later Hindustan Steel Ltd. controlled the management, which was formed on 19th January 1954 to manage Rourkela Steel Plant.

Bhilai Steel Plant became the constituent of Hindustan Steel Ltd., with the formation of Steel Authority of India Limited on 24th January 1973. In the organization of BSP, the Managing Director is the top most authority responsible for overall control. There are six Executive Directors in following manner. Executive Directors Executive Directors Executive Directors Executive Directors Executive Directors Executive Directors Director - Personal & Administration - Material Management - Project - Finance & Accounts - Works - B.S.P. - Medical & Health Services

They have under then General Manager, DGM, AGM, and Sr.Manager & Manager. Executive Director has the most important function of the second rung, in view of the fact that he is in the entire charge of the plant and is directly responsible in their fields. Also, GM (Marketing & Strategic Planning) reporting to MD directly has the sole responsible of Marketing of various main steel products &secondary products through CMO and BSP.

THE QUALITY POLICY OF BSP

Attaining market leadership through enhancing customer satisfaction. Achieving continual improvement in productivity, quality and salability of our products.

Active involvement of all our people in achieving our goals, objectives and targets. Adherence to a quality management system based on USO: 9001:2000 and its periodic review for continue effectiveness.

ORGANIZATION OBJECTIVE To enhance customer satisfaction through

Improvements in productivity and product quality. Skill enhancement of our people by competence, commitment and culture building. Production as per Customer Requirement.

8. MAIN PRODUCTS OF BHILAI STEEL PLANT Steel from BSP have always played a prominent role in functioning of ideal engineering industries, small scale steel marker, roller, foundries and forged shops, large scale fabrications, builders, the construction industries and Railways. BSP is putting on the market a wide range of rolled products and in some of the products enjoys the status of monopoly. Bhilai has all along maintained its position as the most productive of Indias integrated steel plants its different product mix is as follows: The following are various units/mills of Bhilai Steel Plant with their Products is shown against it :
1.

Blast furnace- Hot Metal slag (as a bye product)

2. 3.

PCM (Pig casting moulds)- Pig Iron (A) Steel Melting Shop Crude Steel (By Twin Hearth Process) (B) Converter Shop Crude Steel (By L.D. Process) Coke Owen Coke, Bye Products (Sulfuric Acid, Ammonium Sulphate, Benzol, tar, Naphthalene ball, toluene etc.) Rail & Strl. Mill Rail, Heavy Structurals Like Angle, Beam, Channel Wire Rod Mill Wire Rod (5.5 mm to 12mm). Merchant Mill- Merchant Products (rounds up to 75mm. Channels up to 200mm. Angles up to 200mm etc) Plate mill- Plates up to 3600mm in width (from 200mm thick) Bloom Billet Mill Blooms and Billets. Cont. Casting Shop Blooms and slabs Foundry Shop Various Casting of steel as per drawings Oxygen Plant Oxygen gas Acetylene Plant Acetylene gas 5mm to

4.

5.

6. 7.

8.

9. 10. 11. 12. 13.

Power Plants- Electric Power Generation ENVIRONMENT POLICY Bhilai Steel Plant (BSP), Steel Authority of India Limited is an integrated steel plant with an annual production capacity of 4.0 MT of steel specializing in production of Rails, Heavy Structural Wire Rod & Plates. Bhilai Steel Plant collective reaffirms it commitment to protect environment and shall strive to:

Introduce sound environmental management practices for minimizing pollution and its impacts on air, water and land. Conduct operation in an environmentally responsible manner for complying with legislation and regulation related to its environment aspects. Conserve and optimally utilize raw materials, energy, water and other resources. Minimize waste generation and promote its recovery, recycling and reuse. Achieve continual improvement performance by setting and reviewing the objectives and targets periodically. Enhance environment awareness amongst employees and interested parties. Communicate environmental policy to the persons working for or on behalf of the organization and make it available to public on demand.

AWARDS National Energy Conversation Award-99 from honorable Minister of power Mr.S.Prabhu. Best Pollution Control Implementation Gold Award Institute of Lal Bahaduer Shastri Memorial National Awards for excellence industries. Best performance award to Dalli Mechanized Mines.

PMs Shram Vir Award 200 to Shri J.S.William, Sr. Operator, CCS, by Honble Prime Minister on 4.02.02 at New Delhi. PMs Shram Bhushan Award 2001 to a group of 5 employees from Blast Furnace Vishwakarma Rastriya Purushkar 99 to employees of the plant on 17th Sep. 2001. National Level Coal India Productivity award to Shri Hemant Kumar Desai Additional Chief Industries Engineer. 4 Collective & Individual Awards for the year 1999 to BSP on Safety Health and environment in Steel Industry. PRIME MINISTER TROPHY BEST INTEGRATED STEEL PLANT AWARD: 1992-93, 1997-98, 1993-94, 2003-04, 1995-96 2004-05

Recipient of the PM Trophy for seven times out of 13 declared result 2004-05 from honorable Prime Minister Dr.Manmohan Singh on 20th May 2006.

B. WORKING CAPITAL MANAGEMENT AT BHILAI STEEL PLANT

Forecasting of working capital at Bhilai Steel Plant
1.

Bhilai Steel Plant is the major unit of SAIL. The prime object of every organization is to make profit, whether or not this is accomplished in most business depends largely on the manner in which heir working

capital is managed. No doubt the finance department of B.S.P. is doing best possible manner in working capital management. Working capital management usually is considered to involve the administration of current assets of a firm namely, cash marketable securities, account receivable and inventories. Component of management of working capital The management of working capital encompasses the following problems:To decide the optimum levels of investment in various current assets namely, cash, accounts receivables and inventory, etc., determining the size of working capital. To decide the optimal mix of short-term funds in relation to long-term capital and To locate the appropriate means of short term financing. Forecasting Bhilai Steel Plant A major unit of SAIL has been generating continuous profits as compared to previous year with current year. Finance Department of Bhilai Steel Plant and various individual units decides the amount of funds required during the preparation of operation budget, and then requirement of fund is intimated to corporate office. Cash inflows and outflows are estimated in budget. The marketing of all SAILS prime products are done by the central marketing organization and the receipts of sale are directly sent into the inner unit current account which is centrally controlled by the corporate office and the corporate office allocates the funds as per intimation to individual units. Besides coordinating with the central marketing organization, the cash realization is also done by the plant itself through the sale of products, defectives and scrap.

2. Monitoring of working capital management:All the aspects of working capital are monitored separately and accurately in Bhilai Steel Plant.

Cash

A transparent system for cash has been adopted by cash section of Bhilai Steel Plant. Cash is monitored every day and intimated to the top management as well as fortnightly to the company. The daily cash report includes the details of cash inflows and outflows. Finally the annual cash budget is made and reported to its corporate office. In the total cash flow, 12% is from the plant and rest 88% is from that of inter unit account.

Inventory
The main aim of Inventory management in B.S.P. is avoided excess and inadequate levels of inventory and to maintain sufficient inventory for smooth production and sales operation. Inventory is monitored differently for raw material, work in progress, finished goods and stores. Monthly inventory report is sent to chairman through the finance department to corporate office. Obviously the inventory report is prepared to plant level. Production planning and control department gives the data of closing stock of raw material, finished goods as well as the work in progress.

Receivables At a plant all finished good are sold cash and in advance payment but the major portion of debtors are delt by central marketing organization. It is considered as an essential marketing tool.

Payables The supplier credit is referred to as Account payable, Trade credit, and Trade bill. Trade acceptance. But now and pay later facility is provided by suppliers depends up on a variety of factors such as natures, quality and volume of items to be purchased, the creditors of coal are monitored by corporate office and the individual creditors are

monitored by the concerned departments i.e. the raw material, stores & spares and the operations accounts department which look after the contracts. To summaries, working capital at a plant level mainly involves forecasting and monitoring of different components which is done systematically. Major portions of important components of working capital is bills payables and borrowing of funds monitored by corporate level.

3.

Management of Inventory

Inventory constitutes the principal items in the capital of the majority of trading any industrial companies. In inventory the stores of raw material, stock finishing goods, work in progress and other accessories and included to maintain the continuity in the operation of business to regulate the size of the investment if good carried in stock and turnover rates. The purpose of inventory management is to ensure available of material in sufficient quality as and when required and also minimize investment in inventory.

Motives for Holding Inventories The transaction motive, which emphasizes the need to maintain inventories to facilitate smooth production and sales operations. Precautionary motive, which necessities holding of inventories to guard against the risk of unpredictable changes in demand and

supply forces and other factors. Speculative motives, which influence the decision to increase or reduce, inventory advantage of price fluctuations. levels to take

Objective of Inventory Management To maintain a large size of inventory for sufficient and smooth production and sales operations. To maintain a minimum investment in inventories to maximize profitability. Inventory Management at Bhilai Steel Plant Inventories are stock of a company, which is manufacturing for sale of component that make up the product. Inventory means a schedule of items held at a particular point of time. In managing inventories the objective of SAIL is to determine and maintain optimum level of inventory investment. The optimum level of inventory lies between two danger points of excess and inadequate inventories.

Raw Materials Raw materials is those basic inputs that are converted into finished products through the manufacturing process. Raw material inventory are those, which have been purchased and are stored for future production. In Bhilai Steel Plant, raw materials central procurement unit of central marketing organization as per the requirements of the Individual steel plant. The bulk purchase are procured and send to the place of need. Basic objective in holding raw materials inventory

is torn separate purchase and production activities. If raw materials inventories were not held, purchase would have to be made continuously at the usage rate in production.

Semi Finished / Finished Products Semi finished products are semi manufacturing products. They represent products that need more work before they became finished products for sale and finished goods inventories are those completely manufacturing products, which are ready for sale. Stock of finished goods is required for smooth marketing operations. Semi finished products are valued at lower of cost or net realizable value of the respective paints. Raw materials are valued at lower of cost and net realizable value. Iron scrap and steel scrap at the integrated plant are valued 75% and 90% respectively of previous years realizable value of pig iron. The stock of week scrap lying unconsummated at the plant and mixed coke and middling/rejects, are valued at the estimated net realizable value. In the case of special products, which have a realizable value at the finished stages only the realizable value of process material is arrived at by applying the ratio of finished products realizable value and its costs, to the cost up to the stage of process. Stores and spares Stores and spares include stock of all stores and spares for operation and maintenance like consumable stores, explosive, oil, diesel, petrol, Lubricants, electrodes, refectories, rolls. Ingots moulds, bottom plates, casting, capital assets temporarily kept in general stores

pending transfer to concerned mills/shops stock with fabricators for operational purposes spares lying unused at shop floor etc. at year end. Stores and spares are valued at cost of stores and spares declared obsolete/surplus and also those, which have not moved for five years more provision is made at 75% and 10% respectively of the book value and charged to revenue. Here the inventory is classified into:
1. 2. 3. 4.

ABC analysis XYZ ANALYSIS Non moving inventory Surplus inventory

ABC analysis Items, which constitutes to 70% of total consumption (of stores and spares) value when arranged in descending order of consumption value will be termed as A class items. Next 20% of total consumption value will be termed as B class items and the rest 10% as the C class items. XYZ analysis Items which constitute top 70% of total stock of stores and spares holding value when arranged in descending order of stock holding will be termed as X class items next 20% of total stock holding will be termed as y class items and the rest 10% and the z class. Non-moving inventory Items, which has not been issued for the last 3 to 5 years shall be non-, moving items. Surplus inventory Out of the above non moving inventory when there is issue made to various shops asking for the requirement of the inventory and if therere also it is not needed then transferred to

another steel plant and it again not needed there also then sent for disposal through auction sale. Placement of Order Material planning department of Bhilai Steel Plant determines when and how much to order. This is determined by calculating the reorder point. The reorder point is that inventory level at which an order is placed to replenish the inventory. This department scrutinizes that the order made are specifically as per requirement and there is sufficient capital to make purchase. Procurement After the purchase order is of delivery whether through rail/road, Nature of sharing taxes, the inspection time the terms and document needed with the material all the formalities are finalized. Received material is examined by visual survey. Then whole lot is sent to the central store, which takes into account the whole lot is sent to the central store, which takes into account the whole documentation process. The detail of material stored and stores are given below. Bulk material Silicon manganese Capital items Spare items Bulk atore Central Plant Store cell Borea stores Plant Spare store

After receiving the material consignment control number is provided and when the identification of material with the purchase order is done then the R. number is given. Here, again the inspection takes place and if the quantity received is accepted

then receipt is prepared and accounting is done and if the quantity is rejected then no receipt is prepared again there is a clause that if the quantity rejected is accepted to the acceptable level by Material Review Board. Then new certificate prepared by MRB. The goal of budgeting control in B.S.P. is to maximize the total cost budgeting section monitors the shop wise procurement budgets for indents raised by the shop. The amount sanctioned is utilized for the items and quantities. The Material Management Department monitors the receipt budget on monthly basis and control the daily receipts separate funds are being allocated to the products.

The analyst of Inventory Department in B.S.P. estimates the different expenses with varying inventory levels and choose the level with the lowest total cost. The lowest total cost considers both the caring cost and ordering costs.

4. METHOD OF VALUATION OF INVENTORIES

According to international Accounting Standard 2(IAS 2), the inventories should be valued at the time of historical cost and net realizable value. Historical cost :-

Historical cost of inventories is the aggregate of cost of purchase, cost of conversion and other cost incurred in bringing the inventories to their present location and condition. Thus historical cost include not only price paid for making them fit for use in production or for sale, e.g. transportation costs, duties, insurance in transit , manufacturing expenses incurred for converting raw material into finished product etc. selling expenses such as advertisement expenses or storage costs should not be included. Net Realizable Value :According to International Accounting Standard 2(IAS2),the net realizable value means the estimated selling price in the ordinary course of business less cost of completion and less cost of necessarily to be included in order to make the sale. Thus net realizable value is to be calculated after taking into consideration all expenses. which might have to be incurred for making sales. For the example, ,if the seller will have to pay a commission of 2% on sale, the net realizable value of an article having a selling price of Rs.10 should be taken as only Rs.8. Inventories are to be valued at cost or net realizable value which ever Is less. The ascertainment of net realizable value of different item and it comparison with he historical costs can be done by any of the following.

Aggregate or total inventory method :According to this method of the total cost prices of the different items of the inventories are calculated. The total so calculated is compared with the total of the net at a price which is lower of the two.

Group method :According to this method, groups are formed of homogeneous items are inventories. The cost and the net realizable value of the each group so formed are found out. The lower cost of cost or net realizable value of each group of items is taken for valuation of inventories.

Item by item method :According to this method ,the cost and net realizable price of each item of inventory are found out . Each item is valued at a price, which is lower of the cost or net realizable value. A major objective of accounting for inventory is the paper determination of the income through the process Of matching

appropriate costs again revenue. It required assigning of proper cost to inventory as well as goods sold. However, it should be noted that assigning of each cost, need not conform to the physical flow goods. The various method for assigning historical costs of inventory of raw material and goods are explained below: Specific identification method :According to this method each item of inventory is identified with its costs. The total of the various cost so identified constitute the value of inventory. This method is generally used when the materials or goods have been purchased for a specific job or customer. Such materials or goods when received are earmarked for the job or customer whenever demanded. This technique of inventory valuation can be adopted only by a company,which is handling a small number of item. In case of manufacturing company having number of inventory item it is impossible to identified the cost of each individual item of inventory. Thus this method is inappropriate in the most cases on account of practical consideration moreover the method open door to income manipulation when like item are purchased at different price. First in first out method (FIFO) :-

Under this method,it is assumed that the materials or goods first received are first to be issued or sold. Thus according to this method .the inventory on a particular date is presumed to be composed of the item, which were acquired most recently. Advantage:It value nearer to current market price since stock is presumed to be constituting of the recent purchases. It based on cost and therefore, no unrealized profit enter into financial account of the company. The method realistic since it takes into account the normal/ procedure of utilizing or selling those material or goods which have been longest in stock.

Disadvantage :It involves complicated calculation and hence increase the possibility of clerical error. Comparison between different jobs using the same type of material becomes sometimes difficult. A job commenced a few minutes after another job may have to bear an entirely different charge for material

because the first job completely exhausted the supply of the of materials of the particular lot. Last in First out method (LIFO) :This method is based on the assumption that last item of materials of goods purchased are first to be issued or sold. Thus according to this method ,inventory consists of items purchased at the earliest cost.

Advantage :It takes into account the current market condition while valuing materials issued into different jobs or calculated the cost of the goods sold. This method is based on the cost and therefore, no unrealized profit or loss is made on account of use of this method. This method is most suitable for materials which are of a bulky and non-perishable type. Highest in First out method (HIFO) ;According this method, the inventory of materials or goods should be valued at the lowest possible price. Materials or goods purchased at the highest price are treated as being first issued irrespective of the date of purchased. This method is very suitable when the market is constantly fluctuating because cot of heavily priced material or goods

is recovered form the production or the sales at the earliest. However the method involves too many calculation as in the case of LIFO method. The method has ,therefore ,not been adopted widely. Base Stock Method :The method is based on the contention that each enterprise maintains all the times a minimum quality of material or finished goods in its stock. This quality is termed as base stock. The base stock is demanded to have been created out of the first lot purchased and therefore its always valued at this price and is carried forward as a fixed asset. Any quality over and above the base stock is valued in accordance with any other appropriate method. As this method aim at matching current cost to current sales, the LIFO method will be most suitable for valuing stock of materials or finished goods other than the base stock. The base stock method has the advantage of charging out materials / goods at actual cost. Its other material or demerit will depend on the other method which used for valuing material other than the base stock. Next in first out method :The method attempts to value material issue or goods sold at an actual price which is as near as possible to market price. Under the method the issues are made of cost of goods sold to taken as the next price. i.e. the price of material or goods have been order but not yet received. In other word issues or goods for further processing or

sale at the latest price at the company has been committed even through they have not yet been physical received. This method is better than market price method under which every time when goods are issued their market have to be ascertain. Incase of this method goods will be issued at the price at which new order have been placed at this price will gold goods all future issues till next order is placed. For example 100 units of material A purchased Rs. 1 per unit are lying in sore and an order for another 100 units Rs.1.25 has already been placed. If a requisition of another 50 units for a department is made, they will issue to the department at Rs1.25 Per units. The value of inventory on particular data is ascertained by deducting the cost of material issued or goods sold from the total value of material or goods purchased. Calculations of issued price are complicated in this method and therefore the method is not widely used.

Weighted Average Price Method :This method is based on the presumption that once the materials are put into a common bin, they lose their identity. Hence the inventory consists of no specific batch of goods. The inventory is thus period on the basis of advantage prices paid for the goods weight according to the quality purchased at each price.

Weighted Average Price method is very popular on account of its being based on the total quality and value of material purchased besides reducing number of calculation. As a matter of fact the average price is to be calculated only when a fresh purchased of material is made in placed of calculating it every now and than as it the case of FIFO, LIFO, NIFO, or HIFO methods .However, in case of this method different price of materials are charged from production particularly when the frequency of purchased and issued /sales is quite large and the concern is following perceptual inventory system. Retail Inventory Method:This is also termed as adjusted selling price method .It is widely used in business where the inventory comprises items individual costs of which are not readily ascertainable. Calculating it in the first instance at selling price and then deducing an amount equal to the estimated gross margin of profit on such stock estimated the historical cost of inventory.

5.

Management of Cash

Cash is a medium, of exchange to purchase the goods and services and to discharge the liabilities. In business enterprise, it includes cash in hand cash in hand, cash at bank, and ready marketable securities. Thus cash is the most important current

asset for the smooth operations of the business. Now-a-days liquidity and solvency maintenance has become the main task of financial executives. Moreover, cash management assumes more importance than other current assets because cash is the most significant and the least productive asset that a company holds. Cash balance is an unproductive investment also. Idle cash produces nothing. Therefore, the aim of cash management may be said to maintain adequate cash position at one hand and to use excess cash in some profitable way on the other hand. Objectives of Cash Management To minimize the amount of funds as cash balance. To meet the cash disbursement needs as per payment schedule. Management of Cash at Bhilai Steel Plant Cash section is an important section of Finance and Accounts department. It deals with the employees, Contractors and suppliers for their payment. Corporate office plays a dominant role in cash management. The corporate office allocates different amount of cash to different steel plant as per its requirement. Corporate office acts as a linkage between the B.S.P. and main bank the state Bank of India. Corporate office has determined the credit facility for every unit of SAIL. Number one unit of SAIL can get the credit facility more than the limit, which is permitted to any one. The credit is known as rolling cash limit, which is subject to change from year to year depending up to company position, transactions, profitable and inventory position.

1. 2.

Although corporate office provides credit limit facility, yet B.S.P. is not fully dependent on the corporate office. The sale of scrap materials of defectives at plant level generates the cash. Thus at a time plant can also pay its liabilities and then the balance amount is only intimated to the corporate office. B.S.P. gives priority in cash payment, which is urgent and sends the report to its corporate office. Fund Allocation Here the initial allocation for mines and B.S.P. unit is done by corporate office and all supplementary requirements are to look by B.S.P itself. The corporate office allocates the funds for all steel plants and particularly about Bhilai Steel Plant the fund is allocated keeping in view that there are three mines i.e. Rajhara Iron ore, Nandini Lime stone, Hirri Dolomite which are owned by B.S.P. Fund Utilization Bhilai Steel Plant operates an annual Cash Budget and a rolling Cash Plan drawn up every month. Although specific forecasting technique is used, funds are deployed to different transaction is prepared by cash section to keep a track of all payments made in the days work. Every month cash transaction report is sent to corporate office showing all the transactions of cash (inflow and outflow) actual utilization of cash and allocation of fund, then the plant has to justify its more utilization and if the justification is not found satisfactory then the letter of improvement is given by the corporate office.

Cash budget is most significant device to plan for and control the cash receipts. Cash budget is a summary statement of B.S.Ps expected cash in flows and outflows. Again this cash budget is broken in to month wise budget where allocation of cash on month wise it becomes easier to allocate the amount. The information of expected cash flows and cash balance helps to financial manager of Bhilai Steel Plant to determine the future cash needs of the firm, plan for the financing of these need and exercise control over the cash and liquidity of B.S.P.

Bhilai Steel Plant needs cash to Cary out the day-to-day functions of business just as the level of operations affects working capital requirements it affects the need for cash. These days the direct sales of billets and merchant products are increasing cash. Cash has been receiving from customers and has been providing for adequate cash for their liabilities. As the corporate level the 100% accuracy in cash forecasting is not possible, corporate office provides adequate cash for contingencies. If suddenly a major customer does not pay its bill, the cash inflow will be reduced below the forecasted level. It has also been seen the supplier of coaking coal has offered a large discount for cash purchasing of material and SAIL has gained of

this opportunity by importing low cash high quality coaking coal is imported from Australia.

6.

Management of Account Receivables

An account receivables represent the amount due from its customers to whom the company has extended the credit. When a firm sells its products and services and does not receive cash for it immediately, the firm is said to have granted trade credit to customer and the customers from whom receivables or took debt have to be collected in future are called trade debtors. Objectives of Receivables Management
1. 2.

To take a sound decision as regards to investments in debtors. To promote sales profit until that point is reached where the return on investment in future funding of receivables is less than the cost of funds raised to finance the additional credit.

Management of Receivables in Bhilai Steel Plant Although managing the receivables is done by corporate office, yet central marketing organization directly deals with it. Three years ago when market was declining, they used the receivable accounting to maintain the market share, at that time the credit policy of corporate office helped to retain old customers and create new customers. Now the situation is opposite of that there is a growing demand of steel products not only in our country but also in abroad, the credit policy is helping to increase the firms market share. Obviously the minor part of receivable management dealt at the Bhilai Steel Plant. Which consists of the recovery of the direct sales and scrap and defectives and employee related matters. Mostly the whole of sundry debtors and the third party like shopkeepers. The shopkeepers are one to whom the B.S.P. quarters and shops are given from the money is recovered and the credit facility given is one month for the interest matter which are

basically got from house building advantages given where one month recovery is done. Thus we can say that the management of receivables is dealt major part by corporate office and minor part by the finance department of Bhilai Steel Plant.

7. Management of Account Payables

Management of account payable is as much important ad management of accounts receivable. Whereas the underlying objective in case of account receivables is to maximize the acceleration of the collection process, the objective in case of account payable is to slow down the payments process as much as possible. But it should be noted the delay in payment of accounts payable may result in saving of some interest cost but it can prove very costly to the firm in the form of loss of credit in market. The finance manager has therefore, to ensure that the payments to the creditors are made at the stipulated time periods after obtaining the best credit terms possible. Management of accounts payables at Bhilai Steel Plant The creditors are managed at plant level only. Mostly the creditors comprises of contractors to whom payments are to be given and the capital works. This is basically done as per terms and conditions with the respective parties. In the case of small industries it is done with in 30 days if the dues are above 1 lakh. There is also a scheme of Earnest Money Deposits for the registered small scale industries. The scheme allows to have a security deposit, which is refundable at the end of contract. In case of statutory payments i.e. the income tax etc, whereby one month due is provided.

CHAPTER - 2 OBJECTIVE OF THE STUDY

Objective of the Study The objective of the study is to examine the extent of use of permanent working capital & variable w/c. Comparision of change in working capital from previous years to the years of examination and liquidity position. Knowledge of the working capital will help us in interruption of financial terms and measure to be taken to improve the health of the companies in the steel industry can be suggested.
1. 2. 3. 4. 5. 6.

To study the working capital concept. To study the working capital management process in Bhilai Steel Plant. To know the legal aspects of managing the working capital in Bhilai Steel Plant. To study the inventoty management process in Bhilai Steel Plant. To compare the performance of working capital for a particular year with the previous year. Suggesting ways to improve the current situation in working capital management.

CHAPTER - 3

RESEARCH METHODOLOGY

WHAT IS RESEARCH? Research in common parlance refers to a search for knowledge. It is a scientific and systematic search for pertinent information on a specific topic. In fact, research is an art of scientific investigation. It is important in solving various operational and planning problems of business and industry. It is equally important for social scientist in studying social relationships and in seeking answer to various social problems. WHAT IS RESEARCH METHODOLOGY? Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind it. Research methodology consists of:

3.1 SOURCE OF DATA The data for study is both primary and secondary data. For primary data selection respondent has been approached. PRIMARY DATA: Data collected by the researcher itself for the purpose of research is primary data. It directly benefits the research problem.

SECONDARY DATA: Data which has already been collected and analyzed by someone else is secondary data. It means data that has already collected. 3.2 Methods Adopted for Data Collection In order to collect data we have used secondary sources. In order to get sufficient information the following sources of data collection has been adopted :Through Articles and magazines. Though manuals. Through books. Through Detailed Project report. Through personal interviews. Through websites. 3.3 RESEARCHER INSTRUMENT .

This research design is based on descriptive research and this descriptive research focus on discover of ideas which is generally based on secondary data. It is a primary investigation which does not have rigid design because reseacher gets engaged in an descriptive study. 3.4 Tools and Techniques of analysis :

Coding operation is usually done at this stage through which the categories of data are transformed into symbols that be tabulated and counted. Editing is the procedure that improves the quality of the data for coding. With coding the stage is ready for tabulation. Tabulation is a part of the technical procedure wherein the classified data are put in the form of tables Pie chart is a part of technical procedure to differenciate different groups.

CHAPTER - 4

DATA ANALYSIS & INTERPRETATION

Data Analysis
WORKING RESULTS OF B.S.P. for the Financial Year 2005-06 : 1) CURRENT RATIO:

Current Assets = Sundry Debtor + Cash and bank balances+ other current asset + loan and advances + Total Inventory = 20.53 + 33.81+ 16.55 + 218.44 + 1505.76 = 1795.09 Current liabilities= Sundry Creditor + Security deposits + other liabilities +provision = 518.08 + 42.13 + 289.95 + 29.36 = 879.52 Current Ratio = current asset / current liabilities = 1795.09/879.52 = 2.04 In the same way C.R. (Current Ratio) of the rest have been calculated below:Year 2004-05 2003-04 2002-03 Ratio 1.31 0.93 1.54

2) LIQUID RATIO or QUICK RATIO or ACID TEST Ratio: Quick Assets = Sundry Debtors +Cash and Bank balance +Interest Receivable Loans and Advance + Other(-) inventories.

= current assets total inventories =1795.09 1505.09 =290 Liquid Ratio = Quick Assets/ Current Liabilities = 290 / 879.52 = 0.33

In the same way Liquid Ratio of the rest of year have been calculated below:Year 2004-05 2003-04 2002-03 Ratio 0.26 0.21 0.47

3) GROSS SALES TO WORKING CAPITAL RATIO: Working Capital (W.C.) = Current Assets Current Libilities = 1795.09 879.52

= 915.75 Gross Sales to Working Capital Ratio = (Gross Sales/ Working Capital) = (9564.63 / 915.75) = 10.44 times

In the same way Gross Sales to Working capital Ratio of the rest of the years have been calculated below :Year 2004-05 2003-04 2002-03 Ratio 37.2 -96 13.6

4) WORKING CAPITAL TURNOVER RATIO:

Average Net Working Capital = (Opening Balance of w.c. + Closing Balance of w.c.) / 2 = (308.67 + 915.75) / 2 = 612.21 Working Capital Turnover Ratio = Net Sales / Average Net working Capital = 9564.63 / 612.21 =15.622 times In the same way Working Capital turnover ratio of the rest of thr year have been calculated below :Year 2004-05 2003-04 2002-03 Ratio 92.75 19.11 11.25

5) CURRENT ASSETS TURNOVER RATIO:

Average Current Assets =(opening current assets + Closing current assets) / 2 =(1297.22 + 1795.09) / 2 = 1546.16 Cost of goods sold = net sales profit after tax = 9564.63 2781.07 = 6783.56 Current Asset Turnover Ratio = Cost of goods sold / Average Current Assets = = 6783.56 / 1546.16 4.39 times

In the same way current asset Turnover Ratio of the year have been calculated below :Year 2004-05 2003-04 2002-03 Ratio 4.72 4.38 3.65

6) INVENTORY HOLDING PERIOD:

Average Inventory = (Opening Inventory + Closing Inventory) / 2 = (1041.68 + 1505.76) / 2 = 1273.72 Inventory turnover ratio = Cost of goods sold/ Average Inventory = 6783.56 / 1273.72 = 5.33 times Now, Inventory Holding Period = 360/ Inventory Turnover = 360 / 5.33 =68 days In the same way Inventory Holding Period of rest of the year have been calculated below ;Year 2004-05 2003-04 2002-03 Days 60 60 70

7) WORKING IN PROCESS (w.i.p.) INVENTORY TURNOVER PERIOD: Average inventory of finished and semi finished goods =( 385.73 + 734.15) = 559.94 Work in process (w.i.p.) inventory turnover Cost of Production = ------------------------------------------------------Average Work in process inventory = 4450 / 559.94 = 7.95 Work in process (w.i.p.) inventory turnover in days = 360 / work in process turnover = 360 / 7.95 = 46 days

In the same way work in process Inventory turnover period of the rest of the year have been calculated below :Year 2004-05 2003-04 2002-03 Days 24 27 35

8) SEMI FINISHED / FINISHED GOODS STORAGE PERIOD :

Average inventory of finished and semi finished goods =( 385.73 + 734.15) = 559.94 Where, Semi Finished / Finished goods inventory turnover ratio is Cost of goods sold = -----------------------------------------------------------------------Average inventory of finished and semi finished goods = 4450/559.94 = 7.95 times Semi Finished /Finished goods storage Period = 360 / 7.95 = 46 days In the same way Semi finished /finished goods storage period of the rest of the year have been below :Year 2004-05 2003-04 2002-03 Days 24 26 34

9) DEBTOR COLLECTION PERIOD:

Average debtors = (19.48 + 20.53)/2 = 20.01 Net credit Sales Debtor turnover Ratio = -----------------------------------Average debtors = 9564.63 / 20.01 =478 Hence, Debtor Collection Period = 360 / Debtor Turnover = 360 / 478 = 1 days In the same way Debtor Collection Period of the rest of the years have been calculated below ;Year 2004-05 2003-04 2002-03 Days 1 4 7

10) CREDITORS PAYMENT PERIOD: Average Trade Credit =(opening Sundry Creditors + Closing Sundry Creditors) =(581.26 + 518.08) / 2 = 549.67 Average of trade credit Purchased /day = (Raw material purchased including semi /finished products + Stores & spares + power & fuel) / 360 = (4214.30 + 896.48 + 801.69) / 360 = 5912.47 / 360 = 16.42 Credit Payment Period Average Trade Credit = ---------------------------------------------------------Average of trade credit Purchased /day = 549.67 / 16.42 = 34 days In the same way Credit Payment Period of the rest of the year have been calculated below:Year 2004-05 2003-04 Days 43 47

2002-03

54

CHAPTER 5 LIMITATION

LIMITATIONS :-

1). Descriptive research is totally based on secondary data therefore futher modification is not possible. 2). Every research contain the chance of standard error. 3). The study was limited for the period of 60 days.

CHAPTER - 6

FINDINGS

RESULT AND DISCUSSION The Working Capital Ratio or Current Ratio of B.S.P. is in favorable trend, which means there is a correlation between changes in current assets with that of current liabilities. The Current Ratio was low in the year 2005 - 06 which was mainly due to the high inventory and cash blockages. The Liquid Ratio of B.S.P. is in a favorable trend, which is due to existence of high level of inventory turnover and non moving stock the higher the ratio, the higher the business level of liquidity, which usually corresponds to its financial health. Here in this case it has improved from 0.26 in the year 2004 - 05 to 0.33 in the year 2005 06, which indicates that the business is capable to pay off its debts quickly, if that becomes necessary. The Gross Sales to Working Capital Ratio which shows the efficiency by which working capital is being used by the business and we can see that there was a decrease by -96 times in the year 200304 which was mainly due to the negative working capital balance which resulted due to the payment of wage revision which took place that year and then it increased to 37.2 times in the year 2004-05 which again shows working capital is supporting sales. In 2005-06 it is 10.44 times. Working Capital Turnover is in a increasing trend and we can see a decrease in the year 2005-06 (15.62 times) as compared to the year 2004-05 (92.75 times) which is mainly due to the increase in the average net working capital.

The current assets turnover ratio is increased from 3.65 times in the year 2002-3 to 4.72 times in the year 2004-05 that shows that there was an increase of 1.07 times, which indicates the efficiency by which the firm uses all its current assets to generates sales. In 2005 06 it is 4.39 times. The Inventory Holding Period decreased from 70 days in the year 2002 03 to 60 days in the year 2004 05 which shows the sign of higher efficiency which indicates that the inventory is quickly utilized in the production process and not being piled up. It is 68 days in 2005 -06. The Work in Process Inventory Turnover period and semi finished / finished goods period decreases from 2002-03 to 2004-05 due to implementation of effective production and operation techniques in use, whereby optimum utilization of resources is taking place. The Debtor Collection Period is in a decreasing state that is from 7 days in the year 2002-03 to 1 day in the year 2005 -06 which shows that there chances of bad debts and also depicts that B.S.P. is following a strict and efficient credit policy, and as a result there is a prompt collection of receivables taking place. The Creditor Payment Period is showing a decreasing trend from 54 days in the year 2002 -03 to 34 days in the year 2005-06 which shows that the time lag in the bills payables period has came down which indicate a prompt payment of all the payables is taking place, which is a healthy sign for any firm. Companys policy relating to collection of debt is in a sound position. Which shows that B.S.P. has allowed the credit facility it its customers and are realizing it in timely manner. Regarding the temporary working capital, which is for the day to day management, the plant generates a large amount of temporary working capital by sale of scrap, defectives, and cuttings material wastages to small industries. And receives remittances of cash from some malicious receipts. The marketing of all SAILS prime products are done by the Central Marketing Organization (CMO) and the receipts of sale are directly sent into the inner unit current account which is centrally controlled by the corporate office at New Delhi.

CHAPTER-7 RECOMMENDATION S

RECOMMENDATION :-

1). The company should try as far as possible to maintain its current ratio 2:1. 2). Inventory management should be properly in time. 3). The company should allow a short collection period of its

receivables

CHAPTER-8 CONCLUSIONS

Conclusion
Bhilai Steel Plant a major unit of SAIL has been generating continuous profits as compared to previous year with current year. To summaries, working capital at a plant level, this mainly involves forecasting and monitoring of different components, which is done systematically. Whereby major portions of receivables are managed by central marketing organization for all plants level. Other important components of working capital are bill payables and borrowing of funds monitored by corporate level. Finance Department of Bhilai Steel Plant and various individual units decides the amount of funds requirement during the preparation of operation budget, and then requirement of fund is intimated to corporate office. Cash inflows and outflows are estimated in budget. The marketing of all SAILs prime products are done by the central marketing organization and the receipts of sale are directly sent into the inner unit current account which is centrally controlled by the corporate office and the corporate office allocates the funds as per intimation to individual units. Cash is monitored every day and intimated to the top management as well as fortnightly to the company. Inventory is monitored differently for raw material, work in progress, finished goods and stores. Monthly inventory report is sent to chairman through the finance department to corporate office, but the major portion of debtor are dealt by central marketing organization. While analyzing the data, I found that all most all the ratios calculated above shows a favorable trend which shows that B.S.P. is working efficiently and it is having a sound liquidity, and at the same time the

duration of operating cycle has been decreased from year 2002 -03 to 2004-05 which shows an favorable trend and as a result which indicates that it will require less working capital in the years to come.Which it self shows that the efficiency of working capital management in Bhilai Steel Plant.

CHAPTER-9 BIBLIOGRAPHY

BIBLIOGRAPHY 1. Functional Finance & Accounts Manual. 2. Finance year book. 3. SAIL journal. 4. SAIL news magazine. 5. BSP news magazine.

6. Steel Scenario Journal. 7. http:// www.sail.co.in// (WEBSITE)

STATEMENT SHOWING CHANGES IN WORKING CAPITAL

WORKING CAPITAL C.A C.L CURRENT ASSETS CURRENT LIABILITIES WORKING CAPITAL

2003-04 (in crores) 1223.50 1316.64 -93.14

2004-05 (in crores) 1297.22 988.55 308.67

2005-06 (in crores) 1795.09 879.52 915.57

This decrease can be due to the increase in the current assets and rise in the working capital requirement. The current assets in this year are proportionately more then the current liabilities.

CURRENT ASSETS Vs LIABILITIES

YEAR CURRENT ASSETS CURRENT LIABILITIES

2003-04 (in crores) 1223.50 1316.64

2004-05 (in crores) 1297.22 988.55

2005-06 (in crores) 1795.09 879.52

This graph shows that there is a gradual increase in the current assets and gradual decrease in liability.

A Project Report on WORKING CAPITAL MANAGEMENT WITH SPECIAL REFERENCE TO INVENTORY MANAGEMENT

Under the guidance of

Submitted By

MR.Milton Ray Sr.Manager Bhilai Steel Plant

Prakash Verma (MBA 3rd Sem)

A project report submitted in partial fulfillment of the requirements for

Master of Business Administration (2007-2008) Shri Shakaracharya Institute of Management & technology Junwani, Bhilai (C.G.)

DECLARATION

I am a student of Master of business Administration from Chhattishgarh Swami Vivekanand Technical University, Bhilai for the session 2006 - 2008, hereby declare this project report prepared, in lieu of a compulsory paper for the partial fulfillment of Management in Business Finance, is my original work, which I have submitted in Bhilai Steel Plant, to my guide Mr. Milton Ray Sr. Manager. All the information and data given in my project are authentic to the best of my knowledge and taken from reliable sources.

Place: Bhilai Date:

Prakash Verma MBA IIIrd Sem

PREFACE
There's a little bit of SAIL in everybody's life "Steel is the basic framework which has built nations, and it is on this strength that nations stand apart. This man-made metal has an extraordinary quality of contributing to every aspect of life. While it keeps the wheels of industry turning, it also lends ever-lasting quality to all kinds of structures and infrastructure." This project has been undertaken to study the operation budget & management accounting system practiced in an integrated steel plant like BSP. In the present era of cut-throat competition, the need to have an integrated operation budget system is growing very fast. Management accounting helps to provide information to management to take effective & efficient decision regarding pricing, product-mix, cost control, ascertainment of profitability & internal & external reporting. BSP is ideally suited for this purpose since it is one of the largest Integrated Steel Plants of our country and is been awarded for its appreciating step of cost reduction by Institute of Cost & Work Accountants of India. Other than this BSP is the maximum profit making unit & also is the highest steel producing unit of Steel Authority of India Limited (a NAVRATNA PSU). Various units of BSP closely resemble the flow of material / information throughout the plant, which helps in a better understanding of the entire operation on an overall basis. It helps to gain a better understanding of the process of Iron and Steel Making and helps us in appreciating the effort and dedication involved in the successful working of a huge integrated steel plant.

ACKNOWLEDGEMENT Acknowledgements are not the full expression of ones gratitude towards the person whose help is acknowledged. Though language is an inadequate medium to express ones sentiments, it is the only way one can record ones grateful indebt ness to ones guide and benefactor. I would like to take this privilege to thank Dr. R.M Shingh (Director of NDIM, New Delhi) who has given me opportunity to do this project. I also express my deep sense of obligation to the management of Steel Authority of India Ltd (Bhilai) for giving me an opportunity to undergo field training in their esteemed organization and Mr. P.Madhusudan (D.G.M, Finance & Accounts), who provided this great help to me with his kind co-operation. I express my profound sense of respect and deepest gratitude to my guide Mr. Milton Ray, Mr. N.K.Yadav, Mr. Rajiv Mahendru for their kind cooperation and help. I also thanks to Human Resource Development department Mr.Anil Sharma (DGM-HRD),Mr. S.Dubey(DGM-HRD), Mr. S.M.Singh (GM-HRD) and Mr.D.K.Jadhav(Sr.MGR.-HRD). I am specially thankful to respected Mr.Namdeo Barange (Training coordinator V.T. Section-HRD) and Mr.A.K. Shukla (AGMSED), who gave the opportunity for summer traning in Bhilai Steel Plant. I also express my sincere debt of gratitude to the Finance & Accounts, Human Resource and Administration Departments in providing me with all the necessary information in carrying out my project study. I also extend my thanks to the officers and staff members of the Finance & Accounts Department, who directly and indirectly helped me while undergoing the project work. Lastly, I am thankful to all those people and others whose efforts and contribution now escape my memory. Prakash Verma

TABLE OF CONTENTS CHAPTER

Chapter 1.

Introduction (a) Company profile (b) Working capital management at B.S.P. Objective of the study Research Methodology 3.1 3.2 3.3 3.4 Source of Data Method of data collection Researcher instrumentation Tools and Techniques analysis

Chapter 2 Chapter 3.

Chapter 4. Chapter 5. Chapter 6. Chapter 7.

Analysis and Interpretation of Data Limitation Findings Recommendation

BIBLIOGRAPHY Appendix - QUESTIONNAIRE