A STUDY ON

WORKING CAPITAL MANAGEMENT

with reference to installation of Expansion project

RASHTRIYA ISPAT NIGAM LIMITED, VISAKHAPATNAM

A Project report submitted in partial fulfillment of the

requirements for the award of

MASTER OF COMMERCE
Submitted by

S. NEELAMMA

(Regd. No. 111233106008)

Under the esteemed guidance of

SRI S. BANGAR RAJU

Manager (F & A)

SRI GOWRI DEGREE & P G COLLEGE

VISAKHAPATNAM
FACILITED BY HR DEPARTMENT

SRI O.R.M.RAO, AGM (HRD)

SRI M. L. S. VARMA, Dy. Mgr. (HRD)
VISHAKHAPATNAM STEEL PLANT

CERTIFICATE
This is to certify that the project work entitled A Study on Working
Capital Management at RASHTRIYA ISPAT NIGAM LIMITED,
VISAKHAPATNAM is a bonafide work carried out by 01-09-2012 to 29-09-

2012 under our guidance to

Place: Visakhapatnam

S. BANGAR RAJU

Date:

Manager (F & A)

DECLARATION
I S. NEELAMMA that this project report entitled A
STUDY

ON

WORKING

CAPITAL

MANAGEMENT

IN

VISAKHAPATNAM STEEL PLANT has been prepared by me during

the period of 4 weeks from 01-09-2012 to 29-09-2012 under
the guidance of Sri. S. BANGAR RAJU Manager (F &A ) is
the result of my own work and has not been submitted to any
other institute or university earlier.

Place : Visakhapatnam
student
Date

(S.Neelamma)

Signature of the

ACKNOWLEDGEMENT
With great pleasure, I express my deep sense of gratitude to the management of
RASHTRIYA ISPAT NIGAM LIMITED, Visakhapatnam for giving me this very
inspirational opportunity to do my observation study in their reputed company to take this
opportunity to express my deep and profound gratitude to the people concerned who have
helped me directly or indirectly in successful completion of this project. S. BANGAR
RAJU Who found the greatest confidence in me which would always act as a motivator in
my life.
I convey my sincere thanks to Mr. S. BANGAR RAJU Manager (F & A),RINL who
has motivated me with their valuable suggestion and helped throughout the project in
permitting to perform various tasks in this esteemed organization.
I would like to take the pleasure of this opportunity to express my heartful gratitude to
my

guide

Mr.ORM

RAO AGM.(HRD)

&MR.MLS.VARAMA,

DY.Mnager,HRD,

RINL/VSP & Student coordinator for accepting my request for doing the project work in their
esteemed organization.
Finally I would like to thank other faculty members for their extended co-operation &
suggestions which have helped a lot. Lastly, I would like to thank my parents for their
encouragement and support.
(S. NEELAMMA)

PREFACE
This project report is a presentation of my effort to study the practice of Financial
Management in a public sector enterprise, with reference to Rashtriya Ispat Nigam Limited,
Vishakhapatnam. The report presents the practical approach in the subject of Financial
Management, mainly in the field of WORKING CAPITAL MANAGEMENT AT
RINL IN VISHKHAPATNAM.". It intends to provide brief knowledge of various
concepts, Principles, approaches, considerations relevant to this field. The Project Report
has undergone a realistic survey of actual theory and practices in VSP although there may be
much gap to be bridged.
This report seeks to cover the topics of Financial Management, mainly focusing on
the aspects like working capital Management, Cash Management, Receivables Management,
Inventory Management etc.
The report has been divided into five chapters and the arrangements of topics in
various chapters have been grouped according to the analysis of the subject.

(S. NEELAMMA)

CONTENTS
CHAPTER I

1- 7

INTRODUCTION
NEED FOR STUDY
OBJECTIVES OF THE STUDY
METHODOLOGY
LIMITATIONS
CHAPTER II

8-55

INDUSTRY PROFILE
COMPANY PROFILE
CHAPTER- III

THEORETICAL

56-82
FRAMEWORK

OF

THE

WORKING

CAPITAL MANAGMENT
CHAPTER- IV

83-106

DATA ANALYSIS & INTERPRETATION

CHAPTER-V

107-109

 SUMMARY AND SUGGESTIONS

BIBLIOGRAPHY

INTRODUCTION
Steel comprises one of the most important inputs in all sectors of economy. Economy
of any country depends on the strong base of the iron and steel industry. Steel is versatile
material with multitude of useful properties, making it indispensable for furthering and
achieving continuing growth of the economy-be it construction, manufacturing,
infrastructure or consumables. The level of steel consumption has long been regarded as an
index of industrialization and economic maturity attained by country. Keeping in view the
important of steel, the integrated steel plants with foreign collaborations were set up in the
public sector in the post- independence era.
Capital is essential for setting up and smooth running of any business. Investments
made on fixed assets will yield excess each cash inflows apart from the pay back amount and
is spread over a longer period of time. Hence the cash inflows (or) benefits associated are not
immediate but are expected in the future. Cash inflows & outflows occur on a continuous
basis in case of current assets. Credit forms an essential feature in the business (credit given
to customers 7 credit from liabilities, suppliers). Since there is some time log from the mine
of sales & sales realization current assets & current which together constitute the net working
capital, supports the business in its normal of operations. This calls for an efficient
management of working capital.
The policies, procedures and measures taken for managing capital again further
importance in an organization like RINL where the working capital requirements runs in
crores or rupees. Any mismanagement on the part of authority will not just cause loss but

may even impair business operations. It is in this context working capital has gained
importance.
The growth of any organization depends on the overall performance such as
production, marketing, human resource and financial performance of the organization. The
financial performance of the any organization reflects the strength, weakness, opportunities
and threads of the organization with respect to profits earned, investments, sales realization,
turnover, return on investment, net worth of capital. Efficient management of financial
resources and deliberate analysis financial results are pre requisite for success of an
enterprise. In that working capital management is one of the major and important areas of
financial management. Managing of working capital implies managing of current assets of
the company like cash, inventory, accounts receivable, loans an advance, bank balances and
current liabilities like sundry creditors interest payments and provision.
Rashtriya Ispat Nigam Limited is a multi-product steel-manufacturing unit with
varying cycle time for each product. The capital required by each department in a large
organization like RINL depends on the product target for that.
Particular year, invites the need for an effective working capital management. Monitoring the
duration of the operation cycle is an important aspect of working capital management and
control for an Effective management. RINL is now on its turn round path and needs to cut
cost and increase its revenue its revenue therefore it must have to keep close check on the
day to day expenses and to get a maximum utilization out of it. Some prominent issues
should always be taken into account like:
1. The duration of raw material stage depends on the regularity of supply, transactions
time, degree of perish ability, price ability, price fluctuations, and economics of bulk
purchases.
2. The duration of the work in progress stage depends of Length of the manufacturing
cycle, consistency in capacity utilization Different stages and efficient coordination of
various inputs.
3. The duration at debtors stage depends on the credit period Granted, discount offered
for prompt payments and efficiency and rigor of collection efforts.

Thus a detailed study regarding the working capital management in RINL is to be

done to consider the effectiveness of working capital management, identify the shortcoming
in management and to suggest for improvement in working capital management.

NEED FOR THE STUDY

LPG or Liberalization, Privatization and Globalization as it is referred in short today have
changed the scenario of corporate world and management of enterprises in our country. It has
now become more important to not just manage an organization but to achieve corporate
excellence simultaneously as the future belongs to learning and performing organizations.
As every business concern irrespective of its size, nature, and age needs funds to carry out
business operations such as purchase of raw materials, payment of wages and other day-today expenses, working capital becomes an important and integral part of business. Working
capital is the life blood and nerve centre of a business because no business can run
successfully without an adequate amount of it. Therefore, to manage working capital in any
sector is a challenging job.
The project report titled Working Capital Management at RINL, special
thrust on cash management deals with this matter and is based on the in-house
summer internship training at Rashtriya Ispat Nigam Limited (RINL), pertaining to
the requirement for the master degree from Sri Gowrie Degree & PG College,
Visakhapatnam, Andhra University Unless organization learn to manage its
working capital, success, will be elusive. Thus, the effectiveness of an organization depends
on the strength of its working capital management as it is core to the whole system. In the
context of Indias Steel Industry working capital management holds a greater significance
because steel which forms the backbone of any infrastructural facility, in recent years has
become more crucial for achieving rapid economic growth of our country.

Keeping this background in view, an attempt is made to examine the working capital
practices in RINL with special thrust on cash management. The project contains the basic
postulates of working capital, procedures for the analysis of working capital, and the impact
of shortcomings in the management of it. All this had been done to get a clear view of the
techniques of working capital management in Visakhapatnam steel plant.

OBJECTIVES OF THE STUDY

BROAD OBJECTIVES:
To find out the efficiency of working capital management in Visakhapatnam Steel
Plant.
To have a firsthand experience of the functioning of a large PSU Steel Plant.
To have a practical experience of the functioning of the Finance Department of a
steel producing company.
To study how working capital management practices plays an important role in
supporting other activities of an integrated steel plant.

SPECIFIC OBJECTIVES:
To gain familiarity with the various components of working capital in
Visakhapatnam Steel Plant.
To judge the success of the management in carrying on the daily transactions of
the company.
To gain an in-depth knowledge of the tricks of managing the daily financial
activities of VSP.
To find out the difference between the theoretical and practical aspect of working
capital management.
To study and come out with any solution for improvement of working capital
management at Visakhapatnam Steel Plant.

SIGNIFICANCE OF STUDY
The significance of adequate working capital in commercial undertaking s can never be over
emphasized. A concern needs funds for its day to day running. Adequacy or inadequacy of
these funds would determine the efficiency with which the daily business may be carried on.
Management of working capital is an essential task of the finance manager. He has to ensure
that the amount of the working capital available with his concern is neither too large nor to
small for its requirements. A large amount of working capital would mean that the company
has idle funds. Since funds have a cost, the company has to pay the amount as interest on
such funds. The various studies conducted by the Bureau of Public Enterprises have shown
that one of the reasons for the poor performance of public sector undertaking in our country
has been the large amount of funds locked up in working capital. This result in over
capitalization. Over capitalization implies that a company has too large funds for its
requirements, resulting in a low rate of return a situation is implies a less than optimal use of
resources. A firm has, therefore, to be very careful in estimating its working capital
requirements.
If the firm has inadequate working capital, it is said to be under capital, it is said to
be under-capitalization. Such a firm runs the risk of insolvency. This is because; Paucity of
working capital may lead to a situation where the firm may not be able to meet its liabilities.
It is interesting to note that many firms which are otherwise prosperous (having good
demand for their products and enjoying profitable marketing conditions) may fail because of
lack of liquid resources.

Limitations of the Study

Though the project is completed successfully a few limitations may be Limitation.

Although every effort has been made to study the working capital management in
detail, in an organization of VSP size, it is not possible to make an exhaustive study in
a limited duration of 6weeks.

Apart from the above constraint, one serious limitation of the study is that it is not
possible to reveal some of the financial data owing to the policies and procedures laid
down by VSP. However the available data is analyzed with great effort to get an
insight into Working Capital Management in VSP.

And analysis of sub topics is limited to some extensions.

The study is carried basing on the information and documents provided by the
Organization and based on the interaction with the various employees of the
respective departments.

METHODOLOGY
The data which I have collected for making this project is combination of both primary and
secondary data.
PRIMARY DATA:
This data had been collected through meetings and interviews with various managers and
employees of the finance department located in the administrative building of
Visakhapatnam Steel Plant. At the same time I had visited various departments for collection
of data. The departments that had been visited are as follows: Main Cash Department
Treasury Department
Pay Section

SECONDARY DATA:
Apart from the primary data certain secondary data were required for this project. Following
are the sources of secondary data:

Annual Reports
Cost & Budget Reports
Cash Report
Production Reports
Sales Reports

STEEL INDUSTRY
Steel is a versatile, constantly developing material that underpins all manufacturing
activity. If a product is not made from steel, then it is certainly made using steel at some
point in the manufacturing process.
OVERVIEW OF IRON AND STEEL INDUSTRY
HISTORICAL PERSPECTIVE
The finished steel production in India has grown from a mere 1.1 million tonnes in
1951 to 29.27 million tonnes in 2000-2001. During the first two decades of planned
economic development, i.e. 1950-60 and 1960-70, the average annual growth rate of steel
production exceeded 8%. However, this growth rate could not be maintained in the following
decades. During 1970-80, the growth rate in steel production came down to 5.7% per annum
and picked up marginally to 6.4% per annum during 1980-90, which increased to 6.65% per
annum during 1990-2000. Though India started steel production in 1911, steel exports from
India began only in 1964. Exports in the first five years were mainly due to recession in the
domestic iron and steel market. Once domestic demand revived, exports declined. India once
again started exporting steel only in 1975 touching a figure of 1 million tonnes of pig iron
export and 1.4 million tonnes of steel export in 1976-77. Thereafter, exports again declined
to pick up only in 1991-92, when the main producers exported 3.87 lakhs tonnes, which rose
to 2.79 million tonnes in 1995-96. The steel exports in 1999-2000 were 2.36 million tonnes
and in 2000-01 it was 2.57 million tonnes. The growth in the steel sector in the earlier
decades since Independence was mainly in the public sector units set up during this period.
The situation has changed dramatically in the decade 1990-2000 with most of the growth
originating in the private sector. The share of public sector and private sector in the

production of steel during 1990-91 was 46% and 54% respectively, while during 2000-01 the
same was 32% and 68% respectively. This change was brought about by deregulation and
decontrol of the Indian iron and steel sector in 1991. A number of policy measures have been
taken since 1991 for the growth and development of the Indian iron & steel sector. Some of
the important steps are
Removal of iron & steel industry from the list of industries reserved for the public
sector and also exemption from the provisions of compulsory licensing under the Industries
(Development & Regulation) Act, 1951, deregulation of price and distribution of iron &
steel, inclusion of iron and steel industry in the list of high priority industries for automatic
approval for foreign equity investments up to 74%, lowering of import duty on capital goods
and raw materials etc.
THE INDIAN STEEL SECTOR AFTER LIBERALISATION
The Indian steel sector was the first core sector to be completely freed from the
licensing regime and the pricing and distribution controls. This was done primarily because
of the inherent strengths and capabilities demonstrated by the Indian iron and steel industry.
During 1996-97, finished steel production shot up to a record 22.72 million tonnes with a
growth rate of 6.2%, while in 1997-98, the finished steel production increased to 23.37
million tonnes, which was 2.8% more than the previous year. The growth rate has drastically
decreased in 1997-98 and 1998-99 being 2.8% and 1.9% respectively as compared to 20% in
1995-96 and 6.2% in 1996-97. The growth rate in 2000-2001 has improved to a healthy
9.60% with the total production touching 29.27 million tonnes. The production of finished
steel during 2001-02 has been 30.61 million tonnes, which means a lower growth rate of
about 4.5% compared to the previous year. This fall in the growth rate of steel production has
been brought about by several factors that, inter-alia, include general slow down in the
industrial production and construction activities in the country coupled with lack of growth
in major steel consuming sectors. The total production of finished steel and the share of main
and secondary producers during 90's and up to 2002-03 are given in the annexure.

APPARENT CONSUMPTION OF STEEL

Apparent consumption of steel is arrived at by subtracting export of steel from the
total of domestic production and import of steel in the country. Change in stock is also
adjusted in arriving at the consumption figures. It is also treated as the actual domestic
demand of steel in the country. The year-wise apparent consumption of finished steel since
1990-91, is given in the table in the annexure.
PROJECTIONS OF FINISHED STEEL
In order to have a long-term perspective and planning, a Sub-Group on Steel and
Ferro Alloys was constituted for steel sector under the aegis of Planning Commission. The
Sub-Group deliberated upon all aspects including supply-demand projections for finished
steel during the period 2001-02 to 2011-12. Considering a GDP growth rate of 6.5% as
realistic during the 10th Plan, the Sub-Group has projected the demand for finished carbon
steel in the country. The figures are given in enclosed chart.
The iron and steel sector has experienced slow down from the year 1997 to 2001. The
growth of the steel sector is dependent upon the growth of the economy in general and the
growth of industrial production and infrastructure sectors in particular. The major reasons for
the slow growth in the steel sector during the last few years include: (a)

Sluggish demand in the steel consuming sectors Steel being the basic raw material
for the construction industry, the capital goods and engineering goods industry, as also
the auto sector and white goods sector, its growth is dependent upon the demand for
steel by these segments of the industry. Since no major infrastructure or construction
projects have been implemented in the last few years, demand for steel has remained

low. No major projects in the oil sector, power sector, fertilizer sector, where intensity
of steel consumption is high, have come up in the recent past.
(b)

Overall economic slowdown in the country. All major core sectors of the economy
have been facing an economic slowdown. These include, power, coal, cement,
industry, mining and steel. The slow down phenomenon is not restricted to the steel
sector alone. Only when the overall economy of the country picks up, the steel sector
would also show signs of revival.

(c )

Lack of investment by Government/private sector in major infrastructure projects Due

to budgetary constraints, no major construction activity in mega projects including
fertilizer, power, coal, railways etc. have been planned by the Government. Despite
liberalization of the economy and relaxation in the investment norms, private sector
investment is yet to materialize in the core sectors of the economy. This has also
contributed to slowing down demand for steel.

(d)

Cost escalation in the input materials for iron and steel Power tariff, freight rates, coal
prices etc. have been under the administered price regime. These rates have been
frequently enhanced, thereby contributing to the rise in input costs for steel making.

(e)

Continuous reduction in import duty on iron and steel. After liberalization, import
duty rates on iron and steel items have been gradually reduced over the years. This
has opened up the domestic iron and steel sector to international competition. Due to
rationalization in the import duty structure in 1999- 2000, the rates of basic custom
duty have generally gone up to about 35% average.

MARKET SCENARIO
After liberalization, with huge scale addition to steelmaking capacity, there is no
shortage of iron and steel materials in the country. Apparent consumption of steel increased
from 14.84 million tonnes in 1991-92 to 27 million tonnes in 2001-02. During 2001-2002,
due to economic slowdown, certain sector like power and fertilizer projects, auto sector and
white goods sector have shown a slump in demand for steel. Steel Industry has been facing a
slowdown in the level of demand due to slow down of the domestic economy and that of the

major steel-consuming sector. Efforts are being made to boost demand particularly in rural
areas and also to increase exports. Prices of iron and steel have declined in 2001-02 in tune
with global trends, while input cost have gone up. However, of late, there has been
resurgence in the price level mainly of flats and demand has also witnessed an upward trend.
In 2003-2004 steel sector market demand increased mainly because of massive construction
activity taken up in China.
PRODUCTION
Steel industry was de-licensed and decontrolled in 1991 and 1992 respectively. India
is 8th largest producer of steel in the world. In 2001-02, finished steel production was 30.61
million tonnes. Pig iron production in 2001-02 was 3.95 million tonnes. Sponge iron
production was 5.66 million tonnes in 1999-2000. In 2001-02, nearly 51% of crude steel
production was by public sector the remaining 49% was by private sector. In 2001-02, the
integrated steel plants produced 42% of finished steel and the remaining 58% was by the
secondary producers. Interface with consumers by way of Steel Consumer Council exists,
which is conducted on regular basis. Interface helps in redressing availability problems,
complaints related to quality.
PRICING & DISTRIBUTION
Price regulation of iron & steel was abolished on 16.1.1992. Distribution controls on
iron & steel removed except 5 priority sectors, viz. Defense, Railways, Small Scale
Industries Corporations, Exporters of Engineering Goods and North Eastern Region.
Development Commissioner for Iron & Steel makes allocation to priority sectors.
Government has no control over prices of iron & steel. Open Market Prices have been
generally stable, though fluctuations have been noticed. Price increases of late have taken
place mostly in long products than flat products. In the current financial year the long
product prices have increased by about 20% because of raise in demand internationally.
IMPORT AND EXPORT OF IRON AND STEEL
India was importing about 10 to 15 lakh tonnes of steel, annually. Due to a rise in
domestic demand, the import of saleable steel in 1996-97 reached a level of 1.80 million

tonnes. The incidence of import was mainly in hot rolled coils, cold rolled coils and semis.
Import of carbon steel during 2000-01 was about 1.41 million tonnes, which was about 12%
less than the import in 1999-2000. The total imports of carbon steel during six years up to
2001-02 are given in enclosed chart.
The Industry has been able to maintain its net exporter status from the last two years
in the trading of finished steel. In fact exports of non-flat products recorded a growth rate of
5.7% over 2000-01. The quantity of carbon steel exported from the year 1996-97 is as given
in enclosed chart.
Earlier, exports consisted mainly of plates, structurals, bars and rods, whereas now
additional items like semis, hot rolled coils, cold rolled coils, colour coated sheets, GP/GC
sheets and pig iron are also being exported. In future, it is expected that the quantum of
exports of more value added items would further increase.
MEASURES ON IMPORTS
Iron & Steel are freely importable as per the Exim Policy. India has been annually
importing around 1.5 Million Tonnes of steel. Imports have largely dropped, partly an
indication of greater self-sufficiency and partly the ability to control inflow of seconds and
defectives. To check unbridled imports of cheap/seconds & defective steel, several measures
have been put in place, like; The Government has fixed floor prices for seven items of
finished steel viz. HR coils, HR sheets, CR coils, Tinplates.
The other notable measure in this regard is that imports of certain types of steel have
been subject to mandatory compliance of quality standards as specified by the Bureau of
Indian Standards (BIS). Adherence to BIS norms imply supplying information like name and
address of the importer, generic or common name of the commodity, net quantity in terms of
standard units of weights and measures, month and year of packaging and maximum retail
sale price. Moreover all manufacturers/exporters of the listed products shall be required to
register themselves with the BIS.
Further protection in this regard has been the issuance of the Government notification
to 3 major ports Kolkata, Mumbai and Chennai to monitor the flow of foreign steel into the

country. The customs duty on second and defective HR Coils has been raised to the bound
rate of 40 per cent. Anti dumping duty has been levied on import of HR coils from Russia
and Ukraine.

MEASURES FOR EXPORT OF IRON & STEEL

Iron & Steel are freely exportable and India is a net exporter of steel. Advance
Licensing Scheme allows duty free import of raw materials for exports. Duty Exemption
Pass Book Scheme also facilitates exports. Indian steel exports have been subject to antidumping/anti-subsidy duties actions by the stronger economies over the last few years. These
include:
Anti dumping duty on cuttosize plate exports from Bhilai Steel Plant of SAIL with
a total duty of 72.48 per cent, and an anti subsidy component of 14.82 per cent. India
however, has been exempted from the safeguard duties under Section 201 of the US Trade
Laws on almost all steel products except carbon flanges. This is on account of the countrys
status as a developing nation. EU has also taken AD/CVD actions on import of HR coils.
However, a Suspension Agreement with exporters like SAIL allows the company to sell at a
price not lower than the agreed one. The EU has also imposed safeguard duties for India;
such measures apply on electrical steel sheets and stainless steel wire rods.
Canada has covered pipes, hot rolled, cold rolled and galvanized products in the
AD/CVD actions. China has recently imposed a safeguard duty on the import of steel, which
ranges from 7-26%. The country-wise details are yet to be worked out. The rising trend in
Indian steel exports that was being witnessed in the last couple of years was halted due to
these anti dumping actions initiated by the advanced, developed nations of the world, which
led to the loss of major markets for the Indian steel exporters. Despite the initial setbacks
Indian exports have recovered - largely due to the ability to find out alternative export
markets where selling steel has been profitable. Steel Exporters Forum has been recently set
up to boost steel exports.

An Anti dumping Directorate has been set up under the Ministry of Commerce &
Industry with adequate power to fight trade actions while remaining within the WTO
framework.

DUTIES & LEVIES ON IRON & STEEL

Custom Duties
Peak rate of Custom Duty has been reduced sharply during last 5 years. In the Union
Budget 2002-03 it has been further reduced to 30%. This has forced domestic industry to
become internationally competitive. Custom Duty on seconds and defectives has been raised
to the bound rate of 40%. Custom Duty has been reduced on a wide range of inputs, which
would bring down the cost of production for the domestic steel industry. Custom Duty on
Met Coke has been reduced to 5% for integrated steel plants using blast furnace, pig iron
units and steel plants using Corex technology.
Excise Duty
Excise Duty on iron & steel has not been reduced in successive budgets. At present
excise duty on all iron and steel products is 16% ad valorem called CENVAT. High excise
duty has made domestic industry unviable.
LEVIES ON IRON & STEEL
SDF- (Steel Development Fund)
This was a levy started for funding modernization, expansion and development of steel
sector. The Fund, inter-alia, supports:
Capital expenditure for modernization, rehabilitation, diversification, renewal &
replacement of Integrated Steel Plants.
Research & Development
Rebates to SSI Corporations
Expenditure on ERU of JPC

Fund was abolished on 21.4.94. Cabinet decided that Corpus could be recycled for loans
to Main producers. Interest on loans to Main Producers be set aside for promotion of R&D.
An Empowered Committee has been recently set up to guide the R&D effort in this
sector.

EGEAF
This was a levy started for reimbursing the price differential cost of inputs used for
engineering exporters. Fund was discontinued on 19.2.96.
OPPORTUNITIES FOR GROWTH OF IRON AND STEEL
The New Industrial Policy Regime
The New Industrial policy has opened up the iron and steel sector for private investment
by
(a)

Removing it from the list of industries reserved for public sector and

(b)

Exempting it from compulsory licensing. Imports of foreign technology as

well as foreign direct investment are freely permitted up to certain limits under
an automatic route. Ministry of Steel plays the role of facilitator, providing
broad directions and assistance to new and existing steel plants, in the
liberalized scenario.

GLOBAL SCENARIO
The global production of crude steel increased from 777 million tonnes in 1998 to 785
in 1999. The world steel consumption has also increased by 1%. The international steel trade
constituted around 279.6 million tonnes or 39.8% of the production. World steel industry
witnessed major ups and downs in the last two decades and especially over the past five
years. The pattern of trade has been upset by two important developments. These are the
collapse of the Soviet Union and the severe financial crisis in most South East Asian
countries as well as in Korea and Japan. The Asian crisis and the collapse of USSR have
transformed importers of steel into exporters. Till the recent financial crisis, the Asian

countries were large importers of steel. In 1996, eight of the ten largest steel producing
nations were in Asia and import by the region in the mid 1990s was around 80-90 million
tonnes of finished and semi finished steel per year, which is equivalent of a third of total steel
trade. After the Asian crisis, the region got transformed into a net exporter of steel. The world
steel industry is today characterized by excess capacity and poor demand. This scenario has
led to an undesirable impact in the form of increasing protectionism within the developed
countries and large scale dumping in the international markets. During this year, Indian
exports have been subjected to Anti- dumping/Counter-veiling duties investigations in EU,
USA and Canada. There have also been instances of dumping of steel in our country. It is in
this global context that the Indian steel industry will have to cast its future role. World
production of crude steel in March 2003 rose by 8.2% to 79.6 million tonnes, the highest
monthly total in over a decade. The total of the 3 months to date was 226.8 million tonnes,
8.8% higher than the January to March period in 2002.

Cessation of gas supply in Venezuela stopped about 6 million tonnes of

annualized production of steel.

Ukraine has imposed export duty on scrap steel, which is a raw material.

There has been series of blast furnace outages in USA.

Shut down of many coking coalmines in China due to safety reasons.

Internal consumption of China has increased.

Global scrap prices increased

Capacity addition is not significant except in China.

US Dollar is weakening

The fascination for cheap steel has come down.

THE GROWTH PROFILE AFTER LIBERALISATION

The liberalization of industrial policy and other initiatives taken by the Government
have given a definite impetus for entry, participation and growth of the private sector in the
steel industry. While the existing units are being modernized/expanded, a large number of

new/greenfield steel plants have also come up in different parts of the country based on
modern, cost effective, state of-the-art technologies.
Increasing role of private sector in total production can be seen from the fact that its
share has increased from 51.4% in 1991-92 to approximately 67% in 1998-99. This trend is

likely to continue. At present, total (crude) steel making capacity is over 34 million
tonnes and India, the 8th largest producer of steel in the world, has to its credit, the capability
to produce a variety of grades and that too, of international quality standards. As per the
ratings of the prestigious " World Steel Dynamics", Indian HR Products are classified in the
Tier II category quality products a major reason behind their acceptance in the world
market. EU, Japan have qualified for the top slot, while countries like South Korea, USA
share the same class as India.
In pig iron also, the growth has been substantial. Prior to 1991, there was only one
unit in the secondary sector. Post liberalization, the AIFIs have sanctioned 21 new projects
with a total capacity of approx 3.9 million tonnes. Of these, 16 units have already been
commissioned. The production of pig iron has also increased from 1.6 million tonnes in
1991-92 to 3.94 million tonnes in 2001-02. The share of Private/secondary sector has
increased over time and is currently around 74% of total production.
Considering the facts of current low levels of per-capita consumption in India, the huge
potential for its increase and the estimated GDP growth, the steel industry is likely to have
substantial growth in the medium to long term perspective.

PROFILE OF VISAKHAPATNAM STEEL PLANT

INTRODUCTION
Steel occupies the foremost place among the materials in use today and pervades all
walks of life. All the key discoveries of the human genesis, for instance, steam engine,
railway, means of communication, automobile, aero plane and computers are in one way or
other, fastened together with steel and with its sagacious and multifacious application steel is
a versatile material with multitude of useful properties, making its indispensable for
furthering and achieving continual growth of the economy be it construction, manufacturing,
infrastructure or consumables. The level of steel consumption has long been regarded as an
index on industrialization and economic maturity attained by a country. At the time of
independence India had only three integrated Steel Plants-Iron $ Steel Company at Burnpur,
Tata Iron And Steel Company at Jamshedpur, Iron $ Steel Company in the erstwhile princely
state of Mysore. Keeping in view the importance of steel, the following integrated steel
plants with foreign collaborations were set up in the public sector in the post-independence
era.
1

Durgapur Steel Plant

British

Bhilai Steel Plant

Erstwhile USSR

Bokaro Steel Plant

Erstwhile USSR

Rourkela Steel Plant

German

BACKGROUND
To meet the growing domestic needs of steel Government of India decided to set up
an integrated steel plant at Visakhapatnam. An agreement was signed with erstwhile USSR
in 1979 for cooperation in setting up 3.4 MT integrated steel plant at Visakhapatnam. The
foundation stone for the plant was laid by the then Prime Minister on 20 th January 1971.
The project was estimated to cost Rs. 3897.22 Crores based on prices as on 4 th quarter
of 1981. However on completion of construction and commissioning of the whole plant in
1992, the cost escalated to around 8500 Cores. Visakhapatnam Steel Plant is one of the most
modern steel plants in the country. The plant was dedicated to the nation on 1st August 1992
by the then Prime Minister Sri P.V. Narasimha Rao.
The consultant, M/s M.N. Dastur and company ltd., submitted a techno-economic feasibility
report for the plant, with an annual capacity of about 3.4 million tones of liquid steel, in
October, 1977.
The erstwhile USSR Government examined the detailed project report prepared by
Dastur & company and offered technical and economic co-operation for the same. The govt.
of India and erstwhile Ussr signed an agreement on June 12 th 1979, for co-operation in

setting up a 3.4 million tones integrated steel plant at Visakhapatnam. The u.s.s.r agreed to
provide financial assistance of 3.4 million Rouble credit to GOI specifically for setting up the
steel plant. In terms of this agreement, Soviets and Indian design organization revised the
earlier detailed project report of Dastur co., jointly and a comprehensive revised detailed
project report for vsp was submitted in November 1980. A new company i.e. Rashtriya spat
enigma ltd. (RINL) was incorporated for faster implementation of the project.
The construction of the project commenced in 1982 with a schedule of 4 and 6 years
for the first and second stage respectively. During construction due to inadequate fund
availability, the project schedule could not be adhered to, resulting in huge cost and time
overruns. The project cost escalated to around rs.8500 cars. In a bid to reduce the capital
investment, rationalized concept was adopted in 1985. As per this one steel melt shop and
one rolling mill i.e. The universal beam mill were dropped. The other steel melt shop of 2.2
mtpa of liquid steel was up rated to 3 mtpa without any additional facilities. Further the
capacities of rolling mills i.e. Light and medium merchant mill (LMMM), medium merchant
and structural mill (MMSM) and wire rod mill (WRM) were also up rated without any
modification to make the project economically viable.
The project cost with all these modifications was brought down to about rs.6281
cars. However during implementation further cost escalations took place and finally the
project was implemented at a capital cost of around rs.8500 cars. Various operating units
were commissioned one after another from 1989 onwards and entire project was completed
by July 1992. The honorable Prime Minister Sri. P.V. Narasimha Rao dedicated the plant to
the nation on 1st august 1992. Unlike other integrated steel plants in the country, new
technology, large-scale computerization and automation etc. Were incorporated in the plant.
To operate the plant at international levels and attain such labor productivity, the total
manning of the organization was frozen to 17,500 employees. The plant has a capacity of
producing 3.0 mt of liquid steel and 2.656 mt saleable steel.

MILESTONES OF VISKHAPATNAM STEEL PLANT

s no.

Date

Milestone

1.

17.04.1970

Prime minister of India announces in the

parliament to construct a new steel plant
at Visakhapatnam.

2.

June 1970

Site selection committee appointed.

3.

30.11.1970

Committees report approved for site.

4.

20.01.1971

foundation stone laid by P.M.

5.

27.02.1971

Consultant appointed. Feasibility reports

submitted
in
1972
and
other
investigation carried out.

6.

07.04.1974

First block of land taken over for VSP.

7.

15.10.1977

Detailed project report submitted by

consultant.

9.

12.06.1979

Inter government agreement signed

between India and erstwhile u.s.s.r at
Moscow for the cooperation in the
construction of vsp.

10.

19.10.1979

government approved setting up of

Vsp. Soviet side carries out the revision
of detailed project report.

11.

Jan. 1980

Site leveling work started.

12.

30.11.1980

M.N.Dastur & co., principal consultant

submits the comprehensive revised
detailed project report.

13.

01.01.1981

Export
committee
submits
recommendation for approval of
comprehensive revised detailed project
report with certain modification.

14.

05.02.1981

Contract signed with erstwhile soviet

union for preparation of working
drawings for coke ovens. Blast furnace
and sinter plant.

15.

23.02.1981

Comprehensive revised detailed project

report along with expert committee

recommendations approved.
16.

10.07.1981

Protocol signed with erstwhile soviet

union for supply of equipments and
specialists.

17.

23.01.1982

Blast furnace foundation (1st mass

concreting in the project) lay.

to
26.02.1982
18.

01.02.1982

Zero date of the construction of the

project.

19.

18.02.1982

Rashtriya spat enigma ltd. (RINL)

formed.

20

29.01.1987

Commissioning of structural shop. With

this commissioning of various auxiliary
units commenced.

21.

06.09.1989

Coke oven battery no.1 starts pushing of

cake. with this the commissioning
metallurgical unit starts.

22.

14.11.1989

Sinter plant (machine-1) commissioned.

23.

28.03.1990

Godavari the
commissioned.

24.

03.05.1990

P.M. dedicates Godavari to the nation.

25.

06.09.1990

The 1st converter and the 1st continuous

casting machine of the steel melt shop
starts production.

26.

28.08.1990

Billet production in the light and

medium merchant mil started.

27.

21.11.1990

Wire rod mill commissioned.

28.

04.03.1991

The 2nd converter commissioned.

29.

30.06.1991

Yelleru water supply scheme made ready

for supply of water to vsp.

30.

28.10.1991

Trial production commences in the bar

mill of light and medium merchant mill.

31.

31.10.1991

Coke oven battery no.2 commissioned.

32.

27.12.1991

Sinter machine-2 commissioned.

1st

blast

furnace

33.

20.03.1992

Medium merchant and structural mill

commissioned.

34.

21.03.1992

Krishna
commissioned.

35.

July 1992

Coke oven battery no.3 commissioned.

36.

July 1992

Converter

blast

no.3of

commissioned.

furnace-2

steel

This

milt

shop

marks

the

completion of commissioning units of

the no.3 million tones plant.
37.

Aug. 1992

Dedication of the plant to the nation by

the prime minister.

Coke Oven Battery No.4

38

10.12.2003

data of approval

39

10.12.2006

schedule date of commissioning

(36 months from date of approval)

expansion proposal for 6.3 mt

40

28.10.2005

Govt of India approval ref.6 (1) 2005vsp approval date

41

28.10.2005

commencement date

HIGHLIGHTS OF EXPANSION TO 6.3 MT LIQUID STEEL CAPACITIES.

1. Govt. Of India Approval Ref: 6 (1) 2005-Vsp Dated 28th October 2005.
2. Commencement Date

28th October 2005

3. Main Units In Expansion

Raw Material Handling Plant
One Sinter Plant
One Blast Furnace

3.25 Mt / Year Sinter

One Blast Furnace

(Bf-3800 C.2.50 Mt/ Year Hot Metal

Claiming And Refractory Materials

12x500 T / Day

One Steel Melt Shop

2.60 Mt / Year Liquid Steel

Rolling Mills
Wire Rod Mill

600,000 T/ Year

Light Structural Mill ( LSM) (In Stage Ii) 700,000 T/ Year

Augmentation Of Existing TPP
Power Plant (Boo Basis)

1x67.5 MVV Turbo Generator With Tb

2x67.5 MVV Capacity With All Necessary

Facilities
Air Separation Plant (Boo Basis)
Captive Mines

2x1200 T / Day Oxygen

Augmentation Of Capacities At Ashram.

Jaggayyapeta
And Garb Ham Mines.
MAJOR SOURCE OF RAW MATERIALS
Iron ore lumps and fines
Bailadilla, MP
BF lime stone
Jagayyapeta, AP
SMS lime stone

Jaisalmer, Rajasthan

BF Dolomite
SMS Dolomite

Dubai
Madharam, AP

Manganese Ore
Boiler coal

Chipurupalli, AP
Talcher, Orissa

Coking coal

Australia

WATER SUPPLY:
Operational water requirement of 36 Mgd is being met from the Yeleru Supply
scheme.
POWER SUPPLY
Operational power requirement of 180 to 200 MW is being met through Captive
Power Plant. The capacity of the Power plant is 286.5 MW. VSP is exporting 60 MW power
to APTRANSCO.

MAJOR UNITS
Department

Annual cap 000 T

Units (3.0 MT stage)

Coke ovens

2261

Sinter Plant

5256

Blast furnace

3400

2 Furnaces of 3200 m3 volume each

Steel melt shop

3000

3 LD converters each of 150 m3 volume

and strand bloom casters

LMMM

710

3 Stand finishing mill

WRM

850

2 x 10 stand finishing mill

MMSM

860

6 stand finishing mill

3 Batteries each of 67 ovens and 7 Meter

height
2 Sinter machines of 213 m2 grate area
each

MAIN PRODUCTS OF VSP

Steel Products

By products

Angles

Granulate slag

Billets

Lime fines

Channels

Coal tar

Beams

Anthracene acid

Squares

HP Naphthalene

Flats

Benzene

Round

Toluene

Rebars

Zylene

Wire rods

Wash oil
Ammonium sulphate
Nut coke
Coke dust

VSP TECHNOLOGY: STATE-OF-THE-ART

7 Metre tall Coke oven batteries with coke dry quenching

Biggest Blast furnaces in the country

Bell less top charging system in Blast furnace

100% slag granulation at the BF cast house.

Suppressed combustion LD gas recovery system.

100% continuous casting of liquid steel.

Tempcore and Stelmor cooling process in LMMM & WRM.

Extensive waste heat recovery systems.

Comprehensive pollution control measures.

CORPORATE PLAN OF VSP

VISION
To establish as an excellent corporate citizen and ensure optimal return on investment.
Harness our growth potential and sustain profitable growth
Deliver high quality and cost competitive products and be the first choice of
customers
Create an inspiring work environment to unleash the creative energy of people.
Achieve excellence in enterprise management.
Be respected corporate citizen, ensure clean and green environment and develop
vibrant communities around us.

MISSION
To attain 16 (MT) million tones liquid steel capacity through technological up gradation,
operational efficiency and expansion; augmentation of assured supply of raw materials to

produce steel at international standards of cost and quality; and to meet the aspirations of the
stakeholders.
OBJECTIVES
Towards growth Expand the plant capacity to 6 MT by 2009-10, 8 MT by 2014-15
and 10 MT by 2018-19.
Towards Profitability Achieve net profits continuously from 2002-03.
Towards Stakeholders Make VSP the company of choice.
Towards Technology Continuously upgrade technology to operate at international
efficiency levels.
Towards Safety, Environment and Society Continue efforts towards safety of
employees, conservation of environment and be socially responsive.
Expand plant capacity to 6.3 Mt by 2011-12 with the mission to expand further in
subsequent phases as per Corporate Plan.
Revamping existing Blast Furnaces to make them energy efficient to contemporary
levels and in the process increase their capacity by 1 Mt, thus total hot metal capacity
to 7.5 Mt.
Be amongst top five lowest cost liquid steel producers in the world.
Achieve higher levels of customer satisfaction.
Vibrant work culture in the organization.
Be proactive in conserving environment, maintaining high levels of safety &
addressing social concerns.

CORE VALUES
Value foresight is crucial in todays competitive businesses climate VSP values

Commitment

Customer satisfaction

Continuous improvement

Concern for environment

Creativity and innovation

VSP POLICES
HR POLICY
In Visakhapatnam Steel Plant, believe that employees are the most important resources. To
realize the full potential of employees, the company is committed to:

Provide work environment that makes the employees committed and motivated for
maximizing productivity

Establish systems for maintaining transparency, fairness and equality in dealing the
employees

Empower employees for enhancing commitment, responsibility and accountability

Encourage teamwork, creativity, innovativeness and high achievement orientation

Provide growth and opportunities for developing skill and knowledge

Ensure functioning of effective communication channels with employees

HRD POLICY

In Visakhapatnam Steel Plant, are committed to create an organizational culture which

nurtures employees potential for the prosperity of the organization. To accomplish this:

Identify development needs of the employees on a regular basis, provide the

necessary training and continually evaluate and monitor the effectiveness of the
training so that the quality of the training also gets upgraded

Provide inputs to the employees for developing their attitude towards work and for
matching their competencies with the organizational requirements

Create an environment of learning and knowledge sharing by providing the means

and facilities and also access to the relevant information and literature

Facilitate the employees for continuous development of their knowledge base, skills,
efficiency, innovativeness, self-expression and behavior so that they contribute
positively with commitment for the growth and prosperity of the organization while
maintaining a high level of motivation and satisfaction

Prepare employees through appropriate development programs for taking up higher

responsibilities in the organization

Fulfill social obligations by providing training to the students of educational

institutions and to the trainees of other organizations

CUSTOMER POLICY

VSP will endeavor to adopt a Customer-focused approach at all times with

transparency

VSP will strive to meet more than the Customer needs and expectations pertaining to
Products, Quality, Value for Money and Satisfaction

VSP greatly values its relationships with Customers and would make efforts at
strengthening these relations for mutual benefit

ENERGY POLICY
In Visakhapatnam Steel Plant, are committed to optimally utilize various forms of energy in a
cost-effective manner to effect conservation of energy resources. To accomplish this:

Monitor closely and control consumption of various forms of energy through an

effective Energy Management System

Adopt appropriate energy conservation technologies

Maximize the use of cheaper and easily available forms of energy

I.T POLICY
RINL/VSP is committed to leverage Information Technology as the vital enabler in
improving the customer-satisfaction, organizational efficiency, productivity, decisionmaking, transparency and cost effectiveness, and thus adding value to the business of steel
making. Towards this, RINL shall

Follow best practices in Process Automation & Business Processes through IT by inhouse efforts / outsourcing and collaborative efforts with other organizations / expert
groups / institutions of higher learning, etc, thus ensuring the quality of product and
services at least cost

Follow scientific and structured methodology in the software development processes

with total user-involvement, and thus delivering integrated and quality products to the
satisfaction of internal and external customers

Install, maintain and upgrade suitable cost-effective IT hardware, software and other
IT infrastructure and ensure high levels of data and information security

Strive to spread IT-culture amongst employees based on organizational need, role and
responsibilities of the personnel and facilitate the objective of becoming a world-class
business organization

Enrich the skill-set and knowledge base of all related personnel at regular intervals to
make employees knowledge-employees

Periodically monitor the IT investments made and achievements accrued to review

their cost effectiveness

CARE FOR SOCIETY

The Company has committed Rs.12.75 Crores for the year 2009-10, as against Rs.
38.83 Crores in the previous year, towards Corporate Social Responsibility activities.
The reduction is largely due to the reduced PAT for the year.

CORPORATE GOVERNANCE

Company is committed to conforming to the highest standards of corporate

governance by ensuring transparency, disclosures, and reporting as required under the
Corporate Governance Guidelines issued by the Department of Public Enterprises.

POLLUTION CONTROL AND ENVIRONMENTAL PROTECTION

Generally, integrated steel plant is seen as a major contributor to environmental pollution

as it discharges a large volume of waste products. Elaborate measures have been adapted
to combat air and water pollution in VSP. In order to be eco friendly, VSP has planted
more than 3 million trees over an area of 35 squares Kms. and incorporated various
technologies at a cost of Rs. 460 crores towards pollution control measures.

HUMAN RESOURCE MANAGEMENT

Human resource initiatives at VSP are clearly linked to the corporate strategy of the
organization. VSP has exemplary industrial relations where the entire workforce works as a

well knit team for the progress of the Company. The productive environment prevailing in
the Company fosters an atmosphere of growth, both for the employees and for the Company.
VSP has introduced multi skilling concept since inception and the employees are trained as
per this concept. VSP has adopted a system of overlapping shifts, the first of its kind, in the
industry. This system ensures smooth changeover of the shifts and uninterrupted peace of
operation of the plant during the shift change over. Another unique feature followed at VSP
is the uniform working hours for the ministerial employees.
TRAINING AND HUMAN RESOURCE DEVELOPMENT
Training and HRD are given due emphasis at VSP. Each year, a minimum of 1/3 rd of the
employees undergo various training sessions either at Training and Development Centre or at
Centre for HRD for sharpening their skills on the technical and management related issues.
Training is also given in the area of safety, fire prevention, and occupational health besides
on the job at the shop floor.

WELFARE AMENITIES
The welfare measures provided for the employees of the Company are the best in the
industry. A modern township with all amenities has been developed with 8032 quarters to
house the plant employees and other government agencies in 11 sectors. The township is
having best facilities in terms of drinking water supply, drainage system, roads, community
centers, crche, parks, schools, shopping complexes, medical facilities, recreational facilities,
etc to cater to the needs of the employees and their dependent families. The Company also
provides welfare facilities much beyond the statutory requirements by way of introduction of
a unique superannuation benefit fund and a unique family benefit scheme.

SWOT ANALYSIS
SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be avoided,
opportunities that should be banked, and threats that should be faced & yet survive in the
business.
STRENGTHS:
State of the art technology:
VSP was built with the co-operation of USSR and claims to be one of the most
modern steel plants in the country. VSP employs highly sophisticated technology,
large-scale computerization & automation in the production.
Location advantages:
VSP was rendered with additional advantages due to its location. The location
aspect has helped the VSP in easy procurement of raw materials as most of the
raw materials are imported from Andhra itself, apart from Orissa & M.P which are
located nearby.
More over the existence of Visakhapatnam port makes it easy in procurement of
raw materials like cooking coal from Australia. Also exports to various countries
can be made directly from Visakhapatnam port.
Self-Sufficiency in power: VSP has its own power generation unit with a total
capacity of 286.5 MW. VSP requires power of 180 MW to 200 MW. VSP, after
meeting its requirement exports power to APSEB.
High commitment on part of employees:

 The productive environment prevailing in the company fosters an atmosphere of

growth both for employees & for the company. The labour productivity is
currently262 tonnes/man/year unparallel in the public sector steel industry.
Strong commitment to conserve environment:
VSP is forefront of Indian industry in area of pollution control, equipment &
measures. The total cost of these measures works out at Rs.4600 million which
forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified
company (certificate for environment protection & pollution control measures).
ISO 9002 Certification:
VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO
certification gives an edge for VSP over other companies & depicts the
competency of Vizag steel to compete with the global steel producers.

Land and layout for expansion up to 16mt with proximity to port.

Quality producer image.
High standing for customer service.
Committed workforce.
Ability to raise fund.

WEAKNESS:
High intake of employees: VSP employs 17,500 employees including both
administrative and plant. When compared to international standard companies like
POSCO and other major steel producers, VSP employs 50% more for the same
capacity. Hence the salaries of these employees, medical & other facilities will raise
cost further which may disturb the cost effectiveness achieved in the production front.
Low return product mix: The product mix of VSP is small. VSPs long products like
billets, wire rods, structural are facing less demand due to the crisis in South East
Asian nations.
Inadequate port facilities: The berthing facilities at VSP are not adequate relative to
the requirements of VSP.

No in-house key raw materials-iron ore/coal.

Lack of level playing field.
Single location company-Only long products, exposed to cyclic market.
Major capital repairs and modernization- New overdue.
High cost of servicing huge equity.
Consumption of coking coal contracted at higher cost in 2008-09.

OPPORTUNITIES:
Sizeable export markets: China is the biggest importer of Indian steel. China is going to
have huge requirements of steel in next 5 years due to Olympics (in 2008), shanghai expo (in
2010).Reconstruction work in Iraq requires huge amounts of steel where RINL can play a
significant role.
Other promising factors are Proximity to southern market.
Strong economy.
Possibility of new markets.
A slow but steady increase in domestic steel demand.
Potential for growth in domestic steel demand- Low per capita consumption in India.
Huge investment planned in infrastructure in 11th plan.
Ease of imports / Exports with adjacent upcoming Gangavaram (deep draft), VPT &
VSPL.

THREATS:
Global steel majors like POSCO & Mittal steel are venturing into steel production very soon
(in Orissa). This may pose a problem to VSP in the procurement of raw materials as it is
dependent on Orissa for these materials. Input costs are increasing due to the increasing cost
of raw material. Also the demand for coal & coke is escalating.

High raw material prices & shift of value chain towards raw materials.
Oligopolistic coal supply side.
Single Iron ore supplier Located in disturbance prone areas.
Predominant secondary sector in long products.

 VSP High earning island.

MARKETING NETWORK
The Company markets its products through headquarters marketing office and a
network of regional offices, branch offices and stockyards located all over the country. It
also takes the help of consignment agents and consignment sales agents for the marketing of
its products. The exports are carried out by the export wing of marketing division with the
help of different agencies. The Company is recognized as Star Trading House by the
Director General of Foreign Trade, Ministry of commerce, Government of India.
The end users of the steel products manufactured at the plant include amongst other
construction industry, automobile industry, engineering industry, re-rolling industry, forging
industry, cable industry, wire drawing industry, fastener industry, electrode manufacturers
and railways. The Company is ideally located to serve the southern Indian market. Regional
Mangers/Branch managers meet at Head quarters regularly to assess the market situation and
decide market strategies.

AWARDS WON BY VSP

Award

Purpose

Year

Gold Award for Outstanding

Achievement in Training Excellence
by Greentech Foundation, New Delhi

VSP has established World Class

Training infrastructure since
inception and continuously
improved training facilities

2010

For his well known leadership

Strategic Leadership Award For CMD
and contribution to HRD and for
of RINL by Asia Pacific Human
being a role model as a thinker, a
Resource Management congress ,
doer and a believer in change and
New Delhi
for his strategic and iconic stature

2010

Global Human Resource

In recognition of outstanding
Development Award of International performance in setting up of high

2010

Federation of Training and

Development Organization, London

standards in HRD and focus on

initiatives that would motivate
and Empower employees to do
their best

Udyog Ratan Award for CMD of

RINL By National Industrial
Conclave-2010, Ranchi

For his outstanding contribution

in making VSP turn around to a
blue chip company and for being
the architect of special purpose
vehicle for global acquisition of
mines

2010

For inspiring Trust among its

Great Places to Work Award By Great Employees, for instilling Pride in
Places to work Institute and Economic them and creating an environment
Times, Mumbai
in the work place that promotes
camaraderie

2010

Town Official Language

For its exemplary Performance in
Implementation Committee Award,
Implementation of Official
Visakhapatnam
language

2010

For Organizational Excellence in

Suggestion Schemes, (in steel
units category)
Won the "grand finale" of almas Vsp won this quiz successively
10th national management quiz for 3 years in a row (2007, 2008
2009 in December 2009.
& 2009) achieving hat-trick
which is a national record.
Bagged third prize in public In the event management
relations national awards-2009
category at the 31st all India
public relations conference held
in chandigarh
INSSAN AWARD

Bagged the first steel ministers For being the best integrated steel
trophy for the year 2006-07
plant in the country (runner up)

2010
2009

2009

2009

Adjudged energy efficient unit For

excellence
award by confederation of Indian management
industry godrej green business
centre at the 10th national award.

in

energy

2009

Won the Tata-crucible corporate For the best performance in the

quiz.
inter corporate business quiz, tatacrucible corporate quiz
Qc teams won gold & bronze For quality circles
medals
at
the
international
convention on quality control circles
(icqcc)
convention
at
cuba,
philippines in october 2009.

2009

For the best suggestions

Vishwakarma rashtriya puraskar
awards for the performance year
2007 5th time in a row.
The india gandhi rajabhasha award For the best performance in hindi
implementation during the year
2007-08 in september.
Ispat rajya bhasha trophy.
for popularizing the usage of
hindi.
Rinl ranked no.2 globally for the Global survey by steel guru for
popularity of website among the the most popular website among
global steel makers.
steel makers all over the world
The best place to work for- 2009

Award given by the economic

times-great place to work
institute was won by vsp in
june .
Ispat rajya bhasha trophy
For popularizing the usage of
hindi.
Vsp bags top assessed award
For 2007-08 for paying highest
central excise.
Ukkuvani, the bi-monthly in-house For employee welfare in
journal was adjudged the best national awards for house
house journal devoted to welfare of journals.
employees
Qcfi-nmdc trophy.
For the best quality circle
implementing organisation given
by qcfi

2009

2009

2009
2009
2009

2009

2009
2009
2009

2008

CII award for 5-s to wrm dept. Of For workplace management.

vsp in November.
Vsp is the 1st organization in steel
industry implementing 5-s at
workplace management.
Two qc teams, harmony from Quality circles
wrm and vices from rmhp won
excellent awards at international
convention on quality control circles
(icqcc) at dhaka, bangladesh

2008

spat suresh pulaski award

For no fatal accident in 2006 &

2007 given by jcssi (joint
committee on safety, health &
environment in steel industry)
Enterprise excellence award 2007 Excellence in overall performance
conferred by Indian institute of
industrial engineering (iiie) in may
2008.
Sri PK BISHNOI, CMD was For his significant achievement
awarded a gold medal by the for sustainable development,
honble
prime
minister, improving the quality of life in
dr.manmmohan singh at the 95th society and supporting the cause
indian science congress at andhra of science& technology.
university, visakhapatnam

2007

Second prize for organisational

excellence.
Best organisation award conferred
by qcfi, visakhapatnam chapter

Efficient
suggestion
scheme
operation given by inssan
For promoting qcs in the
organization

2008

Sri PK BISHNOI, CMD was

presented udyog ratan award by the
institute of economic studies, new
Delhi
Sri pk bishnoi, CMD was presented
excellence award by the delhi
telugu academy
Two qc teams, samruddhi from
sms and trishakti from lmmm
won gold medals at international
convention on quality control circles
(icqcc) 2008 at beijing, china in
october 2007.

For achieving excellence in

productivity, quality, innovation
and management.

2007

For significant contribution to the

industry.

2007

Best quality circles

2007

2008

2008

2008

2008

Sri pk bishop, cmd was awarded the India gandhi memorial national
best chief executive gold award of awards
india gandhi memorial national
awards-2007 by institution of
engineers (india) hyderabad.

2007

National award for e-governance

Exemplary usage of ict by public
sector undertakings

2007-08

Best integrated steel plant

2005-06

Prime minister's trophy

Commendation prize for strong
commitment to excellence cii exam Overall excellence in all activities
bank award for business excellence of the company
2006

2006

Strong commitment
excellence award 2006

2006

cii

hr Excellence in hr processes and

practices

1st - 2006
2nd - 2005
1st - 2004
National energy conservation award

Energy efficiency (first prize for 3

consecutive years and also a
special award for achieving this).
This is the 7th award in a row.

1st - 2003
1st - 2002
2nd - 2001
Merit certificate2000

Organizational excellence award

Business achievement
excellence
Cii -gbc national award

award

Efficient
suggestion
scheme
operation given by inssan

2006, 2004

Environmental conservation &

for pollution control presented by
confederation of asia pacific
chamber of commerce & industry

2005

Excellence in energy management

2005

Energy conservation award by ap Best organization in

productivity council
conservation initiatives

energy

2005

Certificate of appreciation by Excellence in energy conservation

institution of engineers, ap chapter

2005

National award for excellence in Excellence in water management

water management by cii

2005, 2004

Leadership & excellence award in Excellence in she by cii south

she (safety, health & environment) zone

2004

Cacci business achievement award

For environmental conservation

& pollution control by ficci

2004

World
quality
commitment Performance excellence, quality
international star award
management
&
quality
achievement, given by business
initiative directions, paris in the
gold category.

2004

Icwa national award

Good performance for excellence

in cost management

2004

Best enterprise award

For surpassing mou

awarded by scope

targets,

Rolling shield for "environmental To

recognize
efforts
in
protection"
environmental protection, by
directorate of field publicity,
ministry of information &
broadcasting
Prime minister's trophy
India priyadarshini
award

Best integrated steel plant

vrikshmitra For massive afforestation efforts.

Given by ministry of environment
& forests
Best hr practices
Given by indian society for
training & development (istd)
Environment excellence award
For energy conservation by
greentech foundation, delhi
Best enterprise award, wips
Given by scope

2003-04
2002, 2003

2002-03
2002-03
2002
2002
2001-02

Award for best turnaround

Best management award

Given by scope
For outstanding contribution in
management
of
industrial
relations, labour welfare and
productivity given by govt. Of ap
Shield for "best efforts in rain water Ap pollution control board
harvesting"
Sail chairman's silver plaque
For no fatal accidents (for regular
employees category)
Paryavaran parirakshak award
In recognition of it's success in
prevention of industrial pollution
and preservation of ecological
balance by reducing pollution to
the minimum by installing
sophisticated equipment and
machinery in the factory. Given
by
rotary
district
3020
international

2000-01
2000-01

2001
2000
2000

RECENT TRENDS:
VSP BECOMES MINI RATNA COMPANY:
Considering the turn around and the excellent physical and financial performance in
the last 4 years vsp has been awarded Mini Rathna status by the GOI in the month of may
2006. This confers more dop and autonomy to vsp management in financial and policy
matters.

The B.O.D also will be strengthened with more independent non-executive

directors.
VSP EXPANDING ITS CAPACITY:
Vsp has undertaken expansion of capacity from 3-million tone liquid steel to 6.3
million tone liquid steel at a cost of rs.8692cr. Their entire expansion work is to be completed
within a period of 4 years from October 2006. The honorable prime minister of india has
inaugurated the expansion project by laying foundation stone on 20 th may 2006. Vsp will be
producing special grade long products required for automobile, railways and other special
applications in the new mills which are going to be installed. Further vsp will be producing
seamless tubes of 3 lakh tones which are presently imported.

Joint ventures:
Vsp does not own any mines for extracting much required iron ore and low ash
metallurgical coal for its production. Vsp depends on m/s. National mineral development
corporation for meeting its iron ore requirements and import sources (Australia) for low ash
metallurgical coal. These sources have been increasing their prices disproportionately in
recent times due to very high demand because of capacity additions taking place in large
scale. In order to have raw material security and control over prices vsp has embarked upon
acquiring interest in coal mines and iron ore mines through joint ventures in India and
abroad.

VSP has been allotted mining rights in Mahal coal block:

GOI has allotted mining rights in mahal coal block for vsp after continuous
persuasion relentless efforts. Vsp has started exploratory work in mahal coal block to
ascertain the feasibility and project cost for opening up a mining unit in this place.
Implementation of addition modification and replacement:
In order to improve productivity, constantly upgrade the technology and reduce the
cost of production to become one of the worlds lowest cost producers vsp is implementing
number of amr schemes on a continuous basis since last 5 years. Vsp is spending substantial
amount of funds in the amr schemes which are yielding incremental benefits year after year.
UTILIZATION OF RENEWABLE ENERGY:
In order to meet its ever growing power requirement, to conserve the natural
resources and reduce the cost of energy vsp has taken up implementation of power
generation through renewable energy sources like wind, sunlight etc. A policy in this regard
has been unveiled on 29th may 2006 by the cmd of vsp.
CONSERVATION OF WATER:

Vsp has taken up a number of projects for conservation of precious water. This is
carried out in three methods.

Reduce the consumption of water in the process.

Treat the drainage and sewerage water and reuse where ever possible.

To construct check dams for diverting rainwater to underground.

Financial Performance of VSP

History

In the industrial horizon of India, Rashtriya Ispat Nigam Ltd., (VSP), Visakhapatnam
Steel Plant (VSP) stands as a monument of advanced technology. VSP is the first shore
based integrated Steel Plant in the country.
The decision of Government of India to set up an integrated steel plant at
Visakhapatnam was announced by the Prime Minister Smt. Indira Gandhi in Parliament on
17th April, 1970 followed by foundation stone laying by her. The initial project cost was
sanctioned at Rs. 2256 Crores with an Internal Rate of Return (IRR) 4.20%. The Indian
government and USSR signed an agreement on 12 th June 1979 for cooperation in setting up
the 3.4 million tonne integrated steel plant at Visakhapatnam.
Thereafter the project has undergone three revisions as detailed below.
First revision

Second revision

Third revision

Date of sanction by GOI

30.07.1982

24.06.1988

12.07.1995

Capital asset.

Rs. 3897.28 Cr.

Rs. 6849.70 Cr.

Rs. 8593.29 Cr.

Financial IRR

5.40%

Liquid steel capacity (in

3.40
MT per annum)

6.56%

5.30%

3.00

3.00

The broad reasons for revisions were:

(1)

Non-availability of funds on time

(2)

Price escalation

(3)

Enhanced currency exchange rates

(4)

Revision in taxes and duties

(5)

Change in ocean freight.

REASONS FOR TIME OVER RUN

(1)

Inadequate fund flow & its delay

(2)

Midway revision of project concept

(3)

Dislocation of Soviet equipment suppliers

(4)

Delay in supplies made by major PSUs.

(5)

Delay in providing water by AP Government

RATIONALISED CONCEPT
The construction of the plant started in 1981 and scheduled to be completed in 4 to 6
years in two stages. However, due to inadequate funds availability, there was a threat to
project continuance. In order to contain project cost, a Rationalised Project Concept was
evolved where while retaining the Hot Metal capacity, the liquid steel capacity was brought
down to 3.0 MT from 3.4 MT by dropping one SMS converter and uprating the capacity of
other converter. Further on the finishing line, Universal Beam Mill was dropped. The
Rationalised Concept helped in reducing the project cost by Rs. 1497 Crores. Details of
major production facilities under original concept and revised concept are given at annexure.
The plant was commissioned in two stages.

The 1st BF viz., Godavari was

commissioned in March 1990. The 2 nd BF viz Krishna was commissioned in March 1992

and finally the plant was dedicated to the Nation by the then Honourable Prime Minister Sri
PV Narasimha Rao in August 1992.
CAPITAL RESTRUCTURING
FIRST CAPITAL RESTRUCTURE
Long gestation period in commissioning the plant and escalation of the project cost to
Rs. 8593.29 crores (3.8 times over the original estimate) necessitated capital restructuring,
in order to ensure viability and to prevent from becoming potentially sick under Sick
Industrial Company (Special Provisions) Act 1985. Action was taken for restructuring the
capital base even before the Company became totally commercially operational. The first
capital restructuring took place in July 1993.
SALIENT FEATURES

Conversion of Rs. 1184 crores Government of India loans into Equity Capital.

Conversion of Rs. 1185 crores Government of India loans into 7% noncumulative preference shares redeemable at the end of 10 years.

Conversion of Rs. 791 crores interest due on Government of India loans into
interest free loans for a period of 7 years.

Conversion of GOI loans receivable in 1992-93 into 7% non-cumulative

preference shares redeemable at the end of 10 years from the date of allotment
(Rs. 419 crores released after 31st July 1992).

Conversion of GOI loans receivable in 1993-94 into Preference Shares to be

decided after review.

Waiver of penal interest that becomes due up to July 1992 (Rs. 149.40 crores).

Government of India ensures funds (RS. 1507 crores) in the plan period for the
project.

BENEFITS FROM CAPITAL RESTRUCTURING

Reduction of loss by Rs. 432.47 crores annually on account of interest saving

due to conversion of loans to equity capital, Preference Capital and Interest
free loan.

Reduction of loss by Rs. 149.40 crores on account of interest saving due to

waiver of penal interest.

SECOND CAPITAL RESTRUCTURE

Owing to historical capital burden, long gestation period in the commissioning of the
plant, the accumulated net losses before total commissioning, the general recession set in
Steel Industry from mid 1996, the Company continued to incur net loses and getting close to
erosion of 50% of net-worth of the Company. At this stage, to avoid a situation of reporting
a technically viable integrated steel plant to BIFR, a second capital restructuring was
sanctioned by the Government.
The second capital restructuring was approved in May 1998, whereby Rs. 542.47
crores of Government loan was converted into 7% non-cumulative preference share capital
redeemable after ten years from the date of release of these loans. Further, conversion of Rs.
791 crores interest free loan to 7% non-cumulative preference capital was also agreed to.
Benefits from this capital restructuring was a reduction of loss by Rs. 235.85 crores on
account of interest saving and an annual interest saving of Rs. 88.47 crores. While approving
second capital restructure, government of India-Inter-alia desired to appoint a financial
consultant of repute to suggest a turnaround strategy for the organisation.
FINANCIAL AND PHYSICAL PERFORMANCE
FINANCIAL PERFORMANCE
The financial performance of the organisation against the set targets right from 199091 to 2002-03 is placed at Annexure. From this table it can be seen that the Company was
gaining considerable gross margin which reflects the satisfactory performance of the plant
for all the years except during the year 1998-99 and 1999-2000 when there was a major set

back to Coke ovens. Further it had also secured reasonable cash profits barring those two
years and initial period up to 1992-94.

The Company had again gained its momentum during 2000-01 when it made a cash
profit of Rs. 153 crores and turned around during the year 2002-03 making a Net Profit of
around Rs. 520crores for the first time. During the last few years, the Company had taken a
number of steps like major capital repairs to Coke ovens, BF capital repairs, austerity
measures to cut down the cost, restrictions on capital expenditure etc. It may need a special
mention that a special drive took place to cut down the interest cost on term loans and
working capital arrangements.

PHYSICAL PERFORMANCE
The details of physical performance as against the targets set right from 1990-91 to
2002-03 are placed at annexure. From the table it can be seen that the targets set were
reasonably met by the organization, up to 1999-2000 and far exceeded the targets from the
year 2000-01 onwards.
PRESENT PERFORMANCE
The Company turned around during the year 2002-03, making for first time Net Profit
of Rs. 520 crores, achieving Gross sales/turnover of Rs. 5059 Crores. The financial year
2002-03 is a happy note in VSPs diary because of its remarkable performance in all fronts.
On the production front, the Company far exceeded the targets set. The performance of the
Company for the year 2002-03 is placed at Annexure.
At the beginning of the financial year 2002-03, the Company was having total term
loans to the tune of Rs. 1373.98 crores. UTI (Rs. 590.29 Crores, LIC Rs. 580.80 crores and
Bonds Rs. 175 crores) are the major outstanding. Apart from this the utilisation of working

capital limits from the banks were Rs. 600 crores (CC Rs. 96 crores, WODL Rs. 395 Crores
in the form of FCNR (B) DL Rs. 267 cores, DCDL Rs. 128 crores and EPC Rs. 109 crores).

Taking advantage of falling interest rates, dynamism prevailing in the financial

market, strong economic factors with reference to countrys strengthened foreign currency
reserves, appreciation of rupee with reference to USD in the later part of the year, the
Company has taken several initiatives to reduce the debt burden.

STEPS TAKEN TO REDUCE DEBT BURDEN

The significant steps taken by the Company to reduce debt burden include
restructuring of dept through prepayment of high interest loans out of internal resources,
swapping of high cost loans with borrowings from banks at lower interest rates, swapping off
high cost working capital demand loans with FCNR borrowings and commercial paper at
cheaper rates of interest.
The Company due to the above initiatives could prepay the entire term loan of Rs.
590 crores from UTI during the year 2002-03 from out of internal resources and by swapping
with bank loans. 15% working capital demand loan of Rs. 400 crores was also substituted
with commercial paper with an average interest rate of 7% and FCNR demand loan at an
average interest rate of 3.4% to 10.09T.
The above steps resulted in brining down outstanding term loans to Rs. 773.37 crores
as at the end of the year 2002-03 (debt free on date) and utilisation of working capital to the
extent of only Rs. 368 crores. The above steps resulted in containing the interest expenditure
to Rs. 135 crores for the year 2002-03 as against the previous year level of Rs. 290 crores as
shown in Annexure.

PRODUCTION PERFORMANCE (000 TONNES):

YEAR

HOT

LIQUID

SALEABLE

METAL

STEEL

STEEL

1999-2000

2,943

2,656

2,382

2000-2001

3,165

2,909

2,507

2001-2002

3,485

3,083

2,757

2002-2003

3,941

3,356

3,056

2003-2004

4,055

3,508

3,169

2004-2005

3,920

3,560

3,173

2005-2006

4,153

3,603

3,237

2006-2007

4,046

3,606

3,290

2007-2008

3,913

3,322

3,074

2008-2009

3,546

3,145

2,701

2009-2010

3900

3399

3167

COMMERCIAL PERFORMANCE (RS. CRS.):

YEAR

SALES

DOMESTIC

TURNOVE

SALES

EXPORTS

2002-2003
2003-2004
2004-2005
2005-2006
2006-2007

R
5,059
6,174
8,181
8,469
9,131

4,433
5,406
7,933
8,026
8,487

626
768
248
443
424

2007-2008

10,433

9,878

555

2008-2009

10,411

10,333

78

2009-2010

10635

10284

351

FINANCIAL PERFORMANCE(rs. In crs)

Year
1999-00
2000-01
2001-02
2002-03

Gross margin
252
504
690
1049

Cash profit
-130
153
400
915

Net profit
-562
- 291
-75
521

2003-04
2004-05
2005-06
2006-07
2007-08
2008-2009

2073
3271
2383
2632
3001
2355

2024
3260
2355
2584
2977
2267

1547
2008
1251
2222
2686
1336

2009-2010

1603

1525

797

INDUSTRY OUTLOOK DURING THE YEAR 2008-09

According to a report of South East Asia Iron and steel institute published in April09,
Indias economy is largely domestic consumption led and accordingly it has been less
affected by the deceleration in global economic growth when compared to other countries.
Exports account for 14% of GDP. The economic slowdown which hit the industry in the
second half of 2008-09 had limited the GDP growth to 6.7% for the year 2008-09 against a
growth of 9.0% for the year 2007-08. Industry wise comparison growth rates achieved in
2008-09 and 2007-08 make it clear that major steel consuming sectors like construction and
manufacturing sectors were hit badly during the year. Manufacturing sector registered a
growth of 2.4% during 2008-09 against a growth of 8.2% in 2007-08 and construction sector
grew at 7.1% against a growth of 10.1% in 2007-08.The economic growth forecast made by
the Prime Ministers Economic Advisory Council was 7.1% for fiscal year 2009.IMF, in its
World Economic Outlook, estimated Indias GDP growth at 5.1%.
Despite the adverse impact of global economic meltdown, Indian steel industry has
performed commendably when compared to other steel majors. As per WSA publication,
World Steel in Figures 2009, India tops the list when it comes to growth during 2008 with a
growth rate of 3.95%.Though the current market turmoil has dented the growth curve of
various industries such as automobile and construction, which in turn has hit the Indian steel
industry hard, with the governments plan to boost up the economy by injecting funds in
various industries like infrastructure, construction & power and automotive sector set a
regain lost ground, domestic steel demand is going to recover soon.

INDUSTRY OUTLOOK DURING THE YEAR 2009-10

The year 2009-10 has been an eventful year for the Company as because the impact of the
Global Financial crisis that started in the second half of the previous year has been gradually
assimilated and the Company withstood the crisis consequent to a strong recovery in the
Indian economy, thanks to the timely and proactive initiatives of the Govt of India to boost
economic growth by enabling injecting funds in various industries like construction,
infrastructure, auto mobile and Power Sectors. Yet, 2009-10 was at best a year of cautious
recovery but encouraging year for the Company. The Steel Markets saw a growth in
consumption but the prices continued to be under pressure.
During the year, the Company has achieved some of the best ever yearly performances in
respect of production of value added steel (2.403 million tonnes), steel dispatches by rail of
2.07 million tonnes and best ever gross sales of Rs.10635 Crores in addition to best technoeconomic parameters achieved in terms of yields (Wire Rods and MMSM Mills) and
Specific Water Consumption of 2.16 Cub. Mtrs./tls. This could be possible despite certain
constraints like Power availability, etc.
OUTLOOK FOR THE COMPANY IN 2010-11
On the back of strong commitment for infrastructure funding and revival and strong
comeback by the auto sector, the Steel demand in the country is projected to go up by 10%
giving an encouraging opportunity for the Company to improve its overall performance.
However, the raw material prices continue to be a major concern as they have cut into the
margins of the company for the year and shall continue to show a negative impact in the
coming year as well cutting into the bottom line of the company. The Iron ore prices have
already been increased by 40% from the price level of 2009-10 and are likely to go up further
while the imported coking coal prices have gone up by 56% in the First Quarter of 2010-11.

The Company will continue to face stiff competition from steel producers in the private
sector who are making higher availability of long products in the market particularly in the
Southern India Region. Efforts are on for improvement of the net sales realization by value
added production and better delivery mechanisms to enhance consumption. The company is
looking at optimization of product and market mix and production at higher levels of
efficiency and productivity with a focus on cost reduction to partially neutralize the impact of
cost escalations. All said and done, steep increase in prices of key raw materials like coking
coal and iron ore and the sluggish market and declining selling prices is and further likely to
put pressure on the margins. The Company, in the current year, is also focusing on
synchronization for commissioning of various units of the Expansion project (6.3 Mt stage)
in logical sequence to the extent possible so as to minimize logistical/operational over heads
with increase of production. RINL is continuing its efforts on strategic initiatives for
acquiring overseas coal mines through the Joint Venture Company, International Coal
Venture Ltd., and long term contracts with the major coal suppliers and through the joint
venture company RINMOIL formed for setting up of ferro alloy plant with M/s MOIL.
Further, to improve energy efficiency of the Plant, the company entered into an MOU with
NEDO for a 20.60 MW waste heat recovery system. Our people, the RINL collective,
continue to be the key to the success of the Company. The Steel Ministrys Trophy, which
was given for the first time, was received by the Company in the year and this, along with
many other recognitions like Energy efficient unit conferred by CII, Rajbhasha Award,
CMMI Level 3 Certification, Gold and Bronze medals ICQCC Philippines, Indias
Best Companies to Work for 2009 etc., is a testimony to the companys commitment to
Excellence in Steel making.
STEPS TOWARDS A PROMISING FUTURE
The Company embarked upon Expansion Plan for doubling the capacity from 3 million
tonnes to 6.3 million tonnes and it is estimated that Ist Phase Units will be commissioned in
the 4th quarter of the year 2010-11. The Coke Oven Battery No.4 has been commissioned
during the year and was dedicated to the Nation by the Honble Union Minister for Steel in

May 2010. The Company during the year took upon Modernization & Up gradation of CCM2 with EMS facility and TG-I Automation along with Combined Blowing facility in SMS-1.

WORKING CAPITAL MANAGEMENT

Working Capital is the Life-Blood and Controlling Nerve Center of a business

INTRODUCTION:
Working capital management is concerned with the problems that arise in attempting
to manage the current assets, the current liabilities and the inter relationship that exists
between them .The term current assets refer to those assets which in the ordinary course of
business can be, or will be, converted into cash within one year without undergoing a
diminution in value and without disrupting the operations of firm. The major current assets
are cash, marketable securities, accounts receivable and inventory. Current liabilities are
those liabilities which are intended, at their inception, to be paid in the ordinary course of
business, within a year, out of the current assets or earning of the concern. The basic current
liabilities are account payable, bills payable; bank over draft, and outstanding expenses, the
goal of working capital management is to manage the firms current assets and liabilities in
such way that a satisfactory level of working capital is maintained.

Definition:
In the words of cubing working capital is the amount of funds necessary to cover the
operating the enterprise.
According to Gene Stenberg Circulating capital means current assets of a company that
are changed in the ordinary course of business from one form to another as for example,
from cash to inventories, inventories to receivables , into cash .

OPERATING / WORKING CAPITAL CYCLE OF MANUFACTURING

FORM:

CLASSIFICATION OF WORKING CAPITAL:

Working capital can be classified into two ways.

On the basis of concept

On the basis of time.

1) On the basis of concept:

Working capital is classified as gross working Capital and net working capital. This
classification is important from the point of view of the financial manager.
a) Gross working capital:

Gross Working Capital refers to the firms investment in current assets. Current assets are
the assets which can be converted into cash within an Operating Cycle time or within an
accounting year i.e., within 12 months. This includes cash, short term securities, and debtors.
Bills receivable and inventory. This Gross Working Capital concept is also called Economist
Concept.

The gross working capital concept focuses attention on two aspects of current assets
management.
Optimum investment in current assets and
Financing of current assets
b) Net working capital:

Net working capital refers to the difference between current assets and current liabilities.Net
working capital can be positive or negative. A positive net working capital will arise when
current assets exceeds current liabilities. It indicates the liquidity position of the firm and
suggests the extent to which working capital needs may be financed by permanent sources of
funds. Net working capital concept also covers the question of judicious mix of long term
and short term funds for financing current assets. The level of NWC has a bearing on the
Companys Profitability as well as the risk, in the sense that it affects the ability or otherwise
of the firm to meet its obligations as and when they become due.

Therefore, a tradeoff

between profitability and risk is an important element in evaluation of the level of NWC. In
general, the higher the NWC, the lower the risk and profitability and vice versa.
FORMULA:
Net Working Capital = Current assets - Current liabilities
2) On the Basis of Time: On the basis of time, it may be classified as
a) Permanent working capital
b) Temporary working capital
a) Permanent working capital:

Permanent working capital is the amount invested in all current assets which
is required at all times to carry out minimum level of business activities. It grows with the
size of the size of the business. It is permanently needed for the business and therefore be
financed out of long term funds.
b) Variable working capital:

Variable working capital

is the excessive amount over permanent working capital.

This keeps on fluctuating from time on the business activities. It is further divided into

 Seasonal working capital

Special working capital
Seasonal working capital is required to meet the seasonal demands of busy periods
occurring at stated intervals. Whereas special working capital is required to meet
extraordinary needs for contingencies.

FOCUSING ON MANAGEMENT OF CURRENT ASSETS

The gross working capital concept focuses attention on two aspects of current assets
management: (1) how to optimize investment in current assets? (2)How should current assets
be financed?
The consideration of the level of investment in current assets should avoid two danger
points- excessive or inadequate investment in current assets. Investment in current asset
should be just adequate to the needs of the business firm. Excessive investment in current
asset should be avoided because it impairs the firms profitability, as idle investment earns

nothing. On the other hand inadequate amount of working capital can threaten solvency of
the firm because of its inability to meet its current obligations. It should be realized that the
working capital needs of the firm may be fluctuating with changing business activity. This
may cause excess or shortage of working capital frequently. The management should be
prompt to initiate an action and correct imbalances.
Another aspect of the gross working capital points to the need of arranging
funds to finance current assets. Whenever a need for working capital funds rises due to the
increasing level of business activity or for any other reason, financing arrangement should be
made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to
remain idle, but should be invested in short term securities. Thus, the financial manager
should have knowledge of the sources of working capital funds as well as investment
avenues where idle funds may be temporarily invested.
FOCUSING ON LIQUIDITY MANAGEMENT:
Net working capital is a qualitative concept. It indicates the liquidity position of the
firm and suggests the extent to which working capital needs may be financed by permanent
sources of funds. Current assets should be sufficiently in excess of current liabilities to
constitute a margin or buffer for maturing obligations within the ordinary operating cycle of
a business. In order to protect their interests, short term creditors always like a company to
maintain
Current assets at a higher level than current liabilities. It is a conventional
rule to maintain the level of current assets twice the level of current liabilities. However, the
quality of current assets should be considered in determining the level of current assets vis-vis current liabilities. A weak liquidity position poses a threat to the solvency of the company
and makes it unsafe and unsound. A negative working capital means a negative liquidity, and
may prove to be harmful for the companys reputation. Excessive liquidity is also bad. It may
be due to mismanagement of current assets. Therefore, prompt and timely action should be
taken by management to improve and correct the imbalances in the liquidity position of the
firm.

WORKING CAPITAL CYCLE:

The upper portion of the diagram above shows in a simplified form the chain of events in a
manufacturing firm. Each of the boxes in the upper part of the diagram can be seen as a tank
through which funds flow. These tanks, which are concerned with day-to-day activities, have
funds constantly flowing into and out of them.
The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be carried out on the
stock, and it will become part of the firms work-in-progress.
Work will continue on the WIP until it eventually emerges as the finished product.
As production progresses, labor costs and overheads need have to be met.

Of course at some stage trade creditors will need to be paid.

When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.
Each of the areas- Stock (raw materials, WIP, and finished goods), trade debtors, cash
(positive or negative) and trade creditors can be viewed as tanks into and from which
funds flow.
Working capital is clearly not the only aspect of a business that affects the

amount of

cash.
The business will have to make payments to government for taxation.
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form of cash
Some shares may be redeemed for cash
Dividends may be paid
Long-term loan creditors (existing or new) may provide loan finance, loans will
need to be repaid from time-to-time, and
Interest obligations will have to be met by the business
Unlike, movements in the working capital items, most of these non-working capital cash
transactions are not every day events. Some of them are annual events (e.g. tax payments,
lease payments, dividends, interest and, possibly, fixed asset purchases and sales). Others
(e.g. new equity and loan finance and redemption of old equity and loan finance) would
typically be rarer events.
OPERATING AND CASH CONVERSION CYCLE:
Operating cycle is the time duration required to convert sales, after the conversion of
resources in to inventories, in to cash. The operating cycle of a manufacturing company
involves three phases:
Acquisition of resources such as raw material, labour power and fuel etc
Manufacture of the product which includes conversion of raw material in to work-inprogress in to finished goods.
Sale of the product either for cash or on credit. Credit sales create account receivable
for collect The length of operating cycle of a manufacturing firm is the sum of

inventory conversion period (ICP), and debtors (receivable) conversion period (DCP).
The inventory conversion period is the total time needed for producing and selling the
product. It includes raw material conversion period (RMCP), work-in-progress
conversion period (WIPCP) and finished goods conversion period (FGCP). The
debtor conversion period is the time required to collect the outstanding amount from
the customers.
The total inventory conversion period and debtors conversion period is referred to as gross
operating cycle (GOC). The creditors deferral period (CDP) the length of time the firm is
able to defer payments on various resource purchases. The difference between gross
operating cycle and payables deferral period is net operating cycle (NOC).
If depreciation is excluded from expenses in the computation of operating cycle,
the net operating cycle also represents the cash conversion cycle (CCL). It is the net time
interval between cash collection from sale of the product and cash payments for resources
acquired by the firm. It also represents the time interval over which additional funds, called
working capital, should be obtained in order to carry out the firms operations.
GROSS OPERATING CYCLE (GOC):
The firms gross operating cycle can be determined as inventory conversion period (ICP)
plus debtor conversion period (DCP). Thus GOC is given as follows:
Gross operating cycle = Inventory conversion period + debtor conversion period
GOC = ICP + DCP
Inventory conversion period (ICP) is the sum of raw material conversion period (RMCP),
work-in-progress conversion period (WICP), and finished good conversion period (FGCP).
ICP = RMCP + WICP + FGCP
Raw material conversion period (RMCP) - It is the average time period taken to convert raw
material in to work-in-progress. RMCP depends on raw material consumption per day and
raw material inventory. Raw material consumption per day is given by the total raw material
consumption divided by the number of days in the year (say 360). The raw material
conversion period is obtained when raw material inventory is divided by raw material
consumption per day.

1.

Raw

material

conversion

period

(RMCP)

Raw

material

inventory

(Raw material consumption)/360

RMCP = RMI360
RMC
2. Work in progress conversion period (WIPCP) - It is the average time taken to complete
the semi finished or work-in-progress.
Work-in-progress conversion period = Work-in-progress inventory
(Cost of production)/360
WIPCP = WIPI360
COP

3. Finished good conversion period (FGCP) - It is the average time taken sell the finished
goods.
Finished goods conversion period = Finished goods inventory
(Cost of goods sold)/360
FGCP = FGI360
CGS
4. Debtor conversion period (DCP) - It is the average time taken to convert debtors in to
cash. DCP represents the average collection period.
DCP = debtors 360
Credit sales
5. Creditors deferral period (CDP) - it is the average time taken by the firm in paying its
suppliers (creditors).
CDP=Creditors360
Credit purchases
CASH CONVERSION OR NET OPERATING CYCLE (NOC):

Net operating cycle (NOC) is the difference between gross operating cycle and payables
deferral period.
Net operating cycle = Gross operating cycle - Creditors deferral period
NOC = GOC - CDP
DETERMINANTS OF WORKING CAPITAL IN RINL:
It is understood that working capital is the vital component for future growth of the firm.
Financial manager has to maintain adequate level of working capital. There are several
factors influence the determinants of working capital. It is necessary to know those factors
which identifying the optimum size of working capital. In RINL working capital is generally
deter mind by these factors.

They are:
1. Market Coverage
2. Manufacturing Cycle
3. Advances
4. Growth of the firm
5. Seasonal fluctuations
6. Global Market boom
7. Expansion Chances
8. Credit Policy
The Management of working capital in RINL encompasses the following problems:1. To decide upon the optimal level of investment in various current assets.
2. To decide upon the optimal mix of short-term funds high relation to long term capital.
3. To locate the appropriate means of short-term financing.

THE DANGERS OF EXCESSIVE WORKING CAPITAL:

It results in unnecessary accumulation of inventories. Thus chances of
inventory mishandling, waste, theft and losses increase.
It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts results, which adversely affect
profit.
Excessive working capital makes management complacent which degenerates
in to managerial efficiency.
Tendencies of accumulating inventories tend to make speculative profits grow.
This may tend to make dividend policy liberal and difficult to cope with in
future when the firm is unable to make speculative profits.

THE DANGERS OF INADEQUATE WORKING CAPITAL:

It becomes difficult for the firm to undertake profitable projects for non
availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firms

profit target.
Operating in inefficiencies creep in when it becomes difficult even to meet
day to day commitments.
Fixed assets are not efficiently utilized for the lack of working capital
funds. Thus the firms profitability would deteriorate.
Paucity of working capital funds render the firm unable to avail attractive
credit opportunities etc.
The firm losses its reputation when it is not in a position to honor its short
term obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore, maintain the right amount of working

capital on a continuous basis. On then a proper functioning of business operations will be
ensured. Sound financial and statistical techniques, supported by judgment, should be used to
predict the quantum of working capital needed at different time periods.
RECEIVABLES MANAGEMENT AND FACTORING:
INTRODUCTION
Trade credit arises when a firm sells its products or services on credit and does not
receive cash immediately. It is essential marketing tool acting as abridge for movement of
goods through production and distribution stages to customers. A firm grants trade credit to
protect its sales from the competitors and to attract the potential customers to bye its at
favorable terms. Trade credit creates accounts receivable or trade debtors also referred to
book (debts in India) that the firm is expected to collect in the near future. The customers
from whom receivable or book debts have to be collected in the future are called trade
debtors or simply as debtors and represents the firms claim or asset.
A credit sale has three characteristics. First, it involves an element of risk that
should be carefully analyzed. Case sales are totally risk less but not the credit sales as the
cash payments are yet to be received. Second, it is based on economic value. To the buyer,
the economic value in goods or services passes immediately at the time of sale, while the
seller expects an equivalent value to be received later on. Third it implies futurity. The buyer
will make the cash payment for goods or services received by him in a future period.
CREDIT POLICY: NATURE AND GOALS:
A firms investment in accounts receivable depends on: the volume of credit sales and the
collection period. For example if a firms credit sales are Rs 30 lakh per day and customers,
on an average, take 45 days to make payment, then the firms average investment in accounts
receivable is:
Daily credit sales average collection period
Rs 30 lakh45=Rs 1,350 lakh

The investment in receivables may be expressed in terms of costs of sales instead of sales
value.
The volume of credit sales is a function of the firms total sales and the percentage of
credit sales to total sales. Total sales depend on market size, firms market share, product
quality, intensity of competition, economic condition etc. the financial manager hardly has
any control over these variables. The percentage of credit sales to total sales is mostly
influenced by the nature of business and industry norms.
There is one way in which the financial manager can affect the volume of credit sales and
collection period and consequently, investment in accounts receivable. That is through the
changes in credit policy. The term credit policy is used to refer to the combination of three
decision variables:
Credit standard, credit terms and collection efforts, on which the financial manager has
influence.

Credit standards are the criteria to decide the type of customers to whom goods
should be sold on credit. If a firm has more slow paying customers, its investment
in accounts receivable will increase. The firm will also be exposed to higher risk

of default.
Credit terms specify duration of credit and terms of payment by customers.
Investment in accounts receivable will be high if customers are allowed extended
time period for making payments.

Collection efforts determine the actual collection period. The lower the collection
period, the lower the investment in accounts receivable and vice versa.

Goals of credit policy:

A firm may follow a lenient or a stringent credit policy. The firm following a lenient
credit policy tends to sell on credit to customers on very liberal terms and standards, credits
are granted for longer period even to those customers whose creditworthiness is not fully
known or whose financial position is doubtful. In contrast, a firm following a stringent credit
policy sells on a credit on a highly selective basis only to those customers who have proven

creditworthiness and who are financially strong. In practice, firms follow credit policies
ranging between stringent to lenient.
Marketing tool
Firms use credit policy as a marketing tool for expanding sales. In a declining market it may
be used to maintain the market share. Credit policy helps to retain old customers and create
new customers by weaning them away from competitors. In a growing market, it is used to
increase the firms market share. Under a highly competitive situation or recessionary
economic conditions, a firm may loosen its credit policy to maintain sales or to minimize
erosion of sales.
WHY DO COMPANIES IN INDIA GRANT CREDIT?
Companies in India feel the necessity of granting credit for the following reasons: Competition- generally the higher the degree of competition the more the credit
granted by the firm. How ever there are exceptions in case of the electronics
industries in India.
Companies bargaining power- if A Company has higher bargaining power vis--vis
its buyers, it may grant no or less credit. The company will have a strong bargaining
power if it has a strong product, monopoly power, brand image, large size or strong
financial position.
Buyers requirements- in a number of business sectors buyers/dealers are not able to
operate without extended credit. This is particularly so in cash of industrial products.
Buyers status- large buyers demand easy credit terms because of bulk purchases and
higher bargaining power. Some company follows a policy of not giving much credit
to small retailers since it is quite difficult to collect dues from them.
Relationship with dealers - companies sometimes extend credit relationship with
dealers to keep long term relationship with them and to reward them for their loyalty.
Marketing tools- credit is used as marketing tool, particularly when a new product is
launched or when a company wants to push its weak products.

 Industry practice- small companies have been found guided by industry practice or
norm more than the large companies. Sometimes companies continue giving credit
because of past practice rather than industry practice.
Transit delay- this is a forced reason for extended credit in case of a number of
companies in India. Most companies have evolved systems to minimize the impact of
such delays. Some of them take the help of banks to control cash flows in such
situations.
Maximization of sales vs. incremental profit
Is sales maximization the goal of firms credit policy? If it is so the firm would follow a
very lenient credit policy, and would sell on credit to every one. Firms in practice dont
follow very loose credit policy just to maximize sales. Sales dont expand without costs.
The firm will have to evaluate its credit policy in terms of both return and cost of
additional costs. Additional sales should add to the firms operating profit. There are three
types of costs involved.
Production and selling costs- These costs increase with expansion of sales. If sales
expand within the existing production capacity, then only the variable production and
selling costs will increase. If capacity is added for sales expansion resulting from
loosening of credit policy, then the incremental production and selling costs will include
both variable and fixed costs.
The difference between incremental sales revenue and the incremental production and
selling cost is the incremental contribution of the change in the credit policy. We should
note that a tight credit policy means rejection of certain type of accounts whose credit
worthiness is doubtful. This results in to loss of sales and consequently, loss of
contribution. This is an opportunity loss to the firm. As the firm starts loosening its
credit policy, it accepts all or some of the accounts which the firm had earlier rejected.
Thus the firm will recapture lost sales and thus, lost contribution. The opportunity cost of
lost contribution declines with the loosening of credit policy.
Administrative cost- Two types of administrative cost are involved when a firm loosens
its credit policy. (a) Credit investigation & supervision cost and (b) collection costs. The

firm is required to analyze and supervise large number of accounts when it loosens its
credit policy. Similarly, the firm ill have to intensify its collection efforts to collect
outstanding bill from financially less sound customers. The incremental cost of credit
administration will be nil if the existing credit department without any additional costs
can implement the new credit policy. This will be the case when the credit department has
idle capacity.
Bad debt losses- These arise when the firm is unable to collect its accounts receivable.
The size of the bad debt depends on the quality of accounts accepted by the firm. This
firm tends to sell to customers with relatively less
credit standing when it loosens its credit policy. Some of these customers delay
payments, and some o f them dont pay at all. As a result bad debt losses increase. The
firm can certainly avoid or minimize these losses by adopting a very tight credit policy. Is
minimization of bad debt losses a credit policy? If it is so no firm will ever sell on credit
to any one. If this happens, then the firm is not availing the opportunity of using credit
policy as a marketing tool for expanding sales, and will incur opportunity cost in terms of
lost contribution. Thus the evaluation of a change in firms credit policy involves analysis
of:
Opportunity cost of lost contribution
Credit administration cost and bad debt losses
These two costs behave contrary to each other. We can see that as the firm moves
from tight to loose credit policy, the opportunity cost declines (i.e. the fir recaptures lost
sales and thus, lost contribution), but the credit administration costs and bad debt loses
increase( i.e. more accounts have to be handled which also include bad accounts which
ultimately fail to pay). How should the firm determine its credit policy? The firms credit
policy will be determined by the trade-off between opportunity cost and credit
administration costs and bad-debt losses. In the figure, this trade-off occurs at point A
where the total opportunity costs of lost contribution and credit administration costs and
bad-debt losses is minimum.
CREDIT POLICY SYSTEM:

Costs and benefits

cost of administration
And bad-debt loss
Opportunity cost

Tight

credit policy

loose

(Cost of credit policy)

Optimum credit policy:
A marginal cost- benefit analysis
The firms operating profit is maximized when total cost is minimized for a given level of
revenue. Credit policy at point A in the above figure represents the maximum operating
profit (since total cost is minimum). But it is not necessarily the optimum credit policy.
Optimum credit policy is one which maximizes the firms value. The value of the firm is
maximized when the incremental or marginal rate of return of an investment is equal to
the incremental or marginal cost of the funds used to finance the investment. The
incremental rate of return can be calculated as incremental operating profit divided by the
incremental investment in receivable. The incremental cost of fund is the rate of return
required by the suppliers of funds, given the risk of investment in accounts receivable. We

should note that the required rate of return is not equal to the borrowing rate. Higher the risk
of investment, higher the required rate of return. As the firm loosens its credit policy, its
investment in accounts receivable becomes more risky because of increase in slow paying
and defaulting accounts. Thus the required rate of return is upward slopping curve.
In sum we may state that the goal of the firms credit policy is to maximize the value of
the fir. To achieve this goal the evaluation of investment in accounts receivable should
involve the following four steps.

Estimation of incremental operating profit

Estimation of incremental investment in accounts receivable.
Estimation of the incremental rate of return of investment
Comparison of the incremental rate of return with the required rate of return.

Cost and return (%)

marginal cost of capital (k)

Marginal rate

Optimum investment in receivable

Stringent

credit policy

(Optimum level of receivables)

MONITORING RECEIVABLES

liberal

of return (r)

A firm needs to continuously monitor and control its receivable to ensure the success of
collection efforts. Two traditional method of evaluating the management of receivable are
average collection period (APC) and aging schedule. These methods have certain
limitations to be useful in monitoring receivable. A better approach is collection
experience matrix.
COLLECTION EXPERIENCE MATRIX
The major limitation of the traditional method is that they are based on aggregated data
and fail to relate outstanding receivables of a period with the credit sales of the same
period. Thus using the traditional method two analysts can came up with entirely
different signals about the status of receivables if they aggregate sales and receivables
data differently. Using disaggregated data for analyzing collection experience can
eliminate this problem. The key is to relate receivables to sales of the same period. When
sales over a period of time are shown horizontally and associated receivables vertically in
a tabular form, a matrix is constructed. Therefore, this method of evaluating receivables
is called collection experienced matrix. Let us take an example.
Suppose that the financial manager of affirm is analyzing its receivables from the
credit sales of past six months starting from July to December. The credit sales of the
company are as follows.

July
August
September

Rs in lakh
400
410
370

October
November
December

Rs in lakh
220
205
350

From the sales ledger the financial manager gathered out standings receivables data for
each months sales. For example he found that for July, there was a sale of 400 lakh, the
out standing receivables during July, august and September were Rs 330 lakh, Rs 242
lakh, and Rs 80 lakh. Similarly he ascertained receivables for sales of other months. This
information is shown in table-1.
How do we interpret the information contained in table-1? We can convert the table to a
collection experience matrix by dividing the out standing receivables in each column by

sales amount in that column. This is shown in table-2, which contains information on the
percentage of receivable on the credit sales from which those receivables have originated.
For example for the sale of July, 82.5 per cent receivables (i.e. 330/400) were outstanding
at the end of July, 60.5 per cent (i.e. 242/400) at the end of august and 20 per cent (i.e.
80/400) at the end of September. In other words, 17.5 per cent receivables were paid by
the end of July, 39.5 per cent by the end of august (viz., 39.5-17.5=22 per cent additional
receivables were paid in august), 80 per cent by the end of September (viz., 80-39.5=41.5
per cent additional receivables were paid during September) and remaining receivables
were collected during October so that the balance of book debts became nil at the end of
October. Receivables of other months can also be analyzed in the same way. Thus when
we read a column top down, we get an idea of the manner in which the firm collects a
given months sales. How well a firm does collects current months sales? This can be
ascertained by reading the diagonals drawn in table-2. For example the top diagonal
shows the manner in which current months sales are collected. The next diagonals show
receivables one month older and so on. For the firm in our example, we find the table-2
that about 80 per cent of sales in a given month remain uncollected by the end of that
month. In other words, about 20 per cent of sales in a given month are collected in the
same month. If the percentages increase as we move down by diagonal, it implies that the
firm is unable to collect its receivables faster. This requires an investigation for
appropriate remedial action.
Table-1
Sales and receivables from July to December
Month
Sales
Receivables

July
Aug
Sept
Oct
Nov
Dec

July
400
330
242
80
0
0
0

Aug
410

Sept
370

320
245
76
0
0

320
210
72
0

oct
220

162
120
40

Rs in lakhs
Nov
Dec
205
350

160
130

285

Table-2
Collection experience matrix
Rs in lakhs

Month
Sales
Receivables (%)

July
Aug
Sept
Oct
Nov
Dec

July
400
82.5
60.5
20.0
0
0
0

Aug
410

Sept
370

oct
220

Nov
205

Dec
350

78.0
59.8 86.5
18.5 56.8
0 19.5
0
0

73.6
54.5
18.2

78.0
63.0

81.4

Factoring
It is a method of converting a non productive inactive asset (i.e. receivable) in to a
productive asset (cash) by selling receivables to a company that specializes in their collection
and administration. A factor makes the conversion of receivable in to cash possible.
Factoring services
While purchase of receivable is the fundamental to the functioning of factoring, the factor
provides the following three basic services to the clients:
Sales ledger administration and credit management.
Credit collection and protection against default and bad debt losses.
Financial accommodation against the assigned book debts (receivables).
In developed countries like USA, factors provide many other services. They include:

Providing information on prospective buyers.

Providing financial counseling.
Assisting the client in managing its liquidity and preventing sickness.
Financing acquisition of inventories.
Providing facilities for opening letters of credit by the client etc.

DIFFERENT WORKING CAPITAL RATIOS

Although working capital management particularly its receivable component,
apparently takes on a short term approach, commitment to a particular receivables policy and
the customer relation ship that emanates from it are long term in nature. Hence, the credit
manager must take a long term as well as short term view of the business to which he is
going to commit him self. It is not important to have a strong accounting background to
make intelligent use of financial statements. A credit manager is required to calculate and

interpret certain key ratios which will tell him where his account receivables are in danger or
not.
Classification of ratio:
Liquidity ratio
Solvency ratio
Profitability ratio
Among these three ratios the liquidity ratio is generally important for the working capital
management. So let us discuss about the liquidity ratio first.
Liquidity ratio- This ratio measures the ability of a business organization to pay short term
obligations in time. The liquidity ratio can be sub classified into two groups.
Liquidity study
Efficiency study
The liquidity study can be further classified in to three categories.
Current ratio
Quick ratio(acid test ratio)
Absolute liquid ratio
The efficiency study can be further classified in to three categories.
Inventory turn over ratio(ITR)
Debtor turn over ratio(DTR)
Creditors turn over ratio(CTR)
Current ratio
It establishes the relationship between the current assets and current liabilities.
Mathematically,
Current ratio=current assets/ current liabilities
Rule of thumb: The standard fixed for current ratio is 2:1
The current ratio is a crude measure of liquidity.
Quick ratio(acid test ratio)
It establishes the relationship between liquid asset and current liability.
Mathematically,
Quick ratio=liquid assets /current liabilities
It is the absolute measure of liquidity.

Rule of thumb: The normal standard fixed for the quick ratio is 1:1
It is a rigorous measure of examining the liquidity of a business concern. Its other name
is also acid test ratio.
Absolute liquid ratio
It establishes the relationship between absolute liquid assets and current liabilities.
Mathematically,
Absolute liquid ratio=absolute liquid assets/current liability
Rule of thumb: The normal standard fixed for absolute liquid ratio is 1:2
A rare measure of liquidity used under certain special circumstances.
Inventory turn over ratio(stock velocity)/(ITR)
ITR measures the relationship between cost of goods sold and the average inventory
during the period.
Mathematically,
ITR=cost of goods sold/average inventory
Or sales / average inventory
Its main objective is to measure the movement of stock. It is an absolute measure of
movement of stock or inventory.
Inventory holding period=365/ITR (days)
Debtor turn over ratio(DTR)
It measures or establishes a relationship between the net sales and the average debtor.
Mathematically,
DTR=net sales/average debtors
It measures the conversion of debtors in to the cash. It is an absolute measure of
measuring the turn over or conversion of debtors. There is a relative measure also namely
average collection period.
Average collection period=365/DTR (days)
Creditors turn over ratio(CTR)

While receivables turn over ratio of the customer organization measures the vulnerability
of the sources from which payables of the vendor-organizations are satisfied, the creditors
turn over ratio indicates the actual payment behavior of the customer organization.
CTR=purchases/trade creditors (payables)
Conversion of this ratio in number of days = 365/CTR

CONSTITUENTS OF CURRENT ASSETS ARE:

1) Cash in hand and bank balances
2) Bills receivable
3) Sundry debtors(less provision for bad debts)
4) Short term loans and advances
5) Inventories of stock as:
a. Raw materials
b. Work-in-progress
c. Stores and spares
d. Finished goods
6) Temporary investments of surplus funds
7) Prepaid expenses
8) Accrued income
In narrow sense the term working capital refers to the net working capital. Net working
capital is the excess of currents assets over current liabilities (or)
Gross working capital= Current assets total
Net working capital=Current assets-Current liabilities
Net working capital may be positive or Negative. When the current assets exceed the current
liabilities the working capital is positive and the negative working capital results when the
current liabilities are more than the current assets. Current liabilities are those liabilities
which are intended to be paid in the ordinary course of business with in a short period of
normally one accounting year out of the current assets or the income of the business.
Current Liabilities are those, which are expected to fall due or nature of payment in
short period of one year, and they represent short-term sources of funds they include

1. Short-term borrowings: include bank borrowings other than those against own
debentures and other mortgages.
2. Trade creditors and other liabilities Sundry creditors, outstanding expenses and
advances received.
Provisions for taxation, dividends and other current provisions

CONSTITUENTS OF CURRENT LIABLITIES:

1. Bills payable
2. Sundry creditors (or) Accounts payable
3. Accrued or outstanding expenses
4. Short-term loans, advances and deposits
5. Dividends payable
6. Bank overdrafts
7. Provision for taxation, If it does not amount to appropriation of profits

THE NEED FOR WORKING CAPITAL:

A firm has to make profit to maintain its image in the capital market the investors will
also be looking forward to the continuous growth of profitability gradual increase in profit
will result in capital growth of the firm. To earn substantial profit, sales volume has to be
increased.
It is observed that sale of goods will not immediately be converted in to cash. When the
sale transactions are more credit in nature to have uninterrupted business operations the
amount will be looked up in the current assets like accounts receivables, stock, etc., This
actually happens due to the cash cycle by the time the cash is converted back to the cash.
The firm needs extra funds and hence the need for working capital. If this is not provided
the business operations will be effected to a greater extent and hence this past of finance has
to be managed well.
THE WORKING CAPITAL NEED FOR THE FOLLOWING PURPOSES:

1. The purchase of raw materials, components and spares

2. To pay wages and salaries.
3. To incur day-to-day expenses and overhead cost such as fuel, power and office
expenses, etc.,
4. To meet the selling costs as packing, advertising etc,.
5. To provide credit to the customers.
6. To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.

IMPORTANCE OF WORKING CAPITAL:

Working capital is the life blood and nerve center of a business, just as circulation of
blood is essential in the human body for maintaining life, working capital is very essential to
maintain the smooth running of a business. No business can run successfully without an
adequate amount of working capital.
The main advantages of maintaining adequate amount of working capital are as follows:
Solvency of the business.
Goodwill.
Easy loans.
Cash discounts.
Regular supply of raw material.

APPROACHES FOR FINANCING WORKING CAPITAL:

There are two sources of financing working capital requirements:
(1) Long term sources such as share capital, debentures, public deposits, Pouching back of
profits, loans from financial institutions, and
(2)

Short term sources such as commercial banks, indigenous bankers, trade credits, and

installment credit, advances, and accounts receivables and so on.

There are three basic approaches for determining an appropriate Working capital
financing mix.
Hedging approached
Conservative approach
Aggressive approach
1. HEDGING APPROACH:
The firm can adopt a financial plan which matches the expected life of assets with the
expected life of the source of funds raised to finance assets. The firm follows matching
approach. It suggests that the permanent working capital requirements should be financed
with funds from long term sources while temporary working capital requirements should be
financed with funds from short term funds
2. CONSERVATIVE APPROACH:
This approach suggests that the entire estimated investments in current assets should
be financed from long term sources and the short term sources should be used only for
emergency requirements. The distinct features of this approach are:
Liquidity is severally greater
Risk is minimized
The cost of financing is relatively more as interest has to be paid even on seasonal
requirements for the entire period.
3.AGGRESSIVE APPROACH:
The aggressive approach suggests that the entire estimated requirements of current
asset should be financed from short term sources and even a part of fixed asset investments
be financed from short term sources. This approach makes the finance mix more risky, less
costly and more profitable.
WORKING CAPITAL MANAGEMENT GOAL:
The goal of working capital management is to manage the firms Current Assets and

Current Liabilities in such a way that a satisfactory level of working capital is maintained.
This is so because if the firm cannot maintain a satisfactory level of working capital, it is
likely to become insolvent and may even be forced into bankruptcy. Sometimes, a Company
may have tremendous potential for profitability in the long run, but may languish due to
inadequate liquidity. The basic goal of working capital management is to manage each of
the funds current assets and current liabilities in such a way that an acceptable level of net
working capital is always maintained in the business.
There are number of methods to determine the working capital needs.
They are
By determining the amount of current assets and current liabilities
Cash forecasting methods
Balance sheet method
Profit& loss adjustment method

Working capital as a percentage of sales

Working capital as a percentage of fixed assets

ADVANTAGES OF ADEQUATE WORKING CAPITAL:

Working capital is the life blood and center of a business. Working capital is very essential to
maintain the smooth running of a business. No business can run successfully without an
adequate amount of working capital .Some of the advantages of working capital management
is as follows.
SOLVENCY OF THE BUSINESS:
Adequate working capital enables helps in maintaining solvency of the business by
providing the uninterrupted flow of production.
GOODWILL:
Sufficient working capital enables a business concern to make prompt payments and
hence help in creating and maintaining goodwill.
EASY LOANS:
A concern having adequate working capital, high solvency and good credit standing
can arrange loans from banks and others on easy and favorable terms.

 CASH DISCOUNTS:
Adequate working capital also enables a concern to avail cash discounts on the
purchases and hence it reduces costs.

REGULAR SUPPLY OF RAW MATERIALS:

Sufficient working capital ensures regular supply of raw materials and continuous

production.

REGULAR PAYMENTS:
Regular payment of salaries, wages and other day to day commitments. A company

which has sample working can make regular payment of salaries, wages and other day to
day commitments which raises the moral of its employees, efficiency and enhances
production and profits.

HIGH MORAL:
Adequacy of working capital creates an environment of security confidence, high

moral and creates overall efficiency in a business.

DETERMINANTS OF WORKING CAPITAL:
The need for working capital is not always the same; it varies from year to year or
even month to month depending upon a number of factors. There is no set of rules or
formulate to determine the working capital needs of the firm. Each factor has its own
importance and the importance of the factors changes for a firm over a time.
In order to determine the proper amount of working capital of a concern, the
following factors should be considered carefully.

NATURE OF THE BUSINESS:

The amount of working capital is basically related to the nature and volume of the

business concern where the cost of the raw materials to be used in the manufacturing of a
product is very large in proportion to its total cost of manufacturing the requirements of
working capital will be very large.

SIZE OF THE BUSINESS UNIT:

The size of the business unit has an important impact on its working capital needs.
Size may be measured in terms of operations. A firm with large scale of operation will need
more working capital then a small firm.

SEASONAL VARIATION:
Seasonal industries require more working capital to stock the raw materials during the

season. In peak season

TIME CONSUMED IN MANUFACTURING:

The average time taken in the process of manufacturing is also an important factor in

the process of manufacturing is also an important factor in determining the amount of

working capital .The longer the period of manufacturing the larger the inventory required.

TURN OVER OF CIRCULATING CAPITAL:

Rapidly of turnover determines the amount of working capital .The faster the sales the

larger the turnover hence less working capital.

MANUFACTURING/PRODUCTION POLICY:
Each enterprise in the manufacturing sector has its own production policy, some

follow the policy of uniform production even if the demand varies from time to time, and
others may follow the principle of demand based production in which production is based on
the demand during that particular phase of time. Accordingly, the working capital
requirements vary for both of them.

OPERATIONS:
The requirement of working capital fluctuates for seasonal business. The working

capital needs of such business may increase considerably during the busy season and
decrease during the slack season. Ice creams and cold drinks have a great demand during
summers, while in winter the sales are negligible.

MARKET CONDITION:
If there ids high competition in the chosen product category, then one shall need to

offer sops like credit, immediate delivery of goods etc. For which the working capital

requirement will be high. Otherwise, if there is no competition or less competition in the

market then the working capital requirements will be low.

AVAILABILITY OF RAW MATERIAL:

If raw material is readily available then one need not maintain a large stock of the

same, thereby reducing the working capital investment in raw material stock. On the other
hand, if raw material is not readily available then a large amount of working capital is
required.

BUSINESS CYCLE FLUCTUATIONS:

Working capital required more in boom period and less in depression period.

TERMS OF PURCHASE AND SALE:

Terms of purchase and sales affect the amount of working capital .The practice of

cash purchases with credit sales requires more working capital.

INVENTORY TURNOVER:
With a better inventory control, a form is able to reduce its working capital

requirements. If the inventory turnover is high the working capital requirements will be low.

GROWTH AND EXPANSION:

Growing concerns requires more working capital than the forms that are static. It is

logical to expect larger amount of working capital in a growing concern to mean its growing
needs of funds.

LEVELS OF WORKING CAPITAL INVESTEMENT:

The overall policy considers both the level of working capital investment and its financing.
In practice, the firm has to determine the joint impact of these two decisions upon its
probability and risk. The size and nature of a firms investment in current assets is a function
of a number of different factors , including the following:

The type of products manufactured.

The length of the operating cycle.
The sales levels.
Inventory polices.

 Credit policies.
How efficiently the firm manages current assets.

INVENTORY MANAGEMENT
Every enterprise needs inventory for smooth running of its activities. It serves as a
link between production and distribution process. There is, generally a time lag between the
recognition of a need and its fulfillment. Greater the time lag the higher the requirements for
inventory. The unforeseen fluctuations in the demand and supply of goods also necessitate
the need for inventory. It also provides a cushion for future price fluctuations.
The investment in inventories constitutes the most significant part of current
assets/working capital in most of the undertakings. Thus it is very essential to have proper
control and management of inventories. The purpose of inventory management is to ensure
availability of materials in sufficient quantity as and when required and also to minimize
investment in inventories. Inventories include all types of stocks. For effective working
capital management, inventory needs to manage effectively. The level of inventory should be
such that the total cost of ordering and holding inventory is the least. Simultaneously, stock
out costs should also be minimized. Business, therefore, should fix the minimum safety stock
level, re-order level and ordering quantity so that the inventory cost is reduced and its
management becomes efficient.
The meaning of inventory is Stock of goods or a list of goods. In accounting language
it may mean Stock of finished goods only. In a manufacturing concern it may include raw
materials, work in process and stores etc.

Purpose of inventory management:

Every firm needs to maintain inventories
To facilitate continuous production and timely execution of sales orders
To meet the unpredictable changes in demand and supplies of material
To reduce ordering costs and avail quantity discounts etc. For taking advantages of
price fluctuations, saving in reordering costs.

Need to hold Inventories: There are three general motives for holding
inventories.
1. The Transaction Motive:
Which emphasis the need to maintain inventories to facilitate smooth production and
sales operation.
2.The Precaution Motive:
This necessitates holding of inventories to guard against the risk of unpredictable
changes in demand and supply forces and other factors.
3.The Speculative Motive:
This influences the decision to increase or reduce inventory level to take advantage of
price fluctuation.

OBJECTS OF INVENTORY MANAGEMENT:

The main objectives of inventory management are operational and financial. The
operational objectives mean that the materials and spears should be available in sufficient
quantity so that work is not disrupted for want of inventory. The financial objective means
that investments in inventories should not remain ideal and minimum working capital should
be locked in it. The objectives of inventory management are as follows.
To ensure continuous supply of materials, spares and finished goods so that product
should not suffer at any time and the customers demand should also be meet.
To avoid both overstocking and under stocking of inventory.
To maintain investment in inventories at the optimum level as required by the
operational and sales activities.
To keep material cost under control so that they contribute in reducing cost of
production and overall costs.
To minimize losses through deterioration, wastages and damages.
To facilitate furnishing of data for short term and long term planning and control of
inventory.

Tools and techniques of inventory management:

In managing inventories, the firms objective should be in consonance with
shareholder wealth maximization principle. To achieve this, the firm should determine the
optimum level of inventory. Efficiently controlled inventories make the firm flexible.
Inefficient inventory control results in unbalanced inventory and inflexibility the firm may
sometimes run out of stock and sometimes may pile up necessary stocks. This increases the
level of investment and makes the firm unprofitable.
To manage inventories efficiency, answers should be sought to the following two
questions:
How must should be ordered?
When should it be ordered?
The first question, how much to order, relates to the problem of determining
economic order quantity (EOQ), and is answered with an analysis of cost maintaining certain
level of inventories. The second question, when to order, arises because of uncertainty and is
a problem of determining the re-order point.
Economic Order Quantity (EOQ)
One of the major inventory management problems to be resolved is how much
inventory should be added when inventory is replenished. If the firm is buying raw materials,
it has to decide lots in which it has to be purchased on replenishment. If the firm is planning
a production run, the issue is how much production to schedule (or how much to make).
These problems are called order quantity problems, and the task of the firm is to determine
the optimum or economic order quantity (or economic lot size).
Determining an optimum inventory level involves two types of costs:

Ordering cost

Carrying cost. The Economic Order Quantity is that inventory level that
minimizes the total of ordering and carrying costs.

Ordering cost:

The term ordering costs is used in case of raw materials (or supplies) and includes the
entire costs of acquiring raw materials. They include costs incurred in the following
activities: Requisitioning, purchase ordering, transporting, receiving, inspecting and storing
(store placement). Ordering costs increase in proportion to the number of orders placed. The
clerical and staff costs, however, do not have to vary in proportion to the number of orders
placed, and one view is that so long as they are committed costs, they need not be reckoned
in computing ordering cost. Alternatively, it may be argued that as the number of orders
increases, the clerical and staff costs tend to increase. If the number of orders are drastically
reduced, the clerical and staff force released now can be used in other departments. Thus,
these costs may be included in the ordering costs. It is more appropriate to include clerical
and staff costs on appropriate basis.
Ordering costs increase with the number of orders; thus the more frequently inventory
is acquired, the higher the firms ordering costs. On the other hand, if the firm maintains
large inventory levels, there will be few orders placed and ordering costs will be relatively
small. Thus, ordering costs decrease with increasing size of inventory.
Carrying Cost:
Cost incurred for maintaining a given level of inventory are called carrying costs.
They include storage, insurance, taxes, deterioration and obsolescence. The storage costs
comprise cost of storage space (warehousing cost), stores handling costs and clerical and
staff service cost (administrative costs) incurred in recording and providing special facilities
such as fencing, lines, races etc.
INVENTORY CONTROL SYSTEMS:
A firm needs an inventory control system to effectively manage its inventory. There
are several inventory control systems in vogue in practice. They range from simple systems
to very complicated systems. The nature of business and the size dictate the choice of an
inventory control system. For example, a small firm may operate a two-bin system. Under
this system, the company maintains two bins. Once inventory in one bin is used, an order is
placed, and meanwhile the firm uses inventory in the second bin. For a large departmental

store that sells hundreds of items, this system is quite unsatisfactory. The departmental store
will have to maintain a self-operating, automatic computer system for tracking the inventory
position of various items and placing order.
ABC INVENTORY CONTROL SYSTEM:
Large numbers of firms have to maintain several types of inventories. It is not
desirable to keep the same degree of control on all the items. The firm should pay maximum
attention to those items whose value is the highest. The firm should, therefore, classify
inventories to identify which items should receive the most effort in controlling. The firm
should be selective in its approach to control investment in various types of inventories. This
analytical approach is called the ABC Analysis and tends to measure the significance of each
item of inventories in terms of its value. The high-value items are classified as A items and
would be under the tightest control C items represent relatively least value and would be
under simple control B items fall in between these two categories and require reasonable
attention of management. The ABC Analysis Concentrates on important items and is also
known as control by importance and exception (CIE). As the items are classified in the
importance of their relative value, this approach is also known as proportional value analysis
(PVA).
The following steps are involved in implementing the ABC analysis:
Classify the items of inventories, determining the expected use in units and the price per unit
for each item.

Determine the total value of each item by multiplying the expected units by its units
price.

Rank the items in accordance with the total value, giving first rank to the item with
highest total value and so on.

Compute the ratios (percentage) of number of units of each item to total units of all
items and the ratio of total value of each item to total value of all items.

Combine items on the basis of their relative value to form three categories-A, B and
C.

CASH MANAGEMENT
Meaning of cash;
The term cash is used in two senses. In a narrower sense it includes currency notes,
cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In a
broader sense it also includes near cash assets such as marketable securities and time
deposits with bank.
The main reason for a firm to hold cash is to meet the needs of day-to-day
transactions and to protect the firm against uncertainties characterizing its cash flows.
While cash serves these functions, it is an idle resource which has an opportunity cost.
The liquidity provided by cash holding is at the expense of profits sacrificed foregoing
alternative opportunities. Hence, the finance manager should carefully plan and control cash.
Cash is the one of the current assets of a business. It is needed at all times to
keep the business going. A business concern should always keep sufficient cash for meeting
its obligations. Any shortage of cash will hamper the operations of a concern and any excess
of it will be unproductive. Cash is the most unproductive of all the assets. While fixed assets
like machinery, plant etc and current assets such as inventory will help the business in
increasing its earning capacity, cash in hand will not add anything to the concern. It is in this

context that cash management has assumed much important.

Cash itself doesnt produce goods and services. It is used as a medium to acquire
other assets. It is the other asset, which is used in manufacturing goods or providing services.
The ideal cash can be deposited in bank to earn interest. A business has to keep required cash
for meeting various needs. The assets acquired by the cash again help the business in
producing cash. The goods manufactured are sold to acquire cash. The firm will have to
maintain a critical level of cash. If at a time it doesnt have sufficient cash with it, it will have
to borrow from the market for reaching required level.There remains gap between cash
inflows and outflows. Sometimes cash receipts are more than cash payments. It is called
surplus. Sometimes cash payments are more than cash receipts. This is called as deficiency.
A financial manager tries to synchronies cash inflows and cash outflows. Perfect
synchronization of receipts and payments of cash is only an ideal situation.
Cash management has assured importance because it is the most significant of all the
current assets. It is required to meet business obligations and it is unproductive when not
used. It is deals with the following.
Cash inflows and out flows.
Cash flows within the firm.
Cash balances held by the firm at a point of time.
Cash management needs strategies to deal with various facets of cash. Following are
some of the facets.
a) Cash Planning:
Cash planning is a technique to plan and control the use of cash. A projected cash flow
statement may be prepared, based on the present business operations and anticipated future
activities. The cash inflows from various sources may be anticipated & cash outflows will
determine the possible uses of cash.
b) Cash forecasts and budgeting:
A cash budget is the most important device for the control of receipts and payment of cash. A
cash budget is an estimate of cash receipts. It is an analysis of flow of cash in a business over

a future, short or long period of time. It is a forecast of expected cash intake and outlay. The
short-term forecasts can be made with the help of cash flow projections. The long-term cash
forecasts are also essential for proper cash planning. These estimates may be for three, four,
five or more years. A long term forecast indicates company's future financial needs for
working capital. Both short term and long term forecasts may be made with the help of
following methods.
a) Receipts and disbursements method.
b) A adjusted net income method.
OBJECTIVES:
To meet cash disbursement need as per the payment schedule.
Utilization of cash effectively.
To minimize amount locked up as cash balances.

MOTIVE FOR HOLDING CASH:There are four motives for holding cash;
Transaction motive
Speculative motive
Compensation motive
Precautionary motive
Transaction motive:A firm enters into a variety of business transactions resulting in both inflows and
outflows.
Speculative Motive:A firm keeps cash balance to take advantage of unexpected opportunities, typically
outside the normal course of the business such motive is therefore is purely speculative
motive.
Compensation motive:-

Banks provide certain services to their clients free of charge. They therefore, usually
require clients to keep to minimum cash balance with them which keep them to earn interest
and they compensate them for the free services so provided.
Precautionary Motive:A firm keeps cash balance to meet unexpected cash needs arising out of unexpected
contingencies.
CASH MANAGEMENT BASIC PROBLEMS:
Cash is the life blood of a business firm; it is needed to acquire supplies, resources,
equipment, and other assets used in generating the products and services provided by the
firm. It is also needed to pay wages and salaries to workers and managers, taxes to
governments, interest and principal to creditors, and dividends to shareholders.

CASH AND NEAR-CASH ASSETS AS HEDGES:

Cash : Unfortunately, the firms future cash needs for transaction purposes are often
quite uncertain , emergencies may arise for which the firm needs immediate cash.
Near-cash assets: Near-cash assets, we mean interest-earning marketable assets
that have very short maturities
CASH SYSTEM
The cash system of a firm is the mechanism that provides the linkage between cash flows.

ELEMENTS OF A CASH MANAGEMENT SYSTEM

C.R.
C.P.
C.R.

C.R

Deposit
Bank 1
Deposit
Bank 2
Lock box
bank 2

C.P.

Disbursement
bank 1

C.P.

concentration
bank

C.R.

C.P.

Disbursement
bank 1

C.R.

C.P.

C.P.
C.R.

RECEIVABLES MANAGEMENT
Given a choice, every business would prefer selling its produce on cash basis.
However, due to factors like trade policies, prevailing marketing conditions, etc., businesses
are compelled to sell their goods on credit. In certain circumstances, a business may
deliberately extend credit as a strategy of increasing sales. Extending credit means creating a
current asset in the form of Debtors or Accounts receivables. Investment in this type of
current assets needs proper and effective management as it gives rise to costs such as:
a) Cost of carrying receivable
b) Cost of debt losses
Thus the objective of any management policy pertaining to accounts
receivables would be to ensure that the benefits arising due to the receivables are more than
the cost incurred for receivables and the gap between benefit and cost increases resulting in
increased profits. Effective control of receivables helps a great deal in properly managing it.
each

business should, therefore try to find out an average credit extended to its client using

the below given formula;

Total amount of receivables

Average credit extended=
Average credit sales per day
Each business should project expected sales and expected investment in receivables
based on various factors, which influences the working capital requirement. From this it
would be possible to find out the average credit days using the above seven formula. A
business should continuously try to monitor the credit days and see that the average credit
offered to clients is not crossing the budgeted period. Otherwise, the requirement of
investment in the working capital would increase and as a result activities may get squeezed.
This may lead to cash crisis.
Sources of working capital funds:RINL raise its working capital multiple banking which includes
State bank of India, State bank of Hyderabad, Bank of Baroda, Canara bank, UCO
bank, Andhra bank, PSB, Indus Ind bank.etc..
In RINL working capital requirement is assessed by
Fixing the target production for the year
Preparation of Budget (in Rupees)
Working capital requirement are prepared taking into account
Previous two years actual
Projected for the next two years
Procedure for procurement of funds:
RINL applies a Credit Monitoring And Appraisal (CMA) Report (a Forty pages
document) consists of historical data about the company and profit and loss account, balance
sheet, current assets, current liabilities, working capital assessment, fund flows etc., State
Bank of India subscribes the maximum working capital limit (up to extent of 38%) of the
entire working capital assessed. The other banks of the under the multiple banking
arrangement above provide the rest of working capital limits.
Types of working capital sources:
1. Fund based limits :-

Under this source, RINL can obtain working capital finance by bank borrowing in the
form of cash credit of export packing credit.
2. Non-fund based limits :RINL receives non-fund based working capital in the form of
a) Letter of credit
b) Bank guarantee
What is letter of credit and bank guarantee?
A letter of credit is a document typically issued by a bank or financial institution,
which authorizes the recipient of the letter (the "customer" of the bank) to draw amounts of
money up to a specified total, consistent with any terms and conditions set forth in the letter.
This usually occurs where the bank's customer seeks to assure a seller (the "beneficiary") that
it will receive payment for any goods it sells to the customer.
In simple terms, a letter of credit could be said to document a bank customer's line of
credit, and any terms associated with its use of that line of credit. Letters of credit are most
commonly used in association with long-distance and international commercial transactions.
which one better letter of credit or bank guarantee and when will we recieve our
amount from them.
A letter of credit means you have found a creditor that is willing to loan you a certain
amount. You don't receive that amount in cash to do whatever you please with, but it will be
a loan tied into some type of collateral (usually you only hear this term with mortgages).
A bank guarantee and a letter of credit are similar in many ways but they're two
different things. The main difference between the two credit security instruments is the
position of the bank relative to the buyer and seller of a good, service or basket of goods or
services in the event of the buyer's default of payment. These financial instruments are often

used in trade financing when suppliers, or vendors, are purchasing and selling goods to and
from overseas customers with whom they don't have established business relationships.
A bank guarantee is a guarantee made by a bank on behalf of a customer (usually an
established corporate customer) should it fail to deliver the payment, essentially making the
bank a co-signer for one of its customer's purchases. A bank guarantee is more risky for the
merchant and less risky for the bank.
A letter from a bank guaranteeing that a buyer's payment to a seller will be received
on time and for the correct amount. In the event that the buyer is unable to make payment on
the purchase, the bank will be required to cover the full or remaining amount of the purchase.
Banks accept full liability in both cases. With a bank guarantee, a client can default
and the bank assumes the liability.To do the trade legally by LC or Bank guarantee, they
follow the rules of incoterms 2000.
INCOTERMS 2000:
Incoterms rules are international rules that are accepted by governments, legal
authorities and practitioners worldwide for the interpretation of the most commonly used
terms in international trade. They either reduce or remove altogether uncertainties arising
from differing interpretations of such terms in different countries.
When negotiating an international sales contract, both parties need to pay as much
attention to the terms of sale as to the sales price. To make it as clear as possible, an
international set of trade terms (INCOTERMS) has been adopted by most countries that
defines exactly the responsibilities and risks of both the buyer and seller including while the
merchandise is in transit.
The 13 INCOTERMS: Origin Terms:
EXW - Ex-Works, named place where shipment is available to the buyer, not loaded. The
seller will not contract for any transportation.

International Carriage NOT Paid by Seller:

FCA - Free Carrier, unloaded at the seller's dock OR a named place where shipment is
available to the international carrier or agent, not loaded. This term can be used for any mode
of transport.
FAS - Free Alongside Ship, named ocean port of shipment. Ocean shipments that are NOT
containerized.
FOB

Free

On

Board

vessel,

named

ocean

port

of

shipment.

This term is used for ocean shipments only where it is important that the goods pass the
ship's rail.

International Carriage Paid by the Seller:

CFR - Cost and Freight, Named ocean port of destination. This term is used for ocean
shipments that are not containerized.
CIF

Cost,

Insurance

and

Freight,

named

ocean

port

of

destination.

This term is used for ocean shipments that are not containerized.
CPT - Carriage Paid To, named place or port of destination. This term is used for air or
ocean containerized and roll-on roll-off shipments.
CIP - Carriage and Insurance Paid To, named place or port of destination.
This term is used for air or ocean containerized and roll-on roll-off shipments.
Arrival At Stated Destination:
DAF - Delivered At Frontier, named place of destination, by land, not unloaded. This term is
used for any mode of transportation but must be delivered by land.

DES

Delivered

Ex-Ship,

named

port

of

destination,

not

unloaded.

This term is used for ocean shipments only.

DEQ - Delivered Ex-Quay, named port of destination, unloaded, not cleared. This term is
used for ocean shipments only.
DDU - Delivered Duty Unpaid, named place of destination, not unloaded, not cleared. This
term is used for any mode of transportation.
DDP - Delivered Duty Paid, named place of destination, not unloaded, cleared. This term is
used for any mode of transportation.

PAYABLES MANAGEMENT
Management of accounts payable is as much important as the management of such
accounts receivable. However there is a basic difference between the approaches adopted by
the finance manager in both the cases. The underlying objective in such case of accounts
receivables is to maximize the acceleration of collection process while in case of accounts
payable it is to slow down the payments process as much as possible. The delay in payments
of accounts payable may result in saving of some interests costs but proves very costly to the
firm in the form of loss of credit in the market. The finance manager therefore has to ensure
that the payments to the credits are made at the stipulated time period after obtaining the best
credit term possible.
Control of accounts payable:
Computing the average age of payable can be calculated by any of the following methods.
Months or days in the period / Accounts payable turnover = Credit purchase in the period /
Average accounts payable.

WORKING CAPITAL MANAGEMENT IN RINL

DATA ANALYSIS & INTERPRETATION
Working capital Management is the concept of how effectively holding the current

assets and current liabilities of an organization.

RINL is the steel manufacturing industry. In RINL production of steel is done in 24
hours continuously. It follows the most effective and perfect methods for holding the
working capital.
RINL working capital management seems to be best in the industry with better
utilization of available resources. They are taking advantages of cheap working capital credit
and investing their funds at a very good rate of returns.
Management efforts over the few years have been to inculcate cash consciousness
through constant emphasis on working capital, manly inventory and book debtors. In all
these, it is to be kept in mind that RINL is a multi product undertaking, where management
decisions affecting working capital is taken at the top managerial level.

DETERMINANTS OF WORKING CAPITAL IN RINL :It is understood that working capital is the vital component for future growth of the
firm. Financial manager has to maintain adequate level of working capital. There are several
factors influence the determinants of working capital. It is necessary to know those factors
which identifying the optimum size of working capital. In RINL working capital is generally
deter mind by these factors.
THOSE ARE:
1. Market Coverage
2. Manufacturing Cycle
3. Advances
4. Growth of the firm
5. Seasonal fluctuations
6. Global Market boom
7. Expansion Chances
8. Credit Policy
The Management of working capital in RINL encompasses the following problems:1. To decide upon the optimal level of investment in various current assets.
2. To decide upon the optimal mix of short-term funds high relation to long term capital.
3. To locate the appropriate means of short-term financing.

Working Capital Statement Of RINL 2004-05 (Figures in

Particulars
Current Assets
Inventories
Sundry debtors
Cash and bank bal
Other current assets
Loans and advances
Total current assets (a)
Current Liabilities
Liabilities
Provision
Total current liabilities (b)
Net Working capital (a-b)
Net Increase in Working
Capital
Total

crores)
2004
March

2005
March

706.34
85.62
1359.71
24.31
550.91
2726.89

1255.31
49.3
3932.61
100.18
710.12
6047.52

1078.84
156.51
1235.35
1491.54

1154.88
269.27
1424.16
4623.36

3131.82
4623.36

4623.36

Increase

Decrease

548.97
36.32
2572.9
75.86
159.22

76.05
112.76

3356.95

3131.82
3356.95

Source: Annual report of RINL

Interpretation:
There is a significant increase in net working capital, which amounts to
3131.82crores. There noticeable increase in net working capital is due to increase in cash &
bank balances. The increase in cash is 2572.90 (189%). A positive growth is observed in loan
& advances and other current assets. The increase is offset by the increase in total current
assets. The net effect of the above changes has brought about the increased working capital.

Working Capital Statement Of RINL 2005-06(Figures in

crores)

Particulars
Current Assets
Inventories
Sundry debtors
Cash and bank bal
Other current assets
Loans and advances
Total current assets (a)
Current Liabilities
Liabilities
Provision
Total current liabilities (b)
Net Working capital (a-b)
Net Increase in Working Capital
Total

2005
March

2006
March Increase

1257.53
49.3
3932.61
100.18
710.12
6049.74

1216.45
165.65
5621.7
184.36
1063.84
8252

712.46
269.27
981.73
5068.01
1596.13
6664.14

871.49
716.37
1587.86
6664.14
6664.14

Decrease
41.08

116.35
1689.09
84.18
353.72
159.03
447.1

2243.34

1596.13
2243.34

Source: Annual report of RINL

Interpretation:
There is a significant increase in net working capital which amounts to 1596.13crores.
There noticeable increase in net working capital is due to increase in cash &bank balances.
The increase in cash is 1689.09 cores. A positive growth is observed in loans & advances and
other current assets. The increase in liabilities is offset by the increase in total current assets.
The net effect of the above changes has brought about the increased working capital.

Working Capital Statement Of RINL 2006-07(Figures in

crores)

2006
March

2007
March

1218.35

1203.24

Sundry debtors

166.27

216.8

Cash and bank bal

5621.7

7194.68

1572.98

Other current assets

184.36

314.48

130.12

Loans and advances

1061.32

1518.9

457.58

8252

10448.1

Liabilities

785.77

1011.53

225.76

Provision

716.37

1092.77

376.4

Total current liabilities (b)

1502.14

2104.3

Net Working capital (a-b)

6749.86

8343.8

Net Increase in Working Capital

1593.94

Particulars

Increase

Decrease

Current Assets
Inventories

Total current assets (a)

15.11
50.53

Current Liabilities

Total
Source: Annual report of RINL

Interpretation:

8343.8

1593.94
8343.8

2211.21

2211.21

There is a significant increase in net working capital, which amounts to 1593.94

crores. There noticeable increase in net working capital is due to increase in cash & bank
balances. The increase in cash is 1572.98 crores. A positive growth is observed in loan &
advances and other current assets. The increase in liabilities is offset by the increase in total
current assets. The net effect of the above changes has brought about the increased working
capital.

Working Capital Statement Of RINL 2007-08(Figures in crores)

Particulars
Current Assets
Inventories
Sundry debtors
Cash and bank bal
Other current assets
Loans and advances
Total current assets (a)
Current Liabilities
Liabilities
Provision
Total current liabilities (b)
Net Working capital (a-b)
Net Increase in Working Capital
Total

2007
March

2008
March

1203.24
216.8
7194.68
314.48
1518.9
10448.1

1761.15
93.41
7699.11
292.43
1958.49
11804.59

1011.53
1092.77
2104.3
8343.8
269.17
8612.97

1610.15
1581.47
3191.62
8612.97
8612.97

Increase

Decrease

557.91
123.39
504.43
22.05
439.59

598.62
488.7

1501.93

269.17
1501.93

Source: Annual report of RINL

Interpretation:
There is a significant increase in net working capital, which amounts to 269.17crores.
There noticeable increase in net working capital is due to increase in inventories, cash &
bank balances. The increase in cash is 504.43crores. A positive growth is observed in loan &

advances. The increase in liabilities is offset by the increase in total current assets. The net
effect of the above changes has brought about the increased working capital.

Working Capital Statement Of RINL 2008-09(Figures in

crores)

Particulars

2008
March

2009
March

Increase

Decrease

Current Assets
1761.15

3215.28

1454.13

93.41

191.27

97.86

Cash and bank bal

7699.11

6624.17

1074.94

Other current assets

292.43

258.91

33.52

Loans and advances

1958.49

1569.69

388.8

Total current assets (a)

11804.59

11859.32

Liabilities

1610.15

2560.79

950.64

Provision

1581.47

1620.53

39.06

Total current liabilities (b)

3191.62

4181.32

Net Working capital (a-b)

8612.97

7678

Inventories
Sundry debtors

Current Liabilities

Net decrease in Working Capital

Total
Source: Annual report of RINL

934.97

934.97

8612.97 8612.97

2486.96

2486.96

Interpretation:
There is a significant decrease in net working capital, which amounts to 934.97
crores. There noticeable decrease in net working capital is due to decrease in cash & bank
balances. The decrease in cash is 1074.94crores. A negative growth is observed in loan &
advances and other current assets. The net effect of the above changes has brought about the
decreased working capital.

Working capital statement of RINL 2009-2010

Particulars

2009
March

2010
March

Increase

Decrease

Current Assets
Inventories

3215.28

2451.52

763.76

Sundry debtors

191.27

181.18

10.09

Cash and bank bal

6624.17

5415.54

1208.63

Other current assets

258.91

137.40

121.51

Loans and advances

1569.69

1365.02

204.67

Total current assets (a)

11859.32

9550.66

Liabilities

2560.79

2871.95

Provision

1620.53

1435.89

Total current liabilities (b)

4181.32

4307.84

Net Working capital (a-b)

Net decrease in Working Capital

7678

5242.82
2435.18

2435.18

Total

7678

7678

2619.82

Current Liabilities

Interpretation:

311.16
184.64

2619.82

There is a significant decrease in net working capital, which amounts to 2435.18

crores. There noticeable decrease in net working capital is due to decrease in cash & bank
balances and inventories. The decrease in cash is 1208.63crores and inventories are
763.28crores. A negative growth is observed in loan & advances and other current assets.
The net effect of the above changes has brought about the decreased working capital.

Working capital statement of RINL 2010-2011

Particulars

2010
March

2011
March

Increase

Decrease

Current Assets
2451.52

3254.71

803.19

181.18

330.61

149.43

Cash and bank bal

5415.54

1998.89

3416.65

Other current assets

137.40

75.96

61.44

Loans and advances

1365.02

1965.04

Total current assets (a)

9550.66

7625.21

Liabilities

2871.95

3271.43

Provision

1435.89

1336.06

Total current liabilities (b)

Net Working capital (a-b)

4307.84

4607.49

5242.82

3017.72

5242.82

2225.10
5242.82

Inventories
Sundry debtors

600.02

Current Liabilities

Net decrease in Working Capital

Total

Interpretation:

399.48
99.83

2225.1
3877.57

3877.57

There is a significant decrease in net working capital, which amounts to 2225.1

crores. There noticeable decrease in net working capital is due to decrease in cash & bank
balances and inventories. The decrease in cash is 3416.65 crores and inventories are 803.15
crores. A negative growth is observed in loan & advances and other current assets. The net
effect of the above changes has brought about the decreased working capital.

Gross working capital(Figures in crores)

Year
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011

Gross Working Capital

( Rs in crores)
6047.52
8252.00
10448.10
11804.59
11859.32
9550.66
7625.21
Gross working capital (Rs in crores)

Net working capital

Year

Net Working Capital

(Rs. in crores)

2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
2011-2012

4623.36
6664.14
8343.80
8612.97
7678.00
5242.82
3017.72

Net working capital (Rs in crores)

Current ratio:

A current ratio of 2:1 is considered to do ideal. The ration is an indicator of the firms
commitment to meet its short-term liabilities. It indicates the rupees of current assets
available for each rupee of current liability. The higher the current ratio the higher the funds
available for a rupee of current liabilities. As a convention rule a current ratio of 2:1 or more
is considered satisfactory.
The higher current ratio is higher the funds available for a firm.
Current Ratio:

Current Assets /Current Liabilities

YEAR
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011

CURRENT
ASSETS
6047.52
8252.00
10448.10
11804.59
11859.32
9550.66
7625.21

CURRENT
LIABILITIES
1424.16
1587.86
2104.30
3191.62
4181.32
4307.84
4607.49

CURRENT
RATIO
4.2
5.2
5.0
3.69
2.83
2.21
1.65

Working capital turnover ratio:

Working capital turnover ratio of sales to net working capital. It is indicator of
efficiency of working capital management. Higher the ratio greater is the efficiency.
Working capital turnover ratio= net sales / average working capital.
YEAR
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011

Net Sales
(In Crores)
7359.85
7305.71
7932.66
9088.37

Working Capital
(In Crores)
4623.36
6664.14
8343.80
8612.97

Working Capital
Turnover Ratio

9128.38

7678.00

9809.15
10471.18

5242.82
3017.72

1.18
1.87

1.59
1.10
0.95
1.06

3.47

Net Working Capital Ratio:

This ratio is calculated by dividing net working capital by net assets. The difference
between current assets and current liabilities excluding short term borrowings is called net
working capital or net assets. Net working capital sometimes used as a measure of firm's
liquidity, however measures the firms potentials reservoir of funds.
Net Working Capital Ratio =
Net Working Capital / Net Assets
Net Assets
= Net Current Assets + Net Fixed Assets

Year

Net Working Capital

Net Assets

Ratio

2004
2005
2006
2007
2008
2009
2010
2011

1491.33
4623.36
6664.14
8343.80
8612.97
7678.00
5242.82
3017.72

6124.30
8549.90
10511.00
12835.80
15276.51
17733.48
18523.21
19053.44

0.24
0.54
0.63
0.65
0.56
0.43
0.28
0.16

INVENTORY MANAGEMENT IN RINL

RINL is multi-product, integrated steel plant with 3.0 M.T capacities. This makes
RINL to store, handle and process of huge quantity of material. Also RINL being a process
industry running 365 days throughout the year 24 hrs a day it material. This calls form
efficient inventory management o the part of RINL. RINL holds three types of inventory,
they are:
1. Raw materials
2. Stores, spares and scrap
3. Semi/finished goods.
Different sections carry out the procurement, storage and control of these inventories.

Raw materials:
The raw materials are produced and stored by raw materials department. The basic
principle followed by RINL in holding raw material inventory is to hold indigenous raw
material for 10 days.
Stores and spears:
The stores and spares are procured and stored by central stores department (a part of
purchase department).
The store and spares Re-categorized as
Automatic recoupment items
Department specific items
Automatic recoupment items:

A.R items are those, which are general consumables with standard specification and required
by more than one department. The main objective of stock control is to make available vital
items all time.

The AR items are classified as a class, b class and c class as per value given below.
a. Annual consumption value more than rs.100,000
b. Annual consumption value between rs.100,000-50,000
c. Annual consumption value less than rs50,000
The stocks of these items are maintained as per their vitality, consumption frequency,
automatic indenting of the items done once the level of stock comes to recumbent level foxed
for each item.
Department specific items:
User departments based on approval given by top management for level of inventory to hold
indents department specific items. The amount is fixed based on consumption of a particular
item in the previous years. These items are also stored by stored department and are released
against stores indent note issued by department.

Inventory control:
Inventory control is major responsibility of stores department in RINL. It adopts
following procedure for inventory control:
1. The stores department generates data periodically on the inventory status and conducts
analysis of it. The same is circulated to all departments once in a quarter.
2. XYZ analysis of all items is carried out and circulated to all departments. Categorization
is based on values of item contributing to total value of stock.
3. Identification of non-moving and slow moving items on regular basis and intimating it to
user departments and there by reducing the indent quantity.
4. Identification of absolute and surplus items which are of no use and disposal of the same
after receiving clearance from top management.

5. Standardization of general store material and spares and reduce the number of items.
6. Conduct ABC analysis on consumption pattern o items and submit the same to purchase
department for regulation of supplies.

SEMI/FINISHED GOODS:
The semi-finished goods comprise blooms and billets and finished goods are the
various products mentioned in product mix of RINL. The semi finished goods are stocked
and controlled by production planning and monitoring department. They chart plans based on
inputs from marketing department for holding inventory of various grades. They generally
hold stock for 10 days production, the finished goods stocks are held at central stockyard
within plant and at various stockyards spread all over India.
Sales
Total Inventory Turnover ratio =
Average Inventory
There is a constant improvement inventory turnover ratio and indicates that total inventory is
managed well. To Know the efficiency of management of components of inventory,
inventory turnover ratios are calculated for individual components.

Sales
Inventory turnover of semi/finished material =
Inventory of semi/finished material
Sales
Inventory turnover of raw material =

Inventory of raw material

Sales
Inventory turnover of stores & spares =
Stores & spares inventory material
The split of raw material, spares and stores and semi/finished goods inventory, their
percentage and total inventory are given in the table.
INVENTORY TURNOVER RATIO:
Inventory turnover ratio is ratio of sales to average inventory, the turnover ratio of RINL
is between 2 and 8.
This is however a low value, indicating huge quantity of funds locked up in stock. As
mentioned earlier the reason for low turnover is due to large quantity of nonmoving spares
and stores.
The inventory turnover ration of RINL for the past 6 accounting periods is shown in the
table.
YEAR
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

Total
Inv.Turnover
Sales
Avg. Inventory ratio
8181.34
980.83
8.34
8482.44
1236.99
6.86
9150.57
1210.79
7.56
10433.07
1228.88
8.49
10410.63
3215.28
3.23
10634.63
2451.52
4.33
11517.00
3254.52
3.54

CASH MANAGEMENT IN RINL

All the working capital decisions place at cash section. In RINL cash section is
working very well. Every day information about all payments and receipts from all the
branches, sections, departments are collected latest by 11 am on daily basis.
Procedure of Cash Management:-

In RINL cash requirements is placed and arrived at in the following manner.

The chairman cum managing director of RINL in consultation with board of directors
and decides the production schedule for the following year.
The production schedule as approved by the directors is then circulated to all
departments after that production target for each month will be set.
The heads of 35 budgets formulate various budgets regarding to the production,
finance.
After receiving all the budgets, the directors formulate a master budget for the
particular year and the monthly budget allocation is done for each section.
At the end of every month the actual results are comparing to the project budgets. The
management and the directors discuss about results of performance.
And finally, they will take decision about the amount of cash required for the next
month.
Initially cash section of the finance department prepares the cash budget. They
forecast monthly and week wise requirements of cash. They gathering the information
regarding to the cash inflows like cash from customers, export incentive, export credit etc.,
cash outflows like purchase of raw materials, spares, excise duty, sales tax, payment of
wages and salaries, railway fright etc.
Weekly projected cash flow:Proper cash management system is very important to any organization to meet
objectives of the company. In RINL cash is managed in a different way. In RINL every week
decides, what would be done in next week. Every week analyzes, what are the payments and
receipts of the next week and prepare the cash budget. Whenever cash budget choose surplus
balance of cash, RINL invites the tender to public limited banks and also some private banks

which have an MOU. Then RINL receive the bids from various banks in the form of sealed
bids or through the email. After that RINL select the bank, which bank codes the highest
interest rate and also agree with the rules and regulations of RINL.
In the same way when RINL have deficit balance of cash, again we invite the tender
and select the bank which bank codes less interest rate. In this way RINL manage the cash
very effectively.

OBJECTIVE:
To transfer Funds from Branches to Head Quarters, Visakhapatnam without any transit time
i.e., crediting on day Zero at the designated account at Visakhapatnam with charges being
most economical.
FUNDS COLLECTION MECHANISM:
The Sales are affected by way of DD/ Pay Orders and Cheques payable at respective
Branches.
SALIENT FEATURES OF CASH COLLECTION POLICY:
a)

The Collections of each day at the Branches of RINL will be deposited in the Bank

before 11.00 AM of the next working day.

b)

The Bank will provide pick up facility for collection of cheques from the respective

RINL branches at their risk and responsibility.

c)

The funds so deposited at various branches will be pooled and credited to the account

of RINL held at Visakhapatnam on the same day by 3.00 PM , as long as Cash Management
System is in vogue.

d)

Banks must be capable to switch over immediately to Real Time Gross Settlement

(RTGS) at those RINLs locations once RBI enables and the credit to the account of RINL at
Visakhapatnam must be as per the system in vogue at that time.
e)

The bank at Visakhapatnam should honor the cheques received in the clearing or

Transfers issued by
f)

RINL against the anticipated funds for the day.

The Bank shall allow for a temporary overdraft in case of mismatch i.e., if the

payments of the day are more than the receipts, the short fall shall be adjusted by way of
overdraft which will be mitigated by the next working day or two.
g)

The Overdraft allowed by the Bank and the charges payable for returned cheques

shall be at softer rate of interest charge.

h)

The bank will submit MIS report on daily basis to the respective RINL Branches

showing Cheques/DDs deposited, its clearing status, details of returned cheques, amount
transferred and a consolidated report on a fortnightly basis and summary report daily and
fortnightly to Head Quarters at Visakhapatnam in mutually agreed user friendly formats.
i)

Service charges to be levied by the Bank on the 1 st of the following month as per the

agreed rates with a report of it being sent to Head Quarters.

RECEIVABLES MANAGEMENT
Procedure of receivables management:
RINL sells its product directly to its customers. It has 27 marketing offices spread
through the country. The marketing and the finance department and top management at the
head quarter formalize the price of different products and different branches jointly. The
price list for each product in their region is circulated to all branch offices.
The sales and billing are done at the individual braches and the record of the daily
transactions is maintained. The cash deposits are done at one of the respective banks in turn
transfer the entire sum to the banks at Visakhapatnam through telegraphic transfer.

Credit policy of RINL:

The credit policy of RINL is strict in one sense and flexible in other. As RINL has got
a wide network of marketing offices numbering 27 there is always a possibility of increased
credit sales by the branch sales offices, resulting in liquidity crunch if proper control is not
maintained. Therefore, all regions and branches are given a limit for credit sales beyond
which they cannot sell on credit without prior approval of competent authority. At any given
point of time credit sales should not exceed the limit given.
At the same time branch sales offices are given the freedom to give interest bearing
credit which they can decide depending upon the level of finished goods inventory in their
stockyard and other aspects of customer.
Collection policy of RINL:
RINL follows two types of credit sales of its products. They are:
i) Secured credit sales
ii) Unsecured credit sales
Secured sales are backed by securities which can be
a) Letter of Credit:
Letter of credit is an agreement where by the banks opens letter of credit of its
customers in favor of suppliers and undertakes the responsibility of payment obligation of its
client.
b) Bank guarantee:
Bank guarantee to RINL is like issuance letter of credit where by the customers bank
gives the guarantee to RINL to undertake responsibility of payment obligation of its credit.
Secured credit sales are primarily done with private customers. Cheque facility
extended to the customer based on the credit worthiness of the party. The average collection
period of RINL is 30 days. RINL stock holding period is 30 days. If the Cheque is
dishonored notice to the customer will be sent. In case of no satisfactory reply from the
customer RINL issues investigation notice to banker who guaranteed the customer and the
banker has to pay the money to RINL. Cheque facility for such customers for all future sales
stands cancelled.

Unsecured sales are made mostly to government agencies. There will be no security
in such cases. Credit period varies from 15-60 days. Generally, RINL cannot compel
government agencies for prompt releases of payments due unlike private parties since they
are also part of government undertakings.
Interest charges for credit sales:
Penal
violation
Type of customer Secured
Project customer
15%
Other customer
16%
Source: www.vizagsteel.com

Unsecured
17%
18%

interest
of

on

Credit

period
2%
2%

Receivable turnover ratio:

Receivable turnover ratio is defied as ratio of total sales to average receivables. This
ratio indicates the number of items the management is able to convert the receivable in to
sales and it indicates the efficiency with which receivable are manage. The receivable turn
over ration of RINL for past 10 accounting years are given in the table.
Sales
Receivable Turnover Ratio = -----------------Avg. Receivables

PAYABLES MANAGEMENT
In RINL all payments are effected through the cast section of fianc department in the
head quarters. Cast sections monitor the cash position on a daily bases and prioritize the
payments. Cash section prepares cash report every morning and checks with the banks for
cash balance. Based on the balance available in the banks and priority of payments, cheques
are issued to the parties. Payments are prioritized so as to optimize the cost. Prioritization is
done based on the financial implication of non-payment of the due. The financial
implications considered by RINL for non-payment of the due. The financial implication
considered by RINL for non-payment of due are
1. Interest cost penal and over due
2. Penalties and fines in case of statuary obligation.
3. Impact of production and sales in case of payment is for a critical Stem.
Close liaison is maintained between purchase department, bill-passing section of finance
department and cash section for efficient management of account payable.
The major payment of the plant are towards.

1. Purchase of Raw material

2. Purchase of stores and spares
3. Employee payments
4. Freight payments
5. Interest on loans including working capital
6. Repairs and loans including working capital
7. statutory duties like excise and sales tax.
THE COMPANY PAYS:
1. Excise duty-2 Crore/day
2. Sales tax 12 crore / month
3. Custom duty 12 crore/month
4. Employee salary -35 crore/month
5. Iron ore-15 crore/month
6. Coking coal -70 crore/month
7. Railway fright 50 crore/month
8. Ocean fright-15 crore/month
PAYABLE TURNOVER RATIO:

Payables turnover ratio is ratio of total purchases

to average payables. It indicates the number of times management is able to convert accounts
payables into purchase. The average payable turnover ratio was high during 93-94 to 95-96 it
was around 4.9, 6.1 and 8.3 during 93 to 96 respectively. Too higher ratio was due to bad
cash position of RINL. Higher ratio even through is good for organization. It had some bad
reputation for the organization at the time. But from 96-97 it was reduced to around 3.0. This
was mainly possible due to improved sales cost reduction purchase value reduction and
better cash position.
Payable Turn over ration = Purchases / Avg. payable.

FINDINGS AND SUGGESTIONS

During the period of study it is observed that the amount of working capital has been
continuously increasing year by year due to the continuous increase in the value of
inventories.

It is found that the reason for the continuous increase of inventory is due to the decrease
in the inventory is due to the decrease in the inventory turnover ratio.

It is also heard that the reason why the stock is lying more in quantity in the list of current
assets because of the high prices for the steel in the market.

Even after at the request of the customers the prices are not at all being cheated by the
management which resulted in the poor customer relationships which resulted in the
decrease of turnover.

The company is able to maintain sufficient working capital in every year during the
period of study i.e. from 2003 04 to 2007 08.

The company has been maintain the ideal current ratio during the year 2003 04 but
during the year 2004 05 and 2005 06 it has maintained its current ratio more that the
ideal one which represents that the company has blocked up the capital in the current
assets than they require one.

During the year 2007 08 the company has followed the policy of maintaining an ideal
current ratio

During the five years of i.e., from 2003 04 to 2007 08 the gross working capital has
been steadily increasing year by year.

It is observed that the cash and bank balances constitute for more percentage in that total
current assets every year.

It is recommended to put a check upon the prices of the steel (if possible), as there is an
economic recession during the current year

The company has to put a regular check upon it inventory level to avoid the locking of
the capital in the inventories

However, the overall performance of the company during the period of study is much
satisfactory.

SUMMARY AND SUGGESTIONS

However, VSP has to put some more efforts to reduce the holding of inventory by proper
utilization of funds, so that the carrying cost etc. will be reduced.
While comparing the increase in working capital from the year 2002 07 there is a
continuous rise in current assets till the year 2005 and then a fall after that year this
shows the position of the company therefore concentration must be given to the assets
side also.
Funds from operations has only increased for the first two years, therefore it is not good
for the concern,
In its all scenario, VSP has maintained well defined funds flow position and also utilized
funds in a proper manner.

 There has been increasing trend in sources and application of funds for the first 3
consecutive years since 2003 ended and a decrease in the last 2 years.

BIBLOGRAPHY
1 Essentials of Financial Management

I.M.Pandey

2 Financial Management

Prasanna Chandra

3 Financial Management
k. Gupta

Annual Reports of Rastriya ISPAT Nigam Limited

Website : www.vizagsteel.com
Search Engine : Google Search

R.K.Sharma, sheshi