Project report on working capital mgmt

A PROJECT REPORTON

WORKING CAPITAL MANAGEMENT

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Working Capital Management

Table of ContentsSummer Project Certificate 2

Industry Guide Declaration 3

Faculty Guide Declaration 4

Acknowledgement 5

Executive Summary 7

Objectives of the Study 8

Methodology of the Study 9

Limitations of the Study 9

IFFCO – The Organization 10

Chapter 1 Working Capital Management 29

Data Analysis 30

Findings 58

Conclusion and Suggestions 59

Chapter 2 Cash Management 61

Cash Management at IFFCO 62

Observations 73

Conclusion 76

Suggestions 77

References 78

Appendix

A Working Capital Management 79

B Cash Management 108

C Financial Statement 112

D Significant Financial Indicators 116

E Provisional highlights of IFFCO performance during2008-09 117

F Value Added Statement 118

G Some of the well known fertilisers used in India 119

H Some Calculations 120

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Executive Summary

Indian Farmers Fertiliser Co-operative Limited (IFFCO) is a Multistate

Co-operative Society. It was a unique venture in which the farmers of thecountry through their own Co-operative Societies created this new institution

to safeguard their interests. IFFCO manufactures Urea and NPK/ DAPfertilizers and sells them to the co-operative societies.

The project is Working Capital Management of IFFCO. The objectives of theproject are:

To analyse the working capital and working capital management

policies at IFFCO

To analyse the cash management practices at IFFCO

The study is mainly based on the secondary data which refers to that form of

information that has already been collected and is available. The analysis ofworking capital is based on ratio analysis to monitor overall trends inworking capital and to identify areas requiring closer management.

Working capital is not measurable by only current assets & current liabilities

but there are some other factors also that have an influence on the workingcapital. From the analysis of the components of working capital, it was foundthat the organization is utilizing its funds properly, the inventory is managed

efficiently and the organization is able to get sufficient short term financing.It is clear that the working capital of IFFCO is in sound position. Thesuggestions can be made in the management of inventory by

implementation of JIT or Kanban and management of liquid assets includingthe subsidy provided by the government.

The Cash Management System at IFFCO is very sound and efficient. It hasenabled the organization to manage its funds in a proper manner resulting

in better utilization and availability of funds in cash deficit periods. IFFCOhas a tie up with banks such as IOB, HSBC Bank, ICICI Bank that areproviding IFFCO with facilities such as cash management services,

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personalized financial MIS to enable IFFCO to accelerate the collection andpayment of funds, debit sweep option, Anywhere banking facility, etc. Thesuggestion that can be given to the organization is the implementation of

RTGS (Real Time Gross Settlement) and NEFT (National Electronic FundTransfer) facilities which will improve the cash transfer at IFFCO.

Objectives of the Study

To analyse the Working Capital and Working Capital Managementpolicies at IFFCO

To understand Working Capital Management of the organization

To analyze Liquidity position of the organization

To find out the Profitability and operating efficiency of theorganization

To understand the importance of Working Capital Management

To analyze the short term financing patterns, which affect theworking capital of the organization

To study the factors that affects the Working CapitalManagement at IFFCO

To analyze the data and information of the previous years toknow the actual position of funds, investments and liabilities ofthe organization

To identify some broad policy measures to improve the workingcapital position of the organization

To estimate the working capital requirements of theorganization in the near future

To analyse the Cash Management Practices at IFFCO

To understand the cash management process followed at theorganization

To study the factors both intrinsic and extrinsic that influencesthe cash management at the organization

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To study and analyze the changes being brought about theexisting cash management system

To study the salient features, methodology and advantages ofthe new cash management system being implemented at theorganization

To suggest some recommendations to the organizations for theimprovement of the cash management practices and the newcash management MIS

Methodology of the studyThe basic type of research used to prepare this report is Descriptive.The study is mainly based on the secondary data which refers to that form ofinformation that has already been collected and is available. These include

some internal sources within the company and externally these sourcesinclude books and periodicals, published reports and data of IFFCO and theannual reports of the company. Interaction with the various employees of the

marketing accounts department has also been a major source of information.No primary data has been used as a part of this study.

The analysis of working capital is based on ratio analysis to monitor overalltrends in working capital and to identify areas requiring closer management.

Limitations of the Study

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The following are the limitations of this summer project training:

The study is limited to five financial years i.e. from 2005-2009.

The data used in this study has been taken from the Financial

Statements & their related schedules of IFFCO Ltd., New Delhi as perthe requirement.

Some of the information that was essential for this study cannot

however be given in this report due to their confidential nature.

The scope and area of the study was limited to corporate office of

IFFCO, New Delhi only.

IFFCO – The Organization

Indian Farmers Fertiliser Co-operativeLimited (IFFCO) was registered onNovember 3, 1967 as a Multi-unit

Co-operative Society. It was a uniqueventure in which the farmers of thecountry through their own

Co-operative Societies created thisnew institution to safeguard their

interests. The numbers ofco-operative societies associated with IFFCO have risen from 57 in 1967 to38, 155 at present. On the enactment of the Multistate Cooperative Societies

act 1984 & 2002, the Society is deemed to be registered as a Multistate

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Cooperative Society. The byelaws of the Society provide a broad frame workfor the activities of IFFCO as a Cooperative Society.

IFFCO commissioned an Ammonia - urea complex at Kalol and the NPK/DAPplant at Kandla both in the state of Gujarat in 1975. Another Ammonia -urea complex was set up at Phulpur in the state of Uttar Pradesh in 1981.

The ammonia - urea unit at Aonla was commissioned in 1988.

In 1993, IFFCO had drawn up a major expansion programme of all the fourplants under overall aegis of IFFCO VISION 2000. The expansion projects atAonla, Kalol, Phulpur and Kandla have been completed on schedule. Thus all

the projects conceived as part of Vision 2000 have been realised withouttime or cost overruns. All the production units of IFFCO have established areputation for excellence and quality.

A new growth path has been chalked out to realise newer dreams and

greater heights through Vision 2010 which is presently underimplementation. As part of the new vision, IFFCO has acquired fertiliser unitat Paradeep in Orissa in September 2005. As a result of these expansion

projects and acquisition, IFFCO's annual capacity has been increased to 3.69million tonnes of Urea and NPK/DAP equivalent to 1.71 million tonnes ofP2O5.

Mission

IFFCO's mission is "to enable Indian farmers to prosper through timelysupply of reliable, high quality agricultural inputs and services in an

environmentally sustainable manner and to undertake other activities toimprove their welfare."

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To provide to farmers high quality fertilizers in right time and inadequate quantities with an objective to increase crop productivity.To make plants energy efficient and continually review various

schemes to conserve energy.Commitment to health, safety, environment and forestry developmentto enrich the quality of community life.

Commitment to social responsibilities for a strong social fabric.To institutionalise core values and create a culture of team building,

empowerment and innovation which would help in incremental growthof employees and enable achievement of strategic objectives.Foster a culture of trust, openness and mutual concern to make

working a stimulating and challenging experience for stake holders.Building a value driven organisation with an improved and responsivecustomer focus. A true commitment to transparency, accountability

and integrity in principle and practice.To acquire, assimilate and adopt reliable, efficient and cost effective

technologies.Sourcing raw materials for production of phosphatic fertilisers ateconomical cost by entering into Joint Ventures outside India.

To ensure growth in core and non-core sectors.

A true Cooperative Society committed for fostering cooperative movement in

the country.

IFFCO is emerging as a dynamic organisation, focussing on strategicstrengths, seizing opportunities for generating and building upon pastsuccess, enhancing earnings to maximise the shareholders' value.

Vision

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To augment the incremental incomes of farmers by helping them to increasetheir crop productivity through balanced use of energy efficient fertilizers,maintain the environmental health and to make cooperative societies

economically & democratically strong for professionalized services to thefarming community to ensure an empowered rural India.

Vision 2010Encouraged by the success of Vision 2000, IFFCO has charted on a new

course of action to realise a fresh set of dreams. A high powered committeehas been constituted to steer the organisation through this Road Map.Activities being actively pursued through the strategy are:

Phosphoric Acid plant

Foray into Power Sector to set up a 500 MW power project

Ammonia Plant for supplies to Kandla Unit

IFFCO Kisan Bazar

IFFCO Bank

Multi Commodity Exchange

Acquisition of Fertilizer Plants

Nellore Fertilizer Project

Agri business

The ApproachTo achieve their mission, IFFCO as a cooperative society, undertakes severalactivities covering a broad spectrum of areas to promote welfare of member

cooperatives and farmers. The activities envisaged to be covered areexhaustively defined in IFFCO’s Bye-laws.

The CommitmentThe thirst for ever improving the services to farmers and memberco-operatives is insatiable, commitment to quality is insurmountable andharnessing of mother earths' bounty to drive hunger away from India in an

ecologically sustainable manner is the prime mission.

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Plants owned by IFFCOKalol Unit (Ammonia - Urea complex)

P. O. Kasturinagar, District Gandhinagar, Gujarat - 382423

Kandla Unit (NPK/DAP plant)

P. O. Kandla, Gandhidham, Kandla (Kachchh), Gujarat - 370201

Phulpur Unit (Ammonia - urea complex)P. O. Ghiyanagar, District Allahabad, Uttar Pradesh - 212404

Aonla Unit (Ammonia - Urea unit)P. O. IFFCO Township, Paul Pothen Nagar, Bareilly, Uttar Pradesh -

243403

Paradeep Unit (NPK/DAP and Phosphoric Acid Fertiliser unit)Village Musadia, P. O. Paradeep, District Jagatsinghpur, Orissa -

754142

Production and SalesDuring the year 2008-09 IFFCO produced 71.68 Lakh (7.168 million) MT(Metric Tonnes) of fertiliser material, consisting of 40.68 lakh MT of Urea and

31.00 lakh MT NPK/DAP. It contributes 21.4% of country’s total nitrogenousfertiliser production and 27% of total phosphatic fertiliser production in the

same period.PRODUCTION

(in LAKH MT)

YEAR UREA NPK / DAP TOTAL

2006-07 37.87 32.26 70.132007-08 39.63 28.84 68.472008-09 40.68 31 71.68

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PLANT WISE PRODUCTION

Unit 2008-09 2007-08

Production CapacityUtilization Production Capacity

Utilization

(Lakh MT) (percent) (Lakh MT) (percent)UREAKalol 5.60 102.80 5.45 100.00

SALES OF FERTILIZER MATERIAL(in Lakh MT)

Material 2008-09 2007-08 2006-07UREA 58.69 54.29 52.41NPK/ DAP 53.89 38.95 33.69TOTAL 112.58 93.24 86.10

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Phulpur –I 6.63 120.30 6.30 114.30Phulpur – II 8.40 97.20 9.24 106.90Aonla – I 9.87 114.10 8.76 101.30Aonla – II 10.18 117.80 9.89 114.40SUB TOTAL UREA 40.68 110.30 39.63 107.40NPK / DAPKandla 17.94 74.30 20.18 83.50Paradeep 13.06 68.00 8.66 45.10SUB TOTAL NPK / DAP 31.00 71.40 28.84 66.50

TOTAL PRODUCTION 71.68 89.20 68.47 85.30

All India Capacity, Production and Capacity Utilization of FertilizerIndustry

Year N P2O5

Capacity ProductionCapacityUtilization

(%)Capacity Production

CapacityUtilization

(%)2004-05 12208 11304.9 93.4 5480.4 4038.4 75.52005-06 12288.4 11332.9 94.5 5459.6 4202.6 78.52006-07 12290.4 11524.9 95.6 5736.3 4440 78.52007-08 12290.4 10902.8 95.2 5874.6 3714.3 64.72008-09 12290.4 10900.2 95.2 5892.3 3417.3 58.5

Sector Wise Capacity and Production of N and P2O5

(capacity: As on 1.11.20(production: 2008

April-Ma(Figures in '000 tonne nutrie

Sector N P2O5Capacity Production Capacity Production

NP/NPKs SSP Total NP/NPK SSP To

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sPublic 3591.5 2973.2 386.7 - 386.7 191.7 - 191

Private 6030.3 4829.9 2860.1 1225 4085.1 1903.9 405.4 230

Cooperative 3423.4 3133.1 1712.8 - 1712.8 916.3 - 916

Total 13045.2 10900.2 4959.6 1225 6184.6 3011.9 405.4 341

Capacity and Investment in the Fertilizer Industry

Year / Period Capacity During theInvestments During the Period ( in Rs.

Crore )Period

(in '000 tonnes) SectorsN P2O5 Public Cooperative Private Total

2004-2005 62 39 - - 10 10(as on1.11.2004) 12229 5427 7474.5 4231.5 14227.9 25933.92005-2006 -21 1 - - 3 3(as on1.11.2005) 12208 5428 7474.5 4231.5 14230.9 25936.92006-2007 52 243 350 - 35 385(as on1.11.2006) 12260 5671 7824.5 4231.5 14265.9 26321.92007-2008 30 204 - - 15 15(as on1.11.2007) 12290 5875 7824.5 4231.5 14280.9 26336.92008-2009 - 17 - - 55 55(as on1.11.2008) 12290 5892 7824.5 4231.5 14335.9 26391.92009-2010 755 293 - 350 470 820(as on1.11.2009) 13045 6185 7824.5 4581.5 14805.9 27211.9

BIO – FERTILISERSBio-fertilisers are capable of fixing atmospheric nitrogen when suitable

crops are inoculated with them. Bio-fertilisers are low cost, effective,

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environmental friendly and renewable source of plant nutrients tosupplement fertilisers. Integration of chemical, organic and biologicalsources of plant nutrients and their management is necessary for

maintaining soil health for sustainable agriculture. The bacterial organismspresent in the bio-fertiliser either fix atmospheric nitrogen or solubiliseinsoluble forms of soil phosphate. The range of nitrogen fixed per ha/year

varies from crop to crop; it is 80 - 85 kg for cow pea, 50 - 60 kg forgroundnut, 60 - 80 kg for soybean and 50 - 55 kg for moongbean.

All India Production and Dispatches of BioFertilizers

( in tonnes)Year Production Dispatches

2004-05 10479 10427.62005-06 11752.4 11357.62006-07 15871 157452007-08 20111.1 201002008-09 24455 24400

Prices of IFFCO's Fertilisers(Applicable only within India)

UREA NPK DAP MOP

N-46% 10-26-26 12-32-16 20:20:00 18-46-0 K-60%

M.R.P. 4830 7197 7637 6295 9350 4455

Local Taxes Extra, where ever applicable.

Joint Ventures of IFFCOIndian Potash Limited (IPL)

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The Society holds an investment of Rs. 2.68 Crore (2008-09) in IndianPotash Limited (IPL) with equity share holding of 34 per cent in thepaid up equity share capital of IPL. IPL is primarily engaged in trading

of imported Potassic and Non-Potassic Fertilisers.

Industries Chimiques Du Senegal (ICS)

The Society holds 18.54 per cent equity (2008-09) in ICS, whichmanufactures Phosphoric Acid for exports and Phosphatic Fertilisers

for domestic consumption. ICS has the capacity to produce 660000 MTof Phosphoric Acid (as P2O5) per year. The Government of Senegal andIFFCO signed an Agreement on 16th July, 2007 and Amendment on

14th January, 2008, for the debt restructuring and recapitalisation ofICS. Post restructuring and recapitalisation, the new Board has beenreconstituted and the IFFCO Consortium has taken over the

management control of ICS.

Indo Egyptian Fertilisers Company, SAE (IEFC)

The Society promoted a joint venture in Egypt, namely ‘Indo EgyptianFertilisers Company SAE’ (IEFC) along with El Nasr Mining Company of

Egypt to set up a Phosphoric Acid plant with a capacity of 1500 tonnesP2O5 per day. IEFC was incorporated in Egypt as a Joint Stock

Company on 15th November, 2005 with shareholding of IFFCO and itsaffiliates at 76 percent and El Nasr Mining Co. Egypt holding 24 percent equity.

Oman India Fertiliser Company (OMIFCO)Oman India Fertiliser Company (OMIFCO) is a Joint Venture Company

in Oman in which the Society has invested an amount of Rs. 329.08Crore (2008-09) to acquire 25 percent equity in OMIFCO, which has an

installed capacity of 16.52 lakh tonne Urea and 2.5 lakh tonne surplusAmmonia. OMIFCO commenced commercial production at its plant atSur (Oman) with effect from 14th July, 2005.

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Jordan India Fertilizer Company (JIFCO)

IFFCO and Jordan Phosphate Mines Company (JPMC), Jordan haveformed a Limited Liability Joint Venture Company, namely Jordan India

Fertilizer Company (JIFCO) on 6th March, 2008 in Amman, Jordanunder the ‘Free Zone’ system to set up a phosphoric acid plant ofcapacity 1500 tonnes per day P2O5 at Eshidiya in Jordan. In this

company, IFFCO holds 52 per cent equity, while JPMC holds 48 percent equity.

Aria Chemicals (Orissa) LimitedAria Chemicals (Orissa) Ltd. is a joint venture between IFFCO and Aria

Chemicals Private Limited, Chennai wherein IFFCO holds 40 percentequity in this project. This Company will set up an Aluminium Fluoride

facility at Paradeep.

Sector Diversification of IFFCOIFFCO-TOKIO General Insurance Company Limited (ITGI)

IFFCO TOKIO General Insurance Company Limited (ITGI) was formed asa Joint Venture Company in the year 2000 for underwriting generalinsurance business in India. Out of total equity capital of Rs. 247 Crore

in ITGI, the Society and its associates hold 74 percent equity and TokioMarine Asia holds 26 percent.

ITGI had launched products like, ‘Barish Bima Yojna’, ‘Mausam BimaYojna’ and ‘Kisan Suvidha Bima Yojna’ to cater to the insurancerequirements of the farmers. During the year ITGI has launched

various micro insurance policies like ‘Janta Bima Yojna’, ‘JansurakshaBima Yojna’, ‘Janswasthya Bima Yojna’ and ‘Mahila Suraksha BimaYojna’ to provide protection to the farmers and their families and also

poorer sections for their household goods, personal accident andhealth.

IFFCO Chhattisgarh Power limited (ICPL)

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The Society has diversified into the Power Sector by incorporating aJoint Venture Company namely ‘IFFCO Chhattisgarh Power Limited’(ICPL) with Chhattisgarh State Electricity Board (CSEB) to set up a 1320

MW coal-based Mega Power Plant in District Surguja of Chhattisgarh.The Society will hold 74 per cent equity in ICPL.

National Commodity and Derivatives Exchange Ltd. (NCDEX)The Society holds 12 percent equity in the Paid-up Share Capital (Rs.

30 Crore) and the entire preference capital of Rs. 10 Crore in theNational Commodity and Derivative Exchange Limited (NCDEX).NCDEX is a demutualised, on-line national level commodity exchange

providing a trading platform for futures trading in commodities in thecountry and offers its market participants opportunity at pricediscovery and price risk hedging. Currently, NCDEX offers contracts in

56 commodities, that is, 42 agricultural commodities, 2 bullion, 6metals, 2 energy and 3 polymers and 1 environment (carbon credit).

National Collateral Management Services Ltd. (NCMSL)Along with other reputed institutions, IFFCO co-promoted National

Collateral Management Services Limited (NCMSL) in the year 2004. TheSociety holds 13.56 per cent of the paid up equity capital in NCMSL.

NCMSL is engaged in providing various risk management servicesrelated to commodities like Storage and Preservation services,Collateral Management services, Procurement services, Quality Testing

and Certification services and Information services.

Freeplay Energy India Pvt. Ltd.

During the year 2008-09, the Society made an investment of Rs. 4.83Crore to acquire 30 percent shareholding in Freeplay Energy India Pvt.

Ltd. (FPEI), which is engaged in the field of non-conventional energyproducts and devices suitable for rural India. These products are beingmarketed to co-operative societies through Society’s another

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subsidiary company, that is, ‘IFFCO Kisan Sanchar Ltd’. The utility ofthese products has been greatly appreciated by the rural farmers.

Organizations promoted by IFFCOIFFCO has promoted several institutions and organisations to work for the

welfare of farmers, strengthening cooperative movement, improve Indianagriculture.

Indian Farm Forestry Development Cooperative (IFFDC)

Indian Farm Forestry Development Cooperative, a multi-statecooperative society promoted by IFFCO, has been implementing

afforestation projects in Uttar Pradesh, Rajasthan & Madhya Pradesh.The Society has been floated under contribution agreement signedbetween IFFCO and India - Canada Environment Facility (ICEF).

Development of Primary Farm Forestry Cooperative Societies (PFFCS) isan important activity undertaken towards afforestation of waste lands.High participation of women is an important feature of the IFFDC.

Cooperative Rural Development Trust (CORDET)

IFFCO promoted Cooperative Rural Development Trust (CORDET) in theyear 1979 to provide education and training to farmers on variousaspects of crop production, horticulture, animal husbandry, farm

machinery etc.

IFFCO Kisan Sewa Trust (IKST)

Objective: A Relief Trust for the Welfare of the Victims of NaturalCalamities

Kisan Sewa Trust Fund was created out of contributions from:

IFFCO

Employees of IFFCOCooperative Societies and others

TOTAL

Rs 100 million

Rs 10 millionRs 90 million

Rs 200 million

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IFFCO had always been in the forefront of activities for the rescue ofvictims of natural calamities. Every year significant contributions, bothmonetary as well as in kind, are made by IFFCO along with separate

contributions by the employees.

IFFCO Kisan Sanchar Limited (IKSL)

IFFCO Kisan Sanchar Limited was incorporated in April, 2007 with theobjective to use the information technology to empower farmers in

rural areas and to strengthen the cooperative network in the country.The highlight of IKSL’s services in the rural telecom domain continuesto be Valued Added Services (VAS) extended to the subscribers. Five

free voice messages of immediate relevance to people living in ruralareas, a Help Line with experts to provide information inputs to thefarmers and several other innovative activities for subscribers

constitute a major source of knowledge transfer.

An ambitious project 'ICT Initiatives for Farmers and Cooperatives' islaunched to promote e-culture in rural India. IFFCO obsessively nurtures itsrelations with farmers and undertakes a large number of agricultural

extension activities for their benefit every year.At IFFCO, the thirst for ever improving the services to farmers and member

co-operatives is insatiable, commitment to quality is insurmountable andharnessing of mother earths' bounty to drive hunger away from India in anecologically sustainable manner is the prime mission.

All that IFFCO cherishes in exchange is an everlasting smile on the face ofIndian Farmer who forms the moving spirit behind this mission.IFFCO, to day, is a leading player in India's fertiliser industry and is making

substantial contribution to the efforts of Indian Government to increase foodgrain production in the country.

IFFCO is also behind several other companies with the sole intention ofbenefitting farmers.

The distribution of IFFCO's fertiliser is undertaken through over 38155

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co-operative societies. The entire activities of Distribution, Sales andPromotion are co-ordinated by Marketing Central Office (MKCO) at New Delhiassisted by the Marketing offices in the field.

In addition, essential agro-inputs for crop production are made available tothe farmers through a chain of 158 Farmers Service Centre (FSC).

Subsidiaries of IFFCOKisan International Trading FZE (KIT)

Kisan International Trading FZE (KIT) was set up as a wholly ownedsubsidiary of the Society in Dubai in April 2005. KIT has become aleading international trading organisation, which handles the import

and export of various fertilisers and fertiliser Raw Materials andIntermediates.

IFFCO Kisan Bazar Ltd.

IFFCO Kisan Bazar Ltd. (IKBL) was incorporated on 26th February, 2004as IFFCO’s wholly owned subsidiary company for inter-alia

undertaking business in agri-inputs and consumer goods for thebenefit of farmers/cooperatives.

Business and Financial Review of Subsidiaries and AssociatesEven in the year of global economic meltdown, the business portfolio has

been steadily growing in tandem with the high growth aspirations. Theorganization have stepped up investments in related businesses throughvarious Joint Ventures and Associate Companies in order to strengthen

themselves further by looking at new opportunities that are unfolding andcreate value addition in the core fertiliser sector.

On 31st March 2009, the total investments were Rs. 914 Crore incomparison to Rs.770.57 Crore on 31st March 2008 as per the followingbreak-up:

(Rs. In Crore)As on 31st

March

2009 2008

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Investment in Jt. Ventures/Subsidiaries 888.27750.13

Investment in Business Associates 25.73

20.44Total 914.00 770.57

Financial PerformanceAs per its tradition, the Society has again exhibited an impressive financial

performance in all its major parameters, namely, Revenue Growth andResource Utilisation, testifying to the robustness of its Corporate Strategy ofcreating multiple drivers of growth in spite of constraints in the availability

of raw materials, the Global Economic Meltdown and inordinate delays inreceipt of large subsidy amounts from the Government of India. This was

possible due to higher production, sales volume and improvement inoperating efficiencies.

The Society achieved the highest ever sales turnover of Rs 32,933 Crore.This represents an increase of 170 per cent over the previous year. While,the sales volume of fertiliser material increased by 20 per cent to 112.58

lakh MT fertiliser during 2008-09, as against 93.24 lakh MT in the previousyear, the major increase in the sales turnover was on account of substantial

increase in the commodity prices. The performance is even more satisfyingwhen viewed in the light of the challenging business environment of thefertiliser industry.

Sources and Uses of FundsThe Cash Flow from Operating, Investing and Financing activities as reflectedin the Cash Flow Statement is summarised in the following table:

(Rs. In Crore)

2008-09 2007-08Cash provided by operating activities 1560

1072Cash Used in Investing activities (6578)

(970)

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Cash provided by financing activities 4844(190)

Decrease in cash and cash equivalents (174) (88)

Corporate GovernanceThe Society has consistently followed transparent, democratic andprofessional practices in Corporate Governance since its inception. We have

carved out a strong ‘Cooperative Identity’ and are making sincere efforts touphold the ‘Cooperative Values’ by cherishing ‘Cooperative Principles’. The

Society’s endeavour has been to achieve the highest levels of transparency,accountability and full disclosure to its shareholders in a bid to uphold thespirit of Cooperative Principles and Cooperative Values by following the

charter as lay down by International Cooperative Alliance (ICA). The activitiesof the Society have been conducted within the provisions of the Multi StateCooperative Societies Act/Rules and IFFCO Bye-laws. A separate detailed

report on Corporate Governance is given along with the Annual Report.

Financial RatingsThe Society’s excellent credit ratings with bankers and rating agencies allows

access to short term funds including foreign currency borrowings atcompetitive rates. Ratings assigned by different Rating Agencies to the

Society were as under:

CRISIL Ratings

Rating for Governance and Value Creation (GVC) Practices of

IFFCOCRISIL has, assigned a “GVC Level 2” rating to IFFCO. This rating

indicates that the capability of the Society with respect to wealthcreation for all its stakeholders, while adopting sound corporategovernance practices, is high.

Rating for the Rs. 100 crore Commercial Paper Programme of

IFFCOCRISIL has assigned a “P1+ (pronounced “P One Plus”) rating to

IFFCO’s Rs.100 Crore Commercial Paper Programme. This rating

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indicates that the degree of safety with regard to timely payment ofinterest and principal on the instrument is Very Strong.

Rating for the Rs. 400 crore Bonds Programme of IFFCO

CRISIL has assigned the rating on IFFCO’s Long Term BorrowingProgramme to AA/Stable. The rating indicates high degree ofsafety with regard to timely payment of interest and principal on

the instrument.

FITCH Ratings

Rating for the Rs. 100 crore Commercial Paper Programmes ofIFFCO

FITCH Ratings has assigned a National Short Term Rating of ‘F1+(Ind)’to IFFCO’s Rs. 100 crore Commercial Paper Programme. This

rating indicates that the degree of safety with regard to timelypayment of interest and principal on the instrument is Very Strong.

Rating for Long Term Borrowing Programme of IFFCO

FITCH Ratings assigned National Long - Term Rating of ‘AA+ (Ind)’to the Long Term Debt Programme of IFFCO. The outlook on the

Long Term Rating is “Stable”. This rating indicates high degree ofsafety with regard to timely payment of interest and principal onthe instrument.

CARE Ratings

PR 1+ (P One Plus) rating to IFFCO’s Working Capital facilities/Short

Term Loans having tenure of up to one year.

CARE AA’ (Double A) rating to External Commercial Borrowings and

other existing long term borrowings having tenure of over one year.

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Value AddedValue Added is the wealth which an enterprise has been able to create

through the collective effort of capital, management and employees. Ineconomic terms, value added is the market price of the output of an

enterprise less the price of the goods and services acquired by transfer.Value Added can provide a useful measure in gauging performance andactivity of the company.

Figure: Allocation of Value Added

Significant Accounting Policies1. Basis of Preparation of Financial Statements

The Financial Statements are prepared on accrual basis of accountingunder the historical cost convention in accordance with the generallyaccepted accounting principles in India, the Accounting Standards

issued by the Institute of Chartered Accountants of India and therelevant provisions of Multi State Co-operative Societies Act, 2002.

2. Use of Estimates

The preparation of financial statements, in conformity with thegenerally accepted accounting principles, require estimates and

assumptions to be made that affect the reported amount of assets and

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liabilities as of the date of the financial statements and the reportedamount of revenues and expenses during the reporting period.Difference between the actual results and estimates are recognized in

the period in which the results materialise.3. Fixed Assets(i). Fixed Assets are stated at historical cost less accumulated

depreciation. Cost comprises of the purchase price and anyattributable cost of bringing the asset to its working condition

for its intended use.(ii). Assets retired from active use and held for disposal are shown

separately under Fixed Assets at lower of net book value and

estimated realisable value.4. Expenditure incurred during Construction PeriodIn respect of new/major expansion of units, the indirect expenditure

incurred during construction period up to the date of thecommencement of commercial production, which is attributable to the

construction of the project, is capitalised on proportionate basis.5. Intangible AssetsAn intangible asset is recognised where it is probable that the future

economic benefits attributable to the asset will flow to the Society andthe cost of the asset can be measured reliably. Such assets are statedat cost less accumulated amortisation.

6. Impairment of AssetsAt each balance sheet date an assessment is made whether any

indication exists that an asset has been impaired. If any suchindication exists, an impairment loss i.e. the amount by which thecarrying amount of an asset exceeds its recoverable amount, is

provided in the books of account.7. Investmentsi) Long Term Investments are carried at cost. Provision for diminution

in the value of such investments is made to recognise a decline,other than temporary, in the value of the investments.

26SAAB MARFIN MBA


ii) Current Investments are valued at lower of cost and fair valuedetermined on an individual investment basis.

8. Depreciation / Amortisation

(a) Depreciation on Fixed Assets is provided on Straight LineMethod as follows:(i) In respect of assets acquired up to 31st March, 1990 at the

rates prescribed under Income tax Act, 1961 and rulesframed there under.

(ii) In respect of assets acquired after 31st March,1990 at therates based on schedule XIV to the Companies Act,1956except for fixed assets taken over at Paradeep Unit which

are depreciated based on useful life of such assets.(b) Assets are depreciated to the extent of 95% of the originalcost except assets individually costing up to Rs.5000/- which

are fully depreciated in the year of acquisition.(c) Railway wagons under "Own Your Wagon Scheme" are

depreciated over a period of ten years.(d) Machinery Spares which can be used only in connection withan item of Plant & Machinery and its use is expected to be

irregular, are fully depreciated over the remaining useful lifeof the related asset.

(e) Premium paid for acquisition of leasehold land, other than

those acquired under perpetual lease basis, is amortised overthe period of lease.

(f) Leasehold Buildings are fully depreciated over the period oflease in case period of lease is less than the useful lifederived from the rates as per Schedule- XIV of Companies

Act.(g) Additions to assets are depreciated for the full yearirrespective of the date of addition and no depreciation is

provided on assets sold/ discarded during the year. However,in the case of capitalisation of project, depreciation is

27SAAB MARFIN MBA


provided on a pro-rata basis from the date ofcommencement of commercial production.

(h) Intangible assets are amortised over their estimated useful

lives but not exceeding ten years when the asset is availablefor use.

9. Provisions, Contingent Liabilities and Contingent Assets

(a) Provisions are recognised for liabilities that can be measured byusing a substantial degree of estimation, if:

i) The Company has a present obligation as a result of a past event;ii) A probable outflow of resources embodying economic benefits

is expected to

settle the obligation; andiii) The amount of the obligation can be reliably estimated.

(b) Contingent liability is disclosed in case of :

i) Present obligation arising from a past event when it is notprobable that an outflow of resources embodying economic

benefits will be required to settle the obligation.ii) Possible obligation, unless the probability of outflow insettlement is remote.

(c) Reimbursement expected in respect of expenditure required tosettle a provision is recognised only when it is virtually certain thatthe reimbursement will be received.

(d) Contingent assets are neither recognised nor disclosed in thefinancial statements.

10. Operating LeasesAssets acquired on leases wherein a significant portion of the risksand rewards of ownership are retained by the lessors are classified as

operating leases. Lease rentals paid for such leases are recognised asan expense on straight line basis over the term of lease.

11. Prior Period Income / Expenditure

Income/Expenditure items relating to prior period(s) not exceedingRs.2,00,000/- each is treated as Income/ Expenditure for the current

year.

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12. Pre-Paid ExpensesExpenditure up to Rs.50000/- in each case except Insurance Premiumis accounted for in the year in which the same is incurred.

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CHAPTER 1

Working CapitalManagement

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Data AnalysisOperating Cycles

1. Days Inventory Outstanding (DIO)

Days InventoryOutstanding (DIO) =

Average Inventory

Cost of Goods sold (COGS) / 365

(in Rs. Crores)

Year AverageInventory COGS DIO (number of

days)

2004-05 976.03 6809.48 52.3172005-06 1225.57 9166.48 48.8012006-07 1901.79 9578.09 72.4732007-08 1930.52 11336.77 62.1552008-09 1654.23 31496.75 19.170

AnalysisThe smaller the number of days of inventory outstanding, the more efficient

a company is. IFFCO day inventory outstanding is around 19 days for theyear 2008-09 which is very good. Inventory is held for less time and less

money is tied up in inventory. Instead, money is freed up for things likeresearch and development, marketing or even share buybacks and dividendpayments.

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The DIO had always been showing a decreasing trend apart from the periodof 2006-07 in which inventory was build up due to the purchase of Paradeepplant.

2. Days Sales Outstanding

Days SalesOutstanding

(DSO)=

Average Accounts Receivable

Net Sales / 365

YearAvg. A/cReceivables(in crores)

Net Sales(in Crores)

DSO (number ofdays)

2004-05 397.025 7396.87 19.5912005-06 399.495 9942.93 14.6652006-07 418.04 10330.11 14.7712007-08 387.72 12162.82 11.6352008-09 410.495 32933.30 4.550

AnalysisDays Sales Outstanding (DSO) looks at the number of days needed to collecton sales and involves Accounts Receivables. While cash-only sales have a

DSO of zero, people do use credit extended by the company, so this numberis going to be positive.Most of sales of IFFCO are on cash basis and sales to large institutions

only are on credit basis. The DSO for the year 2008-09 is 4.550, which is

32SAAB MARFIN MBA


very good for the company. The DSO is showing a decreasing trendmeaning that the days to collect on sales are decreasing every year.

3. Days Payable Outstanding

Days PayableOutstanding (DPO) =

Average Accounts PayableCost of Goods sold (COGS) / 365

(in Rs. Crores)

Year AverageAccounts Payable COGS DPO (number of

days)

2004-05 728.425 6809.48 39.0452005-06 934.165 9166.48 37.1982006-07 913.425 9578.09 34.8092007-08 833.87 11336.77 26.8472008-09 1664.225 31496.75 19.286

AnalysisThis involves the company's payment of its own bills or Accounts Payables. If

this can be maximized, the company holds onto cash longer, maximizing itsinvestment potential.

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The DPO of IFFCO is around 19 days for the year 2008-09. It is alsoobserved that DPO is decreasing every year. From the data provided, it isfound out that IFFCO had sufficient funds to make payments of its own bills

and make investments in various activities.

4. Gross Operating Cycle

Gross Operatingcycle (GOC) = DIO + DSO

(in Days)Year DIO DSO GOC

2004-05 52.317 19.591 71.9082005-06 48.801 14.665 63.4662006-07 72.473 14.771 87.2442007-08 62.155 11.635 73.7912008-09 19.170 4.550 23.720

AnalysisGross operating cycle is a tool which measures the total number of days

from the day the purchases are made or the stock arrives to the day all the

34SAAB MARFIN MBA


collections are made. Cash is said to be blocked till the collections have beencollected. So the sooner the cash is received from the consumers the betteris for the company as they get cash for further production.

IFFCO gross operating cycle is around 24 days. This is very good for thecompany as a fast turnover rate of these assets is what creates real liquidityand is a positive indication of the quality and the efficient management of

inventory and receivables.

5. Cash Conversion Cycle (CCC)

CashConversionCycle (CCC)

= DIO + DSO -DPO

(in Days)Year DIO DSO DPO CCC

2004-05 52.317 19.591 39.045 32.8632005-06 48.801 14.665 37.198 26.2692006-07 72.473 14.771 34.809 52.4352007-08 62.155 11.635 26.847 46.9432008-09 19.170 4.550 19.286 4.434

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AnalysisThe cash conversion cycle (CCC) measures how fast a company can convertcash on hand into even more cash on hand. The CCC does this by followingthe cash as it is first converted into inventory and accounts payable (AP),

through sales and accounts receivable (AR), and then back into cash.IFFCO CCC is of around 4.4 days in the year 2008-09. This means that the

company is able to generate the cash within this period after making itpayments of its own bills. Since it is very low, it is good for the company.

Ratios related to Inventory Management1. Inventory Turnover Ratio

InventoryTurnoverRatio

=Cost of Goods sold

(COGS)Average Inventory

(in Rs. Crores)

Year COGS AverageInventory

InventoryTurnover Ratio

2004-05 6809.48 976.03 6.9772005-06 9166.48 1225.57 7.4792006-07 9578.09 1901.79 5.0362007-08 11336.77 1930.52 5.8722008-09 31496.75 1654.23 19.040

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AnalysisThe inventory turnover ratio at IFFCO is 19.040 in 2008-09. It means thatthat the company is turning its inventory of finished goods into sales 19.040

times in a year and is in good position. There had been a decrease in theinventory turnover ratio from 7.479 in 2005-06 to 5.036 in 2006-07. During

this period, there was a large amount of inventory in the company becauseof the purchase of the Paradeep production plant. During all other period,the turnover is always increasing.

2. Inventory to Working Capital Ratio

Inventory toWorking

Capital Ratio

= Inventory X 100Working Capital

Year Inventory(in Crores)

Working Capital(in Crores)

Inventory toWorking Capital

Ratio

2004-05 931.50 1499.14 62.1362005-06 1519.64 3387.39 44.8622006-07 2283.94 4880.05 46.8022007-08 1577.10 4404.17 35.8092008-09 1731.36 4490.10 38.559

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AnalysisThe Inventory to Working Capital Ratio measures how well the company isable to generate cash using working capital at its current inventory level. An

increasing inventory to working capital ratio is generally a negative sign,showing the company may be having operational problems. If a company hastoo much working capital invested in inventory, they may have difficulty

having enough working capital to make payments on short term liabilitiesand accounts payable.Inventory to working capital ratio for IFFCO has been decreasing consistently

with increasing very marginally in the year 2006-07 and in 2008-09.

3. Inventory to Current Assets Ratio

Inventory toCurrent

Assets Ratio

= Inventory X 100Current Assets


Current Assets(in Crores)

Inventory toCurrent Assets

Ratio

2004-05 931.50 2603.98 35.7722005-06 1519.64 4748.98 31.9992006-07 2283.94 6081.28 37.5572007-08 1577.10 5775.74 27.306

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2008-09 1731.36 7672.99 22.564

AnalysisThe Inventory to Current Assets Ratio measures that how much percentage

of current assets is formed by the inventories. An increasing inventory tocurrent assets ratio is a negative sign. It means that more & more percentageof current assets is being constituted by the inventories. This indicates poor

operational efficiency of the organization. Also it shows that the fundsinvested in current assets to meet obligations on a short notice are actually

illiquid to some extent and it may be difficult to convert them into cashimmediately. Normally, less than 50 % of current assets are treated asaverage position of inventory.

IFFCO has shown a decrease in this ratio over the past years, whichindicates a GOOD inventory position for IFFCO and, the ratio was never beenabove 38%.

4. Inventory to Sales Ratio

Inventory toSales Ratio

= Inventory X 100Sales


Sales(in Crores)

Inventory to SalesRatio

2004-05 931.50 7396.87 12.593

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2005-06 1519.64 9942.93 15.2842006-07 2283.94 10330.11 22.1102007-08 1577.10 12162.82 12.9672008-09 1731.36 32933.30 5.257

Analysis

The Inventory to Sales Ratio measures the percentage of inventory thecompany currently has on hand to support the current amount of sales. An

increasing Inventory to Sales ratio is generally a negative sign, showing thecompany may be having trouble keeping inventory down and/or Net Saleshave slowed, and can sometimes indicate larger financial problems the

company may be facing.As per the data of IFFCO, this ratio had increased initially till the year2006-07 but is falling down consistently after that time, which is a POSITIVE

sign indicating good movement of inventory.

Ratios related to Receivable Management

1. Debtors turnover ratio

DebtorTurnoverRatio

=Net Sales

Average AccountsReceivable

40SAAB MARFIN MBA


Year Net Sales(in Crores)

Avg. A/cReceivables (in

Crores)Debtor Turnover

Ratio

2004-05 7396.87 397.03 18.6312005-06 9942.93 399.50 24.8882006-07 10330.11 418.04 24.7112007-08 12162.82 387.72 31.3702008-09 32933.30 410.50 80.227

AnalysisThis ratio is also known as Accounts Receivable Turnover Ratio andmeasures the number of times Accounts Receivables were collected during

the year. This is also a measure of how well the company collects sales oncredit from its customers.

IFFCO have a high and increasing Accounts Receivable Turnover which isa Positive Sign. The company is able to turnover its debtors 80.227 times ina year.

2. Average collection period

AverageCollectionPeriod

=360

Debtor TurnoverRatio

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Year Sales(in Crores)

AverageDebtors(in Crores)

DebtorTurnoverRatio


2004-05 7396.87 397.03 18.631 19.3232005-06 9942.93 399.50 24.888 14.4652006-07 10330.11 418.04 24.711 14.5692007-08 12162.82 387.72 31.370 11.4762008-09 32933.30 410.50 80.227 4.487

AnalysisThe Average Collection Period represents the average number of days for

which a firm takes to collect accounts receivables. It measures the quantityof debtors.

The Average Collection Period for IFFCO was around 4.5 days in 2008-09.This is extremely good considering the fact that IFFCO is a fertilizer company,and functions as a cooperative. The maximum collection period during this

five year period is around 17 days in the year 2005-06 and is decreasingsince then.

3. Debtors to current assets ratio

Debtors to = Debtors X 100

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CurrentAssets Ratio

Current Assets

Year Debtors(in Crores)


Debtors to CurrentAssets Ratio

2004-05 324.59 2603.98 12.4652005-06 474.40 4748.98 9.9902006-07 361.68 6081.28 5.9472007-08 413.76 5775.74 7.1642008-09 407.23 7672.99 5.307

AnalysisDebtors to Current Assets Ratio indicates the position of debtors in total

current assets. This ratio is calculated by debtors with current assets. Ifdebtors are average or less than average, it indicates proper realization ofdebtors. On the other hand, if debtors are very heavy in respect of other

current assets, it indicates poor recovery of the company.As Per the table, the Debtors to Current Assets Ratio for IFFCO decreased

from 2004-05 to 2006-07 and then increased in the year 2007-08 and thendecreasing onwards. The decrease is a healthy sign showing properrealization of debts in 2008-09.

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4. Debtors to working capital ratio

Debtors toWorking

Capital Ratio

= Debtors X 100Working Capital

Year Debtors(in Crores)


Debtors toWorking Capital

Ratio

2004-05 324.59 1499.14 21.6522005-06 474.40 3387.39 14.0052006-07 361.68 4880.05 7.4112007-08 413.76 4404.17 9.3952008-09 407.23 4490.10 9.070

Analysis

Working capital is directly related with the position of debtors. If debtors are

lower as compared to Working Capital, then it indicates proper and smoothutilization of working capital. But on the other hand, the amount of debtor is

very large in that condition, Working capital blocked and operationalefficiency is directly affected.From the data, it can be seen that this ratio for IFFCO has been decreasing

which is good for the company. There was a increment in the year 2007-08due to increase in the debtors but again it continued to decrease.

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5. Debt to Equity Ratio

Debt toEquity Ratio = Debt

Total Equity

Year Debt(in Crores)

Equity(in Crores)

Debt to EquityRatio

2004-05 647.09 3301.15 0.1962005-06 5035.39 3555.38 1.4162006-07 6486.12 3641.84 1.7812007-08 6775.64 3688.66 1.8372008-09 12802.78 3958.87 3.234

Analysis

The ratio shows the extent to which debt financing has been used in thebusiness. A high ratio means that claims of creditors are greater than those

of owners. A high level of debt introduces inflexibility in the firm’soperations due to the increasing interference and pressure from creditors. Alow debt-equity ratio implies a greater claim of owners than capital.

At IFFCO, this ratio is increasing every year. It means that increase in debtof the company is more than the increase in the equity. In the year 2008-09,it increased to 3.234 from 1.837 in the year 2007-08 because of the major

increase in the short term loans from the banks.

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Ratios Related to Cash Management

1. Working capital ratio or current ratio

Current Ratio=

Current AssetsCurrent Liabilities

Year Current Assets(in Crores)

CurrentLiabilities(in Crores)

Current Ratio

2004-05 2603.98 1104.84 2.3572005-06 4748.98 1361.58 3.4882006-07 6081.28 1201.23 5.0632007-08 5775.74 1371.57 4.2112008-09 7672.99 3182.89 2.411

AnalysisWorking Capital Ratio is used to analyze the short term solvency of thecompany. Usually a ratio of 2:1 is considered to be the best current ratio.

Higher the ratio, greater is the ability of the firm to meet its short termobligations.

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Current Ratio at IFFCO is always greater than 2 in all five years for whichdata has been analyzed indicating that IFFCO never really face a majorproblem in meeting its short-term liabilities.

2. Liquid ratio or Acid-test ratio or Quick ratio

Quick Ratio=

Current Assets - InventoriesCurrent Liabilities

YearCurrentAssets(in

Crores)

Inventories(in Crores)

QuickAssets(in

Crores)


Quick Ratio

2004-05 2603.98 931.50 1672.48 1104.84 1.5142005-06 4748.98 1519.64 3229.34 1361.58 2.3722006-07 6081.28 2283.94 3797.34 1201.23 3.1612007-08 5775.74 1577.10 4198.64 1371.57 3.0612008-09 7672.99 1731.36 5941.63 3182.89 1.867

Analysis

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Position of Liquid ratio is very good. The Quick Ratio of 1:1 is consideredto be satisfactory. This is so because if the quick assets are equal to thecurrent liabilities then the company may be able to meet its entire

short-term obligations pretty conveniently.

The quick ratio of the company is above 1 for all the five years. The quickratio was 3.161 and 3.061 during the year 2006-07 and 2007-08

respectively. This is due to large amount of inventory at IFFCO during thatperiod. However, the reason for this is the purchase of Paradeep production

plant during that period.

3. Cash to current assets ratio

Cash toCurrent

Asset Ratio=

CashX 100

Current Assets

Year Cash(in Crores)


Cash to CurrentAsset Ratio (%)

2004-05 199.10 2603.98 7.6462005-06 98.22 4748.98 2.0682006-07 330.84 6081.28 5.4402007-08 243.32 5775.74 4.2132008-09 69.63 7672.99 0.907

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AnalysisThe Cash to Current Assets Ratio indicates what percentage of current assetsis comprised of cash at hand and cash at bank.

Upon analyzing the data of the past 5 years for IFFCO it was observed that

the cash balances formed only a very small percentage of the current assets.In the last 5 years, the highest was 7.65% in the year 2004-05 after which itis decreasing. The ratio had variations in this period an in the year 2008-09,

it was 0.91%. This is a POSITIVE SIGN as it shows effective utilization of thefunds of the organization and there is not much of idle cash with the

organization.

4. Sales to current assets ratioSales to

Current AssetRatio

=Sales

Current Assets



Sales to CurrentAsset Ratio

2004-05 7396.87 2603.98 2.8412005-06 9942.93 4748.98 2.0942006-07 10330.11 6081.28 1.6992007-08 12162.82 5775.74 2.1062008-09 32933.30 7672.99 4.292

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AnalysisThe Sales to Current Assets Ratio basically measures how well a company ismaking use of its assets in generating sales. An increasing sale to current

assets ratio is a POSITIVE SIGN as it indicates that the company has a healthyproduction scenario because of which most of inventory is being convertedinto sales for the company.

IFFCO has shown a decrease in its sales to current assets ratio from2004-05 to 2006-07 after which it is constantly increasing which implies

that the company is doing well and inventory is not being held up at anystage in the production process.

5. Working capital turnover ratioWorking Capital = Current Assets - Current Liabilities

WorkingCapitalTurnoverRatio

=Sales

Average Working Capital



Working CapitalTurnover Ratio

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2004-05 7396.87 1580.36 4.6802005-06 9942.93 2443.27 4.0702006-07 10330.11 4133.72 2.4992007-08 12162.82 4642.11 2.6202008-09 32933.30 4447.14 7.406

AnalysisIFFCO has a high working capital turnover ratio.

A high or increasing Working Capital Turnover is usually a Positive Sign,showing the company is better able to generate sales from its Working

Capital. The company has been able to gain more Net Sales with the smalleramount of Working Capital in 2008-09 as compared to that in 2007-08. Theworking capital turnover had been decreasing from 4.860 in the year

2004-05 to 2.499 in 2006-07 but it increasing since then to 7.406 in theyear 2008-09.

6. Sales to working capital ratioWorking Capital = Current Assets - Current Liabilities

Sales toWorking

Capital Ratio=

SalesAverage Working Capital

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Sales to WorkingCapital Ratio

2004-05 7396.87 1580.36 4.6802005-06 9942.93 2443.27 4.0702006-07 10330.11 4133.72 2.4992007-08 12162.82 4642.11 2.6202008-09 32933.30 4447.14 7.406

AnalysisThe Sales to Working Capital ratio measures how well the company's working

capital is being used to generate sales. Working Capital represents themajor items typically closely tied to sales, and each item will directly affectthis ratio. Increasing Sales to Working Capital ratio is usually a positive sign,

indicating the company is more able to use its working capital to generatesales.

The sales to working capital ratio has been increasing from 2007-08 forIFFCO which is good as it implies that the company is generating more &more sales and is able to utilize its working capital more efficiently with the

passing years. The decrease of the ratio in the previous years was due to theincrease in inventory holding which was required for the Paradeep production plant.

Profitability Ratios

1. Return on Assets

Return on Assets = Profit After Tax

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(ROA) Average Total Assets

Analysis

ROA is an indicator of how profitable a company is relative to its totalassets. The ROA figure gives investors an idea of how effectively thecompany is converting the money it has to invest into net income. The

higher the ROA number, the better, because the company is earning moremoney on less investment.

At IFFCO, the ROA is increasing from the year 2006-07 which is good forthe company. Earlier it was decreasing as there was increase in the assets

due to purchase of the production plants.2. Return on Equity

Return onEquity (ROE) = Profit After Tax

Average Equity

YearProfit AfterTax (inCrores)

Average TotalAssets

(in crores)ROA

2004-05 319.64 4449.22 0.0722005-06 341.35 6709.33 0.0512006-07 175.02 9855.58 0.0182007-08 257.59 10830.24 0.0242008-09 360.01 14151.13 0.025

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Year Profit After Tax(in Crores)

Average Equity(in crores) ROE

2004-05 319.64 3205.37 0.1002005-06 341.35 3428.27 0.1002006-07 175.02 3598.61 0.0492007-08 257.59 3665.25 0.0702008-09 360.01 3823.77 0.094

Analysis

Return on Equity measures the rate of return on the ownership interest ofthe common stock owners. It measures a firm's efficiency at generating

profits from every unit of shareholders' equity. ROE shows how well acompany uses investment funds to generate earnings growth.

From the data, IFFCO ROE had always been good. There was a decrease in

the year 2006-07 due to the purchase of Paradeep plant which increased thepurchases of the organization.

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3. Return on Capital Employed

Year Profit Before Tax(in Crores)

Average CapitalEmployed(in crores)

ROCE

2004-05 470.92 4449.22 0.10582005-06 481.90 6709.33 0.07182006-07 251.25 9855.58 0.02552007-08 380.52 10830.24 0.03512008-09 441.95 14151.13 0.0312

Analysis

ROCE is used to prove the value the business gains from its assets and

liabilities. It basically can be used to show how much a business is gainingfor its assets, or how much it is losing for its liabilities. At IFFCO, ROCE hadshown variable changes. This is due to the variable increments in the

capital employed (majorly the loan funds) as compared to the profit beforetax.

Return onCapitalEmployed(ROCE)

=Profit Before Tax

Average Capital Employed

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4. Net Profit Margin

Net ProfitMargin = Profit After Tax

Sales

Year Profit After Tax(in Crores)

Sales(in Crores) Net Profit Margin

2004-05 319.64 7396.87 0.0432005-06 341.35 9942.93 0.0342006-07 175.02 10330.11 0.0172007-08 257.59 12162.82 0.0212008-09 360.01 32933.30 0.011

AnalysisNet profit margin ratio establishes a relationship between net profit and

sales and indicates management’s efficiency in manufacturing, administeringand selling the products. This ratio is the overall measure of the firm’s ability

to turn each rupee sales into net profit.From the data, IFFCO have a variable net profit margin. The sales turnoverdepend upon the element of subsidy which is decided by the government

from time - to - time depending on the condition of international market.During the year 2008-09, the component of subsidy increased tremendouslydue to high international fertilizer price. Looking at the turnover of 2008-09,

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the subsidy amounted to Rs. 25545.60 crores vis-à-vis to subsidy amountedto Rs. 6194.35 crores for the year 2007-08.

Loans and Advances to Current Assets

Loans andAdvances toCurrent Assets

Ratio

=Loans andAdvances X 100

Current Assets

YearLoans and

Advances (inCrores)


Loans andAdvances toCurrent Assets

Ratio2004-05 1148.77 2603.98 44.1162005-06 2656.70 4748.98 55.9432006-07 3104.82 6081.28 51.0552007-08 3541.56 5775.74 61.3182008-09 5464.77 7672.99 71.221

AnalysisAs per the data, it can be clearly said that the position of the Loans &Advances with respect to current assets is increasing every year (a marginal

decrease in the year 2006-07) which is very Good for IFFCO. The ratio wasaround 44.116% in 2004-05 which had increased to 71.221% in 2008-09.

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Loans and Advances to Working Capital

Loans andAdvances to

Working CapitalRatio

=Loans andAdvances X 100

Working Capital

YearLoans and

Advances (inCrores)


Loans andAdvances to

Working CapitalRatio (%)

2004-05 1148.77 1499.14 76.6292005-06 2656.70 3387.39 78.4292006-07 3104.82 4880.05 63.6232007-08 3541.56 4404.17 80.4142008-09 5464.77 4490.10 121.707

Analysis

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This ratio shows how significant Loans & Advances Are to Working Capitaland that Loans & Advances plays an important role in working capitalmanagement of IFFCO. This ratio shows that the company has more cash in

hand and can utilize these funds as per the company requirement.At IFFCO, this ratio has always been increasing which is good for theorganization. This means that company is having enough cash and utilizing

it effectively.

Working Capital Position

Working Capital=

Current Assets - CurrentLiabilities

Year Current Assets(in Crores)



2004-05 2603.98 1104.84 1499.142005-06 4748.98 1361.58 3387.402006-07 6081.28 1201.23 4880.052007-08 5775.74 1371.57 4404.172008-09 7672.99 3182.89 4490.10

Analysis

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Working Capital Position indicates changes in Current Assets and CurrentLiabilities over the study period and also during a particular year. Workingcapital position shows operational efficiency & proper utilization of short

term resources in an organization.The trend of working capital with respect to Current Assets and CurrentLiabilities for IFFCO is increasing. This shows a GOOD GROWTH of the

company. The Working Capital is managed properly & efficiently by theorganization. However, there was decrease in the year 2007-08 due to

decrease in the level of inventory.

Comparison with some competitors in the Industry

IFFCO CoromandelInternational

NationalFertilizers

Fertilizersand

ChemicalsTravancore

ChambalFertilizers

Net Worth 3958.87 1127.14 1470.70 647.94 1234.35

Sales Turnover 32933.30 9374.98 5127.10 706.89 4595.53

Net Profit 360.01 496.38 97.46 42.95 230.56

Inventory 1731.36 1347.51 348.68 412.60 316.82

Total Current Assets 7672.99 3726.38 1525.51 823.53 1566.28

Total Current Liability 3182.89 1755.02 886.65 392.21 1288.58

Working Capital 4490.10 1971.36 638.86 431.32 277.70

Total Assets 17303.77 2926.50 1851.19 1457.77 3982.04Working Capital to SalesTurnover 0.136 0.210 0.125 0.610 0.060Inventory to WorkingCapital 0.386 0.684 0.546 0.957 1.141

Working Capital Ratio 2.41 2.12 1.72 2.10 1.22

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Findings

After the analysis of the components of current assets & current

liabilities and the trends of working capital, we find that

Current assets are increasing more than current liabilities. But thecurrent ratio has decreased as the percentage increase in current

liabilities is more than the current assets.

Cash and Bank Balances have decreased during this period which

indicates proper utilization of funds at IFFCO.

Position of inventory is Very Good in current assets (22.564%).Inventory Turnover Ratio increases consistently, which shows greater

degree of utilization of inventory during the study period.

Position of Debtors to Current Assets is 5.307%. This ratio had

decreased during this period with an increase in the year 2007-08.This increase was due to the significant increase in the debts of thecompany.

Loans and Advances are increasing every year and contribute majorlyto current assets. This means that the company is not facing anyproblem to get the required short term financing.

Working CapitalTurnover 7.41 6.21 7.06 1.97 9.63Inventory to CurrentAssets 0.226 0.362 0.229 0.501 0.202

Inventory to Sales 0.053 0.144 0.068 0.584 0.069

Net Profit Margin 0.011 0.053 0.019 0.061 0.050

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Large part of working capital is involved in maintaining inventory and

it depends on the level of inventory every year.

Working capital of the company had increased till 2006-07 after which

it has remain constant with small changes.

Debt to equity ratio increased during the year 2008-09 as the debt

increased due to increase in short term borrowings.

Inventory as a component of current assets was high during thebeginning of the period after which it has continuously decreasing.

Net profit margin decreased in the year 2008-09 because of thesignificant increase in the raw material prices and consequent increasein subsidy. Looking on the trends, IFFCO has been able to manage the

profits.The major variation in the ratios during this period is due to the

purchase of Paradeep production plant.

Conclusions and Suggestions

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Working capital is one of the most important aspects of operationalefficiency of business. Working Capital plays a very important role in thefunctioning of any organization. Both the current assets and current

liabilities are very much influencing factors on the working capital of anorganization.

After the discussion and analysis of the financial position of IFFCO Ltd., it isclear that the working capital of IFFCO is in sound position. Working capital

is not measurable by only current assets & current liabilities but thereare some other factors also that have an influence on the working capital.

In current assets, there are two most important factors, Debtors andInventory that affect working capital. In IFFCO Ltd., Inventory and Debtorsare efficiently managed to strengthen the position of the organization both

in short term and long terms.

After analyzing and interpreting the financial data of INDIAN FARMERSFERTILIZER COOPERATIVE LIMITED (IFFCO) with the help of Ratio Analysis,the following suggestions were given to the organization for further

betterment & improvement in the working capital:

The present status and levels of current assets is extremely good and

therefore it requires proper maintenance.

The current percentage of inventory is high which is not good foroperational efficiency and sound working capital and thus, it need to

be controlled by using various inventory management techniques suchas JIT or Kanban. Another alternative would be to have varying stock orinventory levels during the different seasons or even months and,

thereby, altering the production to suit such needs.

Cash balances have a lower percentage in current assets. This requires

some concern as cash and bank balances are the most liquid of allcurrent assets.

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As the sales turnover majorly consists of subsidiary, the company shall

also depend less on subsidy which is dependent on the annual budgetfixed by the government of India, i.e., when the total outflow of any

financial year is more than the budgeted subsidiary, themanufacturers/ importers have to wait for additional budget or theirsubsidiary get realized in the next financial year.

As the Government of India wants the fertilizers to be supplied atminimum price, they are compensating manufacturers/ importers by

means of subsidy. The government should device a method wherebythe price of fertilizers should increase every year to some extent. Thiswill reduce the subsidy burden on the government and companies will

be able to realize cash against their sales.

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CHAPTER 2

Cash Management

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CASH MANAGEMENT AT IFFCOIFFCO, a large co-operative society, has been generating large amount ofprofits over the years from the date of its commercial production. Its internal

sources generation has been adequate enough to finance the working capitalneed besides its other long term commitments though to meet its working

capital requirements. The main objective of Cash Management of IFFCO isnot different from the basic objective of cash.

Figure: Cash flow at the Organization

The cash is collected by Marketing Central Office (Mkco) and is transferred tothe Head Office (HO). From the Head Office, the cash is provided to theplants depending on their requirements. The plants produce fertilizers and

the sale of products provides cash which is collected by Marketing CentralOffice. Sales are often termed as Release Order (RO).

The fertilizers are sold to corporate societies and most of the payments aremade on prepaid basis. The payments are done through the means of

demand drafts/ pay orders. The system of payment through cheques is not

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used further. There are very few service centres which transacts in cash.There is very small amount of credit for a defined credit period, only to largefederations. The Field Representatives (FR) takes Demand Drafts/ pay orders

from the corporate societies before the Release Order.

IFFCO has been effectively managing the cash in the following ways:

To measure the cash flow time line and assess the magnitude ofsavings that could result from the alternative management strategies.

To compare the length of timeline with that of other companies in theindustry or standard set by the company.

To not permit cash to stand idle for as much as a day

To know the requirements of funds at various units at differentperiods of time

Repayment of loans and debt has been one of the prime objectives

To make every effort to speed up the flow

Bankers of IFFCOIndian Overseas Bank

State Bank of India

Bank of Baroda

Standard Chartered Bank

The Maharashtra State Cooperative Bank Ltd.

The West Bengal State Cooperative Bank Ltd.

Madhya Pradesh State Cooperative Bank Ltd.

The Karnataka State Cooperative Bank Ltd.

The Punjab State Cooperative Bank Ltd.

The Hong Kong and Shanghai Banking Corporation Ltd. (HSBC)

ICICI Bank Ltd.

IDBI Bank Ltd.

HDFC Bank Ltd.

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Punjab National Bank

Axis Bank

BNP Paribas

Implementation of Cash Management at IFFCO

In order to effectively manage its cash, so as to sustain liquidity and

profitability, IFFCO has chosen to go for a Centralized Cash ManagementSystem. The Centralized Cash Management System means that the cash of

IFFCO is basically managed from the Head Office situated at New Delhi. Inorder to smoothly manage the cash, IFFCO takes the service of IOB, its mainbank from the consortium of bank. IOB plays the part of maintaining the

daily fund position of IFFCO i.e. on a daily basis the cash inflows andoutflows are recorded in computer and are daily analyzed by the cash andbank section of IFFCO, which also carries out its daily position on the fund

statement book.

This Centralized Cash Management at IFFCO also helps in to check the idlecash, which would otherwise have a cost structure attaches to it. Throughthis system, the cash is not allowed to remain idle at various branches and is

used by the co-operative giant to pay its short term liabilities, which mayarise. This system of centralized cash management gives an addedadvantage to IFFCO to effectively implement a policy of cash flow timeline

management. IFFCO maintains a strict vigil on the movement of funds forcollection and payments both. Although manufacturing units are

independent enough to issue cheques, but they still have to inform the headoffice. It also prepares the budgets and forecasts and matches the actualwith that, so as to have a proper control over transaction.

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A very efficient Management Information System has been introduced atIFFCO which facilitates:

Forecasting of cash flows on monthly basis or weekly or daily basis,

Helps in cash planning

A Consolidated Statement is prepared at the corporate office which forms

the main basis for planning of funds flow for the continuing month.

Sales Procedure in IFFCO

In IFFCO, there are three systems of sales:

1. Sales through Societies

In the case of Sales through societies, Demand Drafts are received inadvance by IFFCO, i.e. no credit sales are allowed to them. TheDemand Drafts are collected from them and then they are either

deposited with the concern district bank or are sent to state office fordeposit with the respective bank.

2. Sales through FederationIn the case of Sales through Federation, the sales are normally made

on credit basis with a defined credit period. The payments arenormally received by IFFCO’s State Office and are deposited with therespective bank.

3. Sales through IFFCO’s Own Service CentreThe sales through IFFCO’s own outlets are made on cash basis. These

outlets are called as Farmers Service Outlet (FSC). The funds aredeposited with the bank on daily basis and are transferred by the bank

to IFFCO’s state office.

In IFFCO, all the realization of sale proceeds is centralized to IFFCO’s DelhiOffice i.e. the funds are ultimately reaching Delhi for utilization, for IFFCO’s

manufacturing units. The funds that are sent to Delhi are then again

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redistributed to the manufacturing units and all the other offices, farmerservice centers, cooperative societies etc. for meeting their expenses.

Collection Procedure

In earlier times, Field Representatives takes the Demand Drafts/ pay orders

and deposits into Area Office. From Area Office it goes to State Office. FromState Office, Demand Draft goes to Marketing Central Office and in the end,to the Head Office. This process takes around six days. Due to this delay, the

transaction cost was high and there was a loss of interest on the paymentsreceived.

After the implementation of CMS, bank services are hired for bettermanagement of cash. The Field Representatives collects the Demand Draftsfrom the societies. The bank agent collects these Demand Drafts and

deposits them into the State offices, either in person or through courier.From State Offices, the drafts get deposited into the banks through bankagents only. The bank then transfers the money to the Head Office. This

process takes one day or a maximum of two days. Thus, it saves at least fourdays and cash of the organization. There are different banks for different

state offices. For the service provided by the banks, different banks chargethe organization differently.Cash savings can be classified as follows:

Direct savings

Direst Savings are the savings on the interest of the days for which theorganisation has received its cash earlier.

Indirect savingsIt includes administrative cost reduction (transaction and

transportation cost). Since the bank is agreement bound, in case ofdelays, it covers up some of the losses of the organisation.

The savings can be explained as following. The collection through CMS in the

year 2008-09 was approximately Rs. 5250 crores. As there is more than onebank in the CMS, an approximate interest rate of 8 % p.a. is taken for

calculations. Also, a difference of four days is taken. On calculating, the

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interest comes out to be Rs. 4.6 crores. This means that IFFCO saves aroundRs. 4.6 crores in the year 2008-09 due to implementation of CMS.

Cash Management Services (CMS)

The Cash Management Services (CMS) is a technology driven system in whichbank is under contractual obligation to make payment at the designated

branch on the stipulated date as agreed in the agreement. Under this system,the banks pick up the Demand Drafts from IFFCO’s designated locations andpool the same with them. A High Value Demand Draft of the consolidated

amount is deposited by the collecting bankers in IFFCO’s central account forwhich IFFCO receives the credit the same day. Thus, the amounts which arecollected on day zero are received on IFFCO’s Central Account on day one.

Salient features of Cash Management Services (CMS)Cash Management is the stewardship or proper use of an entity’s cashresources. It serves as the means to keep an organization functioning by

making the best use of cash or liquid resources of the organization. At thesame time, the organization has the responsibility to use timely, reliable andcomprehensive financial information systems. Cash Management helps the

organization in:

Eliminating idle cash balances

Monitoring exposure and reducing risks

Ensuring timely deposit of collections

Properly timing the disbursements

Reducing the interest costs

Improving the liquidity as it reduces the transit time enabling the firm

to realize drafts earlier.

Better accounting and Reconciliations as detailed information on drafts

deposited are made available on a daily, weekly/periodically basis,thus simplifying accounting, reconciliation and query resolution.Customized Management Information System (MIS) as per

requirements of the firm can also be made available.

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Interconnectivity with the branch offices increases as these banks

provide a host of internet software on the CMS account that allows thefirm to view current account balances, download statements, view CMS

collections, effect payments/receive payments online, plus a host ofother activities.

Collection Services by these banks ensure quick realization of local

and outstation drafts on day zero and provide the funds in a centralcollection account on day one.

Costs and Benefits of CMS

Before the introduction of cash management services, various

branches of banks at area offices used to take 2-3 days in transferringthe funds to IFFCO’s Central Account. But with the coming of the CMS,

the amount which are collected (as a high value drafts) on day zero,are received on IFFCO’s Central Account on day one.

Due to late transfer of funds, late payments were made due to which

IFFCO was losing a lot of amount of money in the form of interests andpenalties. But now, since the transfer of funds is done through CMS,

IFFCO is saving a lot of interest as the cash credit utilization has beenreduced to the extent of amount received in that account.

With the introduction of CMS, there is a timely remittance of funds and

in the case the bank with whom the CMS agreement has been madefails to make timely remittance, then they are bound to pay interest onlate transfer of funds.

DETAILS OF STATE WISE EXISTING CMS BANKS

NAME OF BANK STATE PICK UPLOCATION

SERVICECHARGES

PAY OUTDAY

HSBC Punjab Chandigarh NIL Day 1Haryana Chandigarh NIL Day 1Rajasthan Jaipur NIL Day 1West Bengal Kolkata NIL Day 0 (HV)

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Day 1Maharashtra Mumbai NIL Day 0 (HV)

Day 1Pune NIL Day 1Nagpur NIL Day 1Aurangabad NIL Day 2Other Districts NIL Day 2

BNP PARIBAS Nasik 0.15/1000 Day 2Kholapur 0.15/1000 Day 2Other Districts 0.15/1000 Day 2

StandardChartered Assam Assam NIL Day 1Bank A. P. A. P. NIL Day 1

Karnataka Karnataka NIL Day 1Tamil Nadu Tamil Nadu NIL Day 1Orissa Orissa NIL Day 1Kerala Kerala NIL Day 1

HDFC Bank HP NIL Day 2J & K NIL Day 1Bihar Patna NIL Day 1

Gaya NIL Day 2Bhagalpur NIL Day 2Muzzafarpur NIL Day 2

Jharkhand Ranchi NIL Day 2Uttaranchal Dehradoon NIL Day 2

Haldwani NIL Day 2Rudraprayag NIL Day 2

ICICI Bank Uttar Pradesh Lucknow NIL Day 0 (HV)Day 1

All 13 AreaOffices 0.02/1000 Day 1

IOB Gujrat Ahemdabad NIL Day 1Chhatisgarh Raipur NIL Day 1MP Bhopal NIL Day 1

SBI Uttar Pradesh FSC NIL Day 1

Axis Bank Uttar Pradesh 38 Districts NIL Day 1

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HV: High ValueFSC: Farmers Service Centre

Cash Management Services (CMS) Agreement through the HSBCBank

Introduction of Cash Management Services (CMS)

IFFCO is availing the cash management services of m/s HSBC bank for

remittances of sale proceeds in the states of Punjab, Haryana, Rajasthan,West Bengal and Maharashtra. Collection services agreement was made on

28th December’2001 between IFFCO and HSBC. The bank will be providing itsservices known as Collection Services in the manner and subject to termsand conditions set out hereunder:

1. These services shall cover instruments (demand drafts/ pay orders)favouring IFFCO and marked “A/c Payee only”, that are

Locally payable at specified HSBC branch locations

Locally payable at other specified locations

Outstation instruments payable at specified locations

Outstation instruments payable at all other locations

2. Demand drafts etc., pickups by courier services shall be arranged at

IFFCO’s offices in Mumbai, Pune, Aurangabad, Nagpur, at 1000 hrsand 1430 hrs by HSBC free of charge. This will aid HSBC in maintaining

their service levels of Day 1 credits for Mumbai, Day 1 credit for Pune,Day 1 credit for Nagpur and Day 2 credit for Aurangabad for allcheques picked up on Day 0. (Day 0 being the date of collection in the

clearing locations.)

3. HSBC shall refund interest @ HSBC PLR 15.50% - 4 % to IFFCO in caseof delayed credits to IFFCO’s account. IFFCO will be required to pay

interest @ HSBC PLR 15.50% - 4% to HSBC in case of demand draftreturns for the period during which the bank will be out of funds.

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4. In the unlikely event of an instrument being misplaced whilst in transitafter being picked up/ acknowledged by HSBC’s courier and credit notmade available to IFFCO as per the contracted agreement, HSBC shall

pay interest to IFFCO @ HSBC PLR 15.50% - 4% for the delayed periodto a maximum period of 30 days. HSBC shall provide all assistance toIFFCO to procure a duplicate demand draft to put a stop payment in

order that a duplicate instrument is issued at the earliest.

5. In the event drafts are lost in transit, HSBC shall debit IFFCO for thesame, and HSBC’s statement intimating the non-payment of the

instrument(s) will be final and binding on IFFCO.

6. HSBC can make MIS available at the check pickup points, the StateOffices as well as Marketing Head office in New Delhi to aid

reconciliation and to help IFFCO exercised greater control on thecollections. The MIS can be amended to contained draft wise ordeposit slip wise details as per IFFCO’s requirements.

Management information system (MIS) reportMIS report contains the demand draft number, amount collected and the

cheques deposit slip number. Marketing Central Office checks the amountcollected by different State Offices and verifies it to that collected by banks.A customized MIS provided by HSBC bank can include:

Daily report of deposits made at various locations

Location wise report

Credit Forecast report

Monthly cumulative report-date wise/location wise

Monthly charging statement

Monthly draft return statement

Customized reports as per mutual agreement

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HSBC has a large pool account which has a dummy account of IFFCO. Thebank takes one day for realization of money and deposits it directly in theaccount of Head Office at New Delhi. The bank provides details to Marketing

Central Office (Mkco) and other offices (SO, AO, FR) through ManagementInformation System (MIS) report.If there is any mismatch in the value of MIS report or any other problem/

query, the department contacts it immediate lower department only.

In CMS, the banks used are as follows:

The HSBC Bank

BNP Paribas

Indian Overseas Bank

Standard Chartered Bank

The ICICI Bank

State Bank of India,

HDFC Bank

Axis Bank

The collection of BNP Paribas, Standard Chartered Bank, ICICI Bank, HDFCBank and Axis Bank are deposited into the centralized account of IOB

whereas the collection of HSBC bank is deposited into centralized account ofSBI. SBI manages the collection of 5 states only out of total of 20 states. As

76SAAB MARFIN MBA


the money comes into these banks, it is transferred to the Head Office by theevening. Through Head Office, the money is distributed into variousdepartments as per the requirements.

For Collecting Payment

Current Features

1. DDs collected by the state/area offices are picked up by an authorizedagent of the banks and sent for collection.

2. Banks also pick up the high value instruments from the pickuplocation before the high value cut off time, present for clearing andeffect the pooling on the same day at the nodal account.

3. Banks gives credit to the main pooling account on a pre agreed day.

4. The collections are transferred the same day to the cash credit account

of IFFCO as per the standing instructions through a high valueinstrument.

5. Banks gives detailed management information system report as per

the requirements of IFFCO.

6. This collection account is used for funding the disbursement ofmanufacturing units.

ReportingThe month wise projections of collections for the year are made in advance.

Daily reports of collection against sales proceeds are made and aresubmitted in the higher departments for comparison with the projections.

Disbursement of Funds

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In addition to CMS, IFFCO has an innovative disbursement scheme known asAnywhere Banking Overdraft Account facility with IDBI and HDFC Bank.Under this scheme, the balances of all the state offices maintain are

transferred to the Central Account having overdraft facilities whereby thebalances with the state offices remain zero.

Anywhere banking (ANB) Facility

ANB facility offers IFFCO the flexibility of making at par payments acrossmultiple locations by using a single current account maintained at Delhi.

All the payments are made through IDBI and HDFC banks. IDBI is used in 17states and HDFC in 3 states (Jammu, Assam, HP). Overdraft limit of IDBI is Rs.229 crores whereas that of HDFC bank is Rs. 20 crores. Till the overdraft

amount is being paid, interest is debited by the bank to Head Office throughMarketing Central Office.For all transactions within the local region (within the New Delhi offices), IOB

is used. It also transacts all the local expenses of the Marketing CentralOffice.

All payments are made through cheques only. But, all employee paymentsand reimbursements are made through cash.

Advantages of ANB Facility

Better Fund Management by Reducing Idle Balances: ANB obviates

the need to maintain idle funds at multiple locations leading to better

funds management.

Minimum Multiple Bank Account: ANB obviates the need for havingmultiple accounts at different locations. It, thus, reduces the number

of bank accounts at different locations leading to lower administrativeload and reduces bank reconciliation.

No service charges: As there is no need of transfer of funds under

anywhere banking system, the organization saves service chargeswhich they used to pay earlier under the traditional system.

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Observations70 % of Sales activity in the business of fertilizers is in Monsoons and

the balance 30% is spread throughout the rest of the year. The monthfrom April to September is known as Kharif Season and from October

to March is known as Rabi Season. The GOI is estimating the demandbased on Kharif and Rabi season and is allocating the supply plansaccordingly.

Investments made by IFFCOAs on 31st March 2009, the Society holds Government of India

Fertilizer Bonds amounting to Rs. 6,638.95 Crores (previous year Rs.646.16 Crores) bearing different rates of interest as per detailshereunder:

Investments(in Rs.Crores)

As at31.03.2009

As at31.03.2008

7.95% Fertilizer Companies GOI SpecialBonds, 2026 646.167.00% Fertilizer Companies GOI SpecialBonds, 2022 2900.976.20% Fertilizer Companies GOI SpecialBonds, 2022 2106.336.65% Fertilizer Companies GOI SpecialBonds, 2023 1631.65

TOTAL 6638.95 646.16

Since the GOI was short of funds, they have issued the above bonds whichhave disturbed the cash position of the society.

Subsidies from government

The entire fertilizer industry gets subsidy from the government ofIndia.

In IFFCO, since the society is dealing in Urea and Phosphate

Fertilizer, there are two system of claiming subsidy.

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The subsidy on urea is received on the retention price fixed for the

group of companies. That is, under this the subsidy is given as adifference between the sales price and the retention price.

Retention Price includes cost of production (i.e. cost of rawmaterials, utilities, fixed cost, freight cost, marketing & selling &distribution expenses). Norms are set in by GOI for fixing retention

price from time to time.

The basic intention of following the retention price scheme is to

give fertilizers to the farmers at a subsidized rate.

In addition to the retention price subsidy, GOI is also reimbursingFreight towards primary and secondary freights to the

manufacturers of controlled fertilizers (Urea) to cover the cost oftransportation from the production plants to the consumption

centres.

Nitrogenous Fertilisers are under the Concession Scheme asnotified by Government of India (GOI) from time to time. The

subsidy on Nitrogenous Fertilisers is decided on month to monthbasis depending upon the input price escalation/ de-escalation

based on the norms prescribed or notified under the subsidyscheme. The GOI is also reimbursing the actual fright on primarytransportation and fixed amount on secondary transportation.

The Phosphatic Fertilizer has been decontrolled and Concession on

Phosphatic Fertilisers has been accounted for based on monthlyconcession rate as notified by Government of India. Pending

notification of monthly concession rate applicable for the periodJanuary, 2009 to March, 2009, the same has been accounted for on

an estimated basis in line with the known policy parameters.However, in order to make available the fertilizer at a low rate to thefarmers, the government is allowing subsidy to the manufacturers. Thisamount is notified by the government for every month on the basis of the

raw material prices of fertilizer.

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Central Subsidy on FertilizersYear Urea Decontrolled Total Subsidy

Imported Indigenous TotalP & K

Fertilizerson all

Fertilizers2004-05 494 10243 10737 5142 158792005-06 1211 10653 11864 6596 184602006-07 3274 12650 15924 10298 262222007-08 6606 16450 23056 16934 399902008-09 10981 19517 30498 65351 958492009-10 5948 9780 15728 34252 49980*

*budgetedIn the year 2008-09, there was a large increase in the subsidy. This was due

to the increase in the prices of the imported raw materials and finishedgoods (for resale). The price for these goods is usually US$370 per metric

tonne but during 2008-09 it was US$1200 per metric tonne.

ConclusionThe organization IFFCO is basically a Farmer’s Organization. It

functions in the cooperative sector of India and is owned by the

Government of India along with the cooperative societies. IFFCO is oneof the most profitable and financially secure fertilizer companies inIndia.

The generation of funds through sale is a seasonal factor. 70% of Sales

activity in the business of fertilizers is in Monsoons and the balance30% is spread throughout the rest of the year. The month from April to

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September is known as Kharif Season and from October to March isknown as Rabi Season. Thus, it becomes imperative for theorganization to have such cash management system in place that

would enable the organization to plan the excess cash obtained duringsurplus periods and ploughs them back into the operations of theorganization during deficit periods.

The Cash Management System at IFFCO is very sound and efficient. Ithas enabled the organization to manage its funds in a proper manner

resulting in better utilization and availability of funds in cash deficitperiods.

Today IFFCO has a tie up with banks such as IOB, HSBC Bank, ICICI

Bank that are providing IFFCO with facilities such as cash managementservices, personalized financial MIS to enable IFFCO to accelerate the

collection and payment of funds, debit sweep option, Anywherebanking facility, etc. All these facilities have helped IFFCO in havingfaster, more secure and more reliable collection and payments of

funds and cheques from its various Area/State Offices.

However, despite all the advantages of this New Cash ManagementSystem such as receiving the proceeds from the sale of fertilizers

within First day of sale, reduction in the amount of interest losssuffered by IFFCO due to late arrival of payments, daily report of

deposits made at various locations, location wise report, creditforecast report, monthly cumulative report date wise/ location wise,monthly charging statement, monthly cheque return statement,

customized reports as per mutual agreement etc. the cashmanagement system can be further improved.

Suggestions to Improve the Cash Management System

By making an analysis of all the collection at other locations and

implementing the same at state offices also.

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At present, the banks with whom the CMS agreements have been made

are not the consortium members of IFFCO’s Lead bank. In case, thesebanks are also included as consortium members, IFFCO shall have an

additional advantage as they shall be in the position to utilize theirpayments directly from their Cash Credit Accounts.

IFFCO should focus on implementation of RTGS (Real Time Gross

Settlement) and NEFT (National Electronic Fund Transfer) facilitieswhich will improve the cash transfer at IFFCO.

References

Books

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Brealey, R A, Myers, S C, Alan, F and Mohanty, P 2008. Principles

of Corporate Finance. Tata McGraw-Hill Publications, New Delhi,8th SIE Edition.

Chandra, T K, Seti, Kuldeep and Robertson, C 2010. Fertilizers

Statistics 2008-09. Fertilizers Association of India (FAI), New

Delhi.

Ramachandran, N and Kakani, Ram 2008. Financial Accounting

for Management. Tata McGraw-Hill Publications, 2nd Edition.

Pandey, I M 2005. Financial Management. Vikas Publishing

House, 9th Edition

Reports

Annual reports of IFFCO

Agreement files of IFFCO

Websites and Internet

www.iffco.nic.in

www.wikipedia.com

www.investopedia.com

www.fert.nic.in

www.faidelhi.org

www.moneycontrol.com

http://www.faidelhi.org

http://www.moneycontrol.com

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Appendix A: Working Capital Management

Working Capital Management is the interaction between current assets andcurrent liabilities. The current assets refer to those assets, which in ordinary

course of business can be, or will be turned into cash within one yearwithout undergoing a diminution in value and without disrupting theoperation of the firm.

Decisions relating to working capital and short term financing are referred toas Working Capital Management. This involves managing the relationship

between a firm's short-term assets and its short-term liabilities. The majorthrust is on managing the current assets because a current liability arises incontext of current assets.

The goal of working capital management is to ensure that a firm is able tocontinue its operations and that it has sufficient ability to satisfy bothmaturing short-term debt and upcoming operational expenses. The

management of working capital involves managing of:

Accounts receivable (current asset)

Inventory (current assets),Accounts payable (current liability), andCash (current asset)

The management of current assets is similar to that of fixed assets in the

sense that in both cases the firm analyses their effects on its return and risk.However, the management of fixed and current assets differs in THREE ways:

1. In the management of fixed assets, time is very importantconsequently, discounting and compounding aspects of time elementplay a significant role in capital budgeting and a minor one in the

management of current assets.2. Large holdings of current assets especially cash strengthen timesliquidity (and reduces riskiness) but also reduces overall profitability.

3. The levels of fixed as well as current assets depend upon the“expected sales”, but it is only the current assets, which can be

adjusted with sales fluctuations in short runs.

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In examining the management of current assets, answers will be sought tothe following questions:

What is the need to invest funds in the current assets?How much funds should be invested in each type of current assets?

What should be the proportion of long term and short term funds to financecurrent assets?

What appropriate sources of funds should be there to finance current assets?

A company can be endowed with assets and profitability but short of

liquidity if its assets cannot readily be converted into cash. Positive workingcapital is required to ensure that a firm is able to continue its operations andthat it has sufficient funds to satisfy both maturing short-term debt and

upcoming operational expenses.Working Capital Management is a significant part of financial management.Its importance arises from two reasons:

Investment in current represents assets a substantial portion of totalmanagement.

Investment in current assets and the level of current liabilities have tobe geared quickly to changes in sales. To be sure, fixed assetsinvestment and long term financing are also responsive to variations in

sales. However this relationship is not as close and direct as it is in thecase of Working Capital Management.

Hence in this study an attempt has been made to analyze the size and

composition of working capital and whether such an investment hasincreased or declined over a period of time.

Financial manager now a day is responsible for shaping the fortunes of theenterprise, and is involved in the most vital decision of the allocation ofcapital. There is a need to have a broader and farsighted outlook and must

ensure that the funds of the enterprise are utilized in the most efficientmanner .One of the most important task of financial manager is to select an

assortment of appropriate sources of finance for the current assets. Normallythe excess of current assets over current liabilities should be financed by

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long-term sources. Precisely it is not possible to find out which long termsources has been used to finance current assets, but it can be examined asto what proportion of current assets has been financed by long term funds.

Therefore, an attempt has been made in this regard.

In working capital analysis the direction of change over a period of time is of

crucial importance. Not only that, analysis of working capital trends providesa base to judge whether the practice and prevailing policy of the

management with regards to the working capital is good enough or animprovement is to be made in managing the working capital funds.

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Hence in this study, an attempt is made about the trends of the workingcapital management of selected enterprise. In addition, to have higher

profitability the firms may sacrifice solvency and maintained a relatively lowof current assets. When the firms do so their profitability will improve andless are tied up in the idle current assets, but their solvency will be

threatened. Hence, an attempt is made to study the association ofprofitability with the working capital ratios. With this view, an effort has been

made in this project report to make an in-depth study of IFFCO in respect ofits performance and its working capital management.

Types of CapitalEvery business needs funds for two purposes for its establishment to carryout its day-to-day operations. Capital required for business can be classifiedunder two main categories:

1) Fixed Capital2) Working Capital

Fixed Capital

Long term funds are required to create production facilities throughpurchase of fixed assets such as plant & machinery, land, buildings,

furniture, etc. investments in these assets represents that part of firm’scapital, which is blocked on a permanent or fixed basis and is called fixedcapital.

Working Capital

Funds are also needed for short-term purpose for the purchase of rawmaterials, payment of wages and other day-to-day expenses, etc. These

funds are known as Working Capital. There are two concepts of workingcapital:1. Gross working Capital

2. Net working Capital

Gross Working Capital

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Gross working capital refers to the firm’s investment in current assets.Current assets are the assets which can be converted into cash within anaccounting year or within an operating cycle. The items comprising of

current assets are:

Cash

Marketable securities

Accounts receivable

Notes or bills receivable

Prepaid expenses

Merchandise inventory

Manufacturing inventory

Net Working CapitalNet Working Capital refers to the difference between the current assets andcurrent liabilities. Current liabilities are those claims of outsiders which are

expected to mature for payment within an accounting year or the operatingcycle of the business. The items comprising of current liabilities are:

Accounts Payable

Acceptance

Promissory Notes Payable

Accrued Liabilities

Estimated Liabilities or Provisions

Bank Overdraft

Contingent Liabilities

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

capital will arise when current assets exceed current liabilities. A negativenet working capital occurs when current liabilities are in excess of currentassets. If current assets are less than current liabilities, an entity has a

working capital deficiency, also called a working capital deficit.

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES

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An increase in working capital indicates that the business has eitherincreased current assets (that is received cash, or other current assets) orhas decreased current liabilities.

Types of Working CapitalWorking Capital can be further divided into two types namely:

1) Permanent or fixed working capital2) Variable or temporary working capital

Permanent or Fixed working capital

There is always a minimum level of current assets which is continuouslyrequired by a firm to carry on its business operations. Permanent or Fixedworking capital is the minimum level of current asset. It is permanent in the

same way as the firms fixed assets are. Depending upon the changes inproduction and sales, the need for working capital, over and above

permanent working capital will fluctuate. For example: every firm has tomaintain a minimum level of raw material, work-in-progress, finished goodsand cash balance. As the business grows, the requirements of permanent

working capital also increase due to the increases in current assets.

Temporary or Variable Working Capital

Variable working capital is the extra working capital needed to support thechanging production and sales activities of the firm. Both kinds of working

capital – permanent and temporary – are necessary to facilitate productionand sale through the operating cycle. But the firm to meet liquidityrequirements that will last only temporarily creates a temporary working

capital. Variable working capital can be further classified as seasonalworking capital and special working capital. Most of the enterprises have toprovide additional working capital to meet the seasonal and special needs.

The capital required to meet the seasonal needs of the enterprise is calledseasonal working capital. Special working capital is that part which is

required to meet the special exigencies such as launching of extensivemarketing campaigns for conducting research etc.

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Temporary working capital differs from Permanent working capital in thesense that it is required for short periods and cannot be permanentlyemployed gainfully in the business.

WorkingCapital(inRs.)

TemporaryWorkingCapital

PermanentWorkingCapital

TimeGood Management of Working Capital

Good management of working capital is part of good financial

management. Effective use of working capital will contribute to theoperational efficiency of a department; optimum use will help to

generate maximum returns.

Ratio analysis can be used to identify working capital areas, which

require closer management. Various techniques and strategies areavailable for managing specific working capital items.

The areas of working capital management are as follows:

Cash management: Identify the cash balance which allows for

the business to meet day to day expenses, but reduces cashholding costs.

Inventory management: Identify the level of inventory whichallows for uninterrupted production but reduces the investment

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in raw materials - and minimizes reordering costs - and henceincreases cash flow

Debtor management: Identify the appropriate credit policy, i.e.

credit terms which will attract customers, such that any impacton cash flows and the cash conversion cycle will be offset byincreased revenue and hence Return on Capital (or vice versa);

Short term financing: Identify the appropriate source offinancing, given the cash conversion cycle: the inventory is

ideally financed by credit granted by the supplier; however, itmay be necessary to utilize a bank loan (or overdraft), or to"convert debtors to cash" through "factoring".

Objectives of Working Capital Management

Liquidity vs. Profitability

The basic objective of working capital is to provide adequatesupport for the smooth functioning of the normal business

operations of the company. The quantum of investment in currentassets has to be made in such a manner that it not only meets theneeds of the forecasted sales but also provides a built in cushion in

form of safety stocks to meet unforeseen contingencies.

Based on this the companies can follow any of the two approaches

or even a combination of both. A company opting for highinvestment in current assets follows the Conservative Approach i.e.subjected to lower degree of risk. This approach imparts greater

LIQUIDITY to the company.

The other approach is the Aggressive Approach in which the firmgoes for fewer investments in current assets, thus leaving more

amounts of funds for investment in more profitable ventures. Thisapproach imparts greater PROFITABILITY to the company. An ideal

policy would be the moderate policy, which strikes a balancebetween the two approaches.

Choosing the pattern of financing

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The management of financing the chosen level of current assets

once again takes into consideration the attitude of managementtowards risk.

Determinants of Working CapitalThe working capital requirements of a concern depend upon a large numberof factors. It is not possible to rank them because all such factors are of

different importance and the influence of individual factors changes for afirm over time. However the following are the factors generally influencing

the working capital requirements:

Nature or character of businessThe working capital requirements of a firm basically depend upon the

nature of the business. Public undertakings like electricity, watersupply, and railways need very limited working capital because they

offer cash sales only and supply services. Trading and financial firmsrequire less investment in fixed assets but have to invest largeamounts in current assets, as they need large amount of working

capital. The manufacturing undertakings also require sizable workingcapital along with fixed investments.

Size of business

The working capital requirements of a concern are directly influencedby the size of the business. Greater the size of a business unit,

generally larger will be the requirements of working capital.

Manufacturing processIn manufacturing business, the requirements of working capital

increase in direct proportion to length of manufacturing process.Larger the process period of manufacture, larger is the amount of

working capital required. The longer the manufacturing time, the rawmaterial and other supplies have to be carried far a longer period inthe process with progressive increment of labor and service costs the

finished product is finally obtained.

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Seasonal variations

In certain industries raw material is not available throughout the year.They have to buy raw materials in bulk during the season to ensure the

uninterrupted flow and process them during the entire year. A hugeamount is thus blocked in the form of material inventories during suchseasons, which gives rise to more working capital requirements.

Rate of stock turnover

There is a high degree of inverse co-relationship between the

quantum of working capital and the velocity or speed with which thesales are affected. A firm having a high rate of stock turnover will needlower amount of working capital as compared to a firm having low rate

of turnover.

Firm’s credit policy

A concern that purchases its requirements on credit and sells itsproducts/services on cash requires lesser amount of working capital.On the other hand the concern buying its requirements for cash and

allowing credit to its customers shall need larger amount of workingcapital.

Advantages of Adequate Working Capital

The main advantages of maintaining adequate amount of working capitalare as follows:

Solvency of the business

Adequate working capital helps in maintaining solvency of thebusiness by providing uninterrupted flow of production.

GoodwillSufficient working capital enables a business concern to make prompt

payments and hence helps in creating and maintaining goodwill.

Quick and regular return on investmentsEvery investor wants a quick and regular return on his investments.

Sufficiency of working capital enables a concern to pay quick andregular dividends to its investors, as there may not be much pressure

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to plough back profits. This gains the confidence of its investors andcreates a favorable market to raise additional funds in the future.

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Ability to face crises

Adequate working capital enables a concern to face business crises inemergencies such as depression because during such periods,

generally, there is much pressure on working capital.

Regular payments of salaries, wages and other day-to-day

commitmentsA company which has ample working capital can make regularpayments of salaries, wages and other day-to-day commitments which

raise the morale of its employees, increases their efficiency, reduceswastages and costs and enhances production and profits.

Easy loans

A concern having adequate working capital, high solvency and goodcredit standing can arrange loans from the banks and others on easy

and favorable terms.

Regular supply of raw materialsSufficient working capital ensures regular supply of raw materials and

continuous production.

Balanced Working CapitalEvery business concern should have adequate working capital to run its

business operations. It should have neither redundant for excess workingcapital nor inadequate or shortage of working capital. Both Excess, as wellas short Working capital positions is bad for any business.

Disadvantages of Redundant or Excessive Working Capital

Excessive working capital means idle funds, which earn no profit for

the business, and hence the business cannot earn proper rate of returnon investments.

When there is a redundant working capital, it may lead to unnecessarypurchasing and accumulation of inventories causing more changes of

theft, losses and waste.

Excessive working capital implies excessive debtors and defectivecredit policy, which may cause higher incidents of bad debts.

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When there is excessive working capital, relations with the bank and

other financial institutions may not be maintained.

It may result into overall inefficiency in the organization and also due

to low rate of return on investments the value of shares may also falls.

Dangers of Inadequate Working Capital

A concern, which has inadequate working capital, can pay itsshort-term liabilities in time. Thus, it will lose its reputation and shall

not be able to get good credits facilities.

It becomes difficult for the firm to exploit favorable market conditions

and undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations andcreates inefficiencies, increase costs and reduces the profits if the

business.

It becomes impossible to utilize efficiently the fixed assets due to

non-availability of liquid funds.

It cannot buy its requirements in bulk and cannot avail of discounts,etc. and also the rate of return on investments also falls with the falls

with the shortage of working capital.

Issues in Working CapitalThe financial manager must determine levels and composition of current

assets. He must see that right sources are tapped to finance current assets,and that current liabilities are paid in time.There are many aspects of working capital management which make it an

important function of the financial manager:

Time Working capital management requires much of the financial

manager’s time.

Investment Working Capital represents a large portion of the totalinvestment in assets.

Critically working Capital management has great significance for all

firms but it is very critical for small firms.

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Growth The need for working capital is directly related to the firm’s

growth.

It is necessary for a financial manager to manage working capital in the bestpossible way to get the maximum benefit.

Financial manager should pay special attention to the management ofcurrent assets on a continuing basis. Actions should be taken to curtail

unnecessary investment in current assets.There is a direct relationship between a firm’s growth and its working capitalneeds. As sales grow, the firm needs to invest more in inventories and

debtors. These needs become very frequent and fast when sales growcontinuously. The financial manager should be aware of such needs andfinance them quickly. Continuous growth in sales may also require additional

investment in fixed assets.The finance manager should pay particular attention to levels of current

assets and the financing of current assets.

Policies for Financing Current AssetsA firm can adopt different financing policies vis-à-vis current assets. Threetypes of financing may be distinguished:

Long-term financing The sources of long-term financing include

ordinary share capital, preference share capital, debentures,long-term borrowings from financial institutions and reserve and

surplus (retained earnings).

Short-term financing The short-term financing is obtained for a

period less than one year. It is arranged in advance from banks andother suppliers of short-term finance in the money market.Short-term finances include working capital funds from banks, public

deposits, commercial paper, factoring of receivable etc.

Spontaneous financing Spontaneous financing refers to the automaticsources of short-term funds arising in the normal course of business.

Trade (suppliers) credit and outstanding expenses are examples ofspontaneous financing. There is no explicit cost of spontaneous

financing. A firm is expected to utilize these sources of finances to the

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fullest extent. The real choice of financing current assets, once thespontaneous sources of financing have been fully utilized, is betweenthe long-term and short-term sources of finances.

Depending on the mix of short-term and long-term financing, the

approach followed by a company may be referred to as:

Matching approach

Conservative approach

Aggressive approach

Approaches to Working Capital ManagementThe objective of working capital management is to maintain the optimumbalance of each of the working capital components. This includes making

sure that funds are held as cash in bank deposits for as long as and in thelargest amounts possible, thereby maximizing the interest earned. However,such cash may more appropriately be "invested" in other assets or in

reducing other liabilities.Working Capital Management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital

and to identify areas requiring closer management

The individual components of working capital can be effectively

managed by using various techniques and strategies

When considering these techniques and strategies, departments need torecognize that each department has a unique mix of working capitalcomponents. The emphasis that needs to be placed on each component

varies according to department. For example, some departments havesignificant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an

integral part of the department's overall management. The needs of efficientworking capital management must be considered in relation to other aspectsof the department's financial and non-financial performance.

The main purposes of Working Capital Ratio Analysis are:

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To indicate working capital management performance; and

To assist in identifying areas requiring closer management

Three key points need to be taken into account when analyzing financial

ratios. These key points are as follows:

The results are based on highly summarized information.Consequently, situations, which require control, might not be apparent,

or situations, which do not warrant significant effort, might beunnecessarily highlighted.

Different departments face very different situations. Comparisons

between them, or with global “ideal” ratio values, can be misleading.

Ratio analysis is somewhat one-sided; favourable results mean little,

whereas unfavourable results are usually significant.

However, financial ratio analysis is valuable because it raises questionsand indicates directions for more detailed investigation.

Sources of CashThe various sources of cash that provide the money to fund the working

capital include the following:

Existing cash reserves

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long term loans

Profit or net income

Inventory ManagementInventories constitute the most significant part of current assets. Inventoriesare stock of the product, a company is manufacturing for sale and

components to make that product. The various forms of inventory in afertilizer manufacturing company are:

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Raw Materials are those basic inputs that are converted into the

finished products through the process of manufacturing.

Work-In-Progress inventories are semi-manufactured products.

Finished Goods inventories are completely manufactured products.

Stores & Spares, loose tools, chemical catalysts, packing &

Construction materials

Objectives of Inventory Management

The problems faced by an organization in the context of inventory

management are:

To maintain a large size of inventory for efficient and smooth

production & sales operation

To maintain minimum investment in inventories to maximizeprofitability

To ensure continuous supply of materials, spares & finished goods.

To avoid both overstocking & under stocking of inventory

To eliminate duplicate stock orders. This is possible with the help of a

centralized purchasing system.

To design proper organization for inventory management

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Both Excessive & Inadequate Inventories are not desirable. The objective ofInventory Management is to determine & maintain the optimum level ofinventory investment. The optimum level of inventory will lie between two

danger points of excessive & inadequate inventories.Excessive stocks can place a heavy burden on the cash resources of abusiness.

Insufficient stocks can result in lost sales, delays for customers etc.

The key is to know how quickly the stocks are moving or how long each item

of stock sits on shelves before being sold. Average stock holding periods areinfluenced by the nature of the business.

The key issue for a business is to identify the fast and slow stock moverswith the objective of establishing optimum stock levels for each category andthereby minimize the cash tied up in the stocks.

Factors to be considered when determining the optimum stock levels include:

What are the projected sales of each product?

How widely available are each component, raw materials, etc.?

How long does it take for delivery by the suppliers?

Can one remove the slow movers from one’s product range without

compromising on the best- sellers?

For better stock control, following measures can be adopted:Review the effectiveness of existing purchasing & inventory systems.

Know the stock turnover for all major items of inventory.

Apply tight controls to the significant few items & supply control forthe remaining.

Sell off outdated or slow moving merchandise.

Consider the idea of outsourcing the manufacturing of the product toanother manufacturer.

Review security procedures to minimize losses through deterioration,pilferage, wastage & damages.

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To facilitate furnishing of data for short-term & long-term planning &

control of inventory

Receivable ManagementAccounts Receivable refers to the amount owed by the debtors to the

business. They are usually created because of trade credit that is given to thecustomers of the business.These receivables have three characteristics:

It involves an element of risk, which should be carefully analyzed.

It is based on economic value

It implies futurity.

To maintain a proper flow of funds in the business in order to make timely

payments to the creditors, to buy raw materials & to run the day-to-dayactivities of the business, it is essential that the debtors make their

payments on time. The interval between the date of sale & the date ofpayment has to be financed out of the working capital. Thus, trade debtorsrepresent investment.

Objectives of Receivable ManagementThe objective of Receivable Management is to promote sales & profits until

that point is reached where the returns that the company gets from fundingreceivables is less than the cost that the company has to incur in order tofund these receivables. However, to maintain these receivables the

company has to incur certain costs such as:

Additional fund requirements for the company – When a firm

maintains receivables, some of its resources remain blocked in themso to finance the activities during that time gap the firm requires funds.

Administrative Costs

Collecting Costs

Defaulting Costs

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The size of receivables or investment in Receivable Management isdetermined by the firm’s credit policy & level of sales. Receivablemanagement is the process of making the decision of selection of trade

debtors in which the funds could be invested or to whom money can begiven.

Receivable management involves the careful consideration of the

following aspects: -

Forming the credit policy

Executing the credit policy

Formulating & executing the collection policy

The Credit Policy is the policy followed by the company with respect to thecredit standards adopted, any incentive in the form of cash discount offered,

and also the period over which the discount can be utilized by the customers& the collection effort made by the company. All these variables underlying a

company’s credit policy influence the volume of sales and hence the profitsof the company.

Cash Management

Cash, the most liquid asset and also referred to as the life blood of abusiness enterprise and is of vital importance to the daily operations of the

business firms. Its efficient management is crucial to the solvency of thebusiness because cash is the focal point of the fund flows in a business. If abusiness has no cash and no way of getting any cash, it will have to close

down.

Cash Management is concerned with the managing of:

Cash flows into and out of the firm.

Cash flows within the firm

Cash balances held by the firm at a point of time for financing deficits

or investing Surplus cash.

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Cash Management refers to management of cash balance and the bankbalance and also short term deposits. The term cash may be used in twodifferent ways:

1) It may include currency, cheques, drafts, demand deposits held bythe firm i.e. pure cash or generally accepted cash equivalents.

2) In a broader sense, it also includes near cash assets such as

marketable securities and short term deposits with banks. For cashmanagement purposes, the term cash is used in this broader sensei.e. it covers cash, cash equivalents and those assets which are

immediately convertible to cash.

Objectives of Cash Management

The cash management strategies are generally built around two goals:

To provide cash needed to meet the obligations, and

To minimize the idle cash held by the firm

The risk return trade-off of any firm can be reduced to two prime objectives

for the firm’s Cash Management System:

1) Meeting the Cash Outflows: This will help the firm in avoiding the

chance to default in meeting financial obligations otherwise thegoodwill of the firm is adversely affected. Also this will further help inavailing the opportunities of getting cash discounts by making early

or prompt payments and meeting unexpected cash outflows withoutmuch problem.

2) Minimizing the Cash Balance

Loans and AdvancesLoans and Advances are one of the important factors of working capital. In

current assets loans and advances play a significant role. When we talk aboutthe working capital management it is necessary to consider Loans &

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Advances, as they are a major component of Current assets and along withthe equity of the company for a source of generating cash in theorganization.

While analyzing the loans & advances position of IFFCO the following ratioshave to be calculated for better understanding i.e.

Loans and advances to Current Assets ratio

Loans and advances to Working capital ratio

Operating CycleOperating Cycle is the times duration required to convert sales, after theconversion of resources into inventories, into cash. The operating cycle of amanufacturing company involves three phases:

Acquisition of resources such as raw material, labour, power and fueletc.

Manufacture of the product which includes conversion of raw

material into work-in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create

account receivable for collection.

PurchasesCredit Sales Collection

Inventory PeriodAccounts Receivable

Period

Accounts

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PayablePeriod Cash Conversion Cycle

Payments

Operating Cycle

The operating cycles are of two types:1. Gross Operating Cycle

2. Net Operating Cycle or Cash Conversion Cycle

Gross Operating Cycle

Gross operating cycle is a tool which measures the total number of daysfrom the day the purchases are made or the stock arrives to the day all the

collections are made. Cash is said to be blocked till the collections have beencollected. So the sooner the cash is received from the consumers the betteris for the company as they get cash for further production. Gross Operating

Cycle is given as follows:

Operating cycle(OC) =

Days InventoryOutstanding(DIO) + DaysSales Outstanding(DSO)

Cash Conversion Cycle

The cash conversion cycle (also referred to as CCC or the net operating cycle)is the analytical tool of choice for determining the investment quality of twocritical assets - inventory and accounts receivable. The CCC tells us the time

(number of days) it takes to convert these two important assets into cash. Afast turnover rate of these assets is what creates real liquidity and is apositive indication of the quality and the efficient management of inventory

and receivables.

The cash conversion cycle is comprised of three standard, so-called activityratios relating to the turnover of inventory, trade receivables and trade

payables. These components of the CCC can be expressed as a number oftimes per year or as a number of days.

CCC = Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO)

- Days Payable Outstanding (DPO)

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The cash conversion cycle (CCC) measures how fast a company can convertcash on hand into even more cash on hand. The CCC does this by followingthe cash as it is first converted into inventory and accounts payable (AP),

through sales and accounts receivable (AR), and then back into cash.Generally, the lower this number is the better for the company.

The components of CCC are calculated as follows:

Days Inventory Outstanding (DIO)

This addresses the question of how many days it takes to sell theentire inventory. The smaller this number is the better.

Days InventoryOutstanding

(DIO)=

Average Inventory

Cost of Goods sold (COGS) /365

Broadly, the smaller number of days, the more efficient a company -inventory is held for less time and less money is tied up in inventory.

Instead, money is freed up for things like research and development,marketing or even share buybacks and dividend payments. If thenumber of days is high, that could mean that sales are poor and

inventories are piling up in warehouses.If inventory days are increasing, that’s not necessarily a bad thing.Companies normally let inventories build up when they are introducing

a new product in the market or ahead of a busy sales period. However,if you don’t foresee an obvious pickup in demand coming, the increase

could mean that unsold goods will simply collecting dust in thestockroom.

Days Sales Outstanding (DSO)

This looks at the number of days needed to collect on sales andinvolves Accounts Receivables. While cash-only sales have a DSO ofzero, people do use credit extended by the company, so this number

is going to be positive. Again, smaller is better.

Days SalesOutstanding

=Average Accounts

Receivable

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(DSO) Net Sales / 365If a company's collection period is growing longer, it could meanproblems ahead. The company may be letting customers stretch their

credit in order to recognize greater top-line sales and that can spelltrouble later on especially if customers face a cash crunch. Gettingmoney right away is preferable to waiting for it - especially since some

of what is owed may never get paid. The quicker a company gets itscustomers to make payments, the sooner it has cash to pay for

salaries, merchandise and equipment, loans and, best of all, dividendsand growth opportunities.

Days Payables Outstanding (DPO)

This involves the company's payment of its own bills or AccountsPayables. If this can be maximized, the company holds onto cashlonger, maximizing its investment potential; therefore, a longer DPO is

better.

Days PayableOutstanding

(DPO)

=

Average Accounts Payable

Cost of Goods sold

(COGS) / 365

Key Ratios

The ratios can be divided into following categories according to financialactivity or functions to be evaluated:

Ratios related to Inventory Management

Ratios related to Receivables Management

Ratios related to Cash Management


Ratios related to Inventory Management1. Inventory Turnover Ratio2. Inventory to Working Capital Ratio3. Inventory to Current Assets Ratio4. Inventory to Sales Ratio

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1. Inventory Turnover Ratio

The inventory turnover measures that how well the company canmanage to sell its inventory. Another way of saying is how efficiently

the company turns inventory into sales. The purpose is to ensure theblocking of only required minimum funds in inventory.

Importance of Inventory Turnover

If the company can quickly sell its inventory, the inventory turnoverwill be higher. Conversely, if the company cannot sell its inventory well,

then the inventory turnover will be low. One has to watch this figureclosely – if the inventory ratio climbs too high, then the company maybe keeping too little inventory. This could cause lost profits due to

customer orders that had to wait until inventory arrived.InventoryTurnoverRatio

=Cost of Goods sold (COGS)

Average Inventory

2. Inventory to Working Capital ratio

The inventory to working capital ratio measures how well the companyis able to generate cash using working capital at its current inventory

level. This ratio shows the relationship between investments made ininventory & the total net investment in working capital. Inventory is animportant part of working because of its direct impact on the profits of

the organization. The value of inventory is susceptible to changingprice levels, fluctuation in business activities, variation in consumerdemand, obsolescence & other unpredictable factors that determine

the market conditions. Therefore, working capital should be sufficientto provide a cover for the possible losses in inventory value.

Importance of Inventory to Working Capital

An increasing Inventory to Working Capital ratio is generally a negativesign, showing the company may be having operational problems. If a

company has too much Working Capital invested in Inventory, theymay have difficulty having enough Working Capital to make payments

110SAAB MARFIN MBA


on Short-Term Liabilities and Accounts Payable. This is a great ratioto be used with several others to really pick apart the inner workingsof a company.

Inventory toWorking Capital

Ratio

=Inventory

X 100Working Capital

3. Inventory to Current Assets Ratio

Inventory is one of the largest components of the current assets. The

position of inventory indicates operational efficiency of organization.The inventory to current assets ratio measures how much percentageof current assets is formed by the inventories. This ratio is essential as

inventories are the most illiquid of all current assets as sometimes itbecomes difficult to convert inventory ( raw materials,

work-in-progress and finished products ) into cash on a short notice.

Importance of inventory to current assets

An increasing inventory to current assets ratio is a negative sign. It

means that more & more percentage of current assets is beingconstituted by the inventories. This indicates poor operationalefficiency of the organization. Also it shows that the funds invested in

current assets to meet obligations on a short notice are actually illiquidto some extent & it may be difficult to convert them into cash

immediately. On the other hand, if the position of inventory is lower incurrent assets, it indicates higher operational efficiency of theorganization. Normally, less than 50 % of current assets are treated as

average position of inventory.

Inventory toCurrent Assets

Ratio

= Inventory X 100Current Assets

111SAAB MARFIN MBA


4. Inventory to Sales RatioThe Inventory to Sales ratio measures the percentage of inventory thecompany currently has on hand to support the current amount of

sales.

Importance of Inventory to Sales

An increasing Inventory to Sales ratio is generally a negative

sign, showing the company may be having trouble keeping inventorydown and/or Net Sales have slowed, and can sometimes indicate

larger financial problems the company may be facing. Viewing thisratio over several periods reveals the important aspect of thecompany's ability to manage inventory while attempting to increase

sales. It is also important to compare this ratio amongseveral companies to gauge how well each one performs, and tocompare their ratios to industry averages.

Inventory toSales Ratio

= Inventory X 100Sales

Ratios related to Receivable Management1. Debtors turnover ratio

2. Average collection period

3. Debtors to current assets ratio

4. Debtors to working capital ratio

5. Debt to Equity Ratio

112SAAB MARFIN MBA


1. Debtors Turnover RatioThis ratio is also known as Accounts Receivable Turnover Ratio.Accounts Receivable is the amount that customers owe the company.

The Accounts Receivable Turnover measures the number of timesAccounts Receivables were collected during the year. This is also ameasure of how well the company collects sales on credit from its

customers, just as Average Collection Period measures this in days.Importance of Accounts Receivable Turnover

A high or increasing Accounts Receivable Turnover is usually a positivesign – showing the company is successfully executing its creditpolicies and quickly turning its Accounts Receivables into cash. A

possible negative aspect to an increasing Accounts ReceivableTurnover is that the company may be too strict in its credit policiesand missing out on potential sales.

DebtorTurnoverRatio

=Net Sales

Average Accounts Receivable

2. Average Collection Period

The Average Collection Period measures the average number of days it

takes for the company to collect revenue from its credit sales. TheAverage Daily Sales is the Net Sales divided by 365 days in the year.

The company will usually state its credit policies in its financialstatement, so the Average Collection Period can be easily gauged as towhether or not it is indicating positive or negative information.

Importance of Average Collection Period

This ratio reflects how easily the company can collect on itscustomers. It also can be used as a gauge of how loose or tight the

company maintains its credit policies. A particular thing to watch outfor is if the Average Collection Period is rising over time. This could be

an indicator that the company's customers are in trouble, which couldspell trouble ahead. This could also indicate the company hasloosened its credit policies with customers, meaning that they may

have been extending credit to companies where they normally would

113SAAB MARFIN MBA


not have. This could temporarily boost sales, but could also result inan increase in sales revenue that cannot be recovered, as shown in theAllowance for Doubtful Accounts.


=

360

Debtor TurnoverRatio

3. Debtors to Current Assets Ratio

Debtor to current assets ratio indicates the position of debtors in totalcurrent assets. This ratio is calculated by debtors with current assets.Debtors are one of the largest components of current assets. If debtors

are average or less than average, it indicates proper realization ofdebtors. On the other hand, if debtors are very heavy on respect ofother current assets, it indicates poor recovery of the company.

Debtors toCurrent

Assets Ratio

= Debtors X 100Current Assets

4. Debtors to Working Capital RatioDebtor to working capital ratio is one of the important ratios for

analysis of working capital management. Working capital is directlyrelated with the position of debtors. If debtors are lower as comparedto working capital, it indicates proper and smooth utilization of

working capital. But on the other hand, the amount of debtor is verylarge in that condition, working capital blocked and operationalefficiency is directly affected.

Debtors toWorking

Capital Ratio

= Debtors X 100Working Capital

5. Debt to Equity RatioDebt to Equity ratio describes the lenders contribution for each rupee

of the owners’ contribution. The ratio is directly computed by dividingtotal debt by equity or net worth.

Debt to EquityRatio

=Debt

Equity

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Importance of Debt to Equity RatioThe ratio shows the extent to which debt financing has been used inthe business. A high ratio means that claims of creditors are greater

than those of owners. A high level of debt introduces inflexibility inthe firm’s operations due to the increasing interference and pressurefrom creditors. A low debt-equity ratio implies a greater claim of

owners than capital.

Ratios Related to Cash Management1. Working capital ratio or current ratio2. Liquid ratio or Acid-test ratio3. Cash to current assets ratio4. Sales to current assets ratio5. Working capital turnover ratio6. Sales to working capital ratio

1. Working Capital Ratio or Current Ratio

The working capital ratio (or current ratio) attempts to measure thelevel of liquidity, that is, the level of safety provided by the excess of

current assets over current liabilities. The current ratio compares allthe Current Assets of a company to all the Current Liabilities. What

this ratio basically tells us is if the company had to sell all its readilyavailable assets, would it be able to pay off its immediate debt?Importance of Working capital ratio or current ratio

At a minimum, you would hope the company whose financialperformance you are analyzing could meet to pay its Current Liabilitiesif it were to liquidate all its Current Assets. This would translate to a

Current Ratio of 1:1 - the point where the Current Assets equal theCurrent Liabilities. As with all the other performance ratios, the

Current Ratio value depends on the industry in which the company isoperating. It is also important to know what assets make up most ofthe Current Assets. Inventory and Accounts Receivable, which are part

of the Current Assets, cannot always be counted on as easilytransferred to cash. Cash and Marketable Securities comprising the

115SAAB MARFIN MBA


majority of the Current Assets would definitely be favorable. Knowingthis, would the company you are analyzing truly be able to meet itsfinancial obligations is it in fact had to sell its Current Assets? The

Current Ratio rising over time will be favorable.

Current Ratio=

Current Assets

CurrentLiabilities

2. Liquid Ratio or Acid-Test Ratio or Quick RatioLiquid ratio is also known as Acid-test ratio or Quick ratio. Liquid ratio

is a more vigorous test of liquidity than current ratio. The term“liquidity” refers to the ability of the firm to pay its short termobligations as & when they become due. Current assets include

inventories and prepaid expenses, which are not easily converted intocash within a short span of time. So, quick ratio may be referred to asthe relationship between quick assets i.e. (current assets – inventories)

& current liabilities. An asset is said to be liquid if it can be convertedinto cash within a short span of period without loss of value.

Importance of Liquid RatioIf a company one is analyzing looks good while testing it against theCurrent Ratio, then the Quick Ratio should be your next test to apply.

Companies with steadily rising Inventories may look good with theCurrent Ratio, but will have a deteriorating effect on the Quick Ratio,since we subtract the Inventory out. The Quick Ratio rising over time is

favorable.

Quick Ratio=

Current Assets – Inventories

Current Liabilities

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3. Cash to Current Assets RatioThis ratio basically measures what percentage of the current assets isformed by the cash component. This is a more stringent measure of

liquidity as it considers the most liquid current asset.Importance of Cash to Current Assets RatioHigh or increasing Cash to Current Assets ratio is generally a positive

sign, showing the company's liquid assets represent a larger portion ofits Total Current Assets. It also indicates the company may be betterable to convert its non-liquid assets, such as inventory, into cash.

Cash toCurrent Asset

Ratio=

CashX 100

Current Assets

4. Sales to Current Assets Ratio

The Sales to Current Assets ratio measures how well a company ismaking use of its assets in generating sales. This ratio is most valid inindustries where companies hold the majority of their own inventories

in-house, as opposed to having their customers hold their inventoryfor them.

Importance of Sales to Current AssetsThe Sales to Current Assets ratio is best measured over several periodscompared to industry averages, as the amount of Current Assets varies

widely among companies and industries. Decreasing Sales to CurrentAssets ratio is generally a negative sign, indicating the company mayhave slowed production, decreasing the amount of inventory and

resultantly the Current Assets.Sales to

Current AssetRatio

=Sales

Current Assets5. Working Capital Turnover Ratio

The Working Capital Turnover ratio measures the company's Net Salesfrom the Working Capital generated. Note that another ratio exists, theSales to Working Capital Ratio also measures Net Sales to Working

Capital. We chose to interchange the usual components of WorkingCapital (Total Current Assets - Total Current Liabilities) with an

alternate method (shown above). With two similar ratios using slightly

117SAAB MARFIN MBA


different methods to compute Working Capital, plotting both of theseratios together to see their differences would be wise.Importance of Working Capital Turnover

A high or increasing Working Capital Turnover is usually a positivesign, showing the company is better able to generate sales from itsWorking Capital. Either the company has been able to gain more Net

Sales with the same or smaller amount of Working Capital, or it hasbeen able to reduce its Working Capital while being able to maintain

its sales. Efforts to streamline the operations of the company willoften show favorably in this ratio.


=

Sales


118SAAB MARFIN MBA


6. Sales to Working Capital Ratio

The Sales to Working Capital ratio measures how well the company'scash is being used to generate sales. Working Capital represents the

major items typically closely tied to sales, and each item will directlyaffect this ratio.

Importance of Sales to Working Capital

An increasing Sale to Working Capital ratio is usually a positive sign,indicating the company is more able to use its working capital to

generate sales. Although measuring the performance of a company forjust one period reveals how well it is using its cash for that singleperiod, this ratio is much more effectively used over a number of

periods. This ratio can help uncover questionable managementdecisions such as relaxing credit requirements to potential customersto increase sales, increasing inventory levels to reduce order

fulfillment cycle times, and slowing payment to vendors and suppliersin an effort to hold on to its cash.


=Sales



1. Return on Assets (ROA)

2. Return on Equity (ROE)

3. Return on Capital Employed (ROCE)

4. Net Profit Margin

1. Return on Assets (ROA)

ROA is an indicator of how profitable a company is relative to its total

assets. ROA tells how efficient management is at using its assets togenerate earnings. The ROA figure gives investors an idea of howeffectively the company is converting the money it has to invest into

net income. The higher the ROA number, the better, because thecompany is earning more money on less investment.

119SAAB MARFIN MBA


Return onAssets (ROA) =

Profit After TaxAverage Total

Assets

2. Return on Equity (ROE)

The return on equity is net profit after taxes divided by average equity.

It measures the rate of return on the ownership interest of thecommon stock owners. It measures a firm's efficiency at generatingprofits from every unit of shareholders' equity. ROE shows how well a

company uses investment funds to generate earnings growth.

Return onEquity (ROE) = Profit After Tax

Average Equity

3. Return on Capital Employed (ROCE)

ROCE is used to prove the value the business gains from its assets andliabilities, a business which owns lots of land but has little profit will

have a smaller ROCE to a business which owns little land but makesthe same profit.

It basically can be used to show how much a business is gaining for its

assets, or how much it is losing for its liabilities.

4. Net ProfitMargin

Net Profit Margin ratio is measured by dividing profit after tax by sales:

Net ProfitMargin = Profit After Tax

SalesImportance of Net Profit Margin

Net profit margin ratio establishes a relationship between net profit

and sales and indicates management’s efficiency in manufacturing,administering and selling the products. This ratio is the overallmeasure of the firm’s ability to turn each rupee sales into net profit.

Return onCapitalEmployed(ROCE)

=Profit Before Tax

Average Capital Employed

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Appendix B: Cash ManagementCash, the most liquid asset and also referred to as the life blood of abusiness enterprise and is of vital importance to the daily operations of thebusiness firms. Its efficient management is crucial to the solvency of the

business because cash is the focal point of the fund flows in a business. If abusiness has no cash and no way of getting any cash, it will have to closedown.

Cash Management refers to management of cash balance and the bankbalance and also short term deposits. A Cash Management System is

essential for a company for the following two reasons:

Uncertainty of cash flows

Lack of synchronization of inflows and outflows

Cash Management is concerned with the managing of:

Cash flows into and out of the firm.

Cash flows within the firm

Cash balances held by the firm at a point of time for financing deficitsor investing Surplus cash.

Goals of Cash ManagementThe Cash Management Strategies are generally built around Two Goals:

To provide cash needed to meet the obligations, and

To minimize the idle cash held by the firm

In order to resolve the uncertainty about cash flow prediction and the lack ofsynchronization between cash receipts and payments, the firm should

121SAAB MARFIN MBA


develop appropriate strategies for cash management. The firm should evolvestrategies regarding the following four facets of Cash Management:

Cash Budgeting/ forecasting: Cash inflows and Cash Outflows should

be planned to protect cash surplus or deficit for each period ofplanning. Cash Budget should be prepared for this purpose.

Manage the Cash Flows: The flow of cash should be managed

properly. The cash inflows should be accelerated, while, as far aspossible, decelerating the cash outflows. Managing of cash is done

through:

Organized collection management

Proper disbursement managementOptimum Cash Level: The firm should decide about the optimum level

of cash balances. The cost of excess cash and danger of cashdeficiency should be matched to determine the optimum level of cash

balances.

Investment of Surplus Cash: The surplus cash balances should beproperly invested to earn profits. The firm should decide about the

division of such cash balance between bank deposits, marketablesecurities and inter-corporate lending.

Motives for Holding Cash

There are four primary motives for holding cash.

1. Transaction Motive

Business firms as well as individuals keep cash because they require itfor meeting demand for cash flow arising out of day-to-daytransactions. The firm needs cash primarily to make payments for

purchases, wages & salaries, other operating expenses, taxes,dividends, etc. The need to hold cash would not arise if there were

perfect synchronization between cash payments and cash receipts, i.e.enough cash is received when the payment has to be made. For thoseperiods, when cash payments exceeds the cash receipts, the firm

122SAAB MARFIN MBA


should maintain some cash balance to be able to make requiredpayments. For transaction purpose, a firm may invest its funds inmarketable securities. The Transaction Motive mainly refers to holding

cash to meet anticipated payments whose timing is not perfectlymatched with cash receipts. In other words, the necessity of keepingminimum cash balance to meet payment obligations arising out of

expected transactions is known as Transaction Motive for holding cash.

2. Precautionary Motive

A firm should maintain larger cash balance that required forday-to-day transactions in order to avoid any unforeseen situation

arising because of insufficient cash. The necessity of keeping cashbalance to meet any unforeseen situation or unpredictable obligation

is known as Precautionary motive for holding cash. The Precautionarymotive for holding cash depends on the predictability of cash flows.The amount of precautionary cash is also influenced by the firm’s

ability to borrow at short notice when the need arises. Stronger theability of the firm to borrow at short notice less is the need forprecautionary balance. The precautionary balance may be kept in the

form of cash or marketable securities. Marketable securities play animportant role here. The amount of cash set aside for precautionary

reasons may not earn anything, but if these funds are invested in highliquid marketable securities, then they can give a lot of profits.

Hence, the amount of cash, a firm holds for transaction and

precautionary depends upon:

The expected cash inflows and cash outflows based on the cash

budget and forecasts, encompassing long and short range cashneeds of the firm i.e. Degree of Predictability of its cash flows

The degree of deviation between the expected and actual cash

flows

Efficient planning and control of cash

123SAAB MARFIN MBA


The firm’s ability to borrow at short notice in the event of any

emergency

The willingness and the capacity of the firm to take risk of

running short of cash

3. Speculative Motive

The firm’s desire to keep some cash balance to capitalize anopportunity of making an unexpected profit is known as SpeculativeMotive for holding cash. The Speculative Motive provides affirm with

sufficient liquidity to take advantage of unexpected profitableopportunities that may suddenly appear (And just as suddenlydisappear if not capitalize immediately). However, not many firms

engage their funds in speculative motives to a great extent. Thus, theprimary motives to hold cash and marketable securities are:

Transaction Motive and Precautionary Motive.

Cash Management, thus, deals with optimization of cash as an asset and forthis purpose the financial manager has to take various decisions from time

to time. He has to deal as the cash flows in the direction of the firm. Even if afirm is highly profitable, its cash inflows may not exactly match the cashoutflows.

He has to manipulate and synchronize the two for the advantage of the firmby investing excess cash if any as well as arranging funds to cover the

deficiency.

Factors affecting the Cash NeedsIntrinsic factors influencing the cash management

Cash Cycle: The term cash cycle refers to the length of the time

between the payment for the purchase of raw materials and thereceipts of the sales revenue.

Cash Inflows and Cash Outflows

Cost of Cash Balance

124SAAB MARFIN MBA


Other Consideration: There may be several subjective considerations

such as uncertainties of a particular trade, staff required for cashmanagement etc., which will have a bearing on determining the cash

balance required by a firm.

Extrinsic factors influencing the cash management

Management Information System (MIS) of the banks: They provide

full details of the payments received. The details provided by themcontain information of the payment of the Field Representative (FR),

Area Office (AO) and State Office (SO). The report is made such that itcan be used by the Marketing Central office (Mkco), State Office, Area

Office and Field Representative for verification of payments receivedand to find out any discrepancies, if there any.

Innovative Schemes: Banks generates various new schemes time to

time which changes the cash flow of the organization.Interest Lost: If any payment gets delayed even by one day, there is aloss of investment over that income. So banks are bound by the

agreement by which they pay interest for any delay on their part.Bank Charges: Banks arrange their representatives for pick up of

demand drafts from the Field Representatives, Area Offices and StateOffices and deposit them in the banks. For this service they chargestransportation cost and transaction cost, which vary depending on the

banks.

Appendix C: Financial Statements

BALANCE SHEET

125SAAB MARFIN MBA


(Rs. in Crores)Schedule As At 31.03.2009 As At 31.03.2008

SOURCES OF FUNDSShareholders' funds:Share capital 1 426.28 423.93Share Application MoneyReserve and Surplus 2 3532.59 3958.87 3264.73 3688.66

Loan Funds:Secured Loans 3 7373.18 2404.67Unsecured Loans 4 5429.6 12802.78 4370.97 6775.64

Deferred Tax Liability (Net ) 542.12 534.19

TOTAL 17303.77 10998.49

APPLICATION OF FUNDSFixed Assets: 5Gross block 8808 8138.98Less: AccumulatedDepreciation 3842.16 3400.04Net Block 4965.84 4738.94Capital Work-In-Progress 6 290.98 5256.82 430.85 5169.79

Investments 7 7552.95 1416.73Current Assets, Loans andAdvancesInventories 8 1731.36 1577.1Sundry Debtors 9 407.23 413.76Cash and Bank Balances 10 69.63 243.32Loans and Advances 11 5464.77 3541.56

7672.99 5775.74Less: Current Liabilities andProvisionsCurrent Liabilities 12 2860.18 1048.49Provisions 13 322.71 323.08

3182.89 1371.57Net Current Assets 4490.10 4404.17Miscellaneous Expenditure(to the extent not writtenoff)Voluntary RetirementScheme Expenses 3.9 7.8

TOTAL 17303.77 10998.49

PROFIT AND LOSS ACCOUNT(Rs. in Crores)

Schedule For yr 31.03.2009 For yr 31.03.2008

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INCOME FROM OPERATIONSTurnoverSales 7387.70 5968.47Less: ExciseDuty - -

7387.70 5968.47Subsidy onFertilizers 25545.60 32933.30 6194.35 12162.82Other Revenue 14 499.00 345.77Increase/ (Decrease) in Stocks 15 280.51 (1136.21)

33712.81 11381.38LESS: COST OF OPERATIONSConsumption of Raw Materials, Storesetc.Raw Materials 13997.22 6646.44Stores andSpares 108.34 96.26Chemicals and Catalysts 41.38 38.22PackingMaterials 200.39 170.43Power, Fuel and Water 981.80 756.48

15329.13 7707.83Less: Stock Transfer for SelfConsumption 159.41 15169.72 118.81 7589.02Purchase of products for resale 14539.23 1245.44Employees' Remuneration & Benefits 16 595.96 405.75Manufacturing, Administration,Distribution and Other Expenses 17 1481.91 959.49Interest 18 1023.20 389.37Depreciation/ Amortisation 470.40 410.93Prior Period Adjustments (Net) 19 (13.46) (3.00)Deferred Revenue Exp. Written-off 3.90 3.86(Voluntary Retirement SchemeExpenses)

33270.86 11000.86Profit Before Tax 441.95 380.52Provision forTaxation Current Tax 92.80 61.80

Fringe Benefit Tax 8.02 6.50Deferred Tax 7.93 56.14Earlier Years (26.81) 81.94 (1.51) 122.93

Profit After Tax 360.01 257.59Profit transferredto:Capital Repatriation Fund 0.47 0.46Dividend Equalisation FundContribution towards ApprovedDonations 1.00 1.47 - 0.46(Under Income Tax Act, 1961)

127SAAB MARFIN MBA


Net Profit as per Multi stateCooperative Societies Act, 2002 358.54 257.13

CASH FLOW STATEMENT(Rs. In Crores)

Year Ended31.3.2009

Year Ended31.3.2008

(A) Cash Flow from Operating Activities:Net Profit before Tax 441.95 380.52Adjustment for:Depreciation 470.40 410.93Interest (Net) 857.19 362.71Provision for Doubtful Debts 0.01 0.31Loss on Damaged Goods 17.60 -Write down of Value of Goods-in-Transit 107.68 -Amount charged off / adjusted 0.04 0.20Assets Written-off 13.41 2.27Loss on Sale of Investments (Net) 83.16 15.47Exchange Rate Variations (Net) 148.84 5.10Loss on Sale of Fixed Assets (Net) 4.29 2.75Dividend Income (274.42) (132.54)Profit on sale of Investments - (115.22)Deferred Revenue Exp. Written off - VRS 3.90 3.97Diminution in value of Long Term Investments 81.16 -Liabilities / Provision written back (3.88) (14.12)Prior Period Depreciation (0.12) 1509.26 2.95 544.78Operating Profit before WorkingCapital Changes 1951.21 925.30Adjustment for:Inventories (279.54) 706.83Trade and Other Receivables (1717.19) (487.06)Trade Payable and Provisions 1747.04 (249.69) 3.43 223.20Cash Generated from Operations 1701.52 1148.50Direct Taxes Paid(Net of Refunds) (135.23) (72.07)Payment towards Cooperative Education Fund (2.57) (1.75)Payment to Cooperative Welfare Fund (1.90) (1.60)Donations Paid (1.87) (141.57) (0.67) (76.09)

Net Cash From Operating Activities (A): 1559.95 1072.41

(B) Cash Flow from Investing Activities:Purchase of fixed Assets including C.W.I.P. (590.82) (594.93)Proceeds from Sale of Fixed Assets 11.50 31.89Purchase of Investments (Net) (6300.54) (691.73)

128SAAB MARFIN MBA


Dividend Received 246.61 132.74Profit on Sale of Investments - 115.22Interest received 55.66 26.26

Net Cash used in Investing Activities (B): (6577.59) (970.55)

(C) Cash Flow from Financing Activities:Proceeds from issue of Share Capital 2.35 0.01Repayment of Term Loans (362.67) (153.97)Repayment of Deferred Trade Tax Loan (Net) (9.21) (4.10)Increase in Cash Credit 589.37 160.88Increase in Short Term Loans 5809.65 286.72Interest Paid (1008.14) (389.37)Dividend Paid (84.53) (84.45)Exchange Rate Variation (Net) (92.87) (5.10)

Net Cash used in Financing Activities (C): 4843.95 (189.38)

NET INCREASE/ (DECREASE) IN CASHAND CASH EQUIVALENTS (A+B+C) (173.69) (87.52)CASH AND CASH EQUIVALENTS AT THEBEGINNING OF THE YEAR 243.32 330.84CASH AND CASH EQUIVALENTS AT THECLOSE OF THE YEAR 69.63 243.32NET INCREASE/ (DECREASE) IN CASHAND CASH EQUIVALENTS (173.69) (87.52)

129SAAB MARFIN MBA


Appendix D: Significant Financial Indicators

2008-09

2007-08

2006-07

2005-06

2004-05

FINANCIAL RATIOS :Operating Profit to Sales (%) 6.5 7.8 6.69 6.92 6.52Profit before Tax to Sales (%) 1.34 3.13 2.43 4.85 6.37Return on Capital Employed (%) 3.12 3.5 2.53 7.18 10.58Profit before Tax to Net Worth(%) 11.16 10.31 6.9 13.55 14.27

Profit After Tax to Net Worth (%) 9.09 6.99 4.81 9.6 9.68Fixed Assets Turnover (Times) 6.32 2.38 2.2 3.01 3.57Working Capital Turnover(Times) 7.41 2.62 2.5 4.07 4.58

Inventory of Finished Goods(Months Sales) 0.12 0.76 1.48 0.74 0.9Inventory of Raw Material &PackingMaterial (Months Consumption) 0.74 1.25 1.01 0.86 0.79Sundry Debtors (Months Sales) 0.67 0.78 0.9 0.89 1.17Current Ratio 2.41:1 4.21:1 5.06:1 3.49:1 2.36:1Quick Ratio 1.87:1 3.06:1 3.15:1 2.37:1 1.51:1Debt Equity Ratio 3.23:1 1.84:1 1.78:1 1.42:1 2.20:1Employees ProductivityNo. of Employees 6757 6743 6826 6506 5752Sales per Employee (Rs. Crore) 4.87 1.8 1.51 1.77 1.29

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Appendix E: Provisional highlights of IFFCO performanceduring 2008-09

Highest Production of Fertilisers(Previous Best 70.12 lakh MT in2006-07)

71.68 lakh MT

Highest Production of Urea(Previous Best 39.63 lakh MT in2007-08)

40.68 lakh MT

Production of NPK/DAP/NP(Best 32.26 lakh MT in 2006-07)

31.00 lakh MT

Highest Sales of Fertilisers(Previous best 93.24 lakh MT in2007-08)

112.58 lakh MT

Highest Sales of Urea(Previous best 54.29 lakh MT in2007-08)

58.69 lakh MT

Highest Sales of NPK/DAP(Previous best 38.95 lakh MT in2007-08)

53.89 lakh MT

Profit Before Tax(Best PBT 807.1 crore in 2002-03)

Rs.441.95 crore

Profit After Tax(Best PAT 557.2 crore in 2002-03)

Rs.360.01 crore

Highest Turnover(Previous best Rs.12163 crore in2007-08)

Rs 32933 crore

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Plant Productivity(Best 1669 MT in 2005-06)

1376 MT per employee

Highest Marketing Productivity

(Previous best 6158 MT in 2007-08)7397 MT per employee

Composite Energy Consumption

(Lowest 5.907Gcal / MT in 2007-08)5.941 Gcal/ MT

Appendix F: VALUE ADDED STATEMENT

(Rs. In Crore)

ParticularsYear ended31.3.2009

Year ended31.3.2008

Income from Sales 32933.30 12162.82Dividend and Other Income 499.00 354.77

33432.30 12517.59

Less:Cost of Materials 29418.89 9971.54Manufacturing, Admn.,Distribution 1481.91 959.49& Other Expenses

Total Value Added 2531.50 1586.56

Applied to meet:Employee Cost 595.96 405.75Interest Payment 1023.20 389.37Income Tax (Net) 74.00 66.79Dividend 85.10 84.53Donations 1.75 0.75Cooperative Education Fund 3.59 2.57Retained Cash Profit 747.90 636.80

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Total Utilisation of ValueAdded 2531.50 1586.56

RatiosValue added to Total Income(%) 7.57 12.67Value added to CapitalEmployed (%) 17.89 14.65Value added to Net Worth (%) 63.95 43.01Value added per Employee(Rs. Lakh) 37.46 23.53

Appendix G: Some of the well known fertilisers used in India

Nitrogenous Fertilisers

Urea 46%N

Ammonium Sulphate (As) 21%N

Ammonium Chloride (ACl) 26%N

Calcium Ammonium Nitrate (CAN) 25%N

Phosphatic & Potassic Fertilisers

Single Super Phosphate (SSP) 16% P2O5

Muriate of Potash (MOP) 60%K2O

Sulphate of Potash (SOP) 48%K2O

Di-ammonium Phosphate (DAP) 18 – 46

Rock Phosphate (RP) 16 - 20% P2O5

NPK Grades

133SAAB MARFIN MBA


10:26:26

12:32:16

14:35:14

15:15:15

16:20:00

17:17:17

19:19:19

20:20:00

23:23:00

28:28:00

Appendix H: Some Calculations

Calculation of Cost of Goods Sold (COGS)

(in Rs. Crores)

Year Opening Stock Closing Stock Purchases COGS

2004-05 495.27 353.65 6667.86 6809.482005-06 353.65 593.33 9406.16 9166.482006-07 593.33 1347.34 10332.1 9578.092007-08 1347.34 211.13 10200.56 11336.772008-09 211.13 491.64 31777.26 31496.75

Calculation of Average Inventory

(in Rs. Crores)

134SAAB MARFIN MBA


Year OpeningInventory

ClosingInventory

AverageInventory

2004-05 1020.56 931.50 976.032005-06 931.50 1519.64 1225.572006-07 1519.64 2283.94 1901.792007-08 2283.94 1577.10 1930.522008-09 1577.10 1731.36 1654.23

Project report on working capital mgmt

Education

global economic

debit sweep

deferred revenue

review security

compute working

working capital

working capital

ample working