Rupam Project

CHAPTER: 1
INTRODUCTION TO THE STUDY
The study of “Working Capital Management (Including Ratio

Analysis)” is an attempt to resolve the problems that which arise
in attempting to manage the Current Assets and Current
Liabilities And is an attempt to overlook the performance of the
company.
The basic objective of Working Capital Management is to

manage the firms Current Assets and Current Liabilities in such a
way that the satisfactory level of Working Capital is maintained
i.e. it neither inadequate nor excessive. The basic objective of
Ratio Analysis is to find out the performance of the company of
current year as compared to its previous year.
Control on Working Capital is very important for any

organization because by controlling Working Capital, company
can able to have control on its cash flow in order to meet its
Operating Expenses. With the help of Working Capital company
can control its current Assets, Current Liabilities, its Inventories,
its Debtors, Creditors, etc. working Capital ensures that there is
sufficient cash flow in an organization. Working Capital also
identifies the profitability of the company. Therefore control on
Working Capital is an important task.
Objective:
The primary objective of working capital management is to
ensure that sufficient cash is available to:
• Meet day-to-day cash flow needs;
• Pay wages and salaries when they fall due;
• Pay creditors to ensure continued supplies of goods and
services;
• Pay government taxation and providers of capital, dividends;
and ensure the long-term survival of the business entity.
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Calculation of working capital gives clear idea about the
requirement of the needed inventories in the production and
Ratio Analysis gives idea about performance of the company.
Besides that it also takes account of required current assets.
So, the calculation of working capital is an essential part of
financial planning.
My Objective Behind this Project is:
➢ To find out all the component that should considered
while calculating, working capital in Barauni Refinery
Unit (IOCL).
➢ To find out all the component that should considered
while calculating, ratio analysis of Barauni Refinery Unit
(IOCL)
➢ To find out the problem area which affects the
credibility of calculating working capital.
➢ To overtook the performance of Barauni Refinery Unit
(IOCL)
➢ The working capital management is elaborately done at
head office (New Delhi) but still the Barauni Refinery
Unit needs to assists the head office in taking such
decisions. How this work is done is the topic of my
concern.
➢ With the help of ratio analysis I would like to reveal the
financial performance of the company.
➢ To have a feel of an organization and it’s working.
IMPORTANCE OF THE STUDY

In the area of financial management, “Working Capital
Management” plays an important role. Working capital
management is concerned with two fold important factors Viz.,
the level of current assets to be held and the level of current
liabilities to be paid.
The most important thing is that working capital is the one
way through, which a company’s profitability can be determined.
2
Therefore, this study is confined to how Barauni Refinery Unit
(IOCL determines the amount of working capital.
METHODOLOGY USED
The methods adopted for the collection of data and
information for this work was gathered mostly through various
books, annual report and discussion with various executives and
office staff of Barauni Refinery Unit (IOCL). Moreover, selective
literature, previous research works and internet have also been
referred for the purpose.
LIMITATIONS OF THE STUDY
I found the following difficulties during my training session.
➢ Scarcity of Printed materials on the topic.
➢ Since the Finance Department of Barauni Refinery Unit
keeps the reports confidential, so exact date analysis is
not possible.
➢ Studying the balance sheet of the company was not
easy.
➢ Impact of individual thinking and perception.
➢ All the employees and executives were found busy
during their working hour so they co-operated partially.
3
CHAPTER: 2
OVERVIEW OF INDIAN OIL CORPORATION LTD
INTRODUCTION:
Indian Oil Corporation is an Indian public-sector petroleum

company. It is India’s largest commercial enterprise, ranking
116th on the Fortune Global 500 listing (2008). It began operation
in 1959 as Indian Oil Company Ltd. The Indian Oil Corporation was
formed in 1964, with the merger of Indian Refineries Ltd. Indian
Oil and its subsidiaries account for a 47% share in the petroleum
products market, 40% share in refining capacity and 67%
downstream sector pipelines capacity in India. The Indian Oil
Group of Companies owns and operates 10 of India's 19 refineries
with a combined refining capacity of 60.2 million metric tons per
year.On 30th June 2009 IndianOil will complete 50 years of its
existence and a series of events are being planned to celebrate
its Golden Jubilee Year.
Indian Oil was formed as joint ventures between one

company and Government of India but later become fully owned
government undertaking. Indian Oil established as an oil
marketing entity on 30th June 1959, Indian Oil company ltd was
renamed Indian Oil Corporation Ltd. on 1st September 1964
following merger with the refining entity. Indian Refineries Ltd.
that was established in August 1958.
4
International rankings
Indian Oil is the highest ranked Indian company in the prestigious
Fortune Global 500 listing, the 105th position(in 2009) based on
fiscal 2007 performance. It is also the 18th largest petroleum
company in the world and the number one petroleum trading
company among the National Oil Companies in the Asia-Pacific
region. IOCL was featured on the 2008 Forbes Global 2000 at
position 303.
VISION:
A major diversified, trans-national, integrated energy company,

with national leadership and a strong environment conscience,
playing a national role in oil security & public distribution.
MISSION:
• To achieve international standards of excellence in all
aspects of energy and diversified business with focus on
customer delight through value of products and services,
and cost reduction.
• To maximize creation of wealth, value and satisfaction for
the stakeholders.
• To attain leadership in developing, adopting and assimilating
state-of-the-art technology for competitive advantage.
• To provide technology and services through sustained
Research and Development.
• To foster a culture of participation and innovation for
employee growth and contribution.
• To cultivate high standards of business ethics and Total
Quality Management for a strong corporate identity and
brand equity.
• To help enrich the quality of life of the community and
preserve ecological balance and heritage through a strong
environment conscience.
5
FINANCIAL OBJECTIVES:
• To ensure adequate return on the capital employed and

maintain a reasonable annual dividend on equity capital.
• To ensure maximum economy in expenditure.
• To manage and operate all facilities in an efficient manner so
as to generate adequate internal resources to meet revenue
cost and requirements for project investment, without
budgetary support.
• To develop long-term corporate plans to provide for
adequate growth of the Corporation’s business.
• To reduce the cost of production of petroleum products by
means of systematic cost control measures and thereby
sustain market leadership through cost competitiveness.
• To complete all planned projects within the scheduled time
and approved cost.
PRESENT POSITION:
Today, Indian Oil Corporation Ltd. is the largest commercial

enterprise of the country accounting for almost half of the
country’s petroleum consumption today. Indian Oil has grown
3000 times and is India’s no. 1 company in the prestigious
Fortune “Global 500” listing of the worlds largest corporate.
Indian Oil is the highest ranked Indian company in the prestigious
Fortune Global 500 listing, the 105th position(in 2009)
Since Indian Oil has passed 50 summers and 50 winters

means it has crossed its 50 years. Therefore this year 2009 marks
the 50 golden years of Indian Oil Corporation Ltd. Indian Oil is the
biggest marketers of liquid gold in the country. This Golden
Jubilee Celebration is a commemoration of all that the company
6
has achieved through the refining and marketing of liquid gold of
the standards it has achieved.
HISTORY:
2001:
Public sector oil major Indian Oil Corporation has tied up with
Standard Chartered Bank to mobilize Rs 400 crore from the
overseas market. Stan Chart is the book-runner, lead arranger
and the facility agent, and Union Bank of India is the joint
arranger for this loan syndication of IOC.
2002:
Indian Oil Corporation (IOC) has bought out IBPs 25 per cent stake
in Indian Oil Tanking (IOT), a company engaged in the storage
and handling of petroleum products, for Rs 44 crore.
2003:
Indian Oil Corporation (IOC) has appointed McKinsey for
conducting a 'structure, process, people' study.
2004:
Indian Oil Corporation Ltd (IOC), the petroleum refining and
marketing major, plans to merge with itself its subsidiary, IBP Ltd,
and also set up a new exploration company with an investment of
$2 billion
2005:
Tata Motors has initiated an informal project with Indian Oil
Corporation for the use of bio-diesel blended fuels in its buses.
There is no written agreement between the two companies for the
project.
2006:
Indian Oil Corporation (IOC) has signed an agreement with the
West Bengal government for setting up a petrochemical hub in
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the state. The company would be the primary investor in the
proposed hub housing petrol, chemical and petrochemical units.
2007:
Dabur India Ltd has entered into an agreement with Indian Oil
Corporation (IOC) to service rural market demand for consumer
goods through the latter's chain of Kisan Seva Kendra (KSK).
2008:
Haldia refinery alone is expected to save an average Rs450 crore
a year once crude is sourced from Paradip
IOC's refineries had a capacity utilization of 104 per cent in 2008,
processing 48.9 million tonne of crude oil.
2009:
Essar Oil is reported to have expanded the number of its fuel
retail outlets to over 1,000, with plans to have around 1,400
outlets operational by April 2009. Unconfirmed reports said that
Essar claimed a market share of around four per cent, and was
aiming to increase it further to over six per cent
8
OVERVIEW OF BARAUNI REFINERY:
Barauni Refinery was built in collaboration with Russia and

Romania. Situated 125 kilometers from Patna, it was built with an
initial cost of Rs. 49.40 crore. Barauni Refinery was commissioned
in 1964 with a refining capacity of 1 Million Metric Tones per
Annum (MMTPA) and it was dedicated to the Nation by the then
Union Minister for Petroleum, Prof. Humayun Kabir in January
1965. Barauni Refinery was initially designed to process low
sulphur crude oil (sweet crude) of Assam. After establishment of
other refineries in the Northeast, Assam crude is unavailable for
Barauni . Hence, sweet crude is being sourced from African, South
East Asian and Middle East countries like Nigeria, Iraq Malaysia.
The year 2008-09 saw Barauni Refinery achieve the highest

ever-crude throughput of 5.94 MMT, beating the previous best of
5.63 MMT, which was achieved in 2007-08, along with sustaining
the distillate yield of more than 85% (i.e. 85.7%) year after year
Barauni refinery achieved lowest ever 65.5 MBN of energy in

the year 2008-09. It reduced energy consumption by almost 10%
over the previous fiscal year of 2007-08. It excellence safety
record during the year 2008-09 is another feather. Barauni
Refinery Coker unit was declared as a zero steam leak unit it has
avoided any accidents in the unit during the year 2008-09
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Barauni petrochemicals plant is in the country the second oil
refinery in the public sector and forms an important part of the
Indian petrochemical industry Indian Oil Corporation Ltd is
speeding up work on the high sulphur crude maximization project
at its Barauni refinery in Bihar. The project is estimated to cost Rs
790 crore.
10
CHAPTER: 3
PRODUCT PROFILE
PRODUCTS:
Indian Oil is not only the largest commercial enterprise in the

country it is the flagship corporate of the Indian Nation. Besides
having a dominant market share, Indian Oil is widely recognized
as India’s dominant energy brand and customers perceive Indian
Oil as a reliable symbol for high quality products and services.
Indian Oil is a heritage and iconic brand at one level and a
contemporary, global brand at another level. While quality,
reliability and service remains the core benefits to our customers,
our stringent checks are built into operating systems, at every
level ensuring the trust of over a billion Indians over the last four
decades. Indian oil has many products but few products are as
follows.
1) Auto Gas:
Auto Gas (LPG) is a clean, high octane, abundant and eco-

friendly fuel. It is obtained from natural gas through
fractionation and from crude oil through refining. It is a
mixture of petroleum gases like propane and butane. The
higher energy content in this fuel results in a 10% reduction
of CO2 emission as compared to MS. Auto Gas is a gas at
atmospheric pressure and normal temperatures, but it can
be liquefied when moderate pressure is applied or when the
temperature is sufficiently reduced.
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2) Indian Oil Aviation Service:
IndianOil Aviation Service is a leading aviation fuel solution

provider in India and the most-preferred supplier of jet fuel to
major international and domestic airlines. Between one sunrise
and the next, IndianOil Aviation Service refuels over 1500 flights –
from the bustling metros to the remote airports linking the vast
Indian landscape, from the icy heights of Leh (the highest airport
in the world at 10,682 ft) to the distant islands of Andaman &
Nicobar. IndianOil is India's first ISO-9002 certified oil company
conforming to stringent global quality requirements of aviation
fuel storage & handling. IndianOil Aviation also caters to the fuel
requirements of the Indian Defense Services, besides refueling
VVIP flights at all the airports and remote heli-pads/heli-bases
across the Indian subcontinent.
3) Bitumen:
The common binders used in bituminous road constructions

are road tars and Bitumen. Bitumen has gradually replaced
road tar for road construction purposes mainly because of its
greater availability as compared to road tars. It is principally
obtained as a residual product in petroleum refineries after
higher tractions like gas, petrol, kerosene and diesel, etc.,
are removed generally by distillation from suitable crude oil.
Indian standard institutions define Bitumen as a black or
dark brown non-crystalline soil or viscous material having
adhesive properties derived from petroleum crude either by
natural or by refinery processes.
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4) High Speed Diesel
Indian Oil’s XTRAMILE Super Diesel, the leader in the

branded diesel segment is blended with world-class ‘Multi
Functional Fuel Additives (MFA). XTRAMILE has brought in a
huge savings in the high mileage commercial vehicle
segment. Transport fleets that operate a large number of
trucks crisscrossing the country are using XTRAMILE to not
only obtain a higher mileage but also for low maintenance
costs.
5) Indane Gas:
Indane is today one of the largest packed-LPG brands in the

world. IndianOil pioneered the launch of LPG in India in the
1970s and transformed the lives of millions of people with
the introduction of the clean, efficient and safe cooking fuel.
LPG also led to a substantial improvement in the health of
women in rural areas by replacing smoky and unhealthy
chullahs with Indane. It is today a fuel synonymous with safety,
reliability and convenience.
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6) SERVO LUBRICATING AND GREASES
Indian Oil’s SERVO range of lubricants reigns as the

undisputed market leader in the Indian lubricants market.
Known for its cutting-edge technology and high-quality
products, SERVO backed by Indian Oil’s pioneering R&D,
extensive blending and distribution network, sustained brand
enhancement and new generation packaging is a one-stop
shop for complete lubrication solutions in the automotive,
industrial and marine segments.
7) MS/Gasoline:
Automotive gasoline and gasoline-oxygenate blends are used in

internal combustion spark-ignition engines. These spark ignition
engine fuels are primarily used for passenger cars. XTRAPREMIUM
Petrol is India’s leading branded petrol boosted with new
generation multifunctional additives known as friction busters
that prevent combustion chamber deposits. XTRAPREMIUM is
custom designed to deliver higher mileage, more power, better
pick up, faster acceleration, enhanced engine cleanliness and
lower emissions.
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CHAPTER: 4
WORKING CAPITAL MANAGEMENT
(A theoretical framework)
INTRODUCTION:
The working capital is the amount resolving capital to meet

the day today requirements of the firm. The other facets of the
working capital is circulating capital, floating capital and moving
capital which are required to meet the immediate requirements of
the firm.
The “working capital” means the funds available for day

today operations of the enterprise. It also represents the excess
of current assets over the current liabilities, which include the
short-term loans.
Working capital, also known as net working capital, is a
financial metric which represents operating liquidity available to a
business. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. It is
calculated as current assets minus current liabilities. If current
assets are less than current liabilities, an entity has a working
capital deficiency, also called a working capital deficit.
Working capital also gives investors an idea of the
company's underlying operational efficiency. Money that is tied
up in inventory or money that customers still owe to the company
cannot be used to pay off any of the company's obligations. So, if
a company is not operating in the most efficient manner (slow
collection), it will show up as an increase in the working capital.
Comparing the working capital from one period to another can
see this; slow collection may signal an underlying problem in the
company's operations Positive working capital means that the
company is able to pay off its short-term
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liabilities. Negative working capital means that a company
currently is unable to meet its short-term liabilities with its current
assets (cash, accounts receivable and inventory).
CONCEPTS OF WORKING CAPITAL
The concepts of working capital can be broadly divided into

two categories (i) Gross Working Capital and (ii) Net Working
Capital.
(i) Gross Working Capital:
This concept implies the total of all current assets of a

business firm. A current asset is that asset which can be
converted into cash within an accounting year or an
operating cycle. The current assets include cash and bank
balances, debtors, bills receivables, inventories, prepaid
expenses and short-term investments.
(ii) Net Working Capital:
Net working capital refers to the difference between current

assts and current liabilities. Net working capital can be
positive or negative. A positive net working capital will arise
when current assets exceed current liabilities. A negative net
working capital occurs when current liabilities are in excess
of current assets.
FACTORS AFFECTING WORKING CAPITAL
The working capital needs of a firm are affected by

numerous factors. The important factors are as follows:
(i) Nature of business: In some business organizations,

the sales are mostly on cash basis and the operating cycle
(explained later) is also very short. In these concern, the working
16
capital requirement is comparatively less. Mostly service giving
companies come in this category. In manufacturing concerns,
usually the operating cycle is very long and a firm has to give
credit to customers for improving sales. In such cases, the
working capital requirement is more.
(ii) Production Policy: Working capital requirements also

fluctuate according to the production policy. Some products have
a seasonal demand but in order to eliminate the fluctuations in
working capital, the manufacturer plans the production in a
steady flow throughout the year. This policy will even out the
fluctuations in working capital.
(iii) Market Conditions: Due to competition in the market,

the demands for working capital fluctuate. In a competitive
environment, a business firm has to give liberal credit to
customers. Similarly, it will have to maintain a large inventory of
finished goods to service the customers promptly. In this
situation, larger amount of working capital will be required.
On the other hand, when a firm is in seller’s market, it can

manage with a smaller amount of working capital because sales
can be made on cash basis and there will be no need to maintain
large inventory of finished goods because customers can be
serviced with delay.
(iv) Seasonal Fluctuation: A firm, which is producing

products with seasonal demands, requires more working capital
during peak seasons while the demand for working capital will go
down during slack seasons.
(v) Growth and expansion activities: The working capital

needs of the firm increase as it grows in terms of sales or fixed
assets. A growing firm may need to invest funds in fixed assets in
order to sustain its growth of production and sales. This will in
turn increase investments in current assets, which will result in
increase in working capital needs.
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(vi) Operating efficiency: The operating efficiency of the
firm relates to the optimum utilization of resources at minimum
cost. The firm will be effectively contributing to its working capital
if it is efficient in controlling operating cost. The working capital is
better utilized and cash cycle is reduced which decreases working
capital needs.
(vii) Credit Policy: Credit term granted by the concern to

its customers as well as to its suppliers will also effect the working
capital requirements. If the concern has allowed very liberal credit
terms to its customer and has adopted a slack collection
procedure, more funds will be tied in book debts and working
capital needs will also be high. Where suppliers have granted
liberal credit terms to the concern, there will be less need for
working capital. Not only will the Ratio of cash and credit sales or
purchase also effect the level of working capital.
(viii) Sales Growth: As the sales grow, the working capital

needs also go up. Actually it is very difficult to establish an exact
proportion of increase in current assets, as a result of increase in
sales. Advance planning of working capital becomes essential
because current assets will have to be employed even before
growth in sales takes place. Once sales start increasing, they
must be sustained. For this a firm will have to expand its
production facilities, which will require more investments in fixed
assets. This will in turn result in more requirements of current
assets, which will increase working capital needs.
(iX) Dividend Policy: A company has to pay dividends in

cash as per company Act. 1956. If a liberal policy is followed for
payment of dividends, more working capital will be required. The
needs for working capital will be substantially reduced if dividend
policy is conservative.
(X) Working Capital Operating Cycle: in a manufacturing

concern the working capital cycle starts with the purchase of raw
materials and ends with the realization of cash from the sale of
finished products. This involves purchase of raw materials and
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spares, its conversion into stock of finished goods through work-
in-process with progressive increment of labour and service costs,
conversion of finished stock into sales, debtors and receivables
and ultimately realization of cash and this cycle continues again
from cash to purchase of raw material and so on.
Thus, there are several factors affecting the working capital

requirements.
NEED FOR WORKING CAPITAL MANAGEMENT
1. There is a positive correlation between the sale of the

product of the firm and the current assets. An increase in
the sale of the product requires a corresponding increase
in current assets. It is therefore indispensable to manage
the current assets properly and efficiently.
2. More than half of the total capital of the firm is generally

invested in current assets. It means less than half of the
capital is blocked in fixed assets. We pay due attention to
the management fixed assets through the capital
budgeting process. Management of working capital too,
therefore, attracts the attention of the management.
3. In emergency (non-availability of funds etc.) fixed assets

can be acquired on lease but there is no alternative for
current assets. Investment in current assets, i.e. inventory
or receivables can in no way avoided without sustaining
loss.
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4. Working capital needs are more often financed through
outside sources so it is necessary to utilize them in the
best way possible.
5. The management of working capital is more important for

small units because they scarcely rely on long term
capital market and have an easy access to short term
financial sources i.e. trade credit, short term bank loan
etc.
6. In the modern system approach to management, the

operations of the firm are viewed as a total that is an
integrated system. In this sense it is not possible to study
one segment of the firm individually or leave it out
completely. Hence an overall look on the management of
working capital is necessary.
MERITS OF ADEQUATE WORKING CAPITAL
➢ Regular payment of salaries wages and other day-to-day

commitments.
➢ Sense of security and confidence.
➢ Solvency of continuous production.
➢ Sound goodwill (Prompt Payment)
➢ Easy loams form banks
➢ Distribution of dividends.
➢ Exploitation of good opportunity.
➢ Meeting unseen contingences.
➢ Increase in efficiency of fixed assets.

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➢ High moral.
➢ Increase production efficiency.
➢ Cash discounts.
➢ Quick and regular return on investment
EVILS OF INADQUATE WORKING CPITAL
➢ Loss of credit worthiness and goodwill
➢ Operating inefficiency.
➢ Low rate of return on fixed assets.
➢ Increase in business risk.

➢ Cannot achieve profit target.
➢ Low moral of business executives
➢ Weakening of financial capacity
➢ Cannot pay day-to-day expenses of its operations.
➢ Delaying payments of wages, salaries, etc.
All this indicates that proper estimation of working capital

requirements is a must of running the business efficiently and
profitably. Therefore, the basic objective of working capital
management is manage the firm’s current assets and current
liabilities in such a way that the satisfactory level of working
capital is maintained, i.e. it is neither inadequate not excessive.
In the management of working capital it is mandatory to know

that what should be the level of current assets. There are two
policies, which determines the level of current assets
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➢ Flexible Policy:- Under his policy the investment in
current assets is high maintains a huge balance of cash
and marketable securities, carries a large amount of
inventories and grants feverous terms of credit to
customers, which leads to a high level of debtors.
➢ Restrictive Policy:- Under this policy the investment

in the current assets is low. This means that the firm
keeps a small balance of cash and marketable
securities, managers with small amount of inventories
and offers terms of credit, which leads to a low level of
debtors.
TYPES OF WORKING CAPITAL
There are two types of working capital: -
Permanent or Regular Working Capital:- It

represents the minimum amount of investment in current
assets that is seemed necessary to carry the operation at
time .It is a continuous process of working capital
management in any organization . In this process there is a
certain level of current assets, which is maintained every
time or every operating cycle.
Variable Working Capital: - It represents additional

assets required at different time during the operating year to
cover any change or variations form the normal operations.
As for example-during the winter season the sales of the
winter garments company increase. To fulfill the demand of
woolen clothes the company requires additional account of
current assets or working capital such as-cash, raw material,
etc.
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However, as a general rule, it can be concluded that in most
cases the period which elapses between purchase of material and
the receipt of sale proceeds of the finished goods will determine
the working capital requirements of any business.
CHAPTER: 5
WORKING CAPITAL MANAGEMENT IN CONTEXT TO
BARAUNI REFINERY UNIT (IOCL)
Barauni Refinery Unit (IOCL) follows a restrictive policy. It

maintains minimum level of current assets. But this unit does not
maintain the working capital fund separately, it shows this
account in their annual budget. Barauni Refinery Unit does not
deal directly. All the dealings are handled or controlled by the
Head Office. Barauni Refinery Unit does not purchase raw
materials directly. Head Office provide raw materials to this unit
as and when required. Through this unit does not purchase raw
materials directly so it has no creditors. The major raw materials
for the Refinery Division being the CRUDE OIL. Since there are not
creditors, it acts as a limitation as it does not present the true
picture of the working capital requirement for the corporation. But
in spite of this, that all the payments made by the Head Office.
The Naraimo Refinery Unit maintains the working capital at some
extent to meet out the following requirements:
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To maintain inventories (Raw materials, work-in-process,
finished goods, chemical, stores and spares)
To pay wages and salary
To incur day-to-day expenses and overheads cost such as

fuel, power and office expenses.
Note: To provide credit facilities to the customers is not

applicable to Barauni Refinery. It is because the finished products
are directly sent to the Marketing Division. Yet creditors may arise
due to the lengthy process of book payment system.
Current Assets and Current Liabilities of Barauni Refinery

Unit (IOCL)
Particulars Amount (Rs) Amount (Rs)

2007-08 2006-07
Current Assets: -
Inventories 14,845,162,45 15,513,862,95
Cash and Bank balance 6 0
Book debts 345,90 590,05
Loans & Advances 9 4
- 361,76
Total Current Assets 757,205,50 9
2 797,008,84
Current Liabilities: - 0
Sundry Creditors 15,602,713,86
Security Deposit 7 16,311,823,61
3
Total Current Liabilities
6,319,690,27
0 5,416,258,30
24
99,144,37 1
1 93,497,71
6
6,418,834,64
1 5,509,756,01
7
Particulars Amount (Rs) Amount (Rs)

2005-06 2004-05
Current Assets: -
Inventories 14,420,017,55 22,935,853,41
Cash and Bank balance 2 0
Book debts 368,30 270,72
Loans & Advances 0 2
61,315,37 -
Total Current Assets 9 23,762,305,69
15,428,302,35 8
Current Liabilities: - 5
Sundry Creditors 46,698,429,83
Security Deposit 29,910,003,58 0
6
Total Current Liabilities
2,690,094,37
3,856,952,14 5
6 73,529,11
87,807,32 5
0
2,763,623,49
3,944,759,46 0
25
6
Calculation of Working Capital
For the year 2007-08
Net Working Capital = Total Current Assets – Total Current

Liability
= 15,602,713,867 – 6,418,834,641
= 9,183,879,226

Liability
= 16,311,823,613 – 5,509,756,017
= 10,802,067,596

Liability
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= 29,910,003,586 – 3,944,759,466
= 25,965,244,120

Liability
= 46,698,429,830 – 2,763,623,490
= 43,934,806,340
As it is shown in the graph the Net Working Capital of

Barauni Refinery Unit (IOCL) has been decreased during the year
2007-08 as compared to the previous years. The reason behind
this decrease is that the current assets which has been brought
in, in the year 2007-08 is less than the current assets in the
previous years.
Determinants of working capital: -

The following factors, which determined the working capital
requirement of the fires. The description of these factors have
already been discussed in the previous chapter.
➢ Nature of Business
➢ Production Policy
➢ Market condition
➢ Seasonal Fluctuations
27
➢ Growth and expansion activities
➢ Operating Efficiency
➢ Credit Policy
But in the context of Barauni Refinery Unit (IOCL), the

working capital requirement is mainly determined by factors
like nature of the business, manufacturing process, sales
volume and turnover, production policy and operating
efficiency. Credit policy, seasonal fluctuation and are not
applicable in Barauni Refinery. This is a manufacturing
concern and its working depends on the manufacturing cycle
and the time tag between production and sale. The sales
volume and turnover also has an impact on the holding
period of raw materials, work-in-progress and finished goods
and ultimately affects the working capital requirement for
the concerned department. The cyclical and seasonal
fluctuations as do not affect the business as the final product
is utilized throughout the year.
OPERATING CYCLE
An operating cycle is the technique to forecast the working

capital requirement. The operating cycle can be said to be at the
heart of the need for the working capital. The continuous flow
from cash to suppliers, to inventory, to account receivable and
back into cash is called the operating cycle. In other words,
operating cycle is a time gap required to convert the sales and
their actual realization in cash.
Marketing
division
Finished goods
(LPG, Kerosene,
Cash Petrol, Diesel,
28
Work-in-
Raw
process
Material
(Gasoline,
Operating cycle of Barauni Refinery
If we analyze the above chart of operating cycle of Barauni

Refinery we find that there is a Marketing Division in place of
Debtors. It is due to the only reason that the Barauni Refinery unit
(IOCL) does not sell its product directly, consequently debtors do
not arise. Barauni Refinery Unit sent its product to the Marketing
Division for sell.
The operating cycle of manufacturing company

involves three phases: -
➢ Acquisition of resources such as Raw material, Labour and

Fuel, etc.
➢ Manufacturing of the product which includes conversion of
raw material into work-in-progress into finished goods
➢ Sale of the product either for cash or on credit sales create
account receivable for collection.
The term cash cycle refers to the length of time

necessary to complete the following cycle of events: -
Raw material conversion period: -
Raw material turnover

Raw material holding period
Raw material inventory
Work-in-progress conversion period: -
Work-in-progress turnover
Work-in-progress holding period
29
Work-in-progress inventory
Finished goods conversion period: -
Finished goods turnover

Finished goods holding period
Finished goods inventory
Indian Oil Corporation Ltd.
(Refinery Division) Barauni Refinery
Cost Sheet
Particular Amount (Rs) Amount
2007-08 (Rs)
2006-07
Opening stock of Raw material 7,866,033,711 7,421,419,79
+ Purchases 143,272,803,666 2
+ Pipe line freight 1,031,874,186 132,976,533,41
4
Less: Closing stock of Raw material 1,012,811,00
0
Raw material consumed 152,170,711,563 141,410,764,20
Add: Manufacturing Expenses: 7,264,607,814 6
Chemicals 7,866,033,711
Stores and spares 144,906,103,749 133,544,730,49
Power and Fuels 5
Repairs and Maintenance
30
Freight and Transportation charge 759,020,855 639,199,25
Other manufacturing expenses: 46,480,030 9
(Salary and wages to employees, 49,576,516 45,149,240
overtime, etc) 955,066,394 38,008,324
634,409,180 882,564,438
856,638,760
Add: Opening stock of work-in-
process 1,115,911,307
1,028,129,248
Less: Closing stock of
work-in- 148,466,568,031
process 1,766,187,119 137,034,419,76
150,232,755,150 4
Works Cost: 1,971,777,039 2,126,733,280
Add Office and Administrative 139,161,153,04
expenses: 148,260,978,111 4
789,691,553 1,766,187,119
Cost of Production:
Add opening .stock of finished 149,050,669,664 137,394,965,92
goods: 4,167,577,708 5
795,284,05
153,218,247,372 8
Less closing stock of finished goods 4,094,970,406
138,190,249,98
Cost of Goods Sold: 159,123,276,966 3
3,140,400,21
Add: profit 7,448,693,896 0
Transfer to Marketing Division: 156,571,970,862 141,330,650,19

3
4,167,577,70
8
137,163,072,48
5
773,326,28
9
137,936,398,77
4
Indian Oil Corporation Ltd.
(Refinery Division) Barauni Refinery
Cost Sheet
31
Particular Amount (Rs) Amount
2005-06 (Rs)
2004-05
Opening stock of Raw material 15,901,070,579 8,709,063,24
+ Purchases 105,924,004,243 2
+ Pipe line freight 290,460,000 86,877,980,98
2
Less: Closing stock of Raw material 217,508,000
122,115,534,822 95,804,552,22
Raw material consumed 7,421,419,792 4
Add: Manufacturing Expenses: 15,901,070,57
Chemicals 9
Stores and spares 114,694,115,030 79,903,481,64
Power and Fuels 5
Repairs and Maintenance
32
Freight and Transportation charge 613,844,086 467,601,34
Other manufacturing expenses: 48,446,036 2
(Salary and wages to employees, 52,510,171 22,096,267
overtime, etc) 498,949,542 32,465,854
400,362,721 430,421,808
500,309,128
Add: Opening stock of work-in-
process 783,052,036
880,634,729
Less: Closing stock ofwork-in- 117,091,279,622
process 2,120,551,481 82,237,010,773
119,211,831,103 1,709,783,215
Works Cost: 2,126,733,280 83,946,793,988
Add: Office and Administrative 2,120,551,481
expenses 117,085,097,823
971,428,338 81,826,242,50
Cost of Production: 7
Add: opening stock of finished 118,056,526,161 634,067,79
goods 3,504,702,083 2
121,561,228,244 82,460,310,29
Less: closing stock of finished goods 3,140,400,210 9
2,344,285,92
Cost of Goods Sold: 118,420,828,034 0
Add: profit 4,018,075,333 84,804,596,21

9
Transfer to Marketing Division: 122,438,903,367 3,504,702,08
3
81,299,894,13
6
6,340,434,077
87,640,328,21
3
Raw Materials Conversion period: -
Average stock of R.M = Opening stock of R.M + Closing

of R.M 2
33
= 7,866,033,711 + 7,264,607,814
2
= Rs 7,565,320,763
Raw Material Turnover = Raw Material consumed

Average Stock of R.M
= 144,906,103,749
7,565,320,763
= 19 times
R.M Holding Period = Average stock of R.M x 365

R.M Consumed
= 7,565,320,763 x 365
144,906,103,749
= 19 days
R.M Inventories = R.M Consumed x R.M Holding

Period
365
= 144,906,103,749 x 19
365
= Rs 7,543,057,455
Work-in-process Conversion period: -
Average stock of W.I.P = Op. stock of W.I.P + Cl. stock of

W.I.P
2
34
= 1,766,187,119 + 1,971,777,039
2
= Rs 1,868,982,079
W.I.P Turnover = Cost of Production

Average stock of W.I.P
= 149,050,669,664
1,868,982,079
= 80 times
W.I.P Holding Period = Average stock of W.I.P x 365

Cost of Production
= 1,868,982,079 x 365
149,050,669,664
= 5 days
W.I.P Inventories = Cost of Production x W.I.P Holding

Period
365
= 149,050,669,664 x 5
365
= Rs 2,041,789,995
Finished Good Conversion period: -
Average stock of F.G = Op. stock of F.G + Cl. Stock of

F.G
2
= 4,167,577,708 + 4,094,970,406
2
35
= Rs 4,131,274,057
F.G Turnover = Cost of good sold

Average stock of F.G
= 149,123,276,966
4,131,274,057
= 36 times
F.G Holding Period = Average stock of F.G x 365

Cost of good sold
= 4,131,274,057 x 365
149,123,276,966
= 10 days
F.G Inventories = Cost of good sold x F.G Holding

Period
365
= 149,123,276,966 x 10
365
= Rs 4,085,569,232
Operating Cycle Diagram for the year 2007-08
Rs 7,543,057,455
For 19 days Raw
Cash
Material
(Crude Oil)
36
Rs 2,041,789,995
Transferred to Mktg. Division For 5 days
Finished Goods Work-in-process

(Petrol, Diesel, Rs 4,085,569,232 (Naphtha, etc)
etc) For 10 days
Holding Period and Working Capital Required for 2007-

08
Stock Holding Period W.C.

Requirement
Raw Material 19 days Rs

7,543,057,455
Work-In-Process 5 days Rs
2,041,789,995
Finished Goods 10 days Rs 4,085,569,232

Total W.C. Requirement Rs
13,670,416,682

of R.M 2
37
= 7,421,419,792 + 7,866,033,711
2
= Rs 7,643,726,752

= 133,544,730,495
7,643,726,752
= 17 times

R.M Consumed
= 7,643,726,752 x 365
133,544,730,495
= 21 days

Period
365
= 133,544,730,495 x 19
365
= Rs 7,683,395,453

W.I.P
2
= 2,126,733,280 + 1,766,187,119
38
2
= Rs 1,946,460,100

= 138,190,249,983
1,946,460,100
= 71 times

Cost of Production
= 1,946,460,100 x 365
138,190,249,983
= 5 days

Period
365
= 138,190,249,983 x 5
365
= Rs 1,893,017,123

F.G
2
39
= 3,140,400,210 + 4,167,577,708
2
= Rs 3,653,988,959

= 137,163,072,485
3,653,988,959
= 37 times

Cost of good sold
= 3,653,988,959 x 365
137,163,072,485
= 10 days

Period
365
= 137,163,072,485 x 10
365
= Rs 3,757,892,397
Rs 7,683,395,453
For 21 days
Raw
Cash
Material
(Crude Oil)
40
Rs 1,893,017,123

etc) For 10 days

07

Requirement

7,683,395,453
1,893,017,123

13,334,304,973

of R.M 2
41
= 15,901,070,579 +
7,421,419,792
2
= Rs 11,661,245,186

= 114,694,115,030
11,661,245,186
= 10 times

R.M Consumed
= 11,661,245,186 x 365
114,694,115,030
= 37 days

Period
365
= 114,694,115,030 x 37
365
= Rs 11,626,526,729

W.I.P
2
42
= 2,120,551,481 + 2,126,733,280
2
= Rs 2,123,642,381

= 118,056,526,161
2,123,642,381
= 56 times

Cost of Production
= 2,123,642,381 x 365
118,056,526,161
= 7 days

Period
365
= 118,056,526,161 x 7
365
= Rs 2,264,097,762

F.G
43
2
= 3,504,702,083 + 3,140,400,210
2
= Rs 3,322,551,147

= 118,420,828,034
3,322,551,147
= 36 times

Cost of good sold
= 3,322,551,147 x 365
118,420,828,034
= 10 days

Period
365
= 118,420,828,034 x 10
365
= Rs 3,244,406,248
Rs 11,626,526,729
For 37 days
44
Raw
Cash
Material
(Crude Oil)
Rs 2,264,097,762

etc) For 10 days

08

Requirement

11,626,526,729
2,264,097,762

17,135,030,739

of R.M 2
45
= 8,709,063,242 +
15,901,070,579
2
= Rs 12,305,066,911

= 79,903,481,645
12,305,066,911
= 6 times

R.M Consumed
= 12,305,066,911 x 365
79,903,481,645
= 56 days

Period
365
= 79,903,481,645, x 56
365
= Rs 12,259,164,307

W.I.P
2
46
= 1,709,783,215 + 2,120,551,481
2
= Rs 1,915,167,348

= 82,460,310,299
1,915,167,348
= 43 times

Cost of Production
= 1,915,167,348 x 365
82,460,310,299
= 8 days

Period
365
= 82,460,310,299 x 8
365
= Rs 1,807,349,267

F.G
47
2
= 2,344,285,920 + 3,504,702,083
2
= Rs 2,924,494,002

= 81,299,894,136
2,924,494,002
= 28 times

Cost of good sold
= 2,924,494,002 x 365
81,299,894,136
= 13 days

Period
365
= 81,299,894,136 x 13
365
= Rs 2,895,612,668
Rs 12,259,164,307
For 56 days
48
Raw
Cash
Material
(Crude Oil)
Rs 1,807,349,267

etc) For 13 days

08

Requirement

12,259,164,307
1,807,349,267

16,962,126,242
Graphically Presentation
RAW MATERIAL TURNOVER: -
49
RAW MATERIAL HOLDING PERIOD: -
WORK-IN-PROCESS TURNOVER: -
WORK-IN-PROCESS HOLDING PERIOD: -
FINISHED GOOD TURNOVER: -
FINISHED GOOD HOLDING PERIOD: -
CHAPTER: 6
INVENTORY MANAGEMENT
INTRODUCTION:
Every enterprise needs inventories for smooth running of its

activities. It serves as a link between production and distribution
50
process. There is generally a time lag between the recognition of
needs and its fulfillment. The greater the time-lag, the higher the
requirement 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.
The Inventory Management system and the Inventory

Control Process provides information to efficiently manage the
flow of materials, effectively utilize people and equipment,
coordinate internal activities, and communicate with customers.
Inventory Management and the activities of Inventory Control do
not make decisions or manage operations; they provide the
information to Managers who make more accurate and timely
decisions to manage their operations. Effective Inventory
Management helps organizations to meet or exceed customers'
expectations of product availability while maximizing the
organization's net profits and/or minimizing its inventory and its
related costs.
NATURE OF INVENTORY:
The various forms in which inventories exit in a

manufacturing companies are:
Row Material: Raw materials are materials and

components that are inputs in making the final product through
the manufacturing process. Purchasing and production executives
shape raw material policies.
Work-in-Process: Work-in-process inventories are semi-
manufactured products. They represent products that need more
work before they become finished products for sale. Work-in-
51
process inventories are influenced by the decision of production
executives.
Finished Goods: Finished goods are those completely

manufactured products, which are ready for sale. Stock of raw
materials and work-in-process facilitate production, while stock of
finished goods is required for smooth marketing operations.
Inventory
Raw Work in Finished

material progress goods
NEED TO HOLD INVENTORIES:
Maintaining inventories involves tying up of the company’s

funds and incurrence of storage and handling costs. There are
three general motives for holding inventories:-
Transaction Motive: - This emphasizes the need to

maintain inventories to facilitate smooth production and sales
operations. To increase the production to fulfill the demand
whether seasonal or regular the organization needs to hold
inventories and there should not be any opportunity loss.
Precautionary Motive: - It is necessary to hold inventories

to guard against the risk of unpredictable changes in demand and
supply forces and other factors. For example a manufacturing
company.
Speculative Motive: - It influences the decision to increase

or reduce inventory levels to take advantage of price fluctuation.
There are some concerns which maintain the level of inventories
52
either it is raw material or finished goods and waits for the
increase in the price.
The Various methods of requisitioning of Materials
Reordering Level
This is the level at which the firm should go for fresh

purchase requisition of material through the storekeeper to meet
the requirements. The reordering level which takes into
consideration of minimum level of consumption of raw material
during the course of production process as well as the amount
material required by the firm during period of purchase and goods
in transit immediately after the order.
Reordering Level
Amount of materials
Minimum Level required during the
period of consumption
Reordering Level = Minimum level of stock for uninterrupted flow of

production process
+
Amount of materials required during the period of consumption
Or
Lead-time stock level
Alternate method is available by using the maximum

consumption and maximum reorder period.
Reordering level = Maximum consumption x Maximum Re-order

period
53
This method registers the maximum consumption of the firm
during the production as well as the maximum time period
required for the supply of required materials.
Under this alternate approach, the firm at any moment will not
face any difficulties due to short supply or insufficient amount of
materials.
Minimum Level/Safety level:
The firm should at always maintain minimum amount of

material in its hands to facilitate the low of production process as
unaffected due to short fall in the quantum of materials.
The following points are most important in designing the

minimum level of stock:
➢ Lead-time should be predominantly considered to

determine the time lag in between the materials
ordered and received. The firm should find out the
practical difficulty of the vendor in supplying the
material for the determination for minimum level of
stock.
➢ Amount of consumption of the material during the lead-

time.
Minimum stock level=Reordering level-(Normal level consumption x

Normal Reorder period)
Average and normal level of consumption is synonymous

with each other. If normal or average consumption is not given,
the formula is as follows.
Average consumption +Minimum level consumption + Maximum level

consumption
2
54
Maximum Level
This is the level at which the firm holds maximum quantity of

materials as stock during the process. The ultimate aim of fixing
the level of maximum level is that to avoid the overstocking. If
the stock level of the firm exceeds the maximum level already
fixed is known as overstocking level of the firm, more than the
requirement.
Why over stocking is considered not advisable?
➢ It leads to excessive investment on inventory more

than the requirement.
➢ It leads to unnecessary wastage of the materials due to
excessive stock.
➢ The excessive storage of materials may certainly affect
the price of the product.
Maximum stock level = Reordering level + Reordering quantity –

(Minimum consumption X Minimum reordering period).
Danger level
At this level, the firms should not further issue any materials to
the various functional departments. At the danger level, the
purchase department is vested with greater responsibility to
immediately arrange the supply of raw materials in order to
maintain the flow of production as uninterrupted.
The consumption level of the materials is getting varied from one

time period to another. During the specified period, there may be
maximum consumption and minimum consumption which should
be averaged to find the mid point in between the two, in order
either fulfilled the maximum consumption or maximum
consumption to the content possible.
Why the maximum reorder period is taken into consideration?
55
The purpose of considering is that the greater period taken by the
supplier to supply the required materials.
Danger level = Average consumption X Maximum reorder period.
Average Stock Level
Average level = Minimum stock level + ½ of the reorder quantity.
Economic Ordering Quantity
The ordering of materials using tagged with three different

components of cost viz.
➢ Acquisition cost of materials

➢ Ordering cost of material
➢ Carrying cost of material
The ordering quantity of materials may larger either or meager in

volume, which carries its own advantages and disadvantages.
If the quantity ordered is larger in volume, the following are the

some of important advantages: -
➢ The bulk purchase order reduces the ordering cost of the

materials. The greater the size of the order, which leads to
reduce the numbers of the orders in procuring the materials.
➢ Quantity discount – The discount can be classified into two
categories viz. trade discount and cash discount.
➢ What is trade discount?
Trade discount is the discount granted by the supplier to the

buyer of the materials at the movement of bulk purchase. This
percent of discount is greatly possible only during the periods of
greater of volume of purchase; which reduces the overall cost of
the acquisition.
56
If the quantity is procured in meager volume, the following are
constructed as advantages;
➢ The carrying cost will come down in the case of lesser

inventories.
➢ The cost of storage is lesser as far as the meager quantities
of materials.
➢ Lost due deterioration of obsolescence, wastage will be
minimum.
➢ Insurance cost is less due to meager volume of materials.
2AO
Economic Ordering Quantity = ------------
I
A = Annual requirements in units.
O = Ordering cost
I = Cost of storing per year or cost of carrying the inventory.
Objective of inventory management
➢ To maintain a large size of inventory for efficient and smooth

production and sales operations.
➢ To maintain a minimum investment in inventories to

maximize profitability.
IN CONTEXT TO BARAUNI REFINERY (IOCL)
57
The Indian Oil Corporation (Barauni Refinery unit)
needs to hold inventories for the purpose of transactions motive
and precautionary motive. In this unit production is a continuous
process. For the smooth production, the company needs to
maintain or keep an adequate level of ram material inventory to
avoid any shut down position. For every production unit the
inventory of raw material plays a lead role.
INVENTORY TURNOVER RATIO For Two Years 2007-08 And 2006-

07
Inventory Turnover Ratio = Cost of Good Sold

Average Stock
Since:
Cost of Good Sold = Sales – Profit
= 156,489,733,981 – 7,448,693,896
= 149,041,040,085
Average Stock = Opening Stock + Closing Stock

2
= 15,513,826,950 +14,845,162,456
2
= 15,179,512,703
Therefore:
Inventory Turnover Ratio = 149,041,040,085

15,179,512,703
= 10 times
58
Since:
= 138,253,078,313 – 773,326,289
= 137,479,752,024

2
= 14,420,017,552 +
15,513,862,950
2
= 14,966,940,251
Therefore:

14,966,940,251
= 9.18 times
This Ratio shows that the year 2007-08 is better because the
year 2007-08 shows rapid turnover of stock and consequently
shorter holding period as compared to its previous year.
The Indian Oil Corporation (Barauni Refinery unit)

maintains all these sort of inventories. This unit maintains
adequate stock of inventories of raw material for the smooth
functioning of the process of production. The company also
maintains an adequate level of inventories for work-in-process as
per the requirement. Till the completion of the production cycle,
the work-in-process inventories are maintained and some part of
it is also used as fuel in the unit. Stock of finished goods also has
to be maintained by the Barauni Refinery unit. This unit does not
have authority to sell the finished product in the market directly.
It has to be sent to the Marketing division for further sale. As per
the instruction of the Head Office they have to keep an adequate
level of finished goods for compensating any loss of production
during the period of election (governmental hazards), production
break down and other contingencies. It also sells finished goods
59
like LPG, Petrol, Diesel, etc. on behalf of the Marketing division.
That’s why a stock of finished goods also needs to be maintained.
System of identification of needs
There are mainly three types of inventories maintained by

Barauni Refinery Unit (IOCL) such as:
➢ Crude Oil Inventories
➢ Inventories for chemicals
➢ Inventories for stores and spares
Identify the need for Crude Oil Inventories and system of

placing the order
The Barauni Refinery Unit (IOCL) identifies the need for

inventories for crude oil through Revenue Budget that is prepared
on yearly basis. in the Revenue Budget, the estimate for the
consumption of Crude Oil inventories for the next year is
estimated on the part experience basis. Here a brief introduction
about Revenue Budget of Barauni Refinery Unit (IOCL) is given.
The Revenue Budget is basically a budget of income and

expenditure. The objective of preparing the Revenue Budget is to
fix a target in respect of physical parameters such as, throughput,
product pattern, fuel and loss and also that of operating expenses
which become the basis for monitoring and control and to
estimate, based on targeted physical parameters of operating
expenses, the likely profit or internal sources for income, which
helps in the fund management.
The Barauni Refinery Unit (IOCL) prepares Revenue

Budget every year in mid September. In the month of September,
the Budgeted Estimates (BE) for the next year and Revised
Estimates (RE) for the current year are prepared for which the
Budgeted Estimates (BE) is prepared in the previous year.
60
For example:- In the financial year 2007-08 in the month of
September, the Budgeted Estimates (BE) for the financial year
2008-09 the Revised Estimates (RE) for the next six months 2007-
08 were prepared.
Budgeted Estimates (BE): Budgeted Estimates is that

which is prepared for the next month in which all the items (inflow
and outflow) are included on full estimation.
Revised Estimates (RE): Revised Estimates is prepared

after six months of applications of budget estimates. The purpose
of preparing Revised Estimates is to know that during the present
six months what are the actual expenses or income exits and on
what basis they have been prepared. They collect this
information, about expenses or incomes from the concerned
officers or employees. They also provider information regarding
what will be the expenses and incomes for the basis they next six
months. On this basis they estimate for the next six months.
There is no system for placing order for crude oil in the

Barauni Refinery Unit (IOCL). Because they do not deal or
purchase crude oil directly. The hear office handles determination
of crude oil and its supply to the Refinery unit. Head office
provides crude oil to the Refinery as and when required as per the
estimation. There is continuous supply of crude oil through
pipelines and tankers to the Refinery.
Identify the need for chemicals and spares:
Identification for need for chemicals basically depends on

the quantity and types of crude oil processed. The quantity for
chem8icals is decided in the ratio of quantity and types of crude
oil processed. Orders regarding the purchase of chemicals and
spares are made on past experiences. Inventory is maintained on
approximation. The user department sends the need for the item_
to the Material department along with the consumption pattern.
61
The reorder point is fixed in certain cases and then the order goes
to the Purchase department. Two kinds of indent is raised:
➢ Inventory control items, which are fixed where the

reorder point or indent, is raised and the consumption
pattern is studied.
➢ Where consumption pattern is not known, preventive

maintenance processes are undertaken on cash basis.
When an indent is raised and if it is universally available

quotations or order is placed and the best is selected
amongst all. Ain case of wholesale items order is placed to
the authorized dealer who manufactures the items as per
the requirement.
Issue system of inventory for Barauni Refinery Unit
Firstly it is needed to explain how many types of issue

system for
Inventories are there, and then which system is opted by the
Barauni Refinery Unit, will be explained.
First in First Out Method (FIFO) : In this method or issue

system inventories, are issued for the production process or for
sales which are purchased first or which enter in the stores first.
And in the determination of cost of product, cost of that issued
material is considered. In this case most recent purchase is as
closing stock in the stores.
Last In First Out Method (LIFO): This method is

absolutely different from FIFO method. N this method or issue
system inventories are issued for the production process or for
the sale, which are purchased or enter in the stores recently. The
purpose for doing so is that issued price is valued at the recent
market price. This method is mostly used when price of
inventories are continuously in the position of rising.
62
Highest In First Out Method (HIFO):- In this method or
issue system inventories are issued for the production process or
for the sale whose cost is high The purpose for doing so is that
the company wants to sell or utilize that material at its fullest and
that there should be no opportunity loss. This method is not
mostly in use because; stock is valued at lowest price.
Barauni Refinery Unit (IOCL): issues inventories for the

production process and for the sale to the Marketing Division on
First in First Out (FIFO) basis. Here there is a continuous flow of
crude oil. Every day crude oil is supplied to Refinery and also
there is a continuous supply of finished product to the Marketing
Division. Every day crude oil is processed or converted in to
finished product and everyday it is sent to the stores and
thereafter it is sent to the Marketing Division. Crude oil enters in
the tank and it is sent for the process and after processing it is
sent to the stores. All this happens automatically. This means that
the crude oil, which enters the tank, first, is sent for the
processing first and after processing it is sent to the sores. From
the stores it is sent to the Marketing Division and then the crude
oil is sent for the process and so on. This is a continuous process
and it works on FIFO basis.
Stores Management: -
There is a separate department in Barauni Refinery Unit

(IOCL) Oil Storage and Movement Department, which manages
and maintains the movement of crude oil, intermediate products
and finished goods. Actual job of this department is to receive the
raw material, intermediate products and finished goods and
dispatch all this, such as raw material for processing,
intermediate products for further processing and some of the
intermediate products to the Marketing Division for sale and
finished products to the marketing department for the same
purpose. This department receives raw material as crude oil and
issues for the further processing at First in First Out basis. After
processing finished products are issued and dispatched to the
Marketing Division for Sale. They receive more than one type of
finished products for which there is different maintenance cost.
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The maintenance cost for LPG is more than the other products.
There should be certain temperature, which has to be maintained.
And for other products like Petrol, Diesel, Etc., which is stored in
tanks, should not be filled up to the brim. A certain portion of the
tank is kept empty.
Valuation of Inventory: -
Generally the valuation of closing stock is done on the basis

of market price or cost price which ever is less. But here we will
see how Indian Oil Corporation (Barauni Refinery Unit) evaluates
its stock, what rules and regulations are followed by them etc. At
first we will see how many types of closing stock they maintain: -
Types of Closing Stock in Indian Oil Corporation Ltd.:
➢ Crude Oil
Crude Oil Stock in Transit.

Crude Oil Stock in Pipeline
Crude Oil Stock in Refinery Tanks.
➢ Intermediate Stock or Work-in-Process
➢ Finished Goods
There are many types of crude oil such as, indigenous crude oil
and
imported crude oil. There are two types of indigenous Crude Oil
(1) off-shore crude oil and (2) on shore crude oil and imported
Crude Oil separately for (1) High Sulphur and (2) Low Sulphur.
Valuation of Crude Oil Stock
Crude Oil Stock to be valued at “Cost” or

Replacement Cost”
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For valuation at replacement cost following conditions should
be satisfied:
There should be fall in the price of Crude Oil after the date of
closing (31st March). The expected realization from products to be
produced out of crude oil inventory results in realization lower
than cost of crude oil.
For the purpose of valuation of crude oil following three

elements are required: -
1) Cost of Crude Oil.
2) Expected realization from products produced from crude

oil.
3) Replacement of cost of crude oil.
Cost of Imported Crude Oil (High Sulpher & Low

Sulpher)
1. All elements which are a part of imported crude oil

are to be considered in the cost of stock at Refinery
such as FOB, marine freight, marine insurance, and
other landing charges, custom duty, pipeline cost,
entry tax (if applicable).
2. All the above elements to be considered are booked

in the purchase cost of crude oil
3. For crude oil in transit FOB and other elements are

booked in purchase cost.
4. The above elements are to be considered for the
purpose of valuation of crude oil stock at cost.
5. All elements as considered for Refinery stock to be
taken on notional basis for crude oil stock in transit
and in pipeline e.g. Custom duty, entry tax etc.
65
6. Operating cost as per budget estimated of the next
year should be included for comparison with
realization.
Valuation of Crude Oil Stock: -
Expected realization value: -
1. If the crude oil quantity is processed during April, the

realization of the products is at the price applicable for the
month of April.
2. For balance crude oil quantity (if any), the expected

product realization for the month of May will be
considered based on Inventory Logistic Plan (ILP)
3. Specific customer price and excise duty benefit to be

considered for above
Replacement cost of crude oil stock: -
The elements for replacement cost will be same as

considered for cost of crude oil, however, following are to be
taken additionally: -
1. FOB as intimated by HO based on actual price during April
2. Other element to be considered by the unit based on the

estimated actual cost.
3. Customs duty as based on percentage; the same should be

revised taking revised FOB value.
Valuation of Intermediate Stock

The valuation will be lower than the cost of intermediate
products or realization of the products, to be produced out of the
intermediate stock, whichever is lower.
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Cost (Including conversion cost)
The cost of intermediate stock will be based on cost of crude

oil as for Refinery stock and 50% of operating cost as considered
for product valuation and 50% of fuel and loss for the month.
Expected realizable value
The realizable value will be similar to crude oil stock

valuation, however, the balance operating cost & fuel & loss
(50%) adjustment has to be done while comparing with the cost
of intermediate products.
Valuation of crude Oil
Pipeline Cost, crude oil valuation
➢ For pipeline cost, the operating cost to be considered as

fixed & variable
➢ Fixed cost to be allocated based in installed capacity if

the capacity utilization is below installed capacity.
➢ Variable cost will be allocated based on the pumped

quantity by pipeline during the year.
Valuation of finished products
Finished stock to be valued at cost or realization value

whichever is lower.
Finished products to be divided into two categories.
➢ Straight run products
➢ Especially products for which there is a separate

production plant such as benzene, toluene, FGH,
propylene, lubes etc.
67
CHAPTER: 7
CASH MANAGEMENT
The starting point for avoiding a cash crisis is to develop a

cash flow projection. Smart business owners know how to develop
both short-term (weekly, monthly) cash flow projections to help
them manage daily cash, and long-term (annual, 3-5 year) cash
flow projections to help them develop the necessary capital
strategy to meet their business needs. They also prepare and use
historical cash flow statements to gain an understanding about
where all the money went.
Efficient cash management processes are pre-requisites to

execute payments, collect receivables and manage liquidity.
Managing the channels of collections, payments and accounting
information efficiently becomes imperative with growth in
business transaction volumes. This includes enabling greater
connectivity to internal corporate systems, expanding the scope
of cash management services to include “full-cycle” processes
(i.e., from purchase order to reconciliation) via ecommerce, or
cash management services targeted at the needs of specific
customer segments. Cost optimization and value-add services are
customer demands that necessitate the creation of a mechanism
to service the various customer groups.
Cash is the most liquid asset in any business. It is a very

crucial asset in the day-to-day operations of a business firm. Cash
is the basis input required to run thebusiness continuously. A firm
has to stike a balance between maintaining a very high cash
balance and very small amount of cash balance. It excessive cash
balance is maintained, the excess cash will remain idle affecting
the profitability of the business adversely. On the other hand, if
too small amount of cash balance is maintained, it will lead to
shortage of cash resulting into disruption of manufacturing
operations of a business firm. Therefore, the major aspect of cash
management is to keep a peoper cash balance.
68
Cash management thus is concerned with, the managing of,
i) Cash flows into and out of the firm.
ii) Cash flows within the firm.
iii) Cash balances held by the firm at a point
of time by financing deficit or investing
surpuls cash
It can be represented by cash management cycle: -
Cash collection
Business
operation
Deficit Borrow
Surplus Invest
Information $
control Cash payment
Cash management cycle
Sales generate cash, which has to be disbursed out. The

surplus cash has to be invested while deficit has to be borrowed.
Cash management seeks to accomplish this cycle at a minimum
cost. At the same time, it also seeks to achieve liquidity and
control. Cash management assumes more importance than other
current assets because cash is the most significant and the least
productive asset that a firm holds. The aim of cash management
is to maintain adequate control over cash position to keep the
firm sufficiently and to use excess cash in some profitable way.
69
IN CONTEXT TO BARAUNI REFINERY (IOCL)
The first and the foremost step in managing cash are

identifying its requirement.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit)
identifies the need for cash for meeting its working capital
requirement and for day-to-day operations of business is through
the preparation of the cash budget. Budgeting is the technique by
which financial and/or quantitative expressions are given to a set
policy in the form of a plan prior to a defined of time.
It involves the coordination of the activities dictated by plans

and sets up a control mechanism to bring to the notice of
management how far the entire activities are geared upon to get
the desired results and corrective action wherever and whenever
necessary so as to comply with the goals set up.
The Indian Oil Corporation Ltd. (Barauni Refinery Unit)

prepares the cash budget on the value dating system. As per
this system the Barauni Refinery (IOCL) maintains a special
current account with the SBI. Barauni Refinery Unit maintains this
account with the campus branch as well as the Kolkata branch.
Cheques make every payment by this branch. Cash payment is
made in rare cases. Only for the payment to the employees, up to
Rs. 20,000 is mae by cash above the payment made by cheques.
The arrangement of this cash payment is made through the State
Bank of India on behalf of the Head Office. Barauni Refinery Unit
issues cheques for the payment to the party every day as and
when required. Out of those cheques how many cheques are
present for payment does not matter. Every day payment is made
for the Barauni payment Refinery Unit and every day they are
sent to the bank for payment for which the Head officer makes
payment ultimately to the Bank. It is a continuous or a cyclical
process. It prepares the Estimated Budget and the Revised
Budget every month and every year. The estimated budget is
prepared every 10th of a month and the revised budget is
prepared every 25th of the same month and the revised budget is
prepared as per the approval of the Head Office every cash
70
budget is prepared as per the approval of the Head Office. This
cash budget is sent to the Refinery Head quarters New Delhi.
The SBI Branch at Kolkata maintains an account for the

Barauni division in order to make payment to the parties who are
interested in getting the payments conveniently form the Kolkata
Branch. For example payments have to be made to auditors,
suppliers for chemicals and stores and spares, entry tax, excise
duty, etc. An amount of Rs. 10 crores is kept and maintained for
payments to the concerned parties and is authorized to spend Rs.
9 cores at a stretch.
The branch has to keep Rs 1 crore as a reserve. The amount

of Rs. 9 crores can be spent at any may be, within an hour or a
day or a week. As and when it is spent the amount is again
reimbursed by the Indian Oil Head Office. The Kolkata Head Office
provides all details regarding the payment made to various
parties, after adjusting the amount received and paid, to the Head
Office as a proof of its payment
Estimated Cash Budget:
This Estimated cash budget is prepared in every month till

the date of 10th for the next month. In this it is estimated how
much cash is required for the next month. In this all the expected
expenses are included and forecasted.
Revised Cash Budget:
Revised cash budget is also prepared in the same month of

the estimated cash budget till the 25th of the month. It is also
prepared for the next year for which estimated cash budget is
required. It is nothing but the system of finalizing the cash
budget. The only difference is that during the period of 15 days
from 10th to 25th there may be some expenses, which are
included, further.
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Items included in the Cash Budget: -
These are some items, which are included in the Cash

Budget: -
Projected Expenditure:
This expenditure is capital in nature. As it is not finalized, it

is considered to be revenue in nature. When the project gets over
then all the expenses relating to this are capitalized. At present a
project related the installation of 3rd sector of Diesel
Hydrogenating Treating Unit in under consideration.
Custom & Excise Duty and Entry Tax:
These expenses are paid on the basis of occurrence. When

these transactions occur then it is shown in the cash budget.
These expenses are on payment basis. For example: - Expenses
for the month of My will be paid in the month of June. The
Refinery pays custom duty, Excise Duty and Entry Tax on Crude
Oil Consumption.
Additional Facilities:
These expenses are also of Capital Nature. These expenses

are related to Plant, Furniture, Constructions, etc. Need for
furniture for the coming period is estimate basically in places
where construction work is done. The repairs and maintenance
department of each section do this estimation.
Employee Payments:
This expense mainly depends on the existing number of

employees INS the Refinery and their pay scale. The estimation is
done on the basis of how many new employees are appointed,
72
how may of them get retired, how many of them get promoted,
how many of them require advanced payment of salary, etc.
Other Expenses:
Other expenses are related to payment to suppliers,

contractors, etc. Budgeting is not only a financial function
performed by the Financial Department alone. The Planning and
Budgeting have to be grassroots operation in which all levels of
management participate. The business of Finance Department is
to receive the operating plans of the line managers and other
Department Heads and transplant those plans into
comprehensive projection of financial condition and operating
results. After the budgets are approved, the actual results are
also forwarded to various Departments by Finance for analysis
and corrective action as required.
System of managing cash:
The Barauni Refinery basically does not deal with raw cash,
at this division, As the cash management is thoroughly dealt at
Delhi and Mumbai Head Office. The daily requirement of cash is
met by direct transitions with the SBI where a special current
account is maintained. The income earned by the Barauni Division
is maintained and kept only on books.
It mainly deals with payments to various parties, which are:
➢ The internal customers who are the employees
➢ The external customers who are the contractors.
➢ For statutory deposits i.e. payment as the Bihar Entry Tax.
The requirements of cash are met as per time and fulfilled by the
Finance department, which deals with the State Bank of India.
Cash for petty uses are paid to the concerned departments and
maintained for further uses. Salary to the staff is directly debited
73
to the concerned accounts. This is how cash is managed in the
Barauni Division.
Cash Budgeting
Budgeting Principles and Practices in Barauni Division
Types of plans/budget
The corporate objective, as approved by the Board of

Directors, forms of basis for long term/short term budgets so as to
attain the desired objectives. The long terms plans comprises of:
1. Perspective plan covering a duration of 10 – 15 years

2. Long range plans covering duration of 5 years.
Perspective Plan
The perspective plan sets the long-term goals to be attained

by the corporation in line with the corporate objectives. The
corporate goals are further divided into Divisional goals and Units’
goals. The purpose of perspective plan is to achieve efficiency
and supremacy in the existing operation and also to diversify into
other areas of operation as may be possible taking into account
the opportunities thrown up by the environment. The perspective
plan is updated once in 2 years is available. This plan is prepared
by the corporate planning dept based on the inputs received by
the divisions
Long range Planning:
Long range planning is aimed to achieve the broad

objectives envisaged in the perspective plan by fixing specific
targets and action plas for various functions. The long range
planning dept coordinates the long-range plan are reviewed
periodically at units/ HO with reference to actual performance. An
in addition to perspective and Long-range plan, the corporation is
74
closely associate in the five year Plans of the government insofar
as it related to petroleum sector. The corporate plans have to
take into consideration the objectives as laid down by the
government in the Five Year Plans. The new projects, which are to
be, included in the long-range plan takes into consideration the
stated objective of the Government in the Five Year Plans.
Short Term Plans:
In the short term the corporation prepares Revenue and

Capital budgets indicating the Revised Estimates for the current
yea5r and the budget estimates fort the next year. These budgets
are more detailed and indicate the expected physical/finance
performance of operations and projects for close monitoring and
control.
In addition to these budgets Purchase Budget. Working

capital budget or capital budget or capital budgets are also
prepared to now the availability of internal resources for financing
projects and for further Fund management in case of
surplus/deficit. The Foreign Exchange budget is also prepared for
submission to the Government our requirements of the Public
section in perspective form Balance of Payment (BOP) angle.
The Barauni Division deals with the planning and the

preparation of the short-term budget and the long range planning
and the HO Delhi Prepares the perspective plans.
Revenue Budget:
The revenue budget is basically a budget of income and

expenditure. The objective of revenue budget is two fold:
1. To fix a target in respect of physical parameters viz.,

throughput production pattern, fuel and loss and also that
of operating expenses which then become the basis for
monitoring and control.
75
2. To estimate based on the targeted physical
parameters/operating expenses, the likely profit/internal
source generation which will then form the basis of funds
management.
Components of Revenue Budget:
The components of Revenue Budget are:
➢ Throughput, Product Pattern, Fuel and loss
➢ Operating income
➢ Raw material
➢ Operating expenses
Based on the above, the summarized position of Revenue

Budget is prepared indicating the estimate profit or loss during
the budget period.
Throughput, Product Pattern and Fuel and Loss:
For the preparation of Revenue Budget, Basic requirement is

the estimation of likely throughput/product pattern for Refineries
and estimated throughput of Pipelines.
This estimation is done by interactive process between

refinery units and HO taking into consideration the shut down
schedules, Crude oil availability and other technical
considerations. Each Refinery indicates at the beginning of the
Year, the shut down schedules, on-Stream days available, etc. to
HO. Head Office interacts with OCC to ensure the availability of
various type of crude and also projected the demand for different
products. Base doesn’t this data, the Unit’s workout the possible
product pattern which is again sent to the HO for review and
confirmation.
76
Operation Income:
Transfer of Products
Based on the projected throughput/product pattern, the

stocks in hand at the beginning of the year, and the anticipated
stock at the end of the year the dispatches to the Marketing
Division shall be worked out. The same is to be valued at the
existing ex-refinery prices for formula products and transfer price
for free trade products.
Pool Accounts adjustments:
The Pool Account adjustments relating to products viz.

product pattern variation, the sex-refinery-retention price
differential price, etc. shall be worked out as per instructions of
OCC/Govt.
Stock Variation:
The variation between the opening stock of

finished/intermediate stocks and the anticipated closing stock
shall be furnished.
Raw Material Cost:
Based on the types of crude to be processed as already

determined, the raw material cost shall be worked out taking into
consideration the prevailing cost of crude and the various Pool
Account (COPE), Cost and Freight Adjustment Account (E&F) etc.
Operating Expenses
Controllable Cost:
The operating cost is estimated based on zero based

budgeting concepts in respect of controllable items of
expenditure. Zero based budgeting is a process in which each
77
manager is required to justify his requirements after evaluation of
various alternatives and raking them in order of importance by
systematic analysis. No allocation of funds can be justified merely
because an activity was taken up in the past The continuation of
any activity is required to be justified along with other competing
claims. The following illustrative items are covered under ZBB:
➢ Chemicals and catalysts
➢ Repairs and maintenance

➢ Overtime
➢ Traveling and conveyance
➢ Communication expenses
➢ Printing and stationary
➢ Staff car expenses
Petty Cash Management:
In every business, of whatever size, there are payments,

which are of small amounts and high frequency, Examples are:
payments of stationary, postage, telegrams, carriage, leaning,
traveling. If all these payments are record in the cashbook, it will
unnecessarily be overburdened. In order to make the task of the
cashier easy, a petty cashier is appointed and is handed over a
small sum (say Rs. 100.00), which, from past experience, has
been found sufficient enough to meet the requirements of a given
period (say one month). This small amount is called “imprest’ or
‘float’. The petty cashier makes the payment of petty expenses
for which he is authorized and records them in his cashbook
called “Petty cash book”. Voucher and receipts support all these
payments. All the end of the given period, the petty cashier
submits the account to the cashier show, after having examined
the accounts, makes the payment of the amount spent by the
petty casher. Thus again on the first day of the next month, the
78
petty casher is found with the same cash balance, which he had
on the first day of the previous month.
For the daily requirements of the Corporation petty cash is

required in each department. Every department gets and
maintains around Rs. 5000 as impressed balance, even through
there is no direct cash dealt by the Barauni Refinery unit. The
State Bank of India, Campus Branch, provides this cash. This a
mount is provided to the required department. It is not necessary
to maintain or provide cash to each and every department. When
the department makes cash expenses up to Rs. 4500, they have
to give the information to the cash department, to the cashier for
up dating the account for Rs. 5000. The departments have to give
information to the cashier when they make cash expenses up to
Rs. 4500. They have to keep a balance of cash of Rs. 500 for
special cases. But they are authorized for making cash expenses
more than Rs. 5000 in times of need. On the next day or time
they are paid Rs. 5000 and the extra payment they had made.
But till the 31st of March of every year, each department is
required to deposit the balance amount, which they have at the
end of the Year. It is necessary that on the March 31st of March
every department closes its petty cash account and sends a
report to the cashier. Again on the 1st of April the cash
department distributes the amount of Rs. 5000 to each
department for the Petty cash requirement. Petty requirements of
each department are maintained with this balance and are
updated at the end of every year that is the 31st of March. This
amount of cash is utilized only in case of contingencies. They are
not authorized to use that amount of money for their personal
requirements such as tea or coffee.
Thus this is how the “Petty Cash Book” is maintained

in the Barauni Refinery Unit.
79
CHAPTER: 8
RECEIVABLES MANAGEMENT
In today’s competitive business scenario any company wants

to maximize sales rather than the profit. For maximizing the sales
it is essentially required that the company should sale its product
more and more on credit rather than on cash sales.
Trade credit arises when a firm sells its products or services

on credit and doesn’t receive cash immediately. A firm grants
trade credit to protect its sales from the competitors and to
attract the potential customers to buy its products at favorable
terms.
The receivables out of the credit sales crunch the availability

of the resources to meet the day today requirements. The acute
competition requires the firm to sustain among the other
competitors through more volume of credit sales and in the
intention of retaining the existing customers.
OBJECTIVES:
1) Achieving the growth in the volume of sales

2) Increasing the volume of profits
3) Meeting the acute competition
80
COST OF MAINTAINING THE ACCOUNTS RECEIVABLES:
➢ Capital cost:
Due to in sufficient amount of working capital with
reference to more volume of credit sales which drastically
affects the existing of the working capital of the firm. The
firm may be required to borrow which may lead to pay
certain amount of interest on the borrowings. The interest,
which is paid by the firm due to the borrowings in order to
meet the shortage of working capital, is known as capital
cost of receivables.
➢ Administrative cost:
Cost of maintaining the receivables.
➢ Collection cost:
Whatever the cost incurred for the collection of the

receivables are known as collection cost.
➢ Defaulting cost :
This may arise due to defaulter and the cost is in

other words as cost of bad debts and so on.
FACTORS AFFECTING THE ACCOUNTS RECEIVABLE
➢ Level of sales:
The volume of sales is the best indicator of accounts

receivables. It differs from one firm to another.
➢ Credit Policies:
81
The credit policies are another major force of
determinant in deciding the size of the accounts
receivables. There are two types of credit policies.
1. Lenient credit policies: Enhances the volume of the

accounts receivable due to liberal terms of the trade,
which normally encourage the buyers to buy more
and more.
2. Stringent credit Policies : It curtails the motive buying

the goods on credit due stiff terms of the trade put
forth by the supplier unlike the earlier
➢ Terms of Trade :
The terms of the trade are normally bifurcated into two

categories viz credit period and cash discount.
Credit period :
Higher the credit period will lead to more volume of

receivables, on the other side that will lead to greater
volume of debts from the side of buyers.
Cash discount:
It the discount on sales is more, that will enhance the

volume of sales on the other hand that will affect the
income of the enterprise.
The full-fledged Receivable management is not

done in the Barauni Unit
82
CHAPTER: 9
PAYABLE MANAGEMENT
While business firms would like to sale on cash, the pressure

of competition and the trend persuades them to sell on credit.
Firms grant credit to facilitate or escalate sales. The credit period
extended by business firms usually ranges from 15 days to 60
days. This helps them to have a much better hold in the market.
Payable management has become mandatory for any business
firm, which wants to exist in this world of competition because the
system of payment is what decides the fate of the business
credibility
TERMS OF PAYMENT:
When goods are sold on cash, the payment is received either

before the goods are shipped (cash in advance) or when goods
are delivered (cash on delivery). Cash in advance is generally
insisted upon when goods are made to order. In such a case, the
seller would like to finance production and eliminate marketing
risk. Cash on delivery is often demanded by the seller if it is in a
strong bargaining position and the customer is perceived to be
risky open account system. In this case the seller first delivers the
goods and then sends the invoice (bill). The creditor (cash period,
cash discount for prompt payment, the period of discount as on)
are stated in the invoice which is acknowledged by the buyer.
83
CREDIT PERIOD:
The credit period refers to the length of time the customer is

allowed to pay for its purchases. It is usually mentioned in days
from the date of invoice. For example 15 days, 30 days, 60 days
etc.
CASH DISCOUNT:
Firms generally offer cash discount to include customer to

make prompt payment. For example 2/10 which means if the
payment is made within 10 days one will get 2% discount.
DRAFT:
Whether goods are sent on an open account or consignment,

the seller doesn’t have strong evidence of the buyer’s obligation.
So a more secure arrangements usually in the form of draft, is
sought. A draft represents an unconditional order issued by the
seller asking the buyer to pay on demand or a certain future date.
It serves as a written evidence of definite obligation
LETTER OF CREDIT :
A letter of credit is issued by a bank on behalf of its

customers (buyers), to the seller. As per this document, the bank
agrees to honour he drafts as drawn on it for the suppliers to the
customer (buyer), if the seller fulfils the condition laid down in the
letter of credit.
IN CONTEXT OF BARAUNI REFINERY UNIT (IOCL)

84
Through bank payment mode is followed in Barauni Refinery
unit (IOCL). The vendor sends two intimation copies to the bank
and one copy to the Finance Department. The two intimation
copies include Lorry Receipt (LR) and the invoice. The units begin
operation only when it gets the intimation letter from the bank.
Cheques is drawn by the Finance Department first in the name of
“Yourself” account and then transferred to the bank. The bank
then receive the cheques, first credits to the party account with
the amount of payment and then releases the original
endorsement consignee copy to the Finance Department. It is
then sent to the stores department, which takes it to the
transporters and gets the possession of the materials.
There are as such no creditors of this unit but the time it
takes the payment to the parties (For Chemicals and stores and
spares) creates such creditors for that period.
PERIOD OF CREDIT ALLOWED:
The period of credit depicts the period for which any firm is
allowed to have possession of the materials without prior
payment. The Barauni unit basically dos not deal with any sort of
credit as per the main goods for the unit is concerned. Thus there
isn’t any such credit payment except the accessories, which are
used for the comfort of the staff members here.
85
CHAPTER: 10
RATIO ANALYSIS
Financial ratio analysis is the calculation and comparison of ratios,

which are derived from the information in a company's financial
statements. The level and historical trends of these ratios can be
used to make inferences about a company's financial condition,
its operations and attractiveness as an investment.
Financial ratio analysis groups the ratios into categories,

which tell us about different facets of a company's finances and
operations. An overview of some of the categories of ratios is
given below.
• Leverage Ratios, which show the extent that debt, is used
in a company's capital structure.
• Liquidity Ratios, which give a picture of a company's short-
term financial situation or solvency.
• Operational Ratios, which use turnover measures to show
how efficient a company, is in its operations and use of
assets.
• Profitability Ratios, which use margin analysis and show
the return on sales and capital employed.
• Solvency Ratios, which give a picture of a company's
ability to generate cash flow and pay it financial obligations.
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Importance of ratio analysis:
➢ Financial ratio reveals the financial position of the
company. This helps the investors for finding the
profitability of the company.
➢ The ratios are very useful in inter-firm and intra-firm

comparisons. Inter-firm comparison is necessary to find
out the exact position of a firm as compared to other
firm in the same industry. Intra-firm comparison is also
necessary to compare the performance of a firm of
current year with that of previous years.
➢ If financial ratios are calculated for a number of years, a

trend can be established. This trend helps in setting
future plans and forecasting.
➢ Financial ratios are of great assistance in locating the

weak spots in the organization.
Limitation of Ratio Analysis:

1) One of the serious limitations of ratio analysis is that
there are difficulties in the comparison between
various firms through ratios.
2) Ratio shows position only on a particular day and not
the picture of the entire year.
3) Inflationary factors are not taken into account in
computing Ratio Analysis. Thus when past
performance is analyzed, the figures may have
become outdated.
INTRA-FIRM RATIO ANALYSIS For the Year 2007-08 And 2006-07

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1) Current Ratio = Current Assets
Current Liability
= 15,602,713,867 = 2.43 : 1
6,418,834,641
Current Ratio = 15,514,814,773 = 2.82 : 1
5,509,756,017
Since idle Current Ratio is 2 : 1. Therefore this ratio shows

that Barauni Refinery has reduced its investment in Current
Assets in the year 2007-08 as compared to its previous year.

2) Quick Ratio = Current Assets – Stock – Prepaid exp.
Current Liability – Bank Overdraft
= 15,602,713,867 – 14,845,162,456 - 0
6,418,834,641 – 0
= 0.12 : 1

Quick Ratio = 15,514,814,773 – 15,513,862,950 - 0
5,509,756,017 – 0
= 0.14 : 1
Since idle Current Ratio is 1 : 1. Therefore this ratio shows that

Barauni Refinery has less ability to pay its short-term liabilities in
the year 2007-08 as compared to its previous year.
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3) Inventory Turnover Ratio = Cost of Good Sold

Average Stock
Since:
= 156,489,733,981 – 7,448,693,896
= 149,041,040,085

2
= 15,513,826,950 +14,845,162,456
2
= 15,179,512,703
Therefore:

15,179,512,703
= 10 times
Since:
Cost of Good Sold = 138,253,078,313 – 773,326,289
= 137,479,752,024
Average Stock = 14,420,017,552 +

15,513,862,950
2
= 14,966,940,251
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Therefore:

14,966,940,251
= 9.18 times
This Ratio shows that the year 2007-08 is better because the
year 2007-08 shows rapid turnover of stock and consequently
shorter holding period as compared to its previous year.
4) Gross Profit Ratio = Gross Profit x 100

Sales
= 7,477,283,585 x 100 = 4.78%

156,489,733,981
Gross Profit Ratio = 772,341,422 x 100 =

0.56%
138,253,078,313
Gross Profit Ratio has been increased by 4.22%, this shows

that the year 2007-08 is better as this year shows higher margin
for covering other expenses like Administrative selling and
Distribution expenses.
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5) Net Profit Ratio = Net Profit x 100
Sales
= 7,448,693,896 x 100 = 4.75%

156,489,733,981
Net Profit Ratio = 773,326,289 x 100 =

0.56%
138,253,078,313
Net Profit Ratio has been increased by 4.19%, this shows

that the year 2007-08 is better as this year shows that overall
efficiency of Barauni Refinery in 2007-08 is good.
6) Operating expenses Ratio = Operating expenses x 100

Sales
= 149,256,259,584 x 100 = 95%

156,489,733,981
Operating expenses Ratio = 137,829,703,822 x 100 =

99.69%
138,253,078,313
91
This shows that the year 2007-08 is better than its previous
year because in this year organization has reduced its Operating
Expenses by 4.69%
7) Working Capital Turnover Ratio = Sales

Working Capital
= 156,489,733,981 = 17.03
times
9,183,879,226
Working Capital Turnover Ratio = 138,253,078,313 =

12.80 times
10,802,067,596
Working Capital Turnover Ratio has been increased by 4.23

times. This shows that the year 2007-08 is better utilization of the
Working Capital as compared to its previous year.
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SUBMITTED TO: UNDER GUIDANCE
OF:
SRI V.C.JAISWAL, ACO
93
94
PREFACE
Ii give me great pleasure to present this project report on “

Working Capital Management” of Indian Oil Corporation Limited,
Barauni Refinery Unit, Barauni. This project report is intended to
fulfill the partial requirement for the completion of Post
Graduation Program.
The real objective behind the partial training and
presentation of the report is to gain experience to the actual work
environment and the required knock to guide knowledge towards
facilitating its application for any professional practical training
and close contact with the prevailing system in an organization is
of great importance.
95
Efforts have been made to prepare this Project Report in
most simple language. While preparing this Project Report, a care
has been taken to make it comprehensive, reliable and analytical
to make it easy to understand. Charts and Diagram have been
used to avoid difficulties.
I am grateful to my project guide Mr.V.C.Jaiswal (ACO) who
has rendered his best possible help and guidance in the
presentation of this project report. I am grateful to my Institute
who gave me an opportunity to do this project. And I am also
grateful to my parents and guardians who encouraged and
supported me to complete this Project Report.
KUMARI RUPAM
ACKNOWLEDGEMENT
First of all I would like to thanks my Institute, my Director Sir

and Placement Cell for giving me this privilege to have a feel of
the professional world.
I would like to thank Mr. W.Kullu (STRM), Mr. J.N.Bhilware
(TRO), and entire training department for giving me an
opportunity to do my training and to gain experience in a known
and recognized organization like Indian Oil Corporation Ltd.
(Barauni Refinery Unit). It was a wonderful experience to working
with this Organization. People here were very helpful and
rendered the best help they could, at every point of time.
I would like to take the opportunity to thank my respected
project guide Mr. V.C.Jaiswal (ACO) for his valuable enlightened
guidance, suggestion, direction and information in the completion
of this Project Report.
96
I would also like to thank Mr. Umesh A. Patel (SACO) and to
Mr. Mukesh Kumar (ACO) who also gave their valuable time and
information to complete this Project Report.
Finally I would like to thank my loving parents and my
Guardians who encouraged and supported me to complete this
Project Report. Their blessing and love helped me to reach the
present position.
THANKING YOU
KUMARI RUPAM
CONCLUSION
After completing this Project Report I would like to

conclude that the Working Capital occupies a major portion of
the working of any type of Organization whether it is small or
big. This Project Report has been prepared highlighting the
need, use and the functioning of the Working Capital.
After completing this Project Report in Indian Oil
Corporation Ltd., Barauni Refinery Unit, I must say that working
condition of Barauni Refinery is very good. That’s why the
position of Barauni Refinery unit is getting better day by day
and days are not far when this Unit will be the best among the
all. The Technology is getting upgraded day by day in order to
cope up with rising competition. The cash here is not dealt with
actually but only on books. The chemicals, stores and spares
inventories is kept and maintained as per the past experience.
The proper coordination between the production department,
stores and the Finance department has let to the effective and
efficient utilization of Raw Material at its fullest. This Unit
provides all relevant information to the head quarters through
application software (SAP), which helps the head office to take
corrective decision.
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98

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CHAPTER: 1

INTRODUCTION TO THE STUDY

The study of “Working Capital Management (Including Ratio

The basic objective of Working Capital Management is to

Control on Working Capital is very important for any

IMPORTANCE OF THE STUDY

Indian Oil Corporation is an Indian public-sector petroleum

Indian Oil was formed as joint ventures between one

A major diversified, trans-national, integrated energy company,

• To ensure adequate return on the capital employed and

Today, Indian Oil Corporation Ltd. is the largest commercial

Since Indian Oil has passed 50 summers and 50 winters

Barauni Refinery was built in collaboration with Russia and

The year 2008-09 saw Barauni Refinery achieve the highest

Barauni refinery achieved lowest ever 65.5 MBN of energy in

Indian Oil is not only the largest commercial enterprise in the

Auto Gas (LPG) is a clean, high octane, abundant and eco-

IndianOil Aviation Service is a leading aviation fuel solution

The common binders used in bituminous road constructions

Indian Oil’s XTRAMILE Super Diesel, the leader in the

Indane is today one of the largest packed-LPG brands in the

Indian Oil’s SERVO range of lubricants reigns as the

Automotive gasoline and gasoline-oxygenate blends are used in

The working capital is the amount resolving capital to meet

The “working capital” means the funds available for day

CONCEPTS OF WORKING CAPITAL

The concepts of working capital can be broadly divided into

(i) Gross Working Capital:

This concept implies the total of all current assets of a

(ii) Net Working Capital:

Net working capital refers to the difference between current

FACTORS AFFECTING WORKING CAPITAL

The working capital needs of a firm are affected by

(i) Nature of business: In some business organizations,

(ii) Production Policy: Working capital requirements also

(iii) Market Conditions: Due to competition in the market,

On the other hand, when a firm is in seller’s market, it can

(iv) Seasonal Fluctuation: A firm, which is producing

(v) Growth and expansion activities: The working capital

(vii) Credit Policy: Credit term granted by the concern to

(viii) Sales Growth: As the sales grow, the working capital

(iX) Dividend Policy: A company has to pay dividends in

(X) Working Capital Operating Cycle: in a manufacturing

Thus, there are several factors affecting the working capital

NEED FOR WORKING CAPITAL MANAGEMENT

1. There is a positive correlation between the sale of the

2. More than half of the total capital of the firm is generally

3. In emergency (non-availability of funds etc.) fixed assets

5. The management of working capital is more important for

6. In the modern system approach to management, the

MERITS OF ADEQUATE WORKING CAPITAL

➢ Regular payment of salaries wages and other day-to-day

➢ Sense of security and confidence.

➢ Solvency of continuous production.

➢ Sound goodwill (Prompt Payment)

➢ Easy loams form banks

➢ Exploitation of good opportunity.

➢ Meeting unseen contingences.

➢ Increase in efficiency of fixed assets.

➢ Increase production efficiency.

➢ Quick and regular return on investment

EVILS OF INADQUATE WORKING CPITAL

➢ Loss of credit worthiness and goodwill