SUMMER TRAINING

REPORT
ON

WORKING CAPITAL MANAGEMENT

IN

JINDAL INDUSTRY LTD. HISAR

In partial fulfillment of the requirement for the award of the degree of

MASTERS OF BUSINESS ADMINISTRATION
(Session 2008-2010)

Under The Guidance of:

Submitted by:
RICHA RANI
Submitted to

DR. I.T GROUP OF INSTITUTE AFFILATED

FROM PUNJAB TECHNICAL UNIVERSITY JALANDHAR

PUNJAB

DECLARATION
I, RICHA RANI, do hereby affirm and declare that this report entitled
ASSESSMENT OF WORKING CAPITAL MANAGEMENT is an
original work conducted by me at Jindal Industry Limited at Hisar and the
same has not been submitted to any other University or Institution for the
award of any other degree or diploma.

RICHA RANI

ACKNOWLDGEMENT
A project report is never the sole product of the person whose name appears on
the cover. There are always some people whose guidance proves to be of
immense help in giving its final shape. So, it becomes my first duty to express my
gratitude towards all of them.
Success in my endeavor calls for co-operation and the valuable guidance for
senior and my colleagues. I am thankful to Department of Business
Administration, MAHARISHI MARKANDESHWAR UNIVERSITY, for granting me
permission to take up this project. This was brought out to me while undergoing
my research project. First, of all I would like to convey my heart full gratitude to
Mr. T.R.GAUR (General Manager) for giving me permission to work on a project
in this organization. I am thankful to Mr. T.R.GAUR who has provided me
supervision and guidance during my project work. I cherish to record my thanks
to management of Jindal industry Ltd. Hisar.
I feel especially privileged to work under the bind supervision of Prof.-------,
Lecturer, Department of Business Administration, OF DR. I.T. INSTITUTE who
guided me at every step to make this project a real success.
I would also wish to express my gratitude towards all those who provides their
valuable support and guidance in my work, learning especially practical
knowledge.
Last but not lest the least, I am extremely thankful to god whom is the ultimate
guided providing me with valuable insist, courage and determination at every

doorstep.
RICHARANI

EXECUTIVE SUMMARY
Working Capital refers to the amount of capital, which is readily available to
organization. In simple words working capital means the difference between
the current assets and current liabilities. It means how much liquidity of cash
is required for the payment of assets.

In this firm requirement of the working capital is calculated by preparing

CMA data, which shows the calculation of working capital. A proper format
is there for finding minimum and maximum capital requirement. This data is
being send to the bank for the approval of the loan.
In this project first the statement of changes in working capital for the last
three years is prepared. The analysis is done on the basis of that. Secondly,
different types of ratios are calculated to know the actual requirement of
working capital and estimates are made on the basis of that.

CONTENTS

ORGANIZATIONAL STRUCTURE

COMPANY PROFILE

INTRODUCTION TO WORKING CAPITAL

RESEARCH METHODOLOGY

OBJECTIVE OF THE STUDY

NEED OF WORKING CAPITAL

IMPORTANCE OF WORKING CAPITAL

OPERATING CYCLE

DETERMINANTS OF WORKING CAPITAL

SOURCES OF WORKING CAPITAL

RATIO ANALYSIS

CASH MANAGEMENT

MANAGEMENT OF INVENTORY

MANAGEMENT

MANAGEMENT OF RECEIVABLE

CONCLUSIONS

BIBLIOGRAPHY

OF

PAYABLE

COMPANY PROFILE

COMPANY PROFILE
JINDAL INDUSTRIES LTD. Regd. Officer Delhi Road,
Model Town, Hisar-125005
Incorporated on 1962 under the companies Act, 1956 as a Pvt. Limited company the
name & style of M/s Jindal Industries (P) LTD. on Jan. 1, 1972. Who's Regd no. was H6005 in ROC of Delhi Haryana, Delhi. Later on this co. was converted into Deemed
Public Ltd. Co. U/S43 (A) of company Act. 1956 named Jindal Industries Ltd. on June
12,1975.
Brief history regarding present business of the Co. is that M/s Jindal Industries Ltd. Was
incorporated in 1972 after being taken over from M/s Jindal Industries '(P) Ltd. Under the
companies act, 1956 & engaged in manufacturing of ERW galvanized & Black steel
pipes/tubes with installed capacity of 2,50,000 MT per annum. This unit is considered as

one of the leading pipe manufacturing Units in India. During the last 7-8 years, the Unit
has undergone modernization from time to time.
Jindal Industries Ltd. has been promoted by Late Sh. O.P.Jindal (chairman), Sh. B.D.
Agarwal, Sh.M.P. Jindal, Sh. R.R. Agarwal, who have good professional Back ground:

ORGANIZATIONAL STRUCTURE

Chairman

General
Manager

Marketing
Manager

Finance
Manager

Production
Manager

Manager
HRD

Secretarial
Banking
Accounts
Income Tax
Central
Excise

Sales Tax

JINDAL INDUSTRIES LTD. HISAR

DETAIL ABOUT DIRECTORS OF THE COMPANY
1. Smt. SAVITRI JINDAL W/O LATE SH. O.P. JINDAL, 52 YEARS
Director of the other companies:
1.

M/s Jindal Strips Ltd.

2.

M/s Jindal Transworld Pvt. Ltd.

3.

M/s Rohit Tower Building Pvt. Ltd.

4.

M/s Nalwa Sponge Iron (p) Ltd.

5.

M/s Monnet Ispat Limited

6.

M/s Monnet Ferro Alloys Ltd.

Experience: she has a rich experience in steel industry. The Flagship company M/s Jindal
Strips Ltd. & associated with Steel Sector for the last 50 years.
2. Sh. SHIV RAM JINDAL, 76 YEARS, INDUSTRIALIST
Directorship' of other companies:
1.

M/s Ravindra Tubes Ltd.

2.

M/s Hisar Farms & Investments,

Experience: He is founder of the company & Associates with Steel Industries for last 55
years. He has also lunched the other M/s Ravindra Tubes Ltd. Which is also running well
under his control & guidance?
3. She B.D. AGERWAL, 71 YEARS INDUSTRIALIST
Directorship of other companies:
1.

M/s Surya Roshni Ltd.

2.

M/s Surya Fincap Ltd.

3.

M/s Osram Surya Pvt:Ltd.

Experience: He is the founder of the company. He has a vast experience of 50 years. His
other Enterprises M/s Surya Roshini Ltd. Is performing extremely well.
4. Sh. M.P.JINDAL: 52 YEARS INDUSTRIALIST
Directorship of other companies:
1.

M/s Ravindra Tubes Ltd.

2.

M/s Hisar Metal Industries Ltd.

Experience: He is son of Sh. Shiv Ram Jindal. He has a working experience of 26 years
under the guidance of his father. He is also managing other concern in the same line viz.
M/s Ravindra Tubes Ltd.
5. Sh. R.R. AGARWAL, 62 YEARS, INDUSTRIALIST
Directorship of other companies:
1.

M/s Ashok Magnetic Limited

2.

M/s Ashok Memory Ltd.

3.

M/s Suban Industries Ltd.

Experience: He is younger brother of Sh.B.D. Aggarwal. He has experience in law,

income tax, sales & other technical matters.

QUALITY IS THEIR STRENGTH

JINDAL INDUSTRIES LTD., HISAR manufactures high quality MS. Black &
Galvanized Pipes/Tubes in the range of 15mm to 150 mm as per BIS standards. The
company is fully equipped with modern manufacturing Machineries, mills, welding
plants & galvanizing plants. It has full own maintenance workshop & testing equipment's
of produce the best quality Steel Pipes besides other infrastructure facilities.
JINDAL INDUSTRIES LTD. Has trebled its production & sales during last five years. It
has achieved this feat by winning a higher share in a very Competitive Market, Which is
also flooded with inferior & duplicate quality Pipes. Their strength lies in their all time
endeavor to provide higher standards of quality & service to worthy customers.
They never compromise on Quality front even under the most adverse Market conditions
only Sail & Jindal Vijay Nagar Limited Material in Steel & high-grade Zinc from Hindust
An Zinc Limited are being used to cater the high quality Pipes/Tubes demand in the
market.

Their Pipes are engraved with ISI mark & work "HISAR" undemeath; Pipes/Tubes
Manufactured by JINDAL INDUSTRIES LTD. Is testimony to our commitment to
quality & service?
Establishment of machines & constant update in technology would be the cover of their
major activities. In the design they would establish approval for drawing & supply it to
the shop, be it product gauges or tools etc

QUALITY ASSURANCE DEPTT.

This deptt. I guided by quality control Manager & it performs below mentioned
functions:
1.

To device & fallow system 'as per ISI standards requirements.

2.

To support product to achieve zero defect product.

3.

Endeavour to achieve total customer Satisfaction.

4.

Continuous production in process rejection store work.

MAINTENANCE DEPARTMENT
Manager of maintenance heads it. It undertakes the following functions:
1.

To maintain the equipments with less down time.

2.

Planning & scheduling of spares required for replacement.

3.

Planning & scheduling of spares required for replacement.

4.

Planning & function of preventive maintenance.

5.

Maintaining of main inventory of spares & consumable.

PURCHASE DEPARTMENT
Purchase deptt. Carries out following function:
1.

Scrutinizing store indents for which purchase is to be affected.

2.

Placing purchase order.

JINDAL INDUSTRIES LTD. Is a prestigious company of Jindal's who have proved their
unerring might in Steel Sector, have unstinted record of four decade-service to the nation.

MANUFACTURING DEPTT.
It is headed by Work Manager & it undertakes following function:
1.

To produce the largest quality consistently.

2.

To produce with zero defect.

3.

To base with planning for effective use of resources.

4.

To maintain quality.

5.

To avoid waste & maintain shop floor cleanness.

MANUFACTURE PROCESS IN BRIEF

Hr Coils are first sited into required size & the feeded to the Tube Mill where it gets
rolled in the shape of Black Pipes There after the Black Pipes & transferred to the
galvanizing section where the Zinc is coated to the pipes & these are called "Galvanized
Pipes" after Galvanizing of Pipes they are treated through threading machines & them
sockets are fitted into Pipes to make them marketable.

PRODUCTION ENGINEERING DEPARTMENT

1.

Deputy Manager heads this department & it undertakes industry.

2.

Watching the progress of delivery in accordance with schedule.

3.

Studying Markets to determine time & quality to buy.

4.

Locating cheaper & better sources to supply.

5.

Maintaining Records:

Purchase order register.

List of suppliers.

For all items the store department indicated all the requirements through purchase
indent. Other departments also indicate their requirement by the requisition slips.

Indents need to specify the item by size; no etc. separate indents are prepared for
every category.

Time Period of delivery is specified. Urgent materials are given the top priority. .
Quantity within the stores, limit of inventories. Purchasing is done for one indented
material mainly by orders, & other invite negotiation

STORES DEPARTMENT
After material received by purchased department store department checks it. Here store
receipt note is prepared. The store receipt specifies description of material, quantity as per
the Challan or will accepted & rejected quantity after inspection. Store code No. rate per
unit & total amount. The name of deptt. Using it is also written. Beside the name of the
supplier, date of delivery & date of Bill, Challan No. Bill No. etc. is noted. It is then
passed to quality control Department where it is checked & prepares a quality report. Its
copies are sept to Purchase, Store, Vendors, Costing & Financing Deptt.. Store catalogue

contains all the information about size, number, and max. I Level, EOQ etc. & a code
number .is given to the material. Store them issue the material of requisition note. A copy
of this is kept in' deptt. Sending it to stores one in accounts & third is sent to store. For
any material/person to come in & out there is .an essential condition to be metgate pass.
A gate pass is prepared by respective deptt. for any entry or exit of man & material.
Products

Black Pipes

Galvanize Pipe

Squares, Rectangles

Equipments

Slitting Units

ERW pipe mills

Galvanizing lines

Threading machine

Hydro Testing Machines

Eddy Current Machine

Awards

National Safety Award-2000

National Safety Award-2004

MAIN COMPETITION IN MARKET

Surya Roshni ( Bhadurgarh )

Tata Steel ( Jamshedpur )

MAIN BRANCHES IN INDIA

Jindal Stainless Steel (Hisar)

Steel Products

Jindal Industries Ltd (Ghazibad)

Pipe and Tubes

INTRODUCTION

OF
PROJECT

WORKING CAPITALMANAGEMENT
Every business needs adequate liquid resources in order to maintain day-to-day cash
flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors
if it is to keep its workforce and ensure its supplies. It needs investment to procure fixed
assets, which remain in use for a longer period. Money invested in these assets is called
long term funds or fixed capital. Fixed capital includes land and building, plant and
machinery, furniture and fittings etc. business also needs funds for short term purposes to
finance current operations. Investment in short term assets like cash, inventories, debtors
is called short term funds or working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's
ability to fund operations, reinvest and meet capital requirements and payments.
Understanding a company's cash flow health is essential to making investment decisions.
A good way to judge a company's cash flow prospects is to look at its working capital
management (WCM). So, working capital management is an important aspect of
financial management. Its main objective is to determine the optimum amount of working
capital required. It is concerned with the problems that arise in attempting to manage the
current assets, current liabilities and the relationship that exists between them.
Positive working capital means that the company is able to pay off its short-term
liabilities. Negative working capital means that a company currently is unable to meet its
short-term liabilities with its current assets. A negative working capital is a sign of
managerial inefficiency in a business with low inventory and accounts receivable. In any
other situation, it is a sign of a company may be facing bankruptcy or serious financial
trouble.

Concept of working capital

There are two concepts of working capital
1. Gross working capital concept
2. Net working capital concept
Gross working capital concept:
According to this concept, working capital which is the total of all current assets of a
business.
Mathematically,

Gross working capital=total current assets.

According to Bonneville and Dewey any acquisition of funds which increases working
capital, for they are one and the same.
Net working capital concept:
According to this concept, working capital means net working capital which is the excess
of current assets over current liabilities.
Mathematically,
Net working capital = current assets current liabilities
According to C.W.Gestenbergh it is ordinarily been defined as the excess of
current assets over current liabilities.

NET WORKING CAPITAL

Year Ending(31st
march)
2002
2003
2004
2005
2006
2007
2008
Explaination

Current Assets

Current liabilities

N.W.C(in lacs)

2866.67
5216.83
7529.82
7598.1.
7034.77
12398.00
17730.00

2012.81
1960.77
2249.62
2587.67
2269.57
3565.00
5797.00

853.86
3256.60
5280.2
50510.43
4765.19
8833.00
11933.00

Net Working capital the excess of current assets over current liabilities. Current assets
refer to assets which are generally converted into cash with in a period alone year.
Current Liabilities are those which are required to be paid 'in a short period normally a
year. An enterprise should have the sufficient Net Working Capital in order to meet the
claim of the creditors & day to day needs of the business. Net Working Capital of Jindal
Industries Limited increasing gradually. It shows that the liquidity of the company is
improving & the company is able to meet its creditors & day expenses. In 2003 Net
Working Capital is increased from 853.86 to 3256.06. In 2004 Net Working Capital has
increased then the previous. However in 2005 Net Working Capital has decreased to
5010.43 & in 2006 Net Working Capital has decreased to 4765.19 due to some short term
investment purposes, still the company will consider to be in a good position. In 2008,
Net Working Capital is Rs. 11933.00 lakhs which is very good.

Current assets:
Those assets which are converted into cash within a short period of time not exceeding
one year.
Current Assets include:

Stocks of raw materials

Work-in-progress

Finished goods

Trade debtors

Prepayments

Cash balances

Accrued income

Current liabilities:
Those liabilities which have to be paid within a short period of time in no case exceeding
one year.
Current Liabilities includes:

Trade creditors

Accruals

Taxation payable

Dividends payable

Short term loans

Outstanding expenses

So, Working capital is a financial metric which represents the amount of day-by-day
operating liquidity available to a business.

RESEARCH METHODOLOGY
Research in simple words can be defined as scientific and systematic search for pertinent
information on a particular topic or project. It is an endeavor to gain new knowledge.
Thus it is an original contribution to present stock of knowledge making or its
enhancement.
Research methodology is the procedure for conducting the research.

Research

methodology should be carefully planned as the accuracy, reliability and adequacy of

results depend up on the research methodology should followed. It gives the researcher a
guideline by which he can decide which techniques and procedures will be applicable to a
given problem. More ever it also helps in evaluation of the research by others also. So
for the research to be purposeful and effective the researcher should plan research
methodology before proceeding to research study.
Objective of Research:
The Objective of research have been analyzed are as follows:
1. Operating Cycle
2. Ratio analysis
3. Cash Management
4. Financing of Working capital
5. Inventory Management

Data Collection:
1. Primary data
The data which are collected for the first time and happens to be original in

nature.

2. Secondary data
The data which are already been collected by someone else and which has

already

passed through the statistical process.

My project work is totally based on the secondary data and I collect all the necessary data
from the company annual report and company website.

OBJECTIVES OF THE STUDY

The main objectives of the study are:
1.

To find out the liquidity position of company.

2.

To find out the effectiveness of working capital management.

3.

To analyze the credit policy of the company'.

4.

To know the cause of changes in the firm's working capital

W OR KI N G C A PI TAL N EED S OF A BU S I N ES S

Different industries have different optimum working capital profiles, reflecting their
methods of doing business and what they are selling.
1. Businesses with a lot of cash sales and few credit sales should have minimal trade
debtors. Supermarkets are good examples of such businesses;
2. Businesses that exist to trade in completed products will only have finished goods in
stock. Compare this with manufacturers who will also have to maintain stocks of raw
materials and work-in-progress.
3. Some finished goods, notably foodstuffs, have to be sold within a limited period
because of their perishable nature.
4. Larger companies may be able to use their bargaining strength as customers to obtain
more favorable, extended credit terms from suppliers. By contrast, smaller companies,
particularly those that have recently started trading may be required to pay their suppliers
immediately.
5. Some businesses will receive their money at certain times of the year, although they
may incur expenses throughout the year at a fairly consistent level. This is often known
as seasonality of cash flow. For example, travel agents have peak sales in the weeks
immediately following Christmas.
6. Working capital also gives investors an idea of the company's underlying operational
efficiency. Money that is tied up in inventory or money that customers still owe to the
company cannot be used to pay off any of the company's obligations. So, if a company is

not operating in the most efficient manner (slow collection), it will show up as an
increase in the working capital
Working capital needs also fluctuate during the year The amount of funds tied up in
working capital would not typically be a constant figure throughout the year. Many
businesses operate in industries that have seasonal changes in demand. This means that
sales, stocks, debtors, etc. would be at higher levels at some predictable times of the year
than at others.
The working capital need can be separated into two parts:
A fixed part, and
A fluctuating part
The fixed part is probably defined in amount as the minimum working capital
requirement for the year. It is widely advocated that the firm should be funded in the way
shown in the diagram below:
The more permanent needs (fixed assets and the fixed element of working capital) should
be financed from fairly permanent sources (e.g. equity and loan stocks); the fluctuating
element should be financed from a short-term source (e.g. a bank overdraft), which can
be drawn on and repaid easily and at short notice.
Five most common sources of short-term working capital financing:
Equity: If your business is in its first year of operation and has not yet become
profitable, then you might have to rely on equity funds for short-term working capital
needs. These funds might be injected from your own personal resources or from a family
member, friend or third-party investor.
Trade Creditors: If you have a particularly good relationship established with your
trade creditors, you might be able to solicit their help in providing short-term working
capital. If you have paid on time in the past, a trade creditor may be willing to extend

terms to enable you to meet a big order. For instance, if you receive a big order that you
can fulfill, ship out and collect in 60 days, you could obtain 60-day terms from your
supplier if 30-day terms are normally given. The trade creditor will want proof of the
order and may want to file a lien on it as security, but if it enables you to proceed, that
shouldnt be a problem.
Factoring: Factoring is another resource for short-term working capital financing.
Once you have filled an order, a factoring company buys your account receivable and
then handles the collection. This type of financing is more expensive than conventional
bank financing but is often used by new businesses.
Line of credit: Lines of credit are not often given by banks to new businesses.
However, if your new business is well-capitalized by equity and you have good collateral,
your business might qualify for one. A line of credit allows you to borrow funds for shortterm needs when they arise. The funds are repaid once you collect the accounts receivable
that resulted from the short-term sales peak. Lines of credit typically are made for one
year at a time and are expected to be paid off for 30 to 60 consecutive days sometime
during the year to ensure that the funds are used for short-term needs only.
Short-term loan: While your new business may not qualify for a line of credit from a
bank, you might have success in obtaining a one-time short-term loan to finance your
temporary working capital needs. If you have established a good banking relationship
with a banker, he or she might be willing to provide a short-term note for one order or for
a seasonal inventory and/or accounts receivable buildup.
In addition to analyzing the average number of days it takes to make a product (inventory
days) and collect on an account (account receivable days) vs. the number of days
financed by accounts payable, the operating cycle analysis provides one other important
analysis.
From the operating cycle, a computation can be made of the dollars required to support
one day of accounts receivable and inventory and the dollars provided by a day of
accounts payable.

Working capital has a direct impact on cash flow in a business. Since cash flow is the
name of the game for all business owners, a good understanding of working capital is
imperative to make any venture successful

IMPORTANCE OF WORKING CAPITAL MANAGEMENT:

Working capital is very essential to maintain the smooth functioning of the business. No
business can run successfully without an adequate amount of working capital. The main
advantage of adequate amount of working capital. The main advantage of the adequate
working capital is as follows:
SOLVENCY OF THE BUSINESS:
Adequate working capital helps in maintaining solvency of the business by
providing interrupted flow of production.
GOODWILL:
Sufficient working capital enables a business concern to make prompt payment
and hence helps in creating and maintaining goodwill.
EASY LOANS:
A concern having adequate working capital high solvency and good credit
standing can arrange loans from banks and others on easy favorable terms.

CASH DISCOUNTS:
Adequate working capital also enables a concern to avail cash discounts on the
purchase and hence it reduces costs.
REGULAR SUPPLY OF MATERIALS:
Sufficient working capital ensures regular supply of raw materials and continuous
production.

REGULAR SUPPLY OF WAGES AND SALARIES:

A Company which has simple working capital can make regular payment' of
salaries, wages and other' day to day commitments which r~ises the morale of its
employees, increases efficiency, reduces wastage and costs enhances production function.
EXPLOITATION OF FAVOURABLE MARKET CONDITIONS:
Only concern with adequate working capital can exploit favorable market
conditions such as meeting .its requirements in bulk when the prices are lower by holding
its inventories for higher prices.
ABILITY TO FACE CRISES:
Adequate working capital enables a concern to face business crisis in emergencies
such as depression because during such periods generally their much pressure on working
capital.
QUICK RETURNS ON INVESTMENT:
Every investor wants a quick and regular on his investment sufficiency of
working capital enables a concern to pay quick and regular returns in form of dividends
to its investors as there may not be much pressure to plough back profits. This gains the
confidence of its investor and creates favorable market to raise additional funds in the
future.
HIGH MORALE:
Adequacy of working capital created an environment of security confidence high
morale and creates overall efficiency in a business.

W OR KI N G C A PI TAL C Y C L E
The working capital cycle can be defined as:
The period of time which elapses between the point at which cash begins to be expended
on the production of a product and the collection of cash from a customer
The diagram below illustrates the working capital cycle for a manufacturing firm

The upper portion of the diagram above shows in a simplified form the chain of events in
a manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a
tank through which funds flow. These tanks, which are concerned with day-to-day
activities, have funds constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.

 In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work in progress (WIP)
Work will continue on the WIP until it eventually emerges as the finished product
As production progresses, labor costs and overheads will need to be met
Of course at some stage trade creditors will need to be paid
When the finished goods are sold on credit, debtors are increased
They will eventually pay, so that cash will be injected into the firm
Each of the areas stocks (raw materials, work in progress and finished goods), trade
debtors, cash (positive or negative) and trade creditors can be viewed as tanks into and
from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of
cash:
The business will have to make payments to government for taxation
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance, loans will need to
be repaid from time to time, and
Interest obligations will have to be met by the business.

Unlike movements in the working capital items, most of these non-working capital cash
transactions are not everyday events. Some of them are annual events (e.g. tax payments,
lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others
(e.g. new equity and loan finance and redemption of old equity and loan finance) would
typically be rarer events.

If you.......

Then......

Collect receivables (debtors) faster

You release cash from the cycle

Collect receivables (debtors) slower

Your receivables soak up cash

Get better credit (in terms of duration or You increase your cash resources
amount) from suppliers

Shift inventory (stocks) faster

You free up cash

Move inventory (stocks) slower

You consume more cash

DETERMINANTS OF WORKING CAPITAL

A firm should plan its operations in such a way that it should have neither too much nor
too little working capital. The total working capital requirement is determined by a wide
variety of factors. These factors affect different enterprises differently. Following are
some of the factors which effect the proper assessment of the quantum pf working capital
required.
1.

GENERAL NATURE OF BUSINESS:

Working Capital requirement of a firm are basically influenced by the nature of its

business. Trading & financial firms have a very small investment in fixed assets; but
require a large sum of money to be invested in working capital. On the other extreme are
public utilities having two relevant features. Cash nature of business & sale of services
rather then commodities. They do not working Capital. The manufacturing enterprises
fall in between these two extremes; The proportion of current assets to total assets
measures the relative's. requirement of working capital of various industries. In India the
%age of current assets to total assets as found to be lowest in case of hotels & restaurants
which are about to lO-20% financial companies have to keep this ratio upto 90-95%
JINDAL INDUSTRIES LTD. is manufacturing enterprise. The ratio of current assets to
the total assets is 40%.
2.

PRODUCTION CYCLE:
Production cycle or manufacturing cycle refers to the time involved in the

manufacture of goods. Its cover the time span between the procurement or raw materials
& the completion of manufacturing cycle, later will be the firm's capital requirement. For
e.g. the manufacturing cycle in case of a boiler may range between 6-24 months
depending upon its size. On the other extreme are the bakeries. They have to sell their
product at very short interval & have a high inventory turnover. Therefore the investment
in inventory & hence working capital is not .very large. The production cycle of JINDAL
INDUSTRIES LTD. i.s of 50 days which is neither too long nor too short. Hence is
requires average working capital.
3. SALES GROWTH:

The working capital needs of the firm increases as its sales grow as current assets
will have to be employed before growth takes place. Therefore it is necessary to make
advance planning of working capital for a growing firm on a continuous basis. The sales
of Jindal Industries Ltd. Is also growing continuously, hence it requires increasing
working capital. Hence advance planning of working capital is a continuing necessary for
the company.
4. CREDIT POLICY:
The level of working capital is also determined by credit policy which relates to
sales & purchases. The credit policy influences the requirement of working capital in two
ways.
1.

Through credit terms granted by the firm to its customers/buyers of goods.

2.

Through credit term available to the firm from its creditors.

The credit sales will result in higher books debts which in turn will men\an

requirement of more working capital. On the other hand, if liberal credit terms are
available from the suppliers of goods i.e. trade creditors, the need for working capital will
be less. In order to ensure that funds are not tied up -unnecessarily in book debts, the firm
should follow a rationalized credit policy. The firm should evaluate the credit standing of
new customers &' periodically review credit-worthiness of the existing customers.

5.

PRODUCTION POLICY:

What type of production policy is adopted by the firms affected the requirement of
working capital in certain basis the product will be purchased during certain months of
the year. If the firm confines its production only to the period when goods are purchased
then they would require large amount of working capital in the production period and
little amount in the non production period. But if the firm is adopting steady production
policy they soon will have large accumulation of finished goods during the peak season.
The progressive accumulation of stock will nature requires an increasing amount of
working capital which will retrain tied up for some months.
6.

OPERATING EFFICIENCY OF PERFORMANCE:

The operating efficiency of management is also an important determent of the

level of working capital. Management can contribute to a sound working capital position
though operating efficiency. Although management cannot control the rise in prices, it
can ensure the efficient utilization of resources be eliminates wastes, improving
coordination and a fuller utilization of existing resources etc. efficiency of operation
accelerates the pace of the cash cycle and improve the working capital turnover. It
releases the pressure on working capital of improving profitability and improving the
internal generation of funds.
This shows that the level of working capital is determined by a wide variety of
factors which are partly internal to the firm and partly external to it Efficient working
management requires efficient planning and a constant review of the needs for an
appropriate working capital strategy.

SOURCES OF WORKING CAPITAL

A part of working capital is required as permanent investment because there is always

minimum level of current assets which are continuously required by the enterprise to
carry out its day to day business operation. This gives rise to permanent working capital.
Similarly demands and some special exigencies like rise in prices, strikes etc. This
proposition or working capital gives rise to temporary working capital.
The fixed proposition of working capital is generally financed from fixed capital sources
while the temporary or variable working capital requirement of a concern may from the
short term sources of capital.
1. PERMANENT WORKING CAPITAL SOURCES

Shares

Debentures

Ploughing back of profit

Loans from financial institutions

Public deposits

2. TEMPORARY WORKING CAPITAL SOURCES

Indigenous bankers

Trade credit

Advances

Accrued expenses

Commercial banks

1. LONG TERM WORKING CAPITAL SOURCES

Shares:
Issue of shares is the most important source for raising the permanent working

capital. A company can issue various types of shares like equity shares and preference
shares. A company should raise maximum amount of working capital by issue of shares.

Debentures:

The debenture is an instrument issued by the company acknowledging its debts to

its holder. The debenture holders are the creditors of the company. It is also a long term
source from which any company meets its fixed working capital requirement.

Public deposits:
Public deposits are the fixed deposits accepted bya business enterprise directly

from the public. The reserve bank of India has laid done certain limits on public deposits
more than 25% of its paid up capital and free reserves.

Ploughing Back of profits:

Ploughing back of profits means the reinvestments by the concern of its surplus

earning its business. It is an internal source of financing the working capital.

Loans from financial institutions:

Financial institutions like commercial banks, Life insurance Corporation of India,

state financial corporation, state industrial development corporation, and industrial

development banks of India etc. provide short term, medium term and long term loans.
This is also a major source to finance working capital.
2.

SHORT TERM WORKING CAPITAL SOURCES

Indigenous bankers:
Indigenous bankers are the private money lenders who are charging very high

rates of interest and exploit the customers. Now they have lost their monopoly. Yet some
business has to depend upon indigenous bankers for obtaining loans to meet their
working requirement.

Trade credit:
Trade credit refers to the credit extended by the suppliers of goods. The buying

firm's don't have to pay cash immediately for the purchases made. The deferral of
payment is the short term financing called trade credit. It is the major source of financing
for firms. In India it contributes to about one- third of the short term financing. It may

also take the form of bills payables whereby the buyers sign a bill of exchange payable on
a specified future date.
In this the borrower is allowed to withdraw funds in access of the balance in his
current account up to a certain limit. The interest as changed on daily overdrawn
balances.

Advances: - .
Some business house get advance from their customers and agents against orders.

It is the cheap source of finance and in order to minimize their investment in working.
Some firms having long. . productiol1; cycle especially the firm manufacturing industrial
product prefers to take advantages from their customers.

Accrued expenses:
Accrued expenses represent a liability that a firm has to pay for the services which

it had already received. Thus they represent spontaneous, interest free sources of
financing. Its major components are wages and salaries, taxes and interests. The firm
incurs a liability when the en1ployees have rendered services. They are paid after works
usually at some fixed interval. Similarly interest is paid periodically during a year while
the borrowed funds are continuously used by the firm.

Commercial banks:
After trade credit, bank credit is the most important source of financing working

capital requirements of the firm. Bank can finance working capital in the following
ways:
a)

Overdraft:
In this borrower is allowed to withdraw funds to access of the balance in the

current account up to a certain limit. The interest as changed on daily overdrawn

balances.
b)

Cash credit:
In this borrower is allowed to withdraw funds from the bank upon the sanctioned

credit limit. He can withdraw periodically to extent if his requirement and repay by
depositing surplus fund in his cash credit account.
c)

Discounting of bills:

In this a borrower obtains credit from a bank against his bills.

The bank

purchases or discounts the borrower bills. The bank purchases the bill payable on the
demand and credit the customers account with the amount of bill less discount. At
maturity, bank presents the bill to its acceptor for payment.
d)

Working Capital Loans:

In this, bank makes an advance in lump- sum against some security known as

loan. The entire loan is paid to the borrower either in cash or by credit to his account.
These loans may be either medium term or long term loans.

BALANCE SHEET

AUDITED BALANCE SHEET AS AT 31st MARCH 2008

PARTICULARS
SOURCES OF FUND
SHARE HOLDERS FUND
Share Capital
Reserve & Surplus
LOAN FUNDS

Current
year

1.5
61.89

Secured loans

64.11

Unsecured loans
DEFFERED TAX
LIABILITY(NET)

11.81
3.19
142.50

Previou
yea

1.5
41.1
8
48.5
6
12.7
3
2.85
106.
82

APPLICATION OF FUNDS
FIXED ASSETS
Gross Block
Less:Depreciation

32.31
9.74
22.57

Add:Silver coin
Add:Capital work in progress
Net Bock
CURRENT ASSETS, LOAN&
ADVANCES
GRATUITY SCHEME
Inventories
Sundry Debtors

0.OOO2
0.60

26.3
4
8.54
17.8
0
0.00
02

23.17

0.68
18.4
8

87.46
41.01

57.6
8
28.5

Cash & Bank Balance

4.80

Other current assets

0.004

Loans and advances

44.02
177.30

Less:Current Liabilities &

Provisions
NET CURRENT ASSETS

57.97
119.33
142.50

RATIO ANALYSIS
Analysis of working capital by ratio analysis
In any business enterprise there is a need to study the important role of working capital in
profit generating process. If a company desires to take a greater risk for bigger profits and
losses, it reduces the size of its working capital in relation to its sales. If it is interested in
improving its liquidity, it increases the level of its working capital. However, this policy
is likely to result in a reduction of the sale volume, therefore of profitability. Hence, a
company should choose between liquidity and profitability and decide about its working
capital requirements.
In this chapter an attempt has been made to assess the impact of working capital on
profitability, to examine the combine effect of the ratios relating to working capital
management and to determine the working capital leverage for examining the sensitivity
of ROI to changes in the level of gross working capital of the company.

8
9.36
0.00
4
28.3
6
123.
98
35.6
5
88.3
3
106.
82

Financial ratios are tools for interpreting financial statements to provide a basis for
valuing securities and appraising financial and management performance.
A good financial modeler will build in financial ratio calculations extensively in a
financial modeling exercise to enable robust analysis. Financial ratios allow a financial
modeler to:

Standardize information from financial statements across multiple financial years

to allow comparison of a firms performance over time in a financial model.

Standardize information from financial statements from different companies to

allow an apples to apples comparison between firms of differing size in a financial
model.

Measure key relationships by relating inputs (costs) with outputs (benefits) and
facilitates comparison of these relationships over time and across firms in a
financial model

Ratio Analysis is a powerful tool of financial analysis. A ratio is defined as "the indicated
quotient of two mathematical expressions" and as "the relationship between two or more
things". The relationship between two accounting figures expressed mathematically is
known as 'financial ratio'. Rations help to summarize large quantities of financial data
and to make qualitative judgement about the firm's financial performance. It measures
the firm's liquidity. The greater the ratio the greater the firm's liquidity and vice-versa.
The point to note is that a ratio reflecting a quantitative relationship, helps to form a
qualitative judgment.

CURRENT RATIO
Current Ratio: Current Assets/Current liabilities
Year Ending (31st
march)
2002
2003
2004
2005
2006
2007
2008

Current Assets

Current liabilities

Current Ratio

2866.67
5216.83
7529:82
7598.1
7034.77
12398.00
17730.00

2012.81
1960.77
2249.62
2587,67
2269.57
3565.00
5797.00

1.42: 1
2.66:1
3.34: 1
2.93:1
3.09:1
3.47:1
3.06:1

Current Ratio shows the ratio of current assets & current liabilities. Since from Net
Working Capital we cannot determine the relationship between current assets & current
liabilities hence we have to calculate current ratio. The ratio shows how, much amount of
current assets is available to pay IRs. Current liability A relatively high ratio shows that
the firm is liquid & hence the ability to pay its current obligations in time as & when they
become due. On the other hand, a relatively low current ratio indicated that the liquidity
position of the company is not so good & may not be able to pay its current liabilities in
time without facing difficulty. Conventionally a ratio of 2: 1 is from this only we cannot
say that the liquidity position is not sound.

GRAPH SHOWING CURRENT RATIO OF JINDAL INDUSTRIES LTD.

QUICK RATIO OR ACID TEST RATIO

Quick Ratio = Quick Assets/Current liabilities
OR
Current Asset Inventories

Year
march)
2002
2003
2004
2005
2006
2007
2008

Ending

(31st

Quick Asset

Current liabilities

Current Ratio

1427.06
2053.70
3647.96 .
3829.11
2465.05
6630.00
8984.00

2012.81
1960.77
2249.62
2587.67
2269.57
3565.00
5797.00

0.7:1
1.05: 1
1.62: I
1.48: 1
1.09:1
1.85: 1
1.55:1

Quick ratio shows the relationship between the quick assets of the firm & its current
liabilities. Quick assets are those which are easily converted into cash. It includes cash &
bank balances, debtors & receivables, marketable securities & excludes prepaid expenses
& inventories. Since inventories are both readily converted into cash hence they are not
including in quick assets. In the year 2003-04 the ratio 1.67:1 shows that the company
can easily fulfill its obligation as & where they become due. In year 2005-06 the ratio is
1.09: 1 which is satisfactory.

GRAPH SHOWING QUICK RATIO OF JINDAL INDUSTRIES LTD.

WORKING CAPITAL TURNOVER RATIO

Working capital ratio is an excellent diagnostic tool as it measures whether or not any
business has enough resources to pay its bills over the next 12 months. It is an indication
of a company's ability to meet short-term debt obligations. The higher the ratio, the more
liquid the company is.
Current ratio is equal to current assets divided by current liabilities.
Calculated by:
Current ratio=current asset / current liabilities
It indicates whether any business has ample working capital. If the current assets of a
company are more than twice the current liabilities, then that company is generally
considered to have good short-term financial strength. or it may not be efficiently using
its current assets. If current liabilities exceed current assets (the current ratio is below 1),
then the company may have problems meeting its short-term obligations.
Year ending(31sT
Sales*(lacs)
march)
2002
21822.29
2003
21766;00
2004
23973.48
2005
29992.46
2006
3.6059.18
2007
55055.00
2008
70811.00
Working Capital of a firm is directly

Networking capital(in Working

capital
lacs)
turnover ratio
853.86
25.26:1
3256:06
6.68:1
5280.02
4.5:1
5010.43
5.99:1
4765.18
7.57:1
8833.00
6.23:1
11933.00
5.93:1
related to sales. Current assets like debtors,

receivables, cash, stock etc., all changes with all change in sales.
Working capital turnover ratio indicates the velocity of utilization of net working capital.
The ratio indicates the number of times the working capital is turned over in the course of
the year. This ratio measures the efficiency with which the working capital is being used
by a firm. A higher ratio indicates efficient utilization of working capital & low ratio
otherwise. In case of Jindal Industry LTD. This ratio is so higher that showing better
utilization of working capital

GRAPH SHOWING WORKING CAPITAL TURNOVER RATIO OF JINDAL

INDUSTRIES LTD.

CREDITORS TURNOVER RATIO

CREDITORS TURNOVER RATIO = PURCHASES/creditors
Creditors payment period = 365/creditors turnover ratio
Year

ending

march)
2002
2003
2004
2005
2006
2007
2008

31st

Purchase(in lacs)

Creditors(in lacs)

15142.00
17882.00
7859.00
2271 2.00
27247.94
40541.00
54591.00

10.20
33.00
47.90
69.30
94.00
657.00
1263.00

Creditor
ratio
1484.0
542.0
372.8
327.7
289.6
61.8
43.2

turnover Average payment(in

days)
3
7
0
11
12
13
8

This ratio indicates the speed at which creditors are to be paid. A turnover ratio of 54
shows that creditors are to be paid 54 times in a year. Creditors Payment Period shows
that on average creditors are to be paid after 7 days. Lower creditor's turnover ratio & the
higher creditor's payment period show receiving liberal credits from the creditors. Lower
credit payment period shoes creditors are to be paid quickly. The credit payment period of
JINDAL INDUSTRIES LTD is increasing in 2006 then 2004 shows liberal trade credit
received.

GRAPH

SHOWING

INDUSTRIES LTD.

CREDITORS

TURNOVER

RATIO

OF

JINDAL

DEBTORS TURNOVER RATIO

Debtor turnover ratio indicates the relation between net credit sales and average accounts
receivables of the year. This ratio is also known as debtors velocity.
Debtors turnover ratio is found out by dividing credit sales by average debtors. Debtors
turnover indicates the number of times debtors turnover each year. Generally the higher
the value of debtors turnover, the more efficient is the management of credit.
Debtor turnover ratio = Net credit sales / Average debtors
Significance of this ratio is that it indicates efficiency of the concern to collect the amount
due from debtors. It determines the efficiency with which the trade debtors are managed.
Higher the ratio better it is as it proves that the debts are being collectively very quickly.
The quicker debts are recovered the more cash you will have at hand. However, longer
lines of credit may be a more attractive option to customers.
The Debtor Turnover Ratio is a 'performance ratio', which means that it indicates the
efficiency of a business. Efficiency and performance are linked, as efficient businesses
are usually more profitable Debtors Turnover ratio of Jindal Industry Limited Limited
from market is seen as:

GRAPH SHOWING DEBTORS TURNOVER RATIO OF JINDAL INDUSTRIES

LTD.

Year Ending (31st

march)

Sales(in lacs)

Debtor(in lacs)

Debtor
turnover ratio

Averageo
collection (in
days )

2002

21822.29

937.30

23.28: 1

16

2003

21766.00

682.00

31.91:1

11

2004

23973.48

697.69

34.36: 1

11

2005

29992.46

960.47

3 1.23: 1

12

2006

36050.18

1004.04

35.90: 1

10

2007

55055.00

2858.00

19.26: 1

18.94

2008

70811.00

4101.00

17.27:1

21

This ratio indicated the speed .with which debtor/accounts receivables are being
collected. It shows how quickly debtor or receivables are converted into cash. A turnover
ratio of 31 shows that debtors are converted into cash 31 times in a year. A collection
period of 11 days shows that debtors on an average are collected in 11 days. The higher
the turnover ratio & lower the average collection period the better the trade credit
management. Longer collection period shows that payment of debtors is delayed. In case
of JINDAL INDUSTRIES LTD. Collection period is short period is short period. It
avoids the risk of receivables being bad debt. It may show that sales are confined to only
such customers as make prompt payment.

CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is the basic
input needed to keep the business running on a continuous basis it is also the ultimate
output expected to be realized by selling the service or product manufactured by the firm.
The firm should keep sufficient cash, neither more nor less. Cash shortage will disrupt the
firms operations while excessive cash will simply remain idle, without contributing
anything towards the firms profitability. Thus a major function of the Financial Manager
is to maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any restriction. The
term cash includes currency and cheque held by the firm and balances in its bank
accounts. Sometimes near cash items, such as marketable securities or bank time deposits
are also included in cash. The basic characteristics of near cash assets is that they can
readily be converted into cash. Cash management is concerned with managing of:
i)

Cash flows in and out of the firm

ii)

Cash flows within the firm

iii)

Cash balances held by the firm at a point of time by financing deficit or

inverting surplus cash.

iv)

Sales generate cash, which has to be disbursed out. The surplus cash has to be
invested while deficit cash has to be borrowed. Cash management seeks to
accomplish this cycle at a minimum cost. At the same time it also seeks to
achieve liquidity and control. Therefore the aim of Cash Management is to
maintain adequate control over cash position to keep firm sufficiently liquid
and to use excess cash in some profitable way.

The Cash Management is also important because it is difficult to predict cash flows
accurately. Particularly the inflows and that there is no perfect coincidence between the
inflows and outflows of the cash. During some periods cash outflows will exceed cash
inflows because payment for taxes, dividends or seasonal inventory build up etc. On the
other hand cash inflows will be more than cash payment because there may be large cash

sales and more debtors realization at any point of time. Cash Management is also
important because cash constitutes the smallest portion of the current assets, yet
managements considerable time is devoted in managing it.
Motives for holding cash:
There are four primary motives for maintaining cash balances:

1.

1.

Transaction motive

2.

Precautionary motive

3.

Speculative motive

4.

Compensating motive

Transaction motive:The transaction motive refers to the holding of cash to meet

anticipated obligations whose timing is not perfectly synchronized with cash receipts. If
the receipts of cash and its disbursements could exactly coincide in the normal course of
operations, a firm would not need cash for transaction purposes.
2.

Precautionary motive: Precautionary motive of holding cash implies the need to

hold cash to meet unpredictable obligations and the cash balance held in reserve for such
random and unforeseen fluctuations in cash flows are called as precautionary balances.
Thus, precautionary cash balance serves to provide a cushion to meet unexpected
contingencies.
3. Speculative motive: It refers to the desire of a firm to take advantage of opportunities
which present themselves at unexpected movements and which are typically outside the
normal course of business. The speculative motive represents a positive and aggressive
approach.

4.

Compensation motive: Yet another motive to hold cash balances is to

compensate banks for providing certain services and loans. Banks provide a variety of
services to business firms, such as clearances of cheque, supply of credit information,

transfer of funds, etc. While for some of the services banks charge a commission of fee
for others they seek indirect compensation.
Determining the optimum level of cash balance:
Cash balance is maintained for the transaction purposes and additional amount may be
maintained as a buffer or safety stock.
The Finance manager should determine the appropriate amount of cash balance. Such a
decision is influenced by trade-off between risk and return. If the firm maintains a small
cash balance, its liquidity position becomes week and suffers from a paucity of cash to
make payments. But a higher profitability can be attained by investing released funds in
some profitable opportunities. When the firm runs out of cash it may have to sell its
marketable securities, if available, or borrow. This involves transaction cost.
On the other hand if the firm maintains a higher level of cash balance, it will have a
sound liquidity position but forego the opportunities to earn interests. The potential
interest last on holding large cash balance involves opportunities cost to the firm. Thus
the firm should maintain an optimum cash balance, neither a large nor a small cash
balance.
To find out the optimum cash balance the transaction cost and risk of too small balance
should be matched with opportunity costs of too large a balance should be matched with
opportunity cost of too large a balance. Figure shows this trade-off graphically. If the firm
maintains larger cash balances its transaction cost would decline, but the opportunity cost
would increase. At point X the sum of two costs is minimum. This is the point of
optimum cash balance. Receipts and disbursement of cash are hardly in prefect
synchronization. Despite the absence of synchronization it is not difficult to determine the
optimum level of cash balance. If cash flows are predictable it is simply a problem of
minimizing the total costs the transaction cost and the opportunity cost. The
determination of optimum working cash balance under certainty can thus be viewed as an

inventory problem in which we balance the cost of too little cash (transaction cost)
against the cost of too much cash (opportunity cash). Cash flows, in practice, are not
completely predictable. At times they may be completely random. Under such a situation,
a different model based on the technique of control theory is needed to solve the problem
of appropriate level of working cash balance. With unpredictable variability of cash
flows, we need information on transaction costs, opportunity costs and degree of
variability of net cash flows to determine the appropriate cash balance. Given such data
the minimum and maximum of cash balances should be set. Grater the degree of
variability, higher the minimum cash balance. Whenever the cash balance reaches a
maximum level, the differences between maximum and minimum levels should be
invested in marketable securities. When balance is falls to zero, marketable securities
should be sold and proceed should be transferred to the working cash balances.

Cash management at JIL

Cash Management was examined and it was seen that cash was primarily received in
current account and then transferred to the adjusted against cash credit limit utilization.
The surplus is invested as short term fixed deposit. This exercise is done to minimize the
interest cost cash. Cash management system is very effective on day to day basis.

MANAGEMENT OF INVENTORY
Inventories are the stock of the product made for sale by the company or semi finished
goods or raw materials. Inventory of finished goods which are ready for sale is required
to maintain smooth marketing operation. The inventory of raw material and work in
progress is required in order to maintain an unobstructed flow of material in the
production line. This inventories serve as a link between the production and consumption
of goods.
The aspect of management of inventory is especially important in respect to the fact that
in country like India, the capital block in terms of inventory is about 70% of the current
assets. It is therefore, absolutely imperative to manage efficiently and effectively in order
to avoid unnecessary investment in them. Although to maintain low inventories may
prove to be profitable but to maintain very low inventories may prove risky on the
contrary.
This aspect of management if tackled in a proper way may prove to be a boom; its
effective and efficient management would result in the maintaining of optimum level of
inventories. At this level the profitability of the organization will not be jeopardized at the
cost of inventory.

Now form the above stated facts it is clear that maintaining of optimum level of inventory
involves huge cost, so why should keep the inventories at all. Basically there are three
main reasons for which inventories are stocked and they are:

1.

Transaction Motive: This motive lays emphasis on maintaining of inventories in

order to maintain a smooth and unobstructed supply of materials for the sales and
production operations.

2.

Precautionary Motive :

This motive emphasizes on the stocking goods in

order to guard against the uncertainties of future i.e. unpredictable changes in the forces
of demand, supply and other forces.
3.

Speculative Motive: This motive influences the decisions regarding the increase

or decrease in the level of inventory in order to take advantage of price fluctuations.

A company should maintain adequate stock of materials for a continuous supply to the
factory for an uninterrupted production. It is not possible for a company to procure raw
material instantaneously whenever needed. A time lag exists between demand and supply
of material. Also, there exists a uncertainty in procuring raw material in time at many
occasions. The procurement of materials may be delayed because of factors beyond
companys control e.g. transport disruption, strike etc. Therefore, the firm should keep a
sufficient stock of raw material at a time to have streamline production. Other factors
which may incite us to keep stock of inventories is the quantity discounts, expected rise is
price.
The work in process inventory builds up because of the production cycle. Production
cycle is the time span between the introduction of raw material in to the production and
the emergence of finished goods at the completion of production cycle. Till the
production cycle completes, the stock of work in process has to be maintained. Efficient
firms constantly try to make the production cycle smaller by improving their production
techniques. The stock of finished goods has to be held because production and sales are
not instantaneous. A firm cannot produce immediately when customers demand goods.
Therefore to supply finished goods on regular basis, their stock has to maintain for
sudden demand of customers. In case the firm sales are seasonal in nature, substantial
finished goods inventory should be kept to meet the peak demand. Failure to supply
products to customer, when demanded, would mean loss of the firms sales to the
competitors.

The basic objective in holding raw material inventory is separate purchase and production
activities and in holding finished goods inventory is to separate production and sales
activities. If raw material inventory is not held, purchase would have to be made regularly
at the time of usage. This would means production interceptions and high cost of
ordering.
A sufficiently large inventory has to be maintained of finished goods so as to meet the
fluctuating demands. If a close link is maintained between the sales and the production
department then an organization can do with a small inventory also. In the process
inventory is also necessary because production cannot be instantaneous. But it should be
seen that the size of production cycle should be small.
If the inventory of finished goods is not adequate than the demand of customer is peak
periods may not be left unmet and it is under investment is in the area of raw materials
that is likely that the production process may be held up frequently.
The aim of inventory management thus should be to avoid excessive and inadequate level
of inventory and to maintain sufficient inventory for smooth production and sales
operation efforts should be made to place an order at the right time to right source to
acquire right amount at the right price and for right quantity. The aspects of a effective
inventory management should take care of are as:

Ensure continuous supply of material to facilitate uninterrupted production.

To maintain sufficient stocks of raw material in the periods of short supply and
evident price rise.

To maintain sufficient inventory of finished goods for smooth sales operation.

Minimize carrying cost and time.

Control investment and keep it to the optimum level.

Before discussing the inventory control technique, here is the discussion of the
various terms such as economic order quantity, carrying cost etc.

1.

Economic Order Quantity: It is the inventory level, which minimizes the total
of ordering and carrying cost. Determining economic order quantity involves two
types of costs i.e. ordering cost and carrying cost.

2.

Ordering Cost: This is used especially in the case of raw materials and is
included in the cost incurred in acquiring the raw material. It is proportional to the
number of orders and inversely proportional to the size of inventory. Apart from
the cost of acquired raw material this also includes requisitioning, purchasing
order, transporting receiving, inspecting and sorting cost.

3.

Carrying points:

This is used in the case of all types of inventories. There are

the costs, which are incurred for holding a given amount of inventory. They
include opportunity cost of funds invested is inventories insurance, taxes, storage
cost and the cost of deterioration and obsolescence. It is directly proportional of
the size of inventory.
4.

Reorder Points:

Reorder point is the inventory level at which an order must

be placed to replenish the inventory and evade the risk of running out of raw
material. To determine the reorder point under uncertainty we should know the
lead-time, the average usage, economic order quantity etc.
5.

Safety Stocks:

It is difficult to predict usage and the lead-time accurately.

The demand for material is never constant. Similarly the actual delivery time may
be different firm the normal lead-time. In case of increased usage or delivery
delayed, there is bound to be problem of stock out. Stock out can prove to be
costly affair for a company. Therefore in order to guard against the stock out, the
company may keep some buffer stock as a cushion against expected increased
and/or delay in delivery. This buffer stock is called as safety stock.

The various techniques or approaches used is the management of inventory by

different firms to calculate the economic order quantity are is here given below:

1.

Trial and Error Approach: This is the technique to resolve the economic order
quantity problem. In this technique we take the annual requirement, purchasing

cost per unit, ordering cost per order and carrying cost per unit for the
computation of economic order quantity. We suppose a constant usage and then
considering different sizes of orders and calculate the different total costs. The
order corresponding to the minimum total cost has the economic order quantity.
2.

This is quite an easy approach to calculate the economic order quantity than the
trial and error approach. Here we find the economic order quantity with the help
of the formula
EOQ = Sort (2AO/C)
Where A = Total Annual Requirement
O = Ordering lost per order
C = Carrying lost per unit

3.

Graphic Approach: Here the economic order quantity is find out with the help of
a graph. We take the order size on horizontal axis and cost incurred on the vertical
axis. Now we plot the graph regarding the carrying cost and the ordering costs.
Now with the help of these two we draw a graph of minimum total cost.
Economic order point is the point at the lowest value of the total minimum costs.
While evaluating inventory it is to be seen that what is the composition of any old
stock lying in the inventory. Efforts should be made by the management to ensure
that non-moving inventory should be minimized

MANAGEMENT OF PAYABLES
A substantial part of purchase of goods and services in business are on credit terms rather
than against cash payment. While the supplier of goods and services tends to perceive
credit as a lever for enhancing sales or as a form of non-price instrument of competition,
the buyer tends to look upon it as a loaning of goods or inventory. The suppliers credit is
referred to as Accounts payable, Trade Credit, Trade Bill, Trade Acceptance, and
commercial drafts of bills payable depending on the nature of the credit. The extent to
which this buy-now, pay-later facility is provided will depend upon a variety of factors
such as the nature, quality and volumes of items to be purchased, the prevalent practices
in the trade, the degree of competition and the financial status of the parties concerned.
Trade credits or Payable constitutes a major segment of current liabilities in many
business enterprises. And they primarily finance inventories, which form major
components of current assets in many cases.
TYPES OF TRADE CREDITS:
Trade credits or Payables could be of three types:
Open Accounts,
Promissory notes and
Bills Payables.
Open Account or open credit operates as an informal arrangement wherein the supplier,
after satisfying himself about the credit-worthiness of the buyer, dispatches the goods are
required by the buyer and sends the invoice with particulars of quantity dispatched, the
rate and the total price payable and the payment terms. The buyer records his liability to
the supplier in his books of accounts and this is shown as Payables on open account. The
buyer is then expected to meet his obligations on the due date.
The promissory notes are a formal document signed by the buyer promising to pay the
amount to the seller at fixed or determinable future times. Where the client fails to meet
his obligations as per open credit on the due date, the supplier may require a formal

acknowledgement of debt and a commitment of payment by a fixed date. The promissory

note is thus an instrument of acknowledgment of debt and a promise to pay. The supplier
may even stipulate an interest payment for the delay involved in payment.
Bills payable or commercial drafts are instrument drawn by the seller and accepted by the
buyer for payment on the expiry of the specified duration. The bill or draft will indicate
the banker to whom the amount is to be paid on the due date, and the goods will be
delivered to the buyer against acceptance of the bill. The seller may either retain the bill
present it for payment on the due date or may raise funs immediately thereon by
discounting it with the banker. The buyer will then pay the amount of the bill to the
banker on due date.

Determinants of Trade Credit:

Size of the firm:
Smaller firms have increasing dependence on trade credits as they find it difficult to
obtain alternative sources of finance as easily as medium or large sized firms. At the same
time, larger firms that are less vulnerable to adverse turns in business can command
prompt credit facility from supplier, while smaller firms may find it difficult to sustain
creditworthiness during periods of financial strain and may have reduced access to credit
due to weak financial position.
Nature of Product:
Products that sell faster or which have higher turnover may need shorter-term credit.
Products with slower turnover take longer to generate cash flows and will need extended
credit terms.
Financial Position of Seller:
The financial position of the seller will influence the quantities and periods of credits he
wishes to extend. Financially weak suppliers will have to be strict and operate on higher
credit terms to buyers. Financially stronger suppliers, on the other hand, can dictate

stringent credit terms but may prefer to extend liberal credit so long as the transactions
provide benefits in excess of the costs of extending credit.
Financial position of the buyer:
Buyers creditworthiness is an important factor in determining the credit quantum and
period. It may be logical to expect large buyers not to insist on extending credit terms for
small suppliers with weal bargaining power. Where goods are supplied on a consignment
basis, the suppliers provide extra finance for the merchandise and pays commission to
consignee for the goods sold. Small retailers are thus enable to carry much large levels of
stocks then they will be able to finance by themselves. Slow paying or delinquent
accounts may be compelled to accept stricter credit terms or higher prices for products, to
cover risk.
Cash discounts:
Cash discount influences the effective length of credit. Failure to take advantage of the
cash discount could result in the buyer using the funds at an effective rate of interest
higher than the alternative sources of finance available. By providing cash discount and
inducing good credit risks to pay within the discount period, the supplier will also sale on
the costs of administration connected with keeping records of dues and collecting
overdue accounts.
Degree of risk: Estimates of credit risk associated with the buyer will indicate what
credit policy is to adopted. The risk may be with reference to the buyers financial
standing or with reference to the nature of the business the buyer is in.
Nature and Extent of competition:
Monopoly status facilitates imposition of light credit terms where as intense competition
will promote the tendency to liberalize credit.

Effective management of Payables:

The salient points to be noted on affective management of Payables are:

Negotiate and obtain the most favorable credit terms consistent with the
prevailing commercial practice pertaining to the concerned product line.

Where cash discount is offered for prompt payment, take advantage of the offer
and derive the savings there from.

Where cash discount is not provided, settle the payment on its date of maturity
and not earlier. It pays to avail the full credit terms.

Do not stretch Payables beyond due dates, except in inescapable situations, as

such delays in meeting obligations has adverse affect on buyers credibility and
may result in more stringent credit terms, denial of credit or higher prices on
goods and services procured.

Avoid the tendency to divert Payables. Maintain the self-liquidating character of

Payables and do not use the funds obtained there from for acquiring fixed assets.

Payables are meant to flow through current assets and speedily get converted into
cash through sales for meeting maturing short terms obligations.

In highly competitive situations, suppliers may be willing to stretch credit limits

and periods. Assess your bargaining strength and get the best possible deal.

Provide full information to suppliers and concerned credit agency to facilitate a

frank and fair assessment of financial status and associated problems. With fuller
appreciation of clients initiatives to honor his obligations and the occasional
financial strains which he might be subjected to for a variety of reasons, the
supplier will be more considerate and flexible in the matter of credit extension.

Keep a constant check on incidence of delinquency. Delays in settlement of

Payables with references to due dates can be classified into age groups to identify
delays exceeding one month, two month, three month, etc. once overdue Payables
are given priority of attention for payment, the delinquency rate can be minimized
or eliminated altogether.

MANAGEMENT OF RECEIVABLES
Trade credit, the tool that as a bridge for movement of goods through production and
distribution stages to customer is a force in the present day business and an essential
device. Trade credit is granted with a motive of protecting the sale from ones, competitors
and attaching more of the potential customers. Trade credit is said to be extended to a
customer when a firm sell its services or goods and does not receive the payment for
them immediately. Thus trade credit creates receivable which refer to the amount, which
a firm is expected to collect in near future. The book debt or receivable which arise a
result of trade credit have the following features:

It involves an element of risk and hence should never to be filled with. As credit
sale leave a sum to be recovered in future and future can never predicted with
certainty, hence it is risky.

It is based on economic value, while for the buyer; the economic value in goods
passes immediately at the time of purchase, while the seller expects an equivalent
value to be received later on.

It represents futurity. The cash payments for the goods or services received by the
buyer will be made in future.
The management of receivable gains more importance in the view of the fact that

more than one third of the total current assets are blocked in the form of trade debtors.
The interval between the date of sale and the date of payment is financed by working
capital. Thus trade debtors represent the investment. As substantial amount are tied up as
trade credit hence it requires careful analysis and proper management.
Goals of Management of Receivables:

As all other aspects of management, this also aims at the maximization of wealth by a
beneficial trade off between liquidity risk and profitability. The main aim of management
is not to maximize sales or minimize bad debt risk but in a way it is to expand sale to the
extent that the bad debt risk remained within the limits. So in an effort to maximize the
wealth, the goals of management of receivable are:

To obtain optimum value of sales

To control the cost of credit and keep it to the minimum level

To maintain investment in debtors at optimum level

Sales maximization is not the purpose of credit management but an effective and
efficient credit management helps in expanding sales and acts as a marketing tool. A good
and well administer credit means profitable credit accounts.
In order to maximize the wealth of the firm, the cost involved in the credit and its
management has to be controlled within the acceptable limits. These costs can bring to
zero level but that would adversely affect the sales, therefore the objective should keep to
the minimum level. A dynamic credit policy and its management will help to optimize the
sale at a minimum cost.
Debtors involve funds, which have an opportunity cost. Therefore the investment in
debtors should be never being excessive. Extending liberal credit pushes the sale and
results in higher profitability but the increase in level of investment in debtors result in
increased cost. Thus we are to bring the investment at a optimum level by doing trade off
between the costs and benefits. The level of debtors to a large extend depends on external
factors such an industry norms, level of activity, seasonal variations etc. But there are lot
of internal factors which affects the firm credit policy. These factors include credit terms,
standard, limits and collection procedures. The internal factors should be well
administered to optimize the investment in debtors.

As far as receivable management of JIL are concerned the major part of the grant are
received come from govt. of India. Fertilizer bonds, are issued by the government to the
JIL. A large part of the receivables is in the form of subsidy from Govt. of India. It is
pertinent to note here that recoverable from Govt. also include certain escalation claims
which are settled by the GoI after a long time. It is important that the subsidy dues are
received from GoI within a reasonable time.

CONCLUSION
Jindal Industries Ltd. is growing enterprise. Its sales are increasing gradually, depending
upon which its capital requirement is also increased.
The management of working capital in JIL is quite satisfactory which is shown by
different ratios and of her calculations. Ratio like net working capital, current ratio, quick
ratio shows that liquidity position of the company is good, which means company can
easily pay to its short-term liabilities as and when it becomes due. Quick ratio for the year
2001-02 is approx equal to 1: 1, which shows that company's quick assets are almost to
its current liabilities. Thus the risk of getting insolvent is almost nil.
Liquidity and circulation of working capital have fluctuated over the year of study.
Although quick ratio is high yet it may be noted that this high ratio is due portion of
working capital and these are not as liquid as cash.
Working capital as the percentage of total net asset is showing. a downward trend. Also,
there is no direct" and proportional relationship between expansion of activity level and
working capital.
The company's trade credit policy is good which is shown by the ratios like debtors
conversion and creditors conversion period.
From these it is concluded that company is getting trade credit for a longer period. It
reflects the efficiency of credit collection department i.e. they has made good credit
collection and adequate collection efforts. These efforts are improving gradually.

BIBLIOGRAPHY

Financial Management by Shashi K.Gupta and R. K. Sharma

Financial Management by I.M. PANDEY

Financial Management by M.Y.Khan and P.K. Jain

Jindal Industry Limited Annual Report.

www.jindalsteel.com

www.google.com

www.msn.com