Final Project Iocl

7/30/2019 Final Project Iocl

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Page No.32

Introduction to Working Capital


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Page No.33

Introduction to Working CapitalThe term working capital is commonly used for the capital required for day-to-

day working in a business concern, such as for purchasing raw material, for

meeting day-to-day expenditure on salaries, wages, rents rates, advertisingetc.

But there is much disagreement among various financial authorities

(Financiers, accountants, businessmen and economists) as to the exact

meaning of the term working capital.

Need for Working CapitalWorking capital is needed till a firm gets cash on sale of finished products. It

depends on two factors:

i. Manufacturing cycle i.e. time required for converting the raw material into

finished product; and

ii. Credit policyi.e. credit period given to Customers and credit period allowed

by creditors. Thus, the sum total of these times is called anOperating cycle

Significance of Working Capital Management: In a typical manufacturing firm, current assets exceed one-half of

total assets.

Excessive levels can result in a substandard Return on Investment.

Current liabilities are the principal source of external financing for

small firms.

Requires continuous day-to-day managerial supervision.

Working Capital management affects the companys risk, return and

share price.

The Factors Influencing Working Capital Requirements:- Nature of Business:-Trading and financial firm has very small

investment. In fixed assets, but require a large sum of money to be


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Page No.34

invested in working capital. Retail stores must carry large stocks of a

variety of goods to satisfy varied and continues demands for their

customers. Some manufacturing business, also have to invest

substantially in working capital and a nominal amount of fixed assets Production policy: The production cycle refer to the time involve in

manufacture of goods. It covers the time-span between the

procurement off raw material and completion of the manufacturing

process leading to the production of finished goods. There is sometime

gap before raw material become finished good to sustain such

activities the need for W.C. is obvious. The longer the time span

(production cycle) the larger will be the tied up funds and therefore,the larger is the W.C. needed and vice-versa.

Market and demand conditions:-The working capital needs of a firmare related to its sales. However, it is difficult to precisely determine

the relationship between volume of sales and working capital needs. In

practice, current assets will have to employ before growth takes place.It is, therefore necessary to make advance planning of working

capital for growing firm on a continuous basis.

Sales depend on demand conditions. The variations in business

condition may be in two directions (i) upward phase when boom

conditions prevail-the need of working capital is likely to grow to

cover the lag between increased sales and receipt of cash as well as to

finance purchases of additional material to cater to expansion of the

level of activity. Additional fund may be required to invest in plant

and machinery to meet the increased demand.

and (ii)downswing phase when the economic activity is marked by

decline. The decline in the economy is associated with a fall in the

volume of sales which in turn, leads to a fall in the level of inventory

and book debts.


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Growth and expansion:-As a company grows it is logical to expect

that a larger amount of W.C. is required. It is off course, difficult to

determine precisely the relationship between the growth in the

volume of the business of a company and the increased in its W.C.Thecritical fact however is that the need for increased W.C. fund does not

follow the growth of business activity but precedes it. Advance

planning of W.C. is therefore a continuing necessity for a growing

concern. Or else the company may have substantial earning but little

cash

Credit Policy:-The credit policy of the firm affects the working capitalby influencing the level of debtors. The credit terms to be granted tocustomers may depend upon the norms of the industry to which the

firm belongs. But a firm has the flexibility of shaping its credit policy

within the constraint of industry norms and practices.

Availability of credit from suppliers:-The working capitalrequirements of a firm are also affected by credit terms granted by its

suppliers. Firms will needless W.C. if liberal credit term is available to

it from suppliers .Suppliers credit finances the firms inventories and

reduces the cash conversion cycle.

Operating Efficiency:-The operating efficiency of the firm relates tothe optimum utilization of resources at minimum cost. The efficiency

in controlling operating cost and utilizing fixed and current assets

leads to operating efficiency.

Price Level Changes:-The increasing shifts in price level makefunctions of financial managers difficult. She should anticipate the

effect of price level changes on W.C. requirement of the firm.

Generally, changing price level will require a firm to maintain higher

amount of W.C.


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Page No.36

Effects of Inadequate and excess working capital:

To maintain an adequate amount of working capital in the business, themanagement has to plan the requirements of working capital properly. If it

fails to do so, there may be some occasions when it faces inadequate working

capital, and other occasions when it has excess working capital.

A business firm may have inadequate working capital mainly due to the

following reasons:

Shortage of liquid funds.

Under investment in inventories.

Under deployment of funds in receivables.

No or under-investment in marketable securities.

The immediate effects of inadequate working capital are:

Poor liquidity.

Low profitability.

Higher interest charges.

Under utilization of production capacity.

Inadequate working capital particularly shortage of funds can threaten the

solvency of the firm if it fails to meet its current obligations.

If actual investment of working capital is more than the actual required

amount, it is termed as excess working capital, which is mismanagement of

working capital funds.

A business firm may have excess working capital mainly due to the following

reasons:


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Page No.37

Excess idle cash.

Over investment in inventories.

Over investment in receivables.

Over-investment in marketable securities.The immediate effects of excess working capital are:

Low inventory turnover.

Low working capital turnover.

Higher cost of inventory.

Higher bad debts losses.

Excess working capital is dangerous as it tempts the management to invest

more funds in slow moving assets particularly inventories. It thus impairs

firms profitability, as idle investment in firms current assets earns nothing.

Why should working capital be analyzed?Analysis of working capital is very important to find out proper answers to the

following questions:

Is the amount of working capital adequate, inadequate or more than

required?

Is the management using working capital efficiently and effectively?

Will the firm be able to pay its short-term obligations as and when

they mature?

Does the firm have a favorable credit rating?

Is the current financial situation improving?

What sources of funds have been applied to finance working capital?

Is the business running smoothly as well as gainfully?


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Page No.38

Thus management of working capital requires a watchful look into the current

assets, current liabilities and trend in the items that are included in the

working capital.

Issues in Working Capital Management:There are many aspects of working capital management that make it an

important function for any financial manager. They are namely Time,

Investment, Criticality, Growth etc. But the three most important issues

regarding Working Capital Management are Profitability, Liquidity and Risk.A firm has to identify an effective mixture of the above three components so as

to meet its requirements under varied situations. For the above we will discuss

three different policies adopted by a firm namely Conservative policy, Average

Policy and Aggressive Policy.

0 25,000 50,000

ASSET

Current Assets

Policy C

PPoolliiccyyAA

PPoolliiccyyBB


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Page No.39

OUTPUT (units)The firm would make just enough investment in current assets if it were

possible to estimate working capital needs exactly. Under perfect certaintycurrent assets holding would be at the minimum. A larger investment in

current assets would imply a low rate of return and hence lower risk.

Conversely a smaller investment in current assets would mean a higher return

but interrupted production and sales because of frequent stock outs and

inability to pay creditors in time. Thus it is up to the firm to choose the level of

investment in current assets depending upon circumstances. To have higher

profitability a firm may sacrifice its solvency and maintain a relatively low

level of current assets. On the other hand there is another situation where a

firm wants to maintain an average level of all the three factors profitability,

risk and liquidity.

Policy A is the conservative policy with a higher level of investment in current

assets whereas Policy C is the aggressive policy where it maintains a smaller

level of current assets to increase its profitability hence assumes greater risk.

The illustration of the policies is provided hereunder:

Policy Type Liquidity Profitability Risk

A Conservative High Low Low

B Average Average Average Average

C Aggressive Low High High

Two points to note here:

Profitability varies inversely with liquidity.

Profitability and risk go hand in hand i.e. risk and return.


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These are the primary issues a firm may face while determining its working

capital requirements. It is up to the firm to decide which policy it will adopt

depending upon circumstances. It may adopt all the three different kinds of

policies throughout a financial year depending on financial situation in everyquarter.

The Cost Trade-off:There are two types of costs involved:cost of liquidity andcost of illiquidity. Ifthe firms level of current assets is very high, it has excessive liquidity. Its

return on assets will be low, as funds tied up in idle cash and stock earn

nothing and high level of debtors reduce profitability. Thus, the cost of liquidity

(through low rate of return) increases with the level of current assets.

The cost of illiquidity is the cost of holding insufficient current assets. This will

also adversely affect the credit-worthiness of the firm and it will face

difficulties in obtaining fund in the future. All this may force the firm into

insolvency. Similarly, the low level of stocks will result in loss of sales and

customers may shift to competitors. Also, low level of debtors may be due to

tight credit policy, which would impair sales further. Thus, the low level ofcurrent assets involves costs that increase at this level falls.

Total Cost Cost of liquidity

Cost

Cost of illiquidity

Optimum level of Level of current assts

Current assets


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Page No.41

TYPES OF WORKING CAPITAL NEEDSAnother important aspect of working capital management is to analyze the

total working capital needs of the firm in order to find out the permanent and

temporary working capital. Working capital is required because of existence of

operating cycle. The lengthier the operating cycle, greater would be the need

for working capital. The operating cycle is a continuous process and therefore,

the working capital is needed constantly and regularly. However, the

magnitude and quantum of working capital required will not be same all the

times, rather it will fluctuate.

The need for current assets tends to shift over time. Some of these changes

reflect permanent changes in the firm as is the case when the inventory and

receivables increases as the firm grows and the sales become higher and higher.

Other changes are seasonal, as is the case with increased inventory required for

a particular festival season. Still others are random reflecting the uncertainty

associated with growth in sales due to firm's specific or general economic

factors.

Classification Working CapitalPermanent or fixed working capital is minimum level of current asset. It is thesame way as the firms fixed assets are. Depending upon the change in production

and sales the need for working capital over and above permanent working

capital will fluctuate.Fluctuating or variable working capital is the extra working capital needed tosupport the changing production and sales activities of the firm.


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Page No.42

Amount

of Fluctuatingworking

capital Permanent

Time

In the above figure the permanent working capital is stable over time, whiletemporary working capital is fluctuating-sometimes increasing and some times

decreasing. However the permanent working capital line need not be horizontal

if the firms requirement for permanent capital is increasing or decreasing over

period. For a growing firm, the difference between permanent and temporary

working capital can be depicted following figure.

Fluctuating

Permanent

Amount

ofworking

capital Time


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Page No.43

Working Capital Component


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Page No.44

Analysis Of Working Capital ComponentThe first part of this report deals with the analysis of the working capital of

Indian Oil Corporation Limited (Marketing Division), over four financial years

i.e. 2007-08 ,2008-09,2009-2010 and 2010-2011. The comparative positions of the

various components of the working capital over the last five years have been

compiled and the reasons for such variance have been analyzed. Suggestions to

improve upon the current position have been provided.

Later, the relevant ratios to determine the financial health of a company have

been determined and the relation between them had been found out. An

attempt has also been made to find the relation between liquidity andprofitability and that between the level of working capital and profitability of

IOCL and also to analyze the working capital policy of IOCL.

The various components of working capital are:

Current Assets Inventories

Book debts

Cash and Bank

Loans, Advances, Claims and Deposits

Current Liabilities Sundry Creditors

Deposits

Other Liabilities


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Page No.45

Inventory Analysis


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Page No.46

Introduction of Inventory:-Inventory refers to the stockpile of the product a firm is offering for sale and

components make up the product. In short Inventory is such type of assets

which will be disposed of in the future in the ordinary course of the business. In

other words Inventory is used to designate the aggregate of those items of

tangible assets which are:

1) Raw Materials & Stores (Consumable):-

It contains items which are purchased by the firm from others.

2) Work-in-Progress (Convertible):-

It consists of the items which are currently used in the production

process. These are the semi finished goods that are held at various

stage of the production in multi stage production process.

3) Finished Goods (Saleable):-It represents final or completed products which are available for

sale.

Need to hold Inventories:-There are three general motives for holding of inventories:

A.The Transaction motives: It expresses the need to maintain inventories to

facilitate production and sale operation smoothly.B. The Precautionary motive: It expresses the need to holding inventories to

guard against the risk of unpredictable changes in demand and supply

forces.

C. The Speculative motive: It influences the decision to increase or reduction

inventory levels to take advantages of price fluctuations.

Objectives of Inventory Management:-Efficient inventory management should result in the maximization of the owners

wealth. For this purpose a firm should neither hold excessive inventories nor hold

inadequate inventories,i.e. it should hold the optimum level of inventory. The


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Page No.47

optimum level of inventory investment lies between the point of excessive and

inadequate levels.

The dangers of over-investment in inventories are:

i) Funds of the firm are tied-up unnecessarily.

ii) It creates loss of profitiii) Excessive carrying cost and risk of liquidity increase.

Inadequate level of inventories is not also free from snags.

The consequences are:

i) Production may shut-down

ii) Commitment for the delivery may not be possible

iii) Inadequate raw material and work-in-progress will create frequent

production interruption.

iv) Customers may shift to the competitor if their demands are met up

regularly.

Thus the objective of inventory management is to maintain its optimum level in

the following manner:

a) To ensure a continuous supply of materials to facilitate uninterrupted

production.

b) To maintain sufficient stocks of raw materials during short-supply

c) To maintain sufficient finished goods for efficient customer service.

d) To maintain the carrying cost

e) To maintain the optimum level of investment in inventories.

INVENTORY MANAGEMENT TECHNIQUE:-The major problem to be restored is how much the inventory should be when

inventory is replenished. If the firm is buying raw material, it has to decided

lots in which it has to purchase on replenishment. If the firm is planning a

production run, the issue is how much production to schedule. This problem is

called order quantity problem and the tasks of the firm is to determine the

optimum or economic lot size. Determine and optimum level involves twotypes of costs;Ordering Cost- This term is used in case of raw material and includes all the

cost of acquiring raw materials. They include the cost in the following

activities:

Requisition


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Purchase ordering

Transporting

Receiving

Inspecting

Storing

Ordering cost increase with the number of orders placed, thus the more

frequently inventory is acquired, the higher the firms ordering costs. On the

other hand if the firm maintains large inventory levels, there will be few

orders placed and ordering costs will be relatively small. Thus, ordering

costs decrease with the increasing size of inventory.

Carrying Costs: Costs are incurred for maintaining a given level of inventoryare called carrying costs. These include the following activities: Warehousing Cost Handling Administrative cost Insurance Deterioration and obsolescence

Carrying costs are varying with inventory size. This behavior is contrary to

that of ordering costs which decline with increase in inventory size. The

economic size of inventory would thus depend on trade-off between carrying

costs and ordering cost.

Total Cost

Carrying Cost

Cost

Ordering Cost

Unit


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Page No.49

Inventories of IOCL (M.D.) ER consist of: Finished Products:-

The products produced by IOCL may be broadly classified into classes

as follows: -

Class A

Liquefied Petroleum Gas (LPG)

Class B

Erstwhile APM-

Superior Kerosene Oil (SKO) High Speed Diesel (HSD)

Class C

Major Bulk-

Light Diesel Oil (LDO)

Furnace Oil (FO)

Bitumen

Naphtha

Aircraft Turbine Fuel (ATF)

Lubes

Others

Petrochemicals & Specialties like MTO, RPC, Sulphur, CPC, and Propyleneetc.

Raw Materials Stores in process Other Stores (including barrels & tins):- Stores and Spares are basically

those inventory items, which augment the production process i.e. they


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Page No.50

are the ancillary items used to support the main activity of production of

finished goods. It includes stock of "loose tools", "power and fuel", "moulds

and dies", etc. This data field captures the value of the stock of stores and

spares lying with the company at the end of the accounting period.

Packing material:-Packing material is the substance in which the finishedgoods are packed for making them ready for dispatch / sale. This data

field captures the value of the stock of packing materials lying with the

company at the end of the accounting period.

INVENTORIESAmount in Rs. (Cr.)

March-11 March-10 March-09 March-2008

In Hand:Stores, SparesetcLess: Provisionfor Losses

Raw MaterialsFinishedProductsStock in ProcessBarrels andTins

1,975.9497.48

1,878.46

13,853.9120,278.52

4,012.4227.25

40050.56

1,578.4582.20

1,496.25

10,440.9416,777.07

2,802.7117.42

31,534.39

1,516.6978.40

1,438.29

5,109.0413,159.63

1,586.3817.53

21,310.87

1,177.0766.76

1,110.31

8,001.0213,455.81

2,179.4615.98

24,762.58

In Transit:Stores & SparesRaw MaterialsFinished

Products

135.928,497.12

60.92

9,233.96

104.254,426.29339.15

4,869.69

110.813,599.25

128.67

3,838.73

77.895,695.95405.06

6,178.90

TOTAL 49,284.52 36,404.08 25,149.60 30,941.48


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Page No.51

From the above table and the graph it is showing that the in 2008 the amount of

inventories 30,941.48 but in 2009 the inventories decreased by 579.188.In 2010 the

inventories further increased by 11254.48 than 2009.Inventories is continuously

increasing & in 2011 the inventories also increased by 12880.44.

Stores in sprats are continuously increasing year and year.

The provision for losses of the Stores in sprats also increasing.

In 2009 holding of raw material is declined than 2008.Afterthat the holding of

raw material is rising in 2010 and also increased in 2011.

In 2009 stock in process is declined than 2008.Afterthat stock in process is

increasing in 2010 which is also increased in 2011.

Holding of finished product also increasing during yearbyyear.

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

Year 2011 Year 2010 Year 2009 Year 2008

INVENTORY

INVENTORY


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Page No.52

Analysis of Inventory over the years:Inventory turnover ratio indicates the efficiency of the firm in producing andselling its product. It is calculated by dividing the cost of goods sold by the

average inventory:Cost of Goods Sold

Inventory Turnover =

Average Inventory

Average inventory= (Openinginventory + closing inventory)/2

The inventory turnover shows how rapidly the inventory is turning into

receivables through sales. Generally, a high inventory turnover is indicative of

good inventory management. A low inventory turnover implies excessive

inventory levels than warranted by production and sales activities, or a slow-

moving or obsolete inventory. A high level of sluggish inventory amounts to

unnecessary tie-up of funds reduced profit and increased costs. If the obsolete

inventories have to be written off, this will adversely affect the working capital

and liquidity position of the firm. However, a relatively high inventory

turnover should be carefully analyzed. A high inventory turnover may be the

result of a very low level of inventory, which results in frequent stock outs; the

firm may be living from hand-to-mouth. The turnover will also be high if the

firm replenishes its inventory in too many small lot sizes. The situations of

frequent stock outs and too many small inventory replacements are costly for

the firm. Thus, too high and too low inventory turnover ratios should be

investigated further. The computation of inventory turnovers for individual

components of inventory may help to detect the imbalance investments in the

various inventory components.


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Page No.53

The importance of low inventory turnover or larger number of days of

inventory holding is due to the fact that low inventory turnover means less

inventory turning into receivables through sales. As a result of which working

capital of the organization gets blocked. This results in the increase in the costof capital. So in order to control the increase in the cost of capital, measures

should be taken that more and inventory are turned into receivables through

sales, and thus increasing the inventory turnover ratio. To judge whether

Indian Oil's inventory management is good or not, it should be analyzed

through which trend the organization is following for the last three years.

Cost of Goods SoldAmount in Rs. (Cr.)

March-11 March-10 March-09 March-08Cost of ProductionAdd: Opening

Finished ProductLess: Closing

Finished Product

Cost of Goods Sold

166,136.92

17,116.22

20,879.44

162,373.70

137,424.34

13,288.30

17,116.22

134,717.70

159,012.71

13,860.87

13,288.30

159,585.28

116720.79

12,505.67

13,860.87

115,365.59

March-11 March-10 March-09 March-08Cost of Goods SoldAverage Inventory

162,373.70

18,997.83

133,596.42

15,202.26

159,585.28

13,574.585

115,365.59

13,183.27

Inventory Turnover 8.55 8.78 11.76 8.75Days of InventoryHolding 42.12 41 30.61 41.13


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Page No.54

Inventory turnover is maximum in the 2009.Because of cost of goods sold is

maximum to the other year & amount of holding inventory is lowest.

Inventory Turnover 11.76 means inventory of finished goods is turning into

sales 11.76 times in a year. So; high inventory turnover is fast inventory

movement which implies more efficient position.

In 2008, 2010 and 2011 the inventories turnovers is comparatively same. The

inventories turnovers are 8.75, 8.78 & 8.55, i.e. that are decreased by 25.5%, 25.3%

& 27.2% from inventory turnover of 2009.

In 2009 the days of holding the inventories is only 30.61 days it signifies that

the inventories are sold in 30.61 days.

In 2008, 2010 & 2011 the days of holding the inventories are 41.13, 41, 42.12 that

are more than holding days of inventory of 2009.

A slow inventory movement has the following disadvantages:

1. Blocking of scarce funds which could be gainfully employed elsewhere;2. Requiring more strong space resulting in higher maintenance and

handling costs;3. Chances of product being outdated or out of fashion especially in case of

consumer goods;4. During storage for excessive period quality may deteriorate due to

inherent factors like rusting loss of potency etc.

0

5

10

15

20

25

30

35

40

45


InventoryTurnover

Days of

Inventory

Holding


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Page No.55

Product wise inventory analysis:-Product for March 2010:

Product Cost of GoodsSold AverageInventory InventoryTurnoverPetroleumProductsLubricantsGreases:

LAB:

PX/PTA:

Gas:

Cry containers/Cry vessels:

143702.3851

559.880952

565.7942857

2256.32

2.3585

24.004

14766.48

323.97

32.02

70.74

2.945

5.995

9.73

10.98

17.67

31.90

0.80

4.00

FinishingProducts

OpeningQuantity(MTs inlakh)

OpeningValue(Rs.incrore)

ClosingQuantity(MTs inlakh)

ClosingValue(Rs.incrore)

SaleQuantity(MTs inlakh)

Sale value(Rs.incrore)

PurchaseQuantity(MTsinlakh)

PurcVal

(Rs.icror

PetroleumProducts

LubricantsGreases:

LAB:

PX/PTA:

Gas:

Crycontainers/Cry vessels:

55.85

0.46

0.08

0.18

1.49

0.05

12846.1

348.91

32.1

51.74

4.3

4.93

52.95

0.42

0.07

0.21

0.60

0.05

16686.9

299.03

31.94

89.74

1.59

7.06

762.97

5.02

1.24

5.28

875.06

0.17

240824.7

5656.69

1098.02

2636.36

2659.75

28.92

306.98

0.02

874.17

982

6.4

256


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Page No.56

Product for March 2011:

Product Cost of GoodsSold AverageInventory InventoryTurnoverPetroleum Products

Lubricants Greases:

LAB:

PX/PTA:

Gas:

Cry containers/Cry vessels:

165687.6233

4023.178378

689.5777778

2298.474

0.685

37.26

18326.76

304.56

40.995

57.73

1.48

5.6

9.04

13.21

16.82

39.81

0.46

6.65

FinishingProducts

OpeningQuantity(MTs inlakh)

OpeningValue(Rs.incrore)

ClosingQuantity(MTs inlakh)

ClosingValue(Rs.incrore)

SaleQuantity(MTs inlakh)

Sale value(Rs.incrore)

PurchaseQuantity(MTs inlakh)

PurcValu(Rs.icror

PetroleumProducts

LubricantsGreases:

LAB:

PX/PTA:

Gas:

Crycontainers

52.95

0.42

.07

.21

.60

.05

16686.86

299

31.94

89.75

1.59

7.06

56

0.37

.09

0.05

.40

.02

19966.66

310.12

50.05

25.71

1.37

4.14

788

4.82

1.24

4.47

851.73

.18

292028

6138.68

1181.37

2530.11

2830.11

34.22

323.30

.02

0.00

0.00

851.53

0.00

1276

25.0

0.00

0.00

2737

0.00


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Page No.57

Petroleum Product: Though in 2011 the sale of Petroleum product isincreased by 3.28% than the previous year but because of price hike17.41% from the previous year the Petroleum product remain moreunsold than the production. So, holding of petroleum product is increaseddue to unsold of the product.

Lubricants Greases: The quantity Lubricants Greases are sold in 2011 isless than 3.98% from 2010 but because of increasing the price the value ofthe Lubricants Greases is increased by 8.52% .But because of demand inthe market the Lubricants Greases is more sold in 2011 than the 2010 asper production.

Lab: The Lab turnover of 2011 is almost same as 2010.

PX/PTA: Though the sale quantity PX/PTA is decreased by 15.34% at thecurrent year from the previous year but the value of PX/PTA isincreased by 13.48% from the 2010, and the more PX/PTA is sold in 2011from the 2010 as per production so in 2011 the holding PX/PTA is lessthan 2010.

Gas: Both in 2011 and 2010 IOCL incurring loss.

0

5

10

15

20

25

30

35

40

45

Petroleum

Products

Lubricants

Greases:

LAB: PX/PTA: Gas: Cry

containers

YEAR

2011

YEAR

2010


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Page No.58

Cry Container: The sale of Cry Container is increased in 2011 by 5.88%from the 2010 and also value is increased by 11.75% from the previousyear.So,the turnover of Cry Container in 2011 is higher than 2010.

Components of Inventory:-The manufacturing firms inventory consists of two more components(i) Raw materials and (ii) work-in-progress.An analyst may also be interested in examining the efficiency with which thefirm converts raw materials into work-in-process and work-in-process intofinished goods. That is, the analyst would like to know the levels of rawmaterials inventory and work-in-process inventory held by the firm on an

average. The raw material; inventory should related to materials consumedand work-in-process to the cost of production.

Raw Material Inventory TurnoverMaterial consumed

Raw Material =

Inventory Turnover Raw Material Average Inventory

Raw Materials Consumed:

March-11 March-10 March-09 March-08Opening BalanceAdd: Transferred fromBRPLAdd: Purchases

Less: Closing Stock

14,867.230.00

150,484.12165,351.3522,351.03

8,708.290.00

123,704.72132,413.0114,867.23

13,696.97575.90

131,482.60145,755.47

8,708.29

9,520.320.00

105,525.48115,045.8013,696.97

Consumption: 143,000.32 117,545.78 137,047.18 101,348.83


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Page No.59

March-11 March-10 March-09 March-08Raw MaterialConsumption:

143,000.32 117,545.78 137,047.18 101,348.83

Raw MaterialAverage Inventory

18,609.13 11,787.76 11,202.63 11,608.645

Raw MaterialInventory Turnover 7.68 9.97 12.23 8.73

Days of rawmaterial holding 46.85 36.10 29.43 41.23

In 2009 the raw material inventory turnover is maximum that is 12.23 times in

a year. That means in 2009 IOCL holds less days of inventory of raw material

that is 29.43 which is less than 2008, 2010 and 2011.

0

5

10

15

20

25

30

35

40

45

50

YEAR 2011 YEAR 2010 YEAR 2009 YEAR 2008

Raw MaterialInventory

Turnover

Days of Raw

Material holding


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Page No.60

Details of Raw Material Consumption:-March-11Qty

(MTs inLakh)

March-11Value

(Rs. Incrore)

March-10

Qty(MTs inLakh)

March-10Value

(Rs. Incrore)

March-09

Qty(MTs inLakh)

March-09Value

(Rs. Incrore)

1. Crude Oil2. Base Oil3. Ethanol4.BENZENE5. Natural

Gas/RLNG6. Additives7. Packing

Materials8. Consumed

Steel Coils /Sheets /Stores /ComponentandSpare Parts

9. RawMaterial forExplosives

10.

Others

529.614.320.680.002.83

.489.38

.08

.58

140,841.421,950.94212.482.48522.37

500.47324.91

1,191.18101.18

28.88

506.944.230.330.175.50

0.4910.13

0.080.49

115,529.751,485.9785.564.15741.01

402.72300.61

815.9777.21

20.13

513.774.271.050.065.25

0.399.40

0.070.42

135,096.421721.21334.724.05679.89

334.94292.94

689.3975.48

26.36

0

20

40

60

80

100

120

140

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Value of Crude Oil

Value


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Page No.61

Stock in Progress TurnoverCost of Production

Stock in progress =Inventory Turnover Average Stock in Progress Inventory

March-11 March-10 March-09 March-08Cost of Production

Average Stock inProgress Inventory

166,136.92

3,407.57

137,424.34

2,194.545

159,012.71

1,882.92

116720.79

1878.015

Stock In ProcessTurnover 48.76 62.62 84.45 62.15Days of Stock InProcess

7.38 5.74 4.26 5.80

In 2009 the stock in process inventory turnover is maximum that is 84.45 times

in a year. That means in 2009 IOCL holds less days of inventory of stock in

process that is only 4.26 days which is less than 2008, 2010 and 2011.

0

10

20

30

40

50

60

70

80

90


Stock In Process Turnover

Stock In

Process

Turnover


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Page No.62

March-11 March-10 March-09 March-08Finished goods turnover 8.55 8.78 11.76 8.75Work-in-process turnover 48.76 62.62 84.45 62.15Material turnover 7.68 9.97 12.23 8.73Sales to total inventory 6.75 7.53 11.44 8.072Inventory to Sales 14.80% 13.26% 8.73% 12.38%

Inventory to saleInventory to Sales is the percentage ofcost of salesattributable toaverage

inventory. A decreasingnumberindicateshigherefficiencyin use ofresources;

an increasing number suggestspotentialcash flow problemsdue to greater

sumstiedupininventory.

In 2009 IOCL use its resources very efficient way because in 2009 inventory to

sale is minimum but from 2010 inventory to sale is continuously rising so it issignificant inefficient condition for IOCL.

An increasing Inventory to Sales ratio is generally a negative sign, showing the

company may be having trouble keeping inventory down and/orNet Sales

have slowed, and can sometimes indicate larger financial problems the

company may be facing. Viewing this ratio over several periods reveals the

0

2

4

6

8

10

12

14

16


Sales to total

inventory

Inventory to

Sales
http://www.businessdictionary.com/definition/cost-of-sales.htmlhttp://www.businessdictionary.com/definition/average-inventory.htmlhttp://www.businessdictionary.com/definition/average-inventory.htmlhttp://www.investorwords.com/10438/number.htmlhttp://www.investorwords.com/10019/indicate.htmlhttp://www.businessdictionary.com/definition/efficiency.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.investorwords.com/10666/potential.htmlhttp://www.businessdictionary.com/definition/cash-flow.htmlhttp://www.businessdictionary.com/definition/problem.htmlhttp://www.businessdictionary.com/definition/due.htmlhttp://www.businessdictionary.com/definition/sum.htmlhttp://www.investorwords.com/11433/up.htmlhttp://www.businessdictionary.com/definition/inventory.htmlhttp://www.spireframe.com/docs/financial-statement-net-sales.aspxhttp://www.spireframe.com/docs/financial-statement-net-sales.aspxhttp://www.businessdictionary.com/definition/inventory.htmlhttp://www.investorwords.com/11433/up.htmlhttp://www.businessdictionary.com/definition/sum.htmlhttp://www.businessdictionary.com/definition/due.htmlhttp://www.businessdictionary.com/definition/problem.htmlhttp://www.businessdictionary.com/definition/cash-flow.htmlhttp://www.investorwords.com/10666/potential.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.businessdictionary.com/definition/efficiency.htmlhttp://www.investorwords.com/10019/indicate.htmlhttp://www.investorwords.com/10438/number.htmlhttp://www.businessdictionary.com/definition/average-inventory.htmlhttp://www.businessdictionary.com/definition/average-inventory.htmlhttp://www.businessdictionary.com/definition/cost-of-sales.html


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Page No.63

important aspect of the company's ability to manage inventory while

attempting to increase sales.

Sales to total inventoryA financial measure of a company's performance that gives investors an idea

of how long it takes a company to turn its inventory (including goods that

are work in progress, if applicable) into sales.

This measure is one part of the cash conversion cycle, which represents the

process of turning raw materials into cash. The days sales of inventory is the

first stage in that process. The other two stages are days sales outstanding and

days payable outstanding. The first measures how long it takes a company to

receive payment on accounts receivable, while the second measures how long it

takes a company to pay off its accounts payable.

From graph it is showing that sales to inventory ratio is maximum in 2009 and

from 2010 it is continuously decreasing this signify the Days of sale

Inventory(DSI)is increasing ,i.e. IOCL is taking longer period to turn its

inventory into sales.So,it take delay on converting the raw material into cash.

Conclusion:IOCLs efficiency is turning its inventories has risen in 2009 from2008 and then it is continuously deteriorating from 2009.The companys

companys utilization of inventories in generating sales is poor from 2009; theyearly holding of all types of inventories is increasing.


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Page No.64

Receivables Analysis


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Page No.65

INTRODUCTION:A sound managerial control requires proper liquid management of liquid assetsand inventory. These assets are a part of working capital of the business. Anefficient use of financial resources is necessary to avoid financial distress.Receivables result from credit sales. A concern is required to allow credit salesin order to expand its sales volume; it is not always possible to sell goods oncash basis. Sometime other concern in that line might establish a practice ofselling goods on credit basis. Under these circumstances it is not possible toavoid credit sales without adversely affecting sales. The increase in sales is alsoessential to increase profitability. After a certain level of sales this increase insales will not proportionately increase production costs. The increase in saleswill bring in more profits.

Receivables constitute a significant portion of current assets of a firm. But for

investment in receivable a firm has to incur certain costs. Further there is arisk of bad debts also. It is therefore very necessary to proper control andmanagement of receivables.Cash is the most important component of current assets; therefore the firm

basic strategies are to reduce the operating cash requirement. The companys

aim is to accelerate the collection of receivables so as to reduce the average

collection period. The receivables represent an important component of current

assets of a firm. The purpose of this analysis is the important dimension of

efficient management of receivables within the framework of a firm objective

of value maximization.

The term receivables are defined as debt owed to the firm by customer arisingfrom sale of goods or services in the ordinary courses of business. Receivablemanagement is also called trade credit management. Thus account receivablesrepresent an extension of credit to customers allowing them a reasonableperiod of time in which to pay for the good received.

OBJECTIVE OF DEBTORS MANAGEMENTIt is not always possible to sell goods on cash basis only, sometimes other firmsin that line might have establish a practice of selling goods on credit underthese circumstances, it is not possible to avoid credit sales without adverselyaffecting the sales. Hence the firm is required to allow the credit sale in orderto expand its sales volume. The increase in sales is also essential to increaseprofitability. The sales of goods have become an essential part of the modern


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Page No.66

competitive economic system. In fact credit sales and receivables are treated asa marketing tool to aid the sale of goods. Credit sale is generally made in anopen account in the sense that there is no formal acknowledgement of debtobligation through a financial instrument. As a marketing tool they are indeneto promote sales and thereby profits. However extension of credit involves risk

and cost. Management should weigh the benefits as well as the costs todetermine the goals of receivable management.

Thus the objective of receivable management is:

To promote sales and profit until that point is reached where the return oninvestment in further funding of receivable is less than the cost of funds raisedto finance that additional credit(i.e. cost of capital)

The objective of receivable management is to promote sales and profit until

that point is reached where return on investment in further fundingreceivables is less than cost of funds raised to finance that an additional credit,i.e. cost of capital. The specific costs and benefits which relevant to thedetermination of receivables management are examined below.

NEED FOR GRANTING TRADE CREDIT:Trade credit is an important marketing tool. A policy of trade credit isfollowed nearly in all capital intensive industries either for sales expansion and/or sales retention. Under any circumstances investment in receivable isgrowth oriented.

Various factors that favors credit

Market factor: Market factors like price, forces accompany to grant credit inorder to maintain sale.

Competition: In view of stiff competition from both domestic and internationalplayers, the company is left with no option then to grant credit. Competition isanother vital factor, which affects the credit policy of a firm, and IOCL is notan exception.

Customer Requirements:As the market has changed to the buyers market, thecustomers have become kings. If the customer expects credit and is worthy of it,he gets it.

Marketing Tools: T o push up sales of slow moving products and encourage bulkpurchase of fast moving products, credit plays an effective role in this context.


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Page No.67

Recessionary Economic Conditions: Liquidity crunch forces the company togrant credit.

DETERMINANT OF SIZE OF RECIEVABLES:-Beside sales, a number of factors also influence the size of receivables. Thefollowing factors directly or indirectly determine the size accounts receivables.

1) Level of sales: The most important factor in determining the volume ofreceivable is the level of firms credit sales. With an increase in the size of thesales,it may bring about a proportional increase in the magnitude of receivable.

2) Credit policies: The firm with the liberal credit policy will have a higherlevel of receivable than with a conservative or rigid credit policy.

3) Terms of trade: The size of receivables also depends upon the term of trade.4) The period of credit allowed and rates of discounts given are linked withreceivables. If the credit period allowed is more, the receivable will also be more

similarly if the rate of discount are reasonable, then also the size of the

receivable will increase.

5) Profit: The level of receivables increases as a result of increase in sales.6) When sales increase beyond a certain level, the additional cost incurred areless than the increase in revenue. It will be beneficial to increase sales beyond a

point because it will bring more profit. The increase in profit will be followed

by an increase in the size of the receivable.

7) Market: It may be necessary for the firm to explore a new market for its8) Products/services. One of the attractive way in which a firm enters a newmarket is by giving incentives to the customers in the form of credit facilities.

In doing so, the size of receivable will increase.

9) Grant of credit: Size of the receivable depends upon the policies andpractices of the firm in determining which customer are to be granted credit.


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Page No.68

10) Paying habit of the customer: The paying habits of the customers also havea bearing on the size of receivables. The customers may be in habit of delayingpayments even though they are financially sound. In such case, the firm shouldremain in constant touch with its customers.

11) Collection policies: The vigor with which affirm collects its dues from thecustomers also affects its receivables, for if the amounts due are not collectedtimely; a firm suffers some financial difficulties, if not losses.

12) Operating efficiency: The degree of operating efficiency in billing, recordkeeping and other function also exercise some influence on a firms creditpolicywhich in turn influences its receivables.

13) Credit collection: The collection of credit should be streamlined. Efficientcredit collection machinery will reduce the size of receivable. Individual firm ofternset up their own well organized credit collection department

COSTS:The major categories of cost associated with the extension of credit and accountreceivables are:1) Collection cost2) Capital cost3) Delinquency cost4) Default costCollection Cost:These are administrative cost incurred in collecting the receivables from thecustomer to whom credit sales have been made.Capital Cost:The increased level of accounts receivables is an investment in assets. There istime lag between the sale of goods to, and payment by the customer. Meanwhilethe firm has to pay employees and suppliers of raw materials. Therebyimplying that firm should arrange for additional funds to meets its ownobligation while waiting for payments from its customers. The cost on the use ofadditional capital to support credit sales, which alternatively could beprofitability employed elsewhere, is , therefore a part of extending credit orreceivables or capital cost.Delinquency Cost:This cost arise out of the failure of the customers to meet their obligation whenpayment of credit sales become due after the expiry of credit period, the cost


38/101

Page No.69

are (i) blocking of funds for extending period, (ii) cost associated with steps thathave to be initiated to collect the overdue, such as reminders and othercollection efforts, legal charges etc.Default Cost:The firm may not be able to recover the over dues because of the inability of the

customers. Such debts are treated as bad debts these cost associated with creditsales and accounts receivables.

BENEFITS:Apart from the cost, another factor that has a bearing on accounts receivableis the benefit emanating from credit sales. The benefits are:The increased sale and thereby profits.However, the benefits would depend upon the credit policy adopted by the firm,i.e., a conservative or liberal credit policy. The impact of liberal credit policy is

likely to have two forms:-i. Sales expansionii. Sales retention

In sales expansion a firm may grant credit either to increase sales or to attractnew customer. This motive is growth oriented; on the other hand the salesretention the firm may grant credit to protect its current sales againstemerging competition. No matter whatever is the motive, the result the resultof increased sales is the increase the profit of the firm.

What are Debtors?Debtors are people or other firms who owe money to the firm. This will usuallyhappen where the firm has sold goods with a period of credit. The firm sells thegood or service but allows the purchaser a period of credit to pay - usually amonth. During this month the purchaser owes the firm the money and istherefore a debtor. If the firm has debts these are considered an asset, becausewhen the debtors pay the firm will have converted the debt into cash in thebank. Because most debts are relatively short-term they are considered currentassets. The other current assets are stocks and cash. The amount of debtors afirm has depends on the line of business they are in. If most of their business iswith trade customers where they have to offer credit then the level of debtorsmay be high. For many retail businesses, however, the level of debtors will tendto be relatively low as most of their sales are cash sales.


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Page No.70

Ways to manage debtors - credit policy and collection procedure:-A sale is not a sale until the money is in your bank account. Having aneffective credit policy and collection procedure in place is one of the mostimportant facets of owning your own business. When it comes to dealing with

customers who seem unwilling to pay on time it can mean the differencebetween prosperity and failure

Credit policy: -Credit policy effects debtor management because it guides management abouthow to control debtors and how to make balance between liberal and strictcredit. If company does not restrict to sell the products on credit after a givenlimit of sale. This liberated credit policy will increase the amount of sale andprofitability. But risk will also increase with increasing of sale. If we sell the

good to those debtors whose capability to pay is not good, then it is possible thatsome amount will become bad debts. Company can increase the time limit forpaying by such debtors. On the other hand, if companys credit policy is strict,then it will increase liquidity and security, but decrease the profitability. So,finance manager should make credit policy at optimum level whereprofitability and liquidity will be equal. We can show it graphically.

Profitability

Security Risk LevelLevel OptimumLiquidity

Strict Liberal


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Page No.71

CREDIT TERMSCredit terms refer to the terms and conditions on which the trade credit will be

made available. Thus the stipulations under which the goods are sold on creditare referred to as credit terms. These relate to the repayment of the amountunder the credit sale. These terms can be finalalized after the scrutiny ofnumber of factors. The various factors which must be taken into account are:

The SellerCompanys place in the market and the credit terms on whichit is buying from its own suppliers.

The availability of the capital it needs to finance its own credit sales andwhether this is to be borrowed and if so at what cost; also the availabilityof capital to finance the payment of other overheads.

The existence of buyer and sellers market The volume of sales planned and how these will be spread over the

range of customers. The profit margin to be obtained. The competitive factors. The character of the market

A.The period the buyer will have the goods i.e. the buying companys inventoryturnover and average collection period will ultimately decide the sellingcompanys credit terms.B.The condition of the customer finances and the degree of the credit risk, whichthe credit sale will involve.

CREDIT TERMS HAS THREE COMPONENTS :-i. Credit periodii. Credit limitiii. Cash discount

CREDIT PERIOD: is the duration of time for which trade credit is extended.During this period the customers must pay the overdue amount.

CREDIT LIMIT: is decided by the top management and varies according to themarket condition. This total amount is broken up into regional limits, which isfurther segregated into monthly limits within which the different parties haveto accommodate. This function is performed by the credit control committee asdiscussed above.


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Page No.72

CASH DISCOUNT: is offered to induce the customers to make promptpayments. The customers can take advantage of discount if they pay theamount within the tipulated time.

DETAILS OF DEBTORS:-Amount in Rs. (Cr.)

March-11 March-10 March-09 March-08Over Six Months:a) From Subsidiary Companies

Unsecured, Considered Good

b) From Othersi) Secured Considered Good

ii) Unsecured, Considered Goodiii) Unsecured, Considered Doubtful

Other Debts :a) From Subsidiary Companies


b) From Othersi) Secured Considered Good

ii) Unsecured, Considered Good

ii) Unsecured, Considered Doubtful

TotalLess : Provision for Doubtful Debts

TOTAL

1.22

0.00

819.41372.82

1,193.45

2,084.19

50.00

5,914.83

55.218,104.23

9,297.68428.03

8,869.65

7.10

1.38

130.51

419.97

558.96

770.56

45.44

4,844.29

48.765,709.05

6,268.01468.73

5,799.28

28.69

8.18

53.77499.61

590.25

1,553.15

139.93

4,154.14

41.81

5,889.03

6,479.28541.42

5,937.86

162.19

0.00

43.70540.30

746.19

1,950.22

138.31

4,526.12

3.076,617.72

7,363.91

543.37

6,820.54


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Page No.73

A debtor is an entity that is indebted to the company. Typically,

customers who have not paid up for goods and services taken from the

company are the company's debtors. Sundry debtors are the amount that

the company's customers owe it for goods and services provided by it.

IOCL distinguish sundry debtors by the period for which such paymentsfrom customers have been outstanding.

1. Sundry debtors, outstanding less than six months: - This data fieldcaptures sundry debtors that have been outstanding for less than

six months. It includes subsidiary companies and others and all

secured and unsecured good debtors and unsecured doubtful

debtors outstanding for less than six months.

2. Sundry debtors, outstanding over six months: - This data fieldcaptures sundry debtors that have been outstanding for more thansix months. It includes all secured and unsecured debtors

outstanding for more than six months. IOCLreports the net amount

of Sundry Debtors in this field i.e. reduced by the amount of

provision made if any for Doubtful Sundry Debtors (Secured or

Unsecured and outstanding for a period more than six months). In

case the annual report is not specific as to whether the "provision

for bad / doubtful debtors" is in respect of " Debtors outstanding for

a period Less than six months" or in respect of " Debtors

outstanding for a period more than six months", we consider theprovision to be in respect of " Debtors Outstanding for a period

more than six months"


43/101

Page No.74

IOCL maintain three types of debtors

Secured, Considered Good

Unsecured Considered Good

Unsecured, Considered Doubtful

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

10,000.00


Other

Debts

Over Six

Months

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000


Unsecured

Considered

Doubtful

Secured

Considered Good

Unsecured

Considered Good


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Page No.75

DEBTORS (ACCOUNT RECEIVABLE) TURNOVER:-A firm sells goods for cash and credit. Credit is used as a marketing tool by a

no. of companies. When the firm extends credit to its customer debtors (account

receivable) are created in the firms account. Debtors are convertible into cash

over a short period and, therefore are included into current assets. The

liquidity position of the firm depends on the quality of debtors to a greater

extent.Finanacial analysis apply two ratios to judge the quality or liquidity of

debtors:

a) Debtors Turnover

b) Collection Turnover

Net SaleDebtors Turnover=

AverageDebtors

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

March-11

March-10

March-09 Mrach-08

Net SaleAverageDebtors

302,954.37

7,334.465

249,271.35

5,868.57

262,715.31

6,379.2

224,405.38

6,778.30

DebtorsTurnover 41.36 42.48 41.18 33.10

Days ofCollection 8.71 8.48 8.74 10.87

Analysis of the Debtors over the years:Debtors Turnover:-Debtors turnover indicates the number of times debtors turnover each

year, i.e. how rapidly receivables are collected. A high ratio is indicative

of shorter time-lag between credit sales and cash collection. A low ratio


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Page No.76

shows that debts are not being collected rapidly. Generally, the higher the

value of debtors turnover, the more efficient is the management of credit.

Collection Period:-The average collection period measures the quality ofdebtors since it indicates the speed of their collection. The shorter theaverage collection period, the debtors the quality of debtors, since a short

collection period implies the prompt payments by debtors. The average

collection period should be compared against the firms credit terms and

policy to judge its credit and collection efficiency.

The above graphs show that the higher debtors turnover ratio and

the shorter the average collection period, the better is the trade credit

management and the better is the liquidity of debtors. On the other hand,

low turnover ratio and longer collection period reflect delayed payment

by debtors.

In IOCL debtors turnover ratio and as well as collection period

moreorless same.

1. In 2011 debtors turnover ratio of 41.36 signifies that debtors

get converted in to cash 41.36times. Debtors turnover ratio

is decreased by 2.63% from 2010 years. As in 2010 debtors

turnover ratio of 42.48 signifies that debtors get converted in

0

10

20

30

40

50

Year 2011Year 2010Year 2009Year 2008

Debtors Turnover

Debtors

Turno

0

2

4

6

8

10

12

Year 2011Year 2010Year 2009Year 2008

Collection Period

Collec

tion

Period


46/101

Page No.77

to cash 42.48 times. So, in 2010 credit management is more

efficient than 2011.In 2009 the ratio is 41.18 which is declined

by 3.06% from the 2010.

So, in 2010 debtors turnover ratio is highest to the 2011 and 2009s

turnover ratio which signifies that in 2010 debtors get fastlyconverted in to cash comparatively other two years debtors.

2. In 2011 collection period of 8.71 days implies that debtors on

an average are collected in 8.71 days.

In 2010 collection period of 8.48 days implies that debtors on

an average are collected in 8.48 days. In 2010 the debtors are

collected faster than 2.64% from 2011.

In 2009 collection period of 8.74 days implies that debtors on

an average are collected in 8.74 days. In 2010 the debtors are

collected faster than 2.96% from 2009.


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Page No.78

Cash & Bank Analysis


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Page No.79

How much cash should a company keep on hand or "on short call" at a bank?The more cash which is on hand, the easier it will be for the company to meet

its bills as they fall due and to take advantage of discounts. However, holdingcash or near equivalents to cash has a cost in terms of the loss of earning whichotherwise have been obtained by using the funds in another way. The financialmanager must try of balance liquidity with profitability.

How much cash should a organization keep on hand? Enough cash to make payments when needed. (transactions motive)

(Daily or Weekly Cash Budget helpful) Additional cash may be held for unexpected requirements.

(precautionary motive)

The size of the minimum cash balance depends on: How quickly and cheaply a organization can raise cash when needed. How accurately managers can predict cash requirements.

(Cash Budget helpful) How much precautionary cash the managers need for emergencies.

The organizations maximum cash balance depends on: Available (short-term) investment opportunities

e.g. money market funds, CDs, commercial paper Expected return on investment opportunities.

e.g. If expected returns are high, organizations should be quick toinvest excess cash

Transaction cost of withdrawing cash and making an investment Demand for Cash for daily transactions

(Cash Budget helpful)


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Page No.80

Cash & Bank Details:-Amount in Rs. (Cr.)

March-11 March-10

March-09

March-08

Cash Balances:a) Cash balances, including imprest

b) Cheques in hand

Bank Balances with Scheduled Banks :a) Current Account

b) Fixed Deposit Account

c) Blocked Account

Bank Balances with Non-Scheduled Banks :Bank of Commerce & Development, Libya

[Maximum balance during the year Rs. 0.50Crore]Myanmar Economic Bank Branch(5),Rangoon[Maximum balance duringthe year Rs. 0.88Crore]Total

2.26

159.92

162.18

480.34

650.50

0.17

1131.01

0.44

0.79

1.23

1294.42

2.13

435.66

437.79

477.36

398.55

0.17

876.08

0.44

0.80

1.24

1,315.11

2.07

498.73

500.80

294.23

1.46

0.16

295.85

0.49

0.88

1.37

798.02

2.48

746.96

749.44

64.57

9.38

0.16

74.11

0.00

0.88

0.88

824.43


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Page No.81

Interpretation:Cash balance for the year 2008 is749.44 and bank balance is 74.99.But in 2009

cash balance is reduced but bank balance is increased but all over cash and

bank balance decreased by 3.20% from 2008. From 2008 the cash balance is

continuously decreasing and bank balance continuously increasing. Overall

cash and bank balance is maximum in 2010.in 2011 furthermore overall cash

and bank balance is decreased by 4.995% from 2010.

Recommendations:

As observed, large amounts of cheques remain outstanding as at the year-end.

This is because of the facts that, a significant amount of cheques are collected

from the debtors in the month of March and these are not deposited to the bank

before the annual closing of accounts. Hence, these cheques should be ideally

collected much before closing of accounts and deposited in the bank for

collection.

0

200

400

600

800

1000

1200

1400


Cash & Bank Balance

Cash &

Bank

Balance


51/101

Page No.82

This would also result in accurate preparation of The Bank Reconciliation

Statement as well as proper maintenance of debtors balances at the year-end.

It is also observed that IOCL keeps a very low amount of cash in hand as

compared to the size of its operations. Thus it should try to release most of thecapital blocked in various investment projects at the year-end and maintain a

healthy cash balance so as to meet any contingencies.

Loans &Advances, Claims & Deposits


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Loans and advances made by the company to other business enterprises andof the same business group that are outstanding at the end of the balance sheet

date. It includes all loans and advances whether with or without interest and

whether to group or other business enterprises. It includes all loans and

advances whether with or without interest.

Loan & advances considered good & secured: - This data field captures the valueof all those loans that the company considers as good in terms of their being

serviced or likely to be serviced as expected in the future and those that are

secured with appropriate collaterals or guarantees. This is a subset of the total

loans and advances of the company as at the balance sheet date.

Loan & advances considered good & but not secured:- This data field capturesthe value of all those loans that the company considers as good in terms of their

being serviced or likely to be serviced as expected in the future. But, these loansare not secured with appropriate collaterals or guarantees. etc. This is a subset

of the total loans and advances of the company as of the balance sheet date.

Loan & advances considered doubtful & not secured: - This data field capturesthe value of all those loans that in the company's view not being serviced or arenot likely to be serviced as expected in the future. The loans are unlikely to berepaid or the interest on them is unlikely to be paid on time. This is a subset ofthe total loans and advances of the company as of the balance sheet date.

Sometimes, Companies fail to report doubtful loans and advances. In such acase, the Auditors' Report provides information about the amount of doubtfulloans and advances and the amount of provision, the company was supposed tomake. The amount of such doubtful advances identified, will be reported in thisfield.


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DERAILS OFLOAN AND ADVANCES:-

March-11 March-10 March-09 March-08

Advance recoverable in cash or in kind orfor value to be received:a) From Subsidiary Companies


b) From Othersi) Secured, Considered Good


Less : Provision for Doubtful Advances

Amount Recoverable from Govt. Of India:Unsecured, Considered GoodAdvances for InvestmentsFinance Lease Receivables

Claims Recoverable :a) From Subsidiary Companies


b) Othersi) Secured, Considered Good


Less : Provision for Doubtful Claims

Balance with Customs, Port Trust and

2.48

728.805,288.09

46.726,063.61

6,056.0946.72

6,019.37

10,959.1623.0311.72

.61

0.001,047.3751.56

1,099.541,099.54

51.561,047.98

0.84

792.311,693.97

46.782,533.06

2,533.9046.78

2,487.12

8,105.1461.5614.81

0.32

0.00997.7443.26

1,041.001,041.32

43.26998.06

0.45

949.071,667.74

5.482,622.29

2,622.745.48

2,617.26

6,320.6117.5919.62

0.00

0.101,172.2240.58

1,212.901,212.90

40.581,172.32

1.74

866.132,037.92

3.862,907.91

2,909.653.86

2,905.79

7,733.02

0.10900.5141.16

941.77941.7741.16

900.61


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From graph it is showing that though in 2008 the amount of loan and advances is

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00


Loan and Advances

Loan andAdvances

Excise Authorities:Unsecured, Considered Good

Deposits for Leave Encashment FundAdvance Tax(net)Materials given on loan:To Others:

i) Secured, Considered Good

ii) Unsecured, Considered Good

To subsidiary Companies :Secured, considered GoodsLess: Deposits received

Sundry Deposits (including amountAdjustable on receipt of Final bills ):i) Secured, Considered Good


Less : Provision for Doubtful Deposits

Total

39.78

1,483.728,055.00

0.000.810.81

0.080.09

(0.01)0.80

9.141,705.51

0.141714.65428.85

1285.80

22,666.56

33.75

1,262.760.00

0.040.000.04

0.000.000.000.04

9.141,756.45

0.121,765.71

0.121,765.59

14,728.83

37.17

0.000.00

0.000.200.20

0.000.000.000.20

9.021,681.32

0.081,690.42

0.081,690.34

11,875.11

39.07

298.09

0.380.380.00

0.000.000.00

9.001,669.13

0.031,678.16

0.031,678.13

13,554.71


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Page No.86

high but it declined in 2009 and again from 2010 the tendency of loan andadvances are upwarding.IOCL maintain advances in the following terms:

1. Advance recoverable in cash or in kind or for value to be received:2. Amount Recoverable from Govt. Of India:

3. Advances for Investments4. Finance Lease Receivables5. Claims Recoverable :6. Balance with Customs, Port Trust and Exc7. Deposits for Leave Encashment Fund8. Advance Tax(net)9. Sundry Deposits (including amount10.Adjustable on receipt of Final bills )

Increased loan & advances increase the benefit of received cash in future.When the loan & advances increased it also signify that the amount of

getting interest also high which will be profitable for the company. It alsomaintain to increase the working capital

OTHER CURRENT ASSET:Amount in Rs. (Cr.)

March-11 March-10 March-09 March-08Interest Accrued on Investments/Bank Deposits

Gold Coins in Hand (at Cost)

Receivable from IBP TrustLess : Provision for Diminution

Receivable from BRPL Trust

Total

184.40

3.44

1840.99971.99

869.00

178.79

1,206.03

214.92

5.65

1,840.991,068.85

772.14

148.79

1,141.50

393.04

3.52

1,840.991,334.76

506.23

148.79

1,051.58

184.80

3.44

1840.99971.99

869.00

148.79

1,206.03


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Page No.87

Payable Analysis


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Page No.88

INTRODUCTION:-Trade credit refers to the credit extended by the supplier of goods and servicesin the normal course of transaction/business/sale of the firm. According to

trade practices, cash is not paid immediately for purchase but after an agreed

period of time. Thus, deferral of payment (trade credit) represents a source of

finance for credit purchase.ADVANTAGES:-Trade credit, as a source of short-term/working capital finance, has certain

advantages. It is easily almost automatically, available. Moreover, it is a

flexible and spontaneous source of finance. The availability and magnitude oftrade credit is related to the size of operations of the firm in terms of

sales/purchase.

COSTS:-Trade credit does not involve any explicit interest charge. However; there is an

implicit cost of trade credit. It depends on the credit terms offered by the

supplier of goods.

Cash discount:-Cash discount implies a percentage deduction from the purchaseprice if the buyer pays within a specified time that is shorter than the credit

period.

Trade credit period: - Trade credit period is the number of days until fullpayment of an account payable is required.

Cash discount period: - Cash discount period implies the number of days afterthe beginning of the credit period during which the discount is available.

Cost of trade credit: - Cost of trade credit is the implicit cost of not availingcash discount.


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Page No.89

The Details of Current Liabilities & Provision:-Amount in Rs.Crore

March-11 March-10 March-09 March-0Current LiabilitiesSundry Creditors:

i) Total Outstanding Dues of Micro Enterprisesand Small Enterprises

ii) Total Dues of creditors other than MicroEnterprises and Small Enterprises

Other Liabilities

Dues to Subsidiary Companies

Investor Education & Protection Fund Shall becredited by the following amount namely :- Unpaid Dividend- Unpaid Matured Deposits

Security DepositsLess : Investments and Deposits with Banks

lodged by outside parties

Liability on Foreign Currency ContractsLess Foreign Currency Receivables

Interest accrued but not due on loans

Total Current LiabilitiesProvisionsProvision for Taxation:

Provision for Current Tax

Less : Advance payments

Provision for Fringe Benefit Tax

Less : Advance payments

Total Provisions for Taxation(Net of Adv tax)

25.66

34,427.5034,453.16

6,951.781,592.37

8.140.01

8.159,008.86

0.009,008.66

3028.58

2965.9062.68

472.94

52,549.94

8,134.08

8,207.12(73.04)

44.5253.03(7.51)

0.00

16.09

19,750.5919,766.68

5,553.40695.26

6.810.01

6.827,954.97

0.017,954.96

1,628.94

1,587.2141.73

461.32

34,480.17

12,043.30

9,887.132,156.17

80.5888.04(7.46)

2,148.71

22.03

19,659.0019,681.03

5,010.35864.43

6.660.05

6.716,938.21

0.046,938.17

795.29

732.6562.64

378.84

32,942.17

7,330.72

7,053.34277.38

111.53111.93

(0.40)

276.98

16.5

19,348.819,365

5,103

1,582

5.890.08

56,468.92

0.046,468

341.00

172.84168202

32,896.3

7,369.47

7,369.470.00

126.12126.120.00

0


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Page No.90

Proposed Dividend

Corporate Dividend Tax

Provision for Employee Benefits

Provision for Contingencies

Total ProvisionsTOTAL

2306.55359.14

2605.09

1492.686763.48

59,313.40

3,156.34508.83

3,191.54

1,266.1410,271.56

44,751.73

910.48

154.74363.28

904.072,609.55

35,551.72

655

76310

6411,684

34,580.9

What Does Accounts Payable Turnover Ratio Mean?A short-term liquidity measure used to quantify the rate at which acompany pays off its suppliers. Creditors turnover ratio indicates the speedwith which the payments are made to the trade creditors.

The average payment period ratio represents the number of days by thefirm to pay its creditors.

Accounts payable turnover ratio is calculated by taking the totalpurchases made from suppliers and dividing it by the average accountspayable amount during the same period.

Net Purchase

Creditors Turnover=

AverageCreditors

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

March-11 March-10 March-09 March-08Raw MaterialPurchase

Purchase of Products& Crude for resale

Total Purchase

150,484.12

155,648.10

306,132.22

123,704.72

122,084.15

245,788.87

131,482.60

136,245.71

267,728.31

105,525.48

121,056.61

226,582.09

Average Creditors 27109.92 19723.855 19,523.2 19,365.37Creditors Turnover 11.29 12.46 13.71 11.70Deferral Period 31.88 28.88 26.25 30.77


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Page No.91

Interpretation:In the graph it is showing that creditors turnover ratio is decline & averagepayment period is increasing year by year. It shows slowly with thepayments are made to the suppliers for the purchase made from them.

In 2011 the credit turnover ratio of11.29, indicate that the creditors are

being turned over 11.29 times during the year. It indicates the number of

rounds taken by the credit cycle of payables during the year.

But in 2010 the credit turnover ratio of12.46, indicate that the creditors

are being turned over 12.46 times during the year and in 2009 the credit

turnover ratio of13.71, indicate that the creditors are being turned over

13.71 times during the year.

This means the company has settled the creditors dues very slowly than

the previous year.

Longer average payment period or smaller payable turnover ratio may

indicate more period of credit enjoyed by the business it may be due to the factthat either business has not better liquidity position; & may be not believe in

availing cash discount .The company cannot consequently enjoys better credit

standing in the market or business credit rating among suppliers is not good

and therefore they do not allow reasonable period of credit. The above two

0

5

10

15

20

25

30

35


Creditors

Turnover

Deferral

Period


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Page No.92

alternative conclusions are contradictory of each other therefore the ratio

should be interpreted with caution.

OPERATING CYCLE ANALYSIS


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Page No.93

Operating Cycle:-The firm has to invest in a fund in current assets for generating sales. Current

assets is needed because sales do not convert into cash insatnteneously.There is

allows an operating cycle involve in the conversion of sale into cash. There is adifference between current and fixed assets in terms of their liquidity.

The firmsGross operating cycle (GOC) can be determined as inventoryconversion period (ICP) plus debtors conversion period (DCP).

GOC=ICP+DCP

The diagram above shows in a simplified form the chain of

events in a manufacturing firm.

1 ) The chain starts with the firm buying raw materials on credit.2) In due course this stock will be used in production, work will be carried

out on the stock, and it will become part of the firmswork-in-progress.3) Work will continue on the WIP until it eventually emerges as the finished

product.

4) As production progresses, labor costs and overheads need have to be met.

Purchase Payment Credit Sale Collection

RMCP+WIPCP+FGCP

Inventory conversion Period Receivable conversion Period

Gross Operating Cycle

Payable Net Operating Cycle


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Page No.94

5) Of course at some stage trade creditors will need to be paid.

6) When the finished goods are sold on credit, debtors are increased.

7) They will eventually pay, so that cash will be injected into the firm

Inventory conversion period: ICP is the sum of raw material conversionperiod (RMCP), work-in-process conversion period (WIPCP) and finished goods

conversion period (FGCP)

Raw material conversion period (RMCP): RMCP is the average time taken toconvert the raw material into work-in-progress.RMCP depends on:

a) raw material conversion per day

b) raw material inventory.

Raw material = Raw material inventory

conversion period [Raw material consumption]/360

Work-in-process conversion period (WIPCP): WIPCP is the average time takento complete the semi finished or work-in-progress.

Work-in-process = Work-in-process inventory

conversion period [cost of production]/360

Finished goods conversion period(FGCP): FGCP is the average time taken tosell the finish goods.

Finished goods = Finished goods inventory

conversion period [cost of goods sold]/360

Debtors conversion period (DCP): DCP is the average time taken to convertdebtors into cash.DCP represents the average collection period.


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Page No.95

Debtors = Debtors

conversion period Credit sales/360

Creditors (payables) deferral period (CDP): CDP is the average time taken by thefirm in paying its suppliers (creditors).

Credit deferral = Creditors

period Credit purchases/360

Cash Conversion or Net operation cycle (NOC): NOC is the difference betweengross operation cycle and payables deferral period

NOC=GOC CDP

March-11 March-10 March-09 March-10GROSS OPERATING CYCLE1.Inventory Conversion Period

i) Finished Goodsii) Work-in-progressiii)Raw Material

2.Debtors Conversion Period

3.Gross Operating Cycle(1+2)

4.Payment Deferral Period

42.127.38

46.85

96.35

8.71

105.06

31.88

415.7436.10

82.84

8.48

91.32

28.88

30.61

4.2629.43

64.3

8.74

73.04

26.25

41.135.80

41.2388.16

10.87

99.03

30.77

NET OERATING CYCLE(3-4) 73.18 62.44 46.84 68.26


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The Operating cycle definition, also known as cash operating cycle or cashconversion cycle or asset conversion cycle, establishes how many days it takesfor a company to turn purchases of inventory into cash receipts from itseventual sale.

This means that on average it takes 73.18 days for a company to turnpurchasing inventories into cash sales. In regards to accounting, operatingcycles are essential to maintaining levels of cash necessary to survive.Maintaining a beneficialnet operating cycle ratio is a life or death matter.The operating cycle concept indicates a companys true liquidity. By tracking

the historical record of the operating cycle of a company and comparing it toits peer groups in the same industry, it gives investors investment quality of acompany. A short company operating cycle is preferable since a companyrealizes its profits quickly and allows a company to quickly acquire cash thatcan be used for reinvestment. A long business operating cycle means it takeslonger time for a company to turn purchases into cash through sales. Ingeneral, the shorter the cycle, the better a company is since less time capital istied up in the business process.

A shortcash cycle reflects sound management of working capital. On the otherhand, a longcash cycle denotes that capital is occupied when the commercialentity is expecting its clients to make payments.There is always a probability that a commercial enterprise can face negativecash conversion cycle, in which case they are getting payments from the clientsbefore any payment is made to the suppliers.The more the manufacturing procedure is extended, the higher the amount ofcash should be kept engaged in inventories by the company. Likewise, the more

0

10

20

30

40

50

60

70

80


Net Operating Cycle

Net Operating

Cycle


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Page No.97

time is taken for the clients for the purpose of bill payment, the more is theaccounts receivable amount. From another viewpoint, if a company is able todetain the payment for its internal inputs, it can decrease the amount ofmoney required. Put differently, the net working capital is dimin

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