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A

SUMMER INTERNSHIP REPORT

ON

AN ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC

Submitted to

L.J. Institute of Management Studies

In requirement of partial fulfilment of

Master’s of Business Administration (MBA)

2 year full time Program of Gujarat Technological University

Submitted on:

18th

July 2011

Submitted by:

Harshit R. Doctariyawala

Batch No.: 2010-12

Enrolment No.:107290592065

DECLARATION

I, Harshit R. Doctariyawala, hereby declare that this report is prepared on the basis of training

taken at „Gujarat Narmada Valley Fertilizers Company Limited‟ for the period of 1st June,

2011 to 15th

July, 2011.

I ensure about the authentication of the material and give guarantee that there will not be any

misuse of data. Data used will only be taken for the academic purpose and will not be used

for commercial or any other purpose.

This project report is entirely an outcome of my own efforts and is not submitted either in

part or in whole to or copied from any project submitted to any other university or institute

for any other degree.

Date: 15th

July, 2011 Harshit R. Doctariyawala

Place: Bharuch L.J. Institute of Management Studies,

Ahmedabad.

PREFACE

Summer project is a part of the academic requirement incorporated in the curriculum of

Master of Business Administration Programme. For the students are required to undertake

industrial training. It helps the students to understand the theoretical knowledge of today‟s

business world. This exercise enables to get practical exposure to realities of corporate world

in action and practice.

A great knowledge comes from the combination of better book education and a good training.

Keeping this in mind, the Gujarat Technological University has introduced a Summer

Training Programme, and thus I got a truly rewarding chance to get the best feel and

experience of the real world economic environment in the best possible manner.

I have undergone for training at “Gujarat Narmada Valley Fertilizers Company Limited”

from 1st June, 2011 to 15

th July, 2011. For this purpose, I had undergone a research project

work on “ANALYSIS OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED”.

During this project work, students get an opportunity to glance into the real business world.

In this reference I had studied the real activities and the bottlenecks come in the progress of

corporate while managing working capital.

For the primary data has been collected by personal discussion with senior officers of finance

department and secondary data has been collected from last five years annual report and

company‟s website. The importance of working capital management is understood with the

help of my project guide as well as with the help of statistical tools that I used to conduct my

research.

I have sincerely tried my best for precise and meaningful report construction.

ACKNOWLEDGEMENT

I have been able to prepare my report successfully and I acknowledge a special thanks to all

those people without whose support it was impossible for me to make the project report. It

has been an enriching experience for me to undergo my summer training at GNFC Limited,

Bharuch.

First of all I would like to thank the management of GNFC for granting me permission to

take training in their organization. I am thankful to Mr. N.K. Patadia (AGM) and Mr. D.C.

Jadeja (Manager) GNFC for giving me an opportunity to carry out the study and prepare this

project at GNFC and also for providing me better co-operation, guidance and other facilities

during training period.

I have been benefited greatly by knowing of various concepts as I visited various websites for

the interpretation of financial ratios.

I would hereby take this opportunity to show my gratitude towards my guide for what I have

learnt during my training. A good response, feedback and co-operation are given by her. She

helped me in gaining knowledge and solving my queries.

So, I would like to give my sincere thanks to Mr. Siddarth Singh bist

who provided support in every aspect whenever I felt the need and for providing me this

opportunity to work and achieve an unforgettable learning experience.

Thanking You,

Harshit R. Doctariyawala

CERTIFICATE

It is hereby certified that the work incorporated in the thesis submitted entitled “ANALYSIS

OF WORKING CAPITAL MANAGEMENT AT GNFC LIMITED” submitted by Harshit R.

Doctariyawala comprises the result of independent and original investigation carried out me.

The material which obtained (and used) from other sources has been duly acknowledged in

the thesis.

Date:

Place: Signature of the student

It is certified that the work mentioned above is carried out under my guidance.

Date:

Place: Signature of the faculty guide

An analysis of working capital management

Summer Internship report - LJMBA Page 1

Table of Contents

Sr. N0. Particulars Page No.

1 List of Tables 2

2 List of Charts 4

3 Executive Summary 7

4 Industry Profile 9

5 Company Profile 14

6 Finance Department 26

7 Introduction to Project : “An Analysis of

Working Capital Management” 52

8 Conceptual Framework and Literature review 55

9 Research Process 75

10 Data Analysis and Interpretation 77

11 Findings of study 117

12 Conclusion and recommendations 119

13 Bibliography 121

14 Annexure 123



Chapter - I

List of tables

Sr. No. Particulars Page No.

1 Calculation of gross working capital 55

2 Calculation of net working capital 57

3 Raw material conversion period 77

4 Work in progress conversion period 79

5 Finish good conversion period 81

6 Total inventory conversion period 83

7 Debtors conversion period 84

8 Creditors conversion period 86

9 Gross operating cycle 88

10 Net operating cycle 89

11 Total investment in working capital 90

12 Current ratio 91

13 Quick ratio 92

14 Current assets to total assets ratio 93

15 Total investment in inventories 94

16 Inventory turnover ratio 95

17 Inventory to current assets ratio 96

18 Inventory to sales ratio 98

19 Investment in sundry debtors 99

20 Receivables turnover ratio 100

21 Average collection period 101

22 Receivables to current assets ratio 102

23 Debt-Equity ratio 103



24 Investment in cash and bank balance 105

25 Cash turnover ratio 106

26 Cash to current assets ratio 107

27 Sales to current assets ratio 108

28 Working capital turnover ratio 109

29 Return on assets 111

30 Net profit margin 112

31 Loans and advancements to current assets ratio 113

32 Loans and advancements to working capital ratio 117

33 Balance sheet of 2005-06 to 2009-10 123

34 Profit and loss account of 2005-06 to 2009-10 125



Chapter - II

List of charts

Sr. N0. Particulars Page No.

1 Share holding pattern of GNFC 15

2 Raw material conversion period 78

3 Work in progress conversion period 80

4 Finish good conversion period 82

5 Total inventory conversion period 83

6 Debtors conversion period 84

7 Creditors conversion period 87

8 Gross operating cycle 88

9 Net operating cycle 89

10 Total investment in working capital 90

11 Current ratio 91

12 Quick ratio 92

13 Current assets to total assets ratio 93

14 Total investment in inventories 94

15 Inventory turnover ratio 95

16 Inventory to current assets ratio 96

17 Inventory to sales ratio 98

18 Investment in sundry debtors 99

19 Receivables turnover ratio 100

20 Average collection period 101

21 Receivables to current assets ratio 102

22 Debt-Equity ratio 103

23 Investment in cash and bank balance 105



24 Cash turnover ratio 106

25 Cash to current assets ratio 107

26 Sales to current assets ratio 108

27 Working capital turnover ratio 109

28 Return on assets 111

29 Net profit margin 112

30 Loans and advancements to current assets ratio 113

31 Loans and advancements to working capital ratio 117



Executive

Summary



Chapter - III

Executive Summary

This is a summer training report prepared at “Gujarat Narmada Valley Fertilizer Company

Limited”. I have tried to cover the glimpse of overall working of the organization.

GNFC is a large fertilizer and petrochemical company established on 10th

May, 1976. The

various departments that are covered in this project are marketing department, human

resource department and finance department. In GNFC, all departments work dependent to

each other and structure is line authority.

GNFC has two aims like to do social work for society and to make India a economically

strong country. It gives full agricultural services as well as education about crop, soil, seeds

and fertilizer to the farmers.

Working capital constitutes the most significant part in all companies. Because of large

amount of working capital maintained by firms it is very important to manage working

capital efficiently and effectively. This management of working capital carries a favourable

impact on the company‟s profit.

By understanding the great importance of working capital in overall operation of the

company, the analysis had been done on “working capital management” at GNFC.

The study on working capital management has been done with objective of analyzing

working capital position of the company, studying operating cycle of the company, studying

various working capital ratios and to analyze liquidity position of the company. For that

purpose the data has been analyzed for the last 5 years. They have been collected from

primary as well as secondary sources. The data has been analyzed with the help of ratio

analysis, graphical method and descriptive analysis. From the above study it has been

analyzed that working capital position of the company is sound.



Industrial

Profile



Chapter - IV

4. INDUSTRIAL PROFILE

4.1 Industry overview:

Fertilizer sector is a very crucial for Indian economy because it provides a very important

input to agriculture. The fertilizer industry in India has played a pivotal role in achieving self

sufficiency in food grains as well as in rapid and sustained agriculture growth.

India is the third largest producer and consumer of fertilizer in the world after china and the

United States.

The growth of the Indian fertilizer industry has been largely determined by the policies

pursued by the government. The government exercised extensive controls on the production,

pricing and distribution of fertilizers.

Like every developing economy, the economy of India is also agro based. Agriculture

accounts for nearly 1/4th

of India‟s GDP and more importantly about 2/3rd

of the country‟

population is dependent on agriculture and allied activities for their livelihood.

As per statistics nearly 225 lacks MT of fertilizer nutrients are required every year in this

country. The demand of fertilizers was so high that India had to import almost 30% of its

requirement from other countries.

Therefore, to achieve the economic growth, agriculture base of the country must be

strengthened. To attain this objective, agriculture practices have to be improved from their

traditional pattern to a higher technological track involving better irrigation and use of better

quality seeds, fertilizers, insecticides and pesticides.

Therefore, chemical fertilizers are key player in this process and fertilizer industries plays

quite a major role in increasing food production in the country and also helps to modernize

the outlook of the common farmers and make them innovative and respective to the new

technology change.



Fertilizer production is of permanent importance for this country because fertilizer increases

agriculture productivity. On the one hand population is increasing and on the other hand the

land is fixed. So we have to produce more without any increase arable land area. This can be

done if productivity goes up. And fertilizer plays a major role in productivity escalation.

As this is a vital commodity it is in the interest of the nation that farmers get fertilizer at

reasonable rate and in adequate quantity. Looking to the poor economic condition of Indian

farmers government of India framed fertilizer policy in 1977 based on Maratha committee

report.

The purpose behind introducing this was to supply fertilizer to farmers at a price they can

afford, so as to increase the consumption of fertilizer to increase the food production and

ensure fair returns to fertilizer producers.

With this twin objective, Retention Price Scheme (RPS) for fertilizers came into picture. In

this scheme government has brought the fertilizer under the purview of Essential

Commodities Act (ECA) in which the retail price of fertilizer to the farmer is notified by the

Government of India from time to time.

Government of India fixes the price of fertilizers in such a way that manufacturer‟s cost of

production including cost of marketing is covered and the manufacturer gets a 12% post tax

return on net worth of the unit at pre-defined capacity utilization.

Norms are fixed for consumption of raw material, utilities, services, capacity utilization etc.

The price so fixed is called Retention Price (RP). This price is reviewed every three years.

In a nutshell, fertilizers cannot be sold in open markets and producing unit has almost nil say

right in fixing fertilizer price. The work of administering the Retention Price Scheme (RPS)

is entrusted to Fertilizer Industry Co-ordination Committee (FICC), which works under the

control of department of chemicals and fertilizers.



4.2 Fertilizer Industry Scenario in India

In India, first of all in 1996, a Single Super Phosphate (SSP) manufacturing unit was set up at

ranipat near Chennai with annual capacity of 6000 tons.

4.2.1 Public Sector:

The Fertilizer And Chemicals Travancore Ltd. (FACT)

Hindustan Fertilizer Corporation Ltd. (HFC)

Madras Fertilizer Ltd. (MFL)

Hindustan Copper Ltd. (HCL)

Naively Lignite Corporation Ltd. (NLC)

Pyrites, Phosphates And Chemicals Ltd. (PPCL)

Pradeep Phosphates Ltd. (PPL)

Rastriya Chemicals and Fertilizers Ltd. (RCFL)

National Fertilizer Ltd. (NFL)

Gujarat State Fertilizer Company Ltd. (GSFC)

4.2.2 Joint Sector:

Gujarat Narmada Valley Fertilizer Co. Ltd. (GNFC)

4.2.3 Co-operative Sector:

There are only two fertilizer manufacturing societies in co-operative sector.

Indian Farmers Fertilizers Cooperative Ltd. (IFFCO)

Krishak Bharati Cooperative Ltd. (KRIBHCO)



4.2.4 Private Sector:

There are 13 companies in private sector, which are producing fertilizer.

Hindustan Lever Ltd. (HLL)

Hari Fertilizer.

ICI India Ltd.

Indo Gulf Fertilizers and Chemicals Corporation Ltd.

Mangalore chemicals and Fertilizers Ltd. (MCFL)

Southern Petro Chemicals Industries Corporations Ltd.

Nagarjuna Fertilizer and Chemicals Ltd. (NFCL)

Shri Ram Fertilizers and Chemicals Ltd.

Tuticorian Alkali Chemicals and Fertilizer Ltd.

Zuari Agro Chemicals Ltd.

Bindali Agro Chemicals Ltd.

Chambal Fertilizer and Petrochemical Corporation Ltd. (CFPCL)

E.D.I. Passy (I) Ltd.



Company

Profile



Chapter - V

5.1 COMPANY PROFILE

Name of the company:

Gujarat Narmada Valley Fertilizer Company Ltd.

Type:

Public sector

Scale:

Large scale

Registered office:

P.O. Narmadanagar -392015, Dist. Bharuch, Gujarat (India).

Telephone:

(02642) 247001 to 247015

Fax:

(02642) 247057

Date of establishment:

10th

May, 1976

Website:

www.gnfc.in

http://www.gnfc.in/



Promoters:

Government of Gujarat

Gujarat State Fertilizers Company Ltd.

5.2 SHAREHOLDING PATTERN

Source: www.gnfc.in

http://www.gnfc.in/



5.3 GNFC AT A GLANCE

Gujarat Narmada Valley Fertilizers Company Ltd. (GNFC) is a joint sector enterprise

promoted by the Government of Gujarat and the Gujarat State Fertilizers Company Ltd.

(GSFC). It was set up in Bharuch, Gujarat in 1976.

Located at Bharuch in an extremely prosperous industrial belt, GNFC draws on the resources

of the natural wealth of the land as well as the industrially reach reserves of the area.

GNFC started its manufacturing and marketing operations in 1982, by setting up one of the

world‟s largest single stream ammonia-urea fertilizer complexes.

Over the next few years, GNFC successfully commissioned different projects in the diverse

fields like chemicals, fertilizers and electronics.

Since inception, GNFC has worked towards an extensive growth as a corporation.

GNFC today has extended its profile much beyond fertilizers through a process of horizontal

integration.

Chemicals/Petrochemicals, Energy sector, Electronics/Telecommunications and Information

Technology form ambitious and challenging additions to its corporate portfolio. GNFC has

an enterprising, strategic view towards expansion and diversification.



5.4 VISION AND MISSION STATEMENT

5.4.1 Vision:

To be a technology driven, environmentally responsible joint sector company manufacturing

fertilizers, commodity and specialty chemicals maintaining highest standards of operational

excellence and innovation for creating sustainable nature for all stake holders.

5.4.2 Mission statement:

We shall

Be the leading provider of chemicals and agricultural inputs through adoption of state of the

art technologies and business process.

Have a firm commitment to quality, environment, health and safety.

Enrich human resources and promote teamwork, innovativeness and integrity.

Achieve sustainable economic growth based on corporate excellence driven by ethical

business practices, professionalism, dynamism and social responsibility.



5.5 GNFC BOARD OF DIRECTORS

5.5.1 Board of Directors

Shri. A.K. Joti IAS Chairman

Shri. Anand Mohan Tiwary IAS Managing Director

Shri. M.M. Srivastava IAS Director

Shri. D.J. Pandian IAS Director

Shri. R.K. Tripathy IAS Director

Shri. G.C. Murmu IAS Director

Dr. TT Ram Mohan Director

Shri. D.C. Anjaria Director

Dr. Ashok Shah Director

5.5.2 Executive Directors

Shri. J.S. Kochar Executive director-II

Shri. K.C. Jatania Executive Director & Chief Finance Officer

Source: www.gnfc.in/aboutus/boardofdir.html

http://www.gnfc.in/aboutus/boardofdir.html



5.6 KEY PRODUCT PROFILE

AMMONIA

4,45,500 MTPA

Technology: From M/s Linde AG, Germany. Texaco, USA.

BASF, Germany. Haldor topsoe, Denmark.

Use: In the manufacture of Urea, Ammonium Nitrophosphate,

And Weak Nitric Acid.

METHANOL

(99.85%)

1,50,000 MTPA

Technology: From ICI, UK. Product conforms to highest purity

grade of US Federal AA.

Use: - Acetic Acid

- Formaldehyde

- Pentaerythritol

- DMT

- TAME

- Pharmaceutical and other intermediate etc.

FORMIC ACID

(85%)

10,000 MTPA, the country’s largest production capacity.

Technology: From Kemira OY, Finland. High quality produced

Formic Acid through Methyl Formate route.

Use: - Coagulant in obtaining rubber from latex.

- Fixing of dyes in leather and textile industries.

- Intermediate in the manufacture of basic drugs etc.

ACETIC ACID

(GLACIAL)

1, 00,000 MTPA, the country’s largest production capacity.

Technology: M/s BP Chemicals, UK. The only manufacturer in



the country to employ methanol route.

Use: In the manufacture of Acetic Anhydride, Vinyl Acetate

Monomer (VAM), Purified Terephthatic Acid (PTA), Monochloro

Acid, Acetates and Diketene Derivatives etc.

COCENTRATED

NITRIC ACID

(CNA)

66,000 MTPA, the country’s largest production capacity of

superior-grade CNA.

Technology: M/s Plinke, Germany.

Use: In the manufacture of Dyes, Dye intermediates, Drugs,

Nitrobenzene, Aniline, Nitro Chlorobenzene, Nitro Toluene, TDI

and other Nitro Derivatives etc.

WEAK NITRIC

ACID(WNA)

2, 47,500 MTPA capacity.

Technology: M/s UHDE, Germany.

Use: In the manufacture of fertilizers.

UREA



Use: In the manufacture of fertilizers, Ammonium Nitrate and

other explosives, Glyxal, Sodium Nitrate, H- Acid, Nitrobenzene

and other Nitro derivatives etc.

AMMONIUM

NITROPHOSPHATE


Technology: M/s BASF, Germany.

Use: Basic application during sowing time.

CALCIUM 1, 42,500 MTPA capacity.



AMMONIUM

NITRATE


Use: - In all upland crops, especially commercial and cash crops.

- To avoid soil acidity or alkalinity



5.7 AWARDS:

National Safety Council, USA: Good Safety Performance.

National Productivity Council: Best Productivity - First, Second & Third Prizes, Best

Productivity for Nitrogenous Fertilizers.

Ministry of Labour, GOI: Good Safety Performance (Thrice)

Federation of Indian Chamber of Commerce & Industry (FICCI) : Best Environment

Preservation & Pollution Control.

Indian Chemicals Manufacturers Association (ICMA) : Environmental Control &

Safety.

Fertilizer Association of India (FAI) : For research paper

Best Technical Innovation - pure CO2 enhancement scheme in Ammonia plant

Best Technical Innovation implemented in fertilizer industry (twice)

Best Overall Performance of an operating unit for P2O5 in complex fertilizers

All India Organization of Employers: Outstanding Contribution in the field of

Industrial Relations.

National Energy Conservation Award, Dept. of Energy, Government of India : Energy

Conservation Award, Second Prize.

Government of India: Award for Energy Conservation.

Jawaharlal Nehru Memorial National Award: Effective Energy Conservation Award.

National Suggestion Scheme: Two awards for the company, one for the employee.

Indian National Suggestion Scheme (INSAAN) : Prizes in different years (thrice),

Excellence in Suggestion Scheme for the Company, Second Prize to the employee

(twice).

Texaco Development Corporation (TDC), USA : Licensee of the year for operating

gassifier on more than rated capacity for over a decade.

Labour & Employment Dept., Government of Gujarat: Shram Bhushan Award &

Rajya Shram Ratna Award to the employees.

Indian Institute of Chemical Engineers (IICE): ICI Award for Excellence in Process /

Product Development.

Dept. of Scientific & Industrial Research, Ministry of Science & Technology, GOI

FICCI: National Award for R&D efforts.

World Environment Foundation: Golden Peacock Eco Innovation Award.



Fertilizers Association of India: Transfer of Improved Farm Technology Award at the

national level.

Computer Society of India: CSI-Nihilent e-Governance Award for the best technology

implementation for

e-Governance projects.

The Government of Gujarat Project e Procurement handled by (n)Code Solutions – A

Division of GNFC Ltd. has won the CSI-Nihilent e-Governance Awards 2006-2007 in

the category of Government to Business. Award ceremony held at Bangalore on

December 1, 2007 at 42nd Computer Society of India (CSI).

5.8 ACHIEVEMENTS:

Set up the world's largest single stream, fuel oil based Ammonia - Urea plant.

All fertilizers under the brand name of Narmada, along with extensive support

activities, have been well accepted by the country's farmer community..

India's largest producer of Formic Acid, Acetic acid and Methanol.

India's only manufacturer of Glacial Acetic Acid through the cutting-edge Methanol

route.

India's largest single stream plant of Aniline.

The only manufacturer of Toluene Di-isocyanate in South East Asia.

Record capacity utilizations in all plants, defying the vintage through ingeniously

innovative maintenance measures.

Development of the first indigenous, eco-friendly technology for H2S removal,

CATSOL, a much awarded product of the Company's R&D labs.



5.9 CONTRIBUTIONS TO THE SOCIETY:

A trust formed by GNFC, Narmada Rural Development Society (NARDES), works for the

less privileged by organising or supporting eye check up camps, blood donation camps, book

banks, self-employment programs, relief and rebuilding operations after disasters including

village adoption, women empowerment programs and senior citizens activity club.

Efforts towards improving quality of life of GNFC employees include creating a township

with all amenities, building recreation and sports complex, hospital, establishing a school and

colleges or institutions for science, commerce, BBA, MBA, MCA and post graduate diploma

courses.

5.10 SOCIAL COMMITMENTS:

Large Lush green landscape with beautiful surroundings nestles Narmada nagar, a peaceful

adobe for those who make GNFC what it is.

A club house, tennis court, swimming pool and an open air theatre provide recreations for

GNFC personnel. Narmada nagar also has a 32-bed hospital with modern systems and

equipments.

Narmada nagar is designed to serve the ideals of community living, encourage fraternity

among all GNFC members and integrate the various interests and inclinations of all the

individuals.

GNFC is wedded to the prosperity of the farmers. It interacts with them on selection of seeds,

on correct usage of fertilizers, on scientific farming methods and on land and water

management.

A large soil testing laboratory offering free service, mobile fertilizer sales units, field

demonstrations and farmers‟ camps – all provides direct linkage with farmers.



Finance

Department



Chapter - VI

6. FINANCE DEPARTMENT

Financial management is the operational activity of a business that is responsible for

obtaining and effectively utilizing the funds necessary for efficient operations.

GNFC possesses a well-organized and highly efficient finance department. It is responsible

for funds within as well as outside the organization. The finance department‟s main function

is to take decision, harmonize individual motives and enterprise goals.

6.1 SECTIONS OF FINANCE DEPARTMENT:

Finance department of GNFC is divided into different sections. Finance department includes

total 10 sections.

1. Bank fund section

2. Bills payment section

3. Central Accounting section

4. Marketing Accounting section

5. Stores Accounting section

6. Concurrence section

7. Establishment section

8. Budget and cost section

9. Insurance section

10. Taxation section



Hierarchy for Finance Department

MD

ED

GM

AGM

CM

SR.MANAGER

MANAGER

OFFICERS



6.1.1 BANK SECTION:

The bank section in the finance department is a very important section in any company

because it carries out various critical activities which are needed for the funds and other cash

operations of a company.

6.1.1.1 FUNCTIONS:

The major task of bank section in GNFC is to negotiate with banks and to get best rate

for finance.

They have to see that working capital requirement also get satisfied.

There is one time sanction of working capital in a year.

GNFC has Rs.430 Crores fund based limit of working capital, while non fund based

limit is Rs.400 Crores.

Fund based limit is decided on the basis of debtors and inventories of the company i.e.

current assets.

Non fund based limit includes bank guarantee, letter of credit.

Long term working capital is only given for the projects. For this appraisal is

necessary and is given by Finance department.

In case company is having surplus fund, that fund is deposited in the bank as fixed

deposit.

Bank section has to decide upon whether to go for purchase of equipment or go for

leasing. In case of leasing they have to find out EMI.

The banking section of this company also does many such important activities which are

divided into two activities. They are as under.

1. Operational Activity

2. Funds management Activity



The Operational Activity department deals with four understated activities:

Issue of cheques

Deposit

Cheque signing authority

Bank reconciliation

The Funds Management section deals with the managing of funds and cash operations

activities which are as under,

6.1.1.2 Maintaining of Cash Credit with the banks:-

There are 6 banks with the company maintains such facility. The main bank financing the

company is Bank of Baroda. Other are State Bank of India, Canara Bank, Bank of India,

ICICI Bank and HDFC Bank.

6.1.1.3 Managing working capital finance and such facility with the banks:-

The Maximum Permissible Bank Finance(MPBF) of Rs. 375 crore is the facility provided to

the company. Every year such limit is sanctioned to the company. Every month the

statements of debtors, stock and creditors is prepared and based on that the monthly limit is

fixed by the bank which is 75% of the total working capital, the standard margin set by the

banks.



6.1.2 BILLS PAYMENT SECTION:

The bills payment section is divided into five different sections depending on the nature of

payments incurred and to be made for different activities and expenses. The different parts or

sections are as under,

1. Raw materials payment

2. Purchase payment

3. Project/works payment

4. Services payment

5. Foreign payment

Let us see them in detail:

6.1.2.1 Raw materials payment section:

This section deals with the payments for the purchase of raw materials of the company. Thus

the functions of this section are

- Record the transactions of purchase of raw material.

- Payments done for the purchases and their expenses incurred.

The raw materials which are purchased by the company are

I. Oil

II. Gases

III. Coal

IV. Chemicals – Caustic soda, Lime, Hydrated lime

V. Rock phosphate

6.1.2.2 Purchase order payment section:

This section has mainly to do with functions which are,

- To do the payments for the purchases of raw materials

- To prepare a material requirement report for the request made by the concerned

department.



6.1.2.3 Project / works payment section:

The works payment section deals with the payment for the replacements, civil construction

and repairing, breakdown maintenance etc.

There are two types of contractor‟s bills:

1. First and final bill.

2. Running nature.

There are three types of categories in works payment:

I. Bill for up to Rs.5000 (minimum) sign of AGM level is required.

II. Above Rs.5000 and below Rs.50000; for that purpose it has to prepare service order

for 5000 to 50000 in the vendor code. It comes under TDS of which the rate on

consultancy is more i.e. 5% +10% surcharge + 2% education sales.

III. Above Rs.50000 – sealed tenders are issued with quotation and it is sent to

concurrence department.

6.1.2.4 Services payment section:

This section makes payment for expenses like; Security, Administrative operation, Freight,

Transportation, Labor, Stationary and office items, Telecom and Annual maintenance

Contracts etc.

Payment modes:

Cash mode:

1. Temporary advance

2. Departmental impressed money

3. Cash reimbursement

Cheque mode:

Above Rs.20000 company does not pay cash but it gives cheque instead and the

company has to give statutory information for that.



6.1.2.5 Foreign payment section:

This section deals with the payment for all the import purchases of raw materials and other

spare parts etc. For that material there is an annual policy of one year taken by the company.

During the time of purchase, general vendor registration is done. Inquiry is plotted form the

vendor‟s quotation only. After seeing the quotations a statement is prepared by the purchase

department and then it is sent to the finance department for the final decision. Then annual

contract is done by the party.

Then security deposit for PBG (Performance Bank Guarantee) is made. After this inspection

department sees it and goods receipt is issued and the payment is done for the same.

This procedure remains same for the indigenous goods also but with different payment terms.

The company has to do its payment for these imported goods through a Letter of Credit

which is issued by the bank of the respective countries of the companies and the terms laid

down by them.



6.1.3 CENTRAL ACCOUNTING SECTION:

The central accounting section deals with the consolidation of all the accounting done by the

various other sections of the company. Each section has to account for respective areas by

way of payment from the parties or through passing the journal vouchers.

6.1.3.1 Accounting work in central accounts section:

Provision of depreciation on various fixed assets. Depreciation is charged against the

utilization of and passage of time of fixed assets. It is charged as expenses to the profit and

loss account for each year. The amount of depreciation is worded out as per the provisions of

the companies Act, 1956.

The company act has specified different rates of depreciation under different methods. There

are different rates for different kind of fixed assets like building, plant and machinery,

vehicles, furniture etc.

Accounting of sale of fixed assets is also done here in central account, where they have to

calculate the profit or loss of the assets.

6.1.3.2 Consolidation of Accounts:

They have SAP system, which has got FAS package. All the accounting entries passed in the

FAS package. At the end of the take a run of a system and close the books of the month.

While closing the books of accounts, the general ledger is prepared, which shows the

transactions booked under the particular head during the given period. From general ledger, a

head wise summary is prepared, which is called Trial Balance.

The accounts (Balance sheet and profit & loss account) are prepared from the trial balance.

The accounts are prepared in accordance the provisions of the companies Act, which specify

the format and the manner in which it is to be prepared.



While preparing the accounts, it also requires complying with the accounting standard issued

by the Institute of Chartered Accountants Of India. It also requires disclosing additional

information for better presentation of the accounts.

6.1.3.2 Audit:

After preparing the accounts, it requires to audit by the practicing firm of chartered accounts,

called statutory auditors. They have M/s CC Chokshi and Co. CA, Ahmedabad as out

statutory auditor. During the year the auditors come here to audit the books of accounts

maintained by company. They audit their books as per the requirements of Co Act and as per

standard practice and norms.

The auditors make sure that all the relevant provisions of the Co. Act, accounting standards,

fundamental accounting principles, accounting rules etc are followed properly and

consistently.

After satisfactory audit of the accounts, the statutory of the accounts, they give qualified audit

report.

After completion of the audit, the accounts are printed along with additional information as

required by the co Act and the same to be sent to each shareholder.



6.1.4 MARKETING ACCOUNTING SECTION:

The main function of this section is to do the collection of cash from the various sales from

the indigenous and the exported products which are fertilizers and industrial products. Mostly

the company gets the sales income through the industrial products.

6.1.4.1 Functions:

1. Cash collection from the exported products.

2. To check the terms and conditions of the Letter of Credit.

3. Cash collection.

Company uses different marketing network for different products. So fund collection method

also differs from product to product.

6.1.4.2 Fertilizer products:

For sale of fertilizer products, company uses wide distribution network of regional offices

and 23 area offices. For Gujarat, company opened 62 Narmada Khedut Sahay Kendra.

Generally company approves credit as follows:

Product Credit period

Urea 30 days

CAN 60 days

ANP 60 days

Company determines credit period based on marketing strategy.



6.1.4.3 Industrial products:

The major customers for the industrial products of GNFC are as under

Reliance industries

Reliance petrochemicals

IPCL

Kanoria chemicals

Simalin chemicals

Thus the main activities performed by marketing account section are:

- Preparation of sales summary.

- Preparation of journal ledger.

- Provide guidance for collection of debts.



6.1.5 STORES ACCOUNTING SECTION:

Stores accounting section is responsible for making all the accounting entries related to store

and valuation of inventories. Stores department when receives any material it sends material

receiving report to store accounting section.

When store department issues material to plant or any department, they inform the stores

accounting section. Sometimes plants return the material to store department. The stores

accounting section makes reverse entry for that.

Stores accounting section prepares monthly report which shows how much store is issued,

how much is remaining in stock, how much is returned by a plant etc. Store accounting

section also prepares final accounts for stores.

This section is mainly concerned with the accounting. It deals mainly with the MRR, MIV

and MRV. It maintains an account for any material received, issued or returned so that they

are able to know the inventory at any point of time.

According to code of the item debited to the different account codes are given below.

Code Particulars

1 to 100 items Assign to capital and liability

101 to 200 items Assign to assets side

201 to 250 items Assign to income code(credit)

251 onwards items Assign to expense code(debit)



6.1.6 CONCURRENCE SECTION:

This section deals with concurrence procedure. Concurrence means pre-audit. As per

company policy, no purchase order can be placed without concurrence section. The main

objective of financial concurrence is to get a competitive rate. The concurrence procedure

involves approval by authorities of any purchases of goods or services, making contracts,

capital expenditure and other marketing related expenses.

Whenever company receives tenders, it should be opened in the presence of finance officer.

After opening tenders, technical analysis is done by indented person. Then concurrence

section comes into picture.

The main activity of concurrence section is to prepare comparative statement mainly includes

– rate, days of credit, sales tax, excise duty, insurance and freight.

The concurrence section keeps the control on the amount specified for the expenditure of

budget and expenses.

In the SAP system, budget section has defined different cost center and on the front of the

cost center the annual amount of expenditure is defined so that the concurrence section

officer can take decision regarding the expenses of that cost center.

After verifying comparative statement concurrence section invite party for negotiation and try

to obtain more comparative rates.

The department invites quotation and review them and finally the best bid is found out is

given the contract. E-tendering is also done by this section.



6.1.7 ESTABLISHMENT SECTION:

The establishment section has the function of making the employee related payments like;

wages, salary, perks and other facilities like medical facilities, reimbursement of telephone

bills, LTC (leave travel concession).

6.1.7.1 DIFFERENT PAYMENTS MADE BY THE COMPANY:

6.1.7.1.1 Medical facilities:

The company has tied up with certain hospitals in various cities like, Mumbai, Ahmadabad,

and Surat. All the medical expenditures incurred by the employee are passed on to the

company directly if treatment is taken in any of these hospitals.

6.1.7.1.2 Loans and advances:

Loans are given to the employees for various uses such as;

- For construction of house.

- For purchase of vehicle.

- For the marriage of children.

All the loans are given on the basis of certain norms and conditions which are taken care of

by this section. The calculation of taxes partially and fully, and the interest thereon the loan is

handled by this section.

The employees are also provided with advances like;

- For the purchase of food grains.

- For the festivals.

6.1.7.1.3 Maintenance of employee’s record:

For the efficient working of the HRM system the establishment section is integrated with the

SAP system which is connected to the HR department.



This system maintains the entire record of the employee from the date of his joining, salary of

the employee, total expenditure incurred, information regarding family and education of

children of employee etc.

The data so recorded in the HRM system is summarized and transformed to the SAP system.

The SAP system gives support in tax calculation, deduction and also help in how much and

how to file the return. It gives control on payment for the professional tax gratuity and pay

fund for gratuity and pension.

6.1.7.1.4 Other expenditures payment:

1. School for children

2. Sports and recreation club

3. LTC and travelling expenses

4. Electricity and maintenance of house

5. Telephone expense reimbursement



6.1.8 BUDGET AND COSTING SECTION:

6.1.8.1 BUDGET:

A budget is a quantitative and monetary expression of future activities which acts as a

barometer to monitor for the business.

This section prepares the detailed estimates of all expenditures to be undertaken during a

financial year as per the production capacity and market conditions for the products of the

company.

Also it deals with the costing of the requirements of raw materials, labor, utilities,

maintenance, imports etc. is calculated with consideration of inflation and volatility of fuel

prices to find out the total fund requirement during the financial year.

6.1.8.1.1 Sales budget:

Based on marketing survey, it prepares monthly product wise sales budget. And at the end of

month, actual sales are compared with budgeted sales.

6.1.8.1.2 Production budget:

Production budget is prepared on the basis of targeted sales and capacity of plants. They also

prepare monthly production budget for each product.

6.1.8.1.3 Stock budget:

It is prepared based on the sales and production budget. Budget section is also responsible for

finding the difference in actual figures and budgeted figures.



6.1.8.2 BUDGETORY CONTROL:

Strategic or long term planning requires specification of objectives toward which the future

operation should be directed. These objectives should answer a number of fundamental

questions about the company‟s future growth and development.

Objective therefore should establish the direction in which the management of the company

wishes to be handled. The mission of an organization describes in very general terms the

broad purpose and reason for an organization existence, the nature of the business it is in and

the customer it seeks to serve and satisfy.

6.1.8.2.1 Objective of budgeting:

1. Plan and co-ordinate all the activities of business.

2. Quantify expectation in physical and monetary terms.

3. Co-ordinate all actions.

4. Provide a base for control of function.

5. Examine area of uncertainty and risk.

6.1.8.2.2 Process of budgeting:

1. Communicating details of budget policy and guidelines to those responsible for the

preparation of budget.

2. Determining the limiting factor.

3. Negotiation of budget with superior.

4. Initial preparation of various budgets.

5. Final acceptance of review budget.

6. Ongoing review of budget.



6.1.8.2.3 Human factor in budgeting:

Participation of employee at various levels in preparation.

Greater acceptance or resistance to the budget from members of family ownership.

Resistance from employee to the language of budget and approach to budgeting.

Resistance from employee to the penalty and reward system shown in the budgetary

control system.

Unexpected response to the budget, from lender and government institute.

6.1.8.2.4 Budgeting process in GNFC:

The budgeting process in the company starts with the distribution of circular from the costing

department to the respective departments for preparing their budget proposal for discussions

and revision approval on the basis of ZBB situation. This activity is done in the month of

December/January.

The budget and costing department also sends the reports regarding the resources consumed

during current financial year with reference to the approved budget.

It provides budget provision for the year vis-a-vis actual is providing to the concerned budget

controller, to enable to estimate project for next year.

On this basis the concern department prepares its budget for the coming financial year on its

projection for expenses and production/ sales/ service plan.

In this process the plant monitoring group plays an important role in preparing budget for all

production departments of fertilizer and industrial product division.

If required, finance department also interacts with the concern operation department. PMG

also co-ordinates with the marketing department.



6.1.9 INSURANCE SECTION:

This section is responsible for the plant and machinery and other assets of the company. The

company has a mega risk policy which is insured by a consortium of insurers which covers

all the plants and machinery and assets and also damages to the third parties dur to operations

of the company.

The insurance section in the company‟s finance department takes care of all the policies

undertaken by the company. It looks after the new policies to be taken for a particular asset.

And it deals with the renewal of the old policies as and when required by a particular plant or

department.

Thus the various functions of this department may be seen as under

1. This section assesses the risk associated with the insurable assets from the Act-of-God

and Non-Act-of-God perils for the assets uninsured.

2. It takes the stock of goods in the company premises prior to valuation.

3. It also does the valuation of assets for calculating the value of sum insured.

4. It selects the insurance policy best suited for the coverage of perils faced by the assts

of the company.

5. It makes regular payments of premiums.

6. It handles all the insurance claims for settlements.



6.1.10 TAXATION SECTION:

This section performs the function of collection and payment of service tax, excise duty,

customs duty etc. to the government as per the prevailing rates and regulations at any given

time. This section also files return of the tax paid to the government as per requirements i.e.

quarterly, yearly etc.

6.1.10.1 Vat/service tax:

Enforced in Gujarat from 1/04/06. This tax is revenue for the state government for which the

laws are framed and controlled by it only. Every organization registered under it are given a

TIN (Tax Identification Number) no., with an 11 digit code.

6.1.10.1.1 Payment:

Payment of tax is to be done within 22 days of the previous month.

6.1.10.1.2 Return:

A type of statement in which information is to be provided which declared by the

government. It should have the sales volume of the company, amount of VAT collected on

sales, value of purchases.

The return may be filed monthly, quarterly or annually. The quarterly returns are to be filed

and paid on or before 22nd

July. And 30 days are given for filling returns for the monthly and

quarterly returns. The annual returns are to be filed within 90 days by the department i.e. on

or before 30th

June.

6.1.10.1.3 Assessment:

The assessment is done to check for;

- Demand to pay

- Demand not to pay

- Refund



The information provided by the company has to be checked by the department for arriving at

a conclusion that whether the information given by the company is same as shown for the

returns filed. It also checks whether the company has to pay something to the government.

6.1.10.1.4 Appeal:

Appeal can be done to the Department then to the Tribunal then to the High Court and then if

not solved as the case may be to the Supreme Court.

6.1.10.2 Central sales tax:

The central sales taxes are collected by the central government and the revenue arising from

it belongs to respective state.

The central government has come into picture to decrease the competition between two states

which are entering into transactions. For this purpose the government issues two forms which

are c-form and H-form.

6.1.10.3 Service tax:

The service taxes comes under the purview of central government and the rules and

regulations for it are been fixed by the central government itself.

The service tax was implemented in the year 1994 at that time the rate was 5%. In September

2004 it has increased by 3% and had been 8%. Further in May 2005 it had increased by 2% as

10% rate. Now since June 2006 it had increased by 2% and it has remained 12% on the basic

amount till now.

6.1.10.4 Application / Registration:

There are two ways where the service provider makes application.

1. Voluntary application: where no amount is to be deposited.



2. Compulsory registration: if the total service value crosses Rs.8 lac. If the service

provider‟s value reaches/crosses Rs.7 lac, he has to get registered with the department

but not to make payment of tax till it crosses Rs.8 lac. After that registration number

is given on the basis of PAN no.

6.1.10.5 Payment:

Government gives only 5 days to make payment that means in particular month if the service

provider raises any invoice he has to prepare an account in his books of account.

Whenever the amount for the service provided is received within 5 days of the amount

received from the client, the liability toward government rises.

Payment can be done in two ways:

1. To corporate sector: monthly basis

2. To others: quarterly basis

6.1.10.6 Return:

In the service tax the filing of return is based for 6 months that is

- April to September

- October to March

6.1.10.7Assessment:

The assessment here is self based where the information is assumed to be correct. But if

during a case assessment is done and some information is found to be not disclosed there is

penalty for it.



6.1.10.8 Cenvat:

CENVAT is availed against the excise duty paid. Whatever amount is received back as a

setback it is CENVAT like input tax credit (I.T.C.) in VAT.

Whatever amount is paid as a service tax like for purchasing goods on which excise duty is

paid that amount is set back given as CENVAT.



Project on

Working capital

Management



TABLE OF CONTENTS

Sr. No. Particulars Page No.

1 Introduction 52

2 Conceptual Framework and Literature review 55

3 Research Process 75

4 Data Analysis and Interpretation 77

5 Findings of study 117

6 Conclusion and recommendation 119

7 Bibliography 121

8 Annexure 123



Introduction

to

Working Capital

Management



Chapter - VII

77..11 IINNTTRRDDUUCCTTIIOONN TTOO WWOORRKKIINNGG CCAAPPIITTAALL MMAANNAAGGEEMMEENNTT

A manufacturing concern needs finance not only for acquiring fixed assets but also for its day

to day operations. It has to obtain raw materials, process the raw materials, pay wages and

salaries, store finished goods for marketing and granting credit to the customers.

A non manufacturing concern may not require funds for purchase of raw material and their

processing. But it needs finance for storing goods and providing credit to its customers.

Similarly a concern engaged in providing services may not keep inventories, but it may have

to provide credit facilities to its customers. Thus all the enterprises engaged in manufacturing,

trading or providing services require finance for its day to day operations.

7.2 NEED FOR WORKING CAPITAL

The basic objective of financial management is to maximize the shareholders wealth. This is

possible when the company earns sufficient profit. The amount of such profit largely depends

on the magnitude of sales. However, sales do not cover instantaneously. There always a time

gap between sales of goods and receipt of cash. Additional capital is required to have

uninterrupted business operations, the amount will be locked up in the current assets like

account receivables, stock etc. This actually happens due to the “cash cycle” or “operating

cycle”. By the time the cash is converted back into cash. If it is not provided, the business

operations will be affected to a greater extent and hence this part of finance has to be

managed well.

Working capital is essential for the day to day operations of a business and hence it is the life-

blood of any business. The basic theme of working capital management is to provide

adequate support for smooth and efficient functioning of normal day to day business

operations by striking a trade-off between the three dimensions of working capital i.e.

liquidity, profitability and risk. In the present environment of cut throat competition,



business does not have any other option than cutting the cost of its operations in order to be

competitive as well as financially healthy. It is in this context that effective management of

working capital plays a vital role. Due to this reason the need of analyzing working capital

management of the company arises and research is done for analyzing day to day capital

management of GNFC Limited.



Conceptual

Framework

and

Literature

Review



Chapter - VIII

8. CONCEPTUAL FRAMEWORK AND LITERATURE REVIEW

8.1 Concepts of working capital

There are two concepts of working capital:

8.1.1 Gross working capital: The term “gross working capital” refers to the sum of all

current assets of the enterprise employed in the business process. This is a going concern, so

the finance manager is highly concerned with the management of assets with a view to bring

about productivity from other assets.

Calculation of Gross Working Capital

It refers to the firm‟s investment in current assets. Current assets are the assets which can be

converted into cash within an accounting year or operating cycle and it includes cash, short-

term securities, debtors, bills receivables and inventories.

Rs. in lacs

Sources of Funds 2005-06 2006-07 2007-08 2008-09 2009-10

Current assets

Inventories 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Sundry Debtors 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Cash & bank balance 5,501.95 13,047.91 15,141.34 5,541.39 32,339.02

Interest accrued 141.48 141.48 447.65

Loan & advances 12,663.63 28,465.60 27,240.05 21,725.62 25,385.93

Gross Working

Capital 88,277.33 1,41,029.06 1,20,397.18 99,214.37 99,896.44



The gross working capital of company contains current asset. The value of gross working

capital fluctuates up and down in last five years. It was highest in 2006-07. Investment in

current asses should be judged adequately, not more or less, to the need of the business.

Excessive investment in current assets should be avoided because it impairs firm‟s

profitability, as the idle investment earns nothing. Inadequate amount of working capital can

threaten the solvency of the firm because of its inability to meet the current obligations. Here

we can see that most of the investment in current assets is done in account receivables and

inventories.

8.1.2 Net Working Capital: The “net working capital” can be defined as the difference

between current assets and current liabilities. It is that portion of current assets which is

financed by long term funds.

Thus, the gross concept is in nature of quantitative definition that focuses attention on the

level of current assets for given activity. Whereas net working concept is in nature of a

quantitative definition which highlights the character of the sources from which the funds

have been procured to support that portion of current assets which is in excess of current

liabilities.

In conclusion, we can say that working capital management includes both the management of

current assets and current liabilities.

The goal of working capital management is to manage the firm‟s current assets and current

liabilities in such a way that a satisfactory level of working capital is maintained.

The major thrust is on management of current assets, this is because current liabilities arise in

context of current assets.



Calculation of Net Working Capital

It refers to the difference between current assets and current liabilities. Current liabilities are

those claims of outsiders which are expected to mature for payment within the current year

and include creditors, bills payable and outstanding expenses.

Rs. in lacs

Sources of Funds 2005-06 2006-07 2007-08 2008-09 2009-10

Current assets

Inventories 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Sundry Debtors 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Cash & bank balance 5,501.95 13,047.91 15,141.34 5,541.39 32,339.02

Interest accrued 141.48 141.48 447.65

Loan & advances 12,663.63 28,465.60 27,240.05 21,725.62 25,385.93

(A)Total Current

Assets 88,277.33 1,41,029.06 1,20,397.18 99,214.37 99,896.44

Current Liabilities

Liabilities 26,295.87 44,245.09 35,272.20 23,666.91 28,147.07

Provisions 10,902.56 9,723.65 13,594.99 13,269.69 14,158.65

(B)Total Current

Liabilities 37,198.43 53,968.74 48,867.19 36,936.60 42,305.72

Net Working

Capital(A - B) 51,078.90 87,060.32 71,529.99 62,277.77 57,590.72



8.2 TYPES OF WORKING CAPITAL

There are two types of working capital. The classification is done on the basis of time.

They are:

1. Permanent working capital

2. Temporary or variable working capital

1. Permanent working capital: This type of working capital represents current assets

required on a continuous basis over the entire year. A manufacturing enterprise has to

maintain minimum amount of inventories necessary to ensure uninterrupted

production as well as sales. It has following characteristics:

- It is classified on the basis of the time factor.

- It constantly changes from one asset to another and continuous to remain in the

business process.

- Its size increases with the growth of business operation.

2. Temporary working capital: This type of working capital represents the additional

assets which are required at different times during the operating year i.e. additional

inventory, extra cash etc. Seasonal working capital is the additional amount of current

assets particularly cash, receivables and inventory, which is required during the more

active season of the year. The characteristics of variable working capital are:

- It is not always gainfully employed, though it may change from one asset to another,

as permanent working capital does.



8.3 FACTORS DETERMINING WORKING CAPITAL

In order to determine the amount of working capital needed by the firm, a number of factors

have to be considered by finance manager. These factors are explained below:

1. Nature of business: The composition of current assets is a function of the size of a

business and to the industry to which it belongs. Small companies have smaller

proportions of cash, receivable and inventory than large corporations. This difference

becomes more marked in large corporations. Needs for working capital are thus

determined by the nature of an enterprise.

2. Size of business: The working capital requirements are also determined by the size

of the business. The size of the business has also an impact on its working capital

needs. Size may be measured in terms of scale of operations. A firm with larger scale

of operation will need more working capital than a small firm

3. Firms’ production policy: A firm having uniform production policy will have to pile

stock of materials during the off season periods and thus incurs greater inventory

costs and risk. The effect of seasonal fluctuations upon working capital can be offset

by pursuing the policy of adjusting production plan to seasonal changes. In case,

inventories are kept at minimum levels but the production manager must shoulder the

responsibility of constantly varying production schedules in accordance with the

changing demand.

4. Firms’ credit policy: Credit control includes factors such as the volume of credit

sales, terms of credit sales, collection policy etc. With a sound credit control policy, it

is possible for a firm to improve its cash inflow.

5. Access to money market: The working capital requirements of a firm are

conditioned by the firm‟s access to different sources of money market. Thus, the firm

with readily available credit from banks at liberal terms will be able to get with less

working capital than a firm without such facilities.



6. Growth and expansion of business: Working capital requirement of an enterprise

tend to increase in correspondence with growth in volume of sales. Additional current

assets will be needed to support increased scale of operations. It can further be noted

that a growing enterprise require additional funds continuously to fulfil the increasing

needs of the business.

7. Profit margin and dividend policy: Magnitude of working capital in a firm is

dependent upon its profit margin and dividend policy. As a matter of fact, a high net

profit margin reduces the working capital requirement of the firm because it

contributes towards the working capital pool. To the extent net profit has been earned

in cash, it becomes working capital.

Distribution of high proportion of profits in the form of cash dividend results in a

drain of cash resources and thus reduces company‟s working capital to that extent.

Where the management follows conservative dividend policy and retain larger portion

of net profits, the company‟s working capital position is strengthened.

8. Operating efficiency of firm: Operating efficiency of the firm results in optimum

utilization of resources at minimum cost. If a firm successfully controls operating

costs, it will be able to improve net profit margin which will in turn release greater

funds for working capital purposes.

9. Co-ordination in activities of a firm: Where the production and distribution are co-

ordinated, pressure on working capital will be minimized. In the absence of co-

ordination in production and distribution policies, demand for working capital is

reduced.

10. Business fluctuations: Seasonal fluctuations in sales affect the level of variable

working capital. Often, the demand for product may be of a seasonal nature. Business

expands during the period of prosperity and contracts during the period of depression.

11. Technological development: Technological developments in the area of production

can have sharp effect on the need of working capital.



12. Import policy: Import policy of the government may also have bearing on the levels

of working capital of the enterprise, since they have to arrange funds for importing

goods at specified times.

13. Taxation policy: In the event of regressive taxation policy, as it exists today in

India, imposing heavy tax burden on business enterprise will have very little profits

for distribution and retention purposes. Due to it, they have to borrow additional funds

to meet their increased working capital needs. Thus pressure on working is minimized

particularly when liberal taxation is followed.

14. Transportation and communication developments: Where the means of transport

and communication in a country are not well developed, industries require additional

funds to maintain huge inventory of raw material and other accessories which would

otherwise not be needed where the transport and communication system are highly

developed.



8.4 COMPONENTS OF WORKING CAPITAL

8.4.1 Inventories: The term inventories include stock of raw material, work in progress as

well as finished goods. The estimation of each of them will be made as follows:

I. Stock of raw materials: The average amount of raw materials to be kept in

stock will depend on the quantity of raw materials require for production

during a particular period and the average time taken in obtaining fresh

delivery. Suitable adjustments may have to be made to provide for the

contingencies.

II. Work- in-progress: The cost of work-in-progress includes raw materials,

wages and overheads. In determining the amount of work-in-progress, the time

period for which the goods will be in the course of production process is more

important.

III. Finished goods: The period for which the goods have to remain in warehouse

before sales is an important factor in determining the amount locked in

finished goods.

8.4.2 Sundry debtors: The amount of funds locked in sundry debtors will be computed on

the basis of credit sales and the time lag in collection of payment.

8.4.3 Sundry creditors: The lag in payment to suppliers of raw materials, goods etc and the

likely credit purchase to be made during the period will help in estimating the amount of

outstanding expenses.

8.4.4 Outstanding expenses: The time lag in payment of wages and other expenses will

help in estimating the amount of outstanding expenses.

8.4.5 Cash and bank balance: The amount of money to be kept as cash on hand or cash at

bank can be estimated on the basis of past experience.



8.5 INVENTORY MANAGEMENT

Inventories constitute the most significant part of current assets of a large majority of

companies of India. Because of large size of inventories maintained by firms, a considerable

amount of funds is required to be committed to them. It is therefore imperative to manage

inventories effectively and efficiently in order to avoid unnecessary investment. A firm

neglecting the management of inventories will be jeopardizing its long run profitability and

may fail ultimately. The reduction in „excessive‟ inventories carries a favourable impact on

the company‟s profitability.

8.5.1 Objective of inventory management

1. To maintain a large size of inventories of raw material and work-in-progress for

efficient and smooth production and of finished goods for uninterrupted sales

operations.

2. To maintain a minimum investment in inventories to maximize profitability.

An effective inventory management should

- Ensure a continuous supply of raw material to facilitate uninterrupted production.

- Maintain sufficient stocks of raw material in periods of short supply and anticipate

price changes.

- Maintain sufficient finished goods inventory for smooth sales operation and efficient

customer service.

- Minimize the carrying cost and time

- Control investment in inventories and keep it at an optimum level.



8.6 CASH MANAGEMENT

8.6.1 Factors of Cash management:

Cash is the most important current aspect for the operations of the business and is the basic

input needed to keep the business running on a continuous basis. It is also the ultimate output

expected to be realized at seeing the service or product manufactured at the firm. The firm

should keep sufficient cash neither max nor less. Cash shortage will disrupt the firm‟s

manufacturing operation, while excessive cash will simply remain idle without contributing

anything towards the firm‟s profitability. Thus a major function of the financial manager is to

maintain a sound cash position.

The term cash includes coins, currency and cheque hold by the firm and balances in its bank

account. Sometimes near cash items such as marketable securities or bank time deposits are

also included in cash. The basic characteristics of near cash assets are that they can readily be

converted into cash. Generally, when a firm has excess cash it invests in marketable

securities. This kind of investment contributes some profit to the firm.

Cash management is concerned with managing of cash flows into and out of the firm. Cash

flows within the firm and cash balances held, by the firm at a point of time by financing

deficit or investing surplus cash. It can be represented by the cash management cycle, which

is shown in the figure below:

Sales generate cash, which has to be disbursed out. The surplus cash has to be disbursed out.

The surplus cash has to be invested while deficit has to be borrowed. Cash management seeks

Information & control

Collection

Payments

Borrow or Invest



to accomplish this cycle at minimum cost. At the same time it also seeks to achieve liquidity

and control.

The management of cash is very important because it is very difficult to produce cash inflows

and outflows accurately and also there is no perfect coincidence and synchronization between

cash inflows and outflows. So and obvious aim of the firm is how it can manage its cash

affairs? So as to keep cash balances at a minimum level and to invest the surplus cash funds

in profitable opportunities.

In order to resolve the uncertainty about cash flows prediction, the firm should develop some

strategies for cash management. The main aspect or strategies of cash management are as

follows.

8.6.1.1 Cash planning: Cash inflows and outflows should be planned to project cash surplus

or deficit for cash period of the planning periods. Cash budget should be prepared for this

purpose.

8.6.1.2 Managing the cash flows: The flow of cash should be properly managed. The

inflows of cash should be accelerated, while as far as possible the outflow of cash should be

decelerated.

8.6.1.3 Optimum cash level: The firm should decide about the appropriate level of cash

balances. The cost of excess cash and danger of cash deficiency should be matched to

determine the optimum level of cash balances.

8.6.1.4 Investing surplus cash: The surplus cash balance should be properly invested to

earn profits. The firm should decide about the division of such cash balance between bank

deposits, marketable securities etc.



8.6.2 Cash planning:

Cash flows are inseparable parts of the business operations of all firms. The firm needs cash

to invest in inventories, receivables and fixed assets and to make payment for operating

expense in order to maintain growth in sales and earnings. It is possible that a firm may be

making adequate profits, but may suffer from the shortage of cash or its growing needs may

be consuming cash very fast. The poor cash position of the firm can be corrected, if its cash

inflows exceed cash outflows. Such excess cash may remain idle, again such excess cash can

be anticipated and properly invested if cash planning is recorded. Thus, cash planning can

help anticipate future cash flows and needs of the firm and reduces the possibility of the idle

cash balance and cash deficits.

Cash planning is a technique to plan for and control the use of cash. It protects the financial

condition of the firm by developing a projected cash statement from a forecast of expected

cash inflows and outflows for a given period. The forecasts may be based on the present

operations or the anticipated future operations. Cash plans are very crucial in developing the

overall operating plans of the firm‟s cash planning. It may be done on daily, weekly or

monthly basis.

8.6.3 Cash budgeting:

Cash budget is the most significant device to plan for and control the cash receipts and

payments. A cash budget is a summary of the firms expected cash inflows and outflows over

a projected time period. It gives information on the timing and magnitude of expected cash

flows and cash balances over the projected period. This information helps the financial

manager to determine the future cash needs of the firm plan for the financing of these needs

and exercise control over the cash and liquidity of the firm. Cash budget can be of quarters,

month, weeks or even days.



8.6.4 Cash budgeting process at GNFC:

The budgeting process in GNFC starts with the distribution of circular from the budget and

costing section to the respective departments for preparing their budget proposals for

discussion and revision before approval on the basis of ZBB and flexible budgeting as

applicable practically for a given situation. This activity is generally done in the month of

December and January.

Budgeting section first of all prepare yearly budget and then at the end of every three months

this budget will be revised and if any fluctuation is there than it can be corrected and this

three monthly budget further revised at the end of every month.

The budget and costing section first of all sends the reports regarding the resources consumed

during the current financial year with reference to the approved budget. It provides budget

provision for the year vise-a-vise actual is provided to the concerned budget controller to

estimate project for the next year. On this basis the concerned department prepares its budget

for the coming financial year on its projections for expenses and production or sales or

service plans. In this process the Plant Monitoring Group (PMG) for the plants, plays an

important role in preparing budget for all production departments of fertilizers and IP

division. This is a monitoring group for the plants which has the function of monitoring and

planning of all plants by keeping in concern their inter relationship and dependencies and

then planning the requirement and availability of resources on the basis of priority for

production and bottlenecks in production process of various products. PMG interacts with

regard to budgeting input norms of raw material and various utilities. If required, financial

department also interacts with the concerned operational department. PMG also co-ordinates

with marketing department to understand and get estimates of proposed demand for each

product specifically to plan their product on this basis. It complies the data of month wise

projected production for various product departments and the same is provided to financial

department. Based on targeted production planning, marketing department plans their product

wise, month wise sales budget and also provides the likely product realization. Marketing

department also provides the budgeted selling and distribution expenditures region wise as

well as product wise and other administrative expenditures. The data so provided by various



budget centres are considered and complied in the presentable formats after discussion with

the concern budget center controller.

The latest input price of raw material, chemical, catalyst and etc is being considered in

projection of the directors.

A lot of factors are considered while deciding the cash requirements of the company such as

the production of last few years, sales of last few years, cost of production, availability of raw

materials etc. thereafter the decision on the requirements of cash are arrived. Then a copy of

approved budget is provided to all members of the company.



8.7 DETERMINANTS OF CASH REQUIREMENTS

1. Terms of purchase and sale: Terms on which the goods are bought and sold decide

to a large extent, the amount of cash reserve that a firm will have to hold. If a business

firm can manage to buy material on credit terms but sells its product on cash, it can

run its affairs with a little cash balance. The reserve tendency will be found when the

firm makes purchases on cash basis but it has to sell its product to customers on credit

terms.

2. Collection period of receivables: If speed of collection of accounts receivables in a

firm is quick, the firm need not to carry large balance. However, owing to liberal

credit and collection policies, poor collection machinery and other factor collection

period of receivables in the firm is long, the firm will have to maintain relatively

substantial reserve of cash to meet normal business expenses.

3. Amount of current liabilities and maturity period: A firm with large amount of

current liabilities will have to hold larger than one with small amount of current

liabilities. Furthermore, maturity periods of these liabilities should also be considered

while deciding the level of cash holding.

4. Nature of demand of firm’s product: Where demand of the firm‟s product is highly

susceptible to changes in economic conditions, the firm will have to hold large cash

balance to strengthen its liquidity position. This tendency is usually observed in

undertakings engaged in luxuries products.

5. Credit position of the firm: A firm having established good image in the market

circle can carry its business with little cash balance because the firm gets liberal credit

facilities from other business enterprise.



8.7.1 INVESTMENT OF SURPLUS FUNDS

Companies often have surplus funds for short periods of time before they are required for

capital expenditures, loan repayment or some other purpose. Instead of allowing these surplus

funds to accumulate in current account where they earn no interest, companies invest them in

a variety of short term investments like term deposits with banks, money market with mutual

funds, and so on. Managing the investment of surplus funds is a very important responsibility

of the financial manager.

In GNFC, the surplus funds that are left are invested in fixed deposits with banks, so that

interest can be earned on it. Recently government has given the permission to invest in

mutual funds so some part of the surplus fund is also being invested in it.

8.8 WORKING CAPITAL FINANCING

Financing of additional working capital requirement becomes a real problem to a finance

manager of a concern unit. Commercial banks play the most important role in providing

working capital finance, particularly in the Indian context. In the view of the mounting

inflation, the Reserve Bank of India has taken up certain fiscal measures to check the money

supply in the economy. The balancing need has to be either by long term borrowing or by

issuing equity or by earning sufficient profits and retaining the same for coping with the

additional working capital requirement.

In GNFC, for raising working capital there is a consortium of banks from whom the working

capital funds are raised. The working capital limit is to be sanctioned every year. For getting

funds the company has to show last 3 years actual data and 2 years estimated data to the

banks. Balance sheet, cash flow statement and ratios are shown to the banks.



8.9 OPERATING CYCLE

The duration of time needed to complete the below cycle of events in case of a manufacturing

firm is called operating cycle.

- Conversion of cash into raw material

- Conversion of raw material into work-in-progress

- Conversion of work-in-progress into finished goods

- Conversion of debtors and bills receivables into cash

The operating cycle of a manufacturing unit can be shown as given in the following chart.

A/C Receivables

Cash Finished goods

Raw materials Work-in-progress

The time gap between the purchase of raw materials and the collection of cash for sales is

referred to as the operating cycle, whereas the time gap between the payment of raw material

purchases and the collection of cash for sales is referred to as the cash cycle. The operating

cycle is the sum of the inventory period and account receivable period. Before going into

detail of inventory management techniques followed by GNFC, the operating cycle is being

calculated to show the relationship between the time the production process takes to convert

raw materials into finished goods product and from finished product to generate sales to

recovery of bills receivable.



8.10 LITERATURE REVIEW

Since the literature related to the analysis of working capital management is wide in nature

and scope, the most important literature found in the form of popular write-ups, published or

unpublished research studies, and articles of researchers are reviewed in this section.

Vijayasaradhi and Rajeswara Rao (1978) carried out a research study on the Indian public

enterprises and indicated that an increasing trend in the investment of current assets, unlike in

fixed assets, resulted in higher carrying costs, which in turn, negatively affected the position

of the sector.

The study carried out by Dr. J. panda (1986) on small scale units of Orissa revealed that

management of working capital was neglected by a majority of sample units that led to

incurrence of loss.

Harinath (personal communication) in his study on working capital management in small

scale industries of cuddapah district of Andhra Pradesh suggested that in order to enhance the

profitability, industries should adopt effective working capital management.

Sarvanam (2001) made a study on working capital management in ten selected non-banking

financial companies. He concluded that the sample firms, with the help of statistical tools,

had placed more importance on the liquidity aspect.

Debashish Sur (1997) conducted a study on working capital management in Colgate

(Palmolive) India ltd. He observed that working capital management is not satisfying the

conventional standard.

Indrasena Reddy and Someshwar Rao (1996) conducted a study on working capital

management in HCL. He used seven ratios and statement of changes in working capital and

concluded that the company‟s working capital management is not up to the expected level. It

needs to be improved by the effective utilization and control of current assets.



Eljelly (2004) elucidated that efficient liquidity management involves planning and

controlling current assets and current liabilities in such a manner that eliminates the risk of

inability to meet due short-term obligations and avoids excessive investment in these assets.

Liquidity was examined, as measured by current ratio and cash gap (cash conversion cycle)

on a sample of joint stock companies in Saudi Arabia using correlation and regression

analysis. The study found that the cash conversion cycle was of more importance as a

measure of liquidity than the current ratio.

Ghosh and Maji (2003), in their paper made an attempt to examine the efficiency of working

capital management of the Indian cement companies during 1992-93 to 2001- 02. For

measuring the efficiency of working capital management, performance, utilization and

overall efficiency indices were calculated instead of using some common working capital

management ratios. Setting industry norms as target efficiency levels of the individual firms,

this paper tested the speed of achieving the target level of efficiency by an individual firm

during the period of study. Findings of the study indicated that the Indian cement industry as

a whole did not perform remarkably well during this period.

B. A Ranjith Appuhami (2008) conducted a study to find the impact of Firms' Capital

Expenditure on Working Capital Management. The author used the data collected from listed

companies in the Thailand Stock Exchange. The study used Shulman and Cox's (1985) Net

Liquidity Balance and Working Capital Requirement as a proxy for working capital

measurement and develop multiple regression models. The empirical research found that

firms' capital expenditure has a significant impact on working capital management. The study

also found that the firms' operating cash flow, which was recognized as a control variable,

has a significant relationship with working capital management, which is consistent with

findings of previous similar researches. The findings enhance the knowledge base of working

capital management and will help companies manage working capital efficiently in growing

situations associated with capital expenditure.



Research

Process



Chapter - VIIII

9. RESEARCH PROCESS

9.1 Subject of study:

Subject of study is “Analysis of working capital management at GNFC limited.”

9.2 Objective of the study:

- To analyze working capital position of the company.

- To study the operating cycle of the company.

- To study various working capital ratios of the company.

- To analyze liquidity position of the company.

9.3 Data collection:

The research is descriptive in nature. The research includes the facts or information already

available. The information are used to analyze working capital and critical evaluation of the

working capital. Data has been collected through primary and secondary method.

9.3.1 Primary data has been collected by personal discussion with senior officers of finance

department.

9.3.2 Secondary data has been collected from last five years annual reports, magazines,

journals, internet and some write ups provided by the company.

9.4 Tools of data analysis:

The following tools have been used for the purpose of analyzing the data collected from

company.

- Ratio analysis

- Graphical method

- Descriptive statistics

9.5 Limitations of the study:

- Time period is too short.

- The limitation of statistical tools used, may be the limitation of the study.

- Majority of findings are based on the secondary data.



Data analysis

and

Interpretation



CHAPTER – X

10. DATA ANALYSIS AND INTERPRETATION

10.1 Inventory conversion period:

10.1.1 Raw Material Conversion Period (RMCP):

Raw material conversion period = Average raw material inventory

Raw material consumption per day

Raw material consumption per day = Raw material consumption / 360

Average stock of raw material inventory = (opening stock of RM + closing stock of RM) / 2

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Opening stock of R.M. 2,803.82 5,279.61 5,269.92 5,774.87 6,406.32

Closing stock of R.M. 5,279.61 5,269.92 5,774.87 6,406.32 10,133.78

Average R.M. 4041.72 5,274.76 5,522.40 6090.6 8270.05

R.M. consumption per

year 77,297.37 1,05,123.23 1,23,118.41 1,23,605.50 1,24,761.39

R.M. consumption per

day 214.72 292.01 341.99 343.35 346.56

R.M. conversion

period (Days) 19 18 16 18 24



Interpretation:

The smaller the number of days of Raw material conversion period, the more efficient a

company is. GNFC Raw material conversion period is around 16 days for the year 2007-08

which shows very efficient management. Raw material is held for less time and less money is

tied up in it.

By comparing 5 years data, 2009-10 shows the highest Raw material conversion period

which is 24 days.



10.1.2 Work in progress conversion period (WIPCP):

Work in progress conversion period = Average work in progress inventory

Cost of production per day

Average stock in WIP = (Opening of WIP + Closing of WIP) / 2

Cost of production = Opening of WIP + Manufacturing exp. – Closing WIP

Per day 360

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Opening stock of WIP 1,838.22 3,007.29 580.18 3,447.03 1,968.82

Closing stock of WIP 3,007.29 580.18 3,447.03 1,968.82 252

Average WIP

inventory 2,422.76 1,793.74 2,013.61 2707.93 1110.41

Manufacturing

Expenses 1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75

Cost of production

per day 319.38 420.53 485.84 507.88 498.05

WIP conversion

period (Days) 8 4 4 5 2



Interpretation:

The smaller the number of days of Work in progress conversion period, the more efficient a

company is. GNFC Work in progress conversion period is around 2 days for the year 2009-10

which shows very efficient management. Work in progress is held for less time and increase

in sales and profit.

By comparing 5 years data, 2005-06 shows the highest Work in progress conversion period

which is 8 days.



10.1.3 Finish goods conversion period (FGCP):

Finish goods conversion period = Average finish goods inventory

Cost of goods sold per day

Average stock of finish goods = (Opening FG + Closing FG)/ 2

Cost of goods = Opening FG + Cost of Production + Admin. & sales exp. +

Sold Per day Excise Duty – Closing FG

360

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Opening stock of FG 4,764.67 3,937.86 13,653.44 9,411.58 11,252.97

Closing stock of FG 3,937.86 13,653.44 9,411.58 11,252.97 3,250.04

Average finish goods

inventory 4,351.27 8,795.65 11,532.51 10332.28 7251.51

Cost of Production 1,16,146.61 1,48,964.90 1,77,770.92 1,81,360.00 1,77,580.75

Admin. & sales

expenses 12,870.76 15,313.18 17,751.56 14,544.48 20,606.90

Purchase of FG 24,667.72 40,212.52 63,665.56 30,641.17 6,264.59

Excise Duty 13,375.67 21,739.87 21,952.96 14,222.41 9,833.12

Cost of goods sold per

day 466.35 601.43 792.73 663.69 617.46

FG conversion

period (Days) 9 15 15 16 12



Interpretation:

The smaller the number of days of Finish goods conversion period, the more efficient a

company is. GNFC Finish goods conversion period is around 9 days for the year 2005-06

which is very good. Finish goods is held for less time and less money is tied up in it.

By comparing 5 years data year the highest Finish goods conversion period is for 2008-09.



10.1.4 Total inventory conversion period:

Inventory conversion period = RM Conversion period + WIP Conversion period + FG

Conversion period

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

RM conversion period (Days) 19 18 16 18 24

WIP conversion period (Days) 8 4 4 5 2

FG conversion period (Days) 9 15 15 16 12

Inventory conversion period (Days) 36 37 35 39 38

Interpretation:

The smaller the number of days of inventory outstanding, the more efficient a company is.

GNFC Inventory conversion period is around 35 days for the year 2007-08 which is very

good. Inventory is held for less time and less money is tied up in inventory. Instead, money is

freed up for things like research and development, marketing or even share buybacks and

dividend payments.

By comparing 5 years data we can conclude that the inventory conversion is almost

consistent for all the years. The highest conversion period is observed in 2008-09.



10.1.5 Debtors conversion period:

Debtors conversion period = Average Debtors

Total Credit sales per Day

Average Debtors= (Opening Debtors + Closing Debtors) / 2

Total Credit sales per Day= Total Credit Sales / 360

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Opening Debtors 28,958.77 43,012.40 60,527.55 38,968.35 28,871.65

Closing Debtors 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Average Debtors 35,985.59 51,770 49,747.95 33,920 15,269.88

Total Credit sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Total Credit sales per

Day 633.70 821.30 1014.84 850.63 753.55

Debtors conversion

period (Days) 57 63 49 40 20



Interpretation:

Debtors conversion period looks at the number of days needed to collect on sales and involve

Accounts Receivables. While cash-only sales have a Debtors conversion period of zero,

people do use credit extended by the company, so this number is going to be positive.

The Debtors conversion period for the year 2009-10 is 20 days, which is very good for the

company. The Debtors conversion period is showing a decreasing trend meaning that the

days to collect on sales are decreasing every year.



10.1.6 Creditors conversion period:

Creditors conversion period = Average Creditors

Total Credit Purchase per Day

Average Creditors = (Opening Creditors + Closing Creditors) / 2

Total Credit purchase per Day = Total Credit purchase / 360

Total Credit purchase = Opening of RM + Purchase of RM + Purchase of FG + Power, fuel

& other utilities + Stores & chemicals + packing expense – Closing

Of RM

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Opening Creditors 19,998.32 22,701.03 39,389.51 30,174.94 17,018.55

Closing Creditors 22,701.03 39,389.51 30,174.94 17,018.55 22,752.84

Average Creditors 21,349.68 31,045.27 34,782.23 23,596.75 19,885.70

Total Credit purchase 1,75,032 2,23,560 2,86,344 2,59,164 2,09,268

Total Credit purchase per Day 486.2 621.0 795.4 719.9 581.3

Creditors conversion period

(Days) 44 50 44 33 34



Interpretation:

This involves the company's payment of its own bills or Accounts Payables. If this can be

maximized, the company holds onto cash longer, maximizing its investment potential.

The Creditors conversion period of GNFC is around 34 days for the year 2009-10. It is also

observed that Creditors conversion period is decreasing every year. From the data provided, it

is found out that GNFC had sufficient funds to make payments of its own bills and make

investments in various activities.



10.1.7 Gross operating cycle:

Gross operating cycle = Inventory conversion period + Debtors conversion period

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory conversion period 36 37 35 39 38

Debtors conversion period 57 63 49 40 20

Gross operating cycle (Days) 93 100 84 79 58

Interpretation:

Gross operating cycle is a tool which measures the total number of days from the day the

purchases are made or the stock arrives to the day all the collections are made. Cash is said to

be blocked till the collections have been collected. So the sooner the cash is received from the

consumers the better is for the company as they get cash for further production.

GNFC gross operating cycle is around 58 days in 2009-10. This is very good for the company

as a fast turnover rate of these assets is what creates real liquidity and is a positive indication

of the quality and the efficient management of inventory and receivables.



10.1.8 Net operating cycle:

Net operating cycle = Inventory conversion period + Debtors conversion period – Creditors

Conversion period

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory conversion period 36 37 35 39 38

Debtors conversion period 57 63 49 40 20

Creditors conversion period 44 50 44 33 34

Net operating cycle (Days) 49 50 40 46 24

Interpretation:

The Net Operating cycle (NOC) measures how fast a company can convert cash on hand into

even more cash on hand. The CCC does this by following the cash as it is first converted into

inventory and accounts payable (AP), through sales and accounts receivable (AR), and then

back into cash.

GNFC NOC is of around 24 days in the year 2009-10. This means that the company is able to

generate the cash within this period after making it payments of its own bills. Since it is very

low, it is good for the company.



10.2 Working capital position:

10.2.1 Working capital:

Working capital = Current Assets – Current Liabilities

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 88,277.33 1,41,029.06 1,20,397.05 1,23,638.71 99,896.44

Current Liabilities 37,198.43 53,968.74 48,867.19 36,936.60 42,305.72

Working Capital 51,078.90 87,060.32 71,529.99 86,702.11 57,590.72

Interpretation:

Working Capital Position indicates changes in Current Assets and Current Liabilities over the

study period and also during a particular year. Working capital position shows operational

efficiency & proper utilization of short term resources in an organization.

From the above chart we can say that working capital in GNFC is not consistent and it goes

up and down year by year. By comparing 5 years data we can conclude that highest working

capital has been achieved bin 2006-07 and lowest was arrived in 2005-06.



10.3 Liquidity analysis ratio:

10.3.1 Current ratio:

Current ratio = Current Assets / Current Liabilities

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 88,277.33 1,41,029.06 1,20,397.05 1,23,638.71 99,896.44


Current ratio 2.37 2.61 2.46 3.35 2.36

Interpretation:

Working Capital Ratio is used to analyze the short term solvency of the company. The ideal

current ratio is 2:1 but in GNFC all the year current ratio is higher than ideal ratio. So GNFC

is able to meet its current liabilities out of total current assets and never really face a major

problem in meeting its short-term liabilities, which is good sign for the company.

The best current ratio observed was 3.35 in year 2008-09.



10.3.2 Quick ratio:

Quick ratio = Liquid Assets / Current Liabilities

Liquid Assets = Current Assets – Inventories

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 88,277.33 1,41,029.06 1,20,397.05 1,23,638.71 99,896.44

Inventories 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Liquid Assets 61,319.51 1,02,182.54 81,797.39 80,563 59,393.06


Quick ratio 1.65 1.89 1.67 2.18 1.40

Interpretation:

Position of Liquid ratio is very good. The Quick Ratio of 1:1 is considered to be satisfactory.

This is so because if the quick assets are equal to the current liabilities then the company may

be able to meet its entire short-term obligations pretty conveniently.

In GNFC all the year ratio is higher than the ideal ratio which is a indicator of positive

financial position. The highest quick ratio of 2.18 was observed in 2008-09 due to large

amount of inventory at GNFC during that period.



10.3.3 Current assets to total assets ratio:

CA to TA ratio = Current assets / Total assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Current Assets 88,277.33 1,41,029.06 1,20,397.05 1,23,638.71 99,896.44

Total Assets 2,00,070.03 2,69,387.05 2,86,384.91 2,97,393.7 1,30,763.36

CA to TA ratio 0.4412 0.5235 0.4204 0.4157 0.7639

Interpretation:

Current assets to total assets are fluctuating year by year. In 2006-07 it is increasing trend

whereas in 2007-08 and 2008-09 it is decreasing trend. Again in 2009-10 it shows increasing

trend. By comparing 5 years data we can conclude that CA to TA ratio is highest for the year

2009-10 that is 0.7639. In GNFC all the year current assets are higher side in the total assets,

so company has to think about decreasing current assets by investing extra money in reliable

funds so that profitability can be increased.



10.4 Working capital position:

10.4.1 Inventories:

10.4.1.1 Investment in inventories:

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Stores & spares 14,733.11 19,342.98 19,966.31 23,447.60 26,867.56

Raw material 5,279.61 5,269.92 5,774.87 6,406.32 10,133.78

Work in progress 3,007.29 580.18 3,447.03 1,968.82 252.00

Finish goods 3,937.86 13,653.44 9,411.58 11,252.97 3,250.04

Total inventories 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Interpretation:

From the above chart we can say that total investment in inventories is fluctuating year by

year but the overall trend is increase in total inventories. The higher the inventory means

higher the block of funds and lowers the profit. So increasing trend is not a good sign for

company. By comparing 5 years data we can conclude that 2005-06 is best as it shows lowest

investment in inventories.



10.4.1.2 Inventory turnover ratio:

Inventory turnover ratio = Cost of goods sold / average inventory

Cost of goods sold = Sales – gross profit

Average inventory = (opening of inventories + closing of inventories) / 2

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Gross profit 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68

Cost of goods sold 1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95

Opening of inventories 26,075.42 26,957.87 38,846.52 38,599.79 43,075.71

Closing of inventories 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Average inventories 26,516.65 32,902.20 38,723.16 40,837.75 41,789.55

Inv. Turnover ratio 6.92 7.50 7.95 6.63 5.97



Interpretation:

From the above chart we can say that in 2005-06 inventory turnover ratio is 6.92 times. In

2006-07 it is 7.50 times, in 2007-08 it is 7.95 times, in 2008-09 it is 6.63 times and in 2009-

10 it is 5.97 times. High inventory turnover ratio is better than a low ratio. High inventory

turnover ratio shows good inventory management. A good inventory turnover ratio of 7.95

was observed in 2007-08. It means that that the company is turning its inventory of finished

goods into sales 7.95 times in a year.

10.4.1.3 Inventory to current assets ratio:

Inventory to current assets ratio = Inventory / current assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Current assets 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 99,896.44

Inv. To CA ratio 0.3054 0.2754 0.3206 0.3484 0.4055



Interpretation:

The Inventory to Current Assets Ratio measures that how much percentage of current assets

is formed by the inventories. An increasing inventory to current assets ratio is a negative sign.

It means that more & more percentage of current assets is being constituted by the

inventories. This indicates poor operational efficiency of the organization. Also it shows that

the funds invested in current assets to meet obligations on a short notice are actually illiquid

to some extent and it may be difficult to convert them into cash immediately.

Normally, less than 0.50 of current assets are treated as average position of inventory.

GNFC has shown increase in the ratio over past few years. So it is not a good sign but it has

never gone above 0.41.



10.4.1.4 Inventory to sales ratio:

Inventory to sales ratio = Inventory / Sales

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Inventory 26,957.87 38,846.52 38,599.79 43,075.71 40,503.38

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Inventory to sales

ratio 0.1182 0.1314 0.1057 0.1407 0.1493

Interpretation:

The Inventory to Sales Ratio measures the percentage of inventory the company currently has

on hand to support the current amount of sales. An increasing Inventory to Sales ratio is

generally a negative sign, showing the company may be having trouble keeping inventory

down and/or Net Sales have slowed, and can sometimes indicate larger financial problems the

company may be facing.

as per last 5 years data the lowest ratio was observed in 2007-08 which shows good

movement of inventory but since that it is increasing which is not a good sign.



10.4.2 Sundry debtors:

10.4.2.1 Investment in sundry debtors:

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sundry debtors 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Interpretation:

From the above chart we can say that in 2005-06 sundry debtors are Rs. 43,012.40 lac. In

2006-07 it is 60,527.55 lac, in 2007-08 it is 38,968.35 lac, in 2008-09 it is 28,871.65 lac and

in 2009-10 it is 1,668.11 lac. The lower the sundry debtors means lower the block of funds in

sundry debtors. So company can invest that fund in profitable areas and that increases

profitability. By comparing 5 years data we can say that sundry debtors are decreasing year

by year which is a good sign and lowest sundry debtors were observed in 2009-10.



10.4.2.2 Receivables (debtors) turnover ratio:

Receivables turnover ratio = Credit sales / average accounts receivables

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Credit sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Opening of

receivables 28,958.77 43,012.40 60,527.55 38,968.35 28,871.65

Closing of receivables 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Average receivables 35,985.59 51,769.98 49,747.95 33,920 15,269.88

Rece. Turnover ratio 6.34 5.71 7.34 9.02 17.76

Interpretation:

This ratio is also known as Accounts Receivable Turnover Ratio and measures the number of

times Accounts Receivables were collected during the year. This is also a measure of how

well the company collects sales on credit from its customers.



GNFC have a high and increasing Accounts Receivable Turnover which is a Positive Sign.

By comparing 5 years data we can say that receivables turnover ratio is increasing year by

year. Highest receivables turnover ratio was observed in 2009-10.

10.4.2.3 Average collection period:

Average collection period = 360

Receivables turnover ratio

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Credit sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Opening of

receivables 28,958.77 43,012.40 60,527.55 38,968.35 28,871.65

Closing of receivables 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Average receivables 35,985.59 51,769.98 49,747.95 33,920 15,269.88

Rece. Turnover ratio 6.34 5.71 7.34 9.02 17.76

Average collection

period (Days) 57 63 49 40 20



Interpretation:

The Average Collection Period represents the average number of days for which a firm takes

to collect accounts receivables. It measures the quantity of debtors.

The Average Collection Period for GNFC was around 20 days in 2009-10. This is extremely

good considering the fact that IFFCO is a fertilizer company. The maximum collection period

during this five year period is around 63 days in the year 2006-07 and is decreasing since

then.

10.4.2.4 Receivables to current assets ratio:

Receivables to current assets ratio = Receivables / current assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Receivables 43,012.40 60,527.55 38,968.35 28,871.65 1,668.11

Current assets 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 99,896.44

Rece. To CA ratio 0.4872 0.4292 0.3237 0.2335 0.0167



Interpretation:

Debtors to Current Assets Ratio indicate the position of debtors in total current assets. This

ratio is calculated by debtors with current assets. If debtors are average or less than average, it

indicates proper realization of debtors. On the other hand, if debtors are very heavy in respect

of other current assets, it indicates poor recovery of the company.

Lower receivable to current assets ratio is better than the higher one for the company. By

comparing 5 years data we can say that receivable to current assets ratio is decreasing year by

year which shows good performance for company. The lowest receivable to current assets

ratio was observed in 2009-10.

10.4.2.5 Debt - equity ratio:

Debt – equity ratio = Total debt / Equity share capital

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Total debt 27,236.53 35,158.48 31,351.38 35,589.95 55,505.53

Equity share capital 14,647.62 15,543.74 15,543.74 15,543.74 15,541.88

Debt – equity ratio 1.86 2.26 2.02 2.29 3.57



Interpretation:

The ratio shows the extent to which debt financing has been used in the business. A high ratio

means that claims of creditors are greater than those of owners. A high level of debt

introduces inflexibility in the firm‟s operations due to the increasing interference and pressure

from creditors. A low debt-equity ratio implies a greater claim of owners than capital

By comparing 5 years data we can conclude that debt- equity ratio is increasing year by year

and 2005-06 is the best year for the company. In 2009-10 it reaches to 3.57 because of the

major increase in the short term loans from the banks.



10.4.3 Cash and bank balances:

10.4.3.1 Investment in cash and bank balances:

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Cash and bank balances 5,501.95 13,047.91 15,141.34 5,541.39 32,339.02

Interpretation:

From the above chart we can say that in 2005-06 cash and bank balances are 5,501.95 lac. In

2006-07 they are 13,047.91 lac, in 2007-08 they are 15,141.34 lac, in 2008-09 they are

5,541.39 lac and in 2009-10 they are 32,339.02 lac. High cash and bank balances mean

company is able to meet its expenses easily. By comparing 5 years data we can say that cash

and bank balances are fluctuating year by year. The highest cash and bank balance was

observed in 2009-10.



10.4.3.2 Cash turnover ratio:

Cash turnover ratio = (cost of sales - depreciation) / cash

Cost of sales = sales – gross profit

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Gross profit 44,655.50 48,938.68 57,621.47 35,370.45 21,988.68

Cost of sales 1,83,477.88 2,46,727.93 3,07,722.70 2,70,857.57 2,49,288.95

Depreciation 8,859.43 10,957.02 11,051.70 11,972.57 11,695.92

Cash 5,501.95 13,047.91 15,141.34 5,541.39 32,339.02

Cash turnover ratio 31.74 18.07 19.59 53.10 8.03

Interpretation:

From the above chart we can say that in 2005-06 cash turnover ratio is 31.74 times. In 2006-

07 it is 18.07 times, in 2007-08 it is 19.59 times, in 2008-09 it is 53.10 times and in 2009-10

it is 8.03 times. By comparing 5 years data we can conclude that there are large fluctuations

in cash turnover ratio year by year. The highest cash turnover ratio was observed in 2008-09

and the lowest cash turnover ratio was observed in 2009-10.



10.4.3.3 Cash to current assets ratio:

Cash to current assets ratio = Cash / current assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Cash 5,501.95 13,047.91 15,141.34 5,541.39 32,339.02

Current assets 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 99,896.44

Cash to CA ratio 0.0623 0.0925 0.1258 0.0448 0.3237

Interpretation:

The Cash to Current Assets Ratio indicates what percentage of current assets is comprised of

cash at hand and cash at bank.

Upon analyzing the data of the past 5 years for GNFC it was observed that the cash balances

formed only a very small percentage of the current assets. In last 5 years highest was

observed in 2009-10 which is 0.3237. The lowest was observed in 2008-09 which is 0.0448.

This is a positive sign as it shows effective utilization of the funds of the organization and

there is not much of idle cash with the organization.



10.4.3.4 Sales to current assets ratio:

Sales to current assets ratio = Sales

Current assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Current assets 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 99,896.44

Sales to CA ratio 2.58 2.10 3.03 2.48 2.72

Interpretation:

The Sales to Current Assets Ratio basically measures how well a company is making use of

its assets in generating sales. An increasing sale to current assets ratio is a positive sign as it

indicates that the company has a healthy production scenario because of which most of

inventory is being converted into sales for the company.

GNFC has shown a decrease in its sales to current assets ratio from 2005-06 to 2007-08 after

which it is constantly increasing which implies that the company is doing well and inventory

is not being held up at any stage in the production process.



10.4.3.5 Working capital turnover ratio:

Working capital turnover ratio = Sales

Average working capital

Average working capital = Current Assets – Current Liabilities

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Average working

capital 51,078.90 87,060.32 71,529.99 86,702.11 57,590.72

Working capital

turnover ratio 4.47 3.40 5.11 3.53 4.71

Interpretation:

GNFC has a high working capital turnover ratio.



The Working Capital turnover ratio measures how well the company's working capital is

being used to generate sales. Working Capital represents the major items typically closely

tied to sales, and each item will directly affect this ratio. Increasing Working Capital turnover

ratio is usually a positive sign, indicating the company is more able to use its working capital

to generate sales.

The company has been able to gain more Net Sales with the smaller amount of Working Capital in

2007-08 as compared to that in 2006-07. The working capital turnover had been decreasing from 5.11

in the year 2007-08 to 3.53 in 2008-09 but it increasing then to 4.71 in the year 2009-10.



10.5 PROFITABILITY RATIOS:

10.5.1 Return on assets:

Return on assets = Profit after tax Total assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Profit after tax 29,472.30 32,646.65 37,288.30 22,751.73 12,383.74

Total assets 2,00,070.03 2,69,387.05 2,86,384.91 2,97,393.7 1,30,763.36

Return on assets 0.1473 0.1212 0.1302 0.0765 0.0947

Interpretation:

ROA is an indicator of how profitable a company is relative to its total assets. The ROA

figure gives investors an idea of how effectively the company is converting the money it

has to invest into net income. The higher the ROA number, the better, because the company

is earning more money on less investment.



At GNFC in last 5 years, highest ROA was observed in 2005-06 since than it is decreasing

and in 2009-10 it reaches to 0.0947.

10.5.2 Net profit margin:

Net profit margin = Profit after tax

Sales

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Profit after tax 29,472.30 32,646.65 37,288.30 22,751.73 12,383.74

Sales 2,28,133.38 2,95,666.61 3,65,344.17 3,06,228.02 2,71,277.75

Net profit margin 0.1292 0.1104 0.1021 0.0743 0.0456

Interpretation:

Net profit margin ratio establishes a relationship between net profit and sales and indicates

management‟s efficiency in manufacturing, administering and selling the products. This ratio

is the overall measure of the firm‟s ability to turn each rupee sales into net profit.



From the data, GNFC have a decreasing net profit margin. The sales turnover depend upon

the element of subsidy which is decided by the government from time - to - time depending

on the condition of international market. In last 5 years, due to increase in subsidy the net

profit margin is decreasing.

10.5.3 Loans and advances to current assets:

Loans and advances to current assets = Loans and advances

Current assets

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Loans and advances 12,663.63 28,465.60 27,240.05 21,725.62 25,385.93

Current assets 88,277.33 1,41,029.06 1,20,397.18 1,23,638.71 99,896.44

Loans and advances

to current assets 0.1435 0.2018 0.2263 0.1757 0.2541



Interpretation:

As per the data, it can be clearly said that the position of the Loans & Advances with respect

to current assets is increasing every year (a marginal decrease in the year 2008-09) which is

very good for GNFC. The ratio was around 14.35% in 2005-06 which had increased to

25.41% in 2009-10.

10.5.4 Loans and advances to working capital:

Loans and advances to working capital = Loans and advances

Working capital

Rs. in Lac

Particulars 2005-06 2006-07 2007-08 2008-09 2009-10

Loans and advances 12,663.63 28,465.60 27,240.05 21,725.62 25,385.93

Working capital 51,078.90 87,060.32 71,529.99 86,702.11 57,590.72

Loans and advances

to working capital 0.2480 0.3270 0.3110 0.2506 0.4408



Interpretation:

This ratio shows how significant Loans & Advances Are to Working Capital and that Loans

& Advances plays an important role in working capital management of GNFC. This ratio

shows that the company has more cash in hand and can utilize these funds as per the

company requirement.

At GNFC, this ratio has been in the increasing trend which is good for the organization. This

means that company is having enough cash and utilizing it effectively. In last 5 years, highest

ratio was observed in 2009-10.



Findings



Chapter - IX

11. FINDINGS

After the analysis of the components of current assets & current liabilities and the trends of

working capital, we find that

Current ratio is almost constant which shows that there is uniform increase or

decrease in current assets and current liabilities.

Cash and Bank Balances have increased during this period which indicates improper

utilization of funds at GNFC.

Position of inventory is very good in current assets (40.55%). Inventory Turnover

Ratio increases during first 3 years of study but decreased in last 2 years, which shows

average performance of utilization of inventory during the study period.

Position of debtors to current assets is 1.67%. This ratio had decreased constantly

from 48.72% to 1.67% during the study period which shows significant decrease in

the debtors of the company.

Loans and Advances are increasing every year and contribute majorly (25%) to

current assets. This means that the company is not facing any problem to get the

required short term financing.

Large part of working capital is involved in maintaining inventory and it depends on

the level of inventory every year.

There are huge up and down fluctuations in the working capital of the company

during the study period.



Debt to equity ratio is constantly increasing during last 5 years except small decrease

in the year 2007-08. The increase in debt is due to increase in the borrowings.

Net profit margin has been constantly decreasing in last 5 years because of the

significant increase in the raw material prices, decrease in the subsidy and consequent

increase in cost of production. Looking to the trends, GNFC has been able to manage

the profits but the percentage is decreasing. Profit is realized because of sales of

industrial chemicals.

Net operating cycle of GNFC has decreased to 18 days in 2009-10 means company is

now able to generate cash in very short period.

Company‟s production and operation department are quite efficient and do optimum

use of raw materials but sometimes raw material conversion period takes longer time

because of shutdown or breakdown in the plant. This happens as all plants are

interlinked with each other.

Debtors conversion period and creditors conversion period has also decreasing trend

in the study period which shows efficient performance of the company.



Conclusion



Chapter - IIX

12. CONCLUSION AND RECOMMENDATIONS

The management field requires practical exposure to the outside corporate world to

learn the management skills. I got the golden opportunity to complete my Summer

Internship Project in GNFC. I had a very good experience and was able to gain good

idea about the company and the financial department. I am sure that this experience

will not only be useful to me for academic purpose but it will also be useful to me in

my future career.

My project work involved the study on „Working Capital Management‟. In this

project the study was conducted through the analysis of the operating cycle and ratios

related to working capital. From the analysis I reached to the conclusion that the

GNFC has a very sound Working Capital Management. In the year 2009-10 the

company had very good credit policy through which the collection period was

reduced which was good for the company. From the ratio analysis it is concluded that

the liquidity and solvency position of the company is strong and the company is

managing its working capital very efficiently.

Working capital is one of the most important aspects of operational efficiency of

business. Working Capital plays a very important role in the functioning of any

organization. Both the current assets and current liabilities are very much influencing

factors on the working capital of an organization.

After the discussion and analysis of the financial position of GNFC, it is clear that the

working capital of GNFC is in sound position. Working capital is not only measured

by current assets & current liabilities but also there are some other factors that have an

influenced on the working capital.



In current assets, there are two most important factors, Debtors and Inventory that

affect working capital. In GNFC, Inventory and Debtors are efficiently managed to

strengthen the position of the organization both in short term and long terms.

After analyzing and interpreting the financial data of GUJARAT NARMADA VALLEY

FERTILIZER COMPANY LIMITED (GNFC) with the help of Ratio Analysis, the following

recommendations are given to the organization for further betterment & improvement in the

working capital:

The present status and levels of current assets is extremely good and therefore it

requires proper maintenance.

The current percentage of inventory is high which is not good for operational

efficiency and sound working capital and thus, it need to be controlled by using

various inventory management techniques such as JIT. Another alternative would be

to have varying stock or inventory levels during the different seasons or even months

and, thereby, altering the production to suit such needs.

The working capital turnover ratio was highest in the year 2007-08 i.e. 5.1 times and

then next year it was reduced to 3.53 times and then it was slightly improved in the

year 2009-10 to 4.71 which needs to improve more in the future.



Bibliography



Chapter - IIIX

13. BIBLIOGRAPHY

13.1 Reference books:

P. Janki Ramudu & Durga Rao, “Working Capital Management: A Review of

Research”, Finance India, Vol. XXII No.1.

Pandey I. M, Financial Management 9th

edition, Vikas Publishing House Private

Limited.

Patel D. R, Working Capital Management, Accounting and financial Management,

Atul Prakashan.

13.2 Web sites:

www.gnfc.in

13.3 Annual reports of GNFC:

2005-06

2006-07

2007-08

2008-09

2009-10

http://www.gnfc.in/



Annexure



Chapter - IIIX

ANNEXURE 14.1 BALANCE SHEET:

Particulars 31.3.2010 31.3.2009 31.3.2008 31.3.2007 31.3.2006

SOURCES OF FUNDS:

Shareholder's Funds:

Share Capital 15,541.88 15,543.74 15,543.74 15,543.74 14,647.62

Reserves & Surplus 1,92,363.00 1,85,867.88 1,69,026.13 1,41,518.60 1,03,080.80

2,07,904.88 2,01,411.62 1,84,569.87 1,57,062.34 1,17,728.42

Loan Funds

Secured Loans 29,000.53 10,284.95 31,046.38 34,836.37 26,761.36

Unsecured Loans 26,505.00 25,305.00 305 322.11 475.17

55,505.53 35,589.95 31,351.38 35,158.48 27,236.53

Deferred Tax:

Deferred Tax Liabilities 25,526.32 26,305.75 23,598.65 24,033.56 18,765.00

Less: Deferred Tax Assets 2,479.09 2,850.22 2002.18 836.07 759.49

23,047.23 23,455.53 21,596.47 23,197.49 18,005.51

TOTAL 2,86,457.64 2,60,457.10 2,37,517.72 2,15,418.31 1,61,970.46

APPLICATION OF FUNDS:

Fixed Assets:

Gross Block 3,08,424.97 3,02,799.58 2,75,053.07 2,67,728.77 2,13,788.79

Less: Depreciation/Impairment 1,91,489.85 1,79,851.06 1,68,030.19 1,57,096.09 1,28,679.18

Net Block 1,16,935.12 1,22,948.52 1,07,022.88 1,10,632.68 85,109.61

Capital Work In Progress 1,02,980.34 41,967.41 25,921.16 2,875.04 4,862.82

2,19,915.46 1,64,915.93 1,32,944.04 1,13,507.72 89,972.43

Investments: 8,951.46 8,839.06 33,043.69 14,850.27 21,820.27

Current Assets, Loans &

Advances:

Interest accrued on Investments

447.65 141.48 141.48

Inventories 40,503.38 43,075.71 38,599.79 38,846.52 26,957.87

Sundry Debtors 1,668.11 28,871.65 38,968.35 60,527.55 43,012.40

Govt. of India Fertilizer Bonds 24,424.34

Cash & Bank Balances 32,339.02 5,541.39 15,141.34 13,047.91 5,501.95

Loans & Advances 25,385.93 21,725.62 27,240.05 28,465.60 12,663.63

99,896.44 1,23,638.71 1,20,397.18 1,41,029.06 88,277.33

Less: Current Liabilities &

Provisions




Provisions 14,158.65 13,269.69 13,594.99 9,723.65 10,902.56

42,305.72 36,936.60 48,867.19 53,968.74 37,198.43

Net Current Assets 57,590.72 86,702.11 71,529.99 87,060.32 51,078.90

Miscellaneous Expenditure:

VRS Compensation 98.81

Premium on Prepayment

98.81

TOTAL 2,86,457.64 2,60,457.10 2,37,517.72 215418.31 1,62,970.46



14.2 PROFIT & LOSS ACCOUNT:

Particulars 2009-10 2008-09 2007-08 2006-07 2005-06

INCOME:

Sales & Service 2,71,277.75 3,06,228.02 3,65,344.17 2,95,666.61 2,28,133.38

Less: Excise Duty 9,833.12 14,222.41 21,952.96 21,739.87 13,375.67

Sales (Net) 2,61,444.63 2,92,005.61 3,43,391.21 2,73,926.74 2,14,757.71

Lease Rent 15.82 1.95 709.31

Less: Equalization A/C 0 3.61 181.92

15.82 (1.66) 527.39

Other Income 8,628.26 6,534.06 4,916.63 3,534.35 7,995.62

2,70,072.89 2,98,539.67 3,48,323.66 2,77,459.43 2,23,280.72

Expenditure:

Purchase 6,264.59 30,641.17 63,665.56 40,212.52 24,667.72

Manufacturing Expenses 1,77,580.75 1,81,360.00 1,77,770.92 1,48,964.90 1,16,146.61

Stock of Finished Goods & Stock in

Process 9,719.75 (363.18) 1,375.01 (5,077.09) (342.26)

Marketing, Administration & Other

Expenses 20,606.90 14,544.48 17,751.56 15,313.18 12,870.76

Personnel Expenses 19,682.71 22,131.15 19,016.67 16,886.56 13,305.02

Interest (Net) 2,338.20 2,692.18 70.77 1,263.66 3,624.00

Depreciation/Amortization 11,695.92 11,972.57 11,051.70 10,957.02 8,859.43

Prior Period Adjustments 0 0 (6.06)

Research & Development Expenses 195.39 190.85

2,48,084.21 2,63,169.22 2,90,702.19 2,28,520.75 1,78,625.22

Profit Before Tax 21,988.68 35,370.45 57,621.47 48,938.68 44,655.50

Less: Provision for Current Tax 10,013.24 10,527.66 20.797.27 17,444.74 15,968.00

Add: Provision for Deferred Tax (408.3) 1,859.06 681.93 564.88 1,167.00

Less: Provision for FBT 232 222.1 192.25 382.2

Add: Provision for Taxation 4.27 780.08 0

Profit After Tax 12,383.74 22,751.73 37,288.30 32,646.65 29,472.30

Add: Balance from Previous Year 49,164.41 52,322.23 47,761.80 35.977.83 33,603.86

Add: P & L A/C 0 0 0 6,678.86 0

Amount Available for Appropriation 0 0 0 186.33 0

61,548.15 75,073.96 85,050.10 75,489.67 63,706.16

Appropriation:

General Reserve 10,000.00 20,000.00 25,000.00 20,000.00 20,000.00

Proposed Dividend 5,051.11 5,051.11 6,605.30 6,605.30 6,225.24

Tax on Dividend 838.93 858.44 1,122.57 1,122.57 873.09

Balance Carried to Balance Sheet 45,658.11 49,164.41 52.322.23 47,761.80 35,977.83

61,548.15 75,073.96 85,050.10 75,489.67 63,706.16

A SUMMER INTERNSHIP REPORT ON AN ANALYSIS OF … · Summer Internship report - LJMBA Page 1 Table...

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