Mahesh Final

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CONTENTS

CHAPTER 1:

EXECUTIVE SUMMARY 03

INTRODUCTION 05

PURPOSE OF THE STUDY 06

OBJECTIVE OF THE STUDY 07

RESEARCH METHODOLOGY 08

CHAPTER 2:

PROFILE OF RASHTRYA ISPAT NIGAM LIMITED

BACK GROUND 10

PROFILE 11

VISION, MISSION & OBJECTIVES 15

POLICIES & RULES OF RINL 17VSP ACHIEVEMENTS AND AWARDS 18

PERFORMANCE OF RINL AT A GLANCE 19

BOARD OF DIRECTORS 22

CHAPTER 3:

THEORETICAL FRAME WORKINDUSTRY ANALYSIS 23

GLOBAL SCENARIO INDIAN STEEL INDUSTRY

SWOT ANALYSIS 28

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WORKING CAPITAL MANAGEMENT 32

INVENTORY MANAGEMENT 44

CASH MANAGEMENT 49

RECEIVABLE MANAGEMENT 51

PAYABLE MANAGEMENT

WORKING CAPITAL TURN OVER RATIO 56

INVENTORY TURN OVER RATIO 60

CASH MANAGEMENT IN VSP 79RECEIVABLE TURN OVER RATIO 84

PAYABLE TURN OVER RATIO 89

CAPTER-5

ANALYSIS OF WORK

CHAPTER-6

FINDINGS 92

SUMMARY AND SUGGESTIONS 94

CONCLUSION 98

BIBLOGRAPHY 100

EXECUTIVE SUMMARY

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Working capital is the capital required for maintenance of day-to-day business

operations. The present day competitive market environment calls for an efficient

management of working capital. The reason for that is attributed to the fact that an

ineffective working capital management may force the firm to stop its business operations,

may even lead to bankruptcy. Hence the goal of working capital management is not just

concerned with the management of current assets & current liabilities but also in

maintaining a satisfactory level of working capital.

Holding of current assets in substantial amount strengthens the liquidity position &

reduces the risk but at the expense of profitability. Therefore achieving risk-return trade

off is significant in holding of current assets. While cash outflows are predictable it runs

contrary in case of cash inflows. Sales program of any business concern does not bring

back cash immediately. There is a time lag that exists between sale of goods & sales

realization. The capital requirement during this time lag is maintained by working capital

in the form of current assets. The whole process of this conversion is explained by the

operating cycle concept.

This study gives in detail the working capital management practices in VSP.

Management of each current assets, namely inventory management, cash management,

accounts receivable management is studied permanent to VSP. Similarly management of

accounts payable is studied to understand the managing of current liabilities. A part from

this concept of operating cycle is studied.

The research methodology adopted for this study is mainly from secondary sources

of data which include annual reports of VSP, & website of the company. The use of

primary sources is limited to interviews with few of the employees in finance department.

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The study of working capital management has shown that VSP has a strong

working capital position (from 2002-till date) since its inception. The company is also

enjoying reasonable net profits from 2002 onwards. VSP employs forex funds instead of

domestic loans & W.C facilitates for procurement of their major raw materials. VSP sales

position is also very encouraging. Its excellent performance is attributed to reduced cost of

production.

The overall position of VSP is good & the same is expected by continue

considering its existing management policies, management of exchange rate risk,

competing with domestic and global players in terms of quality & quantity.

INTRODUCTION

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Capital is essential for the setting up and smooth running of any business.

Investments made on fixed assets will yield excess cash inflows apart from the payback

amount and is spread over a longer period of time. Hence the cash inflows (or) benefits

associated are not immediate but are expected in the future. Cash inflows & outflows occur

on a continuous basis in case of current assets. Credit forms an essential feature in the

business (credit given to customers & credit from suppliers). Since there is some time lag

from the time of sales & sales realization current assets & current liabilities, which

together constitute the net working capital, supports the business in its normal of

operations. This calls for an efficient management of working capital.

The policies, procedures and measures taken for managing of working capital gain

further importance in an organization like VSP where the working capital requirements

runs in crores of rupees. Any mismanagement on the part of authority will not just cause

loss but may even impair business operations. It is in this context working capital has

gained importance.

The growth of any organization depends on overall performance of all the

departments. A firms financial performance reflects its strength, weaknesses, opportunities

and threats of the organization with respect to profits earned, investments, salesrealization, turnover, turn on investment, net worth of capital. Efficient management of

financial resources and analysis of financial results are prerequisite for success of an

enterprise. In that working capital management is one of the major area of financial

management. Managing of working capital implies managing of current assets of the

company like cash, inventory, accounts receivable, loans and advances and current

liabilities like sundry creditors, interest payment and provision.

PURPOSE OF THE STUDY:

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The main aim of any firm is to maximize the wealth of shareholders. This can be

achieved only by a steady flow of profits. Which in turn depend on successful sales activity.

To generate sales, investment of sufficient funds in current assets is required. The need of

current assets should be emphasized, as the sales dont convert into cash immediately but

involved a cycle of operations, namely operating cycle.

VSP is multi product manufacturing unit with varying cycle for each product. The

capital requirement for each department in an organization of VSP is large which

(depends on the product target for that particular year) calls for an effective working

capital management. Monitoring the operation on cycle duration is an important aspect of

working capital.

Some prominent issues that are to be addressed are,

Duration of raw material stage (depends on regularity of supply, transactions time).

Duration of work in progress (depends on length of manufacturing cycle,

consistency in capacity utilization).

Duration at the finished goods state (depends on pattern of production & sale).

Thus a detailed study regarding the working capital management in VSP is to be

done to consider the effectiveness of working capital management, identify the shortcoming

in management and to suggest for improvement in working capital management.

OBJECTIVES OF THE STUDY

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To study in general the working capital management procedure in VSP,

Visakhapatnam.

To analyze and apply operating cycle concept of working capital in VSP,

Visakhapatnam.

To know how the working capital is being financed.

To know the various methods to be followed by VSP for inventories and accounts

receivables.

To give suggestions, if any, for better working capital management in VSP.

Research methodology:

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Research methodology used for study includes both primary& secondary sources of

data. However most of study is conducted based on secondary sources.

Secondary sources of data mainly include annual reports of VSP. Statement of

changes in working capital for the past 5 years is done using the data taken from these

financial reports. Similarly time series analysis of operating cycle and calculations of ratios

is done. Apart from this, the website of RINL is referred to know the products, product

facilities, network etc.

Industry analysis is done based on the information gathered from newspapers and

websites of Indian steel ministry & other sector related websites.

The use of primary sources is limited to interviews with some of the employees in

finance department. The reason being, it is against the companys policies & producers to

reveal the sensitive financial information.

Limitations of the study:

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Although every effort has been made to study the Working Capital Management

in detail, in an organization of VSP size, it is not possible to make an exhaustive study in a

limited duration of 2 months.

It is not possible to include data of 2007-08, as the audited financial report has not

come yet (at the time of preparation of this report). However data of 2007-08 is included

partially from the un audited financial reports of VSP.

Apart from the above constraint, one serious limitation of the study is, that it is not

possible to reveal some of the financial data owing to the policies and procedures laid down

by VSP. However the available data is analyzed with great effort to get an insight into

Working Capital Management in VSP.

VISAKHAPATNAM STEEL PLANT

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BACK GROUND:

The government of India has decided to set up an integrated steel plant at

Visakhapatnam to meet the growing domestic needs of steel.

The decision of the government to set up an integrated steel plant was laid down by

the then Prime Minister Mrs. Indira Gandhi. The prime minister laid down the foundation

stone on 20th jan 1971.

The consultant, M/s. M.N.Dastus & Co (pvt.) Ltd., submitted a techno economic

feasibility report in Feb. 1972 &detailed project report for the plant, with an annual

capacity of 3.4MT of liquid steel.

The Govt of Indira and VSP signed an agreement on 12th June 1979 for the

cooperation in setting up 3.4 MT integrated steel plant. The project was estimated to cost

to Rs. 3,897.28 Cr based on prices as on 4 th Q of 1981. However, on completion of the

construction & commissioning of the whole plant in 1992, the cost escalated to Rs. 8,755 Cr

based on prices as on 2nd

Q of 1994. The plant was dedicated to the nation on 1st

Aug 1992

by the then PM, Mr. P.V. Narasimha Rao.

The man power in the VSP has been limited to 17,500 employees. The plant has the

capacity of producing 3.0 MT of liquid steel & 2.656 MT of saleable steel.

It has set up two major Blast Furnaces, the Godavari, & the Krishna, which are the

envy of any modern steel making complex.

PROFILE:

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Steel comprises one of the most important inputs in all sectors of economy. Steel is

the basic input for automobiles, construction, machine building, fabrication and

transportation industries. Keeping in view, the government of India constituted VSP in

1982 by Prime Minister Mrs. Indira Gandhi with the collaboration of Russia. Its process is

to produce a range of steel products. Its a subsidiary of Rashtriya Ispat Nigam Limited.

VSP has come a long way before becoming debt-free company in October 2003 (for

the first time since its inception in 1992). VSP is now poised at 4th position among Indian

steel majors (Ranked no. 69 among global steel makers) after passing through a turbulent

phase & crisis that had threatened its very existence.

The success story of VSP is depicted in its efficient capacity utilization & good

labour productivity. The positive trends in VSPs performance are expected to wipe out the

plants accumulated losses completely by 2007-08.

Location :

The plant is located on the coast of Bay Of Bengal, 16 Kms to the south west of the

Visakhapatnam port. It lies between the northern boundaries of the National Highway

No.5 from Madras to Calcutta and 7 kms to the south-west of Howrah Madras Railway

line.

PRODUCT MIX :

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Visakhapatnam steel plant products angles, channels, bars, wire rods and billets for

re-rolling. The plant also produces pig iron & 1.44 MT of granulated slag, besides normal

by- products from the coke oven and Coal Chemical Plant.

VSP TECHNOLOGY :

7m tall coke oven batteries with coke dry quenching.

Biggest Blast Furnace in the country.

Bell less top charging system in Blast Furnace.

100% slag granulation at the BF cast house.

Suppressed combustion LD gas recovery system.

100% continuous casting of Liquid Steel.

Tempcore & Stelmor cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measures.

MAJOR PLANT UNITS :

VSP has the following major production facilities :

3 Coke oven batteries of 67 ovens each having 41.6 m3.

2 Sinter machines of 312-m2 area.

2 Blast furnace of 3200-m3 useful volume.

Steel melt shop with 3 L.D converters of 150T capacity each and 6 Nos of 4 strand

continuous bloom casters.

Light and medium merchant mill of 7,10,000 tonnes per year capacity.

Wire rod mill of 8,50,000 tonnes per year capacity.

Medium & merchant & structured mill of 8,50,000 tonnes per year capacity.

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Extensive facilities have been provided for repair and maintenance as well as manufacture

of spare parts. A power plant, captive mines for flux, oxygen plant, acetylene plant,

compressed air plant also forms parts of the plant facilities. A part from the above works

departments, the non-works departments in VSP are Personnel, Training & Development

center, purchase, Marketing, Finance, Design & Engineering & Township Administration.

MAJOR SOURCES OF RAW MATERIAL :

TABLE 2.1

Raw Materials

The places where the steel

plant is getting it suppliesof raw materials

Iron or lumps & fines Bailadill, M.P

BF Line stone Jaggayyapeta, A.P.

SMS Line stone UAE

BF Dolamite Madharam, A.P.

SMS Dolamte Madharam, A.P.

Manganese Ore Chipuripalli, A.P.

Boiler Coal Talcher, Orissa

Cokig coal Australia

Medium Coking Coal(MMC)

Gidi /Swang/Rajarappa/kargila

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WATER & POWER SUPPLY:

Operational water requirements are met from Yeluru water supply scheme of AP

State Government. Power requirements are met by captive Power Plant having 3 No.s of60 MW sets and from APSEB grid.

VISION MISSSION & OBJECTIVES :

RINL MISSION :

To attain 10 million ton liquid steel capacity through technological up gradation,

operational efficiency and expansion; to produce steel at international standards of cost &

quality; & to meet the aspirations of the stake holders.

RINL VISSION :

To become a continuously growing world class company .

To harness the growth potential & sustain profitable growth.

To deliver high quality & cost competitive products & to be the first choice of

customers.

Create an inspiring work environment to unleash the creative energy of people.

Achieve excellence in enterprise management.

Be a respected corporate citizen, ensure clean & green environment & develop

vibrant communities.

CORE VALUES :

Commitment

Customer satisfaction

Continuous improvement

Concern for environment

Creativity & innovation

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OBJECTIVES :

Towards growth: Expand the plant capacity to 7 MT by 2011-12.

Towards profitability: Achieve net profits with special emphasis on enhancement of

production of value added steels & cost reduction.

Towards employees: Make RINL the employer of choice. Upgrade the skills and efficiency

of employees through training & development & maintain high levels of motivation &

satisfaction.

Towards customers : Promote branding of products for quality & customer relations

management.

Towards quality : Promote quality movement in all functions of the company through

quality management system.

Towards technology upgradation& productivity : Upgrade technology & practice bench

marking to achieve continuously international efficiency levels. Adopt latest developments

in information & communication technology.

Towards safety, environment & society : continue efforts towards the safety of employees,

conservation of environment & be a good corporate citizen.

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POLICIES & RULES OF RINL/VSP :

VSP takes all necessary actions for the fulfillment of regulatory requirements. In thisregard VSP follows the following policies.

1. Quality policy: Continuously improve the quality of all materials processes and

products, services for customers.

2. Environment policy : Maintain a high level of environmental consciousness amongst

employees and prevention of pollution by minimizing emissions and discharge.

3. Energy policy : By adopting appropriate energy conservation technologies, VSP

controls the consumption of various forms of energy.

4. OSHAS policy : VSP is committed to occupational health and safety of employees

and contract workers.

5. HR policy : VSP believe that their employees are the most important resource, so it

provides good working environment tnet makes the employees committed and

motivated for maximizing the productivity.

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ACHIEVEMENTS AND AWRDS :

ISO 9002 for SMS and all the down stream units- it is a unique distinction in the

Indian steel industry.

Received Indira Priya Dhaashini Vriksha Mithra Award 1992-93.

Nehru Memorial National Award for pollution control 92-93 & 93-94.

EEPC Export Excellence Award ; 94-95 CII (southern region). Energy

Conservation Award 95-96.

Golden peacock (1st prize) National Quality Award-96.

Steel Ministries Trophy for Best safety Performance in 1996.

Selected for World Quality Commitment Award-1997 of Japan, Spain.

Udyoug excellence Gold medal Award for excellence in steel industry.

Excellence Award for outstanding performance in productivity management.

Ispat Surakshya Puraskar (1st prize) for longest accident free period 91-94.

Best labour management award from the government of AP.

SCOPE award for best turn around for 2001.

Environment Excellence award from green tech foundation for energy conservation

in 2002.

Best enterprise award from SCOPE, WIPS for 2001-02.

SAIL chairmans silver plaque for No. Fatal Accident for the year 1999.

Best enterprise award from SCOPE for surpassing MOU targets 2003-04.

ISTD award for Best HR practices -2002.

Prime Minister trophy for Best integrated steel plant-2002-03.

World Quality Commitment International Star Award in the gold category

conferred by business initiative directions, Paris.

Organizational excellence award for 2003-04 conferred by INSSAN.

National Energy Conservation Award, 2004 and special prize from Ministry of

Power, Govt of India.

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PERFORMANCE OF RINL AT A GLANCE

PRODUCTION PERFORMANCE:

Achieving new targets year after year in production has become a part of the work culture.

The production performance of VSP in the last four years is as follows:

PRODUCTION PERFORMANCE-(000 TONS)

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YEAR HOT METALLIQUIDMETAL

SALEABLE

STEEL

LABOURPRODUCTIVITY

(Tones/man)

1999-2000 2943 2656 2382 192

2000-2001 3165 2909 2507 211

2001-2002 3485 3083 2757 228

2002-2003 3941 3356 3056 253

2003-2004 4055 3508 3169 262

2004-2005 3920 3560 3173 3982005-2006 4153 3603 3237 414

2006-2007 4046 3606 3290 413

2007-2008 3913 3322 3074 446


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COMMERCIAL PERFORMANCE :

The commercial performance of VSP for the past four years is as follows

TABLE 2.3(In crores)

YEARSALES

TURNOVERDOMESTIC

SALESCASHPROFIT

2000-2001 3436 3122 153

2001-

2002 4080 3710 3992002-2003 5058 4433 626

2003-2004 6169 5406 768

2004-2005 8190 7942 248

2005-2006 8491 8048 443

2006-2007 9151 8726 425

2007-2008 10443 9878 555

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FINANCIAL PERFORMANCE :

VSP had to bear the burnt of huge project cost right from the day of its inception.This has affected the companys balance sheet due to very high interest burden. The

company, in spite of making operating profit every year had to report net loss during all

financial years. This on the other hand had resulted in making VSP to take great care in

planning the financial resources.

The financial performance of VSP for the past ten years is as follows:

TABLE 2.4

YEAR SALESGROSSMARGIN

CASHPROFIT

NETPROFIT

1998-1999 2762 15 -346 -

1999-2000 2973 252 -130 (-) 562

2000-

2001 3436 504 153 (-) 2912001-2002 4081 690 400 (-) 75

2002-2003 5059 1049 915 521

2003-2004 6174 2073 2024 1547

2004-2005 8181 3271 3260 2008

2005-2006 8482 2354 2323 1252

20006-2007 9151 2632 2583 1363

20007-2008 10433 3515 2303 1943

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BOARD OF DIRECTORS

CHAIRMAN-CUM-MANAGINGDIRECTOR

P.K. Bishnoi

DIRECTOR (FINANCE)

DIRECTOR (PERSONNEL) Y.Manohar

DIRECTOR (COMMERCIAL) M.B.Chatwal.

DIRECTOR (OPERATIONAL)

`P.K.Mishra

DIRECTORS(Govt.)

DIRECTORS(Independent)

G.EliasArun Kumar Rath

RSSLN Bhaskarudu

Dr.V.K.Bhalla

J.S.Mathur

AGM (CA) & COMPANY SECRETARY P.Mohan Rao

OFFICE

Adimistrative BuildingVisakhapatnam SteelPlantVisakhapatnam -- 530001

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INDUSTRY ANALYSIS

Economic stability of nation depends on the strong industrial base it enjoys. TheIndian economy is on a new growth path with buoyancy in capital markets, positive growth

in GDP, strong forex reserves and a remarkable growth in industrial sector. Industry

output has grown by 8.2% in 2005-06 compared to 7.0% growth in 2004-05.

manufacturing industry has grown at 10% (till Apr 05) as against 8.8% growth in Apr 04.

with brisk demand for steel, textiles, non-ferrous metals, gem & jewellary. The future

prospects of Indian industrial sector as a whole looks promising as outlays on mega

projects in steel, power & oil natural gas sectors are contemplated in unprecedented

manner. India is going to be a base for expansion of capacity of many industries by many

multinationals and others with lower costs & higher scope for increasing exports to

neighboring countries.

The following literature looks into the global & Indian steel sector scenario in brief.

Global Scenario :

Global steel demand is on rise on the back of accelerated infrastructure activity in

China, booming housing industry & recovering auto industry in U.S, buoyant housing &

white good industry in Europe. Reconstruction work in Iraq is expected to fuel further

demand for steel over next 3 years.

At present China is the worlds largest crude steel producer followed by Japan &

U.S.A. while U.S.A is the largest importer of semi finished & finished steel products, Japanis the largest exporter of the same.

However, the world at large is grappling with over capacity problem.

The industry had gone through the most difficult years between 1998 & 2002.

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The reasons for this difficult phase are owned to:

Demand Supply mismatch due to unfair priced trading regime.

Large gap between installed capacity & effective capacity and effective capacity &

actual production.

Anti-dumping measures taken against CIS, China, Brazil, India & a few other

countries led to distortion in world trade.

Over capacity.

The global steel industry is facing the raw material shortage in wake of Chinas

massive infrastructure building exercise in view of 2008 Beijing Olympics. The prices may

stabilized after the Olympics.

A move has been initiated globally to cut production of steel thereby to control the

declining steel prices. This cut down of capacity is expected to restore supply demand

balance to some extent.

It is projected that China will emerge a net exporter for exports of Semi, long

products & HR wide coils. Imports by U.S may continue with the dollar losing its shine

against major currencies.

Global steel industry is presently poised to reasonable growth, which is reflected in

renewed interest shown by entrepreneurs for investments in the sector. The demand push

in China, India CIS & also in U.S & E.U. signaled the much awaited revival of the steel

industry.

INDIAN STEEL SECTOR :

`Operating performance is a main driver of competitiveness of any company. Basedon this parameter Indian steel industry is much below global standards. Although

significant improvement has been observed in material, energy and man power

productivity, it is not in a position to compete with steel majors like PSCO, CS or NUCOR.

India is placed in 8th position overall among the steel producing countries in the world.

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The reasons for slow growth in India steel industry are,

Poor productivity due to small size of plants & policy lapses and poor investment in

technology.

Less spending on R & D (less than 1% of revenues) & use of obsolete technology.

Outdated mining policies.

High transaction costs (nearly 10% of foreign trade).

Costly freight charges.

Cost of capital is 2 times the world average interest rate.

Taxes and levies constitute 30% of final value of steel.

Significant government intervention.

ss

In line with global trend, the Indian steel industry has been passing through tough

conditions. The prices have declined due to over capacity, cheap imports, declining global

steel prices and also due to anti dumping duty imposed by USA on Indian exports.

However, the present condition is better compared to last decade, which saw steel prices at

rock bottom levels.

There is a gradual improvement in steel prices owing to-

Trade cases & import restrictions by many steel-producing countries.

Voluntary production cuts after sharp tall in prices.

Continuing strong demand in USA, China.

Recovery in Asian Economics.

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The consumption of finished carbon steel increased from 14.84 MT in 1991-92 to 33.37 MT

in 2004-05. China has been an important export destination for Indian steel.

In 2004-05 the production of finished carbon steel & pig iron are as follows.

Category2004-2005

(million tones)

2005-06(million tones)

Pig Iron 0.273 0.439

Finished

CarbonSteel 3.023 3.084

The share of main producers (SAIL, RINL, TISCO ) & secondary producers in total

production of finished carbon steel was 40% & 60% respectively during the year 2004-05.

The total steel import are estimated to be 2.050 MT while exports stands at 4.375 MT in

2004-05.

Domestic demand is expected to steadily rise from the current level of 34 million tones of

apparent to the projected level of 60 MT by 2011-12. This makes it necessary to have fresh

capacity additions in steel. This in turn is to be supported by adequate sourcing of metallic

and infrastructure growth including port development to support the transportation needs

of output to cater both domestic & global demands.

The industry now looks ahead with anew resolve & determination. Reaping the benefits of

globalized markets calls for utmost vigilance from all stakeholders producers, consumers

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& state. The industry should capitalize the opportunities and mitigate the dangers of

synchronized global trends.

SWOT ANALYSIS:

SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be

avoided, opportunities that should be banked, and threats that should be faced & yet

survive in the business.

Strengths:

State of the art technology:

VSP was built with the co-operation of USSR and claims to be one of the most

modern steel plants in the country . VSP employs highly sophisticated technology,

large-scale computerization & automation in the production.

Location advantages:

VSP was rendered with additional advantages due to its location. The location

aspect has helped the VSP in easy procurement of raw materials as most of the raw

materials are imported from Andhra it self, apart from Orissa & M.P which are

located near by.

More over the existence of Visakhapatnam port makes it easy in procurement of

raw materials like cooking coal from Australia. Also exports to various countries

can be made directly from Visakhapatnam port.

Self-Sufficiency in power:

VSP has its own power generation unit with a total capacity of 286.5 MW. VSP

requires power of 180 MW to 200 MW. VSP, after meeting its requirement exports

power to APSEB.

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High commitment on part of employees:

The productive environment prevailing in the company fosters an atmosphere of

growth both for employees & for the company. The labour productivity is currently

262 tonnes/man/year unparallel in the public sector steel industry.

Strong commitment to conserve environment:

VSP is forefront of Indian industry in area of pollution control, equipment &

measures. The total cost of these measures works out at Rs.4600 million which

forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified company

(certificate for environment protection & pollution control measures).

ISO 9002 Certification:

VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO

certification gives an edge for VSP over other companies & depicts the competency

of Vizag steel to compete with the global steel producers.

Weakness:

High intake of employees:

VSP employs 17,500 employees including both administrative and plant. When

compared to international standard companies like POSCO and other major steel

producers, VSP employs 50% more for the same capacity. Hence the salaries ofthese employees, medical & other facilities will rise cost further which may disturb

the cost effectiveness achieved in the production front.

Low return product mix:

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The product mix of VSP is small. VSPs long products like billets, wire rods,

structural are facing less demand due to the crisis in South East Asian nations.

Inadequate port facilities:

The berthing facilities at VSP are not adequate relative to the requirements of VSP.

Opportunities:

Sizeable export markets:

China is the biggest importer of Indian steel. China is going to have huge

requirements of steel in next 5 years due to Olympics (in 2008), shanghai expo (in 2010).

Reconstruction work in Iraq requires huge amounts of steel where RINL can play a

significant role.

Other promising factors are-

proximity to southern market.

Strong economy.

Possibility of new markets.

A slow but steady increase in domestic steel demand.

Threats:

Global steel majors like POSCO & Mittal steel are venturing into steel production

very soon (in Orissa). This may pose a problem to VSP in the procurement of raw

materials as it is dependent on Orissa for these materials. Input costs are increasing due to

the increasing cost of raw material. Also the demand for coal & coke is escalating.

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No captive iron ore mine:

VSP is the only steel major in the country with out a captive iron ore mine. This

may present a difficult situation when the demand supplies equation for the iron ore

changes.

Other disturbing trends include-

Weak domestic market.

Liberalization & decontrol.

Sensitive to exchange rate risk.

Excise duty continues to be high.

( Excise duty on steel has been increased from 12% to 16% in union budget 2005-06.)

TISCOs rod mill 3,00,000 tap capacity is a major threat for marketing VSPs wire

rods.

WORKING CAPITAL MANAGEMENT

Working capital is the firms holdings of current assets such as cash, receivables,

inventory & marketable securities. Every firm requires working capital for its day to day

transactions such as purchasing raw material, for meeting salaries, wages, rents, rates,

advertising etc.

Significance of working capital:

The world in which real firms function is not perfect. It is characterized by the firms

considerable uncertainty regarding the demand, market price, quality & availability of its

own products and those suppliers. While the firm has many strategies available to address

these circumstances, strategies that utilize investment or financing with working capital

accounts often offer a substantial advantage over the other techniques. The importance of

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working capital management is reflected in the fact that financial managers spend a great

deal of time in managing current assets and current liabilities like-

Arranging short term financing.

Negotiating favorable credit terms.

Controlling the movement of cash.

Administering accounts receivables.

Monitoring investment in receivables.

Decision concerning the above areas play a vital role in maximizing the overall value of the

firm. Once decisions concerning these areas are reached, the level of working capital is also

determined in active decision sense, but falls out as residual from the decision just made.

The management of working capital plays an important role in maintaining the

financial health during the normal course of business. This critical role can be enunciated

by examining the flow of resources through the firm. By far the major flow is the working

capital cycle.

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This is the loop (previous page) which starts at the cash and the marketable

securities account, goes through the current account as direct labour and materials which

are purchased and use to produce inventory, which in turn is sold and generates accounts

receivables, which are finally collected to replenish cash. The major point to notice about

this cycle is that the turnover or velocity of resources through this is very high related to

the other inflows and outflows of the cash account.

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There are two concepts of working capital namely; Gross working capital and Net

working capital.

Gross working capital, simply called as working capital refers to the firms

investment in current assets. Current assets are the assets, which in ordinary course of

business can be converted into cash within an accounting year. Current assets include cash

and bank balances, short term loans and advances bills receivables, sundry debtors,

inventory, prepaid expenses, accured incomes, money receivable (within 12 months).

The gross working capital focuses attention of two aspects of current assets

management.

a) Optimum investment in current assets and

b) Financing of current assets.

The consideration of the level of investment in current assets should avoid two

danger points-excessive and inadequate investment in current arranging funds to finance

current assets. Whenever a need for working capital funds arises due to the increasing

level of business activity or for any other reason arrangement should be made quickly.

Net working capital :

Net working capital refers to the difference between the current assets and current

liabilities. Current liabilities are those claims of outsiders, which are accepted, to measure

for payment with an accounting year and include creditors, bills payable and outstanding

expenses.

Net Working Capital = Current Assets Current Liabilities

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Net working capital can be positive or negative. A positive net working capital will arise

when current assets exceeds current liabilities. It is a quantitative concept, which indicates

the liquidity position of the firm and suggests the extent to which working capital needs

may be financed by permanent sources of funds.

Working capital can be classified into two categories i.e,

1. Permanent working capital.

2. Temporary or variable working capital.

Permanent working capital:

It is the minimum amount of investment in all current assets which is required at

all times to carry out minimum level of business activities. Tandon committee has reserved

to this type of working capital as Core Current Assets.

Amount of permanent working capital remains in the business in one form or

another. It also grows with the size of the business. It is permanently needed for the

business, and therefore be financed out of long-term funds.

Variable working capital :

The amount of working capital over permanent working capital is known as

variable working capital. The amount of such working capital keeps on fluctuating from

time on the business activities. It may further be divided into seasonal working capital and

special working capital. Seasonal working capital is required to meet the seasonal demands

of busy periods occurring at stated intervals. On the other hand, special working capital is

required to meet extraordinary needs for contingencies. Events like strikes, fire,

unexpected competition, rising price tendencies or initiating a big advertisement campaign

require such capital.

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Approaches for financing working capital :

There are three approaches to financing the working capital :

1. Hedging approach

2. Conservation approach

3. aggressive approach

Hedging approach :

A firm is said to be following Hedging approach if it matches the maturity of the

debt with the maturity of assets. For the firm following hedging approach, long term

financing will be used to finance fixed assets and permanent current assets and short term

financing for temporary or variable current assets. As the level of these assets increases,

the long financing level also increases.

However, it should be realized that exact matching is not possible because of the

uncertainty about the expected lives of assets.

Conservative approach:

A firm in practice may adopt a conservative approach in financing its current and

fixed assets. The financing policy of the firm is said to be conservative when it depends

more on long term funds for financing needs. Under a conservative plan, the firm finances

its permanent assets and also a part of temporary current assets, the idle long-term funds

can be invested in the tradable securities to conserve liquidity. The conservative plan relies

heavily on long term financing.

Aggressive approach :

A firm may be aggressive in financing its assets. A firm follows aggressive policy

when it uses more short-term financing than warranted by the matching plan. Under an

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aggressive policy, the firm financing a part of its permanent current assets with short term

financing. Some extremely aggressive firms may even finance a part of their fixed assets

with short-term financing.

Importance of working capital :

A business firm must maintain an adequate level of working capital in order to run

its business smoothly. It is worthy to note that both excessive and inadequate working

capital positions are harmful. Out of two, inadequacy of working capital is more dangerous

for a firm. Excessive working capital results in idle funds on which no profits are earned.

Similarly insufficiency of working capital results in interruption of production. This will

lead to inefficiencies, increase in costs and reduction in profits. Working capital is like the

lifeblood of business. If it becomes weak, the business can hardly prosper and survive. No

business can run successfully with out and adequate amount of working capital.

The following are the few advantages of adequate working capital in the business :

Cash Discount : Adequate working capital enables a firm to avail cash discount

facilitates offered to it by the suppliers. The amount of cash discount reduces the

cost of purchase.

Goodwill : Adequate working capital enables a firm to make prompt payment.

Making prompt payment is a base to create and maintain goodwill.

Ability to face crisis : The provision of adequate working capital facilities to meet

situations of crisis and emergencies. It enables a business to with stand periods of

depression smoothly.

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Credit-worthiness : It enables a firm to operate its business more efficiently because

there is not delay in getting loans from banks and others on easy and favorable

terms.

Regular supply of raw materials : It permits the carrying of inventories at a level

that would enable a business to serve satisfactory the needs of its customers. That is

it ensures regular supply of raw materials and continuous production.

Expansion of markets : A firm which has adequate working capital, can create

favorable market condition i.e, purchasing its requirements in bulk when prices are

lower and holding its inventories for higher. Thus profits are increased.

Increased productivity.

Research programs.

High Morale.

Problems of inadequate working capital :

Firm may not be able to take advantage of profitable business opportunities.

Production facilities cannot be utilized fully.

Short-term liabilities cannot be paid because of non-availability of funds.

Its low liquidity may lead to low profitability. In the same way, low profitability

results in low liquidity.

It may not be able to take advantages of cash discounts.

Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it

may be lose its reputation; thereafter a firm may not be able get credit facilities.

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Danger of excessive working capital :

A firm may be tempted to over trade and lose heavily.

Unable to extract benefits of customers credit.

The situation may lead to unnecessary purchases and accumulation of inventories.

This cause more chances of theft, waste, losses etc.

There arise an imbalance between liquidity and profitability.

Excessive working capital means funds are idle.

The situation leads to greater production, which may not be having matching

demand.

The excess of working capital leads to carelessness about cost of production.

Determinants of Working Capital :

The need of working capital is not always the same it varies from year to year or

even month-to-month depending upon a number of factors. There is no set of rules or

formulate to determine the working capital needs of the firm. Each factor has its own

importance and its importance of the factors changes for a firms over time.

In order to determine the proper amount of working capital of concern, the following

factors should be considered.

Nature of business.

Size of the business unit.

Seasonal variation.

Time consumed in manufacturing.

Turnover of circulating capital.

Need to stockpile raw material and finished goods.

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Growth and expansion.

Business cycle fluctuations.

Terms of purchase and sale.

Pricing level changes.

Inventory turnover.

Dividend policy.

Ratio to measure the efficiency of working capital :

Current Ratio : Current assets/Current liabilities

Quick Ratio : (current assets Inventories) /Current liabilities

Sales to cash : Sales during a period / Averge cash balance.

Average collection period : Debtors dividend by annual credit sales and the

resulting figure multiplied by 365. This retio indicates how many days of credit is

being obtained from the suppliers.

Average payment Period : Creditors divided by annual credit purchase and the

resultant figure is multiplied by 365. This retio indicates how many days of credit

are being obtained from the suppliers.

Inventory turnover ratio : Sales /Average inventory.

Working capital policy :

Working capital management policies have a great effect on firm`s profitability, liquidity

and its structural health. A finance manager should therefore, chalk out appropriate

working capital policies in respect of each competent of working capital so as to ensure

high profitability, proper liquidity and sound structural health of the organization.

In order to achieve this objective the financial manager has to perform basically following

two function.

1.Estimating the amount of working capital .

2.Sources from which these funds have to be raised.

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Objectives of Working Capital Management :

The objectives of working capital management are two fold :

1. Maintenance of working capital and

2. Ability of ample funds at the time of need.

The basic goal of working capital management is to manage each of the funds current

assets and current liabilities in such a way that an acceptable level of net working capital is

always maintained in the business.

Operating Cycle :

Working capital is required because of the time gap between the sales and their

actual realization in cash. This time gap is technically terms as operating cycle of the

business.

In case manufacturing company, the operating cycle of time necessary to complete the

following cycle of event.

Conversion of cash into raw materials.

Conversion of raw materials into work in progress.

Conversion of work in progress into finished goods.

Conversion of finished goods into accounts receivables.

Conversion of accounts receivable into cash.

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This cycle is continuous phenomena. In case of Trading Firm the operating cycle will

include the length of time required to :

a) Cash into inventories.

b) Inventories into accounts receivables.

c) Accounts receivables into cash.

In case of Financing Firm the operating cycle includes the length of time taken for 1

year.

a) Conversion of cash debtors, and

b) Conversion of debtors into cash.

Working capital turnover ratio :

It measures the efficiency of the employment of working capital. Generally higher

the turnover, greater is the efficiency and larger the sale of profits. Working capital

turnover ratio can be calculating with help of the following formula.

Working capital turnover ratio = sales .

Net working capital

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INVENTORY MANAGEMENT

Inventories constitute the most significant part of current assets for a majority ofcompanies in India. The term inventory refers to the stockpile of the product.

Inventories can be classified as three categories :

1. Raw material : Inputs that are converted into finished products through

manufacturing process.

2. Work in progress : semi finished products that require further work to bedone before they are ready for sale.

3. Finished goods : Goods which are completely manufactured products and/or

ready for sale.

Need to hold Inventories :

There are three general motives for holding inventories.

1. The Transaction Motive : Which emphasis the need to maintain inventories to

facilitate smooth production and sales operation.

2. The Precaution Motive : Which necessitates holding of inventories to guard against

the risk of unpredictable changes in demand and supply forces and other factors.

3. The Speculative Motive : Which influences the decision to increase or reduce

inventory level to take advantage of price fluctuation.

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OBJECTIVES :

The objective of inventory management is to determine and maintain the optimumlevel of inventory management as both excessive and inadequate inventories are not

desirable. The optimum level inventory lies between the two danger points, excessive and

inadequate inventories. The optimum level of inventory should be determined on the basis

of trade off between costs and benefits associated with the levels of inventory.

TECHNIQUES :

Attention is given to the basic concepts relevant to the management and control of

inventory. The aspects include-

Determination of the type of control required.

The basic economic order quantity.

The re-order point.

Safety stock.

As a matter of fact the inventory management techniques are a part of production

management. However a familiarity with them is essential for a financial manager in

planning and budgeting inventory.

DETERMINATION OF THE TYPE OF THE CONTROL REQUIRED:

ABC System :

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The ABC system is a widely used classification technique to identify various items of

inventory for purposes of inventory control. This technique is based on the assumption that

a firm should not exercise the same degree of control on all items of inventory. It should

rather keep a more rigorous control on items that are (1) most costly, and/or (2) slowest

turning while items that are less expensive should be given less control effort.

On the basis of cost involved the various inventory items according to the system

are categorized into three classes.

A = Largest inventory leading to most sophisticated inventory control techniques.

B = Midway and deserving less attention than A but more than C leading to

employing less sophisticated techniques.

C = Small investment with fairly large number deserving minimum attention.

Order Quantity Problem :

Economic Order Quantity (EOQ) model :

After various items are classified on the basis of the ABC analysis, the management

becomes aware of the type of control that would be appropriate for each of the three

categories of the inventory items. The group A items warrants the maximum attention

and the most rigorous control. A key inventory problem particularly in respect of the

group A items relates to the determination of the size or quantity of inventory.

Buying in large quantities implies a high inventory level, which will assure

(i) Smooth production /sale operation and

(ii) Lower ordering or set-up costs. However it increases the ordering costs and

likelihood of interruption in the operation due to stock outs.

Thus a trade-off between benefits derived from the availability of inventory and the cost of

carrying that level of inventory has to be derived by placing an optimum level of inventory

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order that minimizes the cost associated with inventory order that minimizes the cost

associated with inventory management.

The optimum level thus derived is known as Economic Order Quantity. EOQ

equates the cost of ordering with the cost of storage of raw materials.

Ordering cost :

It is difficult to quantify this cost, as there are many factors involved. It include cost of

stationary, salaries of those engaged in preparing the purchase orders etc.

Cost of storage (or) cost of carrying inventory :

This includes the cost of store keeping, interest on capital locked up in stores, the incidence

of insurance cost, evaporation etc.

For effective material control and to avoid overstocking and under stocking of raw

materials, an important requirement is to decide upon various levels of materials.

These levels are maximum level, minimum level and re-order level. By taking action on the

basis of these levels, each item of material will automatically be held within appropriate

limits of control.

These level are not permanent, but need revision according to the changes in the factors,

which determine these levels.

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Factors include :

Rate of consumption of materials.

Lead time i.e, time lag.

Storage capacity.

Availability of funds for investment in inventories.

Cost of storage.

Risks of loss due to deterioration, theft, fine etc.

Seasonal factors certain materials are cheaply available during certain seasons.

Fluctuation in market prices.

Insurance costs.

CASH MANAGEMENT

Cash is the most important factor in financial management. It is also the most

important current asset for the operation of the business. Every activity in an enterprise

revolves round the cash. Cash is limited in every enterprise and it cannot be raised as and

when required which calls for an efficient management of funds available.

Cash is the most liquid asset and is of vital importance to the daily operations of the

business. While the proportion of corporate assets held in the form of cash is very small

(often in between 1% to 3%) its efficient management is crucial to the business because

cash is the focal point in business.

Meaning of cash :

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The term cash is used in two senses. In a narrower sense it includes currency notes,

cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In

a broader sense it also includes near cash assets such as marketable securities and time

deposits with bank.

The main reason for a firm to hold cash is to meet the needs of day-to-day transactions and

to protect the firm against uncertainties characterizing its cash flows.

While cash serves these functions, it is an idle resource which has an opportunity cost. The

liquidity provided by cash holding is at the expense of profits sacrificed foregoing

alternative opportunities. Hence, the finance manager should carefully plan and control

cash.

OBJECTIVES OF CASH MANAGEMENT :

To meet the cash disbursement need as per the payment schedule.

To minimize the amount locked up as cash balances.

Advantages of sample cash funds:

a) A shield for technical inefficiency.

b) Maintenance of goodwill.

c) Availing of cash discount.d) Good bank-relations.

e) Exploitation of business opportunities.

f) Encouragement to new investment.

g) Increase in efficiency.

h) Over coming abnormal financial situations.

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RECEIVABLE MANAGEMENT

Accounts receivables constitute a significance portion of the total current assets. They are

direct consequences of trade credit which has become an essential marketing tool in

modern business.

Meaning of receivable :

Receivables are asset accounts representing amounts owned to the firm as a result

of sale of goods or services in the ordinary course of business.

The management of receivables is basically a problem of balancing profitability and

liquidity. Soft credit terms are attractive for higher sales and hence longer the time a

company allows its customers to pay the higher are the sales and hence profits. However,

on the other hand the longer the period of credit, the greater the risk, greater the level of

debt and greater the strain on the liquidity of the company.

Cost of receivables :

Capital cost : It is the cost associated with the blocking of firms resources in the

receivables because of the time lag between the sale of goods to customers and realization

of sales. The firm therefore has to customers and realization of sales. The firm therefore

has to arrange for additional funds to meet its current obligations.

Administrative cost : The firm has to incur additional administration costs for

maintaining account receivable in the form of salaries etc.

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Collection cost : The firm has to incur costs for collecting the payments.

Defaulting cost : Sometimes after making all serious efforts to collect money from

defaulting customers the firm may not able to recover the over debts because of theinability of the customers. Such debts are treated as bad and have to be written off since

they cannot be realized.

Optimum size of receivables :

When the firm resorts to liberal credit policy, the profitability of the firm increases

on account of higher sales. However such a policy results in increased investment in

receivables and the problem of liquidity is created. On the other hand a stringent credit

policy reduces the profitability but increase the liquidity of the firm. Thus optimum credit

policy occurs are a point where Trade off between liquidity and profitability.

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Credit policy variables :

The important dimensions of a firm credit policy are,

Credit standards.

Credit period.

Cash discount.

Collection effort.

System for receivable control :

The management should consider the following four factors in keeping the level of

investment in receivables within the controllable limits.

1. Deciding acceptable level of risk : The first point is to decide to whom goods should

be supplied bearing in mind the risk involved. It is therefore essential to assess the

credit worthiness of the customers before advancing any credit to them.

2. Terms of credit sales : The second step in this regard in to decide terms of credit

sales and the level of cash discounts. Cash discount has important bearing on the

cost of capital and on credit sales.

3. Credit collection policy : The management should provide for bad debts to keep the

losses minimum. (Usually 5% to 7% of sundry debtors are provided for bad debts).

A collection procedure should be established and action should be taken

accordingly. The other steps should be record the age of debt to facilitate the

collection of debts.

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The age of debt is called as average collection period.

Average collection period = (credit sales in the period)/average accounts receivables.

Accounts receivables turnover = average accounts receivables/average

monthly/daily credit sales.

An increase in the age of receivables or debt collection period is an indication of

lenient credit of inefficiency collection.

The effective of the receivable management should be analyzed from time to time with the

help of certain ratios such as average collection period, debtors turnover ratio, receivable

current assets ratio etc.

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PAYABLE MANAGEMENT

Management of accounts payable is as much important as the management of

accounts receivable. However there is a basic difference between the approaches adopted

by the Finance Manager in both the cases. The underlying objective in case of accounts

receivables is to maximize the acceleration of collection process while incase of accounts

payable it is to slow down the payments process as much as possible. The delay in

payments of accounts payable may result in saving of some interests costs but proves very

costly to the firm in the form of loss of credit in the market. The Finance Manager

therefore has to ensure that the payments to the credits are made at the stipulated timeperiod after obtaining the best credit term possible.

Control of accounts payable :

Computing the average age of payable can be calculated by any of the following

methods.

Months or days in the period / Accounts payable turnover accounts payable turnover =

Credit purchase in the period / Average accounts payable.

Average accounts payable / average month / daily credit purchase.

Average accounts payable / average month / daily credit purchases during the period.

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WORKING CAPITAL MANAGEMENT IN VSP

Management efforts over the few years have been to inculcate cash consciousness through

constant emphasis on working capital, mainly inventory and book debtors. In all these, it is

to be kept in mind that VSP is a multi product undertaking, were management decisions

affecting working capital are taken at managerial level.

Sources of funds:

Visakhapatnam steel plant raises its working capital by multiple banking arrangements

with 10 Banks. The following are the ten banks, where funds for working capital are

raised:

1. State bank of India

2. Canara bank

3. UCO bank

4. Bank of Baroda

5. Andhra bank

6. Indian Overseas Bank

7. State Bank of Hyderabad

8. Allahabad Bank

9. IDBI Bank Ltd.

10. HSBC Ltd.

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In VSP working capital requirement is assessed by

Fixing the target production

Preparation of Budget (in rupees)

Working capital requirement are prepared taking into account :

Actual value of the previous two years working capital.

Projected value for the next two years

Limits:

Visakhapantam steel plant is having fund-based limits of Rs.570.65 crores and Non-fund

based limits up to Rs.1231 crores.

Procedure for procurement of funds:

Visakhapatnam steel plant applies a credit monitoring and appraisal (CMA)

report (a 40-page document). The document consists of historical data about the company

and profit and loss account, balance sheet, current assets current liabilities, working

capital assessment, fund flows etc.. SBI subscribes the maximum working capital limit (up

to extent of 38%) of the entire working capital assessed. The other banks of the under the

multiple banking arrangement above provide the rest of Working capital limits.

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WORKING CAPITAL LIMITS (UNDER MULTIPLE BANKING ARRANGEMENT)

(Rs in Crs)

Sl.No.

Name of Bank

Fund Based Non-Fund basedTotal

CCWCD

LTotal EPC Total LC BG Total

(a)3 (b)(c=a+b

)(d)

(e=c+d)

(f) (g) (h=f+g) (i=e+h)

1. State Bank of India 36.00 44.00 80.00 60.00 140.00 450.00 25.00 475.00 615.00

2. Canara Bank 30.00 45.00 75.00 45.00 120.00 270.00 15.00 285.00 405.00

3. Bank of Baroda 13.54 20.31 33.85 20.00 53.85 50.00 1.00 51.00 104.85

4. UCO Bank 5.00 20.00 25.00 15.00 40.00 35.00 5.00 40.00 80.00

5.State Bank ofHyderabad

8.30 12.83 21.13 9.17 30.30 36.00 1.00 37.00 67.30

6. Allahabad Bank 25.00 0.00 25.00 15.00 40.00 90.00 5.00 95.00 135.00

7. HSBC Ltd. 0.00 0.00 0.00 0.00 0.00 50.00 0.00 50.00 50.00

8. IDBI Ltd. 0.00 0.00 0.00 0.00 0.00 50.00 0.00 50.00 50.009. Andhra Bank 14.00 21.00 35.00 11.50 46.50 45.00 3.00 48.00 94.50

10. Indian Overseas Bank 0.00 100.00 100.00 0.00 100.00 100.00 0.00 100.00 200.00

Total 131.84 263.14 394.98 175.67 570.65 1,176.00 55.00 1,231.00 1,801.65

WCDL : Working Capital Demand Loan

CC : Cash Credit

EPC : Export Packing Credit

LC : Letter ofCredit

BG : BankGuarantee

Types of working capital source :

1. Fund based limits : under this source, Visakhapatnam steel Plant can obtain

working capital finance by bank borrowing in the form of cash credit of export

packing credit.

2. Non-fund based limits : Visakhapatnam Steel Plant receives non-fund based

working capital in the form of letter of credit or bank guarantee.

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YEAR WISE CHANGES IN WORKING CAPITAL

YEARS

GROSSWORKINGCAPITAL

NETWORKING

CAPITAL

Amount(In Lakhs)

Changepercentage

Amount(In Lakhs)

Changepercentage

2001-02 171378.57 - 49279.44 -

2002-03 186360.02 8.74 63385.73 26.62

2003-04 271668.92 46.31 149133.81 135.27

2004-05 604752.10 121.78 462336.44 210.01

2005-06 825200.00 36.45 66614.00 44.14

2006-07 104410.00 26.61 834380.00 25.20

2007-08 11804.59 12.98 86120.92 3.22

Interpretation: The above table indicates that working capital is highest for the year 2005-06. The net working capital has shown a gradual increase from 2003-04 till 2004-05.

Statement of changes in working capital is done in the pages that follow to give the

complete picture of variations in working capital.

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Statement of changes in working capital for the year 1999-2000

(figures in Lakhs)

Particulars 1999 2000 Increase Decrease

Current Assets

Inventories

Sundry debtors

Cash and bank balOther current

assets

Loans and

advances

Total current

assets

Current Liabilities

Liabilities

Provision

Total current

liabilities

100940.24

11780.52

15067.08

647.30

27246.26

155681.40

103228.63

3129.57

106358.20

111103.82

16342.80

15993.13

647.30

22352.96

166460.50

115695.66

3555.19

119250.85

10163.6

4562.28

926.05

20.49 4893.30

12467.00

425.62Net decrease in Working

Capital 2113.5

Total 17785.92 17785.92

Source: Annual reports of VSP

Interpretation:

Net working capital has decreased by Rs. 2113.5 lacks due to the increased current

liabilities. At the same time loans and advances too decreased by Rs.4893.30 lakhs.

Although there is an increase in the all of the remaining current assets, the higher value of

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current liabilities has offset the increase in current assets. The net effect is the decrease in

working capital.


(figures in Lakhs)


Current Assets

Inventories

Sundry debtorsCash and bank bal

Other current assets

Loans and advances

Total current assets

Current Liabilities

Liabilities

Provision

Total current

liabilities

111103.8216342.80

15993.13

647.30

22352.96

166460.50

115695.66

3555.19

119250.85

120747.517383.52

16366.93

634.66

24303.43

179436.02

125509.9

4841.72

4841.72

9643.66

1040.7

373.80

1950.47

33.13

9814.22

1286.53

Net increase in Working Capital 1874.77

Total 13008.65 13008.65


Interpretation :

An increase in networking capital is observed (1874.77 lacks) due to significant

increase in inventories. Sundry debtors, cash & bank balances and loans &advances have

also shown a positive growth. The net increase in working capital would have been a very

positive figure due for the drastic increase in liabilities.

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(figures in Lakhs)


Current AssetsInventories

Sundry debtors

Cash and bank bal

Other current

assets

Loans and

advances

Total current

assets

Current Liabilities

LiabilitiesProvision

Total current

liabilities

120747.5

17383.52

16366.93

634.66

24303.43

1794360.02

125509.9

4841.72

4841.72

111137.9

5

21249.40

16122.22

540.50

22338.50

171388.5

7

114315.8

27783.31

122099.1

3

3865.88

11194.06

9609.53

244.71

94.16

1964.93

2941.59

Net Increase in Working Capital 205.02

Total 15059.94 15059.94


Interpretation :

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The increase in net working capital in 2002 over 2001 is very small (195.02 lacs).

Although a decrease is observed in liabilities , a negative is observed in all the current

assets excluding sundry debtors. The net result is the decreased amount of working capital.


(figures in Lakhs)


Current Assets

Inventories

Sundry debtors

Cash and bank bal

Other current

assets

Loans and

advances

Total current

assetsCurrent Liabilities

Liabilities

Provision

Total current

liabilities

111137.95

21249.40

16112.22

540.50

22338.50171378.57

114315.82

7783.31

122099.13

85755.23

21757.92

54157.34

526.06

24163.47

186360.0

2

113904.3

2

9069.97

122974.2

9

508.52

38045.14

1824.97

411.5

25382.63

14.44

1286.66


Total 40790.13 40790.13


Interpretation :

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Net working capital increase stood at 14106.3 lakhs. Cash & bank balances have

shown positive with an increase of Rs.38035.14 Added to this is the decrease in liabilities.

This resulted in increase in net working capital.


(figures in Lakhs)


Current Assets

Inventories

Sundry debtors

Cash and bank

balance

Other current assetsLoans and advances

Total current assets

Current Liabilities

Liabilities

Provision

Total current

liabilities

85755.23

21757.92

54157.34526.06

24163.47

186360.02

114037.78

9069.97

123107.75

70634.36

8561.55

135971.2

7

2431.49

55070.25

272668.92

107883.8

4

15651.27

123535.1

1

818113.93

1905.43

30906.78

6153.94

15120.87

13196.37

6581.3


Total 120780.08 120780.08


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Interpretation: The increase in net working capital in 2004 over 2003 is Rs.85881.54 lakhs .

For the second consecutive year the cash and bank balances have a shown an increasing

trend. Other current assets and loan advances have also increased. All these changes have

brought about an increase in net working capital


(figures in Lakhs)


Current Assets

Inventories

Sundry debtors

Cash and bank bal

Other current

assets

Loans and

advancesTotal current

assets

Current Liabilities

Liabilities

Provision

Total current

liabilities

70634.36

8561.55

135971.272431.49

55070.25

272668.92

107883.84

15651.27

123535.11

125530.98

4930.06

393260.8610017.95

71012.25

604752.10

115488.43

26927.23

142415.66

54896.62

257289.597586.46

1594.2

3631.49

7604.59

11275.96

Net Increase in Working

Capital 313202.63

Total 335714.67 335714.67


Interpretation:

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There is a significant increase in net working capital which amounts to 3132 crores. There

noticeable increase in net working capital is due to increase in cash &bank balances. The

increase in cash is 2572.89 crores (189%). A positive growth is observed in loans &

advances and other current assets. The increase in liabilities is offset by the increase in

total current assets. The net effect of the above changes has brought about the increased

working capital.

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(Figures in Lakhs)

Particulars 2005 2006 Increase DecreaseCurrent Assets

Inventories 125530.98 121645.00 4108.00

Sundry debtors 4930.06 16565.00 11635.00

Cash and bank bal 393260.86 562170.00 168909.00

Other current assets 10017.95 18436.00 8418.00

Loans and advances 71012.25 106384.00 35372.00

Total current assets 604752.10 825200.00

Current Liabilities

Liabilities 115488.43 87149.00 15903.00

Provision 26927.23 71637.00 44710.00

Total current

liabilities

142415.66 158786.00

Net Increase in

Working Capital

159613.00

Total 224334.00 224334.00


Interpretation:

There is a significant increase in net working capital, which amounts to 159613.00 lakhs.

There noticeable increase in net working capital is due to increase in cash &bank balances.

The increase in cash is 168909.00 lakhs. A positive growth is observed in loans & advances

and other current assets. The increase in liabilities is offset by the increase in total current

assets. The net effect of the above changes has brought about the increased working

capital.

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(Figures in Lakhs)


Current Assets

Inventories 121645.00 120324.00 1511.00

Sundry debtors 16565.00 21680.00 5053.00

Cash and bank bal 562170.00 719468.00 157298.00

Other current assets 18436.00 31448.00 13012.00

Loans and advances 106384.00 151890.00 45758.00

Total current assets 825200.00 1044810.00

Current Liabilities

Liabilities 87149.00 101153.00 22576.00

Provision 71637.00 109277.00 37640.00

Total current liabilities 158786.00 210430.00

Net Increase in Working

Capital

159394.00

Total 221121.00 221121.00


Interpretation:

There is a significant increase in net working capital, which amounts to 159394.00 lakhs.

There noticeable increase in net working capital is due to increase in cash &bank balances.

The increase in cash is 157298.00 lakhs. A positive growth is observed in loans & advances

and other current assets. The increase in liabilities is offset by the increase in total current

assets. The net effect of the above changes has brought about the increased working

capital.

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(figures in lakhs)


Current assets

Inventories 120324 176115 55791

Sundry debtors 21680 9341 12339

Cash & bank balances 719468 769911 50443

Other current assets 31448 29243 2205

Loans& advances 151890 195849 43959

Total current assets 1044810 1180459

Current liabilities

Liabilities 101153 161015 59862

Provisions 109277 158147 48870

Total current

liabilities

210430 319162

Net increase in

working capital

26916

Total 150193 150193

Source: annual reports of vsp

Interpretation:

The increase in net working capital in 2008 over 2007 is Rs 26917 lakhs. For the

second consecutive year the inventories shown an increasing trend. Cash & bank balances

and loans & advances are also increased. All these changes have brought about an increase

in net working capital.

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OPERATING CYCLE ANALYSIS:

The level of current assets needed for a business significantly depends upon the length of

the operating cycle. The longer the operating cycle, larger will be the working capital

requirement of the firm for funds needed at different stages of operating cycle and vice-

versa.

Time series analysis of operating cycle in VSP

Year 97-98* 98-99 99-2000 2000-01

Raw Material stage Days Days Days Days

i.Consumption of

R.M stores spares 717.68 1219.65 1394.31 1443.68

ii.per day

consumption 1.96 3.34 3.82 3.95

iii.Avg.stock of

R.M. Stores,

spares 630.44 320.64 628.51 188.06 614.25 16.8 614.05 155.3

Duration of R.M Iii/ii Iii/ii Iii/ii Iii/ii

Work in process stage

i.sales 1007.91 2527.39 2839.58 2789.53

ii.per day

consumption 2.76 41 6.92 15.4 7.77 12.8 7.64 15.14

iii.duration ofF/G stage Iii/ii Iii/ii Iii/ii Iii/ii

Finished goods stage period

i.sales 1663.66 2.63 2761.13 6.12 2972.6 8.58 3435.96

ii.Avg stock of

F/G 630.65 450.83 346.26 429.45

iii.duration of

F/G stage I/ii I/ii I/ii I/ii

Debtors collection period

i.sales 1663.66 2761.16 2972.6 3435.96

ii.sales per day 4.55 33.21 7.56 1595 8.14 17.27 9.41 17.91

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Gross working capital

Year

Gross Working Capital

(Rs.In lakhs)

1998-99 155681.4

1999-00 166460.5

2000-01 199436.4

2001-02 171378.57

2002-03 186360.02

2003-04 272668.92

2004-05 604752.1

2005-06 825200.00

2006-07 1044810.00

2007-08 1180459.00

0

200000

400000

600000800000

1000000

1200000

Gross WorkingCapital(Rs.In lakhs)

1998-9

1999-0

2000-0

2001-02002-0

2003-0

2004-0

2005-0

2006-0

2007-0

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Net working capital:

The net working capital of visakhaptnam steel plant shows an increasing trend from 1993-

98 and decreasing tread from 1997-98 to 2000-01. It is showing a positive figure after that

till 2004-05.

The main reason for the decreasing trend in the years is due to the increasing creditorsyear after year. If also indicates a weak cash balance to meet the liabilities. The current

liabilities of the company is increasing by 200 crores almost every year. The inability of the

company to pay the creditors is also evident from the reducing net operating cycle period.

The operating cycle period has reduced continuously from 138 days during to 42 days

during year 2000-01 against decreasing trends in the previous years.

The increase in working capital is due to better sales and full capacity utilization.

Which has resulted in reduction of cost of production. The net working capital of VSP

for the past 10 years is depicted in the table.

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Net working capital:

years

Net Working Capital

(Rs.In lakhs)

1998-99 49323.2

1999-00 47209.65

2000-01 49084.42

2001-02 49289.44

2002-03 63252.27

2003-04 149133.81

2004-05 462336.442006-07 834380.00

2007-08 861297.00

0

100000

200000

300000400000

500000

600000

700000

800000

900000

Net WorkingCapital(Rs.In lakhs)

1998-9

1999-0

2000-0

2001-0

2002-02003-0

2004-0

2006-0

2007-0

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Current ratio:

A current ratio of 2:1 is considered to do ideal. The ration is an indicator of the firms

commitment to meet its short-term liabilities. It indicates the rupees of current assets

available for each rupee of current liability. The higher the current ratio the higher the

funds available for a rupee of current liabilities. As a convention rule a current ratio of 2:1

or more is considered satisfactory.

The higher the current ratio the higher the funds available for a firm.

Current ratio=current assets/current liabilities.

YEAR CURRENT RATIO

1998-99 1.5

1999-00 1.4

2000-01 1.4

2001-02 1.4

2002-03 1.5

2003-04 2.2

2004-05 4.2

2006-07 4.9

2007-08 3.7

Interpretation: the current ratio was around 1.5 in 1998=99. the current ratio is poised

around 1.4 from 1999-2000 to 1200-2993. the ratio has started increasing from there on

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and is at4.2 in 2004-05. this shows that there is drastic increase is firms current assets

which shows the high liquidity position of the firm.

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Working capital turn over ratio:

Working capital turnover ratio is ratio of sales to net working capital. It is indicator of

efficiency of working capital management. Higher the ratio greater is the efficiency.

The working capital turnover ratio has constantly increased from 1998-99 to till date. This

is mainly due to increased sales and delay in payment to creditors.

Working capital turn over ratio= net sales / average working capital.

The turn over ratio for the last 10 accounting periods is as shown:

YEAR

WORKING CAPITAL

TURNOVER RATIO

1998-99 5.6

1999-00 6.3

2000-01 7

2001-02 8.32002-03 8

2003-04 4.2

2004-05 1.8

2006-07 1.02

2007-08 1.21

Note: here current assets are taken as working capital;

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Working capital turnover ratio

working capital turnover ratio

0

1

2

3

4

5

6

7

8

9

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

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INVENTORY MANAGEMENT IS VSP

VSP is multi-product, integrated steel plant with 3.0 M.T capacity. this makes VSP to

store, handle and process of huge quantity of material. Also VSP being a process industry

running 365 days throughout the year 24 hrs a day it material. This calls form efficient

inventory management o the part of VSP.VSP holds three types of inventory, they are:

1. raw materials

2. stores, spares and scrap

3. semi/finished goods.

Different sections carry out the procurement, storage and control of these inventories.

Raw materials:

The raw materials are produced and stored by raw materials department. The basic

principle followed by VSP in holding raw material inventory is to hold indigenous raw

material for 10 days.

Stores and spears: the stores and spares are procured and stored by central stores

department(a part of purchase department).

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The store and spares recategorized as

1. automatic recoupment items:

2. department specific items

Automatic recoupemnt items: A.R items are those, which are general consumables with

standard specification and required by more than one department. The main objective

of stock control is to make available vital items all time.

The AR items are classified as a class, b class and c class as per value given below.

a. annual consumption value more than rs.100,000

b. annual consumption value between rs.100,000-50,000

c. annual consumption value less than rs50,000

The stocks of these items are maintained as per their vitality, consumption frequency,

automatic indenting of the items done once the level of stock comes to recumbent level

foxed for each item.

Department specific items: user departments based on approval given by top

management for level of inventory to hold indents department specific items. The

amount is fixed based on consumption of a particular item in the previous years. These

items are also stored by stored department and are released against stores indent note

issued by department.

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Inventory control:

Inventory control is major responsibility of stores department in VSP. It adoptsfollowing procedure for inventory control:

1. The stores department generates data periodically on the inventory status and

conducts analysis of it. Th

Mahesh Final

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