1. INTRODUCTION 1.1 INDUSTRY PROFILE: HISTORY AND DEVELOPMENT OF SUGAR INDUSTRY IN INDIA: India has been as the original home of sugarcane and sugar. Indians knew the art of making sugar since the fourth century. However the advent of modern sugar industry in India dates back to mid 1930’s when a few vacuum pan units were established in the tropical belts of Uttar Pradesh and Bihar. The Sugar industry is predominantly localized in Uttar Pradesh, particularly in the districts of Meerut, Saharanpur, Bijnour, Bereilly, Muzaffarnagar, Moradabad, Bihar and in the eastern coastal districts of Andhra Pradesh. If we refer to the historical events in the Sphere of Sugar Industry, Uttar Pradesh and Bihar occupied the predominant position as far as the location pattern of the industry is concerned and still these States are enjoying the same position. The reasons for such heavy concentration in the States of Utter Pradesh and Bihar are manifold. The unique position which Utter Pradesh enjoys in respect of cane cultivation is due to the advantages conferred by the 1
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1. INTRODUCTION
1.1 INDUSTRY PROFILE:
HISTORY AND DEVELOPMENT OF SUGAR INDUSTRY IN INDIA:
India has been as the original home of sugarcane and sugar. Indians knew the art
of making sugar since the fourth century. However the advent of modern sugar industry
in India dates back to mid 1930’s when a few vacuum pan units were established in the
tropical belts of Uttar Pradesh and Bihar.
The Sugar industry is predominantly localized in Uttar Pradesh, particularly in
the districts of Meerut, Saharanpur, Bijnour, Bereilly, Muzaffarnagar, Moradabad,
Bihar and in the eastern coastal districts of Andhra Pradesh. If we refer to the historical
events in the Sphere of Sugar Industry, Uttar Pradesh and Bihar occupied the
predominant position as far as the location pattern of the industry is concerned and still
these States are enjoying the same position. The reasons for such heavy concentration in
the States of Utter Pradesh and Bihar are manifold. The unique position which Utter
Pradesh enjoys in respect of cane cultivation is due to the advantages conferred by the
rich and fertile alluvial soil of the Genetic plain, the bulk of which contains adequate
quantities of lime and potash, the presence of thin varieties of cane admirably suited to
the climate conditions of the region and the existence of cheap and extensive irrigation
facilities. The concentration of sugarcane crop in compact blocks enables the sugar
factories to get supplies of sugarcane direct from the fields. Moreover, the cost of the
cane cultivation is less and the cultivators are not accustomed to raise alternative crops
like groundnuts, chilies, plantains, etc.
In recent years the sugar industry spreading to other parts of India, notably in the
southern states on Maharastra, Karnataka, and Andhra Pradesh and so on. Since sugar
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mills got to be near the sugar fields, Sugar mills are getting established near places
where Sugarcane can be and is grown. Also, the consumption of sugar is widespread
and sugar is demanded practically in all areas. And, therefore there is in recent year’s
tendency in the case of sugar industry towards its dispersal in different parts of the
country.
India is the largest consumer and second largest producer of sugar in the
world. The sufficient and well distributed monsoon rains, rapid population growth and
substantial increases in sugar production capacity have combined to make India the
largest consumer and second largest producer of sugar in the world. The Indian Sugar
industry has not only achieved the singular distinction of being one of the largest
producer of white plantation crystal sugar in the world but has also turned out to be a
massive enterprise of gigantic dimensions. With over 450 sugar factories located
throughout the country, the sugar industry is amongst the largest agro processing
industries, with an annual turnover of Rs150bn. It plays a major role in rural
development and its importance for India stretches far beyond the role of a sweetener
supplier.
The Sugar factories located in various parts of the country work as nuclei for
development of rural areas by mobilizing rural resources and generating employment,
transport and communication facilities. Over 45mn farmers, their dependants and a
large mass of agricultural labor are involved in sugarcane cultivation, harvesting and
ancillary activities constituting 7.5% of the rural population. The sugar industry
employs over 0.5mn skilled and unskilled workmen, mostly from the rural areas.
Since the beginning of planning era, sugar industry operated under a policy of
partial control in 1950-51 and 1951-52, followed by a continuous period of six years of
decontrol between 1952-53 and 1957-58. This policy was followed under the pragmatic
leadership of the Minister of Food, Sri Rafi Ahmed Kidwai. However, with his
departure, the perception of decontrol was lost.
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After altering between control and the Government adopted the policy of partial
decontrol in 1967-68, which has since been the mainstay of Government policy except
for two short periods of decontrol in the 1970’s. Under this policy, the Government
procures 40% of production at controlled prices based on the Statutory Minimum price
for sugarcane, for supply through the Public Distribution System and the balance 60 %
is allowed to be sold by the mills in free market subject to the monthly release
mechanism. The details of past Government policies for sugar industry are provided in
annexure 1.
The levy quota for sugar mills has been brought down from the peak levels of
70% in 1968-69 to the present levels of 40% as a gradual process of deregulation of
sugar industry.
The number of operating sugar mills in the country has increased from 29 in
sugar year (SY) 1930-31 to 412 by 1996-97 (sugar year = October 1st to September
30th). The addition in number of mills was at its peak during seventies when nearly 100
mills were added between 1970 and 1980 to increase the number of operating units to
300. The development of industry in the past is as given in table below.
The average capacity of the sugar mills in the industry has considerably moved
up from just 644 ton per day in SY 1930-31 to 2656 ton per day. But still the growth in
the Indian sugar industry was driven by horizontal growth (increase in number of units)
compared to the vertical growth witnessed in other countries (increase in average
capacity).
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CENSUS OF SUGAR MILLS AND CRUSHING ACTIVITY IN INDIA
Sugar year
(oct-sept)
Number of
operating
Sugar mills
Average capacity
ton Crushed per
day
1930-31 29 644
1940-41 148 750
1950-51 139 882
1960-61 174 1172
1970-71 215 1394
1980-81 315 1718
1990-91 385 2088
1996-97 412 2656
2000-01 423 3000
2003-04 453 3200
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SIGNIFICANCE OF SUGAR INDUSTRY
Sugarcane and sugar beet are two main sources of white crystal sugar in the
world. Out of the world’s total white crystal sugar production about 70% comes from
sugarcane and 30% from sugar beet. More than 100 countries in the world cultivate
sugarcane while 35 countries produce sugar from sugar beet. About 12 countries
produce sugar both from sugarcane and sugar beet. Worldwide sugarcane occupies an
area of 20.1 million hectares with a total production of 1318.1 million tones and
productivity of 65.5 tones per hectare. Asia has the highest area (9.08 million hectares)
and contributes 42% towards world’s sugarcane production.
The main By-products of sugar industries are
(i) Molasses
(ii) Bagasse
(iii) Filter cake
1. Molasses is used to produce chemicals, spirit and alcohol.
2. Bagasse is the raw material for manufacturing paper.
3. Filter is used for manure.
Sugar is not only for domestic purpose but also it is used as semi industrial
goods for the manufacturing of foodstuff. So sugar industry has direct or indirect effect
on other industries. The different types of significances of Sugar industry are
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Sugar industry – Multi-product complexes:
There are 453 sugar mills in operation in the country. A few more are in the
pipeline. The existing mills have to diversify into “sugar-ethanol cum-electricity”
generation complexes. Around 1000 such complexes will have to be established to
process 3750 million tones of cane into value added products, with an investment of
Rs.1, 32,650 crores.
With 3750 million tones of sugarcane, the country can produce 16 million tones
of sugar, 10 million tones of jaggery/gur, 246.15 billion liters of ethanol and 298.35
billion KWH of surplus electricity after providing for captive consumption. The
domestic market can absorb the production of 16 million tones of jaggery/gur.
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1.2WORKING CAPITAL MANAGEMENT
A CONCEPTUAL FRAMEWORK ON WORKING CAPITAL MANAGEMENT
Working capital is the firm’s holdings of current assets such as Cash, receivables,
inventory and marketable securities. Every firm required working capital for its day to
day transaction such as purchasing raw material, for meeting salaries, wages, rents rates,
advertising etc. But there is much disagreement among various financial authorities
(financial manager, accountants, businessmen and economists) as to the exact meaning of
the term working capital.
Definition:
“Working capital is the amount of funds necessary to cover the cost of operating
the enterprise”
-Shubin-
“Circulating capital means current assets of a company that are changed in the
ordinary course of business form one form to another as for example, from cash to
investors, inventories to receivable, receivable into cash.”
-Gene Stenberg-
Significance:
The world in which real firms function is not perfect. It is characterizes by the
firm’s considerable uncertainty regarding the demand, markets price, quality and
availability of its own products and those of suppliers.
These real world circumstances introduce problems to the firm must deal. While
the firm has many strategies available to address these circumstances, strategies that
utilize investment or financing with working capital accounts often offer a substantial
advantage over the other techniques. The importance of working capital management is
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reflected in the fact that financial managers spend a great deal of time in managing
current assets and current liabilities like
Arranging short term financing
Negotiating favorable credit terms.
Controlling the movement of cash.
Administering accounts receivables
Monitoring investment in receivables.
Decisions concerning the above areas play an important role in maximizing
overall value of the firm. Once decisions concerning these areas are reached, the level of
working capital is also determined in active decision sense, but falls out as residual from
the decision just made.
The management of working capital plays an important role in maintaining the
financial health during the normal course of business. This critical role can be enunciated
by examining the flow of resources through the firm. By far the major flow is the
working capital cycle.
Working Capital Cycle:
This is the loop which starts at the cash and the marketable securities account,
goes trough the current account as direct Labour and materials which are purchased and
use to produce inventory, which in turn is sold and generates accounts receivables, which
are finally collected to replenish cash.
Concept & Scope:
There are two concepts of working capital
Gross Working Capital
Net Working Capital
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Gross Working Capital:
Gross working capital, simply called as working capital refers to the firm’s investment in
current assets. Current assets are the assets, which in ordinary course of business can be
converted into cash within an accounting year.
Examples of Current Assets are:
Cash and bank balances
Short term loans and advances
Bills Receivables
Sundry Debtors
Inventory
Prepaid Expenses
Accrued Incomes
Money Receivable in 12 months
The gross working capital focuses attention of two aspects of current assets
management.
Optimum investment in current assets and
Financing of current assets.
The Consideration of the level of investment in current assets should avoid two
danger points - excessive and inadequate investment in current arranging funds to finance
current assets. When ever a need for working capital funds arises due to the increasing
level of business activity or for any other reason arrangement should be made quickly.
Net Working Capital:
Net working capital refers to the difference between the current assets and current
liabilities. Current liabilities are those claims of outsiders, which are accepted, to mature
for payment with an accounting year and include creditors, bills payable and outstanding
expenses.
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Net Working Capital = Current Assets - Current Liabilities
Net working capital can be positive or negative. A positive net working capital
will arise when current assets exceeds current liabilities. It is a quantitative concept.
It indicate the liquidity position of the firm and
It suggests the extent to which working capital needs may be financed by
permanent sources of funds.
Types of Working Capital:
Working Capital can be classified into two categories i. e
Permanent working capital
Temporary or variable working capital
Permanent Working Capital:
It is the minimum amount of investment in all current assets which is required at
all times to carry out minimum level of business activities. Tandon Committee has
reserved to this type of working capital as “Core Current Assets”.
Variable working capital:
The amount of working capital over permanent working capital is known as
variable working capital. The amount of such working capital keeps on fluctuating form
time to time on the business activities. It may again be subdivided into seasonal working
capital and special working capital.
Seasonal working capital is required to meet the seasonal demands of busy
periods occurring at stated intervals on the other hand, special working capital is required
to meet extraordinary need for contingencies. Even like strikes, fire unexpected
competition; rising price tendencies or initiating a big advertisement campaign require
such capital.
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Approaches for financing working capital:
There are three approaches to financing the working capital:
Matching approach
Conservation approach
Aggressive approach
Matching approach:
The form cab adopts a financial plan, which matches the expected life of assets
with the expected life of the source of funds raised t finance assets. The firm follows
matching approach, long-term financing with is used to finance fixed assets and
permanent current assets and short term financing temporary or variable current assets.
However, it should be realized that exact matching is not possible because of the
uncertainty about the expected lives of assets. The firms fixed assets and permanent
currents assets are financed with long-term funds and as the level of these assets
increases, the long term financing level also increases.
The temporary or variable current assets are furnace with short-term funds and as
their level increases, the level of shot-term financing also increases.
Conservative Approach:
A firm is practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it depends
more on long- term funds for financing needs. Under a conservation plan, the firm
finances its permanent assets and also a part of temporary current assets with long term
financing. In the periods when the firm has no need for temporary current assets, the idle
long- term funds can be invested in the tradable securities to conserve liquidity. The
conservative plan relies heavily on long term financing.
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Aggressive Approach:
A firm may be aggressive in financing its assets. A firm follows aggressive policy
when it uses more short –term financing than warranted by the matching plan. Under an
aggressive policy, the firm financing a part of its permanent current assets with short-
term financing. Some extremely aggressive firms may even finance a part of their fixed
assets with short-term financing.
Importance of Working Capital:
A business firm must maintain an adequate level of working capital in order to
run its business smoothly. It is worthy to note that both excessive and inadequate working
capital positions are harmful. Out of two, inadequacy of working capital is more
dangerous for a firm.
Excessive working capital results in idle funds on which no profit is earned.
Similarly insufficiency of working capital results in interruptions of production. This will
lead to inefficiencies, increase in costs and reduction in profits.
Working capital is just like the lifeblood of business. If it becomes weak, the
business can hardly prosper and survive. No business can run successfully without an
adequate amount of working capital. The following are the few advantages of adequate
working capital in the business:
Cash Discount:
Adequate working capital enables a firm to avail cash discount facilities are
offered to it by the suppliers. The amount of cash discount reduces the cost of purchase.
Good will:
Adequate working capital enables a firm to make prompt payment. Making
prompt payment is a base to create and maintain goodwill.
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Ability to face crisis:
The provision of adequate working capital facilitates to meet situations of crisis
and emergencies. It enables a business to withstand periods of depression smoothly.
Credit – worthiness:
It enables a firm to operate its business more efficiently because there is no delay
in getting loans from banks and others on easy and favorable terms.
Regular supply of raw materials:
It permits the carrying of inventories at a level that would enable a business to
serves satisfactory the needs of its customers. That is it ensures regular supply of raw
materials and continuous production.
Expansion of markets:
A firm, which has adequate working capital, can create favorable market
condition. That is purchasing its requirements in bulk when prices are lower and holding
its inventories for higher. Profits are increased.
Problems of working capital:
It may not be able to take advantage of profitable business opportunities.
Production facilities cannot be utilized fully.
Short-term liabilities cannot be paid because of lack of working capital.
It may fail to pay its dividend because of non- availability of funds.
Its low liquidity may lead to low profitability. In the same way, low profitability
results in low liquidity.
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Danger of excessive working capital:
A firm may be tempted to over trade and lose heavily.
Unable to extract benefits of customer credit.
The situation may lead to unnecessary purchases and accumulation of inventories.
This cause more chances of theft, waste, losses etc.
There arises an imbalance between liquidity and profitability.
Excessive working capital means funds are idle.
The situation leads to greater production, which may not be having matching
demand.
The excess of working capital leads to carelessness about cost of production
Determinants of working capital:
The need of working capital is not always the same it varies from year to year or
even month-to month depending upon a number of factors. There is no set of rules or
formulae to determine the working capital needs of the firm. Each factor has its own
importance and the importance of the factors changes for a firm overtime. In order to
determine the proper amount of working capital of concern, the following factors should
be considered carefully.
Nature of Business:
The amount of working capital is basically related to the nature and volume of
business in concerns where the cost of the raw materials to be used in the manufacturing
of a product is very large in proportion to its total cost of manufacturing the requirement
of working capital will be very large.
Size of the Business Unit:
The size of the business unit has an important impact on its working capital needs. Size
may be measured in terms of scale of operation. A firm with larger scale of operation will
need more working capital than a small firm.
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Seasonal variation:
Seasonal industries require more working capital to stock the raw materials during
the season.
Time consumed in manufacturing:
The average time taken in the process of manufacture is also an important factor
in determining the amount of working capital. The longer the period of manufacturing the
larger the inventory required.
Turnover of circulating capital:
Rapidly of turnover determines the amount of working capital. The faster the
sales the larger the turnover hence less working capital.
Need to stockpile raw material and finished goods:
In industries where raw materials are bulky and best purchasable in large
quantities such as cement or where labor stoppage is frequent large amount of working
capital is required.
Growth and expansion:
Rowing concerns requires more working capital than those that are static. It is
logical to expect larger amount of working capital in a growing concern to mean its
growing needs of funds.
Business cycle fluctuations:
Working capital is required more during boom period and lesser in depression
period.
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Terms of Purchase and Sale:
Terms of purchase and sales affect the amount of working capital. The practice of
cash purchases with credit sales requires more working capital.
Pricing level changes:
Rising price level requires more working capital to maintain the same levels of
current assets.
Inventory Turnover:
With a better inventory control, a firm is able to reduce its working capital
requirements. If the inventory turnover is high the working capital requirements will
below.
Sources of working capital:
After determining the level of working capital on the basis of various
determinants the next step is to consider how it will be financed. A large manufacturing
concern may procure funds from various sources to meet its working capital requirements
form time to time.
For the convenience of study the sources of working capital may be classified
under two heads.
Sources of long –term or regular working capital.
Sources of short term or seasonal working capital.
Sources of long term working capital:
The long-term working capital requirements can be met from the following
sources.
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Issue of Shares:
It is the safest way of procuring permanent and regular working capital with out
any fixed charges.
Issue of Debentures:
Regular and long term working capital may be obtained at lower cost of trade on
equity.
Retained profits:
Accumulated large profits are also considered to be a good source of a financing
long – term working capital requirements. It is the best and the cheapest source of
finance. It creates no change in future profits.
Sale of fixed assets:
If there is any idle fixed assets in the firm can be sold out and the. Proceeds may
be utilized for financing the working capital requirements.
Term loans:
Mid term and long-term loans for a period above 3 years provide import sources
of working capital such term loans can be borrowed from the special financials
institutions such as IDBI, IFCI, LIC etc.
Sources of short term working capital:
The sources of short – term working capital may be classified in two.
Internal sources
External sources
Internal Sources:
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Under this category the sources of working capital are tapped from within the
internal sources are depreciation funds, provision for taxation and accrued expenses.
1. Depreciation fund:
Depreciation funds created out of profits provided they are invested in or
represented by assets.
2. Provision for taxation:
There remains a time lag between making the provision for and payment of
taxation. A company may utilize such provision during the intermittent period
temporarily.
3. Bank credit:
The greater part of the working capital is supplied by commercial banks to their
customers through direct advances in the shape of loans, cash credit or over draft and
through discounting the credit, papers, e.g. bills-payable and promissory notes etc.
4. Customer credit:
Advance may also be obtained form customers against the contracts entered into by the
enterprise such advances are generally asked for, by the Companies manufacturing large
plants and machinery involving longer time in completing the process of manufacturing
e.g., Ship building industries.
5. Public deposit:
Most of the companies in recent years depend on this source to meet their
working capital requirements. Under the companies Act 1956 a company is authorized to
raise funds equal to 25% paid up capital and free reserves by this source.
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Standards of working capital management:
1. There is no one single criteria for judging the efficient arrangement of Working
Capital.
2. Factors to be taken into account for organizing on efficient lines:
3. Ability to meet short – term commitments in time, make payment of bills on due
dates.
4. Ability to find adequate cash at the right time to present forecast levels of
business.
5. Ability to maximize sales turnover with minimum possible cash.
6. Minimum possible Inventory Turnover - Turnover norms are fixed.
7. Whether reasonable credit is extended to customers as a sales and monitoring
strategy.
8. Financing plans are prepared in anticipation of future need so that funds become
available at the right time and at least cast.
9. Policies for credit to present and new customers are prepared and forecast of
collections of receivables are whole along with forecast of sales.
Ratios to measure the efficiency of working capital.
1. Current Ratio:
= Current assets/ Current liabilities
2. Quick Ratio:
= (Current assets – Inventories)/ Current liabilities
Sales to Cash:
= Sales during a period / Average cash balance
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Average collection period:
Debtors divided by annual credit Sales and the resulting figure multiplied by 365.
This ratio indicates how many days of credit are being obtained from the suppliers.
Average payment period:
Creditors divided by annual credit purchase and the resultant figure is multiplied
by 365. This ratio indicates how many days of credit are being obtained from the
suppliers.
Inventory turnover ratio:
= Sales / Average Inventory.
Working capital policy:
Working capital management policies have a great effect on firm’s profitability,
liquidity and its structural health. A finance manager should therefore, chalk out
appropriate working capital policies in respect of each competent of working capital so as
to ensure high profitability, proper liquidity and sound structural health of the
organization.
Objectives of Working Capital Management:
The objectives of working capital management are two fold:
Maintenance of working capital and
Ability of ample funds at the time of need
The basic goal of working capital management is to manage each of the funds
current assets and current liabilities in such a way that an acceptable level of networking
capital is always maintained in the business.
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Working Capital Forecast:
There are number of methods to determine the working capital needs by
determining the amount of current assets and current liability:
The assessment of working capital requirement can be made on the basis of the
current assets required for the business and the credit facilities available for the
acquisition of such current assets from the current liabilities.
1. Cash forecasting method:
In this method the position of cash at the end of the period is shown after considering the
receipts and payments to be made during the Period. Its form assumes more or less a
summary of cashbook. This shows the deficiency or surplus of cash as the definite point
time.
2. The Balance sheet Method:
The Balance sheet method of forecast is made up of the various assets and liabilities of
the business. Afterwards, the difference between the two is taken which will indicate cash
surplus or deficiency.
3. Profit and Loss adjustment method:
Under this method the forecasted profits are adjusted after adding the cash inflows and
deducting the cash outflows. The basic idea under this method is to adjust the estimated
profit on cash basis.
4. Working Capital as a percentage of sales:
Under this method the working capital is to be related to sales and calculated as a
percentage of sales.
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Operating Cycle:
Working Capital is required because of the time gap between the sales and their
actual realization in cash. This time gap is technically terms as operating cycle of the
business. In case of manufacturing company, the operating cycle is the length of time
necessary to complete the following cycle of event.
Conversion of cash into raw materials.
Conversion of raw materials into work in progress
Conversion of work in progress into finished goods.
Conversion of finished goods into account receivables.
Conversion of accounts receivable into cash
This cycle is continuous phenomena. In case of “Trading Firm” the operating
cycle will include the length of time required to:
a. Cash into inventories
b. Inventories into accounts receivables
c. Accounts receivables into cash.
In case of “Financing Firm” the operating cycle includes the length of time taken
for 1 year.
Conversion of cash debtors and
Conversion of debtors into cash
Working Capital Ratio:
It measures the efficiency of the employment of working capital. Generally higher
the turnover, greater is the efficiency and larger the sale of profits. Working Capital
turnover Ratio can be calculated with help of the following formula.
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Working Capital turnover Ratio = Sales
Net working capital
Components of Working Capital Management:
Inventories constitute the most significant part of current assets of a large majority
of companies in India. The term inventory refers to the stockpile of the product. The
assets which firms store as inventory are:
Inventories can be classified as three categories:
Raw material:
Inputs that are converted into finished products through manufacturing process.
Work in progress:
Semi finished products that require more work before they are ready for sale.
Finished goods:
Goods which are completely manufactured products /And /or ready for sale.
Objectives:
The objective of Inventory Management should be to determine and maintain the
optimum level of inventory investment since both excessive and inadequate inventories
are not desirable.
The optimum level of inventory will lie between the two-danger point’s excessive
and inadequate inventories. The optimum level of inventory should be determined on the
basis of trade off between costs and benefits associated with the levels of inventory.
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Techniques:
Many sophisticated mathematical techniques are available to handle inventory
management problems. Here attention is given to the basic concepts relevant to the
management and control of inventory and techniques for the major problems area that
comprise the heart of inventory control. The aspects are:
Determination of the type of control required.
The basic economic order quantity.
The re-order point.
Safety stock
As a matter of fact the inventory management techniques are a part of production
management. But a familiarity with them is of great help to the financial manager in
planning and budgeting inventory. Hence, forming an important part in current assets
leading to working capital management.
Cash Management:
Cash is the most important factor in financial management. It is also the most
important current asset for the operation of the business. Every activity in an enterprise
and it cannot be raised as and when required. It is therefore, desirable that available cash
must be management properly.
Cash is the most liquid asset, is of vital importance to the daily operations of the
business. While the proportion of corporate assets held in the form of cash is very small
often in between 1% to 3%, it efficiency management is crucial to the solvency of the
business. In view of its importance, it is generally referred to as the lifeblood of a
business enterprise.
Meaning of Cash:
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The term ‘Cash’ is used in two senses. In a narrower sense it includes coins,
currency note, cheques, bank drafts held by a firm with it and the demand deposits held
by it in banks. In a broader sense it also includes near cash assets such as marketable
securities and time deposits with bank.
There are two main reasons for a firm to hold cash:
1. To meet the needs of day – to – day transactions,
2. To protect the firm against uncertainties characterizing its cash flows.
Objectives:
To meet the cash disbursement need as per the payment schedule i.e. the first
basic objective of cash management is to meet the payments schedule. In other words the
firm should have sufficient cash to meet the various requirements of the firm at different
period of time.
The second basic objective of cash management is to minimize the amount locked
up as cash balances. In the process of minimizing the cash balances, the finance manager
is confronted with two conflicting aspects.
A higher cash balance ensures proper payment will all its advantages. But this
will result in a large balance of cash remaining idle. A low level of cash balance may
results in failure of the firm to meet the payment schedule.
Cash management basic problems:
The problems associated with the cash management are:
1. Controlling ‘0’ level of cash:
Level of cash can be fixed by taking into account the following
a. Predictable discrepancies through the technique of cash budget
b. Unpredictable discrepancies
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2. Controlling inflow of cash:
It is necessary to check the fraudulent diversion of cash receipts and to collect the
receipts speedily. Fraudulent diversion can be controlled by internal check system.
Speedily collection of receipts may be arranged through.
3. Controlling outflow of cash:
Controlling of outflow of cash is equally important. For this purpose, a centralized
payment, avoidance of early payments, float and accruals should be taken recourse.
4. Investment of surplus cash:
Investment of surplus cash available with the company depends upon the
discretion of the executive of the company. Investment may be made on Temporary basis
and on Permanent basis. In taking investment decisions.
Following point are usually given weight age.
Security
Liquidity
Yield
Maturity
Advantages of ample cash funds:
Firms having ample cash reserve may derive the following advantages:
A shield for technical inefficiency
Maintenance of good will
Availing of cash discount
Old bank – relations
Exploitation of business opportunities
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Encouragement to new investment
Increase in efficiency
Over coming abnormal financial situations
Facts of Cash management:
The following are the four face of cash management
1. Cash Planning
2. Managing the cash flows
3. Optimum cash level
4. Investing surplus cash
Receivable Management:
Account receivables constitute a significance portion of the total current assets of
the business. They are direct consequences of “Trade credit”. Which has become an
essential marketing tool in modern business?
Meaning of receivable:
Receivables are asset accounts representing amounts owned to the firm as a result
of sale of goods or services in the ordinary course of business.
Meaning of receivables Management:
It may be define, as the process of marking decision relating to the investments of
fund on this aspect, which will result in maximizing the overall on the investment of the
firm the problem of management of receivables is basically a problem of balancing
profitability and liquidity.
Soft credit terms are attraction for higher sales and hence longer the time a
company allows its customers to pay, resulting in greater sales as higher profits.
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However, on the other hand the longer the period of credit, the greater the risk, greater
the level of debt and greater the strain on the liquidity of the company.
Cost of Receivables:
The cost with respect to maintenance of receivable can be identified as follows:
1. Capital Cost:
Maintenance of accounts receivable result in blocking of firm’s financial
resources in them. This is because there is a lag between the sale of goods to customers
and the payments by them. The firm therefore has to arrange for additional funds to meet
its obligations such as payments employees, suppliers of raw materials etc. while waiting
for payments from its customers.
2. Administrative cost:
The firm has to incur additional administration costs for maintaining account
receivable in the form of salaries to the staff kept for maintaining accounting records
relating to customer, or conducting investigations regarding potential credit customers to
determine their credit worthless.
3. Defaulting cost:
Sometimes after making all serious efforts to collect money form defaulting
customers the firm may not able to recover the over debts because of the inability of the
customers. Such debts are treated as bad and have to be written off since they cannot be
realized.
Optimum size of receivables:
The optimum investment in receivables will be a level where there is a trade off
between costs and profitability. When the firm resorts to liberal credit policy, the
profitability of the firm increases on account of higher sales.
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However, such a policy results in increased investment in receivables increases
and thus the problem of liquidity is created on the other hand a stringent credit policy
reduces the profitability but increase the liquidity of The firm. Thus optimum credit
policy occurs are a point where they’re Trade off between liquidity and profitability”.
Credit policy variables:
The important dimensions of a firm credit policy are:
Credit standards
Credit period
Cash discount
Collection effort
Credit standards:
It represents the basic criteria for extension of credit to customer. The firm’s
credit standards are generally determined by the five ‘C’s I. e., charter, capacity capital,
collateral and conditions. Information about 5 Cs can be calculated both form internal as
well as external sources.
Internal sources include the firm’s previous experience with the customers
supplemented by its own well-developed information system. External resources include
customer’s reference, trade associates and credit rating organizations.
Credit period:
Extending the credit period stimulates sales but increase the cost on account for
more tying up of funds in receivables. Similarly shortening the credit period reduces the
profit on account of reduced sales, but also reduces cost of tying up of funds in
receivables.
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Cash discount:
A cash discount is a reduction in payment offered to customers to induce them to
repay credit obligation within a specified period of time
Collection procedure:
A target collection procedure is expensive for the firm because of high out of
pockets costs and loss of goods will of the firm among its customers. However, it
minimizes the loss on account of bad debts as well as increase savings in terms of power
capital costs on account of reduction in size of receivable. A balance has therefore to be
struck the cost and benefit of different collection procedures or policies.
System for receivable control:
The management should consider the following four factors in keeping the level
of investment in receivables within controllable limits.
Deciding Acceptable Level of Risk:
The first point is to decide to whom goods should be supplied bearing in mind the
risk involved. It is therefore essential to assess the credit worthiness of the customers
before advancing any credit to them.
Terms of credit sales:
The second steps in this regard into decide terms of credit sales and the level of
cash discounts. Cash discount has important bearing on the cost of capital and on credit
sales.
Credit collection policy:
The management should provide for bad debts to keep the losses minimum.
Usually 5% to 7% of sundry debtors are provided for bad debt. A collection procedure
should be established and action should be taken accordingly. The other steps should be
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to record the age of debt to facilitate the collection of debts. The age of debt is called as
average collection period. The age of debt is computed by following methods.
Payable Management:
Management of accounts payable is as much important a management of accounts
receivable of course, there is a basic difference between the approaches to be adopted by
the Finance Manager in the two cases.
Whereas the underlying objective in case of accounts receivable is to maximize
the acceleration of collection process, the objective incase of accounts payable is to slow
down the payments process as much as possible.
But it should be noted that delay in payments of accounts payable may result in
saving of some interests costs but it can prove very costly to the firm in the form of loss
of credit in the market. The finance Manager has, therefore to ensure that the payments to
the credits are made at the stipulated time period after obtaining the best credit term
possible.
Control of accounts payable:
Computing the average age of payables can do this. This may be calculated by
any of the following methods.
1. Months or days in the period/ Accounts payable turnover = Credit
Purchases in the period/ Average accounts payable
2. Average accounts payable/ average month/ daily credit purchase.
3. Average account payable × months/ days in the period/ purchases.
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2. COMPANY PROFILE
HISTORICAL BACKGROUND OF DELTA SUGARS LIMITED:
Sree Hanuman Co-operative sugars Ltd., Hanuman Junction was registered on
30-09-1972 and the contribution started on 17-11-1972 by the chief Minister Sri
Jalagam Vengala Rao. Sree Hanuman Co-operative Sugars Limited was established in
90 acres of land. The machinery was supplied and established by the Andhra Foundry
and Machinery Company Ltd., Hyderabad. The installed capacity of the factory was
crushing per day. As on March 1991, enrolled members in the society are 6,334.
Hanuman Junction Co-operative Sugar Mills that was laid off in September
2001 and revived in November 2001 by Delta sugars Ltd. It is one example of the
implications of revival of closed SLPEs through privatization for varied stakeholders of
enterprise reform programme in Andhra Pradesh. Contrary to the fears of a section of
the society about the moves of privatization of sugar factories, transformation of
Hanuman Junction Co-operative Sugar Mills into Delta Sugars Ltd reveals a different
reality. Perceptions of the workers, cane farmers and Sugar enterprises in the area
demand attention to appreciate the nature of implications of privatization programme.
Cross-section of the society in the sugarcane belt of Hanuman Junction Co-
operative Sugar Mills views privatization with hope and expectations for a brighter
future. However, there are issues that need to be resolved to address apprehensions and
conflicts of the pre privatization tangle. A closer look at the ground realities makes one
believe that post privatization scenario after another crushing season is likely to present
a different picture more in favor of the transition as by then the pending issues of pre
and post privation would be resolved meaningfully. Issues that require attention include
payment of job severance compensation for the workforce that is not absorbed by the
new management, capacity building of the surplus labor force, and resolution of the
payment of long standing arrears to the farmers.
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In September 2001, the Government of Andhra Pradesh privatizes the sugar
factory and running by the private management i.e., M/s Delta Sugars Limited,
Hanumanjunction. The factory registered under Companies Act 1956. The present
capacity of the plant is enhanced to 3000 MT per day.
Crushing season:
Generally the season starts from November to April of every year depending
upon availability of raw material i.e., sugarcane. The main objective of the industry is to
manufacture white crystal sugar from sugarcane through various manufacturing
processes. In addition to the main product, we obtain the by-products such as molasses,
bagasse and filter cake.
Location:
Sree Hanuman Co-operative Sugar Ltd is located in Seri Narasannapalem
village, Bapulapadu Mandal, Krishna District, A.P., beside National High Way
5(GNTRoad) which is about 42 kms away from Vijayawada and 4 kms away from
Hanuman Junction. The Head Office is on the factory site, the main railway station is
Nuzvid, which is at a distance of 6 kms from the factory site, and the main railway
station is Vijayawada.
Lorries, bullock carts and tractors transport sugarcane and other materials. There
are two major towns, Vijayawada at a distance of 42 kms and Eluru at a distance of 23
kms from the factory. Factory is connected to these two towns by railway as well as
roadways. The factory has nearest marketing facility at Vijayawada which is one of the
biggest centers in South India. It offers a wide market for sale of sugar and other by-
products.
There are three sugar factories in the immediate neighbor. They include
1. KCP limited, Vuyyuru, which is at a distance of 40 KMS.
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2. The West Godavari Co-op sugar, Bhimadole that is at a distance of 43 KMS.
3. KCP Sugar Ltd, challapalli at a distance of 65 KMS.
The main raw material of the sugar factory is sugarcane. The sugar production
area of the organization is very vast. There are 260 villages in the area of operation of
the factory. The 260 villages are extended into 16 mandals.
Size:
The crushing capacity of the plant is initially 1250 tons per day. This plant is
gravity flow type. The white mass will flow by gravity pumps and avoided as the crystal
ligers are placed in the first floor along with the evaporator, pans in second floor. The
present capacity of the plant has extended to 3000 MT tons per day.
CANE PROCUREMENT PROGRAMME OF DELTA SUGARS IMITED:
Delta sugar factory has 1,600 cane growing members. Though it has 1,600
members only about 100 are the active cane growers. Delta Sugars ltd commenced
crushing during 1974-75 season. It has a new factory having the privilege to enjoy the
benefit of the general central government incentive scheme given to the new sugar
factories. It has to crush a minimum quality of 1, 62, 500 MTs. For optimum point but
so far it has not crushed even 1, 00,000 Mts. It is due to mainly lack of raw material.
The area is very compact which is radius of about 15 kms from factory.
There are 150 villages in the area of operation of the factory from where it has
enrolled the members. These villages are extended into 9 mandals. The total land
holding of the members is about 6529 acres and the average holding of the members of
each members work out to 4.8%. About 90% of the area hold by the members is quiet
for cane cultivation. As per by law no.33, it is obligatory on the part of he member to
supply cane @ 25 MTs. During each crushing season but due to lack of proper
irrigation facilities, lack of remuneration price to cane, riots are not showing such
interest to grow cane. So to make the cane cultivation economical, the company has to
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provide good seeds. Material incentives for early maturing, high yielding and better
varieties and to make cane cultivation viable to farmers. To achieve this object,
developing seed nurseries and providing pesticides etc., to farmers is essential.
Policies with respect to Cane Growers:
Cane growers are the major link in the supply chain of sugar unit. Cane growers
coexist with sugar unit and vice versa. The interest of the sugar unit and the cane
growers are complementary to each other. The cost of sugarcane supplied by the cane
growers constitutes nearly 80-85% of the total cost of producing sugar. Delta Sugars
limited lays special emphasis on the cane development and welfare of farmers. Cane
developmental efforts are directed towards improvement in the quantity and quality of
sugarcane produced
Efforts towards quantitative development:
Prompt payment to farmers for sugarcane supplies.
Field Education by field officers on cane varieties and plantation techniques
through seminars, meetings, supply of pamphlets and coordinating meetings
with experts from Cane Development Counsels and Drip Irrigation
companies.
Free and subsidized distribution of pesticides and fertilizers.
Extending crop loans.
Efforts towards qualitative development:
Operation of subsidy schemes to encourage the farmers to cultivate more area.
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Providing seeds, fertilizers and pesticides to the farmers so that their crop is not
vulnerable to diseases etc., and improving the quantity.
Conducting trial demonstration on plots for different methods and varieties.
Cane procurement programme starts with the survey work of assessment of cane
availabilities in the area of supply no the plantation is completed. Such programme
comprises of actual measurement of the acre age sugarcane plantation and the date of
plantation. In case of Raton, the date o harvesting has also to be recorded. A
consolidated statement is prepared of this information for assessing period, the actual
cane availabilities also to arrive at possible maturing period for finalizing the
harvesting. Graphs and charts are prepared based on these dates for each section of cane
supply area comprising the detailed information of all field and villages of the area.
These dates are very helpful for guidance for harvesting programme.
The factory staff will take the maturing test a few months earlier from the date
of actual start of crushing. During the survey brides of the standing cane are observed
on the spot by hand and refract meters. The result of such survey recording the brides of
the juice are there brought to the laboratories where actual laboratory tests are done for
expected sugar recovery. Such pre harvest maturity tests are continue till the period
when the general maturity in the cane salt sets in and then maturity tests may not be
necessary. Then the harvesting as to which cane could be harvested earlier when the
factory starts is finalized.
Early varieties:
This variety matures earlier than other varieties. The early varieties plat will take
11 months for mature and will take from 10 and half month to 11 months. Some of the
early varieties are
86 V96
Co 690 791V83
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Co 671 85 A261
87 A298 81V48
93 V 297
Mid/Late varieties:
Mid/late varieties take more time for maturing in the CAE of Raton these take at
least 11 to 11 ½ month and in plant case they take 12 months. Some varieties are
Mid:
7805
7219
85V110
89032Co
Late:
89 V74
85 R186
88 A 184
7219
Procurement Programme:
A cane procurement programme start with the survey work of assessment of
cane availabilities in the area of supply on the plantation is completed. Such programme
comprise of actual measurement of the acre age sugarcane plantation and the date of
plantation. In case of Raton, the date of harvesting has also to be recorded. A
consolidated statement is prepared of this information for assessing period the actual
cane availabilities also to arrive at possible maturing period for finalizing the harvesting
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programme. Graphs and charts are prepared based on these dates for each section of
cane supply area comprising the detailed information of all field and villages of the
area. These dates are very helpful for guidance for harvesting programme.
The factory staff undertaken prepares maturing test a few months earlier from
the date of actual start of crushing. During the survey brides of the standing cane
observed on the spot by hand refract meters. The result of such survey recording the
brides of the juice are than brought the laboratories where actual laboratory test are
done for expected sugar recovery. Such pre harvest maturity tests are continued till the
period when the general maturity in the cane salt sets in and next maturity tests may not
be necessary. Then the harvesting programmes as to which cane could be harvested
earlier when the factory starts are finalized.
The work of cane procurement programme has to be formulated for proper
execution. The most harmful feature of the cane is less planning of the procurement
programme or the over supply and accumulation of sugarcane in the factory yard. Sugar
content in the cane decreases soon after the cane is harvested and the cane dries out due
to assertive supply or delayed transportation that affects the sugar recovery drastically.
To avoid this problem Delta Sugars ltd is fixing dates to harvest the cane to reduce the
over supply of cane in some days.
The factory is getting cane from 30 to 37 villages only. At present the farmers
are cultivating cane mostly in upland area with the help of bore well irrigation. In some
areas the farmers are not interested to grow cane because of lack of water during the
yield. This resulting cane cultivation un-remunerative. To make the cane cultivation
remunerative, provision of bore wells is essential to supplement the canal irrigation in
the upland areas.
Mainly in the factory zone of the Hanuman Junction, Bapulapadu mandal, the
farmers are cultivating in nearly 6529 acres (1997-1998) and the supply of Raton is
38.839 MTs to the factory. It is the highest procurement and the next places are
Pedavegi and Eluru mandal respectively.
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Reasons for short fall of cane and recovery for season:
Irrigation source:
Delta Sugars is private limited sector factory and the zone is spread over 16
mandals of Krishna District. Usually the sugarcane is being grown in upland area only.
The entire sugarcane is affected by power cut since last 2 seasons. As, such every year,
the sugarcane is being dried up to some extent and also the lack of continuous rains
worse the cane quality.
Late application of chemical fertilizers:
In Delta Sugars Ltd, the cane growers are arising development of sugarcane
every year from December to the march and with early and mid cane varieties. But due
to power cut in the peak summer month, the bore wells are not properly functioning to
lift the water and hence the farmers are being faced difficulties in applying chemical
fertilizers to the sugarcane fields due to non-availability of required irrigation.
Application of chemical fertilizers, nitrogen in heavy dose:
In spite of several instructions and directions given by Delta Sugars Ltd
agricultural staff and other scientists, the growers are habituated in applying nitrogen
with heavy dose to their cane fields.
Salinity:
On analysis, it is observed that about 50% of bore well tater is highly salinated
and low sodium water.
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Cane Development Expenditure:
The factory is providing crop loans through the commercialized banks on tie up
arrangement at 3,000 per acre and the factory is providing many facilities.
Organization and Management
The organization has five departments. The Departmental Heads are accountable
to managing director who co-ordinate all the activities of the departments. He is
accountable to chairman and board of directors.
The departments of organization are as follows
1. Administrative Department
2. Accounts Department
3. Engineering Department
4. Agriculture Department
5. Manufacturing Department
6. Mechanical Department
7. Civil Department
1. Administrative Department:
The Administrative Officer is the Head of this Department. He is responsible to the
Managing Director for his department activities. The Duties of the departments are as
follows
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i) Purchasing
ii) Inventory control
iii) Sales of sugar and molasses
iv) Personal activities
v) Security and other general matters
The administrative Officer directs, motivates the subordinates and controlling the
above activities. The following personnel assist administrative officer: