report on working capital

1A REPORT ON WORKING CAPITAL MANAGEMENT AT NALCO A report submitted in partial fulfillment of the requirement of PGDM Programme of IIMT COLLEGE OF MANAGEMENT GREATER NOIDA, U P. NALCO (A NAVARATNA COMPANY) (A Navaratna Company) Submitted to: Prof. GIRISH KHATURIA Faculty guide, IIMT COLLEGE OF MANAGEMENT TABLE OF CONTENT CERTIFICATE................................................ ACKNOLEDGEMENT……………………………. 05 DECLARATION…………………………... EXECUTIVE SUMMERY………………... 1. INTRODUCTION-: 1. a) objective of study………………….. 1.b)research methodology. ……………... 1.c)scope of study.. ………………........... 1.d)limitation of study……………….….... WORKING CAPITAL MANAGEMENT Submitted by: TARENI PRASAD DHAL PGDM-(2008-2010) ROLL-pgdm/08/113 04 06 08 11 11 12 12 NALCO (A NAVARATNA COMPANY) 1.e)period of study………………............…. 2.INDUSTRY PROFILE ………………… 2.1) Introduction to aluminum………..… 2.2)Growth of aluminum industry………. 2.3)Aluminum industry in India ………… 2.4)Consumption of aluminum in India…. 3.company profile………………............… 3.1)introduction to Nalco………............… 3.2)Brief history..………………............…. 3.3)location….………………………….... 3.4)product and specification………….... 3.5)achievements……………………….... 12 13 13 15 17 19 22 23 23 23 24 25 3.6) Performance at a Glance………….... 4. Introduction to working capital……....... 4.a)Working capital management……….... 4.b)Types of working capital……………… 4.c)Factors affecting working capital……… 4.d)Estimate of working capital requirement. 4.e)Financing working capital……………… WORKING CAPITAL MANAGEMENT 28 29 31 32 33 39 40 NALCO (A NAVARATNA COMPANY) 4.f)source of working capital……………… ... 4.g)management of inventory……………… 4.h)management of cash…………………… 4.i) management of receivables…………… 5) Operating cycle…………………………. .. 6) Working capital management at NALCO.. 7) Data processing and analysis…………… 8) Conclusion……………………………… . 9) Recommendation and suggestion………. 10) Bibliography…………………………… 41 42 45 46 48 50 58 70 71 73 Certificate This is to satisfy that the summer project work of Mr.Tareni Prasad Dhal Titled Working capital management is an original work and this work has not been submitted elsewhere in any form. The indebtness to other works/publications has been duly acknowledged at the relevant places. The project work was carried out during 15.06.2009 to 31.07.2009 in National Aluminum Company Limited (NALCO). WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Date: Mr. B.K.Pattanaik, CM (Finance), NALCO, SMELTER PLANT, NALCO NAGAR, ANGUL. ORISSA-751013 TARENI PRASAD DHAL WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) ACKNOWLEDGEMENT I wish to express my deep felt to Mr.B.K.PATTANAIK CM(Finance) of NALCO for having extended their valuable time in helping, guiding ,supervising and supporting my work during the entire project without which this project could not have been successfully completed. I also take this opportunity to express my gratitude to prof.G.Khaturia my faculty guide for his, help guidance and support during the entire course of my project work. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) TARENI PRASAD DHAL DECLARATION I hereby declare that the project report entitled “WORKING CAPITAL MANAGEMENT in NALCO” is submitted in partial fulfillment of degree of PGDM under IIMT COLLEGE OF MANAGEMENT under the guidance of Mr.B.K.PATTANAIK (CM FINANCE, and Prof. GIRISH KHATURIA,IIMT COLLEGE I am very much thankful to all concerned people of the organization and the faculties of our institution for their timely cooperation and help. Tareni Prasad Dhal Roll-pgdm/08/113 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) IIMT COLLEGE INTRODUCTION WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) EXECUTIVE SUMMARY: The major objective of the study is to proper understanding the working capital of NALCO & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firm’s short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period. The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management. Inventories management at NALCO: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) NALCO is a large scale manufacturing company involved in mining of Bauxite and production of Aluminum. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning. Major inventories of Nalco are Raw material – The raw material that consist of CP coke, CT pitch, Aluminum fluoride, Pig iron, HFO Alumina and anodes for SMELTER & COAL, HFO, LDO for CPP & Caustic Soda, Alum, Lime, CGM Stores and Spares – At the time of Procurement of the machinery, generally some spares procured for immediate maintenance that directly linked with different equipments. These spares are known as instance spares and most of these items of High Value. Intermediary Goods- Which consist of Green Anodes, Baked Anodes, Rodded Anode, and Anode stem, etc. for which NALCO has installed its own plant for producing the Green & Baked Anodes and imports them only when there is a shortage Finished Goods- That consists of Bauxite, Aluminum Hydrate, Alumina, Aluminum Ingots, Sow Ingots, Billets, Wire rod Sheets etc. The finished Products of NALCO move fast and hence the stock of Finished Goods is very less in company CASH MANAGEMENT AT NALCO: NALCO has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate reqThe key areas of effective cash management in NALCO are: Identifying the requirements of funds at various units WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Investment of surplus funds productively, Repayment of loans, Proper capital expenditure. Standardized reporting systemized funds from within the organization i.e. from internal sources. Centralized Cash Management system: For centralized cash management system, NALCO has chosen State Bank of India (S.B.I) as its sole banker and the control cash account of the company is maintained at the S.B.I. main branch, Bhubaneswar under direct control of NALCO’s Corporate Office. RECEAVABLE MANAGEMENT AT NALCO: NALCO has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office obtains sales order from Aluminum users in India as well as globally. On the basis of order received for different products it marks production planning of different i.e. Ingot sow ingot, Billets, Wire etc. DATA PROCESSING AND ANALYSIS: 1.) Working capital of previous 4 years. 2.) Use of Carl Pearson’s core ration to know the relation between a) Correlation between total current Assets and Total Current Liabilities. b) Correlation between total current Assets and Working capital. c) Correlation between total current Liabilities and Working capital. RECOMMENDATION & SUGGESTION: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) For inventory, in order to improve the position, NALCO can reduce the level of stocks by resorting to phased production i.e. producing according to requirement and disposing off or recycling the unserviceable inventories. NALCO can also consider negotiating its creditors for relaxing the debt repayment period and repaying only on or just before the expire of the credit period. The plant must take certain steps to decrease the working capital cycle. One way can be better management of inventories Proper planning of production should be maintained and communicated to all concerned departments so as to determine the exactneed of materials and prevent unnecessary blockage of unless materials. Plant should given freedom in deciding the credit policies, cash discount or credit ratings. 1. A) Objective of study: To analyze the efficiency of working capital management of Nalco by studying different element of working capital, trend of various parameters across different years of comparison. To suggest measures for improvement in the management of working capital of Nalco. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 1.b)Research methodology: Data base: The study mostly confined to secondary data which collated from the annual reports published by Nalco. Additional information’s has also been collected from concerned officials from Nalco. Techniques and tools used: The analysis has been based on simple tools like ratios and percentages. Microsoft excel and spss package has been used for various calculations purposes. 1. c) Scope of study: The study has been conducted from infor mation over a period of 4 years from financial year 2004/05 to 2007/08. 1.d)Limitations of study: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) During the course of study of summer training project entitled “working capital management” of Nalco the report has been prepared subject to the following limitations. • The study is limited to four financial years from 2004to2008 performance • The data used in the study have been taken from balance sheet and their related schedule of Nalco • The study has been conducted during the boundaries of Nalco • The analysis ignores the time value of money 1. e)Period of study: Period of study during 15th march to 15th may 2009. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 2.INDUSTRY PROFILE 2.1) Introduction to aluminum: Aluminum is a silvery white and ductile member of the boron group of chemical elements. It has the symbol Al; its atomic number is 13. It is not soluble in water under normal circumstances. Aluminum is the most abundant metal in the Earth's crust, and the third most abundant element therein, after oxygen and silicon. It makes up about 8% by weight of the Earth’s solid surface. Aluminum is too reactive chemically to occur in nature as a free metal. Instead, it is found combined in over 270 different minerals. The chief source of aluminum is bauxite ore. Aluminum is remarkable for its ability to resist corrosion (due to the phenomenon of passivation) and its low density. Structural components made from aluminum and its alloys are vital to the aerospace industry and very important in other areas of transportation and building. Its reactive nature makes it useful as a catalyst or additive in chemical mixtures, including being used in ammonium nitrate explosives to enhance blast power. GENERAL USE A piece of aluminum metal. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Aluminum is the most widely used non-ferrous metal. Global production of aluminum in 2005 was 31.9 million tones. It exceeded that of any other metal except iron (837.5 million tons). Relatively pure aluminum is encountered only when corrosion resistance and/or workability is more important than strength or hardness. A thin layer of aluminum can be deposited onto a flat surface by physical vapor deposition or (very infrequently) chemical vapor deposition or other chemical means to form optical coatings and mirrors. When so deposited, a fresh, pure aluminum film serves as a good reflector (approximately 92%) of visible light and an excellent reflector (as much as 98%) of medium and far infrared. Pure aluminum has a low tensile strength, but when combined with thermo-mechanical processing, aluminum alloys display a marked improvement in mechanical properties, especially when tempered. Aluminum alloys form vital components of aircraft and rockets as a result of their high strengthto-weight ratio. Aluminum readily forms alloy with many elements such as copper, zinc, magnesium, manganese and silicon (e.g., d uralumin). Today, almost all bulk metal materials that are referred to loosely as "aluminum," are actually alloys. For example, the common aluminum foils are alloys of 92% to 99% aluminum. Some of the many uses for aluminum metal are in: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Household aluminum foil Transportation (automobiles, aircraft, trucks, railway cars, marine vessels, bicycles etc.) as sheet, tube, castings etc  Packaging (cans, foil, etc.)  Construction (windows, doors, siding, building wire, etc.)  Cooking utensils  Street lighting poles, sailing ship masts, Walking poles etc  Outer shells of consumer electronics, also cases for equipment eg photographic equipment.  Electrical transmission lines for power distribution  MKM steel and Alnico magnets  Super purity aluminum (SPA, 99.980% to 99.999% Al), used in electronics and CDs.  Heat sinks for electronic appliances such as transistors and CPUs.  Substrate material of metal-core copper clad laminates used in high brightness LED lighting.  Powdered aluminum is used in paint, and in pyrotechnics such as solid rocket fuels and termite.  WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 2.2) Growth of aluminum industry: In the late-1990s, India had total aluminum smelting capacity of 7.15 lakh tpa, out of which 6.28 lakh tpa was functional. (Capacity worth 0.87 lakh tpa belonging to Indian Aluminium Co. was redundant.) The early years of this decade witnessed a phase of consolidation, privatization and expansion, resulting in the total capacity reaching 8.24 lakh tpa. The expansion drive is far from over. By 2010, India's aluminum capacity is slated to cross 12.5 lakh tpa, the increase in capacity being entirely from Brownfield expansions. It is encouraging to note that Greenfield ventures in the aluminum industry are shaping up after over 15 years of quietus. The aluminium industry did not witness a single Greenfield project between 1987, when public sector National Aluminium Co. went on stream, and 2003 when the Sterile group began work on its 1.4 million tpa alumina refinery at Lanjigarh in Orissa. The AV Birla group, very recently, commenced work on its 3 million tpa aluminium smelter project, also in Orissa. By 2020, India would have an aluminium capacity of 17-20 lakh tpa. For a country endowed with nearly 10 per cent (2,525 million tons) of the world's bauxite reserves and having the lowest cost of production, this capacity would be technically justified. However, with India's per capita aluminium consumption of a meager 0.6 kg, compared with the global metric of around 20 kg, absorption of this colossal capacity would be an intimidating challenge. Thus, India's vision for 2020, besides being a global player in terms of size, should also include achieving international standards in terms of consumption. Today, 35 per cent of Indian aluminium is consumed by WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) the power industry, compared with less than 10 per cent in USA and Japan. Areas like construction and packaging where global aluminium consumption thrives, has low relevance to India. Barely 6 per cent of the Aluminium finds its way in the construction industry compared with 17 per cent in USA and 25 per cent in Japan. The Indian construction industry, which is headed for promising growth, can, therefore, be a major demand driver. Exports would, of course, be a major demand source. Even here, the industry needs to focus on value-added products instead of the conventional ingot exports. International developments surrounding China can influence India's aluminium industry in the medium term, 2005 onwards. The aluminium industry has been identified as a priority area in China, traditionally a low aluminium consumer. Chinese smelting capacity has nearly doubled from 2.8 million tpa in 2002 to 5.2 million tpa in 2003. By 2005, capacity is likely to reach 7.5 million TPA. China is expected to have an exportable surplus of 2 million tons per year, beginning 2005. This would cause intense competition. China, however, would need to source more than half of its alumina (raw material for aluminium) requirements through imports. The country is expected to import over 12 million tons of alumina annually. This would provide a good export opportunity to India, which might lead to projects investment in the alumina industry. Global Aluminium production has grown at 7%: Per capita consumption of aluminum is closely related to Gross Domestic Product (GDP) of a country. The consumption of aluminum in developed countries with high GDP WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) values is quite high compared to the consumption in developing countries. The global aluminum production grew at a CAGR of 7.7 per cent, while the consumption increased at a CAGR of 5.89 per cent during 2003-06. The market size for aluminum globally is US$ 96.56 billion. Europe and North America are the biggest players in the aluminum segment, with 35 per cent and 22 per cent of global market share respectively. Aluminum consumption is 30 kgs in the US and Europe, 15 kgs in Japan, 10 kgs in Taiwan and 3 kgs in China 2.3) The Aluminum industry in India: Aluminium Industries in India is one of the leading industries in the Indian economy. The growth Of the aluminum, Metal industry in India would be sustained by the diversification and exploration of new horizons for the industry. India has huge deposits of natural resources in form of minerals like copper, chromate, iron ore, manganese, bauxite, gold, etc. The India aluminum industry falls under the category of non-iron based which include the production of copper, tin, brass, lead, zinc, aluminum, and manganese. The main operations of the of the India aluminum industry is mining of ores, refining of the ore, casting, alloying, sheet, and rolling into foils. At present, Hindalco and Nalco are one of the most economical in the production of aluminum in the world. For the sustenance of the growth, the aluminum industry in India has to develop research and development units to assist the production and improve on the quality measures to keep a stringent quality control. The India aluminum Metal Industries sector in the previous decade experienced substantial success among the other industries. The India WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) aluminum industry is developing fast and the advancement in its technologies is boosting the growth even faster. The utilization of both international and domestic resources was significant in the rapid development of the India aluminum industry. This rapid development has made the India aluminum industry prominent among the investors. The India aluminum industry has a bright future as it can become one of the largest players in the global aluminum market as in India the consumption is fairly low, the industry may use the surplus production to cater the international need for aluminum which is used all over the world for several applications such as aircraft manufacturing, automobile manufacturing, utensils, etc. The companies under the India aluminum industry: • Hindalco (Hindalco Industries Ltd) • Indal (Indian Aluminum Co Ltd) • Nalco (National Aluminum Co Ltd) • Balco (Bharat Aluminum Co Ltd) • Malco (Madras Aluminum Co Ltd) The yearly pattern of production of the companies in India Aluminum Industry: • Hindalco produced in 150,000 metric tons in 1990-1991 and 242,000 metric tons in 2000-2001 • Nalco produced in 218,000 metric tons in 1990-1991 and 230,000 metric tons in 2000-2001 • Indal produced in 117,000 metric tons in 1990-1991 and 110,000 metric tons in 2000-2001 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) • Balco produced in 100,000 metric tons in 1990-1991 and 100,000 metric tons in 2000-2001 • Malco produced in 25,000 metric tons in 1990-1991 and 25,000 metric tons in 2000-2001 • The total production was 610,000 metric tons in 1990-1991 and 707,000 metric tons in 2000-2001 The yearly production of rolled products by the companies in India Aluminum Industry: • Hindalco produced 22,500 meters of rolled products in 1990-1991 and 80,000 meters of rolled products in 2000-2001 Nalco produced 13,500 meters of rolled products in 1990-1991 and 36,500 meters of rolled products in 2000-2001 • • Indal produced 24,825 meters of rolled products in 1990-1991 and 90,000 meters of rolled products in 2000-2001 • Balco produced 44,900 meters of rolled products in 1990-1991 and 43,600 meters of rolled products in 2000-2001 • The total amount of production was 102,225 meters of rolled products in 1990-1991 and 227,100 meters of rolled products in 2000-2001 2.4) Consumption of Aluminium in India: The consumption of aluminium in India of 0.7 kg per person in 2005 is very low in keeping with the countries low GDP. However, the low per capita consumption of aluminum in India is in fact an opportunity for growth in aluminium consumption against the back drop of fast growing economic conditions in India. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) However, aluminum consumption has increased 12.6% in 2006 to around 1.08mt. Consumption is estimated to have increased to a 5 year CAGR of 12.9%. Secondary aluminium demand also shot up to 0.6 MT last year. Sector-wise aluminum consumption: Aluminium is used in various sectors, such as, transportation, packaging, building / construction and electricity. However, the usage pattern differs significantly for Indian and rest of the world. Globally, the automotive, packaging and the construction sectors are the major end users of aluminium, while in India the power sector consumes most followed by automotive and housing sectors. Sector-wise consumption break-up • Electrical – 65% • Transport-21% • Construction -8% • Packaging – 5% • Industrial machinery – 4% • Consumer durables – 4% • Steel sweetening, powers & chemicals – 13% The Transportation sector is a major driver of aluminum consumption in the future where the onus of growing consumption lies with the industry. The automobile segment has attracted major global producers to set up their manufacturing facilities in the country. All these manufacturers are now engaged in bringing out high quality fuelWORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) efficient cars in the market for India as well as global markets. Besides cars, there are commercial vehicles which have also witnessed quantum growth over the years. Use of Aluminum as an alternative to steel has huge potential in the railways. The government has taken note of this and has started working on that. Aluminum castings are primarily used in transport and automobile sectors. The global casting is currently estimated at around 7.4 million tons, against that consumption in India as only around 110,000 tons. The country’s share in the global downstream sector is low as compared to other developed countries. Casting of aluminum alloys is a particularly versatile process and offers greater degree of flexibility than other methods of manufacture, and can be done by various methods like in sand, in metallic dies, under gravity or pressure, and cast by modern methods like low-pressure die- casting (LPDC), investment casting, and squeeze casting. No other metal can be cast under such a wide range of processes and sizes varying from a few grams to 100 kg. Although, domestic aluminum production exceeds the domestic demand, India imports on an average 15-20 per cent of the total supply of aluminum. Imports are necessary, due to the shortage of domestically produced ingots. India’s imports of aluminum and products primarily WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) comprise of unwrought items like ingots, billets, scrap, bars and rods. Imports of primary aluminum products account for less than 10 per cent of domestic consumption. India also exports aluminum products such as, scrap, powder and flakes, bar rods, foil, pellets, sheets, tubes and pipes. Exports figures hovers around 82000 tons annually and the major importer countries of Indian aluminium are Bangladesh, Sri Lanka, Egypt and Iraq. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Company profile (Ordinary people with extraordinary attitude) Vision: To be a reputed global company in the metal and energy sector. Mission: To achieve growth in business with global competitive edge providing satisfaction to the customers, employees, share holders and community at a large. 3.1)National Aluminum Company Ltd. (Nalco) is considered to be a turning point in the history of Indian Aluminium Industry. In a major leap forward, Nalco has not only addressed the need for self-sufficiency in aluminium, but also given the country a technological edge in producing this strategic metal to the best of world standards. Nalco was incorporated in 1981 in the Public Sector, to exploit a part of the large deposits of bauxite discovered in the East Coast. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Nalco is one of the biggest and Asia’s largest integrated complex, encompassing Bauxite mining, Alumina refineing,Aluminium smelting and casting power fgeneration,rail and port operations.NALCOwas established in 1981 as a public sector enter enterprise of the Govt.of india. It is considered a truing point in the 50-year-old history of the Indian aluminum industry. 3.2)Brief History: After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats, the govt. of India on the 28th March, 1978, authorized Aluminum Pechiney of France to prepare a feasibility report on the industrial exploration of bauxite for the establishment of an integrated Aluminum complex. The result of this study led to sifting of focus of attention to Panchpattermali, 30km.East of Koraput District of Orissa. Nalco was incorporated in 1981as a public sector Unit. The newly founded NALCO signed an agreement of collaboration with aluminum Pechiney, the world leader in this field for incorporation of technical know-how to set up Asia’s largest integrated aluminium complex. 3.3)LOCATION: Registered office:………………………….Bhubaneswar WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Bauxite mine…………………………………….. Panchpatmali Aluminium refinery…………..............................Damonjodi Captive power power plant….…………………..Angul Aluminium smelter.……………………………..Angul Port facilities….……………………………….…Visakhapatnam Rolled product unit……………………………….Angul WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 3.4)Product and Specification: 1. Claimed Alumina 2. Alumina hydrate a)Specialty Hydrates b) Specialty Alumina 3. Zeolite 4. Aluminium a)Ingots b)Wire rods c) Alloy ingots d) Alloy wire rods. e) Billets f) Cast strip WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 3.5)Achievements of Nalco: 1980: A Memorandum of Understanding was signed in January, by the Government of India for technical collaboration and financing of an integrated alumina-aluminium complex with Aluminium Pechiney of France. 1981: The Company was Incorporated on 7th January, as a wholly owned enterprise of Government of India. The Company Manufacture aluminium hydrate, claimed alumina, aluminium ingots and aluminium wire rods. 1993: NALCO signed a project co-operation agreement with Hydro AluminiumAG, Norway to carry out a joint study for feasibility of setting up a100% export oriented aluminium plant of 0.9 milliotonnesper annumcapacity. 1,28,86,19,200 No. of shares allotted 1994: The Company proposed to undertake expansion of bauxite mine from2.4million t.p.a. to 4.8 million t.p.a. and alumina refinery from8,00,000 t.p.a. to 13,50,000 t.p.a. This was subject to necessary clearances. 1995: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) A Smelter plant at Angul was undertaken with a capacity of 26000 TPYof strip casting facility. A special Alumina plant at Damanjodi was undertaken with a capacityof 20,000 TPY. A 10,000 TPY detergent grade Zeolite (Zeolite-A) plant at Damanjodi, was undertaken. 1996: The proposal to expand the capacities of bauxite mine at Panchpatmali from 24 lakh tonnes to 48 lakh tonnes and alumina refinery at Damanjodi from 8 lakh tonnes to 15.75 lakh tonnes was approved by the Government on 18.12.1996. 1997: Subject to necessary approvals being obtained the company proposed to convert 50% of its existing equity capital into debt. The public sector aluminium giant, National Aluminium Company (NALCO)set up in technical collaboration with Pechiney, France is the largest integrated aluminium company in Asia. National Aluminium Company Ltd (Nalco), country's largest Aluminium company, has opened a stockyard at Bhiwandi in Thane district. National Aluminium Company (Nalco), India's largest producer and exporter, got the ISO 14001 certification for environmental excellence. The National Aluminium Company, Bhubaneswar, signed an agreement of national importance with the NRDC for licensing from the NRDC the knowhow to manufacture gallium from the sodium alumina plant. 1998: The company has been forced to curtail its power generation WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) capacity due to a drastic reduction in intake by Gridco - the nodal power transmission and distribution agency in Orissa. 1999: The National Aluminium Company Ltd (NALCO) a Government of India undertaking is setting up a plant for extraction of gallium at its aluminium refinery complex at Damanjodi. The National Aluminium Company (Nalco) will take over International 2000: Icra has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture issue of the company, while it has assigned an A1 rating to the Rs 5-crore CP issue of Narmada Chematur Petrochemicals. 2001: A public sector Aluminium Company making a foray into detergent business sounds out of place. But if senior officials of National Aluminium Company (Nalco) are to be believed, the country’s second largest aluminium company will be doing that at its zeolite plant scheduled to start operations in July end. 2002: S Behuria appointed as part time official Director of Nalco. Nalco's alumina refinery capacity increased to 15.75 lakh tone 2003: Commissions one unit of Captive Power Plant with a capacity of 120 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) MW and 120 pots of Smelter with a capacity to produce 57,500 MT of Aluminium per year Nalco members okay delisting of securities from stock exchanges of Bhubaneshwar,Delhi, Calcutta & Madras 2004: National Aluminium Company Limited (NALCO) has informed that Madras Stock Exchange Limited vide its letter dated December 22, 2003 have withdrawn the admission granted to dealings on their exchange for the securities of NALCO. Nalco open offer to acquire 20% stake for Ondeo Nalco India 2005: Nalco inks agreement with NMDC. PERFERMANCE AT A GLANCE( PHYSICAL): particulars 1.production Bauxite Alumina Hydride Alumina for In MT MT MT 46,84,68 4 1575500 46,23278 1475200 4854253 15,90,00 0 4851721 1575500 48,16,76 2 1556100 units 2007/08 2006/07 2005/06 2004/05 2003/04 3,60,45 7 3,58,73 4 3,58,95 4 3,38,48 3 2,98,20 7 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) consumption Rolled products Power(net) 2.Export sales Alumina Aluminum 3.Domestic sales Alumina /hydride Aluminum power MT MU 2,43,06 4 129 2,61,63 6 421 2,58,09 4 322 2,05,79 4 406 1,66,65 0 498 MT 11,307 10,920 12,994 21,177 17,784 MT MT 8,59,94 3 1,00,84 7 7,73,57 3 92,678 8,62,61 6 95,747 9,09,08 1 1,32,73 0 9,34,87 4 1,29,71 8 MT MU 10,004 5,609 2,587 5,968 5,040 5,679 858 5,613 2,660 5,122 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 4. INTRODUCTION TO WORKING CAPITAL * WORKING CAPITAL * WORKING CAPITAL MANAGEMENT * TYPES OF WORKING CAPITAL * FACTORS DETERMINING WORKING CAPITAL * ESTIMATE OF WORKING CAPITAL REQUIREMENTS * FINANCING OF WORKING CAPITAL What is WORKING CAPITAL? Fixed Capital is that part of which is required for the purchase of fixed assets like Land and Building , Plant and machinery etc. The fixed capital provides the basic means for the business to earn its return... But by themselves, these fixed assets would not produce anything. For instance, to operate the machines, we require men, materials, power, tools, accessories etc. These factors involve expenses. In addition, we have to maintain certain current assets like stocks, stores, equipments, etc. All these require enough resources to keep the wheels of the business in motion. Therefore, in addition to the amount WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) of fixed capital every business – whether new or growing requires Working Capital. Working Capital is that portion of a business concern’s total capital, which is employed in term of operations. Without working capital, fixed capital would be idle and ineffectual. A number of definitions have been formulated: perhaps the most widely acceptable would be; “WORKING CAPITAL represents the excess of CURRENT ASSETS over CURRENT LIABILITIES “ The same may be designated in the following equation: WORKING CAPITAL= LIABILITIES: CURRENT ASSETS – CURRENT Funds thus invested in current assets keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Thus it is known as revolving or circulating capital or short term capital. These are two concepts of working capital:a. b. Gross Working Capital. Net Working Capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current assets and current liabilities. The constituents of current assets and current liabilities are shown in table A. TABLE A: Constituents of Current Assets and Current Liabilities PART –A: CURRENT ASSETS ➢ ➢ ➢ ➢ ➢ ➢ ➢ ➢ Inventories – Raw materials and components, Work in progress, Finished goods, other. Trade Debtors. Loans and Advances. Investments. Cash and Bank balance. Sundry Creditors. Trade Advances. Borrowings. PART –B: CURRENT LIABILITIES WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) ➢ Provisions. 4.a). WORKING CAPITAL MANAGEMENT:Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:- ➢ Investment in current assets represents a substantial portion of total investment. ➢ Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components. The importance of working capital management is effected in the fact that financial manages spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers. The problem of working capital management is one of the “best” utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 4. b) TYPES OF WORKING CAPITAL:Working Capital may be classified in to two ways:a) On the basis of concept. b) On the basis of time. c) TYPES OF WORKING CAPITAL Permanent or Fixed Working Capital:Permanent or Fixed Working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. There is always a minimum level of current assets that is continuously required by the enterprise to carry out its normal business operation. For example every firm has to maintain minimum level of raw materials, work in process, furnished goods and cash balance. The minimum level of current assets is called permanent or fixed working capital as their part of working capital is permanently blocked in current assets. With the growth of business there is an increase in current assets. 1) Temporary or Variable Working Capital:Temporary or Variable Working Capital is the amount of working capital that is required to meet the seasonal demands and some special exigencies. Variable working capital can be further classified as:a) b) Seasonal Working Capital. Special Working Capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Most of the enterprises have to provide additional working capital to meet the special and seasonal needs. The capital required to meet the seasonal needs of enterprise is called Seasonal working capital. Special working capital is the part of working capital which is required to meet the special exigencies such as part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research etc. is called Special working capital. 4.c) FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS:With the type of business and the ambition of proprietors the amount is bound to vary. For instance, a small business would need lesser amount of working capital than a larger business engaged in the same line. As the business expands the amount needed would grow. Similarly, business with seasonal demand would require larger amount of working capital. Therefore, an estimate of requirements of working capital will differ from concern and from industry to industry. Further, cyclical changes, periods of prosperity and depression cause wide variations in the demand for working capital. Other unexpected happenings are likely to create unusual demands for working capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) There is no concrete formula to decide the amount of workings capital required by a business. There are also business in which fixed is small ion relation to working capital. The Major determinants of the proportion of fixed to working capital are as follows:1.Nature of Business:Business units selling service (like public utilities) instead of a commodity, have little need for working capital, as they have little demand for large inventories. Generally they operate in cash and prepay basis. But trading concerns (merchandising companies) make a greater use of working capital, since inventory represents a major item of investment. A relatively small proportion will consist of working capital in case of manufacturing concerns. Larger working capital will require in labor intensive industries than in highly mechanized industries. In chemical or engineering industries, working capital would be relatively larger. Size of Business : The working capital requirements of a concern are directly influenced by the size of the business which may be measured in terms of scale of operations. Greater the size of a business unit generally larger will be the requirement of working capital. However, in some cases even a smaller concern may need more working capital due to high overhead charges 1) Insufficient use of available resources and other economic disadvantages of small size. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Production Policy:In certain industries the demand is subject to wide fluctuation due to seasonal variation. The requirement of working capital, in such cases depends upon the production policy. The production could be kept either steady by accumulating inventories during slack period with a view to meet high demand during the peak season or the production could be curtailed during the slack season and increased during peak season. If the policy is to keep production steady by accumulation inventories it will require higher working capital. A company should have some production policy i.e. to maintain the production is a considerable range in order to meet the changing demand. A company like NALCO whose productive capacities can be utilized for manufacturing varied products can have the advantages of diversified activities and solve their working capital problem. 2) Manufacturing Process/ Length of the production cycle:In manufacturing business, the requirements of working capital increase in direct proportion to length of manufacturing process, longer the process period of manufacture, longer is the amount of working capital required. The longer the manufacturing time, the raw materials and other supplies have to be carried for a longer period in the process with progressive increment of labor and service costs before the finished product is finally obtained. Therefore, if there is alternative process of production, the process with the shortest production period should be chosen. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Working Capital Cycle:In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on. 3) 4) Market Condition:The degree of competition prevailing in the market places has an important bearing on working capital needs. When competition keen, a larger inventory of finished goods is required to promptly serve customer who may not be inclined to wait because other manufacturers are ready to meet their needs, further, generous credit terms may have to be offered to attract customers in a highly competitive market. Thus, working capital needs tends to be high because of greater investment in finished goods inventory and accounts receivable. If the market is strong and completion weeks a firm can manage with a smaller inventory of finished goods because customers can be served with some delay. Further in such situation the firm can insist on cash payment and avoid lock – up of funds in accounts receivable, it can even ask for advance payment, partial or total. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 5) Credit Policy:The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables. 6) Business Cycle:Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at he time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal 7) Rate of Growth Of business:The working capital requirements of a concern increase with the growth and expansion of its business activities. Although it is difficult to WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) determine the relation between growth in the volume of the business and in the growth of the working capital of the business, yet it may be concluded that for normal rate of expansion in the volume of the business, we may have retained profits to provide for more working capital but in the first growing concerns, we shall require larger amount of capital. 8) Earning Capacity And Dividend policy:- Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. 9) Price Level Changes:Changes in the prices level also effects the working capital requirements. Generally the rising prices will require the firm to maintain larger amount of working capital as more funds will require maintaining the same current assets. The effect of rising prices may be different for different firms. Some firms may be affected much while some other may not be affected at all by the rise in prices. 10) Other Factors:WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital. 12)Other Factors:Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital. 4.d)Estimate of working capital requirements: To avoid the storage of working capital at once an estimate of working capital requirements should be made in advances so that arrangement can be made to procedure adequate working capital. But estimation of working capital requirements is not an easy task and a large number of factors have to be considered before starting this exercise. Factors requiring consideration while estimating working capital:Total costs incurred on materials, wages and overheads. 1) The length of time for which raw materials are to remain in stores before they are issued for production. 2) The length of the production cycle or work in progress, i.e. the time taken for conversion of raw materials into finished goods. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 3) The length of sales cycle during which finished goods are kept waiting for sales. 4) The average period of credit allowed to customers. 5) The amount of cash required to pay day-to-day expenses of the business. 6) The average amount of cash required to make advance payment. 7) 8) The average period expected to be allowed by suppliers. Time lag in the payment of wages and other expenses. 4.e) FINANCING OF WORKING CAPITAL:The working capital requirements of a business concern can be classified as:a) Permanent or Fixed working capital requirements. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) b) Temporary or Variable capital requirements. In concern, a part of working capital investments are as permanent investment in fixed assets. This is so because there always a minimum level of current assets which are continuously required by the enterprise to carry out its day-to-day business operations and this minimum cannot be expected to reduce at any time. This minimum level of current assets gives rise to permanent or fixed working capital as this part of working capital is permanently blocked in current assets. Similarly some amount of working capital may be required to meet the seasonal demands and some special exigencies such as rise in prices, strikes etc. this proportion of working capital gives rise to temporary or variable working capital which cannot be permanently employed gainfully in business. The fixed proportion of working capital should be generally financed from the fixed capital sources while the temporary or variable working capital requirements of a concern may be met from the short term sources of capital. The various sources for the financing of working capital are:PERMANENT OR FIXED SOURCES OF WORKING CAPITAL:1) 2) Shares Debentures WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 3) 4) 5) Public Deposits Ploughing back of profits Loans from financial institutions OR VARIABLE SOURSES OF WORKING TEMPORARY CAPITAL:- 1) Commercial banks 2) Indigenous bankers 3) Trade creditors 4) Installment credit 5) Advances 6) Accounts receivable- credit/factoring 7) Accrued expenses 8) Commercial paper Commercial banks are the most important sources of short term capital. The major portions of working capital loans are provided by commercial banks. They provide of wide variety of loans tailored to meet the specific requirements of a concern. The different forms in which the banks normally provide loans and advances are as follows:A) Loans b) Cash credits c) Overdrafts WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) D) Purchasing and discounting of bills In addition to the above mentioned forms of direct finance, commercial banks help their customers in obtaining credit form their suppliers through the letter of credit arrangements. It is always a test to the prudence of a financial manager to obtain the correct amount of working capital at the right time, at a reasonable cost and at the most favorable terms. • • • MANAGEMENT OF INVENTORY MANAGEMENT OF CASH MANAGEMENT OF RECEIVABLES 4.f) MANAGEMENT OF INVENTORY:Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques. 1.1 Need to Hold Inventories:There are three general motives for holding inventories:Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation. 1) Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. 2) Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts etc. 3) 2.2. Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital Should be locked in it. The following are the objectives of inventory management:1) To ensure continuous supply of materials, spares and finished goods. 2) To avoid both over-stocking of inventory. 3) To maintain investments in inventories at the optimum level as required by the operational and sale activities. 4) To keep material cost under control so that they contribute in reducing cost of production and overall purchases. 5) To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) To minimize losses through deterioration, pilferage, wastages and damages. 1) 2) To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization. 3) To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. 4) To ensure right quality of goods at reasonable prices. 5) To facilitate furnishing of data for short-term and long term planning and control of inventory 4.g) MANAGEMENT OF CASH:Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain ideal without contributing anything WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) towards the firm’s 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 coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm. NEEDTO HOLD CASH: The firm’s need to hold cash may be attributed to the following three motives:The Transaction Motive: The transaction motive requires a firm to hold cash to conduct its business in the ordinary course. The firm needs cash primarily to make payments for purchases, wages and salaries, other operating expenses, taxes, dividends, etc. The Precautionary Motive: A firm is required to keep cash for meeting various contingencies. Though cash inflows and outflows are anticipated but there may be variations in these estimates. For example a debtor who pays after 7 days may inform of his inability to pay, on the other hand a supplier who used to give credit for 15 days may not have the stock to supply or he may not be in opposition to give credit at present. Speculative Motive: - The speculative motive relates to the holding of cash for investing in profit making opportunities as and when they arise. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) The opportunities to make profit changes. The firm will hold cash, when it is expected that interest rates will rise and security price will fall. 4.h) MANAGEMENT OF RECEIVABLE:A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables. 3.1. NEEDS TO HOLD CASH: Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to take a sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is “to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.” WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 5.) Operating cycle: Operating cycle refers to the time duration required to convert sales ,after the conversion of recourses into inventories, into cash .the operating cycle of a manufacturing company like NALCO includes: 1.)Accusation of resources such as raw materials, labor, power and fuel etc. 2.)Manufacture of the product which includes conversion of materials into work-in-progress into finished goods. 3.)Sale of the product either for cash or on credit. Credit sales create account receivables for collection. OPERATING CYCLE: COMPONENTS FOLLOWS: OF WORKING CAPITAL ARE CALCULATED AS 1) Raw Materials Storage Period=Avarage stock of raw materials/Avarage cost of raw material consumption per day. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 2.) W-I-P Holding period=Average w-i-p in inventory/Average cost of production per day. 3.) Stores and spares conversion period= Average stock of Stores and spares/ Avarage consumption per day. 4.) Finished goods conversion period= Average stock of finished goods/Avarage cost of of goods sold per day. 5.) Debtors collection period=Avarage book debts/Avarage credit sales per day. 6.) Credit period availed=Avarage trade creditors/Average credit purchase per day.. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) WORKING CAPITAL MANAGEMENT AT NALCO A) Inventory Management in NALCO:NALCO is a large scale manufacturing company involved in mining of Bauxite and production of Aluminum. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning. During the year 2007 – 2008, the company bettered its own records of previous years in many a key field and has exceeded the target set of the year. In the mine sector, annual Bauxite transportation and excavation of 46,84684 MT have been the highest since inception exceeding the previous best of 46,23,278 MT during the year 2006 – 2007.Allumina production is 9,34,874MT are highest ever since inception exceeding the previous best of MT achieved during 2007-2008.However the power generation for the year is little reduced because of the Ash Pond debacle during the year 2007 December. The major inventory items in NALCO are composed of:- WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Raw material – The raw material that consist of CP coke, CT pitch, Aluminum fluoride, Pig iron, HFO Alumina and anodes for SMELTER & COAL, HFO, LDO for CPP & Caustic Soda, Alum, Lime, CGM etc. for Alumina Plant & it has not faced the situation like out of stock of raw materials during the recent part. 1) Stores and Spares – At the time of Procurement of the machinery, generally some spares procured for immediate maintenance that directly linked with different equipments. These spares are known as instance spares and most of these items of High Value. Besides for day-to-day maintenance some spares, tools, Consumable etc are procured from the near by available market. This also requires involvement of High Value and these items are consumed on regular basis for observation and maintenance. 2) Some items required on regular basis are also procured as AP items i.e. Automatic Procurement basis, once this stock is reduced below minimum level. Attempt is made to deproparietise and gets the same from indigenous sources for some reputed spares. Intermediary Goods- Which consist of Green Anodes, Baked Anodes, Rodded Anode, and Anode stem, etc. for which NALCO has installed its own plant for producing the Green & Baked Anodes and imports them only when there is a shortage. 4)Finished Goods- That consists of Bauxite, Aluminum Hydrate, Alumina, Aluminum Ingots, Sow Ingots, Billets, Wire rod Sheets etc. The finished Products of NALCO move fast and hence the stock of Finished Goods is very less in company. 3) WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) The company also effectively reduces the rejected inventory. The rejected inventory in NALCO comprises of anode butts and rejected finished products. Anode rejects are recycled and reused in the process while finished stocks rejects are either recycled or sold at a lower price. The company is exercising goods control of minimize the rejects. (A) INVENTORY NORMS:  Insurance Items: Broadly the insurance items are those items which are installed with equipments on the critical path of the production chain, which do not normally wear out, which are not easily available, have long lead time and failure or damage or break down of the items will lead to stoppage of the unit and production loss. NORM- 1.26% of the cost of plant & machinery. The value limited to be adjusted at the end of financial year applying RBI index for plant & machinery.  Raw Materials: Caustic Soda- 3 months Consumption (1 month at Damanjodi and 2 months at Vizag) C.T. Pitch - 2 months consumption. Other – 1 month consumption WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY)  Stores & Spares: Imported and Proprietary items– 17 months consumption. Others spares- 14 months consumption. Consumables Stores – 6 months consumption. B) CASH MANAGEMENT OF NALCO. NALCO has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate required funds from within the organization i.e. from internal sources. The key areas of effective cash management in NALCO are: 1. Identifying the requirements of funds at various units 2. Investment of surplus funds productively. 3. Repayment of loans. 4. Proper capital expenditure. 5. Standardized reporting system Control on cash flows: NALCO, a multi-core Organization, exercises food control over its cash flows by adopting centralized cash management system and strict reporting system. Centralized Cash Management system: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) For centralized cash management system, NALCO has chosen State Bank of India (S.B.I) as its sole banker and the control cash account of the company is maintained at the S.B.I. main branch, Bhubaneswar under direct control of NALCO’s Corporate Office. About ten branches of the company, including manufacturing units, spread across the country, are converted under the centralized cash management system. No cash is maintained at the branches and the TM branches have been authorized to honor the cheque presented by the company without any upper limit TM the transactions are transmitted to the central cash account at Corporate Office on a day to day basis. Similar account is also maintained by NALCO’s corporate office for proper reconciliation. The information regarding daily cash flows different branches is monitored simultaneously by the S.B.I. as well as by NALCO’s corporate office. Besides, NALCO also has cash collection center at different branches and realization of sale are credited and transferred to the central cash account daily. The encores time and quick realization of cash. Moreover, optimum level of funds is readily available with the company, by not maintaining any balances at different branches of S.B.I. Similarly, NALCO is exercising strict control over the payments made by its various branches. Through the manufacturing units are authorized to issue cheques, they are required to obtain clearance from the corporate office for all payments exceeding a prescribed limit, before the actual realization of such cheques. Further, the units are required to WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) make forecast of cash flow on a routine basis and intimate the same to the corporate office to ensure prompt availability of funds. The cash flow projections submitted by different branches at the corporate office are consolidated. Accordingly, the corporate office chalks out effective cash flow strategy to ensure minimum holding of cash as well as avoiding deficit at the same time. NALCO being cash rich company by nature, the extent of success lies in how quick the company has identified its surplus funds and invested the same in short term investment for optimization of wealth. The Reporting system in NALCO: Proper reporting or management information system is one or the key factors for the success of an organization. NALCO has introduced a strict management information system to ensure proper functioning of control mechanism of fulfillment of objectives. The reporting system in NALCO mainly includes:1) Forecasting of monthly cash flow/Operating performance. 2) Reporting of actual vis-à-vis forecasted cash flow on weekly basis 3) Reporting of receipts and payment at different units of daily basis. The monthly forecasts of cash flows are flexible in nature. While reporting the weekly cash flows; the units have a scope to revise the forecasted and submitting them to the corporate office before the WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) beginning of every month. Based on these, the corporate office prepares a consolidated cash flow statement. This consolidated cash flow statement from the main basis to plan the funds flow for the coming month, and this is a continuous process. On the other hand the daily report enables the company to know the latest surplus cash balance available and thus helps the company in taking various investment decisions. In case of any crises, special reports are made to identify the resources where the funds are to be realized. NALCO even has a cash credit arrangement with State Bank of India (S B I), though there has never been any excess withdrawal during the last five years. This clearly indicates the effective and efficient management of cash in NALCO. MAINTAINANCE BILL PAYMENTS SECTION: For awarding work order on contractual basis to a local party three rates are taken into consideration. These are:Zero Base Budgets Last Year Rate + Some percentage (%) due to inflation Delhi Subsidiary Rate C) RECEIVABLE MANAGEMENT IN NALCO: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) NALCO has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office obtains sales order from Aluminum users in India as well as globally. On the basis of order received for different products it marks production planning of different i.e. Ingot sow ingot, Billets, Wire etc. and accordingly advices product ion planning at Production Units Marketing office also sends dispatch instruction to dispatch section, which indicates various commercial terms i.e. product requirement, mode of dispatch, payment terms etc. The function of Dispatch department is to receive finished product from production department and segregate it on the basis of its laboratory analysis and grade. It keeps account of the various grade of finished product received by them. As per the sale order/dispatch instruction received from marketing office for export /domestic sale the dispatch departments segregates and prepares the materials for dispatching the same by Rails/Roads/Trucks. The materials are handed over to the transporter. On completion of dispatch of the consignment as per dispatch advice, the dispatch department sends all the dispatch documents which delivery invoice and a copy of L.R to finance department .on the basis of this the finance department makes a commercial invoice in which takes care of Taxes and other duties over and above the cost of product and sends it to the Marketing office may WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) be in the form of Banker cheque ,bank draft or in the from of letter of the credit opened by the buyer .The buyer opens a letter of credit with its banker. On completion of dispatch, on the basis of commercial invoice and proof of dispatch the money is realized by the Nalco’s banker from the buyer’s bank. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) DATA ANALYSIS AND INTERPRETATION: (Rs in cores) 2004/05 A: CURRENT ASSETS: Inventories: 686.65 Sundry debtors: 60.65 Cash and bank balance: 3516.46 Other current assets: Loans and advances: 541.10 529.06 92.81 755.21 82.01 351.95 2005/6 2006/7 2007/8 591.58 29.42 2193.71 118.62 364.95 212.4 634.96 34.13 3686.53 236.46 406.42 ………………………………………………………………………………………… TOTAL: 1811.04 3257.88 5041.33 4974.08 B: current liability: Sundry creditors: a) on capital a/c: b) on others: 324.94 64.72 169.38 44.39 222.95 102.09 272.78 260.74 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Other liabilities: Security deposit: Book over draft Provisions: 326.92 55.92 …..… 190.14 284.96 55.10 …… 332.82 424.64 74.66 9.98 346.49 557.94 162.69 …….. 222.57 ……………………………………………………………………… TOTAL: 806.39 940.15 2317.73 1218.61 3822.72 1540.40 3433.68 WORKING CAPITAL (A-B): 1004.65 ITEMS OF WORKING CAPITAL AS % OF WORKING CAPITAL 2004/05 2007/8 A: CURRENT ASSETS: Inventories: 19.99 Sundry debtors: Cash and bank balance: 102.41 Other current assets: 8.16 9.23 52.66 1.26 75.17 5.11 2005/6 2006/7 22.50 0.89 94.64 5.55 16.61 1.76 96.43 6.88 Loans and advances: 35.03 15.74 10.63 15.75 ……………………………………………………………………………………… WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) TOTAL: 180.26 140.56 131.87 144.86 B: current liability: Sundry creditors: a) On capital a/c: b) On others: Other liabilities: Security deposit: Book over draft Provisions: TOTAL : 6.24 16.85 32.54 5.56 18.92 80.26 1.91 9.61 12.29 2.37 14.35 40.56 2.67 6.82 11.10 1.95 0.26 9.06 31.87 7.94 9.46 16.24 4.73 6.48 44.86 WORKING CAPITAL (A-B): 100 100 100 100 WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Analysis of Working capital: 1. INVENTORIES: Interpretations: Inventories constitute the maximum portion of working capital. It is increasing year by year .The inventories as a percentage of working capital are always decreasing. Inventories in Nalco include the following. Raw materials: Raw materials occupy the least in the inventories in all the years. Stores and spares: Stores and spares also constitute an average nearly 30% of the working capital. The firm has excessive blockage of funds in the stores and spares. Semi/Finished Goods: Maximum portion of the inventory held by semi/finished goods which almost occupy equal share in working capital in all the years. Semi/finished products when compared with sales figure indicate that productivity and efficiency of plant has improved as sales have grown up subsequently. Inventories of stores and spares ,other than insurance spares identified as not moved for more than 5 years valued at 5% of the cost. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) SUNDRY DEBTORS: Interpretations: Sundry debtors occupy very small portion of the working capital. It is 9.23% in the year 2005,1.26%in the year 2006,it is 0.89% in the year 2007 & it is 1.76 in the year 2008.It is a good signal for the company because it indicates reduction in defective products as debtors in the balance sheet represents debtors with respect to plant sales only. It is seems that the sundry debtors reduces year by year it is good for the company. CASH AND BANK BALANCES: INTERPRETATION: Cash and bank balances occupy a major part of the working capital. It is 75.17% of the working capital in the year 2005,94.64% in the year 2006,it is 94.43% in the year 2007&it is more than 100% in the year 2008 that is 102.41%.NALCO maintains a centralized cash management system so the cash management is very good in NALCO. For WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) centralized cash management system, NALCO has chosen State Bank of India (S.B.I) as its sole banker and the control cash account of the company is maintained at the S.B.I. main branch, Bhubaneswar under direct control of NALCO’s Corporate Office. Here it is seen that the cash and bank balances of NALCO increases year by year which is good sign for the company. OTHER CURRENT ASSETS: Interpretation: Here it is seen that the other current assets are increasing year by year . Here it is seen that the other current assets are 8.16% in the year 2005,it is 5.11%in the year 2006,It is 5.55%in the year 2007 & it is 6.88% of the working capital in the year 2008.the other current assets holds a very negligible portion of the working capital in all the subsequent 4 years. These assets are those assets which are other than the assets which is mentioned in the current assets. LOANS AND ADVANCES: Interpretation: Here in the loans and advances of Nalco we see that it is increasing gradually in the subsequent 4 years. The %of the loans and advances cover very negligible %of the working capital. Here it is 35.03% in the year 2005, 15.74% in the year 2006, 10.63%in the year 2007& it is 17.75% in the year 2008. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) SUNDRY CREDITERS: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Interpretation: Here in these 4 subsequent years it is seems that the sundry creditors increase year by year by year. The sundry creditors on capital and others also increase subsequently. On capital it is 6.24% in the year 2005,1.91%in the year 2006%,it is 7.94%in the year 2007 &it is 7.49% in the year 2008.on others it is 16.85% in 2005,9.61% in the year 2006%,it is 6.82% in the year 2007 & it is 9.46% in the year 2008 of the total working capital. OTHER CURRENT LIABILITIES: Interpretation: Here it is seems that’s the other current liabilities also increasing gradually year by year. This figure represent not heavy amount of current liabilities occurs by NALCO. It is 32.54% in the year 2005,it is 12.29%in the year 2006,it is 11.10% in the year 2007 & 16.24% in the year 2008. It seems that it does not constitute a huge amount of working capital. SECURITY DEPOSITS: WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Interpretations: The security deposits increases gradually year by year in the 4 years. Security deposits refers to those current liabilities which taken from the customers who wants to purchase some specific type of products .It occupies a very small portion of working capital. The security deposits constitute a very small portion of the working capital. BOOK OVER DRAFT: Interpretations: The book over draft is nil in three years but it is 9.98% in the year 2007.which constitute a very small percentage of working capital. PROVISIONS: Interpretations: Provisions from a basic ingredient of working capital as it constitute a large portion of current liabilities. In absolute figures the provisions increases in the year 2006 & it decreases in the year 2008.IT is 18.92% WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) in the year 2005, 14.35% in 2006, 9.06% in 2007, 6.48% in 2008.which is not constitute a huge % of working capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) OVERALL ANALYSIS OF WORKING CAPITAL: Interpretations: Here it is seems that the working capital increases in the year 2006 &2007 but it decreases in the year 2008.It is good for a company to require less working capital. But in NALCO it increasing rapidly in the subsequently in the year 2006 &2007 but it decreases we can interprets that the plant is in a favorable condition. This made possible due to proper co ordination between the departments, policies etc. In the last four years the current asset always higher than the current liabilities which avoids the risk of negative working capital which avoids ht e risk of meeting the short term obligations on due date for the share holders,lenders,and outsiders can trust upon the company. It can concluded that the decreasing working capital of NALCO has not shown any negative impact because the firm is still in a way to achieve profit despite a large amount of working capital. The firm able to avail more credits from i.e. the confidence of the creditors is not a stake. Further the company has amount of which in turn reduce the working capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) KARL PEARSON’S COEFFICIENT OF CORELATION: Karl Pearson’s coefficient of correlation is a very important tool and technique of statistics. It measures the degree of association between the variable that we would not have been able to calculate otherwise. 1) Correlation between total current Assets and Total Current Liabilities. 2) Correlation between total current Assets and Working capital. 3) Correlation between total current Liabilities and Working capital. YEAR CURRENT ASSETS 2005 2006 2007 2008 1811.04 3257.88 5041.33 4974.08 CURRENT LIABILITIES 806.39 940.15 1218.61 1540.40 WORKING CAPITAL 1004.65 2317.73 3822.72 3433.68 Correlation between Total current assets and Total current liabilities. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Correlations VAR00001 Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N VAR00001 1.000 . 4 .888 .112 4 VAR00002 .888 .112 4 1.000 . 4 VAR00002 (Result as per spss package) WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) Interpretation: The Karl parsons’ coefficient correlation between current assets and current liability is .888 which reflects a direct relation between the two variables. Correlation between Total current assets and working capital. Correlations VAR00001 Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N VAR00001 VAR00002 1.000 .993 ** . .007 4 4 .993 ** 1.000 .007 . 4 4 VAR00002 **. Correlation is significant at the 0.01 level (2-tailed). Interpretation: The Karl parsons’ coefficient correlation between current assets & working capital is .965.It represent a high relationship between the two variables. Correlation between Total current liability and working capital. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) C orre tions la VAR 0 00 01 Pe rso C la n a n orre tio Sig (2 ile . -ta d) N Pe rso C la n a n orre tio Sig (2 ile . -ta d) N VAR 0 1 0 00 1 00 .0 . 4 .8 27 .1 73 4 VAR 00 2 0 0 .8 27 .1 73 4 1 00 .0 . 4 VAR 0 00 02 Interpretation: The Karl parsons’ coefficient correlation between current liability & working capital is .827. It represents a high relationship between the two Variables. CONCLUSION The study involves practical and conceptual over view of decisions concerning current assets like cash and bank balance ,inventories( like raw materials ,w-i-p,finished goods ),sundry debtors, loans and advances, other current assets and current liabilities like sundry creditors, securities and other deposits, other current liabilities and provisions of NALCO. Was with the objective of maximizing the overall net profit of the bank. And complete synchronization and co ordination among the working capital components which shall WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) contribute to optimum level of operations. Mismanagement of each or any of these components shall be detrimental to the objectives of efficient operation, profitability and maximization of overall value of the bank. The working capital limits would be considered only after the project nearing completion and after ensuring control over the inventory. The inventory is a great concern for NALCO and it need proper procurement and management. Eligible working capital limits would be assessed by cash Budget method And Projected production method depending the market condition, scale of operation, nature of activity/enterprise and duration/length of operating cycle etc. RECOMMENDATION & SUGGESTION: The recommendation & suggestion for effective management of working capital at NALCO are given bellow: 1) For inventory, in order to improve the position, NALCO can reduce the level of stocks by resorting to phased production i.e. producing according to requirement and disposing off or recycling the unserviceable inventories. However, the low turnover of stock may also be due to problems with generation of sales Inventory management is a great concern for NALCO especially stores and spares. The purchase manager should take proper steps for procurement of inventories. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) 2.) The plant must take certain steps to decrease the working capital cycle. One way can be better management of inventories. 3.) The plant is suggested to maintain a balance in capacities, synchronization of various inputs availability of some materials or parts which are not easily available. 4.) Short term credit period availed must be reduced and sundry creditors should be paid faster. 5.) The plant should maintain inventory at an optimum level rather than a very optimistic level. 6.) The procurement for materials requisition processing should be reduced so as to minimize the lead time. 7.) Plant should given freedom in deciding the credit policies, cash discount or credit ratings. 8).NALCO can also consider negotiating its creditors for relaxing the debt repayment period and repaying only on or just before the expire of the credit period. WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) WORKING CAPITAL MANAGEMENT NALCO (A NAVARATNA COMPANY) BIBLIOGRAPHY: 1.) www. Nalco.co.in 2.) CMIE 3.)www.Google.co.in WORKING CAPITAL MANAGEMENT