2011A PROJECT WORKING REPORT CAPITAL TATA STEEL LTD. (WIRE DIVISION) MANAGEMENT Anugrah P. Roll No. CB.BU.P2MBA10006 WORKING CAPITAL MANAGEMENT 2011 ACKNOWLEDGEMENT I am grateful to TATA Steel, Wire Division for giving me this great opportunity to do my Summer Internship Project with them. I take the privilege to sincerely thank Mr. Sunil Bhaskaran, EIC, Global Wires Business, TATA steel, in creating the opportunity for a summer project in the finance department of this division. I would like to thank Mr. Sanjiv Verma, Financial Controller, Wires Division, TATA steel, for making everything possible for me during the entire course of the project. I am also thankful to my Company Guide, Mrs. Minal Udani, Senior Manager Finance, Banking department, Wires Division, TATA Steel, for her guidance and support during the entire course of the project. I am thankful to Mr. Pradeep Poojari and Mr. Sanjay Nagotanekar for their guidance and support throughout the course of the project. I also take great pleasure in thanking my faculty guide, Prof. R. K. Murthy, Professor, Finance, Amrita School of Business, for giving me the moral support and inspiration to perform well and make the Summer Internship Project successful. I specially thank all the Managers, Officers and the Staff members with whom I interacted during the course of my project for their support and cooperation. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 2 - WORKING CAPITAL MANAGEMENT 2011 TABLE OF CONTENTS 1. EXECUTIVE SUMMARY 5 1.1 INDUSTRY PROFILE…………………………....…………………………………………….…………………....5 1.2 ORGANIZATIONAL PROFILE…………………..………………………………….……………………………..6 1.2.1 Global Wires Business……………….….....……………………………………………………………..…...6 1.2.2 Tata Steel Wire Division (TSWD)…….………………..…………………………………………….........6 1.2.3 Lanka Special Steels Ltd. (LSSL)………….………………………………………………………………..14 1.2.4 Siam Industrial Wires (SIW)………………….……….…………………………………………………….14 1.2.5 Wuxi Jinyong Metal Products (WJMP)………..……………………………………………………....15 1.2.6 Indian Steel & Wire Products (ISWP)……………….…………………………………………………..16 2. INTRODUCTION TO WORKING CAPITAL MANAGEMENT 18 2.1 WORKING CAPITAL……………………………………………………………………………………….………..18 2.2 OPERATING CYCLE…………………………………………………………………………………………………20 3. CREDIT MANAGEMENT 22 3.1 INTRODUCTION………………………………………………………………………………………………………22 3.2 IMPORTANT TERMS....................................................................................................24 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 3 - WORKING CAPITAL MANAGEMENT 2011 4. ANALYSIS OF WORKING CAPITAL 4.1.1 4.1.2 4.1.3 4.1.4 35 4.1 ANALYZING THE FINANCIAL RATIOS..........................................……………………………...35 Global Wires India.........…………………………………………………………………………………………36 Lanka Special Steels Ltd………………………………………………………………………………………….37 Siam Industrial Wires……………………………………………………………………………………………..38 Wuxi Jinyong Metal Products…………………………………………………………………………………39 4.2 ANALYZING THE COMPONENTS OF WORKING CAPITAL..........................……………....40 4.2.1 4.2.2 4.2.3 4.2.4 Global Wires India......……………………………………………………………………………………………40 Lanka Special Steels Ltd.…......………………………………………………………………………………..42 Siam Industrial Wires.................................................................................................45 Wuxi Jinyong Metal Products.....................................................................................48 4.3 ANALYZING THE TRENDS FOR INVENTORIES & RECEIVABELS - GLOBAL WIRES INDIA……....49 4.3.1 4.3.2 Trends for Inventories................................................................................................49 Trends for Receivables...............................................................................................54 4.4 COMPARISON AMONGST GLOBAL WIRES ENTITIES...................................................57 5. 6. CREDIT POLICY AT GLOBAL WIRES RECEIVABLES MANAGEMENT AT GLOBAL WIRES INDIA 60 69 Page - 4 - SUMMER PROJECT AT TATA STEEL WIRE DIVISION 1 INDUSTRY PROFILE Steel wire manufacturing is a fragmented industry with many small and medium sized manufacturers. 9. The wires supplied by TSWD are intermediate products which are converted or assembled into products which in turn touch the end consumers. Most of the steel wire manufacturers are privately owned and owner driven. These customers have clearly defined technical specifications and thus any changes in SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . A key point about the wires industry is that the product changes are few and far in between. Usha Martin. Apollo tyres etc. around 50% of the wire manufacturing capacity is registered under the SWMAI. 8. JK Tyres. ANALYSIS OF OUTSTANDING & OVERDUES LIMITATIONS TO MY STUDY RECOMMENDATIONS TO THE COMPANY BIBLIOGRAPHY 74 78 79 84 1.5 - . rest all units are privately owned. EXECUTIVE SUMMARY 1. 10. SWMAI ensures that there is a platform for sharing concerns and as a single body representative with regulatory authorities and customer/supplier associations.WORKING CAPITAL MANAGEMENT 2011 7. TSWD customers in the institutional business are the original equipment manufacturers such as tyre manufacturers like MRF. Rajratan Global Wires and Ramsarup Industries are in public domain. Today. Tata Steel Wire Division (TSWD) was one of the founder members of the trade association named “The Steel Wire Manufacturers Association of India” (SWMAI). In India only Tata Steel. Melbourne Cricket Ground (Australia). Its products have received quality approvals from certifying agencies across the world – from Europe to Japan and Australia. Hence new product development in steel wire industry can either be achieved by introducing newer wires in a market which has yet to develop or by making subtle changes in product specifications and making process improvements which will enhance usage for customer applications.WORKING CAPITAL MANAGEMENT 2011 the wires specifications require formal approvals and long drawn laboratory and field approvals. Suvarnabhumi Airport (Thailand). nuclear reactors. high rise buildings. it is the world’s leading producer of PC strands and its wires are used in the construction of bridges. Many of the iconic structures built using TSWD’s PC strands include Bandra Worli Sea Link (India). SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .6 - . with eight manufacturing facilities in India. Dubai Ski Dome (UAE). power and retail (galvanized wires) segments. It has a combined annual manufacturing capacity of 670. metro rail projects etc. Delhi Metro Rail (India).2 ORGANIZATIONAL PROFILE 1. China. Changi Airport Terminal 3 (Singapore). With its multiple manufacturing global facilities. Thailand and Sri Lanka. Cross Ring Expressway (Macau) and Shenzheng Bay Great Bridge (China). automotive. Cross Sea Bridge (Japan). Tata Steel Global Wires Business (TSGWB) caters to the construction. Darwin LNG Tanks (Australia). LNG tanks. 1.000 MT and includes 1900 employees worldwide.2.1 GLOBAL WIRES BUSINESS The Global Wires Business of The Tata Steel Group is amongst the largest steel wire manufacturers in the world (largest in India. Thailand & Sri Lanka). 1: TATA STEEL GLOBAL WIRES BUSINESS ENTITIES 1. In 2002 wire division became a separate profit centre under long product division (Tata Steel). GLOBAL WIRES TATA STEEL WIRE DIVISION LANKA SPECIAL STEELS LTD. The global wires business was created to bring about integration in Tata Steel group’s various businesses and also for developing the wire business globally. LTD. FIG 1. Established in 1958 as steel wire manufacturing company it was taken over by Tata Steel in 1984.2. The global wires business of Tata steel group consists of Wire division (India).WORKING CAPITAL MANAGEMENT 2011 Tata launched its brand “Tata Wiron” in 2004 and built a channel from scratch to support its efforts. (China) and Lanka Special Steel Ltd (Sri Lanka) and Indian Steel & Wire Products (ISWP).. Wuxi Jinyang Metal Products Co.2 TATA STEEL WIRE DIVISION (TSWD) Tata Steel Wire Division was setup in 1958 as “Special Steels Limited” to manufacture steel wires for making umbrella ribs. Year 2008 saw the wire division become a part of global wire business (Tata Steel). where after.7 - . SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Ltd. THAILAND INDIAN STEEL & WIRE PRODUCTS LTD. The Siam Industrial Wire Co. Setting up of these manufacturing facilities was one of first steps that the company took in bringing new steel wires for the Indian markets. Tata Steel Wire Division is the market leader and pioneer in wire manufacturing in India over the past 50 years. SRI LANKA WUXI JINYANG METAL PRODUCTS.. (Thailand). CHINA SIAM INDUSTRIAL WIRE CO. Ltd. TSWD made a radical change and changed the rules of Indian wire manufacturers by creating a retail segment portfolio. Power and Retail. WD also has a Wire Rod Mill (West) whose operations are under control of the Chief-WD and the sale of wire rods is controlled by Long Products Division of Tata Steel. The wire division (India) has an annual capacity of 335.000 MT of steel wires across 4 plants (self . TSWD has been constantly striving to create customer value by offering differentiated products. Today. 19 stockyards and 27 Galvanized Wire Distributors (GWD). 8 plants (outsourced) and one subsidiary. WD has 8 sales offices. TSWD is the pioneer of steel wire industry in India and is the largest manufacturer and market leader in India. Construction.1: Key differences in WD Plants SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Table 1.WORKING CAPITAL MANAGEMENT 2011 many wires were introduced which resulted in development of the markets and also growth and consolidation of the company. TSWD is the only manufacture of steel wires in India which has a pan India presence catering to the needs of all four industry sectors namely Auto. WRM West has an annual capacity of 295.8 - . The products rolled include Mild Steel and various grades of High Carbon Wire Rods.owned).000 MT. PC Strands and PC wires are used by the infrastructure sector whereas the power sector uses ACSR (Aluminium Conductor Steel Reinforced).WORKING CAPITAL MANAGEMENT 2011 OWNERSHIP Owned & Managed by WD Owned & Managed by Managing Agency 100% Subsidiary Outsourced TWP1 Assets TWP2 INDORE DWP ISWP Partly by ISWP and partly by WD EPA EPA Wire Division Raw Materials Arranged by Wire Division People On rolls of WD and some non core activities outsourced On rolls of Managing Agency except very few key personnel from WD On rolls of ISWP On rolls of EPA Products & Delivery Mechanisms The Wire Division caters to the needs of institutional as well as retail segments of the market. The institutional segment consists of Automobile industry.9 - . The products for the retail segment of the market include Galvanized wire for Farming. Infrastructure and Power. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The products used by the automobile sector are Tyre Beads and Springs. Poultry and Fencing. About 96% of the sales volume is sold domestically and about 4% exported. The institutional segment contributes to the maximum part of revenues and profits of the wire division. WORKING CAPITAL MANAGEMENT 2011 The Wire Division has adopted ‘Theory of Constraints’ (ToC) approach which has led to major improvements in the delivery mechanism. Wire Division has a workforce of 1037 full time employees. At Tarapur all the core operations are performed by the employees whereas support services like packing and material handling are outsourced to agencies having expertise in those areas. Further Simplified Drum-Buffer-Rope (SDBR) concept has been implemented to improve Supply chain reliability. All three plants at Tarapur have unions and collective bargaining is done with respective unions of each plant.10 - . Stock buffers have been introduced at plant warehouses. As a result of these mechanisms the supply chain is reliable and is a key differentiator as compared to the competitors of WD. At Doddaballapur and Indore the operations are handled by Managing Agencies in order to manage the labour costs SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . distributors and customers’ premises to enable Vendor Managed Inventory (VMI) for enterprise customer’s replenishment model for key distributors. select stockyards. 2: BUSINESS SEGMENTS SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .WORKING CAPITAL MANAGEMENT 2011 PRODUCTS AUTOMOTIVE INFRASTRUCTURE POWER RETAIL (i) Tyre Bead Wire (ii) Spring Wire (i) PC Strands WIres (ii) PC Wire (i) Aluminium Conductor Steel Reinforced (ACSR) (ii) Cable Armoure Wires (i) GI Wires (ii) MIG Wires (iii) Mesh Wires FIG 1.1: PRODUCTS Business Segments by Revenue (FY10) Institutional Retail Business Segments by Profit(FY10) Institutional 33% 67% 30% 70% Retail FIG 1.11 - . The steel billets are supplied by Long Products Division (Jamshedpur). Major value in purchase is of billets from Tata Steel’s Long Product Division. The division has a supplier base of 1600. The technology used by the Wire Division is highly effective and provides them a competitive edge over other wire manufacturers.WORKING CAPITAL MANAGEMENT 2011 TABLE 1.12 - . of which 50 suppliers account for more than 70% of the value purchases for raw materials and SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .2: PLANT WISE PRODUCTION Type of Wire TWP1 TWP2 Self – owned Indore Operations Doddabalapur Operations X Subsidiary ISWP Outsourced EPAs (All India) Total Capacity Motor Tyre Bead LRPC Galvanized Wire Spring Steel Wire Single PC Wire ACSR Current Production Capacities (MT) X X X X X X X X X X 86000 84000 X X 47000 12000 60000 X 46000 335000 Flow Of Raw Materials The Wire business is downstream to steel and various stages in the wire making process are shown in the figure. ISWP and ISIM and these wire rods are finally converted into wires at wire plants. The billets are then hot rolled to wire rods at WRM West. WD’s purchases are approximately 66% of the sales turnover. Steel Making Continuous Cast Billets Hot Rolled Wire Rods Wires FIG 1.3: WIRE PRODUCTION PROCESS SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .WORKING CAPITAL MANAGEMENT 2011 critical production consumables.13 - . These suppliers are known as MOU suppliers and play a key role in the supply chain at WD. High cost to serve including conversion cost. Being solution provider (especially for construction & auto industry). Tapping the (currently untapped) GI wire markets of North/East India. Weaknesses 1. 6. 2. The products are well accepted in the market. Successfully completed the shifting of operations from its plant in Borivali to a new and bigger plant in Tarapur. 2. 3. 3. 2. Capturing greater value by down streaming into wire products. Tyre cord etc. 3. Less hold in the markets of north and east parts of India. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .14 - . Market leader in the industry.WORKING CAPITAL MANAGEMENT 2011 SWOT Analysis Strengths 1. Opportunities 1. marketing & distribution for increasing width & depth of operations. High overhead costs leading to higher price of products for eastern regions.) 4. Best practice sharing with Global Wires International units on process improvements. 5. Entry into high end technology products (such as OHT wire. R&D. More than 50 years of experience in the industry. Leveraging Tata Steel’s strengths in technology. A very good organizational setup with experienced and well qualified employees. 5. 4. (LSSL) Lanka Special Steels Limited. Anticipated stricter environment norms. Increasing intensity of competition due to easy availability of quality RM to other players.LSSL is committed to improve its business processes. Competition is catching up in technology. Unorganized sector with tax evasion (especially in wire products). 5.2. It also plans to get into downstream products like barbed wires. Lanka SSL is the sole manufacturer of GI wires in Sri Lanka and caters to the commercial galvanized wires market for end users like barbed wires. Nimble footed localized competition which replicates WD’s product/process offerings. 3. learn and adopt business practices from The Tata Steel Group and instill and practice the Group’s culture of safety.6mm to 4. The Company enjoys a market leadership position in the segments that it serves and its future plans include getting into value added wires of medium and heavy coating. Retention of talent & tacit knowledge.3 LANKA SPECIAL STEELS LTD. located in Sri Lanka is part of Tata Steel’s Global Wires Business.WORKING CAPITAL MANAGEMENT 2011 Threats 1. It was incorporated in November 2003 out of Tata Steel’s first overseas acquisition.100 gms. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . 4.15 - . 1. As part of Global Wires . wire meshes and chain links. 2. 6.0mm in thickness and zinc coating of 40 . LSSL’s current product mix of GI wires range from 1. 16 - .000 tonnes of wire products annually. The Company is also in the process for BIS (India) certification. Domestically it has been supplying to a number of bridge SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . DCL (Dubai).WORKING CAPITAL MANAGEMENT 2011 Lanka SSL is well poised to reap the benefits of the expected economic growth in Sri Lanka and. Established in 1992. Internationally it has supplied wires for the Redevelopment of Eden Park Stadium (New Zealand). the company became a part of the Tata Steel family as a NatSteel Asia subsidiary company in 2005. high-rise buildings. WJMP caters to the customers in the infrastructure construction segments of municipal projects. highways. PSI Homologation (Israel) and CQC and CNAS (China). LNG terminals and nuclear power stations. Kallang Leisure Park (Singapore) and LRT project (Dubai). It has also been recognized by ISO9000 (Quality System). Pre-stressed Concrete Wires and Pre-stressed Concrete Bars. 1. will be in a position to consolidate its market share in Sri Lanka and significantly contribute to the Global Wires Business.4 WUXI JINYANG METAL PRODUCTS (WJMP) Wuxi Jinyang Metal Products (WJMP) is a proud member of the Global Wires Business of the Tata Steel Group. Bellagio Hotel and Marriott Grand Chateau Hotel (USA). ACRS (Australia). The product repertoire at WJMP consists of Pre-stressed Concrete Strands. The Company prides itself on its quality practices and is recognized by International Quality certification bodies like CARES (UK). WJMP has been involved in a number of prestigious projects in China as well as internationally.2. tunnels. ISO 14001 (Environment system) and JIS (Japan). TUV (Germany). overpass and bridges. therefore. WJMP currently has a turnover of RMB 574 million and employs 285 people at its premises in Wuxi. in the Jiangsu province in China. the Company has a total capacity to manufacture 120. Situated in Wuxi. The company is a leading exporter out of China with products being exported to more than 20 countries across five continents. Located on a 25acre site in Rayong. Ltd. pre-stressed concrete wires. hard drawn wires and welded wire meshes and distributes these quality products throughout Europe. Its sophisticated wire manufacturing technology allows SIW to create high-quality steel wire products for a large customer base. This year.000 metric tonnes. The Company has also trained its employees on Daily Management practices this year and is in the process of implementing the model.2. by appointing an ethics counselor and initiating ethics trainings. Thailand with an annual production of 200. The Company began on the Safety Excellence journey earlier this year. the Company concentrated on the domestic market to sustain sales performance. LTD. cold drawn wires. WJMP has also progressively adopted the Tata Business Excellence Model and has applied for the JNT assessment in the year 2010. Oceania. SIW products are manufactured in accordance with international standards and are tested and approved by international accreditation institutes and laboratories. due to the slowdown in the export demand. Siam Industrial Wire is a vital strand in the overall strength of many construction masterworks. The Company has actively imbibed the Tata Code of Conduct in its functioning. SIW combines strength and skill leading to creation of high standards that have been recognized by leading international quality accreditation agencies. Africa and Asia. SIW is one of Asia’s largest manufacturers of pre-stressed concrete products and is a member of both NatSteel Holdings and The Tata Steel Group. (SIW) is today a part of Tata Steel Global Wires Business and one of the world’s leading manufacturers of steel wire. SIW manufactures pre-stressed concrete stands. The Siam Industrial Wire Co. WJMP has initiated and implemented numerous systems and processes to integrate itself with the Tata Steel Group. Middle East. All of its products can be manufactured in special grade production to meet customer’s specifications. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . (SIW) Established in 1974.5 SIAM INDUSTRIAL WIRE CO.17 - .WORKING CAPITAL MANAGEMENT 2011 and highway projects throughout China. America. 1. The Company (JEMCO) produces iron & steel rolls for Integrated Steel Plants and Engineering Castings for Steel Plants. being established in 1939 in collaboration with Belgium (SAFAK). The wire mill has recently been upgraded with a galvanizing line having an annual capacity of 54.2.WORKING CAPITAL MANAGEMENT 2011 1. The Indian Steel & Wire Products Limited (ISWP). Jamshedpur is one of the first Wire Drawing Plants in India. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . & Machine Manufacturing Company (JEMCO). ISWP. ISWP has two Units – a Wire Unit and a Steel Roll Manufacturing Unit named Jamshedpur Engg.000 MT. Power Plants etc. JEMCO is a Division of ISWP and the pioneer roll foundry in the Indian subcontinent. Modern Roll Foundry. accredited with ISO 9001-2000 Certification is continuously implementing other related activities to improve customer satisfaction. (ISWP) Established in 1920 by a German Technocrat.18 - .6 INDIAN STEEL & WIRE PRODUCTS LTD. The Plant at present has an installed annual capacity of 4500 tonnes. the Automobile Industry. It is equipped with suitable Melting Furnaces. The Wire Unit comprises of Wire Rod Mill and Wire Mill. sophisticated Machine Shop and a well-equipped Laboratory. and inventories. in managing the firm’s net working capital we are concerned with managing the firm’s liquidity. has come to mean more than simply managing the firm’s investment in current assets. Net working capital refers to the difference in the firm’s current assets and its current liabilities. 2. accounts receivables. Managing the firm’s use of short-term or current liabilities. however.19 - . marketable securities.1 WORKING CAPITAL Working Capital is defined as the firm’s investment in current assets. INTRODUCTION TO WORKING CAPITAL MANAGEMENT 2. This entails considering two related processes: 1.WORKING CAPITAL MANAGEMENT 2011 2. Current assets are comprised of all the assets that the firm can convert into cash within the year. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Managing the firm’s working capital. Thus. Managing the firm’s investment. including cash. Another aspect of gross working capital points out the need of arranging funds to finance the current assets. the goal of working capital management is to manage SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The firm thus finds it can reduce its risk if illiquidity only by reducing its overall returns on invested funds. These two aspects will help in remaining away from the two danger points . The gross working capital concept focuses attention on two aspects of current assets management. therefore. In other words. To understand working capital management better we should have basic knowledge about the various aspects of working capital.20 - . The net working capital helps in comparing the liquidity of the same firm over time. they should not be allowed to lie ideal but should be put to some effective use. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. For purpose of the working capital management. and vice versa. firstly optimum investment in current assets and secondly in financing the current assets. since such assets earn little or no return. working capital can be said to measure the liquidity of the firm.WORKING CAPITAL MANAGEMENT 2011 As a means of increasing its liquidity. Such an action involves a tradeoff however. Net working capital: The term net working capital refers to the difference between current assets and current liabilities. To start with. there are two concepts of working capital: Gross working capital New working capital Gross working capital: Gross working capital which is also sample known as working capital refers to the firm’s investment in current assets. No working capital can be positive as well as negative. the firm may choose to invest additional funds in cash and/or marketable securities. So there’s a decrease in profits. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason on the arrangement should be made quickly and similarly if some surpluses are available.excessive or inadequate investment in current assets. long-term debt. Temporary sources of financing consist of current liabilities. and common equity. In this case the firm would have excess liquidity.WORKING CAPITAL MANAGEMENT 2011 the current assets and liabilities in such a way that an acceptable level of net working capital is maintained Hedging Principle Hedging principle involves matching the cash flow generating characteristics of an asset with the maturity of the source of financing used to finance its acquisition. and when that time has passed. Obtaining the needed funds from a long term source (longer than one year) would mean that the firm would still have funds after the inventories they helped finance. had been sold. Funds are needed for a limited period of time. Permanent sources of financing include intermediate-term loans. Spontaneous sources of financing consist of trade credit and other accounts payable that arise spontaneously in the firm’s day to day operations. The notion of maturity matching in the hedging principle can be most easily understood when we think in terms of the distinction between permanent and temporary investments in assets as opposed to the more traditional fixed and current asset categories. Temporary investments are comprised of current assets that will be liquidated and not replaced within the current year. Thus. Short-term notes payable constitute the most common example of a temporary source of financing. the cash needed to repay the loan will be generated by the sale of the extra inventory items. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . A permanent investment in an asset is one that the firm expects to hold for a period longer than one year. preferred stock. The rationale behind this rule is straightforward. some part of the firm’s current assets is permanent and the remainder is temporary.21 - . which it either holds in cash or invests in lowyield marketable securities until the seasonal increase in inventories occurs again and the funds are needed. textile or such other industries the ratio tends to be higher than the service industries like technologies and finance industry. or at bank. In between there are various activities undergone like conversion process.22 - . Such a type of policy aiming at higher profitability and lower liquidity is known as conservative policy. 2. trade debtors. it means that the company has huge current assets like cash and cash equivalents in hand. it also has conversion period and finished goods are also stored whereas the service organization does have any such requirements. in fact some part of the company’s current liabilities are in the form of investments which yields high profits. Higher current ratio of the company signifies the inefficiency of the organization in managing its working capital and requires improvements in it.2 OPERATING CYCLE The operating cycle is a cycle that starts with the purchase of raw materials and is completed with the collection of cash from debtors. For a manufacturing industry like steel. It is for the reason that the manufacturing industries should store the raw material. storage of finished goods inventory sales of finished goods on both cash SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The normal ideal current ratio is defined to 2:1 but this rule does hold true for all organizations and differs from one organization to the other organization. cash and debtors and it signifies that current liabilities of the company is able to finance all the current assets and there is no requirement of any short term borrowings. inventories etc. and not utilizing it effectively by investing these assets thus loosing the opportunity of the company to make higher profits. It is the efficiency of the company that it is able to manage with low level of inventories.WORKING CAPITAL MANAGEMENT 2011 Working Capital Policy On analyzing a balance sheet of a company and finding that it has a current ratio (the ratio of current asses to current liabilities) of 3 or 4. then it may not always be a negative sign for the company. On the other hand if the company has a negative working capital. 23 - . The main sources of cash are Accounts Payables (creditors).WORKING CAPITAL MANAGEMENT 2011 and credit and collection of cash from debtors. the need for working capital would be more. Firms grant credit to facilitate sales. Thus if this cycle involves a longer period. finished goods get converted into accounts receivable (trade debtors) SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .1 INTRODUCTION While business firms would like to sell on cash. CREDIT MANAGEMENT 3. When goods are sold on credit. It is valuable to customers as it augments their resourced – it is particularly appealing to those customers who cannot borrow from other sources or find it very expensive or inconvenient. The credit period extended by business firms usually ranges from 15 days to 60 days. the pressure of competition and the force of custom persuade them to sell on credit. There are two elements in business cycle that absorb cash – Inventory (stocks and work-inprogress) and Accounts Receivables (debtors). 3. WORKING CAPITAL MANAGEMENT 2011 in the books of the seller. In the books of the buyer, the obligation arising from credit purchase is represented as accounts payable (trade creditors). A firm’s investment in accounts receivable depends on how much it sells on credit and how much it takes to collect receivables. Terms of Payment Terms of payment vary widely in practice. At one end, if the seller has financial sinews it may extend liberal credit to the buyer till it converts goods bought into cash. At the other end, the buyer may pay cash in advance to the seller and finance the entire trade cycle. Most commonly, however, some in-between arrangement is chosen wherein the trade cycle is financed partly by the seller, partly by the buyer, and partly by some financial intermediary. Cash Terms: When goods are sold on cash terms, the payment is received either before the goods are shipped (cash in advance) or when the goods are delivered (cash on delivery). Cash in advance is generally insisted upon when the goods are made to order. Cash on delivery is often demanded by the seller if it is in a strong bargaining position and /or the customer is perceived to be risky. Open Account: Credit sales are generally on open account. This means that the seller first ships the goods and then sends the invoice. The credit terms are stated in the invoice which is acknowledged by the buyer. There is no formal acknowledgment of indebtedness by the buyer. Consignment: When goods are sent on consignment, they are merely shipped but not sold to the consignee. The consignee acts as the agent of the seller. The title of the goods is retained by the seller till they are sold by the consignee to a third party. Bill of Exchange: Whether goods are shipped on open account or consignment, the seller does not have strong evidence of the buyer’s obligation. A draft represents an unconditional order issued by the seller asking the buyer to pay on demand (demand draft) or at a certain time in the future date (time draft), the amount specified on it. It is typically accompanied by shipping documents that are delivered to the drawee when he pays or accepts the draft. When the drawee accepts a time draft, it becomes a trade acceptance. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 24 - WORKING CAPITAL MANAGEMENT 2011 Letter of Credit: Commonly used in international trade, the letter of credit is now used in domestic trade as well. A letter of credit, or L/C, is issued by a bank on behalf of its customer (buyer) to the seller. As per the document, the bank agrees to honor drafts drawn on it for the supplies made to the customer if the seller fulfills the conditions laid down in the L/C. Need for Analysis: All industrial and business people would normally prefer to sell their goods on cash basis. It is for the reason to avoid the default risk and the loss of interest on the blocked funds. Besides the liquidity of the company will also be high and productivity, profitability, prosperity and growth therewith. But such conditions cannot be possible in a normal course of business except in case of those monopoly companies whose products are in the buyers’ market they have to give some trade credit as per the prevailing market conditions, and policies adopted by their competitors to stay for different periods generally ranging from 15 days to 60 days. As described earlier, a large proportion of the current assets is in the form of inventories and debtors. Thus because of their large proportion, any changes in the level will affect the profitability of the company. An increase in debtors, i.e., additional extensions of the trade credit will not only result in higher sales but also requires additional financing which subsequently increases the cost of such financing. Apart from the cost of financing, the cost of the credit investigation, collection efforts and the occurrence of the bad debts will also increase. 3.2 IMPORTANT TERMS Credit Policy The size of the investment in accounts receivables is determined by many factors like the level of sales, percentage of credit sales to total sales, credit policies and collection policies etc. the nature of the business tends to determine the proportion of credit sales. The accounts SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 25 - WORKING CAPITAL MANAGEMENT 2011 receivable cycle begins with the company’s decision to extend credit and ends when settlement is received in payment for the goods and/or services rendered. The effective management of the credit function can maximize sales, which directly can affect a company’s bottom line, while the skilful collection of accounts receivable can lower the company’s cost of financing. The important dimensions of a firm’s credit policy are: Credit quality standards Credit period Cash discount Collection effort Credit Quality Standards: Credit quality standards have been incorporated to control the receivable risk by determining the possibility that a given customer will pay slowly or not at all. The standards determine the minimum financial strength required for a customer to be an acceptable credit purchaser. Some factors used in determining customer credit potential can be quantified to determine a likelihood of default. The following are some of the standards: Capacity: Measures the customer’s ability to pay obligations when due, and is based on the buyer’s payment record. Ability to pay may be quantified by calculating the quick and current ratios, and the firm’s net working capital. Capital: Represents the long-term financial means available if additional liquidity is required. The debt/asset ratio is considered because, by its nature, it is the relationship between what the customer owes and owns. Condition: Refers to general economic tendencies and estimates, specific industry, political and technological conditions that may affect the customer’s ability to pay its debts. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 26 - WORKING CAPITAL MANAGEMENT 2011 Character: Refers to the buyer’s soundness to pay the owing amount. This is a subjective judgment and may involve a visit to the customer’s place of business in order to have a better opportunity to appraise the company. In general, liberal credit standards tend to push sales by attracting more customers. This is however accompanied by a higher incidence of bad debt loss, a larger investment in receivables and a higher cost of collection. On the other hand, stiff credit standards have opposite effects. They tend to depress sasles, reduce the incidence of bad debt loss, decrese the investment in receivables, and lower the cost of collection. Credit Period: The credit period is the length of time credit is granted from the invoice date to due date, usually expressed in days. It has a direct impact on the cost of financing receivables and also on collection risk. The credit period extended by the business firms usually ranges from 15 to 60 days. Credit period determines a firm’s investment in accounts receivables. Lengthening the period of credit pushes sales by inducing existing customers to purchase more and attracting additional customers. This is however accompanied by a larger investment in debtors and a higher incidence of bad debt loss. Shortening the credit period would however tend to lower sales, decrease investment in debtors and reduce the incidence of bad debt loss. Cash Discount: Firms generally offer cash discounts to induce customers to make prompt payments. The percentage discount and the period during which it is available are reflected in credit terms. Liberalizing the cash discount policy may mean that the discount percentage is increased and/or the discount period is increased. Such an action tends to enhance sales, reduce the average collection period and increase the cost of discount. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page - 27 - A relaxed program on the other hand would push sales up. A rigorous collection program tends to decrease the sales. Collection costs also increases as the quality of customer. like the probability of default increases with the extension of credit to lower quality customers. Credit ratings are calculated from financial history. Credit Rating System A credit rating system estimates the credit worthiness of an individual.28 - . current assets and liabilities of a firm. Default costs vary directly with the quality of the customer. it becomes more important to identity which of the possibility new customers would be a poor risk and so more time is spent in investigating the lower quality customers. It is an evaluation made of a borrower’s overall credit history. reduce bad debts percentage and increase the collection expense. Thus.WORKING CAPITAL MANAGEMENT 2011 Collection Effort: The collection program of the firm. The key to maintaining control over collection of accounts receivable is that the probability of default increases over the age of account. Managing Credit Risks A very important decision involves determining the type of customer who can qualify for trade credit. In determining whether or not to grant credit evaluation of the credit worthiness of both the individual and the company is very important. In order to reduce the defaults of the borrowers proper assessment of the financial position of the borrower is to be made. lengthen the average collection period. or a corporation. shorten the average collection period. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The following are some of the methods to determine the credit worthiness of a borrower. aimed at timely collection of receivables. increase the bad debt percentage and perhaps reduce the collection expense. There are several costs associated with extending of credit to lower quality customers. Typically. a credit rating tells a lender or an investor the probability of the debtor being able to pay back a loan. Credit Risks Assessments (CRA) Model: The various factors which go for appraising credit risks have been broadly classified under three main heads: Financial Risks Industrial Risks Managerial Risks Financial Risk Assessment: Quantitative Assessment SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . as revealed by their past performance and the prospects and potentials of the borrowers. while in the first stage the risk rating has to be compiled.WORKING CAPITAL MANAGEMENT 2011 A poor credit rating indicates a high risk of defaulting on a loan. based upon the range of credit worthiness and financial strength and stability. repayment capacity. and thus leads to high interest rates or the refusal of a loan by the creditor. Earlier. As per this system. banks and other financial institutions based upon certain objective parameters. it was found that it was not serving the full purpose of assessing and managing credit risks on all the related parameters. effectiveness and efficiency of management. Credit Risk Assessment (CRA) System: In order to take into account all relevant factors and parameters into account this system was introduced. It did not take sufficient care for assessment and management of credit risks like profitability.29 - . an assessment has to be made on the industry and management factors and a judgmental scoring has to be given. During the course of the application of CRS. at the second stage of the credit process. credit rating system used by many companies . scientific scoring pattern. This system was to find an estimate of the amount of credit that can be extended to a company or person without undue risk. On the basis of the figures of the various ratios arrived at. intra-firm and inter-firm comparisons are to be made. Quantitative Parameters: Under this six financial ratios may be analyzed. The six ratios are Current ratio Debt/Equity ratio (Inventory + Accounts receivable)/Sales PBDIT/Interest PAT/Sales ROCE Then the second step is to calculate the below four ratios and should be compared for the past period based upon the figures latest available in the company. Current ratio Debt/Equity ratio SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .30 - . on the basis of latest financial results. The standard measures are Liquidity ratios Profitability ratios Gearing ratios Turnover ratios While analyzing the ratios both.WORKING CAPITAL MANAGEMENT 2011 Qualitative Assessment Quantitative Assessment: The quantitative assessment comprises the appraisal of the financial strength of the company. specific scores are assigned to each of the ratios. Then we should allot specific weightage to each of these six ratios depending upon the degree of the importance and ramifications of each ratio. depending upon the specific scoring rate. competence and level of commitment Perception in the capital market The risk could be computed by assigning a score to the above parameters and calculating the overall score. The factors are as follows: Accounting policies Policy and provision of bad debts Arrears of depreciation Contingent liabilities and claims Auditor’s remarks from the annual reports Industrial Risks: Industry risk can be broadly classified as under: Market competition Cyclicity of Industry Regulatory risk Management Risks: The various sets of parameters that can be gainfully used to assess the management risk have been listed below: Integrity and honesty Track record Organizational structure and system expertise. comparison should be made with the overall industrial performance. Qualitative Assessment: Besides quantitative assessment certain qualitative factors are also assessed and analyzed. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .WORKING CAPITAL MANAGEMENT 2011 PAT/Sales (Inventory + Accounts receivables)/Sales After comparing the past data.31 - . 0 – 1.C. The required ratios are Current ratio Acid test ratio R.25 50 – 90% 3 – 10% 55 – 85 days 45 – 60 days High Risk Under 1. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .O.75 Over 90% Under 3% Over 85 days Over 60 days Considering all the above ratios decisions can be made on the financial strength of the company.WORKING CAPITAL MANAGEMENT 2011 Credit Assessment: Another way of analyzing accounts is only to calculate ratios.75 – 1.5 0. we need to fully understand what the relevance of each individual ratio: Particulars Current Ratio Acid Test Debt/Equity Profit/Sales Debtor Days Sales Creditors Days Sales Low Risk Over 1.E.32 - .5 Over 1.0 Under 0.25 Under 50% Over 10% Under 55 days Under 45 days Average Risk 1. Debt/Equity ratio Profit margin Debtors sales outstanding Creditors sales outstanding If we use ratios in the assessment of our customers. Ratios give a set of figures to match against industry and company standards. This score uses statistical techniques to predict a company’s probability of failure using the following variables from a company’s financial statements. profitability.6 Page . The ratios are classified into five standard categories.3 0.33 - . solvency.WORKING CAPITAL MANAGEMENT 2011 MDA (Multiple Discriminant Analysis) – The Z score Model: Z – score model is a statistical technique evaluating the appropriate importance to be given to various parameters used in rating applicant.999 0. few ratios are used and weights are given to each ratio according to the importance and relevance in the businesses. This technique is used to identify businesses that might go bankrupt. Z-Test: The Edward Altman Z score: This method uses the following combination of a set of 5 financial ratios. for example. including liquidity. leverage. It is used primarily to classify and make predictions in problems where the dependent variable appears in qualitative form. In this study. activity. The items to that are required from the firms’ balance sheet are as follows: Earnings before Interest & Taxes (EBIT) Total assets Net sales Total liabilities Current assets Current liabilities Retained earnings The five financial ratios and their respective weights to calculate the Z – score are as follows: Ratio EBIT/Total Assets Net Sales/Total Assets Market Value of Equity/Total Liabilities SUMMER PROJECT AT TATA STEEL WIRE DIVISION Weightage 3. bankrupt or non bankrupt. dividends to the preference share holders and then any remaining amount is for the equity share holders. while liabilities include both the current and long term. This is done with the intention of further growth of the company or due to lack of cash available to distribute SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The market value is the actual worth of the firm discounting all the factors affecting the firm. It can also be sometimes called as intrinsic value of the firm.4 EBIT/Total Assets: This ratio measures operating efficiency leaving apart the tax and other factors. both preferred and common. Net Sales/Total Assets: This ratio finds out that in a particular period how many times the assets are turned over. This ratio explains what proportion of total assets is employed in the working capital of a company. Retained Earnings/Total Assets: After subtracting the manufacturing. But.2 1. On such profits the company pays taxes. These equity earnings are not totally distributed to the equity share holders. It is otherwise known as capital-turnover ratio. It is a standard financial ratio illustrating the sales generating ability of the firm’s assets. Working Capital/Total Assets: Working capital is defined as the difference between current assets and current liabilities. but some part of these earnings are retained in the firm in order to reinvest into the firm.34 - . The debt equity ratio explains the financial leverage of a firm taking only book values into consideration. This ratio is a measure of a true productivity of a firm’s assets. It is a measure of the net liquid assets of the company to the total capitalization. The measure shows how much the firm’s assets can decline in value before the liabilities exceed the assets and the firm becomes insolvent. Market Value of Equity/Total Liabilities: Equity is measured by the combined value of all shares of stock.WORKING CAPITAL MANAGEMENT 2011 Working Capital/Total Assets Retained Earnings/Total Assets 1. selling & administration. and other financing expenses from the revenues of a company for a particular period. we arrive at the profits for the company. the market values may not be the same. It recognizes operating earnings as being important to long-term viability. the company is safe. B.2 + E x 1. this ratio calculates that what proportion of the total assets is retained in the firm for further investment.80 There is a very high probability of financial embarrassment. Those firms with high retained earnings have financed their assets through the retention of profits and not utilized much of debt capital. 97% of the firms that did not go to bankrupt had a Z score above 2.4 Where A. It was found that 94% had Z scores of less than 2.7. Below 1. Z Score = A x 3. This is useful for valuation of the financial soundness of a company and based on such variations can be taken to offer credit to such companies. These retained earnings when reinvested should lead to some growth of the company. This is the range where one should be cautious. E are the results of five ratios calculated. There are several advantages of credit scoring technique like it is less costly and easy to implement. It is a measurement of the leverage of a firm. Conclusion: The Z score model is the most appropriate technique used in credit rating an individual of a company. The interpretation of Z score: Z SCORE Above 3.7 and only 3% had a Z-score below 2.0 Between 2.35 - . C.99 Between 1.WORKING CAPITAL MANAGEMENT 2011 dividends to the share holders. On the other hand.7 INTERPRETATION On the basis of financial figures. Thus.999 + C x 0. The above ratios calculated are then multiplied by their weights and the results are added together as follows. D.7 & 2. and also the SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .7.7 one year prior to bankruptcy and only 6% had scores above 2. This is a range where there are good chances for the company going bankrupt within 2 years of operations from the date on which the financial figures were given.6 + D x 1.3 + B x 0.8 & 2. Determining the credit worthiness of an individual or a company for granting goods on credit the Z-score model is sufficient. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .36 - .WORKING CAPITAL MANAGEMENT 2011 advantages of credit scorer needs a little training with simple calculations can easily spot those credit risk that needs more attention before extending credit to them. While formulating the credit policies. the quantum and the period of credit would vary party wise depending on the credit worthiness of an individual. It is generally calculated by dividing sales by inventory. the better it is. Inventory Turnover Ratio: It shows how many times a company’s inventory is sold and replaced over a period. Individual inventories should be looked at to find areas where the inventory.WORKING CAPITAL MANAGEMENT 2011 4. a more realistic form of liquidity ratio called the quick ratio is obtained. so that only quick assets are left. A rupee cash or bank balance is more liquid than a rupee inventory. It is obtained by subtracting the inventory from the current assets. ANALYSIS OF WORKING CAPITAL 4. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . This ratio calculates the average time that inventory is held.1 ANALYZING THE FINANCIAL RATIOS Current Ratio & Quick Ratio: The current ratio is an indication of a company’s ability to meet its short-term debt obligation. The higher the ratio. Inventory Holding Period: The average inventory period is also referred to as Days Inventory and Inventory Holding Period. can be reduced.37 - . In simple words. usually a year. and inventory holding period. the more liquid the company is. If current liabilities exceed current assets. To overcome this. it may also be calculated by dividing COGS by average inventory. Greater the inventory turnover ratio value. However. it refers to the ability of a firm to meet its obligations in short-term. Current ratio is equal to current assets divided by current liabilities. then the company may have problems meeting its short term obligations. The current ratio is based on the assumption that all the constituent items of current assets are homogeneous in respect to liquidity. But in practice its not true. Moreover. 4. on the account of ever increasing competition. in terms of receivables.1 GLOBAL WIRES INDIA The various significant financial ratios for Global Wires India are shown in the following table: Table 4.97 0.5 mark which the firm aims at.29 21.1 Global Wires India March '11 Current Ratio Quick Ratio Inventory Turnover Ratio Inventory Holding Period (days) Debtor's Turnover Ratio Average Collection Period (days) 1. So.07 21. the Global Wires Business India is a profit centre for Tata Steel Ltd.51 17.WORKING CAPITAL MANAGEMENT 2011 Debtor’s Turnover Ratio: Debtors turnover ratio or accounts receivable turnover ratio indicates the velocity of debt collection of a firm.41 8.41 Analysis: The current ratio has increased to a very good level as compared to the last fiscal year.11 43. The quick ratio has also increased but it is still at very low levels showing the large dependence on inventories and receivables for the financing of working capital. which is quite common in a manufacturing firm.38 - . all the proceeds from sales and profits are not kept as cash in bank by the SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .38 0. But it’s still short of the 1.38 40.39 17.20 9.1. In simple words it indicates the number of times average debtors (receivable) are turned over during a year.08 March '10 0. from its customers and clients. Average Collection Period (days): It is defined as the approximate amount of time that it takes for a business to receive payments owed. 58 54.01 7.11 51.47 14.2 Lanka Special Steel Ltd (LSSL) The significant financial ratios for LSSL are given in the following table: Table 4. 4.50 1. also illustrated by reduction in inventory holding period nearly 3 days.1.2 LSSL Current Ratio Quick Ratio Inventory Turnover Ratio Inventory Holding Period (days) Debtors Turnover Ratio Average Collection Period (days) March '11 1. The inventory turnover ratio has decreased marginally and also the inventory holding period has increased marginally. This is not a very good sign as this shows that debtors are turned over less frequently and more time is being taken in collecting the receivables from debtors. Inventory turnover ratio has increased which illustrates that there is better inventory management. It’s transferred to the Tata Steel’s accounts.83 11.39 - . this shows that the firm has enough funds for financing its current obligations and there are no issues with the liquidity. So. This has been due to the larger inventory levels kept by the firm during FY2011 as compared to FY2010.91 March '10 1.61 6. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .24 0. This further explains the low levels of quick ratio for the firm. Also the quick ratio is slightly above 1.68 31.33 24.5 which is a very good value. The debtor’s turnover ratio has decreased and the average collection period has increased over the same period.47 Analysis: The current ratio has increased to reach 1.WORKING CAPITAL MANAGEMENT 2011 firm. 93 Mar ‘10 11.19 9.3 SIW Mar ‘11 Current Ratio Quick Ratio Inventory Turnover Ratio Inventory Holding Days Debtors Turnover Ratio Average Collection Period (days) 5. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .12 40. but only marginally. Also the quick ratio has nearly halved.40 - . the average collection period has also increased by more than 3 days which should be a cause for concern.79 Analysis: The current ratio for SIW in Mar’10 was extremely high. There can be a slight concern here. The firm has kept a large amount of cash & bank balances in FY11.03 40. There’s not much change in the inventory turnover ratio and the inventory holding days.02 8.06 9. The debtors turnover ratio has decreased. but again it’s still very much higher than the accepted levels. This shows that the debtors are turned over less frequently which points to a problem in receivables management at the firm and a large increase in the amount of sundry debtors.23 69.42 5. over 11. the current ratio has come down to 5 but it’s still at very large levels.01 5. 4. The average collection period has increased by more than 1 day.WORKING CAPITAL MANAGEMENT 2011 The debtors turnover ratio has however. For Mar ’11. although there’s a marginal increase in the inventory holding days.44 4.07 71.1. decreased. following the trends for current ratio.3 SIAM INDUSTRIAL WIRES (SIW) The significant financial rations for SIW are as follows: Table 4. As a result. the situation has got worse during the last one year.48 66.83 75.82 53.28 4. they have deteriorated further with a decrease in inventory holding days and an increase in inventory holding period.64 Current Ratio Quick Ratio Inventory Turnover Ratio Inventory Holding Days Debtors' Turnover Ratio Average Collection Period (days) Mar'10 2. The high values of inventory SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . and in fact.24 1.41 - . the debtor’s turnover ratio is very small and average collection period is pretty large.34 1.68 64.65 Analysis: The current ratio has increased slightly and the quick ratio has also increase.53 5. which is a little higher than acceptable level.1.63 5. which is assumed to be 2. In fact.WORKING CAPITAL MANAGEMENT 2011 4.4 WUXI JINYONG METAL PRODUCTS (WJMP) The various significant financial ratios for WJMP are shown in the following table: WJMP Mar '11 2.45 6.34 for March ’11. This shows a good amount of funds being tied up which can be otherwise used for investments. again pointing to the fact that a large amount of funds are tied up in debtors and a large amount of time is being taken in recovering the receivables from debtors. Also. The large accumulation in inventory is also visible in small value of inventory turnover ratio and a significantly larger value of inventory holding days. The current ratio is 2. 2.65 21.43 20.10 Global Wires India Mar '10 53.WORKING CAPITAL MANAGEMENT 2011 holding days and average collection period again point to the same fact.42% -0.58% +48.49 (0.26 89.77% +33.38% +74.39 15.1 GLOBAL WIRES INDIA The levels of inventories.42 - .00% +23.21) 48.63 21. 4.42 % change +57.66 133.59 (0. cash and bank balances and receivables are shown in the following table along with their percentage increase from 31st March’10 to 31st March’11.04 32. of substantial funds being tied up.94 63.78% +75.6 (in ` Crores) Global Wires India SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .86) 36. Table 4.5 (in ` Crores) Inventories Raw Material & Stores Inventory Finished & semi-finished/traded goods Cash and bank balances Receivables Sundry debtors Loans & Advances CURRENT ASSETS Mar '11 84.88 37.2 ANALYZING THE COMPONENTS OF WORKING CAPITAL 4.22 11.85% Table 4.46% +94. TSWD SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .00 (20. Thus. The inventory levels have increased by more than 57%.45) Net Increase 43.10 96.88 (2. there is a significant increase in current ratio but not much increase in quick ratio as compared to the current ratio.00 40. Thus.00 ` (in crores) 80. Although Cash and bank balances have increased by 75.42 91.94 Mar '10 89.00 60. the receivables have increased by more than 33%.77%.00 20.43 - .16 36. it is observed that there has been as increase in the levels of current assets by nearly 49%. the increase is insignificant because the net increase is marginal. Also.00) Inventories Cash and bank balances Receivables CURRENT ASSETS Mar '11 Mar '10 Fig 4.40 Working Capital Components 140.28 39.1 Analysis: By analyzing the components of the current assets as on 31 st March 2011 with the levels as on 31st March 2010.00 120.WORKING CAPITAL MANAGEMENT 2011 Mar '11 Current Assets Current Liabilities Net Working Capital 133. The biggest increase in significant terms has been in inventory levels.68 4.00 100. Also the share of receivables SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . it is seen that the share of inventories in current assets has increased from 59% to 63%. which is quite common in manufacturing firms.45 crores to ` 36. As a result there is a large increase in the working capital from March ’10 to March ’11.94 crores.44 - . The net working capital has increased from ` -2.2 Analysis: On studying the proportion of the elements of current assets. Receivables 37% 40% 63% 0% -1% 59% Fig 4.WORKING CAPITAL MANAGEMENT 2011 depends heavily on inventories for financing its working capital. There is also a small increase in current liabilities from March ’10 to March ’11. Proportion of the elements of current assets Current Assets (March '11) Inventory Cash & Bank Balances Receivables Current Assets (March '10) Inventories Cash & Bank Bal. Cash and bank balances are always maintained at near-zero levels. TSWD is now dependent heavily on inventories for making up their working capital. So. Thus.59 311.47 103. 4. So.83 127.45 - .77 451.2 LANKA SPECIAL STEELS LTD.31 31. RP financing.51 151.02 LSSL March '10 194. The levels of inventories.14 198.89 38.7 (in SLR millions) Inventory Sundry Debtors Loans & Advances Cash and Bank balances Current Assets Current Liabilities Net Working Capital March '11 147.53 300.73 385.WORKING CAPITAL MANAGEMENT 2011 has decreased from 40% to 37%.14 24. they need not keep a large amount of cash of bank balances. is done by various types of bank assisted financing techniques like channel financing. cash and bank balances and receivables are shown in the following table along with their percentage increase from 31st March 2010 to 31st March 2011.36 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .10 -3.26 % change -24.80 55. they do not keep any significant cash in bank.33 74.12 198. Table 4.2. OEM financing and Export financing using sundry debtors and inventories. This is due to the fact that TSWD is a profit-centre for Tata Steels. Whatever business purchases or spending they have to do.61 17.51 -19.32 74. by about 3.00 450.00 400.00 (in SLR millions) 350.46 - .00 150. This points to a shift in policy of LSSL of not keeping a large inventory and use more of sundry debtors to make up its working capital.00 300. The current assets have increased by nearly 17%. Hence. There has been a marginal decrease in the current liabilities. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Therefore. But there has been a substantial increase in the cash and bank balances element.WORKING CAPITAL MANAGEMENT 2011 Working Capital Components 500. overall there has been a net increase in the total current assets. and in fact. more than 55%. Also the loans and advances have decreased by nearly 20%.00 200. it has more than doubled its previous year’s levels.3 Analysis: There has been a significant decrease in the inventory levels from FY2010 to FY2011. Also sundry debtors have increased nearly more than 3 times.00 250.00 Inventory Sundry Debtors Loans & Cash and Advances Bank balances Current Assets Current Net Liabilities Working Capital March '11 March '10 Fig 4. the net working capital has increased.4%.00 50.00 100. more than 24%. it can be seen that whereas in FY2010.3 SIAM INDUSTRIAL WIRE Table 4. it contributed to only 33% in FY2011. Keeping such a large amount of cash and bank balances is not advisable for a firm. 4.8 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Also the contribution of loans and advances has decreased by 3%.4 Analysis: On analysis of the proportion of the various elements of current assets.WORKING CAPITAL MANAGEMENT 2011 Proportion of the elements of current assets Current Assets (March '11) Inventory Sundry Debtors Loans & Advances Cash and Bank balances Current Assets (March '10) Inventory Sundry Debtors Loans & Advances Cash and Bank balances 33% 44% 33% 50% 10% 16% 7% 7% Fig 4. unless they are planning some sort of expansion or acquisition. Also the contribution of sundry debtors has increased by nearly 9% to reach 16%. But there has been a substantial increase in the contribution of cash and bank balances.2. It rose up by nearly 9% to 44%.47 - . the inventory contributed for nearly 50% of the total current assets. 23 14.00 70. The levels of sundry debtors have decreased by nearly 32% during the same period.00 20.00 50.00 30. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .92 66.31 SIW Mar ‘10 15.00 )in US$ millions) 60.07 53.31US$ million.71 26.76 % Change +37. which was pretty low in March ’10 has increased to an extremely impressive levels of more than 66.00 10.47 81.04 38.32 3. to reach nearly 35US$ million. The cash & bank balances have increased by nearly 800%.00 80.82 57.WORKING CAPITAL MANAGEMENT 2011 (in US$ millions) Inventory Sundry Debtors Cash & Bank Balances Current Assets Current Liabilities Net Working Capital Mar ‘11 20.85% +803.96% Components of WC 90. current assets have also increased by nearly 42% and there has been a decrease in current liabilities by nearly 72%.22 3.48 - . taking into consideration the impressive level of current ratio.47% +42. The net working capital.32% -72.05 34.00 40.00 Inventory Sundry Debtors Cash and Bank balances Current Assets Current Net Working Liabilities Capital Mar '11 Mar '10 Fig 4.5 Analysis: There’s been an increase in the inventory levels by nearly 38% in March ‘11 as compared to the levels in March ’10.74% -31. As a result.02% +1664. The levels of the current assets are very good. Whereas. in 2010 a large amount of current assets was contributed to by sundry debtors (67%).6 Analysis: It can be seen that the proportion of inventory making up the current assets remains nearly the same.WORKING CAPITAL MANAGEMENT 2011 Proportion of the Elements of Current Assets Current Assets Mar '11 Inventory Sundry Debtors Cash and Bank balances Current Assets Mar'10 Inventory Sundry Debtors Cash and Bank balances 7% 26% 42% 26% 32% 67% Fig 4. in 2011 it contributed to only 32% of the current assets.49 - . The proportion SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . 07 11. 4.07% -1.85% +2.55 14.9 (in US$ million) Inventory Sundry Debtors Loans & Advances Cash & Bank Bal.94 17.25% -75. cash and bank balances and receivables are shown in the following table along with the percentage changes from 31st March 2010 to 31st March 2011. So. Current Assets Current Liabilities Net Working Capital Mar '11 9.WORKING CAPITAL MANAGEMENT 2011 of cash & bank balances increased from 7% to 42%.50 - .66 31.17% -8. there’s a large increase in cash reserves of the company as compared to the previous year.99 7.20 12.24 12. Table 4.79 4.02% SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .29 WJMP Mar'10 11.06 0.41% +71.2.03 4.99 30.47 % change -16.08 17.4 WUXI JINYANG METAL PRODUCTS The levels of inventories.21% -4. it can be seen that there is a decrease in inventory levels by nearly 17%.00 15. Whereas on month ending March ’10 it was more than 4 million US$.WORKING CAPITAL MANAGEMENT 2011 Working Capital Components 35. Also cash and bank balances have increased by more than 71%.00 5.00 30.00 Inventory Sundry Debtors Loans & Advances Cash & Bank Bal. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Loans & Advances has decreased drastically by more than 75%.00 10.7 Analysis: On studying the changes in various working capital components.00 0.25%. on 31st March ’11.51 - . There has been a decrease in current assets by nearly 4% and current liabilities by nearly 8% leading to a small decrease in the net working capital of the firm.00 20.00 (in US$ millions) 25. Sundry debtors have increased marginally by 2. Current Assets Current Liabilities Net Working Capital Mar '11 Mar'10 Fig 4. it was just under 1 million US$. The working capital has decreased marginally by a little over 1%. But on month ending March ’10. it accounted for 15% of the total assets. The share of loans and advances has decreasd from 13% to 3%.8 Anlaysis: The share of cash and bank balances towards making up of current assets has increased by 11%.3 ANALYZING THE TRENDS OF INVENTORIES & RECEIVABLES – GLOBAL WIRES INDIA 4. Current Assets Mar'10 Inventory Loans & Advances 15% Sundry Debtors Cash & Bank Bal. As on 31st March ’10.2. The share of inventory has decreased by about 4%.WORKING CAPITAL MANAGEMENT 2011 Current Assets Mar '11 Inventory Loans & Advances Sundry Debtors Cash & Bank Bal. The share of sundry debtors has increased by nearly 3% and it maintains its status of being the biggest contributor towards current assets.1 TRENDS FOR INVENTORIES SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .52 - . 4. it accounted for about 26% of the current assets. 26% 31% 35% 13% 3% 40% 37% Fig 4. But the sale normally decreases during monsoon period.WORKING CAPITAL MANAGEMENT 2011 In a manufacturing firm. and other macro and micro environmental factors. However. inventory forms a big chunk of current assets. if we study the trends of inventories for the last 2 years. The variation in gross sales in turn depends on the price of steel and speculation in its future prices which lead to people waiting to buy at times when the price comes down. The target for the levels of finished goods inventory are revised monthly taking into considerations the change in demand for the products. initiation of new projects. In case of Global Wires India. There are no seasonal products. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .53 - . the changes in the price of steel and other raw materials. WAC method is used for inventory evaluation. it can be seen that inventories account for nearly 55% to 63% of the current assets with finished goods inventory accounting for more than 45% of the current assets for the same period. especially those of GI wires. The deviation in the inventory levels is closely tied to the gross sales for the same period. The target levels of inventory are planned in the beginning of the fiscal year according to the past trends and the expected demand. the decrease is not substantial. and are tried to be maintained throughout the period. 00 20.00 50.54 - .00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2010 FY 2011 Fig 4.00 10.10 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .00 15.00 40.00 10.00 60.00 5.00 30.00 70.00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2010 FY 2011 Fig 4.WORKING CAPITAL MANAGEMENT 2011 Raw Materals & Stores Inventory 25.00 20.9 Finished Goods & Semi Finished Goods/Traded Goods 80. Earlier Zinc. hence the increase.00 70.00 20. the sales went up. there was much more volatility in inventory levels in FY 2010 and it varied according to the sales. Tata Steel Wire Division managed inventory much better as compared to the previous years when taking into consideration.00 50.00 30.00 10. was included in finished and semi finished goods inventory. the process of relocation from Borivali to Tarapur was at its final stages.11 Observations: In general. It is attributed to the grouping problem. But. During Oct 2010.00 80. Later the management decided to take it as a part of raw material inventory. the inventory came down and decrease in sales lead to accumulation of inventory. There is a sudden rise in raw material inventory levels from Feb ’10 onwards. In the FY 2011.55 - .00 60.WORKING CAPITAL MANAGEMENT 2011 Inventory 90. Whenever. it didn’t affect the production levels as other plants produced more to compensate for the decrease. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2010 FY 2011 Fig 4. the variation in its levels. which is used for coating of wires.00 40. This can be attributed to better inventory management by TSWD. especially the finished goods/unfinished goods inventory. This is not a good sign as the inventory turnover ratio has decreased and this points to the fact that substantial amount of funds are tied up in maintaining higher inventory levels than needed. As. it increased by 33% in the second half of the fiscal year as compared to the first half. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Analysis: During the FY2010.WORKING CAPITAL MANAGEMENT 2011 During the first half of the fiscal year. there are instances when the inventory gets accumulated.56 - . One significant reason for the higher inventory levels is the opening of new plant in Tarapur. especially the work-in-process inventory and is more than the required and budgeted levels. which otherwise could be utilized to increase profits. there was much more volatility in inventory levels as compared to the FY2011. This is due to the difference in the actual steel price and the price of the steel that was taken into account while preparation of budgeted levels. in fact. there was quite less variation in sales and hence not much variation in inventory levels was witnessed. However. the inventory levels in FY2011 were much higher as compared to FY2010. Even then the total inventory levels didn’t show much variation. The dip in sales as opposed to the levels expected lead to a much higher levels of inventory. There is some variation in the budgeted levels of raw material inventory and the actual levels. The sales picked up later in the year and. a new plant requires one and a half years for stabilization of its activities. Another reason is that the sales in 2010 were much better as the market was pretty good for the wires business. A big part of the sales would be in the form of credit given to customers resulting in sundry debtors.00 30. The trends for receivables for the last 2 years are shown.57 - .00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2010 FY 2011 Fig 4.2. The receivables comprise of sundry debtors and loans & advances given by the firm.2 TRENDS FOR RECEIVABLES The receivables form a significant portion of current assets for Global Wires India.00 60.00 10. As much as the firm would like to do its business in cash.00 50. it’s just not practical.12 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .00 20.WORKING CAPITAL MANAGEMENT 2011 4.00 40. Sundry Debtors 70. 00 FY 2010 40.58 - .00 25. Also the levels of receivables are lower than the previous year’s levels.00 20.00 60.00 10.14 Observations: For FY 2010.WORKING CAPITAL MANAGEMENT 2011 Loans & Advances 30.00 5. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .00 20.00 80.00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2011 Fig 4.13 Receivables 100.00 15. the receivables fluctuated a lot as compared to the levels in FY 2011.00 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY 2010 FY 2011 Fig 4. 3. due to lower sales. Gloster Cables DA Chauhan & Co. Ltd. were not able to lately. In Oct’11. There was a huge increase in the levels of sundry debtors in Oct and Nov for FY2010. 1. Similarly. Patel Spun Pipes Laxmi Steels Enercon (India) Pvt. Vallabh Vidyanagar Concrete Factory Oct ‘11 Enercon (India) Pvt. Ltd.WORKING CAPITAL MANAGEMENT 2011 The trends for loans and advances for FY2010 and FY2011 are nearly the same with not much variation. increase in the sundry debtors’ levels. features regularly on the list of customers having over dues for FY2011. there was another 11% increase in June and nearly 19% increase in Oct. In past they had paid their dues on time. but due to some problems. No. again there was an increase in over dues and outstanding leading to an increase. That was the time when the shifting of operations from the Borivali plant to the new plant in Tarapur was at its final stages which affected the operations and hence. 2. There is a close to 44% increase in sundry debtors’ levels in May’10 as compared to previous the previous month. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The reason for giving more credit to them even while not getting paid for the previous ones was their good history and relations with the firm and also the fear of losing a big customer to the competitors. 4. Jun ‘11 Enercon (India) Ltd. For Jun’11. Analysis: The main reason for the increase in debtors for May’11 was the comparatively lower level of sundry debtors in April. the reason was an increase in over dues and also the increase in outstanding for various firms.59 - . The major customers who were given more credit than the limit specified for them for the month of Jun’11 and Oct’11 were: S. Again. The levels of current ratio for SIW and WLMP are very impressive. WJMP’s inventory holding period and debtors collection period is very high which is not good SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .5 4 3 2 1 TISCO LSSL SIW WJMP 3 2.4 COMPARISON AMONGST GLOBAL WIRES ENTITIES The current ratio for Global Wires India is the lowest compared to other partners of Global Wires.WORKING CAPITAL MANAGEMENT 2011 4. the quick ratio for India operations is very small. primarily due to low levels of cash & bank balances kept by the firm because it being a profit centre for Tata Steel. quick ratio is very impressive for SIW and WJMP and extremely high for SIW. Similarly.5 TISCO LSSL SIW WJMP 0 Current Ratio Fig 4. India operations is the most efficient among the firms when it comes to inventory and debtors management.5 1 0.60 - . as compared to the other partners. 6 5 4.15 0 Quick Ratio The inventory holding period and average collection period for Global Wires India is the lowest in comparison to the other partners.5 2 1.5 4 3. The current ratio is too high for SIW. So. LSSL has a pretty low average collection period. it’s the loans & advances that makes up the biggest fraction of current assets and for WJMP. SIW keeps a high stock of cash & bank balances.16 Among the partners. very close to the levels of Global Wires India but their inventory holding period is high. Global Wires India keeps the highest stock of inventory as a fraction of current assets. For LSSL.61 - . SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Inventory Holding Days 70 60 50 Days 40 30 20 10 0 TISCO Days LSSL SIW WJMP Average Collection Period (days) 80 70 60 50 40 30 20 10 0 TISCO LSSL SIW WJMP Fig 4.WORKING CAPITAL MANAGEMENT 2011 sign for the firm and points towards a problem in inventory and debtors management and work needs to be done towards bringing this down. receivables makes up the largest portion of it. one fact being the lesser opportunities for investment in Thailand. nearly 60%. RP/OEM financing. it can be seen that TSWD keeps larger stock of inventories as compared to the other business entities of Global Wires. Global Wires India has a big fraction of inventory making up current assets. it makes up nearly 25. and export financing to provide for funds in case of cash requirements and doesn’t keep a big amount of cash in banks. For TSWD.5% of the current assets. But this is largely due to the fact that there’s negligible amount of cash & bank balances to form a SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . it was noticed that every entity had a different way of managing their working capital. For LSSL. it makes up only 35% of the current assets. The high proportion of inventories that make up the current assets for TSWD is quite opposite to the proportion that it makes up for other entities. Cash and bank balances were negligible. In case of WJMP.17 Analysis: While analyzing the proportion of the working capital components that make up the current assets for the four business entities of Global Wires for the month ending March ‘11. it accounts for 31. It can be concluded that Global Wires India and LSSL are the most efficient in working capital management. This is because TSWD uses channel financing. For SIW. a large proportion was made up by inventories – more than 63%.45% of the current assets. So.WORKING CAPITAL MANAGEMENT 2011 70 60 (percentages) 50 40 30 20 10 0 Inventory Cash & Bank Receivables Bal. Receivables comprised of more than 36% of the current assets. WJMP LSSL SIW TISCO Loans & Advances TISCO SIW LSSL WJMP Fig 4.62 - . an in depth understanding of the market. the perception of risk for each of them would be different. Hence. For this. Because the inventory is turned over very frequently. LSSL needs to work on better inventory management from bringing their inventory holding period down. which is hence shared by inventory and receivables. it should not be a big cause for concern. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . it is important that the exposure on Accounts Receivables is understood correctly and the risk is contained and minimized within the overall risk appetite of the business unit. 5. customer and the competitor would be essential to formulate and design an effective and agile credit policy which would minimize the risk without adversely affecting the business transaction. the steps to be followed in this regard to achieve the above objective have been explained under the following heads. WJMP’s inventory and debtors management is an area of concern with their values being too high when compared to other partners of Global Wires Business. 1) Assessment of Risk Appetite Each business unit is structurally different and is operating in different geographically locations. which not only leads to a greater holding costs but also loss of profits for the firm with funds being tied up in the inventories. SIW are keeping too much in current assets thereby. although it could be brought down to lower levels. decreasing their profits through investments.WORKING CAPITAL MANAGEMENT 2011 part of current assets. CREDIT POLICY AT GLOBAL WIRES INDIA With a view to have efficient working capital management.63 - . product. Hence. Following points help determine the overall risk appetite of the unit with regard to Working Capital. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Based on the market situation. depending on the business requirement. segment wise customer profile to be compiled. if there is any requirement of higher limit. the same needs to be allocated between Domestic and Export and further to be bifurcated amongst various products and customers.5:1. In case of competitive scenario. The same should be put up for approval of the management. limit of accounts receivable can be assessed without disturbing the overall current ratio.WORKING CAPITAL MANAGEMENT 2011 Current assets and current liability of the unit should be balanced. Annealed and Retail. current ratios lower than 2:1 may be considered based on judgment – but not below 1. the same should be carried out by reducing the exposure on inventory or other assets. each unit should ascertain the overall exposure on the Accounts Receivable. Credit requirement for the segment > product > customer needs to be firmed up based on prevailing Market conditions & credit being extended by the competitors. Based on the above. Following points are to be kept in mind for the above allocation: Long term strategy of domestic and export business as per 5 year plan along with Annual Business Plan to form the basis for allocation of exposure between Domestic & Export Markets. like Auto. Infrastructure.64 - . Ideally ratio of current assets and current liability may be kept 2:1. Power. 2) Allocation of Credit Exposure Once the overall credit limit for the unit is decided. deposits and advances are known. For products sold in different segments. like inventory. Accounts receivable is part of current assets and therefore once the level of other assets. Certificate from the bank o the credit worthiness of the customer may be obtained if any other means are not available. In case of Public & Private Ltd companies. A higher share of spend of the customer implies a strategic long term SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .65 - . Their financial are also not available. As payments are generally delayed by them adequate cost of credit for extended period should be factored into the sale. Government companies are generally considered as low risk and do not provide any security.WORKING CAPITAL MANAGEMENT 2011 3) Credit Appraisal Process a) Ascertain Customer Type The customer may fall under any of the following categories Government agency Group Company/Subsidiary Public Limited Company Private Limited Company Trader Pattern of appraisal would differ based on the type of the customer. Hence. credit is to be decided based on the assessment of the business manager. b) Analysis of Non-financial Information: Total purchase volume of the product and the share of purchase to be catered by us to be seen. credit assessment is not mandatory. Ensure legal compliance while drawing up the sale contract and any other related documents to enable legal assistance in the event of any default. For Group Companies/Subsidiaries. financials and other points as elaborated in the subsequent paragraph under Credit Management Process is to be followed. In the absence of reliable financial statements from small traders & sole proprietorship firms. Avenues to scrutinize the exposure are to be explored. credit can be extended to them depending upon the business requirement. supplier-customer relationship. relationship with our unit and management quality to be assessed encompassing: Technical sustainability of the organization.WORKING CAPITAL MANAGEMENT 2011 relationship with us which is a positive point in the credit assessment. It is essential to also compare the total market of the product vs the customer’s share in the market in order to differentiate between customers. compilation of financial data in the format enclosed as per annex II to be carried out to get an insight into the following areas: Growth in the business Increase in the profit Management of working capital Liquidity position and capacity to pay Solvency test Financial viability can be assessed from the following ratios: Structural Debt-equity ratio indicates the level of borrowing in comparison with the equity contribution. Parameters like Technical Leadership. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .66 - . Details of the promoters and the quality of management in meeting their commitments based on the past records Growth potential of the industry Growth potential of the customer Security available to cover the exposure c) Analysis of financial information: Based on the published annual reports of last 3 years. Asset turnover ratio shows the efficiency in utilization of Fixed Assets.WORKING CAPITAL MANAGEMENT 2011 Debt service coverage ratio (DSCR) is imperative in understanding the capacity of servicing debt of the organization. In addition to the above ratios. Liquidity Current ratio indicates management of working capital Quick ratio indicates the capacity of the company to meet its immediate commitments Receivable & inventory turnover ratios also reflect efficiency of the working capital management. Growth EBIDTA to Turn Over indicates the profitable growth of the company. ROIC indiacates the efficiency of capital utilization. a close scrutiny of the balance sheet to be done with regard to the contingent liabilities or any other qualifications of the statutory auditors.67 - . SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . Higher the ratio. Z score measures the overall financial solvency of the business. the safer it is to extend the credit to the company. Investors Dividend payout ratio indicates the surplus distributable profit the company had over the years. Solvency Corporate bankruptcy prediction can be done through Z score which is obtained by compiling the ratios as per annex II. better it is. Higher the ratio. PE ratio shows the perception of the investors for the company. Higher ratio indicates that the company has good image. Ensuring system controls to be put in place to stop invoicing beyond the approved credit limit.68 - . However. Any deviation should have prior approval of the appropriate authority. analyze and review at regular intervals the overdue and sticky account receivables. Board approval to be taken for the overall credit limit sanction and the compliance of the same to be reported to the board by each unit. Chief of Marketing & Sales and Finance Head on annual basis. this should be put up for review by each unit to EIC(GW) with a copy to FC – Wires. Based on the overall approval business head to decide sanction to the various segments. Head sales would then complete the allocation up to customer level. Report. customer wise/product wise credit proposals to be put up to EIC (GW) on quarterly basis for formal approval. India on a monthly basis.WORKING CAPITAL MANAGEMENT 2011 4) Approval Process The overall credit exposure with break – up between Domestic & Export sales to be sent for approval to EIC (Global wires) duly signed by Business Head. This would be the base for transation. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . 5) Credit Management On completion of the credit assessment and approval of the credit exposure is required to be managed by Credit Management Group (CMG) of each unit. Updating & maintaining customer wise sanctioned limits in the credit master. Therefore. WORKING CAPITAL MANAGEMENT 2011 Periodic assessment at customer level to be carried out to revalidate the credit limits extended. LC. insurance backed receivables purchase. The credit limits as per the credit policy and is framed for every year for different products and different segments. credit days 60 30 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . scrutiny of accounts receivables t be effected through financial products like bank guarantee. post dated cheques. credit days 120 60 Avg. Based on credit assessment and time to time guidelines issued by the group. For Domestic Sales 1) Institutional Sale (OE customers) AUTOMOTIVE SEGMENT Product MTB CTB Max. channel & OE financing etc.69 - . 70 - .Barbed & Chain Link Max.WORKING CAPITAL MANAGEMENT 2011 Spoke Spring Laid Clothing 30 60 45 15 30 45 INFRASTRUCTURE Products LRPC PC 3x3 Max. credit days 30 30 Avg. credit days 30 10 3 POWER & ANNEALED Products ACSR RCA FCA Ball Bearings MS Bright Annealed Max. credit days 30 45 45 45 0 Avg. credit days 90 60 15 Avg. credit days 30 30 3) Retail Sales (Channel Customers) SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . credit days 30 30 30 45 0 2) Institutional Sales (Channel Customers) GI SEGMENT Products TW 01 – Poultry TW 02 . 71 - . credit days 30 30 Avg. credit days 30 30 SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . credit days 90 90 90 60 Avg. credit days 4 4 For International Sales: 1) Institutional Sales (OE Customers) Products MTB CTB PC ACSR Max. credit days 60 30 10 30 2) Institutional Sales (Channel Customers) GI SEGMENT Products TW 01 – Poultry TW 02 . credit days 30 30 Avg.Barbed & Chain Link Max.WORKING CAPITAL MANAGEMENT 2011 Products HB Steel Wool Max. credit days 60 60 60 60 6.WORKING CAPITAL MANAGEMENT 2011 3) Retail Sales (Channel Customers) GI SEGMENT Products TW01 – Poultry TW02 – Barbed Wire & Chain Link TW03 – Redraw TW05 – Farming Max.72 - . credit days 90 90 90 90 OTHERS HB Steel Wool 30 30 30 30 Avg. RECEIVABLES MANAGEMENT AT GLOBAL WIRES INDIA The Receivables Management can be bifurcated into four components: Sales & Stock Transfers SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . A domestic sale is either done by institutional selling or through distributors.WORKING CAPITAL MANAGEMENT 2011 Collection Credit Control Debtors 1.1 Sales Sales may be of two types – domestic and export. Sales & Stock Transfers Domestic Sales Despatches Stock Transfers Export Fig 6. Export sales’ transactions are done with the help of LCs and collections takes place by discounting of invoices. The components of sales are: (i) Pricing SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .73 - . the price list may be revised. The amount of stock transferred is based on projection of sales in that region and various tax implications.74 - . Based on the sales order.WORKING CAPITAL MANAGEMENT 2011 The price list of the various products of the firm are finalized and updated on a monthly basis. rebate & discount. It is the main document in the sales transaction which denotes the details of the sales made to the customers. 2. (iv) Debit Note/Credit Note There are some occasions when the actual amount payable by the customer is different than the amount in the invoice due to various reasons for rejections. The reasons may be variation in price & quantity. (ii) Sales Order (SO) A sales order confirms the proposed sale transaction with the customer specifying various terms and conditions. compensation for quality. rejection of material. The price list needs to be approved by COMS & Chief (WD). So. Stock Transfers There are various stock points of the firm where stock gets transferred for subsequent sale to the regional customers of that stock point. the sales planning and execution is started. Collection SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . (iii) Invoicing It is sent to the customer along with the goods to be sold. So debit note/credit notes are generated to account for corrections. etc. Also in some extra ordinary situations. accuracy and completeness of SO is very important. (b) Discounting (i) OEM It stands for ‘Original Equipment Manufacturers. It is an arrangement between the bank. However.2 (a) CMS HDFC Module There’s a special arrangement of the firm with HDFC bank where in there are designated branches / collection boxes for immediate receipt of funds and to dispense with the delivering of cheques to the office. customer and the seller wherein money is drawn against debtor’s invoices.75 - . It provides a cost-effective way for profitable businesses to improve company’s cash flow.WORKING CAPITAL MANAGEMENT 2011 CMS HDFC OE/RP Discounting Collection Export LC/Bills RTGS Cheque deposit by customers Channel Finance Direct Fig 6. the company retains control over the sales invoices. In this method of financing bank makes payment SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . meaning that the seller will get paid by redeeming the letter of credit or presenting it in the bank within due date. (ii) Channel Financing Scheme SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . customer makes payments to the firm. The direct collection can be done by asking the customer to deposit a cheque or pay the required amount electronically. (iii) Letter of Credit (LC) A letter of credit is a document issued by a financial institution (bank0 which usually provides an irrevocable payment undertaking to a beneficiary against credit sales to debtors. On the due date. financing is the purchasing of receivables arising from deliveries of goods and services to debtors on credit. Then bank accepts invoice discounting and credited amount to Tata Steel account. LCs are used in international trade. The LC can also be the source of payment for a transaction. (ii) Receivables Purchase R. P.76 - . (c) Direct Collection (i) RTGS/Cheque deposit by customers RTGS stands for Real Time Gross Settlement.WORKING CAPITAL MANAGEMENT 2011 on behalf of customer to the company and the bank collects money from the customer on due date. For this. the bank prepares credit limit for each customer. In this. It is a package of financial services which is provided by bank. the bank charges interest which has to paid periodically. it’s highly impractical. This thereby helps the dealers in sustaining a seamless business flow and avoiding shortage of working capital related difficulties. 3. The sales in credit terms lead to the rise of debtors. Receivables/ Debtors As much as the company would like to do its business in terms of cash. Credit Control The firm periodically analyses the credit exposure. The company follows stringent measures to recover the receivables and has been following strict rules while granting credit to the customers. The retailers are not offered credit and sales to them are mostly done on cash terms. Credit worthiness of the customers within the segment for respective products is analysed by way of a credit appraisal process. Channel financing is the mechanism through which a bank/financial institution meets the various funds related requirements of dealers/wholesalers.WORKING CAPITAL MANAGEMENT 2011 Channel financing is an innovative option for extending working capital finance to dealers/whole sellers who have business relationships with large companies. Proper credit assessment is done before granting credit to any customer. 4. The assessment of risk appetite of the business based upon the financial health and the market situation is done.77 - . SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . 65 -76.WORKING CAPITAL MANAGEMENT 2011 7) ANALYSIS OF OUTSTANDING & OVERDUES The levels of outstanding and overdues as on Mar ’11 and Mar’10 are shown in the table.56 0.35 % change 31. Table 7. In Crs) MAR '10 Sales Collection Outstanding (Gross) Outstanding (Net of Claim Prov.7 22. 40 crores. The outstanding amount has increased by more than 65% to reach nearly Rs.93 146.49 1.46 MAR '11 144.63 74.39 3. It has consistently decreased throughout the year to reach the low levels of Rs.1 ( `. The collection should always be more than the sales for good debtors management.73 37. the overdues for FY2011 have decreased drastically from high levels in the early half of the year.98 37. In fact.9 112.20 65.87 30. This is down to the strict measures taken by the company to recover the outstanding and tightening of its credit policies.01 -26. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .78 - .56 crores on 31 st March 2011.03 Analysis: There’s been a rise in sales by nearly 32%.93 21. 2.) Overdues (Gross) OD > 6 Months 109.22 2. The overdues have decreased by more than 26% which is quite impressive. 00 20.. Ltd.WORKING CAPITAL MANAGEMENT 2011 The trends for overdues to outstanding ratio are shown. It gives an indication as to how effective the company’s debtor management process is. Maharashtra State Electricity Board etc. the ratio has been consistently decreasing for the past one year. OD to OS % 30. High values are not a healthy indication for the company.00 5.00 15.00 25.79 - . it was at higher levels due to high levels of overdues held by some customers like Enercon (India) Pvt.1 Studying the overdues to outstanding ratio is a very important.00 10. During the early half of the fiscal year.00 30th 30th 30th 31st Jul 31st 30th 31st 30th 31st 31st 28th 31st Apr '10 May Jun '10 '10 Aug '10 Sep '10 Oct '10 Nov Dec '10 Jan '11 Feb '11 Mar '10 '10 '11 OD to OS % Fig 7. but later on. If we see the trends for Global Wires India. with an increased focus on collection SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . WORKING CAPITAL MANAGEMENT 2011 process.5%) Retailers (5%) Others (60.80 - .2 Analysis: There are 181 debtors for the month ending March 2011 with an outstanding amount of Rs 37.77 crores. the situation improved and the values started coming down to much satisfactory levels. Debtors (181) Bank Financed (30%) Export (4.5%) Fig 7. The total debtors are classified into 4 main segments: Bank financed Exports Retailers Others SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . There are 16 customers in this category owing about 4. But under some exceptional cases discussed above the company sells its goods to the retailers on credit. Others: This category of customers account for all those customers which does not come under any of the above categories. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .71 crores. They are offered open credit but only after they satisfy the credit criteria of the company. These debtors owe around 1. It is so because it becomes a compulsion of social status and also a moral responsibility of the company in order to survive.35 crores or about 30% of the total outstanding with debtors. Retailers: According to the credit policy of the company the company does not sell its goods on credit to the retailers. there were 20 retailers to whom the goods were sold on credit. These customers pay the amounts directly to the company on its due date. Assistant engineer to whom the company sells its goods.WORKING CAPITAL MANAGEMENT 2011 Bank financed: Of the total debtors. These customers are not bank financed and are offered open credit by the company.5% of the total outstanding amounting Rs 1. Exporters: As described the company also sells its goods in the international market also. Of the total 181 customers there are 120 customers.91 crores and make up about 5% of the total debtors. The Government customers under this category owe only about Rs 20 lakhs to the company. These receivables are not discounted by the company because the maturity period of such receivables is more than 90 days. It is purely open credit offered to these customers but they are fully secured as they are Government customers. These customers account for around 60% of the total outstanding which amounts to Rs 23.01 crores. And the company with its agreement to the bank has only a tie up of the receivables of maturity period of less than 90 days. This is the decision of the management to sell goods to such customers. For the month ending 31 st March.81 - . There are a few Government customers also like Maharashtra State Electricity Board. there are 25 customers who are bank financed owing around Rs 11. Change in the items like Debtors. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . I mainly concentrated on the items of the assets side of the balance sheet during the project. Inventory. Thus to know the effectiveness of the credit policies of the Wires Division. comparison is very important.WORKING CAPITAL MANAGEMENT 2011 8) LIMITATIONS TO MY STUDY Credit policies of rival companies: For an effective study of any subject. the credit policy of other companies is unavailable for making comparison. Loans & Advances were more into focus than the liabilities. But as there is a shortage of time I was unable to interact with some of the members and get more information on the credit policies of the company. Time: I have interacted with maximum possible members in the company to gather as much information as possible.82 - . Also due to shortage of time. But. comparison of credit policies of Wires Division should be done with its competitive companies. These customers constitute more than 60% of the total outstanding amount. This financing is without recourse to the company and hence fully secured. a bank guarantee or a post dated cheque etc. So. Under this scheme the company discounts its receivables with the bank and obtains funds immediately from the bank to ensure continuous flow of operations and sufficient working capital in the company. the finance department of the company should make its financing & discounting contracts with the banks and insurance companies which could cover maximum number of debtors under SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . there are around 120 debtors who are offered open credit and they are neither under the receivable purchase scheme of bank finance nor provided any security like the letter of credit. The insurance company and the banks have only accepted the customers who have strong financial background and very low default risk.RP backed by Insurance scheme.WORKING CAPITAL MANAGEMENT 2011 9) RECOMMENDATIONS Conversion of open credit customers to bank financed customers: The Company has a policy to optimize number of customers under the bank finance . Of the total 181 debtors on 31st Mar ’11.83 - . On that basis the bank selected to finance only a few customers of the whole client database. secondly the company should try to decrease outstanding amount with the open credit customers to reduce its exposure to risk.WORKING CAPITAL MANAGEMENT 2011 this receivable purchase scheme which would reduce the default risk and also the degree of financial leverage of the company.84 - . As the customers with strong financials will however not default. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . and pay to the company on maturity. Then. Thus. to effectively utilize this bank finance scheme the company should try and negotiate with the insurance company and banks to finance other customers also to reduce the default risk the company. And the company has a contract of discounting its receivables with the bank for a maturity period up to a maximum of 90 days. There were 20 customers as on 31th March. The company can also revise its credit policies by including the circumstances as clauses under which the sale of goods to retailers is permissible. But under some circumstances. There are only 15 customers under this category but owe only around 1% of the total outstanding amount. 2011 with a share of around 5% of the total outstanding balance.customer and product specific. Credit sales to retailers: According to the credit policies of the company. apart from the selling its goods to the manufacturers and retailers on credit.85 - . Also it could add on more details by specifying the credit limit to be offered. sells its goods to Government Organization on credit. But there are a few retail customers to whom the goods are sold on credit. Every company has its own compliance to sell goods to the Government and cannot deny from such sales. The company’s credit policy does not provide any such clauses. the company sells its goods wholly on cash to the retailers through the distributors and on credit only to the manufacturers. on the basis of customer and the credit period to be granted under both basis . Though the amount outstanding from such customers are fully secured.WORKING CAPITAL MANAGEMENT 2011 Sales to Government customers: The company. the company should try to do business with the Government agencies only if it is profitable enough as a lot of expenses and energy is spent in recovering the outstanding from these companies and agencies. While these are rare cases such deviations must be discouraged. It also becomes a social responsibility for the company to sell its goods to such customers. These customers are not covered under the bank finance scheme because the maturity period of these receivables is greater than 90 days. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . as described by the CMG group the company sells goods on credit to retail customers. It is very risky as the company is dealing with these customers without any security back up. capital investment. The current pattern which the company follows takes action only after the customer gets delayed in payments. as compared to the previous years. Currently assessments is done by both the marketing department & the finance department in determining the credit worthiness of the customer only when a credit limit is to be extended to a new customer or an existing customer. This may also have a great chance of default of the payments by the customer if the supplies are stopped.WORKING CAPITAL MANAGEMENT 2011 Inventory Management: The new plant in Tarapur required 1. Thus the company should use other parameters also to determine the credit scoring of a debtor. The company only reviews its debtors by the ageing schedules in the working capital reviews. The inventory levels were higher during this period. credit history and ability to pay debts on time. The SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . especially work-in-process inventory. Credit Assessment: There are a large number of customers to whom the company sells goods on open credit.5 years for stabilization in processes which is nearing completion. The financial numbers of private companies may not be reliable.86 - . The company can provide appropriate weightage to each parameter and use it to determine the credit limit of a customer. technology standards. Thus as a preventive measure the company should make assessments of the customers and be cautious earlier rather than taking late steps. its market share. but the company does not have a practice to review it regularly. And in case of delayed payments as depicted by the ageing schedule the customer would further not be allowed to purchase goods from the company on credit. The company can come out with such assessment in its credit policy. This assessment may be possible only with the public limited companies and a few others whose accounts are fairly audited and published publicly. But the company also sells its goods to private companies and others. The company uses a few parameters and also the Z-Score model to determine the financial health of its customer. The inventory levels could be brought down to lower levels once the stabilization is complete by using the best possible inventory management techniques. The parameters often used for credit rating are customer’s profile. Reduction in Overdues: Although there has been a constant decline in the overdues during FY2011. Thus. avoid risks and also deleverage the company. Thus converting such customers under the financing scheme may not also be possible. it becomes necessary under some circumstances for the company to sell its goods to customers who are not under the bank finance scheme.WORKING CAPITAL MANAGEMENT 2011 assessments can be done using the latest financial information and other market information on regular intervals at least annually and make it a practice and a part of the credit policy so as to predict the financial soundness of the customer well in advance and to avoid the late payments or default risk.87 - . and the remaining on credit. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . On an average. and rigorous follow up for old non-moving overdue with strategic plan for collection of old dues. on providing various discount offers and other promotional schemes the company can increase cash sales which would enhance effective operations. Overdues can be reduced by a number of ways like reduction in pricing disputes. The company should also make a part of the credit policy to block the credit lines of the customer on expiry of the credit assessment. the company can make provisions for circumstances under which such sale will take place and review it regularly. Cash Credit Ratio: The Company should continuously make efforts to sell its goods on cash basis to many of its customers. the cash sales for the financial year was 42%. stringent review of customer claims. Securitization from open credit customers: Though the company tries to finance all its customers through bank. It should also keep revising the total credit exposure of the company and also the individual credit limit from time to time. but there were times during the year when overdues were very high. So. timely settlement of claims. it can be concluded the performance of the company is improving. Especially the second half of the FY2011 saw a tremendous rise in gross sales. However.88 - . Although the profit and sales levels are yet to match the past levels of FY2009. deleveraging by efficient management of its assets. the above mentioned are some of the recommendations that could improve the financial position of the company if implemented. SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page . The management of current assets. thus. It is so because the company recorded an increase in sales and increase in the working capital taking its levels to much satisfactory values. the sales are increasing during this ever increasing competitive business scenario for wires. current liabilities and the working capital is also satisfactory.WORKING CAPITAL MANAGEMENT 2011 Conclusion: On comparison of the financial information of the Wires division for the year ended March 2011 & March 2010. WORKING CAPITAL MANAGEMENT 2011 10) BIBLIOGRAPHY SUMMER PROJECT AT TATA STEEL WIRE DIVISION Page .89 - .