Data Analysis

Chapter-2 THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT

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MEANING OF WORKING CAPITAL:In simple words working capital means that which is issued to carry out the day to day operations of a business. Capital required for a business can be classified under two main categories • • Fixed capital Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investment in these assets represents that part of firm capital, which is blocked on a permanent or fixed basis called fixed capital. Funds are also needed for short term purposes i.e. for the purchase of raw material, payment of wages and other day to day operations of business. These funds are known as working capital. In other words, working capital refers to that firm’s Capital, which is required for short – term assets or current assets. Funds thus invested in current assets keep revolving last and being constantly converted into cash and this cash flow is again converted into other current assts. Hence it is known as circulating or short – term capital.

CONCEPT OF WORKING CAPITAL:
1. Gross Working Capital

It is simply called working capital refers to the firm’s investment in current assets so the total current assets of the firm are known as gross working capital.

2.

Net Working Capital

It represents the difference between current assets and current liabilities. Net working capital may be positive or negative. Positive net working capital is that when current assets are more than current liabilities. But when current liabilities become more than current assets than it is negative working capital.

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In brief we can say that working capital is too much necessary for the smooth functioning and proper utilization of fixed assets.

TYPES OF WORKING CAPITAL:
1. Permanent Working Capital: As the operating cycle is a continuous process so the need for working capital also arises continuously. But the magnitude of current assets needed is not always same; it increases and decreases over time. However there is always a minimum level of current assets. This level is known as permanent or fixed working capital. 2. Temporary Working Capital: The extra working capital needed to support the changing production and sales activities, is called variable or functioning or temporary working capital. This can be shown in the following diagram:-

Amount of Working Capital Temporary capital

Permanent Capital Time Chart 1.1:Chart Showing Temporary working capital

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NEED FOR WORKING CAPITAL:
The need for working capital cannot be overemphasized. The need of working capital arises due to the time gap between production and realization of cash from sales. So the working capital or investment in current assets becomes necessary need for working capital. It arises due to following reasons:A. OPERATING CYCLE “Operating cycle is the time duration requires for converting sales into cash after the conversion of resources into inventories.” First of all a firm purchase Raw Material, then after some processing it is converted into work–in–progress and after this further processing is done to convert work–in–progress in finished goods. After the raw material is converted into finished goods, sales are made. Sales are no always full cash sales; there are credit sales also. These credit sales after some period are converted into cash. So the whole process takes the time. This time taken is known as the length of operating cycle. So operating cycles includes:1. 2. 3. 4. Raw Material conversion period (RMCP) Work–in – progress conversion period (WIPCP) Finished goods conversion period (FCP) Debtors Conversion period (DCP)

So operating cycle can be known as following:Raw Material

Work Progress
Cash from Debtors Collection

in

Sales
Finished Goods Credit Sales Cash Sales

Chart1.2: Chart showing operating cycle 4

If the length of the operating cycle has short length period then less working capital is required. So working capital requirement is directly related with operating cycle. Operating cycle may be of two types 1. 2. 1. Gross Operating cycle Net operating cycle Gross Operating cycle Gross Operating cycle is the total time period from the conversion of Raw Material into finished goods and finished goods into sales and then sales into cash. GOC =RMCP + WIPCP + FCP + DCP 2. Net Operating Cycle As we provide period to debtors for the payments, our creditors also provide period to us for payment to them. So this reduces our requirement of working capital. This also affects the operating cycle. Operating cycle’s length reduces with so many days as provided by the creditors to us. The difference between gross operating cycle and period allowed by the creditors for payment is known as net operating cycle. NOC = GOC – CPP B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR FUTURE:These needs may be of Raw Material or Finished Goods. Sometimes because of nonavailability of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw Material becomes necessary for company. In the similar way due to sudden arise of demand of finished goods in future more finished goods are kept in stock. For both reasons more working capital is required because funds will be involve in these safeties stocks.

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DETERMINENTS OF WORKING CAPITAL:
Followings are the main determinants of working capital. 1. Nature and Size of Business : The working capital of a firm basically depends upon nature of its business for e.g. Public utility undertakings like electricity; water supply needs very less working capital because offer only cash sales whereas trading & financial firms have a very less investment in fixed assets but require a large sum of money invested in working capital. The size of business also determines working capital requirement and it may be measured in terms of scale of operations. Greater the size of operation, larger will be requirement of working capital. 2. Manufacturing Cycle: The manufacturing cycle also creates the need of working capital. Manufacturing cycle starts with the purchase and use of Raw Material and completes with the production of finished goods. If the manufacturing cycle will be longer more working capital will be required or vice versa. 3. Seasonal variation: In certain industries raw material is not available throughout the year. They have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the year. Generally, during the busy season, a firm requires large working capital than in the slack season. . 4. Production Policy: Production policy also determines the working capital level of a firm. If the firm has steady production policy, it may require need of continuous working capital. But if the firms adopt a fluctuating production policy means to produce more during the lead demand season then the more working capital may require at that time but not in other period during a financial year. So the different productions policy arises different type of need of working capital.

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5. Firm’s Credit Policy: The firm’s credit policy directly affects the working capital requirement. If the firm has liberal credit policy, hence the more credit period will be provided to the debtors so this will lead to more working capital requirement. With the liberal credit policy operating cycle length increases and vice versa. 6. Sales Growth: Working capital requirement is directly related with sales growth. If the sales are growing, more working capital will be needed due to arises need of more Raw Material, finished goods and credit sales. 7. Business Cycle: Business cycle refers to alternate expansion and contraction in general business. In a period of boom, larger amount of working capital is required where as in a period of depression lesser amount of working capital is required. 8. Earning Capacity & Dividend Policy: If the firm has enough earnings and it is not paying dividend then it will not be in need of external borrowings. If firm wants to increase its earning power then more working capital will be required also to pay more dividend more profits are needed which give rise to more working capital. Company is paying 42% dividend to its shareholder. 9. Price Level Changes: Changes in the price level also effects the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets. 10. Condition of Supply: The inventory of raw material, spares and stores depends on the condition of supply. If the supply is prompt the firm can manage with small inventory. However if the supply is unpredictable then the firm to ensure continuity of production, should acquire stocks as and when they are available and have to carry larger inventory on an average.

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11. Other Factors: Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, time lag. etc. also influence the requirement of working capital. So these are the main determinants of working capital. The importance of influence of these determinants on working capital may differ from firm to firm.

MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT
The management of working capital is concerned with two problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that asserts between them. The basic goal is working capital management is to manage current assets and current liabilities of a firm in such a way that a satisfactory of optimum level of working capital is maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position is bad for business.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT
There are two major decisions management relating to working capital management:1. 2. What should be ratio of current assets to sales? What should be the appropriate mix of short term financing and long term financing for financing these current assets?

1.

Current assets in relation to sales:-

If the firm can forecast accurately the factors, which effect the working capital, the investment in current assets, can be designed uniquely. When uncertainty characteristics the above factors, as it usually does the investment in current assets cannot be specified uniquely. 8

In case of uncertainty, the outlay on current assets should consist of base component meant to meet normal requirement and a safety component meant to cope with unusual requirement. The safety component depends upon low conservative or aggressive in the current assets policy of a firm. If the firm purchases a very conservative current asset policy it would carry a high level of current assets in relation to sales. If a firm adopts a moderate current assets policy it would carry moderate level of current assets in relation to sales, finally is a firm follows a highly aggressive current assets policy, it would carry a low level of current assets in relation to sales. MCF is following current assets policy showing moderate level of current assets in relation to sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for Financing of current assets:There are three approaches in this regard, which are discussed below: HEDGING APPROACH This approach is also called matching approach. In this approach there is a proper matching of expected life of asset with the duration of fund. Usually, according to this approach longterm sources are used for financing permanent current assets and fixed assets & short-term sources are used for financing temporary current assets:

Temporary current assets Short term financing A S S E T S

Term financing Permanent current assets Long term financing

Fixed Assets Time

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CONSERVATIVE APPROACH In this approach there is more reliance on long-term financing in comparison to short-term financing. Even some part of the temporary current comparison to finance from long-term sources because long-term sources are less risky in comparison to short-term sources.

Temporary Current Assets A S S E T S Permanent Current Assets Fixed Assets Time AGGRESSIVE APPROACH In this approach there is more reliance on short term financing and even a part of permanent current assets is financed from short-term finance. Temporary current assets A S S E T S Short term financing Long-term financing Short-term financing

Permanent current assets Fixed Assets Time

Long term financing

In MCF, the current assets are financed from short term sources as well as long term sources, so they follow conservative approach.

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Chapter- 2 OUTLINE OF THE STUDY

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Outline of the study
The management of working capital is very important aspect of any company. It involves the study of day to day affairs of the company. The motive behind the study is to develop an understanding about the working capital management in the running business organization and to help the company in developing the efficient working capital management. So it helps in future planning and control decisions.

Objectives of the study
• • To study the liquidity position of the company To analyze the working capital management practiced at MCF and suggest for improvement in existing system • • To know overall efficacy of MCF by comparing with industry To render recommendations for effective management of working capital

Scope of the study
The present study relates to all the aspects of working capital management and efficacy of MCF

Methodology
Research design: The present study is undertaken in the form of Analytical research because, we don’t have any control on the variable. Here I have reported the facts already available and analyzed those information in a critical manner

Data sources
The entire project is based on the Secondary data, which comprises the data collected through Balance Sheet, reference books and articles 12

Chapter- 2 PROFILE OF THE GROUP AND UNIT

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United Breweries Group or UB Group, based in Bangalore, is a conglomerate of different

companies with a major focus on the brewery (beer) and alcoholic beverages industry. The company markets most of its beer under the Kingfisher brand and has also launched Kingfisher Airlines, an airline service in India, with international flights operating recently. United Breweries is India's largest producer of beer with a market share of around 48% by volume.[1] The group is headed by Dr. Vijay Mallya who is also a member of the Indian Parliament. United Breweries now has greater than a 40% share of the Indian brewing market with 79 distilleries and bottling units across the world. Recently UB financed a takeover of the spirits business of the rival Shaw-Wallace company giving it a majority share of India's spirits business. The group owns the Mendocino Brewing Company in the United States.

The business of UB group can be divided into four categories, they are. 1. Beverages 2. Fertilizers 3. Aviation 4. Engineering

1. Beverages
Beverage alcohol can be divided into three groups. That is a. Spirits( United Spirits Limited) b. Wine c. Beer

United Spirits Limited (USL) - the INR 5700 crore spirits arm of the UB Group – is India’s largest and the world’s 2nd largest spirits company. USL was earlier McDowell and Company Limited. USL has a portfolio of more than 140 brands, of which 19 are millionaire 14

brands* (selling more than a million cases a year) and enjoys a strong 59% market share for its first line brands in India. United Spirits recorded global sales of 90 million cases for the fiscal year that ended on March 31, 2009. United Spirits’ brands have won the most prestigious of awards across flavors, ranging from the Mondial to International Wine and Spirit Competition (IWSC) to International Taste and Quality Institute (ITQI); a total of 108 awards and certificates (as of June 2009). The company is known to be an innovator in the industry and has several firsts to its credit such as the first pre-mixed gin, the first Tetrapack in the spirits industry in India, the first single malt manufactured in Asia and the first diet whisky in the world. United Spirits has a global footprint with exports to over 37 countries. It has 79 manufacturing and bottling units across the country and in Nepal and is supported by a robust distribution network to deliver its products to customers located across India. USL has a committed 7500-strong workforce spread across its offices and distilleries in the country. United Spirits represents the merged entities of the erstwhile McDowell & Co. Limited, Phipson Distillery Limited, United Spirits Limited, Herbertsons Limited, Triumph Distillers and Vintners Private Limited, Baramati Grape Industries Limited, United Distillers India Limited, McDowell International Brands Limited and Shaw Wallace Distilleries Limited. The erstwhile McDowell & Co. Limited was first established as a proprietary business in 1826. USL acquired Balaji Distilleries Limited in 2008. This acquisition gave the company the strategic advantage to consolidate the Group’s leadership position in a critical, large and growing State like Tamil Nadu. Currently, the procedural formalities are underway for the acquisition which will take retrospective effect from April 1, 2009. Table 2.1: products of United Spirits limited Whisky Bagpiper Mc Dowell’s No1 Director’s Special Old tavern Haywards Mc dowels Green La Brandy Mc dowell’s No1 Honey Bee John Ex Shaw Rum Celebration Rum Old cask Rum Old Adventure Rum Vodka & Gin White Mischief Romanov Blue Riband

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Wine ( Kingfisher Bohemia) A taste nurtured in Cape Floral Kingdom, South Africa, one of the world’s oldest, most ecofriendly wine growing regions, Kingfisher Bohemia is enriched by a 500-million year old soil and the unique climate typical of that area. The resulting flavour is fruity, delectable and goes Well with any food or occasions . Kingfisher Bohemia is the result of a partnership between Kingfisher and The Company of Wine People (COWP), a key player in the South African wine industry, both locally and abroad. Beer (United Breweries Limited (UBL)) The beginning of what is today The UB Group is rooted in the flagship company, United Breweries Limited, (UBL) also referred to as the Beer Division of the UB Group. Led by Mr. Kalyan Ganguly, President & Managing Director, it has around 48% market share in the country. United Breweries Limited has an association with brewing, dating back over five decades; starting with 5 breweries in South India in 1915. From bullock cart-loaded barrels or 'hogsheads' of frothing ale, the Beer business has gone on to become the undisputed 'king' in The Indian beer market Here innovative, creative and aggressive marketing is complemented by a strong distribution network. A management focused on building brand equity on one hand and exploiting it to the hilt on the other with concerted emphasis on quality. Its flagship brand 'Kingfisher', has achieved international recognition consistently and has won many awards in International Beer Festivals. Kingfisher Premium Lager beer is currently available in 52 countries outside India and leads the way amongst Indian beers in the International market. It has been ranked amongst the top 10 fastest growing brands in the UK.

2.

Aviation
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Kingfisher Airlines Limited, is India's largest airline operating more than 400 flights a day and having a wide network of destinations, with regional and long-haul international services. Kingfisher is one of six airlines in the world to have a five-star rating from Skytrax. In May 2009, Kingfisher Airlines carried more than a million passengers, giving it the highest market Share among airlines in India

The airline started operations on 9 May 2005. At the launch of the airline, Dr. Mallya said "we are committed to achieving our ambition of making Kingfisher Airlines India's largest private airline both in capacity and market share by 2010. The airline ushered in a new era of luxury in India's domestic aviation sector with its brand new aircraft with stylish red interiors, and smartly dressed crew and ground staff. Kingfisher was the first Indian airline to have inflight entertainment (IFE) systems on every seat with guests being able to watch live TV inflight. Kingfisher took to the international skies, giving its guests a world-class experience. The brand-new fleet incorporates the latest technology and each aircraft is fitted with a personalized in-flight entertainment system and top quality programming content from around the world creating an environment to cherish.

3.

Fertilizers

Mangalore Chemicals and Fertilizers Limited (MCF), with a turnover of over Rs.2,470 Crore (FY 2008-2009), is the only manufacturer of chemical fertilizers in the state of Karnataka. The factory is strategically located at Panambur, 9 km north of Mangalore City, on the banks of the Gurpur River, in front of the New Mangalore Port. The plant is well connected, both by rail and road. The West Coast National Highway (NH-l7) from Kochi to Mumbai separates MCF from the New Mangalore Port. The Company is a part of the UB Group with Group shareholding of 30.44%. Dr. Vijay Mallya is Chairman of the Board of Directors. The operations are managed by a team of highly dedicated and experienced professionals.

4. Engineering
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UB Engineering- the UB Group's Engineering Division - is one of the foremost Indian engineering companies in the field of installation of industrial plants. UB Engineering's activities are strongly focused on the Turnkey Division for projects in Power, Fertilizers, Oil & Gas, Fire Fighting, Effluent Treatment, Agrotech and other sectors like - concept to commissioning, on-site fabrication, installation, overhauling and maintenance. The range of its operations and concept to commissioning services combined with excellent track record in industrial construction worldwide has allowed UB Engineering to cut across geographical and political boundaries. Fully experienced in erecting plants running into millions of dollars in India and abroad, specialised multi-disciplinary teams adapt their skills to engineering and constructing smaller and medium size plants with speed and efficiency.

INDUSTRY PROFILE
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Indian Fertilizer Industry Indian fertilizer industry is one industry with immense scopes in the future. India is Primarily agriculture oriented country and its economy is highly dependent on the agrarian produce. The majority of the population of India lives in rural areas and the foremost occupation in the villages is agriculture. Developments pertaining to different industries are being made on a massive scale to change the country’s economy from an agrarian one to a industrial one. It is extremely important for the fertilizer industry in India to have development in terms of technologically advanced manufacturing process and innovative new age products. The first fertilizer manufacturing unit in India was set up in the year 1906 at Ranipat in Chennai In the present scenario, there are more than 57 large and 64 medium and small fertilizer production units under the Indian fertilizer industry. The main products manufactured by the fertilizer industry in India are phosphate based fertilizers, nitrogenous fertilizers, and complex fertilizers. The fertilizer industry in India with rapid growth is all set to make a long lasting global impression.

Some of the public sector companies in India are
• • • • • National Fertilizers Limited Rashtriya Chemical And Fertilizers Limited Madras Fertilizers Limited Steel Authority Of India Limited Paradeep Phosphates Limited

Some of the Private sector companies in India are
• • • Chambal Fetilizers and Chemicals Limited Balaji Fertilizers Private Limited Bharath Fertilizer Industries Limited 19

• •

Gugurat Narmada Valley Fertilizers Co. Ltd Karnataka Agro Chemicals

Pricing Policy of the Government
To encourage balanced fertilizer use and make fertilizers available to farmers at affordable prices, the central government determines and notifies the selling price of the urea as well as decontrolled P&K fertilizers and Complex fertilizers. The current selling price of Urea and P&K are less than the cost of production, the difference between selling price and cost of production is borne by Government as subsidy. Stage 3rd of the NPS (New Pricing Scheme) for urea announced by the government of India in March 2007 expires by 31-03-2010. The policy specifies that all Naphtha/ furnace oil/ LSHS based unit should convert to gas by 3103-2010. Despite readiness of the company for, non availability of gas within this deadline is concern. The policy on phosphatic fertilizer has been recently announced based on the recommendation of the Tariff Commission effective from 1-4-2008 with some deviations. The concession for the indigenous DAP is restricted at the same level of imported DAP, as against higher rate of concession given in the past. Under the new policy, concession for complex fertilizers will be unit based which amounts to rolling back to unit based pricing policy. A positive feature about this policy is recognition to sulphur as a nutrient and price compensation for usage of sulphur in manufacture of complex fertilizers. The government of India also recently announced nutrient based pricing of subsidized fertilizers effective from 18-06-2008, resulting in the reduction of prices of complex fertilizers to the farmers. This, however, will lead to the additional subsidy out go to the extent of reduction in MRPs to the farmers, as there is no reduction in cost of productio Because of this type of fertilizer pricing policy and control on the raw material the production of the fertilizer is shrunken. The pricing policy of the Government will affect the profitability of the company

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COMPANY PROFILE
Background: Mangalore Chemical and fertilizers (MCF) is a big part of India’s growing Agricultural industry. It is an ISO 14001 and OHSAS certified company. The company is a part of UB group with Shareholding of 30% by Dr. Vijay Mallya is Chairman of the Board of Directors. The operations are managed by a team of highly dedicated and experienced professionals. MCF, with a turnover of Rs.2470 crore (FY2008-09), is the only manufacturer of chemical fertilizers in Karnataka. The factory is strategically located at Panambur, 9km from Mangalore City, on the banks of Gurpur River, in front of the New Mangalore Port. The Plant is well connected, both by rail and road. The National Highway (NH 17) from Kochi to Mumbai separates MCF from NMPT. NMPT is an all weather port capable of handling ships up to 30ft draft. Naphtha, fuel oil, Ammonia, Phosphoric Acid the main raw materials are obtained through the port. The design and engineering of the ammonia/urea plants was done by Humphreys and Glasgow limited, London, a leading international firm in the fertilizer field and their associates, Humphreys and Glasgow consultants Pvt. Ltd, Mumbai. (The firm is now merged with Jacobs Engineering, USA). The Phosphate Plant is designed and engineered by Toyo Engineering Corporation of ABC and SAP respectively. Manufacturing both nitrogenous and phosphate fertilizers, MCF has an annual manufacturing capacity of more than two million metric tonnes of ammonia and three million metric tonnes of urea. The company sells its products ( including specialty fertilizers) under Mangala brand. UB group owns about 30% of the company with smaller stakes held by the Karnataka Government and various financial institutions.

Milestones of the Company
1966 1969 1971 1972 Incorporated a “Malbar Chemicals and Fertilizers Pvt Ltd” by Duggal Enterprise Govt of India stepped in as promoter after Duggal Enterprise withdrew The company was renamed as Mangalore Chemical and Fertilizer Ltd construction of the ammonia and urea plants commenced 21

1976 1979 1982 1986 1990 1996

ammonia and urea plants were commissioned and commercial production commenced Government of India took over the management commercial production of ABC started the captive power plant commissioned and commercial production of Di- Ammonium Phosphate commenced Government of India decided to induct professional management to retrieve the company for wich UB group was selected. revival of the company commenced rated capacity of achieved in the urea Plant for the first time since inception and a marginal profit being declared after many years of continuous losses

2000 2003 2004 2006 2008

Ammonia Plant revamped Urea plant revamped with 12% increase in production capacity DAP plant revamped 20:20 production added 20% increase in production capacity 100TPD Sulphuric Acid Plant commissioned Installation of imported fertilizer handling unit

Nature of Business Carried
Mangalore Chemical and fertilizers (MCF) is a big part of India’s growing agricultural Industry. It Manufactures the chemical fertilizers such as Mangala Urea, Mangala DAP, Ammonium Bi Carbonate, mangala 20:20:00:13, sulphuric acid etc. MCF also imports some of other products and being sold here in India. It is implemented to all over in India VISSION, MISSION, and QUALITY STATEMENT VISSION 2012 “To cross turnover of Rs.3000 crores and to make PBT of Rs.250crores” MISSION “To create value for farmers, consumers and other stake holders by providing integrated agriculture solution and leveraging our competencies to develop synergetic business” QUALITY STATEMENT “Building quality into our workplace, products and service is essential to successful future for our customers, employees, suppliers’, communication and shareholders

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Product Profile of MCF
Mangala Urea: A nitrogenous fertilizer, suitable for most crops and soil conditions.
Offered in prill form, free flowing, easy to apply and completely soluble in water. Mangala DAP: Nitrogenous complex fertilizer, black in colour and granular form, it is free flowing, soluble in water suitable for most crops and soill conditions, used for initial application Mangala AMBICA(ABC): Ammonium Bi Carbonate a food grade product used as leavening agent, its mainly used in food industry. Product extinctions have successfully been made for leather industry and in making jaggery. Its a white crystalline product of high purity. Mangala 20:20:00:13: it contains 20 percent nitrogen, 20 percent potassium, and 13 percent sulphur, which is suitable for all crops at initial stage and crop dressing. These are in granules of light grey, which makes it easy to apply. Sulpuric acid: it is produced mainly for augmenting the requirement for manufacturing of DAP and 20/20. Table 2.2: Table Showing Ownership Pattern of MCF, Mangalore as on 31.03.2009 Categories UB Group - Promoters Government Financial Institution/ Banks Mutual Funds Insurance Companies Bodies Corporate Foreign Institution Public Others (Clearing House, Foreign Nationals, NRI’s Societies and Trust) TOTAL Number of Shares Percentage of Total 36076775 30.44 3759884 3.17 2918346 2.46 148975 0.13 207887 0.18 12761662 10.77 200270 1.69 56393665 47.58 4247686 3.58 118515150 100

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Achievements and Award
From the 1996-97 performance of the company improved dramatically. Production levels of in all plants increased considerably. In fact the rated capacity of Urea was manufactured for the first time in 1996-97 since inception in 1976. Following are the awards received by MCF 1. FAI awards for ‘Improvement in overall performance of a company’, for three consecutive years 1996-97, 1997-98, 1998-99 2. Letter of recognition from Directorate General of Factory Advisory Service and Labour Institution (DGFASLI) for maintaining good safety an occupational health standards in 1997. 3.Commercial taxes department award for ‘ Honest Tax Paying Businessmen’. Its an unique initiative taken by government of Karnataka to honour the prompt tax payers. Mr P C Jain, senior Vice President (Works), MCF on 18th march 2007.

McKinsey’s 7s model

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The 7-S-Model is better known as McKinsey 7-S. This is because the two persons who developed this model, Tom Peters and Robert Waterman, have been consultants at McKinsey & Co at that time. They published their 7-S-Model in their article “Structure Is Not Organization” (1980) and in their books “The Art of Japanese Management” (1981) and “In Search of Excellence” (1982). The 7’s model of McKinsey is a Value Based Management (VBM) model that describes how one can holistically and effectively organise a company. Together these factors determine the way in which a corporation operates. Elements of 7’s model are, 1. Structure 2. Strategy 3. System 4. Skill 5. Style 6. Staff 7. Shared values The first three element Structure, Strategy and System are considered as the hardware of success. The next four elements skills, style, staff, shared values are the software of the company

Chart 2.1: chart showing 7S model I. Structure 25

Structure refers to the way in which the organisation units relate to each other, that is centralised , decentralised, matrix, network, functional, divisional etc. The Board of Directors frames the organisational structure of MCF. They have a formal organisation structure that is flexible to changing conditios. It is revised time to time to increase growth opportunities. The structure shows delegation of authority and responsibility which is used to co ordinate activities of various departments. The structure followed in MCF is functional organisation structure. Here functional structure is classified as technical and non-technical. In MCF the works director plays a very important role. The chairman looks after the whole company and he is in top position of the company followed by the managing directors. Table2.3: Table Showing Persons appointed in Important Designation Name Designation Dr. Vijay Mallya Chairman Deepak Ananad Managing Director Prabhakar Rao Director (Works) Apollo Fernandes Vice President HR H.M. Kshetrapal Senior Vice President Marketing S. Ramprasad Vice President( Legal) and Company secretary A.Rudrachary Sr. Vice President Commercial K. Raghuveeran Vice President Finance

Finance Head R.L Kamath

Finance Accounting M Suresh Rao

Management Accounting H.L Rao

Treasury, Project accounting, Commercial taxes Sudag Kamath

Import/Repairs & Maintenance Bills Vincent Goveas

Workmen payroll & statutory returns P.S Dinakar

B.P, Insurance and Costing Indrayadav

Raw materials accounting, budgeting P.S Karanth

MGT Staff Payrols & Benefits Pauline D’Souza

Treasury, Project accounting, Commercial taxes, transport bills. Divakar Acharya

Raw material accounting, FICC & CAPEX R.V Shroff

Chart 2.2:Organisational structure of Finance Department

STAFF:
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The staffs in the MCF is classified into two categories, they are technical staffs and non technical staffs. In MCF the staffs are well trained and usually are well versed with the latest technology when they enter the company, MCF also has some training programmes particularly to the staff members. At present the company has 879 employees, out of them 652 are of managerial, 141 workmen and remaining 86 of contract workers. The company recruits outstanding management, engineering and agriculture graduates who are put in the jobs after extensive practical training. All employees undergo a unique change program “Mangala Initiative for Change”. This program focuses on the personal change and facilities, improved relationships and increases contribution at home, work and the workers around them. The company has its own township in Mangalore 8 km from the plant that houses nearly 200 families.

SKILLS:
MCF possesses labour forces with various Skills. The company encourages and provides training for the development of skills depending on whether the employees is at the operating level or at the superior level. The superiority level skill is leadership, motivation, communication and administration. MCF will give training to develop these skills and conduct self development programs. MCF expects all its employees to be experts in particular areas. At the operational level employee require to posses various skill in relation to their job and other aspect like self development, work culture, etc the skill possessed by the workers at the operational level includes latest techniques in welding technology, material management and handling production control, etc. All employees are trained in order to improve their skill so as to help them to maximize their overall efficiency and productivity. The personal and administration department will keep updating the technical and professional skill of the employee in order to change the organizational out door, to bring changes in the attitude and develop good organizational culture. Here the skills are divided into two categories: o Managerial o Technical

STYLE:
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Style of leadership or relationship refers to the manner in which individuals use their talents, values, knowledge, judgment and attitudes to lead and guide others. In any organization style of leadership determines the success or failure of the establishment to a very greater extent. MCF follows participative style of management. The management of MCF encourages the employees to participate in decision making. They constantly try to improve interpersonal relationship and improve team building. The authority and responsibility is clearly defined. Managers provide enough flexibility to the employees in carrying out their work. The style of functioning is procedural and no discrimination exists between employees. MCF maintains good industrial relations. MCF considers human resources as its main resources. It counts land and building, machinery or any other asset after that of human assets. The management of the firm believes that the profitability and potential for the growth depends on attitude, resourcefulness, integrity, courage and dedication of the employees at all level of the organization.

SHARES VALUES:
Pollution Control Measures: With the aim of ensuring minimum disturbance to the ecology, all possible precautions have been taken to avoid pollution. As a good corporate citizen, the company has gone beyond merely complying with the pollution control norms. We are committed to preserving and maintaining the ecological balance. Change from a chromate- based program to a non toxic phosphate based system was made in the cooling water treatment system in 1991. Welfare Measures: Mangala Raitha Suraksha Vima Yojana The company has introduced an innovative Accident Insurance Scheme for its customer, farmers called the ‘Mangala Raitha Suraksha Vima Yojana’ from September 2002. The scheme is open to all Mangala farmers in the Company’s marketing territory. The nominee of the insured gets a financial benefit up to Rs.25000 in the event of accidental death or partial disablement. The entire expenses of this Group Insurance Policy are met by the company at no cost to the farmer. So far 1, 49,360 policies have been distributed. Ten farming families have so far benefited from this scheme. Sports, Environmental and Other activities: o Providing assistance to pursue training in sports. 28

o Conducting public awareness program about environment, Fire Fighting and Safety awareness in surrounding villages. o Providing assistance for beach cleaning. o Providing teachers for the special school which is meant for mentally challenged kids.

STRATEGY:
MCF Ltd has implemented various strategies for the upliftment and up gradation of the company. The strategies used by the company have helped them in achieving their goals. MCF has used such a strategy keeping in consideration of people living around the company. Following are the important strategies applied by MCF:

1) Differentiation Strategy: It produces different products such as Mangala Ammonia, Mangala DAP, and Mangala Urea etc and supplies it to needed agriculture areas. Since it has different products under one brand name it can cover or attract more market. 2) Low Cost Strategy: From the competitors information it is clear that it has applied lowest cost strategy when it is compared to competitors’ price

3) Eco- Friendly Measures: a. Waste water Treatment: The waste water treatment plant which has been installed in the company treats factory waste water which contains sulphide, carbon monoxide, phosphate etc. this water treatment meets the Karnataka State Pollution Control Board (KSPCB) which helps in treatment oil separation, chemical treatment and filtration of the treated waste water. This treated water is discharged into the sea at a distance of 900m and at a depth of 605m. The location of discharging point was selected by the 29

National Institute Oceanography after carrying out a detailed study on the effect of this water on marine life. The quantity of treated waste water and the marine environment around the discharge point is being monitored by an independent agency throughout the year b. Waste Elimination Measures: The factory has taken sufficient measures for the purpose of waste elimination. An adequate pollution control facility according to the environmental standards has been placed most priority given by the factory management. Some of the other measures adopted by MCF are:o Liquid Effluence: This evades used in production process Gets contaminated with oil and other pollutes and has to be treated before discharging from factory. o Gaseous Emissions: Controlling of gaseous emissions, particularly with respect to sulphur dioxide, is one of the major tasks of the factories. o Solid Waste: Chemical is the main hazardous solid waste generating in the factories.

SYSTEM:
System refers to all the rules and regulations both formal and informal that compliment the organization structure. It includes production plans, control system, cost accounts procedure, capitol budgeting system, and performance evaluation system. These systems include both Core Process system and The Support system. a. Core Process System: The core process system includes the primary activities like product development, demand management and order fulfillment. MCF develops new products and tests them in market in order to know the market for that product. MCF has introduced three new products in the market i.e. Complex Fertilizers, Granulated fertilizers and Muriate of Potash. It is also having the plan to introduce one more product into the market. While introducing the new product into the market it conducts various tests and market research and depending on the results of test marketing and research the production of particular product takes place. 30

The production will depend on the decision taken by the Vice President. Vice President Prepares the production plan Monthly wise and product wise for every year, taking into consideration government rules and regulations, policies, financial position and health of the plant. Production plan will be set after discussing with the area officers, managers and dealers by considering crop pattern, rainfall and irrigation pattern. MCF will fulfill the demand by quickly delivering the product and also delivering good quality product to the customers. MCF will get orders from various area offices and will supply the goods to various offices or the dealers. MCF will understand the needs of the customers and provide good quality product and satisfy customers. b. Support System: The various support systems include capital resourcing, human resourcing, and intimation resourcing and control system. The financial performance of MCF is very progressive. Capital of the company has been increased with the strong financial discipline and straight control exercised over cost. The working capital management could be effectively managed and also cumulative preference shares have been redeemed. MCF is now smoothly doing the costing, payroll activities preparation and maintenance of personnel and production budget. Production capacity of the industry has increased since 2000 and has achieved 380000 MT productions. Production Capacity has increased to 340000 to 380000 per anum. All round improvement in the plant safety equipment reliability and performance was achieved through intensive training program, implementing Key result area, 5’s and Total Production Maintenance techniques. The employee suggestion scheme was introduced in the year 2003 in order to get enthusiastic response. All the employees participate in decision making. Information flow top to bottom and bottom to top is running smoothly and effectively.

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Chapter- 4 Data Analysis

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Chapter- 4.1 Working Capital Analysis

1.OPERATING CYCLE ANALYSIS
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Operating cycle refers to the time period which starts from the raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors’ collection. This is also known as working capital cycle. Operating cycle is therefore expressed in terms of months or weeks or days. The higher the operating cycle period, higher the working capital requirement. It comprises of raw material conversion period, WIP conversion period, FG conversion period and debtors’ conversion period and creditors period. The basic reason for calculating operating cycle is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than working capital requirement will be less. OC = R + W + F + D – C Where, R = raw material conversion period W = work in process period F = finished goods conversion period D = debtor collection period C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

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Raw materials conversion period is the averge time taken to convert materials into work in progress. By using following formula we get raw material conversion period RMCP = Average Raw Material Stock Raw Materials consumed during the year X 360

Table4.1.1 Table Showing Raw Material Consumption period Average Raw Materials Year Consumed 2005 2006 2007 2008 2009 4172.21 4784.96 5858.48 9310.03 11687.43 Raw Material consumed 54327.51 69765.6 76465.67 85814.45 146282.4 RMCP 44 32 30 44 49

Chart 4.1.1: Chart Showing Raw Material Conversion Period Here we get the time taken to convert raw materials to work in progress. Currently its 49 it has increased from 44 in 2008.

(2) Work in Progress Conversion Period (WIPCP)

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Work in progress conversion period refers to convert work in progress to finished goods. By applying following formula we’ll get WIPCP. WIPCP = Average stock in progress X 360 Cost of Production

Table 4.1.2: Table Showing Work In Progress conversion Period Average Work Year 2005 2006 2007 2008 2009 In Progress 0 1943 5978 6786 10374 Cost of production WIPCP 82801.05 0 107590.6 7 126510.3 17 157476 16 238098.3 16

Chart 4.1.2: Chart showing Work In Progress Conversion Period Here we get how many days how many days it takes to convert work in progress to finished good. The time taken to convert work in progress conversion is 16 days and it remained the same when compared to 2008.

(3) Finished Goods Conversion Period (FGCP)

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Finished goods conversion period refers to average time taken to sell the finished goods . following formula can be used to get FGCP FGCP = Average Finished goods inventory Cost of goods sold Table 4.1.3: Table showing Finished Goods Conversion Period Average Finished Year 2005 2006 2007 2008 2009 Goods 2237.75 3778.415 6593.625 2598.595 1795.815 Cost Of Goods sold 85108.0 6 133252. 1 104746. 7 160670. 2 244146. 9 Period 13 16 18 9 4 X 360 X 360

Chart 4.1.3: Chart Showing Finished Goods Conversion Period Here we get how many days it takes to sell the finished goods. Currently its 4 days compared to 9 in 2008. Because of this company saves lot of amount in storage of inventory.

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(4)

Debtors’ Conversion Period (DCP)

Debtors conversion period refers to the time taken by the company to collect the amount of the credit sales. Debtors conversion period can be found out using following formula. DCP = Average Debtors Credit Sales Table4.1.4: Table Showing Debtors Conversion Period Average Year Debtors Cr Sales Days 2005 5294.28 87919.4 22 108384. 2006 2007 2008 2009 2877.425 3188.4 4589.695 2153.69 1 137255. 9 162539. 1 247197. 9 10 8 10 3 X 360

Chart 4.1.4: Chart Showing Debtors Conversion Period Here we find out the days required for converting credit Sales to cash. Lesser the number of days more is the benefit for the MCF. Currently the number of days required for Debtors conversion period is only 3compared to 10 in last year. This is only a calculated figure because the company grants credit for a period upto 30 to 45 days. As the conversion period 38

is only 3 company need only little amount of working capital, so the company is having great advantage

(5)

Credit Conversion Period (CCP)

Credit conversion period refers to the average time taken by the firm in payment to its suppliers. We get credit conversion period by using following formula CCP = Average Creditors Credit Purchases X 360

Table 4.1.5: Table showing Credit Conversion Period Average Year Creditors Purchases Days 2005 5294.28 478496 16 2006 2877.425 583905 13 2007 3188.4 928911 16 2008 4589.695 1166141 12 2009 2153.69 1260930 11

Chart 4.1.5: Chart showing Credit Conversion Period Here we got how many days in average the company takes to make the payement. During the current year the number days stands at 11 compared to 12 in previous year. As the days have reduced the company is gaining credit worthiness in the eyes of suppliers. But its loosing the opportunity cost, 39

Gross Operating Cycle The total of inventory conversion period and debtors conversion period is known as gross operating cycle. Gross Operating Cycle = Inventory Conversion Period+ Debtors conversion Period Table4.1.6: Table Showing Gross Operating Cycle
RMCP 44 32 30 44 49 WIPCP 0 7 17 16 16 FGCP 13 16 18 9 4 DCP 22 10 8 10 3 GOCP 79 64 73 78 72

Chart4.1.6: Chart showing Gross Operating Cycle As Gross operating cycle refers to the time taken to convert raw material to inventory and collection of debtors, lesser the duration better is the condition of company collection policy.

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The gross operating cycle is 72 in 2009 which is reduced by 6 days compared to 78 in 2008. This is favorable for the company

Net Operating Cycle
Net operating cycle is the difference between gross operating cycle and payables deferral period. It is also known as cash conversion period. interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input. The fundamental formula that is applied for the calculation of cash conversion cycles as follows: Net Operating Cycle = RMCP + WIPCP + FCP + DCP – CCP Table 4.1.7: table showing gross operating cycle RMCP 44 32 30 44 49 WIPCP 0 7 17 16 16 FGCP 13 16 18 9 4 DCP 22 10 8 10 3 CCP 16 13 16 12 11 NOC 64 51 57 67 61

Chart 4.1.7: Chart showing gross operating cycle Here we find out how many days it takes us to get the money back which we have paid while buying raw materials. Now the days required to get the cash converted is 61 is compared to

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67 in 2008, it means that the time taken for cash conversion is reducing which is good for te company. And less amount of working capital is required.

3.

Computation of Ratios

Ratio analysis is a technique of financial analysis and working capital management. It is a technique of calculating various ratios from figures available in the financial statements and companies ratios of previous years or with those of other concerns or with the standard ratios and drawing further conclusion. Nature of Ratios Ratio analysis is the process of establishing different ratios in order to help the management in taking decisions. It involves following four steps: o Selection of relevant data from the financial statements. o Calculation of relevant data from selected data o Comparison of those ratios with those of previous years or with those of other organization or with the standard ratio. o Drawing conclusion based on the interpretation of ratios. Importance of ratio analysis Ratio analysis of the financial statements of an organization is much of importance to a number of persons such as shareholders, creditors, employees, customers, legal authorities and general public for making decisions. Following are the relevant points reviling importance of ratio analysis. o Measuring the general efficiency: Ratios enable the people to summarize and simplify the mass of accounting data. They act as an index of efficiency of the enterprise. o Measuring financial solvency: Ratios are the useful tools in hands of the management to evaluate firm’s performance over a period of time. They point out the firm’s liquidity position to meet its short-term and long-term obligation. o Forecasting and planning: Ratio analysis is a important tool to the management in its budgeting activities. Ratio analysis enables the management to prepare properly

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different budgets, to formulate scientific business policies and to prepare the future plan of action. o Decision making: Ratio analysis through light on the degree of efficiency of management and to extent of utilization of the enterprise. Helps the management in taking decisions. o Taking corrective action: Ratio analysis helps in making inter-firm comparisons. If the comparison shows unfavourable variations corrective steps can conveniently be taken. Limitation of ratio analysis Ratio analysis is no doubt an important tool of financial management but ratios must be used carefully because of its following drawbacks: o Most important drawback of ratio analysis is that there is no consistency and uniformity in the definition of different ratios. o Inaccurate financial statements: Ratios are calculated from figure contained in financial statements. If the data in financial statements happen to be inaccurate, ratios calculated on the basis of that turnout to be ineffective. o Difficulty in establishing standard ratios: Ratios convey proper meaning only when they are compared with the standard ratios already developed. But it’s very difficult to set standard ratios under changing socio-economic environment. Further, even the standard ratio may have to be changed from time to time. o No proper basis for comparison: Ratios facilitate inter-firm comparison but it’s very difficult to evaluate differences in factoring affecting one firm’s performance in relation to another. Several differences exists, those such as age of the plan, size of the firm, degree of mechanism etc. In fact no two firms are identical in every respect. Thus ratios of one firm cannot be fully comparable with those of other firm. o Quality aspect ignored: Ratios express relationship between two variables to measure efficiency. But quality places a very important role presenting overall efficiency of the enterprise, which is ignored in the ratio analysis.

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(A)

Liquidity Ratio:

a. Current Ratio The current ratio is the ratio of total current assets to total current liabilities. It calculated by dividing current assets by current liabilities

Current ratio = Current assets/current Liabilities

Table 4.1.8: Table Showing Current Ratio of MCF, Mangalore CURRENT YEAR 2005 2006 2007 2008 2009 CURRENT ASSETS 30226.71 48738.93 53382.81 76053.09 78835.35 LIABILITIES 10586.02 20926.23 22984.66 29547.63 30190.6

(Rs in Lakhs) CURRENT RATIO 2.85 2.33 2.32 2.57 2.61

Chart 4.1.8: Bar chart showing current ratio of MCF, Mangalore

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The current ratio of a firm measures the firm’s short term solvency. i.e ability to meet the short term obligation. It indicates the rupees of current assets available for each rupees of current obligation payable. Higher the current ratio higher is the amount available to pay for meeting current obligation. By looking into table 4.8 we can say that the average current ratio of the company for the past five years is showing very good, which shows the ability to pay off the current obligation is high. The company is in very liquid situation where the company’s current ratio is more than the standard 2:1 this is mainly because of high inventory in those periods. It can be seen that only in the year 2006 there was a marginal decline in current ratio by .053 compared to previous year this is mainly because of stringent credit management in terms of over extended account received. It shows that company had a good short term financial solvency and liquidity position. b. Quick Ratio This ratio is also known as quick ratio or acid test ratio. It is a more rigorous test of liquidity than the current ratio. It is based on those current assets which are highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratio is the indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand low ratio represents liquidity position is not good. Quick Ratio = Quick or Liquid Assets Current Liabilities Quick Assets = Current Assets – Inventory – Prepaid Expenses Table 4.1.9: Table Showing Quick Ratio of MCF, Mangalore CURRENT YEAR 2005 2006 2007 2008 2009 QUICK ASSETS LIABILITIES CURRENT RATIO 20817.47 10586.02 1.97 34513.8 20926.23 1.65 39186.53 22984.66 1.70 58985.64 29547.63 2.00 61758 30190.6 2.05 (Rs in Lakhs)

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Chart 4.1.9: Bar chart showing quick ratio of MCF, Mangalore

Interpretation: Quick Ratios refer to current assets which can be converted into cash immediately or at a short notice. Quick ratio represent a rigorous measure of firms ability to service short term laibility. From the above table 4.2 we can say that the company is having sufficient money to meet current obligation. In the current year 2009 company showed a quick ratio of 2.05:1. It indicates there is a jump of .05 because of reduction in the inventory from 14225 crores to 9409 crores, the company is in liquid postion as the ratio is around 2:1 in all years. Totally we can say that company is maintaing its liquidity position more than the industry standard of 1:1. MCF could have invested the same amount in other profitable channels to get more returns.

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c. ABSOLUTE LIQUID RATIO Although receivables are generally more liquid than inventories yet there may be doubt regarding their realization into cash in time. Absolute liquid ratio shows the relationship between liquid assets which include cash, bank and marketable securities. Absolute Liquid Ratio = Absolute Liquid Assets Current Liabilities Table 4.1.10 table showing Cash Ratio of MCF, Mangalore YEAR 2005 2006 2007 2008 2009 CASH 1609.05 365.46 1584.58 5991.1 1609.05 (Rs in Lakhs)

QUICK LIABILITIES CURRENT RATIO 10586.02 0.15 20926.23 0.02 22984.66 0.07 29547.63 0.20 30190.6 0.05

Chart 4.1.10: Chart showing Cash Ratio of MCF, Mangalore The acceptable standard for this ratio is 0.5:1. Thus spinning we can say that in all the years, it is below the standard due to very less cash and bank balance maintained because major cash receipts and payments are handled by corporate office. It is very less in 2005-06, 200809 due to increased cost of production d. WORKING CAPITAL TURNOVER RATIO :

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Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio measures the efficiency with which the working capital is being used by a firm. Working Capital Turnover Ratio = Sales Net Working Capital Table 4.1.11: Table showing Working Capital Turnover Ratio of MCF, Mangalore Working Capital YEAR 2005 2006 2007 2008 2009 Sales (Rs.lakhs) working capital Turnover Ratio 87919.4 19640.69 108384.1 27812.7 137255.86 30398.15 162539.14 46505.46 247197.93 48644.75 4.48 3.90 4.52 3.50 5.08

Chart 4.11: Chart showing Working Capital Turnover Ratio of MCF, Mangalore This ratio indicates the number of times the working capital is turned over in the course of a year. A high working capital ratio indicates the effective utilization of working capital and less working capital ratio indicates less utilization. In the year 2009 the working capital is well utilized where the ratio is 5 times which indicates that working capital is being well utilized and proves efficient management.

3. Common size statement analysis

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This analysis is mainly to see the composition of working capital. Its purpose is to see the percentage of each asset to the total asset and percentage of each liability to total liability. Table 4.1.12: table showing balance sheet of MCF. Managalore (Rs.lakhs)
Percent age to total Percent age to total

Mar-

Mar08
11854.8

Particulars
LIABILITIES
Capital Reserves & Surplus Secured Loans unsecured loans deferred tax liability, TOTAL

09
11854.8 6 27064.8 1 39120.4 9 559.01 3701.96 82301.1 3

14.40 32.89 47.53 0.68 4.50 100

6 25425.5 1 35575.4 3 2425.46 3689.61 78970. 87

14.40 32.20 45.05 3.07 4.67 100

ASSETS
61005.9 Gross Block Less: Depreciation Net Block capital work in progress net Fixed Assets Current Assets, Loans & advances 17077.3 Inventories Sundry Debtors Cash & Bank Balances other current assets loans and advances 5 905 1609.05 195.63 59048.3 2 78835.3 5 30190.6 20.75 1.10 1.96 0.24 71.75 95.79 36.69 17068.0 5 1701.19 5991.1 482.63 50810.7 2 76053. 69 29547.6 3 21.61 2.15 7.59 0.61 64.34 96.31 37.42 6 29013.8 8 31992.0 8 1659.3 33651.3 8 74.13 35.26 38.87 2.02 40.89 58129.0 1 27221.3 2 30907. 69 1557.1 2 32464. 81 73.61 34.47 39.14 1.97 41.11

current assests
Less: Current Liabilities and provisions

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48644.7 NET CURRENT ASSETS P & L A/c 5 190.28 59.11 0.23 100

46506. 06 58.89 0.00 100

82296.

78970 .87

TOTAL

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The major portion of current asset is blocked in the loans and advances. More than 70% of current assets is blocked in the form of Loans and advances. The amount blocked in terms of loans and advances has increased which has increased the need of working capital. But the portion of inventories has been decreased from 21% - 20% in 2009. Even the cash balance has decreased from 7.59%- 2% in 2009. But the sundry debtors’ percentage has fallen from 2%-1% in 2009. Overall the current asset has decreased but the current liability has also increased marginally. Because of which there is increased need for working capital in the business. 4. ANALYSIS ON THE BASIS OF CHANGES IN WORKING CAPITAL Table 4.1.13: table showing changes in Balance sheet between 2008 and 2009(Rs.lakhs)

MarParticulars LIABILITIES
Capital Reserves & Surplus Secured Loans unsecured loans deferred tax liability, TOTAL

Mar08
11854.8 6 25425.5 1 35575.4

Changes in balance sheet

09
11854.8 6 27064.8 1 39120.4

0 1639.3 3545.06 -1866.45 12.35 3330.26

9 3 559.01 2425.46 3701.96 3689.61 82301.1 78970.8 3 7

ASSETS
61005.9 Gross Block Less: Depreciation Net Block 6 29013.8 58129.0 1 27221.3 2876.95 1792.56 1084.39

8 2 31992.0 30907.6

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capital work in progress net Fixed Assets Current Assets, Loans & advances

8 9 1659.3 1557.12 33651.3 32464.8 8 1

102.18 1186.57

17077.3 Inventories Sundry Debtors Cash & Bank Balances other curret assets loans and advances 5 905 1609.05 195.63 59048.3

17068.0 5 1701.19 5991.1 482.63 50810.7 9.3 -796.19 -4382.05 -287 8237.6 2781.66 642.97 2138.69 190.28 3325.26

2 2 78835.3 76053.6 5 9 29547.6

current assests
Less: Current Liabilities and provisions NET CURRENT ASSETS P & L A/c

30190.6 3 48644.7 46506.0 5 190.28 6

82296. 78970.

TOTAL

13

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As we have a look on the schedule of changes in working capital over the years 2008 and 2009 we can see that inventories and loans granted have increased, but debtors, cash balance and other current asset have decreased among current assets. And current liabilities have also increased. Because of which we can say that the amount of working capital have increased.

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Chapter- 4.2 MANAGEMENT OF INVENTORY
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MANAGEMENT OF INVENTORY
Inventory is very important part of current assets. Approximately 60% part of current assets is inventories. So the proper management of inventory is required for successful working capital management. As the larger amount of funds is involved in the inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories
MCF has classified its inventories into four major categories, namely; (a) Raw Material: These are those basic inputs which are converted into work-in-progress after the manufacturing process. Raw materials are purchased for production and storage purpose. (b) (c) Work-in-Progress: These inventories are semi-manufactured Finished Goods: These are completely manufactured products. products. These products are those which are ready for sale. These products are those which are ready for sale. Here is one another type of inventory also which is not directly related with production but facilitate in production process. These inventories are known as supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.

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OBJECTIVES OF INVENTORY MANAGEMENT There are so many objectives of inventory management. These objectives may differ from firm to firm. The main objectives of inventory management are:  To make adequate investment in inventories so that funds can be best utilized.  Smooth production in present and future.  Time availability of inventories.  Smooth and uninterrupted sale processes.  Minimize the cost related with inventories.  To meet the future price change.  To get adequate return on investment.

INVENTORY MANAGEMENT TECHNIQUES For inventories management the two questions must be answered. First, that how much be ordered in one order so that excess or insufficient inventories can be avoided. Secondly, when the order should be placed, so that timely availability of inventory is there. To get answer of these two questions we use two techniques which are following: 1) ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to know how much we must order in single time. So that all the cost related with inventory are minimum. Determining an optimum inventory level involves two types of costs (a) Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes the total of ordering and carrying costs. (a) Ordering Costs – All these costs which are incurred in placing one order. It includes; requisition, transportation, receiving, inspecting, clerical and staff services. Ordering costs are fixed per order. Therefore they decline as the order size increases. (b) Carrying Costs – Cost incurred for maintaining a given level of inventory are called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs vary with inventory. To calculate economic order quantity there is formula: EOQ = Where, 54 2AO/C

A O C 2)

= = =

Annual requirement Ordering cost per order Carrying cost of inventory

REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage (c) EOQ Lead Time is the time normally taken in replenishing inventory after the order has been placed. Average Usage is the inventory used on average daily basis or average weekly basis. So, Reorder Point = Lead Time x Average Usage (Lead Time x Average Usage) + Safety Stock If the firm also maintains safety stock then the reorder point will be: Reorder Point = So when the inventory of reorder point will be in store then the order will be placed for purchase of inventory. In this way, the production process will not stop because the inventory will be available for that period. INVENTORY MANAGEMENT IN MCF Inventory Management of MCF is systematic and organised. MCF has a different stores department. All the inventories except raw material purchases are handled by stores department. Stores department does its work very efficiently. INVENTORY PLANNING For the planning of inventory requirement, budgets are prepared by different departments as per requirements. The material issued during the budget period will not be more than the budget. This rule is strictly followed. For Naptha, requirements are planned in consultation with production department. Stores department have nothing to do with it. PURCHASE OF RAW MATERIAL As in MCF raw material are purchased in the following procedure. First of all the requirement for raw materials are determined by the production department every week in the form of ‘Purchase Requisition’ which contains name of Raw materials and the quantity. The quantity will be decided by the system. This requirement is sent to Purchase departments. 55

Purchase department will invite tender from a minimum of four Vendor. All these Tenders will be sealed, and seal will be opened in Finance Department and comparison will be made between the Tenders and lowest tender will be selected. Finally best tender will be selected and sent back to Purchase department. STORAGE CAPACITY OF MCF Regarding Raw Material Inventory, MCF has 2 terminals which facilitates direct unloading from a ship. Ammonia is stored in 10,000MT atmospheric pressure storage tank. And Phosphoric Acid is unloaded into two tanks of 8000MT each capacity. Regarding Finished Product Inventory, MCF has installed 20000MT capacity silo to handle fertilizer imported through ships to India. Where the Materials will be directly sent Silo for Bagging and dispatch. For products manufactured at MCF Mangalore unit, two Silo of 30000 and 10000 MT have been installed. ISSUING OF INVENTORY When any department requires any inventory, it sends its requirement to stores department. The maximum time within the requirement must be met is 72 hours. Material is issued on the basis of monthly weighted average method. INSPECTION OF INVENTORIES Inspection of inventory is made at the end of month randomly. The stock taking of all the items is not possible keeping in view number of items. SAFETY STOCK OF INVENTORIES For the continuous production process, safety stock of inventories is maintained. Inventories stock is maintained according to supply period and as per their requirement. INVENTORY CONTROL Inventory control is done by budgets. As the budgets are prepared for the planning purpose. Total requirements for inventory during financial period are determined by budget. When the material is issued to any department then the total amount of material issue is deducted from the budget of that good and balance is calculated, only this balance quantity of inventories

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will be issued during the remaining financial period. These records are maintained on daily basis. For different units, the records are prepared separately. For inventory control not any ABC analysis or VED analysis is done. The company also doesn’t follow standardized system of inventory like EOQ. In case of raw material as the input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the cotton season. In case of spares & stores, the inventory is easily available in market;

therefore, the same is procured on requirement basis. The company always maintains stock of critical items, the failure / non-availability of which can cause less of production. As all the units of group are in spinning the stock of critical items, where the high value is involved in financial terms, the inventory is maintained in single unit. This could save lot of money which can be utilized in another area and it also helps to maintain inventory at optimum level. So we can say that overall inventory management of MCF is quite satisfactory.

ABC Analysis
Table 4.2.1: Table showing ABC Analysis of Finished goods Items Mangala Urea 14.39 585.87 10.47 % of total Usage Value(Rs.) Usage Value% Category A B

Mangala DAP Mangala 20:20:20 TR Mop 17:17:17 TR Urea TR DAP TR SSP TR Zinc Sulphate Gypsum TR Filler TR Neem ABC

70.22

92.83

1.82

C

By looking at the table we can see 15.39% of the quantity of items and items valuing 87.71% belonging to ‘A’ category. 14.39% of the quantity of items and items valuing 10.47% 57

belongs to ‘B’ category and 70.22% the quantity of items and items valuing only 1.82% belong to ‘C’ category. The items coming under A,B and C respective are listed below: o A category- Mangala Urea, Mangala DAP o B category- Mangala 20:20:20, TR Mop o C category- 17:17:17, TR Urea, TR DAP, TR SSP, TR Zinc Sulphate, Gypsum, TR Filler, TR Neem, ABC. This implies that the Mangala Urea and Mangala DAP should be given strict supervision as it comes under ‘A’ category followed by ‘B’ and then followed by ‘C’. ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN MCF

I. INVENTORY TURNOVER RATIO
It indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which the firm is to manage inventory. A high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold, the lesser amount of money is required to finance the inventory. Inventory (Raw Material) Turnover Ratio = Cost of Goods sold. Average Inventory Table 4.2.2: Table showing Inventory Turnover Ratio of MCF, Mangalore Cost of goods sold YEAR (Rs.crs) 2005 2006 2007 2008 2009 790.55 976.86 1238.11 1468.14 2179.01 Average Inventory 87.87 118.17 142.1 156.32 170.73 Stock turnover ratio 9.00 8.27 8.71 9.39 12.76

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Chart 4.2.2: Chart showing Inventory Turnover Ratio of MCF, Mangalore Inventory turnover ratio indicates how many times stock has turned over during the year. Higher the ratio higher is the management of inventory. Here the ratio has increased during the year 2009. Where the ratio was only 8.27 in 2006 and now it has increased to 12.76 over the years. This indicates the company is effectively managing the inventories. And only less part of working capital is needed for inventory because of less inventory holding period.

II. INVENTORY HOLDING PERIOD
The number of days inventory is also known as average inventory period or inventory holding period. A high number of days inventory indicates that there is a lack of demand for the product being sold. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands. Inventory holding Period = 365 Inventory Turnover Ratio TABLE 4.2.3: Table showing inventory Holding Period of MCF, Mangalore YEA Inventory Turnover Holding period
(Days)

R Ratio 200 5 200 6 200 7 200 9.00 8.27 8.71 9.39 59

41 44 42 39

8 200 9 12.76
29

Chart 4.2.3: Chart showing inventory to working capital turnover ratio of MCF, Mangalore Here if the number of days of Inventory holding period is high indicates there is less demand for the products. Where as in MCF the holding period is decreasing every year which is a good indicator for company’s progress. Holding period in 2006 was 42 days which went on reducing every year, now it’s 29. This shows that the increasing acceptance and demand for the products of MCF and saves a lot of expenses incurred for holding of inventory.

III.

INVENTORY TO WORKING CAPITAL RATIO:

Percentage measure of a firm's capability to finance its inventories from its available cash. Numbers lower than 100 are preferable as they indicate high liquidity. Numbers higher than 100 suggest that the inventories are too large in relation to the firm's financial strength This ratio is usually calculated to study the liquid financial position of business enterprises. Inventory to working capital ratio = Inventory/ working Capital *100

TABLE 4.2.3: Table showing inventory to working capital turnover ratio of MCF Inventory(Rs.lakhs ) Inventory to working Capital ratio 47.91 51.15

YEAR 2005 2006

working capital 19640.69 9409.24 27812.7 14225.13 60

2007 2008 2009

14195.68 17068.05 17077.35

30398.15 46505.46 48644.75

46.70 36.70 35.11

Here we can observe that the percentage of inventory in total inventory has been decreased over the years. During 2006 it was very high where upto 51 percent of total working capital is in the form of inventory which goes on reducing. In the current year its only 35 percent of total working capital is the form of inventory. And because of reduction of Inventory percent in the working capital we can say that the company is in good liquidity position.

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Chapter- 4.3 RECEIVABLES MANAGEMENT

RECEIVABLES MANAGEMENT
Accounts receivables are simply extension of credit to the firm’s customers, allowing them a reasonable period of time in which to pay for the goods. Most firms treat accounts receivables as a marketing tool to promote sales and profits. They represent extension of credit and investment of funds and must be carefully managed. Every firm must develop a credit policy that includes setting credit standard, defining credit terms and employing methods for timely collection of receivables. The receivables (including the debtors and the bills) constitute a significant portion of working capital and are an important element of it. The receivables emerge whenever goods are sold on credit and customers receivables are created when a firm sells goods or services to its customers and accepts, instead of the immediate cash payment the promise to pay within specified period. Thus, receivables are a type of loan extended by 62

the seller to the buyer to facilitate the purchase process. As against the ordinary type of loan the trade credit in the form of receivables is not a profit making service but an inducement or facility to the buyer-customer of the firm. Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up the sale, which ultimately results in pushing up the profits earned by the firm. At some time selling goods on credit result in blocking of funds in accounts receivables. Additional funds are required for operating needs of business, which involves extra costs in terms of interest. Moreover, increase in receivables also increase chances of bad debts. The creation of accounts receivables is beneficial as well as dangerous. The finance manager has to follow a policy which uses cash funds as economically as possible by extending receivables without adversely affecting the chance of increasing sales and making more profits. Receivables Management generally means what type of credit policy a firm should adopt so that sales and profits can be promoted on the one hand and funds can be economically utilized on the other hand. So the receivables management must be attempted by adopting a systematic approach and considering the following of receivables management: (1) (2) THE CREDIT POLICY CREDIT CONTROL

1. CREDIT POLICY It may be defined as the set of parameters and principles that govern the extension of credit to the customers. This requires the determination of (i) (ii) The credit standard i.e. The conditions that the customers must meet before being granted credit and The credit terms i.e. the terms and conditions on which the credit is extended to the customers. These are discussed as follows: The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of the customers. Therefore, to be on a safer side, it must set credit standard which should be applied in selecting customers for credit sales. The credit standards of a firm represent the basic criteria for the extension of a credit to customer. So the credit standard is the combination of three C’s 63

These are: (i) (ii) (iii) Credit Terms The credit terms refers to the set of stipulation under which the credit is extended to the customers. The credit terms may relate to the following: (a) Credit Period – The credit period is an important aspect of the credit policy. It refers to the length of time customers are allowed to pay for their purchases. It may differ from one market to another market. The credit period generally varies from 15 days to 60 days. In some cases the credit period may be zero and only cash sales are made. It refers to the time duration in terms of net date e.g. if a firm’s credit terms are “net 30”; it means the customers are expected to pay within 30 days from the date of sales. As much the credit period will be shorter, it will be beneficial for a firm. But the firm has to lengthen its credit period to increase sales. But one must compare the cost of extended credit with the incremental profits. If this cost is less then it will be (b) beneficial for company to increase the credit period. (c) Discount Terms – It is reduction in payment offer to customer to induce them to repay credit obligation within a specified period of time. In practice credit terms would include: (i) (ii) (iii) The rate of cash discount The cash discount period The net credit period Character of a person Capacity of a person Condition of a person

2. CREDIT CONTROL The next important step in the management of receivables is the control of these receivables. Following are the directions for controlling the receivables. (1) The Collection Procedure – The overall collection procedure of the firm should neither be too lenient nor too strict. A strict collection policy can affect the goodwill and damage the growth prospects of the sales. If a firm has a lenient credit policy, the customer with a natural tendency towards slow payments may become slower to settle

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his accounts. One possible way of ensuring early payments from customers may be to charge interest on over due balances. (2) Monitoring of receivables – To control the level of receivables, the firm should apply regular checks and there should be a continuous monitoring system. For this, number of measures are available as follows: (i) (ii) A common method to monitor the receivables is the collection period or Another technique available for monitoring the receivables is known as number of day’s outstanding receivables. ageing schedule. Ageing schedule down book debts according to the length of time of which they have been outstanding. The ageing schedule provides more information about collection experience. It helps to shot out the slow paying debtors. The Performa of the ageing schedule prepared by the MCF is as follows:

As earlier discussed, credit sales are too much necessary to increase the total sales. The main reason behind this is cut-throat competition. There are also many competitors of MCF in the market, s to compare with them; MCF has to make credit sales. 20% to 30% of current assets of MCF are sundry debtors. MCF has a good receivable policy as it has large amount of credit sales.

I. CREDIT POLICY OF MCF MCF does not directly make sales. Sales are made by area office. So the sales process is decentralized. As the sales process, debtors are also collected by the Area office directly. Corporate office just receives the amount from the sales of concerned area office. But it does not have any record of outstanding debtors. It sends the credit note to MCF after receiving amount against any debtors. So record for outstanding debtors is maintained by Area office itself. Area office sends fortnightly reports to corporate office which records the data about 65

the outstanding debtors for different periods. In these reports debtors outstanding for one month or six months are shown separately. In this way, corporate office comes to know about age segments of different customers. Corporate office may avoid selling goods to those customers who have not paid for a long period.

CREDIT POLICY VARIABLES 1. Credit Standards – MCF provides credit to customers after getting information about that customer. For this market research is done by marketing department to know about reputation of customer in the market and financial position of him. From the records of customers having MCF and from financial record of those customers, the ability to pay is determined. Thus customer is only known after getting information about him and then credit is provided. 2. Credit Terms (a) Credit Period – For different products MCF provide different credit period. These credit terms are according to the nature of product which are following: Scrap / waste Imported Fertilizers Manufactured Fertilizers (b) Cash Discount – Advance payment 15 days credit Afterwards 1 % C.D. prior to material dispatch Interest free 18 % p.a. interest chargeable cash basis 40 days 15 days

II.

CREDIT CONTROL Collection efforts made by MCF:

Due to cut-throat competition MCF has to make credit sales. To collect the funds MCF has adopted a decentralized method. MCF has established its Area Office in different cities as in Bangalore, Hassan, Davangere, Hubli, Raichur, Callicut, Coimbuttur, Trichy, Nellor, Kholapur , and these centers collect money from the debtors and send it to corporate office. The number of Area Office and city depends upon the number of customers to minimize the bad debts and to accelerate the collections and sales. 66

Commission is also paid to agents This percentage is only on the basis of the realization amount.

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN MCF DEBTORS TURNOVER RATIO This ratio indicates the number of times average debtors are turned over during a year. The higher the value of debtor turnover ratio the more liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors. Debtors turnover ratio = Sales Avg. Debtors Table 4.3.1: Table Showing Receivable Turnover Ratio of MCF, Mangalore Receivables YEAR Sales(Rs.lakhs) Turnover Average Debtors 2005 87919.4 16.61 5294.28 2006 37.67 108384.1 2877.43 2007 43.05 137255.86 3188.40 67

2008 2009

162539.14 247197.93

4589.70 2153.69

35.41 114.78

Chart 4.3.1: Chart Showing Receivable Turnover Ratio of MCF, Mangalore

As we can observe that, the debtors turnover ratio of the company has increased from 35 times in year 2008 to 114 times in year 2009. Increasing RTR is good for the company as it assures that the sundry debtors are more liquid.

Debtor Conversion Period (DCP) The average no. of days for which a firm has to wait before its receivables is converted into cash. DCP = 360 DTR Table 4.3.2: showing debtors Conversion Period of MCF, Mangalore Receivables YEAR 2005 2006 2007 2008 2009
Debt collection

Turnover Period (Days) 16.61 22 37.67 10 43.05 8 35.41 10 114.78 3 68

Chart 4.3.2: Chart showing Debtors Collection Period of MCF, Mangalore The DCP of the spinning mill has decreased from 10days in year 2008 to 3 days in year 2009 which is quite a good fact as lower DCP assures less time period for the conversion of receivables into cash.

Chapter- 4.4 CASH MANAGEMENT
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CASH MANAGEMENT
Cash management refers to management of cash balance and the bank balance and also includes the short term deposits. The cash is important current asset for the operation of the business. Cash is the most liquid and can be used to make immediate payments. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. On the other hand extreme liquidity may take uneconomic investments. This underlines the significance of cash management. The term cash includes coins, currency and cheques held by the firm ad balances in its bank accounts. Sometimes near- cash items such as marketable securities of bank item deposits are included in cash. A financial manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. For this he will have to forecast the cash inflows from sales and outflows for costs etc. This will enable the financial manager to identify the timings as well as amount of future cash flows. Cash management does not end here and the financial manager may also be required to identify the sources from where cash may be produced on a short term basis or the outlets where excess cash may be invested for a short term.

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Cash is the basic input needed to keep the business running on continuous basis. It is also the ultimate output expected to realize by selling the product manufactured by the firm. Cash shortages will simply disturb the firm’s manufacturing operations where excessive cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor less. Hence, a major function of the financial manager is to maintain a sound cash position. Cash management is one of the key areas of working capital management. A part from the fact that it is the most liquid current asset, cash is the common denominator to which all the current assets can be reduced because the major liquid asset i.e. receivables and inventory get eventually converted into cash. Cash management is concerned with the managing of:  Cash inflows and outflows of the unit  Cash flows within the unit  Cash balance held by the unit at a point of time by financing deficit or investing surplus cash

MOTIVES FOR HOLDING CASH Transaction Motive It means a firm holds cash for conduct of business. The daily requirements of cash come under this motive. So enough cash for smooth business is required for transaction motive. Precautionary Motive Under this motive cash is held for most contingencies in future. There may be so many reasons due to which the emergency of cash arises. These reasons can be: (i) (ii) (iii) Sudden rise in the demand which leads to more production Due to inflation Due to any miss-happening in future like loss by fire theft etc. the cash is held for precautionary motive in advance. This cash may be held as marketable securities which are highly liquid and low risky. Speculative Motive The speculative motive relates to holding of cash for investing in profit making opportunity as and when arises. The opportunity may arise in securities, in material purchasing or in any 71

other type. By holding cash for speculative motive, the firm can choose most profitable opportunity, yet by enlarge, business firm do not engage in speculations because the primary motive to hold cash are transaction and precautionary motive. In MCF, it holds cash only for transaction motive. Speculation and precautionary motives cash is held by corporate office. If the MCF requires some more cash to meet any future contingency then it informs about it to corporate office and corporate office sends cash to MCF as per requirement. But the MCF has to give the reasons for extra cash to corporate office. The firm should evolve strategies regarding the following four facts of cash management: (1) (2) (3) (4) Cash Planning Managing the cash flow Optimum cash level Investing surplus cash

1.

CASH PLANNING

Cash planning is a technique to plan to control the use of cash. Cash planning can help to anticipate future cash flows and the need of the form and reduces the possibility of idle cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the most significant device to plan for and control cash receipt and payments. The unit under the study makes cash planning through following tools:  Cash Budget  Rolling cash flow statement  Daily cash flow statement The cash budgets are prepared by the firm on monthly and yearly basis. Through cash budget the unit can make estimates of cash receipts and disbursement during a future period of time. There estimates show the requirement of cash in the unit.

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Another device used for cash planning is six monthly rolling cash flow statement prepared on monthly basis. This statement shows the projections of inflows and outflows of cash during the next six months. This statement can help in taking various decisions, if the unit wants to make any capital payment, these statements can tall when there is surplus of cash and payments can be made during the month. Daily cash flow statement is prepared to see the daily cash position. There estimations are sent to corporate office at Bangalore so that needed cash is obtained at night time. 2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and outflows without any loss to the unit and without impairing its goodwill in the market. These are made at head office Ludhiana so the main source of cash inflows to MCF is the cash credit limit, which is as follows:

Table 4.4.1: Table showing Credit Limit Available to MCF, Mangalore Banks Main Limit (in crores) Peak Normal Corporation Bank Axis Bank State Bank of India The main limits are controlled by H.O. The sub-limits have been allocated to the unit for fulfilling day-to-day requirements of working capital. The daily bank-position of sub-limits is fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds get transferred from main limits. The interest rate paid for this is near about 11.25%. The cash credit limits are sanctioned by the bank against the hypothecation stocks and fluctuating assets as security. 73 300crores 300 crores 500 crores in month. Sub-limit transfer to LDH Unit (in crores)

The unit can withdraw from these limits as and when needed. The amount received from the sale of Fertilizers is debited at head office in main limit. To exchange the efficiency of cash management the surplus funds are transferred to other units if those units need cash thus increasing the overall profitability. Main outflow of the unit is on raw material cost. Different types of raw material are purchased from different states. Cash outflows also arise on account of purchase of stores, spares and all other material normal credit for these products is mainly 30 to 60 days and full credit period is used. 3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the optimum level i.e. neither it is too high that it remains idle and the firm losses interest on it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5 lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per day is kept in hand, thus the unit maintains the appropriate amount of cash balance and meets the firms obligations as and when they due.

4.

INVESTING IDLE CASH

The company has very good system of managing its current assets. The current assets of the unit are managed at corporate level and the unit seeks funds according to their requirements calculated on day-to-day basis. Hence there are no idle funds at unit level. As the funds are monitored / controlled at corporate level, therefore, it becomes the prime responsibility of H.O. to have a good policy of investing idle funds in an appropriate security keeping in view the requirement of funds in the future and liquidity of the security in which the investment is being made.

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Chapter- 5

75

FINDINGS, SUGGESTIONS AND CONCLUSION

Findings
The Analysis of working capital management of MCF using ratio analysis provides following findings. 1. The MCF is in a favorable liquidity position. The liquidity ratios namely Current Ratio and quick ratio are favourable. Current ratio has increased from 2.57 to 2.61 in the year2009 from 2008. In case of quick ratio it raised from 1.99 to 2.05 in the year 2009 from 2008. These ratios show favourable liquidity position, high liquidity may impact adversely on profitability. 2. Operating Cycles of the organistion is very less which is good. As it helps in lower working capital needs. Gross operating cycle and net operating cycle have reduced from 78 to 72 and 67 to 61during 2009 compared to 2008. 76

3. The activities ratio like Inventory to working capital ratio is decreasing which is a favorable sign. The ratio have decreased from 36 in 2008 to 35 in 2009. And even the inventory holding period has also decreased from 39 in 2008 to 29 in 2009. By this the requirement of working capital has also decreased 4. The collection period of debt has reduced from10 days in 2008 to 3 days 2009 though the company gives a credit period of 30 days . This is favorable condition to MCF as the company needs less amount of working capital. 5. The portion of inventory is high in current assets is high compared to other assets in all the years, but the portion is reducing over the years, which is favourable to company.

6. The company gets the funds for working capital management from the nationalized banks upto 300 crores. 7. The profits has decreased in 2009. The 2009 accounting year witnessed a negative rate in growth rate of profit of -55%. The reason for negative growth in profit may be assigned to increase in expenditure. The rate of increase in expenses for the last year was 101%. This increase is because of increasing cost of raw material from 1130 crores in 2008 to 1796 crores in 2009. Total expense of MCF has increased from 1532 to 2273 crores.

8. The products of MCF are sold to farmers through area office located in Karnataka, TamilNadu and kerala.

These are the findings from the analysis of financial statements of organization except in case of profit.

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Suggestion:
1. The study showed, over the gross profit Ratio has been increasing where as the Net profit ratio has decreased. So the administrative and distributive expenses should be controlled. 2. As per the balance sheet the reserves and surplus of the company is 19770 crores, it is more than the capital issued of 11855 crores. This additional amount can be used for upgrading the plant. 3. The company is in the good liquidity position with the current ratio 2.61 and the quick ratio of 2.05. This increase is mainly due to increase in cash and bank balance. Since cash and bank balance is non earning current assets, the company has to take steps to reduce them. 78

4. The debt equity ratio is just 1.02. Company can raise funds through debt source but the interest coverage ratio has decreased. This decrease is due to increase in interest and other financial charges

5. Profit and loss trend show that the profit has come down in the last year, so the company should take necessary steps to minimize expenditure.

6. MCF can concentrate in intensifying its distribution channel by increasing area office. currently there are only 10 area office located only in South India,

Conclusions:
The present study ‘Analysis of working Capital Management at MCF, Mangalore’ is undertaken through the ratio analysis. This gives an image of the quantitative aspect of the company’s financial aspect. Ratios are calculated from current year numbers and are then compared to previous years, and industry standards. By conducting an analysis of working capital management of MCF, Mangalore, it is found that working capital management is managed in a professional manner. The company has maintained industrial standard .MCF has sufficient funds to meet its all its obligations Cash management and receivable management are efficient because of centralized control on these. Safety measures for inventories are also quiet sufficient in MC F. Overall the working capital management of MCF is very much efficient and well managed. 79

Annexure 1: Bibliography Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd. Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill. Van Horne, Jame C; Fundamentals of Financial Management. Rustagi R.P.; Principles of Financial Management. Annual Reports of Mangalore Chemicals and fertilizers

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Annexure 2: Balance sheet:

Mangalore Chemical and Fertilizers, Mangalore
Mar09 LIABILITIES
Capital Reserves & Surplus Secured Loans unsecured loans deferred tax liability, TOTAL 11854.8 6 27064.8 1 39120.4 9 559.01 3701.96 82301. 13 11854.8 6 25425.5 1 35575.4 3 2425.46 3689.61 78970. 87 11854.8 6 22887.3 2 17567.4 5 5275.5 3561.34 61146. 47 11854.8 6 21206.9 8 14818.9 8 6550.15 3298.44 57729. 41 11854. 86 19769. 77 7325.6 6 2824.8 1 2936.7 9 57729. 41

Mar08

Mar07

Mar06

Mar05

81

ASSETS
Gross Block Less: Depreciation Net Block capital work in progress net Fixed Assets Current Assets, Loans & advances Inventories Sundry Debtors Cash & Bank Balances other curret assets 61005.9 6 29013.8 8 31992. 08 1659.3 33651. 38 17077.3 5 905 1609.05 195.63 78835. 35 30190.6 48644. 75 190.28 58129.0 1 27221.3 2 30907. 69 1557.1 2 32464. 81 17068.0 5 1701.19 5991.1 482.63 76053. 69 29547.6 3 46506. 06 55747.5 4 25653.1 4 30094. 4 648.92 30743. 32 14195.6 8 3739.1 1584.58 511.79 53382. 81 22984.6 6 30398. 15 53503.4 4 24106.4 29397. 04 519.67 29916. 71 14225. 13 1318.85 365.46 2446.48 48738. 93 20926.2 3 27812. 7 47716. 86 23250. 66 24466. 2 605 25071. 2 9409.2 4 2218 446.03 222.07 30226. 71 10586. 02 27812. 7

current assests
Less: Current Liabilities and provisions NET CURRENT ASSETS P & L A/c

TOTAL

82296 .13

78970 .87

61141 .47

57729 .41

5288 3.9

Annexure 3: Profit and loss account
Profit & Loss account ------------------- in Rs. Cr. ------------------Mar' Mar Mar Mar Mar 05 '06 '07 '08 '09 12mt 12 12 12 12 hs mths mths mths mths 879.1 9 1,083.8 4 1,372.5 6 1,627.6 7 2,471.9 8

Particulars Income Sales Turnover

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Excise Duty Net Sales Other Income Stock Adjustments

1.17 878.0 2 6.97 -7.66

1.53 1,082.3 1 1.98 46.51

1.51 1,371.0 5 5.39 -35.92

2.28 1,625.3 9 -3.5 -0.6

2.36 2,469.6 2 -93.72 -6.85

Total Income
Expenditure Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Preoperative Exp Capitalised Total Expenses

877. 33
600.9 127.0 4 25.61 13.26 47.41 13.96 0 828. 18

1,130. 1,340. 1,621. 2,369. 80 52 29 05
792.31 169.65 29.39 13.76 58.69 10.28 0 1,074. 08 938.55 193.7 32.68 17.68 66.55 17.91 0 1,267. 07 1,130.0 3 259.61 40.87 17.34 66.24 17.52 0 1,531. 61 1,796.1 7 278.39 43.81 31.57 100.86 21.36 0 2,272. 16

83