CERTIFICATE

This is to certify that Miss.Rashmi Prava Rath bearing the Regd. No. 0806276006 has successfully completed the project work entitled A Study On Working Capital Management of Rourkela Steel Plant, in our organization for the partial fulfilment of Master of Business Administration at BRM institute of management and information technology under BPUT university, during the period of July-August, 2009. I find him dedicated, hardworking and sincere. I wish him all the success in all endeavours of life.

Mr. U.N. DAS Sr.Mgr (F&A) SAIL, R.S.P. ROURKELA.

CERTIFICATE

This is to certify that Miss. Rashmi Prava Rath bearing the Regd. No. 0806276006 has successfully completed the project work under my supervision and guidance, and that this project report has not been submitted anywhere else for the award of any degree or diploma. The project work is entitled A Study on Working Capital Management of Rourkela Steel Plant, and is for partial fulfilment of Master of Business administration at BRM Institute of management And information technology Under BPUT University, during the period July-August, 2009.

DECLARATION

I hereby declare that this project report entitled A study on Working Capital Management of Rourkela Steel Plant, is completed by me. I have undergone the project as a part of the course curriculum in Master of Business Administration at BRM Institute of management and information technology under BPUT University, Bhubaneswar under the guidance of Mr. U.N. Das (F&A), Asst. Manager (F&A), Rourkela Steel Plant, Odisha. I hereby declare that this project report has not been submitted anywhere else for the award of any degree or diploma. I further declare that all the figures included in the project are indicative in nature and shall not be constructed for their precision.

Place: Rourkela Date: Signature

ACKNOWLEDGEMENT
I had undergone fourty (40) days of training commenced from 8th July to 17th August, 2009 in a large-scale organization, Rourkela Steel Plant. In an endeavour of this nature and accomplishment of this academic task, I was guided by host of faculties, well wishers, colleagues and officials to whom I am deeply indebted. My perspicacious and honourable faculty, mentor guide whose convivial and magnanimous nature had been providing a constant source of inspiration and encouragement to me for fulfilling this kind of academic task. I have no words to express my feeling of joy and gratefulness for all the interest and kindness they had shown during the period. First of all I owe my special thanks to the management of Rourkela Steel Plant, for so kindly providing me the data and useful information for the purpose of this study. I cannot perhaps adequately thank my guide Prof. J.Das for worthy guidance. Further, I take this opportunity to express my deep sense of gratitude to Mr. U. N. DAS, Sr. Mgr (F&A), Rourkela Steel Plant for valuable guidance, timely help and encouragement at every stage of the task. Lastly, I express my sincere thanks to my family and relatives, who arranged this project at Rourkela Steel Plant, for their blessing and loving co-operation received from them at all moments and hours of this academic venture. In the end, by the grace of almighty, I humbly dedicate this to the Almighty at his discretion.

PREFACE
The project is an attempt to understand and analyze the working capital management at Rourkela Steel Plant (R.S.P). This project encompasses management of all the financial aspects of working capital management in Roukela Steel Plant. R.S.P. being a major P.S.U., the working capital operation here are much more complicated than a private steel company or a company in any other industry. Besides, focusing on the various activities undertaken to ensure a strong working capital position, the project also tries to shed light on the decisionmaking involved in the working capital management of R.S.P. The main objective of the project is to conducts an in-depth analysis of working capital management in R.S.P. For this purpose, various working capital data are recorded from the annual reports and financial year books of RSP. Components of working capital like inventory, cash, creditors and debtors are recorded in a year wise manner and trend-analysis is carried out on them. Further, these data are again analyses using research tools, like ratio analysis, funds flow analysis. From the analysis, interpretation and suggestions are made to strengthen the financial situation of RSP.

CONTENTS
TOPICS
CHAPTER 1 1. INTRODUCTION TOTHE SUBJECT 2. OBJECTIVES 3. METHODOLOGY 4. IMPORTANCE OF STUDY 5. LIMITATIONS CHAPTER 2 1. STEEL INDUSTRY 2. IMPORTANCE OF STEEL CHAPTER 3 1. ABOUT SAIL 2. MAJOR UNITS 3. JOINT VENTURES 4. SAIL IN FUTURE CHAPTER 4 1. ROURKELA STEEL PLANT 2. MAJOR UNITS 3. PRODUCT MIX CHAPTER 5 1. THEORITICAL ASPECTS OF WORKING CAPITAL 2. CLASIFICATION OR KINDS OF WORKING CAPITAL 3. ADVANTAGES OF ADEQUATE WORKING CAPITAL 4. EXCESS OR INADEQUATE WORKING CAPITAL 5. DETERMINANTS OF WORKING CAPITAL 6. MEASURING THE WORKING CAPITAL CHAPTER 6 1. WORKING CAPITAL OF RSP 2. ANALYSIS OF OPERATING CYCLE OF RSP 3. MEASURING THE WORKING CAPITAL OF RSP CHAPTER 7 1. BIBIOGRAPHY 2. CONCLUSION

CHAPTER 1

Introduction of the Subject

Working Capital Management involves the relationship between a firms short term assets and its short term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Management of working capital is a challenging task particularly in developing countries like India. In developing countries generally, there is shortage of funds, frequent changes in the monetary policy as an instrument of controlling inflation, vast demands on bank funds, high interest rates, shortage of goods and services luring both business houses and consumers to hoard and maintain large inventories and existence of parallel block economy.

Objectives of the Project

The objectives of the study include both primary and secondary objectives:

Primary Objective
To understand and study the management of working capital of RSP.

Secondary Objectives
To analyze the distribution of gross working capital into various components. To analyze the liquidity position of RSP by analyzing the various ratios.

METHODOLOGY
Source of Information:
Mainly the study was based on two types of data. Primary Data Secondary Data

Primary Data:
Primary data are those data collected from individual official guides view from organization. These are the collections through personal interview, observations of records, ledger, files etc. Collections of those data are time consuming but these are the most important and reliable.

Secondary Data:
Secondary data are those data which are already gathered and available. There may be internal source within plant and externally that source may include book, periodicals, published reports, data services and annual reports.

For the collections of secondary data following are considered:

Books on subject Published reports relevant to the subject Commercial data Files Records of the plant

Period of the Study:

In this summer training project, I have analyzed the management of the Working Capital of Rourkela Steel Plant (RSP), Rourkela for the past three years from 2005-06 to 2007-08.

Area of the Study:

In the summer training project I have prepared the report entitled Management of Working Capital on Rourkela Steel Plant. The area of study is as follows: Analysis of Operating Cycle Measuring the Working Capital

Measuring of Working Capital: Ratio Analysis Fund Flow Analysis

Sample Design:
In this study, the samples of three financial years 2005-06 to 2007-08 are taken from Rourkela Steel Plant, Rourkela. In this study, I am using secondary data for collecting the valuable information. The sources of secondary data for the study are the balance sheet and their related schedules of the plant for three financial years 2005-06 to 2007-08 of Rourkela Steel Plant, Rourkela.

Importance of the Study

In every business organization its financial transactions are recorded in the systematic term, which is called Financial Statement i.e. Profit and Loss Account and Balance Sheet. Financial Statements shows the financial strength and weakness of the firm. Hence, it can be said that the Financial Statements are prepared for decision making purpose. For the constant success of the organization such financial statement are necessary to be analyzed. The study will be useful to understand the Working Capital Management at Rourkela Steel Plant. It will also be useful in understanding the implementation of the theoretical concepts of working capital management. Financial ratios and trend analysis tools were used to determine the financial position of RSP. The research is important to determine the current operating position of RSP. The report will also give an insight into the management of various current resources of RSP and whether there is an optimum utilization of these resources.

Limitations
This project is not far from limitations. The main limitation is:
A company generally cannot disclose its internal policies to outsiders. In such case, it is very difficult to find out gather complete and true information in the forms of figures regarding financial matters. The limited time period was also a major road-block. If a time of about threefour months could have been provided then it would have helped to gain more insights into the subject matter.

CHAPTER 2

STEEL INDUSTRY
Iron working can be traced as far as back as 3500 B.C. in Armenia. The steel created independently by Henry Bessemer in England and William Kelly in the United States during the 1850s allowed the mass production of low cost steel : the open hearth process, first introduced in the United States in 1888, made it easier to use domestic iron ores. By the 1880s, the growing demand for steel rail made the United States the Worlds largest producer. The open hearth process dominated the steel industry between 1910 and 1960, when it converted to basic oxygen process, which produces steel faster and the electric-arc furnace process, which makes it easier to produce alloys such as stainless steel and to recycle scrap steel. The business of processing iron ore into steel, which in its simplest form is an iron carbon alloy, and in some cases, turning that metal into partially finished products or recycling scrap metal into steel. The steel industry grew out of the need for stronger and more easily produced metals. Technological advanced in steel making during the last half of the 19th century played a key role in creating modern economy dependent on rails, automobiles, bridges and a variety of other steel products. Global steel production has now crossed the 1 billion tones mark due to an upturn in steel demand during the last five years on the back of the recovery in the global economy. The recovery has largely been led by increasing demand for steel in china as the country focuses on strong infrastructure led growth. There has also been partial recovery in key sector such as housing, construction automobiles in the USA and Europe and the Japanese economy is also promising to turn around after a prolonged phase of recession. In 2002 China became the largest producer and consumer of steel in the world. The current Chinese demand estimates at over 350 MT. China is now following by Japan and the USA in terms of production. But at the backdrop of this recovery has been one of the most turbulent phases for the global steel industry. The industry went through one of its bad phases for the global steel industry. Also the industry went through one of its most difficult phase between 1997 and 2001, as it faced severe recession in the global economy leading to imbalance between capacity, demand and production. After the breakup of USSR many new countries turned into net exporters from net importers and the world market had an excess capacity of 50 MT, steel started getting traded at lower and lower prices. The Asian economic meltdown in 1997-98 had a further impact on steel demand and supply. Demand in Southeast and Fareast was reduced by 35-40 MT. Japan was faced with a weak Yen and lower demand. These events coupled with similar development across the world led to a situation where production had much higher capacity than they could cell. Price of steel during this period touched a 20-year low (with HR steel going below $200 mark in 2001) and most producers made heavy losses. Many companies were forced to shutdown leading to loss of many jobs. New capacities became uneconomical and surplus. Fresh expansion plans had to be abandoned as financial sector withdrew support from the steel sector. The period also witnessed major steel producing nations restoring to tariff and non-tariff barriers to safeguard their domestic industries Pushed to the wall, in 2001 advanced countries were forced to call for a global agreement organized by the OECD to limit the world output of steel and turn the slide in steel prices. Only in 2002 the global steel industry witnessed a turnaround led by growth in China and prices of steel recovered to realistic levels once again.

IMPORTANCE OF STEEL
Steel has had a major influence on our lives, the cars we drive, the building we work in, the home in which we live and countless other facets in between. Steel is used in our electricitypower-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, multifunctional most adaptable of material. The development of making would have been impossible but for steel. The backbone of developed economy 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 characteristic of steel:

Hot and Cold formable Wieldable Suitable mach inability Hard, tough and wear resistant Corrosion resistant Heat resistant and resistance to deformation at high temperature.

Steel compared to other material 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 be recycled. 5.6% of element iron is present in earths crust, representing a secure raw material base. Steel production is 20 times higher as compared to production of all non-ferrous metals put together.

The steel industries had developed new technologies and have strived hard to make the worlds strongest and most versatile material even better. There are all together 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 come. However the degree to which it maintains its dominant position will depend on of 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.

CHAPTER 3

ABOUT SAIL

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 industrialisation 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 organisation, both within and outside India.

Steel Authority of India Limited (SAIL) is the leading steel-making company in India. It is a fully integrated iron and steel maker, producing both basic and special steels for domestic construction, engineering, power, railway, automotive and defence industries and for sale in export markets. 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, galvanised sheets, electrical sheets, structurals, railway products, plates, bars and rods, stainless steel and other alloy steels. SAIL produces iron and steel at five integrated plants and three special steel plants, located principally in the eastern and central regions of India and situated close to domestic sources of raw materials, including the Company's iron ore, limestone and dolomite mines. The company has the distinction of being Indias largest producer of iron ore and of having the countrys second largest mines network. This gives SAIL a competitive edge in terms of captive availability of iron ore, limestone, and dolomite which are inputs for steel making. SAIL's wide range of long and flat steel products is much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL's own Central Marketing Organisation (CMO) and the International Trade Division. CMO encompasses a wide network of 34 branch offices and 54 stockyards located in major cities and towns throughout India. With technical and managerial expertise and know-how in steel making gained over four decades, SAIL's Consultancy Division (SAILCON) at New Delhi offers services and consultancy to clients world-wide. SAIL has a well-equipped Research and Development Centre for Iron and Steel (RDCIS) at Ranchi which helps to produce quality steel and develop new technologies for the steel industry. Besides, SAIL has its own in-house Centre for Engineering and Technology (CET), Management Training Institute (MTI) and Safety Organisation at Ranchi. Our captive mines are under the control of the Raw Materials Division in Kolkata. The Environment Management Division and Growth Division of SAIL operate from their headquarters in Kolkata. Almost all our plants and major units are ISO Certified.

Major Units 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

SAIL IN FUTURE
Modernisation and Expansion Plan of SAIL
The Corporate Plan was reviewed by Honble Minister of Steel in Jul06, 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 Aug06. 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 Plant (Jul06), Salem Steel Plant (Jun06), Bokaro Steel Plant (Dec06), Bhilai Steel Plant (Apr07), Rourkela Steel Plant (May07) and Durgapur Steel Plant (Jul07).

Item Hot Metal Crude Steel Saleable Steel

2006-07 (Actual) 14.61 13.51 12.58

Capacity as per Expansion Plans 26.18 24.59 23.13

Plant-wise Capacity Envisaged After Expansion (Mtpa) Plant BSP DSP RSP BSL ISP SSP ASP VISL Total Hot Metal 7.5 3.5 4.5 7.44 2.91 0.33 26.18 Crude Steel 7.0 3.0 4.2 7.00 2.5 0.18 0.48 0.23 24.59 Saleable Steel 6.53 2.83 3.8 6.53 2.37 0.34 0.43 0.22 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 State-of-art process control computerisation/ 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/ on-going 1,716 114 1,121 2,167 49 121 494 195 280 6257 12

Plant BSP DSP RSP BSL ASP SSP VISL ISP MINES OTHERS TOTAL %

Expansion 11,262 5,549 7,668 8,952 1,902 12,743

Total 12,978 5,663 8,789 11,119 49 1,902 121 13,237 195 280 54,333 100

48076 88

Plant BSP DSP RSP BSL ISP SSP ASP

Plant-wise Expenditure in Expansion (Rs. Crore) 2006-07 2007-08 Actual RE Actual 12.66 35.95 66.63 10.00 16.09 20.00 36.85 12 11.17 28.92 72.69 340.00 495.70 3.26 40.00 35.75 -

Total 79.29 16.09 36.85 40.92 568.39 39.01 -

VISL TOTAL

100.61

457.12

679.94

780.55

CHAPTER 4

ROURKELA STEEL PLANT

ROURKELA [Rourkela], city (1991 pop. 398, 864), Odisha state, eastern central India at the confluence of Koel and Sankh river. The city is build around a large steel plant.

The Govt. Of India under the leadership of the Prime Minister Pt. Jawaharlal Nehru decided to set up a large steel plant by the govt. Itself after the general election of 1952.Rourkela and its adjacent area are rich in iron ores, and manganese, dolomite and limestone, the basic materials for the production of iron and steel. Considering Rourkela to be the best place for a steel plant, the survey work was completed in the year 1954.The infrastructure work was accomplished in between 1955 & 1960. Almost thirty- two villages were alienated and the people of the villages were resettled. The Republic of Germany extended technical know how for the construction of the steel plant and the plant was consider as a joint venture of Govt. Of India and Germany. The initial production limit was raised from one million tonnes to 1.8 million tonnes of steel in the subsequent years. The internationally reputed firms like the Krrups, Dimag and G.H.H. Sag Scholomen, cements and Voist Eipine etc. Supplied different machines and machinery parts to the beginning stage. The Rourkela steel took the part of the leadership in the process of steel production under L.D Techniques. It could establish itself as one of the premier industry in the world under the system of basic oxygen converter. The extension work of the plant was over the years in1968. A circular welding pipe plant and steel plate plant was set up in the decade of the seventies for the production of different readymade materials. To avoid scarcity of power supply the plant set up a power plant itself with a capacity of 120 M.W. the plant is able to carter the power supply from the year 1986. The modernization of the plant was begun in the month of 1988 with a view to produce qualitative materials and establishing its importance entailed and the expenditure outlay of rupees 4500 crores. Some nine main packages were executed at the first phase. This phased revamped the process of supply of raw materials, new oxygen plant, improved techniques in blast furnace, selling of dolomite plant, supply of raw materials to number of sinter plant and coal handling plant etc. Similarly with the implementation of some sophisticated system on the second phase of modernization Rourkela Steel Plant could get the status of a modern industrial unit in the world. The materials being produced from the steel plant are steel in guts, iron sheets, ultra thin plates, and different kind of pipes etc. The by- products are fertilizer sona, bitumen, benjol. Almost all the major units of the plant are covered under ISO:9002 certification, while its Silicon steel mill and Sinter plant have been awarded ISO:14001 certification for the environment management. Rourkela Steel Plant is planning to double its steel capacity to 3.5 million tonnes in the next five years. Rourkela steel plant current steel making capacvity is about 1.9mt. Hot metal.

Rourkela Steel Plant (RSP), the first integrated steel plant in the Public Sector in India, was set up with German collaboration with an installed capacity of 1 million tonnes. Subsequently, the capacity was enhanced to 1.9 million tonnes. The plant was modernized in the mid 1990s with a number of new units with state-of -the-art facilities. Most of the old units have also been revamped for effecting substantial improvement in the quality of products, reducing the cost and ensuring cleaner environment. PRODUCT-MIX TONNES/ANNUM RSP was the first plant in India to incorporate LD technology of steel making. It is also the Plate Mill Plates 2,99,000 first Platesplant in SAIL and the only one presently where 100%92,500 slabs rolled are steel of the HR produced through the cost effective and quality centered continuous casting route. RSP is the HR Coils 3,98,000 only plant in SAIL to produce silicon steels for the power sector, high quality pipes for the oil ERW Pipes and tin plates for the packaging industry. Almost75,000 units of the plant and gas sector all major SW Pipes 55,000 are covered under ISO: 9002 certification, while its Silicon Steel Mill and Sintering Plant II have been awarded ISO: 14001 certification for Environment Management. CR Sheets & Coils 4,33,000 Galvanized Sheets (GP& GC) 1,60,000 The present capacity of the Plant is 2 million tonnes of Hot Metal, 1.9 million tons of Crude Electrolytic Tin-Plates tonnes of Saleable Steel. Its wide and sophisticated product range 85,000 Steel and 1.671 million Silicon Steel Sheets 73,500 includes various flat, tubular and coated products. Total Saleable Steel 16,71,000 Location Rourkela Steel Plant is located in the northwestern tip of Orissa and at the heart of a rich mineral belt. Being situated on the Howrah-Mumbai mainline, Rourkela is very well connected with most of the important cities of India. The nearby airports are Ranchi (173 km), Bhubaneswar (378 km) and Kolkata (413KM). Rourkela also has an Airstrip maintained by Rourkela Steel Plant.

Major Units
Raw Materials play the most vital role in RSP's production of 1.9 million tonnes (MT) of steel per annum. Each year, 2.3 MT of Coking Coal, 1.5 MT of Boiler Coal, 1.8 MT of Iron Ore Lumps, 1.5 MT of Iron Ore Fines, 1.6 MT of fluxes and other materials viz. Tin, Zinc, Aluminium and Ferroalloys constitute RSPs input requirements. Ore Bedding and Blending Plant The Ore Bedding and Blending Plant has a base mix preparation system with on-ground bedding, blending and conveying facilities. Set up under the modernization programme to provide pre-mix feedstock to Sinter Plant I & Sinter Plant II, the plant has a dispatch capacity of 5,00,000T of material per annum. The facilities includes major installations like Wagon unloading (tipplers & track hoppers), Iron Ore Crushing and Screening System, raw material storage yard, rod mills and roll crushers for flux and coke crushing, proportioning bins and elaborate conveying systems.

Coke Oven The 4.5-meter tall coke oven batteries produce coke as the input for Blast Furnaces. The coke ovens are equipped with wagon tipplers, automatic handling and conveying facilities, coal blending provisions, coke wharf age crushing together with screening and conveying systems.

CHAPTER 5

THEORITICAL CAPITAL

ASPECT

OF

WORKING

INTRODUDTION
On of the most important areas in the day today management of the firm is the management of working capital. Working capital management is a significant fact of working financial management. Its importance stems foe two reasons:

Investment in the current assets represents a substantial portion of total investment.

Investment in the current assets and the level of current liability has to be geared quickly to change in sales. To be sure, fixed assets investments and long term financing are also responsive to variation in sales. However, this relationship is not as close and direct as it is in case of working capital components.

Meaning and concept of working capital:

Working capital management is concerned with the problems that arise in attempting to manage the current assets, the current liabilities and inter relationship that exists between them. Current assets are essential to use fixed assets profitable. There are two concepts of working capital: Gross working capital Net working capital.

Gross working capital:-

The Gross working capital is the capital invested in the total current assets of the Rourkela steel plant (RSP). The current assets are:1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Inventory Stores & Spares Raw Materials Semi/Finished products Stock of salvaged/ scraped fixed assets Sundry debtors Debts over six months Provision for bad and doubtful debts Cash and Bank balance Cash and stamp in hand

11. 12. 13. 14. 15. 16. 17. 18. 19.

Cheques in hand With schedules bank Balance with post office Remittance on transit Interest receivable/accrued Provision for doubtful interest Loans Advance for purchase of shares Deposits.

Net working capital

Net working capital is the excess of currents assets over current liabilities. Net working capital = current assets current liabilities. The current liabilities are: 1. 2. 3. 4. 5. 6. Sundry creditors Bills payable Accrued or outstanding expenses Short term loans advances and deposits Provision for taxation Provision for proposed dividend.

The net working capital may be positive or negative when the current assets exceed the current liabilities the working capital is positive and negative working capital results when the current liabilities exceeds the current assets.

Need or Objects of working capital

Every business needs some working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. The working capital is needed for the following purposes: For the purchase of raw material components and spares.

 etc.

To pay wages and salaries. To incur day to day expenses and overhead such as fuel, power and office expenses To meet the selling costs as packing, advertising etc. To provide credit facilities to the customers.

To maintain the inventories of raw material, work in progress, stores, spares and finished stock.

CLASSIFICATION OR KINDS OF WORKING CAPITAL

Working capital may be classified into two ways: On the basis of concept. On the basis of time.

On the basis of concept working capital is classified as gross working capital and net working capital. On the basis of time working capital may be classified as Permanent or fixed working capital and Temporary or variable working capital.

KINDS OF WORKING CAPITAL

ON THE BASIS OF CONCEPT

ON THE BASIS OF TIME

GROSS WORKING CAPITAL

NET WORKING CAPITAL

PERMANEANT OR FIXED WORKING CAPITAL

TEMPORARY OR VARIABLE WORKING CAPITAL

REGULAR WORING CAPITAL

RESERVE WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIAL WORKING CAPITAL

ADVANTAGES OF ADEQUATE WORKING CAPITAL

Solvency of the business. Adequate working capital helps in the maintaining solvency of the business by providing uninterrupted flow of production.
1.

Goodwill. Sufficient working capital enables a business concern to make prompt payments hence helps in creating and maintaining goodwill.
2.

Easy loans. A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others and favourable terms.
3.

Cash discount. Adequate working capital also enables a concern to avail cash discounts on the purchase and hence reduces cost.
4.

Regular supply of raw materials. Sufficient working capital ensures regular supply of raw materials.
5.

Regular payment of salaries, wages and other day to day expenses. A company having adequate working capital can make regular payment of salaries and wages which raises the morale of its employees, increases its efficiency, reduces wastages and cost and enhances production and profits.
6.

Exploitation of favourable market condition. A company having adequate working capital can exploit favourable market condition such as purchasing its requirement in bulk when the prices are lower and by holding its inventories for higher prices.
7.

Quick and regular return on investments. Adequate working capital enables a company to pay quick and regular return on investments.
8.

EXCESS OR INADEQUATE WORKING CAPITAL

Disadvantages of excessive working capital. 1. Excessive working capital leads to idle funds which can earn no profits for the business and hence the business cannot earn a proper rate of return on investment. 2. Excessive working capital leads to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses. 3. Excessive working capital leads implies excessive debtors and defective credit policy which may cause higher incident of bad debts. 4. It may result in overall inefficiency in the organization.

5. Excessive working capital leads to improper relations with the banks and other financial institutions. Disadvantages of inadequate working capital. 1. A concern which has inadequate working capital cannot pay its short-term liabilities in time. Thus, it will lose its reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.

3. It becomes difficult for the firm to exploit favourable market condition and undertake profitable projects due to lack of working capital. 4. The firm cannot pay day-to-day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. 5. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. 6. The rate of return on investments also falls with the shortage of working capital.

DETERMINANTS OF WORKING CAPITAL:

Nature of business:-

The working capital requirement of a firm is closely related to the nature of its business a service firm, like an electricity undertaking or a transport corporation, which has a short operating cycle and which sells predominantly on cash basis, has a modest working capital on the other hand a manufacturing concern like machine tools units, which has a long operating cycle as which sells largely on credit has a very substantial working capital requirement.

Seasonality of operation:-

Firms which have marked seasonality in their operation usually have highly fluctuating working capital requirement. The sale of ceiling fans reaches a peak during the summer months and drops sharply during winter period. the working capital need of such a firm is likely to increase considerable in summer month and decrease significantly during the winter period. On the other hand a firm manufacturing a product like lamps which have fairly even sales round the year tends to have stable working capital needs.

Production policy:-

A firm marked by pronounced seasonal fluctuation in it sales may pursue a production policy which may reduce the shape variation in working capital requirements.

Market conditions:-

The degree of competition prevailing in the market place has an important bearing on working capital needs. When competition is keen, a larger inventory of finished goods is required to promptly serve customers who may not be inclined to wait because other manufacturer are ready to meet their needs. Further generous credit terms may have to be offered to attract customers in a highly competitive market. Thus working capital need tends to be high because of greater investment in finished goods inventory and accounts receivable.

Conditions of supply:-

The inventory of raw materials spares and stores depends on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant, then the firm to ensure continuation of production would have to acquire stocks as and when they are available and carry inventory on an average. A similar policy may have to be followed when the raw material is available only seasonally and production operation is carried out round the year.

Rate of stock turnover:-

There is a high degree of inverse co-relationship between the quantum of working capital and the velocity or the speed with which the sales are affected. A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having low rate of stock turnover.

Credit policy:-

The credit policy of a concern in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products / services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of working capital as a very huge amount of funds are bound to be tied up in debtors or bills receivables.

Operating cycle:-

Operating cycle is the time duration required to convert sales, after the conversion of resources into inventory into cash. The operating cycle of manufacturing company involves three phases. 1. Acquisition of resources such as raw material, labour, power and fuel etc.

2. Manufacturer of the product which includes conversion of raw material into work in progress into finished goods. 3. Sales of the product either on cash or on credit. Credit sale create account receivable for collection. How is the length of the operating cycle determined? The length of operating cycle of a manufacturing firm is the sum of:i. ii. Inventory conversion period (ICP) Debtor conversion period (DCP) The inventory conversion period is the total time needed for producing and selling the product. Typically includes: a. b. c. Raw material conversion period (RAMCP). Work-in-processing conversion period (WIPCP). Finished goods conversion period (FGCP).

The debtors conversion period is the time that is needed for collecting the outstanding amount from the customer. The total of inventory conversion period and debtors conversion period is referred to as to as gross operating cycle (GOC). The firm gross operating cycle (GOC) can be determined as inventory conversion period (ICP) plus debtor conversion period (DCP). GOC = ICP + DCP The inventory conversion (ICP) is the sum of the raw material conversion period (RMCP), work-in-progress (WIPCP), and finished good conversion period (FGCP). ICP = RMCP + WIPCP + FGCP Raw material conversion period (RMCP)

= Raw material inventory / raw material consumption (RMC) 360 = RMI * 360 RMC

Work-in-progress inventory (WIPI)

= Work-in-process inventory (WIPI)/ Cost of production (COP) 360 = WIPI * 360 COP

Finished goods conversion period (FGCP)

= Finished goods inventory (FGI) /cost of goods sold (CSG) 360 = FGI * 360 CGS

Debtors conversion period (DCP)

= Debtors (D)/ creditor purchases (CR SALES) 360 = D* 360 CR PUR

Payable deferral period (PDP)

= Creditors (CRS)/ creditor purchase (CR PUR) 360 = D * 360/ CR PUR Net operating cycle (NOC) is the difference between gross operating cycle and payable deferral period.

Net operating cycle = Gross operating cycle Payable deferral period.

NOC = GOC PDP

DEBTORS
(Receivables)

CASH

FINISHED GOODS

RAW MATERIALS

WORK IN PROGRESS

Working capital / Operating Cycle of a manufacturing concern.

MEASURING THE WORKING CAPITAL

Working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. However, it must also be noted that working capital is a means to run the business smoothly and profitably, and not an end. Thus, concept of working capital has its own importance in a going concern. A, study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in the business. Thus involves the need of working capital analysis. The analysis of working capital can be conducted through number of device, such as: Ratio analysis Fund flow analysis

RATIO ANALYSIS
A ratio analysis is a simple arithmetical expression of the relationship of one number to another. The technique of ratio analysis can be employed for measuring short term liquidity or working capital position of a firm. The following ratio may be calculated for this purpose: Working capital ratio:- Working capital ratio may be defined as the relationship between current assets and current liabilities. This ratio is also known as current ratio it is a measure of general liquidity of a short term financial position or a liquidity of a firm. It is calculated by dividing the total of current assets by total of the current liabilities.

Working capital ratio = Current assets Current liability A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligation in time as and when they became due. The rule of thumb of ratio is 2:1.

Acid test ratio:- Acid test ratio or liquid ratio is a more rigorous test of liquidity than the current ratio. The term acid test refers to the ability of a firm to pay its shot term obligation as and when they became due. The acid test ratio can be calculated by dividing the total of quick assets by total current liability.

Acid test ratio = Liquid Assets Current liabilities A high acid test ratio is an indication that the firm is liquid and has the ability to meet its current or current or liquid in time and on the other hand a low quick ratio represents that the firms liquidity position is not good. As a rule of thumb or as a convention quick ratio of 1:1 is considered satisfactory.

Cash Ratio: - Absolute liquid assets include cash in hand and at bank and marketable securities or temporary investment. Its calculated by:

Cash ratio = Cash & Bank + Short term securities Current liabilities The acceptable norm for this ratio is 50% or 0.5:1.

Inventory turnover ratio: - Inventory turnover ratio also known as stock velocity and is normally calculated as sales/average inventory or cost of goods sold/average inventory. It would indicate whether inventory has been efficiently used or not. The purpose is to see whether only the required minimum funds have been locked up in inventory. Inventory Turnover Ratio indicates the number of time the stock has been turned over during the period and evaluates the efficiency with which a firm is able to manage its inventory. The ratio is calculated by dividing inventory the cost of goods sold by the amount of average inventory at cost.

Inventory turnover ratio = Cost of goods sold Average inventory at cost

Inventory turnover ratio measures the velocity of conversion of stock into sale. Usually a high inventory turnover, stock velocity indicates efficient management of inventory because more frequently the stock are sold, the losses amount of money as required to finance the inventory.

Receivable Turnover Ratio: - A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy. Debtor turnover ratio indicates the velocity of debt collection of form. In simple words, it indicates the number of time average debtors or receivable are turned over during a year it is calculated by:

Receivable turnover ratio = Net credit annual purchases Average trade creditors

Payable Turnover ratio: - In the course of business operation, a firm has to make credit purchases and short-term liabilities. A supplies of goods i.e. creditor, is naturally interested in finding out how much time the firm is likely to take in repaying its creditors payables turnover ratio can be calculated by:

Payable turnover ratio = Net credit annual purchases Average trade creditors The average payment period ration represents the average number of days taken by the firm to pay its creditors, generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is his position of the firm.

Working capital turnover ratio: - Working capital turnover indicates the velocity of the utilization of net working capital. Thus ratio indicates the number of time the working capital is turned over is the course of a year. This ratio measures the efficiency with which the working capital is being used by a firm.

Working capital turnover ratio =

Cost of sale Average working capital

FUND FLOW ANALYIS

The fund flow statement is a statement which shows the movement of funds and is a report of the financial operation of the business undertaking. It indicates various means by which funds were obtained during a particular period and the ways in which these funds were employed in simple words; it is a statement of sources and application of funds. According to the working capital concept of funds, the term flow of fund refers to the movement of funds. In the working capital if any transaction results in the increase in the working capital, it is said to be a source or inflow of funds and if it results in the decrease of working capital it is said to be an application or out flow of funds.

Rule: - The flow of funds occurs when a transaction changes on the one hand a non-current account and on the other a current account and vice-versa. In simple language funds more when a transaction affects. a. b. c. d. A current asset and fixed assets. A fixed liability and a current liability. A current asset and a fixed liability. A fixed liability and current assets.

And funds do not flow when the transaction affects fixed assets and fixed liability or current assets and current liabilities.

FLOW OF FUNDS? CURRENT ASSETS

YES YES YES

NO

CURRENT LIABILITIES

FIXED ASSETS

NO

YES

LONG TERM LIABILITIES

IMPORTANCE OF FUND FLOW STATEMENT

It helps in the analysis of financial operation. It throws light on many perplexing question of general interest. It helps in the formation of a realistic dividend policy. It helps in the proper allocation of resources.

It acts as a future guide. It helps in knowing the overall credit worthiness of a firm. It helps in appraising the use of working capital.

PROCEDURE FOR PREPARING A FUND FLOW STATEMENT Fund

flow statement is a method by which we study changes in the financial position of a business enterprise between beginning and ending of a fund flow statement consists of two parts. Statement or schedule of changes in working capital. Statement of sources and application o funds.

Statement or schedule of changes of changes in working capital Working capital means the excess of current assets over current liabilities. Statement of changes in the working capital is prepared to show the changes in the working capital between the balance sheets. Working capital = Current assets Current liabilities. An increase in the current assets increases working capital. A decrease in the current assets decreases working capital. An increase in current liabilities increases working capital.

STATEMENT OF SOURCES AND APPLICATIO OF FUNDS

SOURCES OF FUNDS:-

Funds from operation and trading profits: - Trading profits from the operation of the business are the most important and major source of funds, They are inflow of funds into the business as they increase current assets but at the same time funds flow out of the business for expenses and cost of goods sold thus the net effect of operation will be a source
A.

of funds if inflow from sales exceeds the outflow for expenses and cost of goods sold and vice versa. Issue of share capital: - If during the year there is any increase in the share capital, whether preference or equity, it means capital, has been raised during the year. Issue of shares is a source of funds, as it constitutes inflow of funds.
B.

Issue of debentures and raising of loans, etc: - Issue of debentures or raising of loan whether secured or unsecured results in the flow of funds into the business. The inflow of funds is the actual proceeds from the issue of such debenture or raising loan.
C.

Sale of fixed assets and long - term or trade investment: - When any fixed assets like land, building, plant & machinery, furniture, long-term investment etc are sold and generates funds and become a source of fund.
D.

Non trading receipts: - Any non-trading receipt like dividend received, refund of tax, rent received etc. Also increases funds and is treated as sources of funds. Because such an income is not included in the funds from operation.
E.

Decrease in working capital: - If the working capital decreases during the current period as compared to the previous period, it means that has been a release of funds from working capital and it constitutes a source of funds.
F.

APPLICATION OR USES OF FUNDS

A. Funds lost in operation: - Sometimes the result of trading in a certain year is a loss

and some funds are lost during that period in trading operation. Such loss of funds in trading amounts to an outflow of funds and is treated as an application of funds.
B. Redemption of preference share capital: - If during the year any preference share

are redeemed, it will result in outflow of funds and is taken as application of funds.
C. Repayment of loans or redemption of debentures, etc: - Redemption of debentures

or repayment of loans also constitutes an application of funds.

D. Purchase of any non-current assets or fixed assets: - When any fixed or non-

current asset like land, building, plant & machinery, furniture, long term investments, etc are purchased, funds outflow from the business. However, if the fixed assets are purchased for a consideration of issue of shares or debentures or if some fixed asset is exchanged for another, it does not involve any funds and hence not an application of funds.

E. Payments of dividend and tax: - Payments of dividends and tax are also applications

of funds. It is the actual of dividend and tax which should be taken as an outflow of funds and not the mere declaration of dividend creating of a provision for taxation.
F. Any other non-trading payment: - Any payment or expense not related to the

trading operations of the business amounts to outflow of funds and is taken as an application of funds.

SOURCES AND APPLICATION OF FUNDS

SOURCES APPLICATION

FUNDS FROM OPERATION ISSUE OF SHARE CAPITAL ISSUE OF DEBENTURES AND RAISING OF LOANS SALES OF NONCURRENT ASSETS NON TRADING RECEIPTS DECREASE IN WORKING CAPITAL FUN

FUNDS LOST IN OPERATION REDEMPTION OF PREFERENCE SHARE CAPITAL REPAYMENT OF LONG TERM LOANS AND REDEMPTION OF DEBENTURES PURCHASE OF NON CURRENT ASSETS PAYMENT OF DIVIDEND AND TAX NON TRADING PAYMENTS

CHAPTER 6

WORKING CAPITAL OF ROURKELA STEEL PLANT (RSP)

(Rupees in crores)

Particular
CURRENT ASSETS
Inventory Sundry Debtor Cash & Bank balance Interest Receivable/Accrued Loans & Advances Total Current Assets

2005-06

2006-07

2007-08

718.11 14.60 17.22 2.47 212.72

877.56 12.96 18.79 1.83 230.94

870.13 11.66 20.66 1.58 243.15

965.12

1142.08

1147.18

CURRENT LIABILITY
Current Liabilities Provisions 499.45 569.48 557.26 635.75 672.33 939.67

Total current Liability PARTICULARS

2005-06 1068.93 26.26 41.56

2006-07 1193.01 29.30 36.00

2007-08 1612.00 27.00 28.80

Raw Material Conversion Period Work In Progress Conversion Period

WORKING CAPITAL (RMCP + WIPCP) (current assets current

Inventory Conversion Period (-) 103.81 67.82 (-) 50.93 65.30 (-) 464.82 55.80 3.81 71.63 54.68 16.95 2.45 67.75 41.00 26.75 1.91 57.71 39.66 18.05

Debtors liabilities) Conversion Period GROSS OPERATING CYCLE (ICP + DCP) Payable Deferred Period NET OPERATING CYCLE (GOP - PDP)

ANALYSIS OF OPERATING CYCLE OF ROURKELA STEEL PLANT

INTERPRETATION:
The above table and figure shows that the Raw Material Conversion Period of RSP has increased from 2005-06 to 2006-07 and decreased from 2006-07 to 2007-08. It is also as per industry norms as raw material conversion period is less than one month, which helps to reduce the holding cost of raw materials and contributes towards profitability. Work In Progress Conversion Period is decreasing from year to year and which is less than or equal to one week, which means that the firm is utilizing its resources efficiently. Finished Goods Conversion Period is also decreasing from year to year which reduces the operating cycle period and holding cost which in turn reduce the requirement of working capital and increase profitability. Decreasing trend of finished goods conversion period also indicates increase in sales. The table shows that there is a gradual decrease in Debtors Conversion Period over the years, which is below 2 days. It shows that the RSPs Debtors conversion policy is developing from year to year. The Payable Deferred Period shows that RSP is getting a credit period of 40 days, which increases the profitability of the company by using funds, which owes to creditors for same order purpose. The Net Operating Cycle Period has increased from 2005-06 to 2006-07 but decreased in the year 2007-08. The decrease in net operating cycle period indicates that it is favorable for the company as decrease in operating cycle need not require more working capital, which shows a better position of the company.

CALCULATION OF NET OPERATING CYCLE

1. Raw Material Conversion Period
Raw material conversion period

Raw material inventory X 360 days Raw material consumed

2005-06

2006-07

2007-08

122.61 X 360 1680.59 = 26.26 days.

174.56 X 360 2144.68 = 29.30 days.

173.31 X 360 2311.81 = 27 days.

NOTE: Raw Material Inventory taken from Inventories Schedule no. 1.5 Raw Material Consumed taken from Income Statement items at expenditure.

2. Work In Progress Conversion Period

Work in progress conversion period = Work in progress inventory Cost of production 2005-06 2006-07 2007-08

393.42 X 360 3407.84 = 41.56 days.

419.05 X 360 4177.84 = 36 days.

396.18 X 360 4952.64 = 28.80 days.

NOTE: WIP Inventory amount taken from Inventory Schedule at semi-finished product

Cost of Production taken from total expenditure excluding freight outward & CMO.

3. Finished Goods Conversion Period

Finished goods conversion period = Finished goods inventory X 360 Cost of goods sold 2005-06 2006-07 2007-08

393.42 X 360 3190.17 = 44.39 days.

419.05 X 360 4018.39 = 37.54 days.

396.18 X 360 4960.07 = 28.75 days.

NOTE: Finished Goods Inventory amount taken from Inventory Schedule at finished goods products. Cost of Goods Sold amount taken from: {cost of product (expenditure freight outward - CMO) + opening stock closing stock}.

4. Debtors Conversion Period

Debtors conversion period = Debtors X 360 Credit sales 2005-06 2006-07 2007-08

14.60 X 360 1375.99 = 3.81 days.

12.96 X 360 1900.77 = 2.45 days.

11.66 X 360 2196.50 = 1.91 days.

NOTE: Debtors amount taken from Current Assets at Sundry Debtors

Annual Credit Sales, amount taken from Income side at Sales (Assume credit sales as 30% of total sales).

5. Payable Deferred Period

Payable deferred period = Creditors X 360 Credit purchases

2005-06

2006-07

2007-08

311.60 X 360 2051.47 = 54.68 days.

293.79 X 360 2582.68 = 41 days.

307.95 X 360 2795.04 = 39.66 days.

NOTE: Creditors amount taken from Scheduling of Current Liability at small scale industry undertakings, subsidiary company & others. Credit Purchase amount taken from expenditure at Raw Materials Consumed and Stores & Spares Consumed.

MEASURING THE WORKING CAPITAL OF ROURKELA STEEL PLANT Ratio Analysis of Rourkela Steel Plant. Funds Flow Analysis of Rourkela Steel Plant.

RATIO ANALYSIS OF ROURKELA STEEL PLANT

1. CURRENT RATIO Current Ratio = Current Assets Current Liabilities
2005-06 2006-07 2007-08

965.12 499.45 = 2 :1 Ratio

1142.08 557.26 = 2 : 1 Ratio

1147.18 672.33 = 1.7 : 1 Ratio

INTERPRETATION:
As per the above table and graph the current ratio of 2007-08 is low as compared to other years (i.e. 2005-06 & 2006-07) which are according to the rule of thumb of 2:1. The year 2005-06 &2006-07 indicates that the firm is very much sound in its liquidity and has the ability to pay its current obligations in time as and when become due. The year 2007-08 indicates that the liquidity position is not so good but it is acceptable. NOTE: Current assets are taken from Balance sheet. Current asset includes inventory, sundry debtors, cash & bank balance, interest receivable, loans & advances. Current liabilities are taken from balance sheet. The figure includes current liability only. Provisions are excluded while calculating current ratio.

2. ACID TEST RATIO

Acid Test Ratio =

Liquidity Assets

Current Liabilities

2005-06

2006-07

2007-08

247.01 499.45 = 0.49 : 1 Ratio

264.52 557.26 = 0.47 : 1 Ratio

277.05 672.33 = 0.41 : 1 Ratio

NOTE: Liquid assets = Current assets Inventories Prepaid expenses.

INTERPRETATION:
As per the above tables and graph the acid test ratio for the years 2005-06 to 2007-08 are below the rule of thumb (i.e.- 1:1). The ratio decreases from year to year which shows the liquidity position of the company is not so good but to some extent the ratio is acceptable.

NOTE: Liquidity assets are taken from Balance sheet. Liquidity asset = Total Current asset Inventory Prepaid expenses. Current liabilities are taken from Balance sheet excluding provisions.

3.

CASH RATIO

Cash Ratio =

Cash & Bank + Interest Receivable + Loans & Advances Current Liabilities

2005-06

2006-07

2007-08

232.41 499.45 = 0.46 : 1 Ratio

251.56 557.26 = 0.45 : 1 Ratio

265.39 672.33 = 0.39 : 1 Ratio

INTERPRETATION:
As per the above tables and graph the cash ratio for the years 2005-06 to 2006-07 are same (i.e. 0.45:1) and for the year 2007-08, it is 0.39:1 which is more or less nearest to the rule of thumb. The cash position of 2007-08 is better than 2006-07 but at the same time the liabilities are also increased. This ratio reflects that the company is ready to pay its creditors at any time of demand and the cash collection from debtors is much better.

NOTE: Cash & bank balance, interest receivable and loans& advances are taken from balance sheet as current assets. Current liability is taken from balance sheet excluding provisions.

4. INVENTORY TURNOVER RATIO

Inventory Turnover Ratio = Cost of Goods Sold

Average Inventory at cost

2005-06

2006-07

2007-08

3190.17 609.33 = 5.24 Times

4018.39 797.83 = 5.04 Times

4960.07 873.85 = 5.68 Times

NOTE:

Average Inventory = opening inventory + closing inventory 2

INTERPRETATION:
The inventory turnover ratio measures the velocity of conversion of stock into sales. As per the above table and graph the ratio has decreased from 2005-06 to 2006-07 and increased from 2006-07 to 2007-08. A high inventory turnover ratio indicates efficient management in inventory because more frequently stocks are sold, the lesser amount of money is required to finance. A low inventory turnover ratio implies that there is over investment in inventories due to poor quality of goods and inefficient inventory management. NOTE: Cost of goods sold = cost of production + opening stock closing stock. Cost of production is taken from total expenditure excluding CMO & freight outward. Average inventory = (opening stock + closing stock) / 2

5. RECEIVABLE TURNOVER RATIO

Receivable Turnover Ratio = Net Credit Annual Sales

Average Trade Debtors

2005-06

2006-07

2007-08

1375.99 13.52 = 101.77 Times

1900.77 13.78 = 137.94 Times

2196.50 12.31 = 178.43 Times

INTERPRETATION:
The receivable turnover ratio indicates the number of times the debtors are turned over during the year. As per the above table and graph the receivable turnover ratio are increasing over the years i.e. from 2005-06 to 2007-08. The ratio in the year 2007-08 is an ideal one because higher the debtors turnover ratio the more efficient is the sales management and low debtors turnover implies inefficient sales management.

NOTE: Net credit sales are taken from income statement. i.e. (30% of total sales is taken as credit sales) because RSP sales by ordered basis only. Average trade debtors = (opening debtors + closing debtors) / 2

6. PAYABLE TURNOVER RATIO

Payable Turnover Ratio = Net Credit Annual Purchase Average Trade Creditors

2005-06

2006-07

2007-08

2051.47 311.22 = 6.59 Times

2582.68 302.70 = 8.53 Times

2795.04 300.87 = 9.29 Times

INTERPRETATION:
The payable turnover ratio represents the higher the creditors velocity better it is, otherwise lower the creditors velocity less favourable are the results. As per the above table and graph the payable turnover ratio gradually increases over the years i.e. from 2005-06 to 2007-08. So here it is favourable for the company. NOTE: Net credit annual purchase is taken from the expenditure of Income statement. i.e. raw materials consumed and stores & spares consumed. Average trade creditors = (opening creditor + closing creditor) / 2

7. WORKING CAPITAL TURNOVER RATIO

Working Capital Turnover Ratio =

Cost of Sales Average Working Capital

2005-06

2006-07

2007-08

3190.17 - 193.43 = - 16.50 Times

4018.39 - 77.37 = - 51.94 Times

4960.07 - 257.87 = - 19.23 Times

INTERPRETATION:
Working Capital Turnover ratio indicates the velocity of the utilization of net working capital.

In the year 2005-06 the ratio is -16.50 times. In the year 2006-07 the ratio is -51.94 times which is reduced in comparison to the previous year. Again the ratio is increased to -19.23 times in the year 2007-08. The indication is higher the ratio more efficient utilization of working capital and lower the ratio lesser is the efficient utilization of working capital. NOTE:

Cost of goods sold = cost of production + opening stock closing stock. Cost of production is taken from total expenditure excluding CMO & freight outward.

Average working capital = (opening W.C + closing W.C) / 2

FUNDS FLOW ANALYSIS OF ROURKELA STEEL PLANT

STATEMENT OF NET SOURCE OF FUNDS

AND UTILISATION OF FUNDS FOR THE YEAR 2007-08 (Rupees in crores) SOURCES OF FUNDS AMOUNT UTILISATION OF FUNDS AMOUNT

Funds from Operation

1711.61

Decreased in borrowed funds 7.22

Sale of Fixed Assets

9.87

Inter Unit Current A/C 1795.99

Decrease in Working Capital 413.89

Increase in Capital Work in Progress 113.28 Purchase of Fixed Assets 218.88

2135.37

2135.37

WORKING NOTE:
Schedule of changes in working capital:
(Rupees in crores)

PARTICULARS

2006-07

2007-08

Change in W.C Increase Decrease

CURRENT ASSETS
Inventories Sundry Debtors Cash & Bank balance Interest Receivable / Accrued Loans & Advances 877.56 12.96 18.79 1.83 230.94 870.13 11.66 20.66 1.58 243.15 1.87 12.21 7.43 1.30 0.25 -

1142.08 CURRENT LIABILITY

Current Liability Provisions

1147.18
115.07 303.92

557.26 635.75

672.33 939.67

1193.01

1612.00

Total

14.08

427.97

Net Decrease in Working Capital

413.89

427.97

427.97

NOTE:

Provisions is taken as Current Liability.

FUNDS FROM OPERATION

(Rupees in crores)

Particulars

Amount

Net Profit for the year Add: Depreciation Add: Decrease in Misc. expenditure

1401.33 304.37 8.02 1713.72

Less: Profit on sale of Fixed Assets

2.11

Funds From Operation

1711.61

CHAPTER 7

BIBLIOGRAPHY

BOOKS AND JOURNALS:

Financial Management -- Khan & Jain (TMGH). Advanced Accountancy R.L Gupta (S.Chand).

WORKING CAPITAL TECHNIQUES:

Annual Reports 2005-06 to 2007-08. Operational Cash Budget 2005-06 to 2007-08.

REFERENCE WEBSITES:
www.sail.co.in www.steelrx.com

CONCLUSION

The sound Working Capital situation of R.S.P indicates the overall improvement of the plant. Though there is a decrease in working capital but the company has repaid a large amount of loan and in cash surplus which in turn has reduced the requirement of working capital. But repayment of loan is itself a good indicator as it has saved the interest burden of the plant and contributes towards profitability. Also the firm is able to avail more credit as the confidence of the creditors has increased. The management of cash, debtors, and creditors is also satisfactory and they show an improving trend.

The management of inventory is also improving and the inventory turnover is in an increasing trend. In the growing steel market, working capital management is going to be an important factor for a steel companys profit. Thus, the movement of R.S.Ps working capital management will help it to reach new milestones.