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PROJECT REPORT

On

A STUDY ON WORKING CAPITAL MANAGEMENT OF HINDUSTAN


NEWSPRINT LIMITED KOTTAYAM

Submitted by
TRACY BAZIL

In partial fulfillment of the award of the degree of

Master of Business Administration


Of

COCHIN UNIVERSITY OF SCIENCE AND TECHNOLOGY

DEPARTMENT OF MANAGEMENT STUDIES

Toc H INSTITUTE OF SCIENCE & TECHNOLOGY


Arakkunnam P.O, Ernakulam District, KERALA – 682 313
Toc H INSTITUTE OF SCIENCE & TECHNOLOGY
Arakkunnam P.O, Ernakulam District, KERALA – 682 313

DEPARTMENT OF MANAGEMENT STUDIES

Certificate

This is to certify that the project entitled “A STUDY ON WORKING CAPITAL


MANAGEMENT” submitted By TRACY BAZIL of Semester is a bonafide
account of the work done by her under our supervision, during the academic year
2009-2010

(Faculty Name) …………………………...


Project Guide Head of the Department

JAISHU ANTONY MANAVALAN


DECLARATION

I the under signed TRACY BAZIL declare that the project report entitled “A
STUDY ON WORKING CAPITAL MANAGEMENT IN HINDUSTAN
NEWSPRINT LIMITED, KOTTAYAM” submitted by me under the guidance of
Mr JAISHU ANTONY MANAVALAN in partial fulfillment of the requirement
for the award of the degree in MBA is my original work. The impartial findings in
the report are based on the data collected by myself and I have not copied from any
report submitted to any university either this or in the previous report year.

PLACE:

DATE : TRACY BAZIL


Acknowledgment

It gives me extreme pleasure and satisfaction to express my sincere


thanks to all those who helped me directly and indirectly to make this study a
faithful one.

First of all, I would like to express my gratitude to my research guide

Mr Jaishu Antony Manavalan (faculty, MBA department) for the unlimited


encouragement and generous help without which this study would not have been
completed. And also I would like to express my sincere thanks to Dr. Job Kuruvila,
Principle of Toch College and all the faculty members of MBA Department.

I like to express my heartfelt gratitude to Mr Narayana Swamy (Project


Guide) of Hindustan Newsprint Company Limited and all those employees of
Hindustan Newsprint Company LTD who gave me their help and information
necessary for this study. And I remember with gratitude all my friends and
classmate for their unreserved support.

I am very much thankful to the almighty God for having blessing to


complete my project successfully.
CONTENTS

CHAPTER ITEMS
PAGE NO:

List of tables
List of figures
1 Introduction

• Objectives of the study

• Scope of the study

• Research methodology

• Research design

• Data source

• Period of the study

• Limitations of the study

2 Industry profile
• Paper

• World scenario

• Indian scenario

• State scenario

3 Company

• History of the company

• Strengths of the company

• Operational & financial leverage

• Production summary

• Financial results

• Functions of the finance department


4 Theoretical perspective

• Introduction

• Meaning of working capital

• Working capital management

• Classification of working capital

• Sources of working capital

• Measures to improve working capital

• Different aspects of working capital

• Factors affecting working capital or requirements or


determinants of working capital

• Approaches or methods of estimating working capital

• Working capital cycle

• Working capital policies

5 Data analysis and interpretation

• Current asset details

• Current liabilities details

• Computing of working capital

• Schedule of changes in working capital (2000-2008)

• Current ratio

• Inventory turn over ratio

6 Findings, suggestions, conclusions

7 Bibliography

Annexure
EXECUTIVE SUMMARY

A well designed and implemented working capital management is expected to


contribute positively to the creation of a firm’s value. “Working Capital” is the capital invested
in different items of current assets needed for the business, viz, inventory, debtors, cash and
other current assets such as loans & advances to third parties. Those current assets are essential
for smooth business operations and proper utilization of fixed assets. The firm should maintain
sufficient level of working capital to produce upto a given capacity and maximize the return on
investment in fixed assets. Shortage of working capital leads to lower capacity utilization, lower
turnover and hence lower profits. Working Capital, in excess of the amount required to produce
to full capacity, is idle and consequently leads to decline in profits. Hence the dictum “Adequacy
is a virtue, surfeit is not”.

This study concentrates on the main components of working capital like inventory
management, accounts receivable management and cash management of HNL for the period F.Y
2004-2009. The tools used in this study includes ratio analysis, trend analysis and percentage
method.

CHAPTER-1

INTRODUCTION
INTRODUCTION:

Every business whether big, medium or small, needs finance to carry on its
operations and to achieve its target. Infact, finance is so indispensable today that its
rightly said to be the lifeblood of an enterprise. Without adequate finance, no
enterprise can possibly accomplish its objectives. So this chapter deals with
studying various aspects of working capital management that is necessary to carry
out the day-today operations. The term working capital refers to that part of firm’s
capital which is required for financing short term or current assets such as cash,
marketable securities, debtors and inventories funds invested in current assets
keep revolving fast and are being constantly converted in to cash and this cash
flows out again in exchange for other current assets. Hence it is known as revolving
or circulating capital. On the whole, Working Capital Management performs a key
function and is of top priority for every finance manager. All managers must,
however, keep in mind that n their pursuit to liquidity, they should not lose sight of
there basic goal of profitability. They should be able to attain a judicious mix of
liquidity and profitability while managing their working capital.

OBJECTIVE OF THE STUDY

PRIMARY OBJECTIVE:
1. To analyze the firm’s Working Capital position.

2. To study the working capital performance of the company.

SECONDARY OBJECTIVE:

1. To determine the composition of current assets and current liabilities.

2. To study the operational performance of the company.

3. To study the financial performance of the company for the last 5 years.

4. To ascertain the liquidity, solvency and profitability positions of the firm.

5. To study the stock level.

SCOPE OF THE STUDY

The study is on working capital management of Hindustan Newsprint Ltd, Kottayam. The study
furnishes the management of idea about the performance of working capital of the company.
Management of working capital refers to management of current assets, current liabilities and
relationship between them. The basic goal of working capital is to maintain the satisfactory level
of working capital. A sound working capital policy ensures higher profitability and proper
liquidity of a firm. Every business needs funds for two purposes: for its establishment and to
carry out its day to day operations. Similarly HNL also need funds to carry out its operation and
establishments. For this purpose it is important for the company to manage its short term assets
and liability.
Working capital is quite essential for the working of any business. For a good
manufacturing company, some basic capital for producing the goods is required before it starts
selling them. It has to take care of production expenses, administration expenses as well as
selling expenses. Moreover, since business is usually done on credit, there is a time lag between
the date of sale and date of receipt of revenues, which can be as high as 90 days at times.
Considering all these, it is essential that a company has sufficient capital to keep it going before
it coverts its purchases into goods and then finally into cash.

Each and every study has its own scope. This project intends to study the working capital
position of the HNL.This study helps to identify the areas that could be improved. Further
suggestions were quoted which the company could use it in the future program enhancing better
utilization of all resources.

METHODOLOGY

The study exhibits both descriptive and analytical character. Regarding the theoretical concept it
is descriptive since it interprets and analysis the secondary data in order to arrive at appropriate
conclusion, it is also analytical in character. The interpretation of data is done based on ratio and
percentage

PRIMARY

Primary data has been obtained through personal discussions with managers and senior officials
of the organization.

SECONDARY
Secondary data’s has been obtained from published reports like the annual reports of the
company, balance sheets, and profit and loss account, booklets, records such as files, reports
maintained by the company. Mainly the annual report consists of two parts;

1) Profit and Loss Account

2) Balance Sheet

Profit and loss account reveals the income and expenditure of the company. Balance Sheet
reveals the financial position of the organization. Those two statements are prepared by the
highly qualified and experts with the help of available information or data.

TOOLS USED FOR THE ANALYSIS

1. Trend Analysis

2. Ratio Analysis

3. Operating Cycle Analysis

4. Working Capital Leverage Analysis

5. Schedule of changing in working capital

PERIOD OF STUDY

The present study deals with the data collected from the annual reports and other relevant
documents for the period commencing from 2004-2005 to 2008-2009.

LIMITATIONS

 The data’s were collected mainly on the basis of secondary data. So all the limitations of
secondary data are applicable.

 Due to busy work schedule, detailed discussions were not possible.


 The data collected for the study was historic in nature, so the suggestions will be
irrelevant.
CHAPTER- 2

INDUSTRY PROFILE

INDUSTRY PROFILE

Paper is one of the important industrial products used for the production of books, magazines
and newspaper. Educational, government and industrial sectors cannot operate without paper.
Other important paper products include cardboard, which is used in packing and adsorbent paper
such as tissue and towels. The different type of the paper being produced is paper, paperboards
and newsprint. Newsprint is a major material input into production of newspapers. During the
course of analysis of the paper industry there is an imperative need to study the prospects of
newsprint industry.

Prior to 1956, India did not have any newsprint mill. Hence, imports alone met the demand
for newsprint in India. It was only in early 1956 that the first mill, owned by government, came to
produce newsprint in India. Since then additional government-owned and many private mills had
sprung up. At present, the newsprint manufacturing industry consists of 73 mills. Five of the mills
are “large”, and these account for about one-third of the total installed newsprint capacity in India.
However, by current international trends it is debatable whether all five mills can be regarded as
“large.” The industry, consisting of many small mills that use obsolete technology and machines,
is further characterized by relatively high costs of papermaking fibre, energy and transport.

In addition, the quality of newsprint produced tends to be poor. India’s newsprint


manufacturers, particularly its medium to small mills, have difficulty competing against imports.
The problem is however not confined to newsprint industry; it extends to India’s several
manufacturing industries ― a lingering result of government policies in the past (Kochhar, et al.
2006). As a result of the introduction of economic liberalisation policies and other developments
since early 1990s, the industry situation is improving but not fast enough to keep pace with the
rising demand for newsprint by the rapidly expanding newspaper industry.
Notwithstanding the problem of competing against newsprint imports, India has been exporting
newsprint on a regular basis since early 1990s. But the quantities have been relatively tiny. In
contrast, imports have been huge. Not surprisingly, the gap between imports and exports has
widened over time.

India turned into a significant net importer of newsprint in 2005, when it was the world’s fifth
largest importer of newsprint. The top four world importers in descending order were the United
States of America, the United Kingdom, Germany and China. Leading suppliers of newsprint to
India were Canada and Russia, together accounting for 60-70 per cent of India’s total imports.

In 2005, India’s net imports satisfied 53 per cent of its total consumption of 1.3 million tons
of newsprint. To put India’s newsprint consumption in perspective, Australia’s newsprint
consumption for the same year was 0.8 million ton and Korea’s 1.0 million ton. Continuing with
international comparison: India was the third largest consumer of newsprint in Asia, with Japan
the second largest at 3.9 million tons and China the largest at 4.1 million tons.

Based on the estimated model and specific assumptions about future prices of newsprint and
economic growth rates, we forecast that consumption of newsprint in India could be 3.1 to 3.7
million tons by 2010.
The demand of the newsprint is dependable on literacy rate of the population, number of
magazines and newspaper etc. The increase in rate of literacy now will hike newsprint demand.
It’s estimated that newsprint segment will grow by 6-7% in the next coming years.

WORLD SCENARIO

International trade in the paper industry has not been significant. In the world, United States
consumption of paper and cardboard averages about 300 kilogram per person each year. Nearly
64 million metric tons of paper and cardboard are produced in the United States annually. Paper
industry tends to be concentrated in those countries that are industrially advanced and have
abundant supplies of fibrous raw material wood.

There is large-scale international trade for wood pulp; pulpwood is flowing from those countries
with large forest resources to those countries that are under-developed. The Chinese are credited
with the invention of paper in AD 105. From China the knowledge of papermaking traveled
gradually westward and the Arabs are known to have made paper in the eighth century. As the
art progressed westward through Morocco and through Spain in Europe, the process was
constantly improved.

The major restructuring programmes embarked upon world’s leading paper companies in 2005
will not begin to be reflected in full year results until the end of the 2006 financial year. Hence
International Paper, Stora Enso and Svenska Cellular (SCA) retained their one-two-three spot in
Paper and Pulp International top 100 for 2005 and each with an increase in net sales. For the top
100 as a whole, net sales from pulp paper and converting operations were up 3.7% and $ 281,
175.6 million. Earning however remained depressed at a combined total of $ 17, 905.1 million,
compared to $ 19,764.4 million for same for same top 100 companies year earlier.

The future of this industry is very bright. Word paper and board demand has grown rapidly over
three consecutive years reaching to a record of 359 million tons in 2004. The growth has been in
the east and south, namely Asia-Pacific, Eastern Europe and South America. The new forecast
for long term paper demand and supply looks at what seems contradictory-a slowing demand but
an explosive growth. The shift in growth from west to east and from north to south was particular
dramatic in 2001 to 2204. In this period Asia accounted for 64% of the global demand growth,
while North America and Western Europe contributed only 11% and 10% respectively. Eastern
Europe only has 4% of global market, but earned 9% of the global demand growth in that period.
If prospects are modest in the industrial west, they are dramatic in the BRIC countries with
Asia’s share of global production raising from 35% to 42% Asia will be responsible for 60% of
the growth of which china and India will be the leaders.

INDIAN SCENARIO

Newsprint is a special type of paper used in newspaper and magazines. At present there are 22
newsprint-manufacturing units in our country with a total capacity of 600000 TPA, of which 5
public sectors unit alone constitutes 63% of the total capacity. Demand for newsprint, which is
dependent on the literacy rate and growth of newspaper and magazines publishing industry has
increased every year. Imports have a significant impact on the industry. Newsprint pricing is
expected to grow by around 6.5% per annum while supply may grow at a much slower pace The
total manufacturing capacity of 6 Lakhs tons constitutes by 22 mills manufacturing newsprint in
the country, of which 5 are public sector units. Wood based units constitute about 58% of the
total capacity while agro and waste paper based unit’s accounts for 23% and 19% of the
newsprint capacity respectively. All public sector units with the exception of TNP are wood
based.

The paper industry in India is more than a century old. At present there are over 600 paper mills
manufacturing a wide variety of items required by the consumers.

These paper mills are manufacturing industrial grades, cultural grades and other specialty
papers. The paper industry in India could be classified into 3 categories according to the raw
material consumed.

1. Wood based
2. Agro based &
3. Waste paper based

While the numbers of wood based mills are around 20 and balance 580 mills are based on non-
conventional raw materials.

The Govt. of India has relaxed the rules and regulations and also relicensed the paper industry to
encourage investment into this sector and joint ventures are allowed and some of the joint
ventures have also started in India. The paper industry in India is looking for state-of-art
technologies to reduce its production cost and to upgrade the technology to meet the international
standards.

It is estimated that the paper industry would be growing at the present rate of 7-8% of
compounded rate and would require 9.5-10 million MT by the end of the decade from the
existing production of around 6.7 million tones.

resulting in increased imports.

Estimated Demand of Paper in the Country

• The demand is growing @ 7% to 8% CAGR per Annum and is likely to reach to 9.5-10
million MT by the end of decade
• Projected Demand in Million Tones is 8.100 by 2006-07, 8.500 by 2007-08 and 9.00
respectively.

The Indian paper industry has been exposed to direct competition from international players in
the recent times after import duties where lowered to favor the entry of such competitors. From
a height of 140%, the duties were reduced to a low of 20% in as span of 5 years. The import
duties have been currently fixed at 30%. The newsprint mills have been adversely affected by
this decision of the government. Due to overall all rise in costs, the paper mill began activities to
generate the economies of scale .Several of the mills went on a cost cutting measure by
generating their own power and electricity via co-generation. The medium sized paper mills too
followed the suit observing the success of the large scaled mills. In spite of these measures being
taken ,the Indian paper industry still confronts various other challenges, such as uncertain
market condition. Due to these reasons some small companies are compelled to shut down as
they could not meet the rising cost of operation and could not confirm to the norms and standards
set by Pollution Control Board.

The share of newsprint in the total cost of production of newspapers is likely to vary across
newspapers and over time. However, the fact that this share for the Hindustan Times group of
newspapers in India is currently around 40 to 50 per cent shows that newsprint is a major
material input into production of newspapers (HT Media Ltd, 2006).

Over the 25 years, production, imports, exports and consumption of newsprint in India have all
had rising trends . Some computed trend growth rates indicated that the average annual growth
rate of production was 7.6 per cent, imports 5.4 per cent and consumption 6 per cent. In the first
half of the period, the consumption growth rate was 3.8 per cent a year; the rate more than
doubled to 8.8 per cent in the second half, indicating acceleration in newsprint consumption by
India's newspapers.

STATE SCENARIO

Hindustan newsprint ltd is a government company in the central public sectors. Hindustan
Newsprint Ltd was incorporated as a wholly owned subsidiary of the Hindustan Paper
Corporation limited (HPC) on June 07, 1983. HNL produces exceptional quality newsprint for
the Indian and International market. The strength properties of HNL newsprint are comparable to
the best in world market. In 1998, HNL became the first newsprint manufacturers in the country
to achieve the coveted ISO-9002 certification.
CHAPTER-3

HINDUSTAN NEWSPRINT LIMITED

PROFILE

COMPANYPROFILE

Hindustan Newsprint Limited (HNL) is a Government of India Enterprise under the


administrative jurisdiction of the Department of Heavy Industry, Ministry of Heavy Industries
and Public Enterprises. HNL was incorporated as a wholly owned subsidiary of the Hindustan
Paper Corporation limited (HPC) on June 07, 1983.
The Government of India had established HPC on May 29, 1970 for developing indigenous
capacity in production of paper and newsprint with a view to reduce dependence on imports.
HPC launched the Kerala Newsprint Project (KNP) in 1976. The Kerala Newsprint mill rolled
out the first newsprint reel on February 26, 1982 and went into commercial production with
effect from November 01, 1982. HNL took over the business of KNP with effect from October
01, 1983.

The core competence of HNL lies in its highly skilled technical manpower, which is rated as the
best in the domestic Newsprint industry and the quality of its product , which is comparable with
international standards. The fact that HNL maintains its profitable track record in a very
challenging post-liberalized business environment characterized by abysmally low import duties
(3%) which is quite lower than even the WTO bound rates (25%) without any protection, support
or preferential treatment stands testimony to the international competitiveness of the company.

Business mission

“The objective of HNL is to be a dominant player in Indian pulp and paper industry by adopting
world class environment friendly technologies and best practices”.

Today, HNL produces exceptional quality newsprint for the Indian and International market. The
strength properties of HNL newsprint are comparable to the best in world market. It is a matter
of great pride for the company that its product is always compared with imported newsprint.
HNL, with its state-of-the-art technology, has emerged in its short span of operations as a
company that is truly contemporary in a global context.

The Quality Management System has been recertified to ISO 9001: 2000 in November 2002.
HNL is also certified to ISO 14001: 1996 in October 2000 for its Environment Management
System. The QMS was recertified in 2003. Fully integrated enterprise resource planning (ERP)
system in vogue since the year 2001 has enabled the company to streamline the processes and
procedures and made it an agile user of IT.

Presently, the company is in the process of implementing a strategic business plan for up scaling
its production capacity with up gradation of the product portfolio. Cabinet committee on
economic affairs (CCEA), Government of India has accorded approval for the project on May 9,
2006. The expansion cum diversification project(EDP),includes a 1,70,000 tons per annum paper
machine ,100 tons per day De-inking plant and a power block consisting of a 150 tons per hour
boiling and a 25 MW Turbo generator with all the associated facilities.

EDP is a brown field project. It would closely integrate the present manufacturing facility with
the proposed one. The EDP configuration is tightly optimized by maximizing the utilization of
present space, land, infrastructure, and auxillaries etc.Environment-friendly and state -of -the -art
technology solutions are formulated as part of the process configuration. The product grades
from the EDP are slated to compete with the best in class . Maphlitho/non-surface sized paper,
copier paper and film coated varieties are included in the product portfolio of EDP.

With the launch of EDP, HNL expects to seize the emerging opportunities in the writing and
printing segments of the industry. In addition, EDP will upscale the capacity to reasonable levels
while significantly mitigating the risks inherent with a single product.

The Company has established an OH&S Management system in accordance with the
requirement of OHSAS standard, 18001:2007. The Occupational Health and Safety Assessment
Series (OHSAS) specification gives requirement for an Occupational Health and Safety
Management System to enable the organization to control its OH&S risk and improve its
performance. A system of this kind enables an organization to develop an OH&S policy,
establishes objectives and processes to achieve the policy commitments, take action needed to
improve its performance and demonstrate the conformity of the system to the requirements
OHSAS standards to support good OH&S practices, in tune with Socio-Economic needs.

HNL AS A RESPONSIBLE CORPORATE CITIZEN


It is said that in today’s fast changing technological situation, one has to keep running to stay at
the same place. Keeping in view this dictum,HNL has been making continuous effort to upgrade
its technology, to modernize its machines and equipments and fully utilize their inbuilt capacity,
to reduce cost, to eliminate waste, to conserve scarce resources like energy, raw materials, etc
and to implement effective measures for environmental protection. At the same time, HNL has
also implemented several welfare schemes not only for its employees and their families but also
to the general public at large in the neighboring areas.HNL has also substantially contributed all
these years to the revenues of both state and central governments. On the whole , HNL has
emerged as a very responsible corporate citizen.

HNL’S credentials in pollution control and in piloting environment friendly methodologies for
newsprint production have been widely acknowledged. Kerala state pollution control Board has
awarded the company with first place among among large scale industries in the year 2005 and
second place in 2006 in making substantial and sustained efforts in pollution control. HNL has
been ranked with ‘two leaves ‘rating in the green rating exercises conducted in the years 1999
and 2004 by centre for science and environment (CSE) New Delhi.

At HNL, pollution control is an integral part of production. In tune with National priorities and
social obligations, HNL has adopted a policy of reciprocating the gifts of nature.

The effluent treatment system initially installed at a cost of Rs.46 million has been upgraded in
1994 with an additional investment of Rs.52 million. Annually the company spends Rs.25
million for effluent treatment. In-plant control measures have substantially lowered fresh water
consumption. Generation of waste water is minimal and in keeping with the national standards.
HNL is the only mill in the country, which, in addition to meeting all parameters for effluent
treatment, decolorizes the effluent before discharge. HNL is also the first to substitute 90% of
chlorine in bleaching with environment friendly Hydrogen peroxide thereby reducing toxic
discharges.
• HNL has been successful in bringing down solid waste to near zero level.

• Entire fly ash has been utilized by an auxiliary unit for producing Portland Pozzolona
cement.

• Bottom ash is used for making construction bricks.

• Lime sludge is reburned to produce the lime required in the production process.

• Chipper waste, DIP sludge and effluent sludge are utilized as secondary fuel in FBC boilers.

HNL has Electro Static Precipitators (ESP) and Dust Collectors to control atmospheric
pollution and to preserve the lush green vegetation of over 30,000 trees around the plant, this is
no small achievement. The United Nations Environmental Programme (UNEP) has selected
HNL as the model paper mill in the Asia Pacific Region under its NIEM programme. Besides
this, HNL has bagged the Kerala State Pollution Control awards in 1997-98, 1999-2000 and
2002 for the best pollution control measures and processes adopted in the mill.

A survey of the Indian Pulp and Paper Industry, the first-ever "Green Rating" exercise in the
country by the Centre for Science and Environment (CSE) and supported by the Union Ministry
of Environment and Forest and the United Nations Development Programme (UNDP) has rated
HNL among the first five environment friendly paper mills.

Newsprint of HNL has following characteristics:-

• Capacity to see through, as the newspaper is printed on both sides.

• Suitable to run with the modern high printing process without any break.

• Brightness level at par with that of the imported newsprint.


• Less bulky newspaper due to low gram mage.

• Capacity to absorb instantaneously the mineral oil present in the printing ink to avoid
blurring of impression.

The Environmental Management System which has been ISO 14001 certified since October
2000 is in place in the company, focusing on continual improvement in pollution abatement
measures and adhering to the norms prescribed by the Kerala State Pollution Control Board. The
Company has already met the majority of action points as per charter on Corporate
Responsibility for Environmental Protection (CREP).

The company has given due importance to the development of Human Resources by imparting
need based training to the employees to equip them to meet their individual task demands as well
as organizational objectives.

Management of the company is vested in the hands of Board of Directors, including a chairman.
The number of directors of the company should not be not less than two and more than twelve.

The chairman and M.D of HPC (Hindustan Paper Corporation) shall be chairman of the
company and all other directors are appointed by HPC with the approval of the President of
India. Presently,Sri. Raji Philip is the chairman and Sri. N. P. Prabhu is the MD of the company.

AWARDS
MOU Excellence Award

Hindustan Paper Corporation was bestowed with the prestigious MoU Excellence Award for
performance during the FY 2005-06.

The Memorandum of Understanding (MoU) is a mutually negotiated agreement between the


Public Sector Enterprises (PSEs) and the Government of India. Under this agreement, a PSE
undertakes to achieve the targets set out at the beginning of each financial year. The MoU covers
both financial and non-financial parameters and the performance is measured on a weighted 5-
point scale. The MoU award was given only to the top ten PSEs securing excellent rating.

National Energy Conservation Award

Hindustan Newsprint Limited has been selected for the certificate of Merit in the Pulp and Paper
sector for the National Energy Conservation Awards-2005.

State Pollution Control Board Award

Hindustan Newsprint Limited bagged the second prize for pollution control activities in the
category of large-scale industries, instituted by Kerala State Pollution Control Board for the year
2007.The award was a true recognition to the sustained efforts and commitment of HNL in
preserving the environment

Productivity Award

Hindustan Newsprint Limited got productivity award for the year 2007-2008.

Production Process
a) Input Requirements

• Fibrous raw materials like wood, reed, bamboo etc.

• Old Newspaper (ONP) and Old Magazines (OMG) for De-Inking Plant

• Chemicals used in pulp and paper making like caustic soda, hydrogen peroxide etc.

• Packing materials like kraft paper, grey board etc

• Imported machineries and spares

• General spares like motors, bearings etc.

• Fuels like coal, furnace oil etc.

Fiberous raw material:

HNL meets a major portion of its requirement for fibrous raw materials from forest sources. The
credit for the superior quality of HNL newsprint goes to the unique raw material: Reed
(Ochlandra travancorica) which is a specialty of Kerala forests. The company has a long-term
agreement with the Government of Kerala for the supply of Eucalyptus wood and Reed from
state forests. Dwindling forest resources has led to this supply getting diminished in the past few
years.

HNL has developed appropriate alternatives by:

• Raising captive plantations using own resources and technical know-how on land allotted
for that purpose by Govt. of Kerala, and also on vacant land made available by various
institutions like Railways.

• Encouraging pulp wood cultivation on agricultural land through implementation of farm


forestry schemes.

• Procuring raw materials from neighbouring states where they are available.
• Buying Eucalyptus, Bamboo and other 'pulpable' raw materials from local suppliers and
farmers directly under "Purchase at Gate" scheme.

• Farm forestry scheme is implemented with the active participation of voluntary /


Nongovernmental Organizations (NGOs). Pulp wood seedlings of various species such as
Eucalyptus, Acacia, Mangium, Bamboo, Reeds etc. are distributed through NGOs.

• High yielding clonal pulp wood plantlets developed at HNL clonal complex are also
distributed at subsidised rates. Approximately 155 lakh seedlings have been distributed
through this scheme among farmers all over Kerala.

• Purchase at gate scheme was launched in 1998 as a complementary programme to Farm


Forestry scheme. As per this scheme, pulp wood materials are purchased directly from farmers
at a remunerative price at the company gate doing away with middle men.

Brief description about process flow:


CUSTOMERS

Newspapers printed on HNL newsprint greet millions of Indians daily morning. It is the
information carrier to millions. HNL Newsprint is preferred by the major publishing houses in
the country. Malayala Manorama, Mathrubhumi, Deshabhimani, Kerala Kaumudi, Mangalam,
Madhyamam, The Hindu, The New Indian Express, Sanmarg, Ananda Bazaar Patrika, Eenadu,
Vartha, Andhra Jyothi, Vijay Anand Printers, Deccan Chronicle, Deccan Herald, Lokprakashan,
Dinamalar, Sandesh, Thuglak, Kalki, Rashtra Deepika, Chandrika etc. are the majors among
HNL customers across the country. HNL is also establishing its market in Srilanka and Malaysia.

Earnings Per Share


Table 1

Year Face value of a share EPS


2004-2005 10 0.51
2005-2006 10 0.9
2006-2007 10 3.87
2007-2008 10 1.39
2008-2009 10 1.26
Number of Employees

HNL has a rich pool of qualified and experienced managerial and technical personnel with
total staff strength of 1035 permanent employees, out of which 761 employees (74% of the total
manpower) are technical staff, 89 supervisors and seniors, 185 officers. The company has a good
strength of contract workers also. The company has a harmonious industrial relation with the
management and trade unions.

The following four shifts are practicing at HNL i.e. General shift, A Shift, B Shift, C
Shift. The timing is as follows:

General Shift: 9 AM to 5.15 PM

A Shift: 6 AM to 2 PM

B Shift: 2 PM to 10 PM

C Shift: 10 PM to 6AM

PROGRESS MADE BY HNL

HNL has made steady progress in all its activities ever since its commissioning in the early
1980’s. Production, productivity and profitability were continuously registering upward trends.
During the year, 2003-04, HNL could achieve a peak production of 1, 12,555 tonnes of 49/45
GSM Newsprint. In matters of Human Resource development, HNL has made spectacular
progress. The officers and employees have been continuously upgrading and sharpening their
knowledge skills and innate capabilities. They form a dedicated and committed team. It is this
dedicated team of officers and employees, which is responsible for the continuous progress made
by the company in fulfilling its objective.

PRODUCT PROFILE

HNL produces a wide range of newsprint grades. Initially, the company was producing 52 GSM
(Grams per Square Meter) newsprint. Later, to meet changing market demands, HNL
commenced production of 48.8 GSM newsprint. As requirement for newsprint with still lower
GSM increased, HNL started production of 45 GSM newsprint also. HNL maintains consistent
quality in all grades of newsprint that it manufactures. At the time of commissioning in 1982,
HNL was producing newsprint having brightness of just 48-50 % ISO. Later, it switched over to
a superior and eco-friendly technology in bleaching using Hydrogen Peroxide (H202). This
change enhanced the brightness to 53-55% ISO. The company’s competitors soon followed suit.
Always a step ahead, HNL further advanced the brightness levels and is at present producing
newsprint with 55 - 58 % ISO.

Better brightness, better product!

Salient Features
Grammage 48.8 / 45 GSM
Colour Standard / Pink
Brightness 55 - 58 % ISO
Size of reel 34 cm to 163 cm

Today, brightness level is at par with that of imported newsprint. Further improvements are
possible by putting a premium value on the product.

In terms of quality, HNL newsprint has an enviable position in the domestic newsprint market
being comparable to the world-class product standards. HNL is highly customer focused and
cherishes good relationship with them. Regular visits are made by HNL’s production managers
to newspaper establishments to understand the customers’ demands. It is found that press room
operators favour HNL newsprint for its excellent runability and printing properties. The
production technology at HNL is modified to match exacting requirements of sophisticated high-
speed printing machines. The quality of the product is given primary importance in the quality
policy at HNL.
Newsprint is the major input for the newspaper industry. Quality newsprint provides excellent
prints to satisfy the discerning and demanding readers - the ultimate customers of the product
HNL commands leadership position in the domestic newsprint market. HNL’s current product
range is from 48.8 GSM to 45 GSM, standard and pink newsprint. Quality of HNL newsprint is
well accepted in the market and services of HNL's marketing department have been appreciated
by customers across the country.

Today, HNL produces exceptional quality newsprint for the Indian and International market.
The strength properties of HNL newsprint are comparable to the best in world market. It is a
matter of great pride for the company that its product is always compared with imported
newsprint. HNL, with its state-of-the-art technology, has emerged in its short span of operations
as a company that is truly contemporary in a global context.

OPERATIONAL AND FINANCIAL LEVERAGE

During the year 2008-2009 under review company could reach almost equal levels of operational
performance when compared with previous year. The company as a whole was dismaying with
the production of 1,08,005MTY as against the highest ever achieved production of 1,16,111 MT
in the previous year and sales of 87,476MT with sales turn over of Rs 297.67in the year ending
31st march 2009against 116111MT at a value of Rs 298.61 crore during the previous year.

The highlights performance of the company during financial year 2008-2009 together with
corresponding figure for the previous year are given below:

PRODUCTION SUMMARY

2008-2009 2007-2008
INSTALLE
PARTICULA D PRODUCTIO CAPACITY PRODUCTIO CAPACITY

RS CAPACITY N UTILIZATIO N UTILIZATIO


(MT) (MT) N % (MT) N %

Saleable news
print 100000 108005 108 116111 116
Chemi
mechanical 60000 50118 84 50846 85
pulp

Chemical pulp 27400 15545 57 16478 60

De linked pulp 33000 29880 91 34805 105

FINANCIAL RESULTS

PARTICULARS 2007-2008 2008-2009

Sales income 29861 29767

Operating profit (PBDIT) 3049 3446

Interest 59 134

Cash profit (PBDT) 2990 3312

Depreciation and write-off 1180 1202

Profit before tax 1810 2110

Profit after tax 1154 1264

FUNCTIONS OF FINANCE DEPARTMENT

Finance department is maintaining a computerized material accounting system. The GRV’s


received from the stores are placed against the purchase order and the supplies bill. They are
given to the computer section and in batches. The issue vouchers also received in the stores from
various departments is fed to the computer. The computer section maintains a master file
schedule approximately 40,000 items. This is updated on monthly basis. GRV/IV (issue voucher)
transactions are also created on monthly basis. These transactions are matched with the master
and priced stores ledger and are prepared on a monthly basis. The following are statements
prepared every month:-

• Price stored ledger.


• GRV analysis for material receipt accounting.
• IV analysis for consumption accounting.
• Stock statements.
• Cost center wise issues analysis for costing purpose.

Financial accounting functions

The major functions of the finance department are as follows:

• Establishment section.
• Work section.
• Sales section.
• Cash section.
• Purchase bill section.
• Price stored ledger section.
• Raw material section.
• Compilation section.
• Costing and MIS section.
• Insurance

• Establishment section:
The establishment section‘s function are the preparation of salary, PF accounting, income tax,
ESI accounting, leave accounting, accounting of loans and advances, bonus calculations,
incentive calculation etc. The functions of this section are:

 Concurrence- administration power is delegated to various officers subjected to financial


concurrence. The proposal relating to establishment matters are to be examined in this
section with reference the rules, procedures, budget provisions, pervious practices etc and
concurred in before competent authority approves it.
 Payment- all payments relating to the establishment matters are to be released from
establishment section. The claims and other regular payments are checked with reference to
the rules and sanction and payment vouchers are prepared and send to cash section under the
sign of delegated officers for releasing payment.
 Accounting- all the payments are debited to relevant head of accounts as per the
nomenclature prescribed the compilation section. Manual compilation sub-ledger is to be
maintained for the payment, as per the requirements.

• Work section.
Work section deals with various contracts for issuing the work order and also checks the bills
received from contractors duly certified by concerned departments and makes the payments.
Work section also prepares the journal entries for general ledger. The entries are done manually.

 Making payments for civil, mechanical, electrical and other contract bills.
 Maintaining the EMD and security deposit register.
 Maintaining records for bank guarantee.
 Preparation of contractor sub ledger.
 Preparation of annual accounts closing schedules.

• Sales section
Sales section receives the dispatch advices, RNI allocation etc from the distribution section and
forwards to the compilation section for preparing invoice and sales accounting. Based on the
output received from compilation section the necessary journal entries are prepared for general
ledger. Computer section also maintains sundry debtors sub debtor.

• Cash section.
Cash section prepares all bank vouchers for the receipt. All the cash/bank vouchers for payment
are received in the cash section from various sections. These vouchers are sent to the compilation
section. This data is maintained in the compilation section for the general ledger.

 Receipt and payment of cash against voucher and the accounting.


 Preparation and issue of the cheque and DDs against vouchers received from section,
preparation of the bank receipt and fund management and investment of surplus funds.

• Purchase bill section


Purchase bill section receives a copy of the purchase order from the purchase department, they
also receives bills cashed by suppliers for payment. A copy of payment voucher is sent to the
computer section for purchase analysis and sundry creditors accounting. They prepare journal
entries for general ledger. The functions are as follows:-

 Making payments for purchase of the spare parts, consumable stores, diesel oil, lubricant
chemical, craft paper, stationery, items, medicines, coal, capital items, and imported items.
 Payment of transportation bills of authorization transporter.
 Marinating EMD and SD register.
 Marinating records for bank guarantees follow up action for extension.
 Deduction and remittances of income tax.
 Valuation of GRV’s and adjusting advances.
 Compilation of purchase analysis and preparation of journal vouchers for final accounts.
 Preparation of sundry creditors sub ledger.
 Preparation of closing schedules.

• Price stored ledger section.


PSL section receives GRV’s and issues vouchers from the stores. GRV’s after pricing and also
posting the debtors/creditors accounting member and IV’s after posting the debtors/creditors
numbers are sent to the compilation section for processing the price ledger and GRV/IV analysis.
PSL section prepares the journal entries for the general ledger and based on the computer output.

• Raw material section.


Raw material procurement section receives token from the log yard through the laboratory and
forward to the compilation section for processing the transportation bills and royalty statement.
They also prepare journal entries for general ledger.
• Compilation section.
Compilation section receives the cash/bank vouchers and journal vouchers from other sections
for processing the transportation bill and forwards to compilation section for preparing cash/bank
books, general ledger, profit and loss account and balance sheet. They also receive inputs
regarding adds/deletion of fixed assets and forwards to the computer section for preparing fixed
assets register, depreciation calculation etc.

 Compilation of monthly accounts.


 Compilation and finalization of annual accounts.
 Furnishing of CMA data and periodical statements to bankers.
 Corporate taxation matters.
 Arranging loan funds from financial institutions and its accounting.
 Fixed assets and its depreciation.
 Liaison with statutory and government auditors.
 Furnishing of information to various agencies and other miscellaneous assignments.
 Calculation of bonus and productivity linked incentives.

• Costing and MIS section.


Costing section is involved in preparing the cost sheet based on the budgeted cost. The inputs to
the costing system are received from the financial accounting system and also from technical
information cell. It’s organized as a part of finance department. Inputs relating to the production,
consumption of raw material and chemical and other utilities are received from plant through the
technical information all on a daily basis. Monthly cost sheets are prepared on the actual costs.
Comparative statements are prepared to analyze the cost variances between budgeted rate and
annual rate.
• Insurance section
The major functions of the insurance section are:

 To ensure adequate insurance cover for all the fixed assets, stock, plantation, cash, goods-in-
transit etc.
 Reduce cost o insurance premium.
 To ensure claims for the loss risen at times.
 To follow up the claims to ensure speedy settlement.
CHAPTER -3

THEORETICAL REVIEW
BACKGROUND OF THE STUDY

In our present day economy, finance is defined as the provision of money at time when it
is required. Every business whether big, medium or small, needs finance to carry on its
operations and to achieve its target. Infact, finance is so indispensable today that its rightly said
to be the lifeblood of an enterprise. Without adequate finance, no enterprise can possibly
accomplish its objectives.

A firm is required to maintain a balance between liquidity and profitability while


conducting its day to day operations .liquidity is a precondition to ensure that the firm are able to
meet its short term obligations and its continued flow can be guaranteed from a profitable
venture. The importance of cash as an indicator of continuing financial health should not be
surprising in view of its crucial role within the business. This requires that business must be run
both efficiently and profitably. In the process, an asset-liability mismatch may occur which may
increase firm’s profitability in the short run but at a risk of its insolvency. On the other hand, too
much focus on liquidity will be at the expense of profitability. Thus, the manager of a business
entity is in a dilemma of achieving desired tradeoff between liquidity and profitability in order to
maximize the value of a firm

Working capital management deals with the most dynamic fields in finance, which needs
constant interaction between finance and other functional managers. The finance manager acting
alone cannot improve the working capital situation.

In recent times,a few case studies regarding management of working capital in selected
companies have been in order to make in-depth analysis of the several experts of working capital
management, The finding of such studies not only throws new lights on the technical loopholes
of management activities of the concerned companies , but also helps the scholars and
researchers to develop new ideas ,techniques and methods for effective management of working
capital.

An effort has been made to make an in-depth study of working capital management with special
reference to Hindustan Newsprint Limited, Kottayam.

LITERATURE REVIEW
WORKING CAPITAL MANAGEMENT

The funds required by every business organization can be broadly classified in to fixed
capital and working capital. Fixed capital is need for the acquisition of fixed assets. Fixed assets
constitute the basic tools or the means of production. Investment in fixed assets by itself is dead
investment and the funds so locked up do not circulate. In the same every business organization
requires some funds to carry on its operations and to produce goods for sale to earn profit. These
funds, which are represented by the current capital used through the various stages of production
and distribution, are invested in current assets.

“Working Capital” is the capital invested in different items of current assets needed for
the business, Viz, inventory, debtors, cash and other current assets such as loans & advances to
third parties. Those current assets are essential for smooth business operations and proper
utilization of fixed assets. The firm should maintain sufficient level of working capital to
produce upto a given capacity and maximize the return on investment in fixed assets. Shortage of
working capital leads to lower capacity utilization, lower turnover and hence lower profits.
Working capital, in excess of the amount required to produce to full capacity, is idle and
consequently leads to decline in profits. Hence the dictum “Adequacy is a virtue, surfeit is not”.

IMPORTANCE OF ADEQUATE WORKING CAPITAL

The importance of adequate working capital in commercial undertakings can never be


over emphasized. A concern needs funds for it’s day-to-day running. Adequacy or inadequacy of
these funds would determine the efficiency with which the daily business may be carried on.
Management of working capital is an essential task of the finance manager. He has to ensure that
the amount of working capital available with his concern is neither too large nor too small for its
requirements. A large amount of working capital would mean that the company has idle funds.
Since funds have a cost, the company has to pay huge amount as interest on such funds. The
various studies conducted by the Bureau of Public Enterprises have shown that one of the reason
for the poor performance of public sector undertaking in our country has been the large amount
of funds locked up in working capital. This results in over capitalization. Over capitalization
implies that a company has too large funds for its requirements, resulting in a low rate of return a
situation which implies a less than optimal use of resources. A firm has, therefore, to be very
careful in estimating its working capital requirements.

If the firm has inadequate working capital, it is said to be under-utilized. Such a firm runs
the risk of insolvency. This is because, paucity of working capital may lead to a situation where
the firm may not be able to meet its liabilities. It is interesting to note that may firms which are
otherwise prosperous (having good demand for their products and enjoying profitable marketing
conditions) may fail because of lack of liquid resources.

CLASSIFICATION OF WORKING CAPITAL


SOURCES OF
WORKING CAPITAL

ON THE BASIS OF
ON THE BASIS OF TIME
CONCEPT

GROSS NET PERMANEN TEMPAROR


WORKING WORKING T WORKING Y WORKING
CAPITAL CAPITAL CAPITAL CAPITAL

POSITI NEGATI REGUL RESER SEASO SPECIA


VE VE AR VE NAL L
WORKI WORKI WORKI WORKI WORKI WORKI
NG NG NG NG NG NG
CAPITA CAPITA CAPITA CAPITA CAPITA CAPITA
L L L L L L

Concept of working capital


There are two concepts of working capital they are:-

• Balance Sheet concept and


• Operating cycle concept

Under the Balance Sheet concept, there are two interpretations of working capital:

a) Gross working capital.


b) Net working capital.

Gross Working Capital


In the broad sense, the term working capital refers to the gross working capital and represents the
amount of funds invested in current assets. Thus, the gross working capital is the capital invested
in total current assets of the enterprise. Current assets are those assets which in the ordinary
course of business can be converted into cash within a short period of normally one accounting
year.

Net Working Capital

In a narrow sense, the term working capital refers to the net working capital. Net working capital
is the excess of current assets over current liabilities.

Net Working Capital = Current assets – Current liabilities

Net working capital may be positive or negative. When the current assets exceed the current
liabilities, the working capital is positive and the negative working capital results when the
current liabilities are more than the current assets.

The task of the financial manager in managing working capital efficiently is to ensure sufficient
liquidity in the operations of the enterprise. The liquidity of a business firm is measured by its
ability to satisfy short term obligations as they become due. Net working capital as a measure of
liquidity is not very useful for comparing the performance of different firms, but it is quite useful
for internal control. The net working capital helps in comparing the liquidity of the same firm
overtime. For purpose of working capital management, therefore, net working capital can be said
to measure the liquidity of the firm. In other words, the goal of working capital management is to
manage the current assets and liabilities in such a way that an acceptance level of net working
capital is maintained.

Nature of Working Capital

Working capital management is concerned with the problems that arise in attempting to manage
the current assets, the current liabilities and the interrelationship that exists between them. The
term current assets refer to those assets which in the ordinary course of business can be, or will
be, converted into cash within one year without undergoing a diminution in value and without
disrupting the operations of the firm. The major current assets are cash, marketable securities,
accounts receivable and inventory. Current liabilities are those liabilities which are intended, at
their inception, to be paid in the ordinary course of business, within a year, out of the current
assets or earnings of the concern. The basic current liabilities are accounts payable, bills payable,
bank overdraft, and outstanding expenses.
The goal of working capital management is to manage the firm’s current assets and liabilities in
such a way that a satisfactory level of working capital is maintained. The current assets should be
large enough to cover its current liabilities in order to ensure a reasonable margin of safety. Each
of the short term sources of financing must be continuously managed to ensure that they are
obtained and used in the best possible way. The interaction between current asset and current
liabilities is, therefore, the best main theme of the theory of working capital management.

Working capital is very essential to maintain the smooth running of a business. No business can
run successfully without an adequate amount of working capital. Working capital management is
concerned with the problems that arise in attempting to manage the current assets, current
liabilities and the inter-relationship that exists between them. In other words, it refers to all
aspects of administration of both current assets and current liabilities.

Source of Working Capital

The sources of working capital can be divided as Long-term source of working capital and
Short-term source of working capital. Long-term funds are required to create production
facilities through purchase of fixed assets such as plant and machinery, land and building, etc.
Investments in these assets represent that part of firm’s capital is blocked on a permanent or
fixed basis and is called fixed capital. Short-term funds are needed to manage the day-to-day
operations of the organization. It is a temporary working capital.

Working capital for the long-term purposes can be obtained by several ways. There are different
sources of long-term working capital:

1. Issue of shares.

2. Issue of debentures

3. Retained earnings

4. Sale of fixed assets

5. Security from employee and from customers.

Sources of Short-term Working Capital are:


1. Trade credit.

2. Credit paper.

3. Bank credit.

4. Public deposits.

5. Government assistance

6. Customer credit

Determinants of working capital

The need of working capital varies from month to month, year to year. For determining the
working capital needed by a business unit there is no set of rules to formulate. In order to
determine the proper or optimum amount of working capital of a business unit various factors
should be considered carefully as each of them having own importance and the importance of
various factors changes for a business unit overtime.The main factors that determine the working
capital requirements of the organization are as follows:

a) General nature of business

b) Size of business operations/scale of operations

c) Production cycle

d) Business cycle

e) Production policy

f) Credit policy

g) Growth and expansion

h) Vagaries and availability of raw material

i) Profit level

j) Terms of purchase and sales

k) Depreciation policy

a) General nature of business


The working capital requirements of an enterprise are basically related to the conduct of the
business. Enterprises fall into some board categories depending on the nature of their business.
For instance, public utilities have certain features which have a bearing on their working capital
needs. The two important features are (1) cash sales and (2) sale of services rather than
commodities.

b) Size of business operations/scale of operations

The size of business has also an important impact on its working capital needs. Size of a business
unit may be measured in terms of a scale of operation. Bigger the size of business unit, the larger
will be the amount of working capital required as because the larger business units are required
to maintain huge inventories and also spend more in carrying out the business operations
smoothly. A business unit carrying on activities on a small scale needs less working capital.

c) Production cycle

It refers to the time involved in the manufacture of goods. It covers the time-span between the
procurement of raw materials and the completion of the manufacturing process leading to the
production of finished goods. Funds have to be necessarily tied up during the process of
manufacture, necessitating enhanced working capital. The longer the time-span the larger will be
the tied-up and therefore the larger is the working capital needed and vice versa.

d) Business cycle

The working capital requirements are also determined by the nature of business cycle. Business
fluctuations leads to a cyclical and seasonal changes that, in turn cause a shift in the working
capital position, particularly for temporary working capital requirements. The variations in
business conditions may be in two directions;

Upward phase: When boom conditions prevail, Downswing phase: When economic activity is
marked by a decline. During in the upswing of business activity, the need for working capital is
likely to grow to cover the lag between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the expansion of the level of activity.

e)Production policy
The quantum of working capital is also determined by the production policy. The case of certain
lines of business, the demand for the product is seasonal. In such a case there are two options:
either they confine their production only to periods when goods are purchased or they follow a
steady production policy throughout the year and produce goods at a level to meet the peak
demand. The former option is inconvenient. The second option would require a sufficient
amount of working capital.

f) Credit policy

The credit policy relating to sales and purchases also affects the working capital. The credit
policy influences the requirements of working capital in two ways. (1) Through credit items
granted by the firm to its customers; (2) the credit term available to the firm from its creditors.

g) Growth and expansion

As a company grows, the working capital requirements will be more. It is very difficult to
determine the relationship between the volume of business of a company and the increase in its
working capital. The composition of working capital in a growing company also shifts with
economic circumstances and corporate practices. Other things being equal, growing industries
require more working capital than those that are static.

h) Vagaries and availability of raw material

The availability or otherwise of certain raw materials on a continuous basis without interruption
would sometimes affect the requirement of working capital. There may be some raw materials
which can’t be procured easily either because of their sources are few or they are irregular. To
sustain smooth production, therefore, the firm might be compelled to purchase and stock them
far in excess of genuine production needs. This will result in an excessive inventory of such
materials. Hence the volume of working capital to be kept will be increased.

i) Profit Level

The level of profits earned differs from enterprise. Higher profit margin would improve the
prospects of generating more internal funds thereby contributing to the working capital pool. The
net profit is source of working capital to the extent that it has been earned in cash.

j) Terms of purchase and sales


Terms of purchase and sales [cash or credit] also affect the amount of working capital. If a
company purchases all goods in cash and sells its finished products on credit, then the company
will require larger amount of working capital. On the other hand, a company purchasing all
goods on credit and allowing no credit to its customers will require lesser amount of working
capital. The length of period of period credit has also a bearing on working capital.

k) Depreciation policy

The depreciation policy through its effect on tax liability and retained earnings has an influence
on working capital. Depreciation is tax deductible. Higher the amount of depreciation the lower
the tax liability and more the cash profit. Similarly, the amount of net profits will be less if
higher depreciation is charged. If the dividend policy is linked with net profits, the firm can pay
fewer dividends by providing for more depreciation. Thus, depreciation is an indirect way of
retaining profits and preserving the firm’s working capital position.

STEPS INVOLVED IN WORKING CAPITAL MANAGEMENT

There are two steps involved in working capital management. They are

• Forecasting the amount of working capital.

• Forecasting the amount of working capital.

• Determining the sources of working capital.

DIFFERENT ASPECTS OF WORKING CAPITAL MANAGEMENT

a. Management of inventory.

b. Management of accounts receivables.

c. Management of cash.

a. Management of inventory

Management of inventories means an optimum investment in inventories. It should neither be too


low affect the production adversely nor too high to block the funds unnecessarily.

The inventory management includes the following aspect:


 Size of inventory- maximum level and minimum level.

 Establishing time schedules, procedures and lot of sizes for new orders.

 Ascertaining minimum safety levels.

 Coordinating sales, production and inventory policies.

 Providing proper facilities.

 Arranging the receipts, disbursements and production and procurement of materials and

developing the form of recording these transactions.

 Assigning responsibilities for carrying out inventory control functions.

 Providing the report necessary for supervising the overall activities.

b. Management of account receivables.

It is the process of weighting the benefits as well as the costs of investments on accounts
receivables and taking such steps as regards as investment on accounts receivable which will
result in maximum results or benefits to the firm.

In other words, it means the maintaining of the accounts receivables at an optimum level or point
i.e., at such a level or point at which there is a trade off or balance between profitability and
costs.

Management of accounts receivables has three aspects. They are:

• Establishing the credit policy of the concern

It involves:

a. Determination of the level of credit sales.

b. Determination of the credit standards.

c. Determination of the credit terms.

• Establishing the collection policy of the concern


It means the determination of the policy and procedure to be followed for the collection of
accounts receivables.

• Control of the maintaining the accounts receivables at the minimum possible level.

It means maintaining the accounts receivables at the minimum possible level

c. Management of cash

Cash management involves the efficient collection and disbursement of cash and any temporary
investment of cash while it resides with the firm. It is concerned with the managing of cash flows
into and out of the firm, cash flows with in the firm, and cash balances held by the firm at a point
of time by financing deficit or investing cash surplus.

METHODS OF ESTIMATING WORKING CAPITAL

There are two methods which are usually followed in determining working capital requirements.
There are:

1. Conventional method

According to the conventional method cash inflows and outflows are matched with each other.
Greater emphasis is laid on liquidity and greater importance is attached to current ratio, liquidity
ratio, etc…which pertains to the liquidity of a business.

2. Operating cycle method

In order to understand what gives rise to differences in the amount of timing of cash flows, one
should first think of the length of time which is required to convert cash into resources, resources
into final product, final product into receivables, receivables back into cash. The length of the
operating cycle is a function of a nature of a business. There are four major companies of the
operating cycle of a manufacturing company. These are:

• The cycle starts with free capital in the form of cash and credit, followed by investment in
materials, manpower and other services

• Production phase

• Storage of the finished products terminating at the time –finished product is sold
• Cash or accounts receivables collection period, which results in and ends at the point of dis-
investment of the free capital originally committed. New free capital then becomes available
for productive reinvestment. When new liquid capital becomes available for recommitment
to productive activity, a new operating cycle begins.

3. Cash cost technique

In this method, all transactions are shown in the working capital forecast on cost basis. For
forecasting working capital, the following information is required.

• Costs to be defrayed on materials, wages and overheads.

• Length of which time during raw materials are to remain in stock before they are put to
production.

• Length of production cycle

• Length of sale cycle denoting the period of time finished goods have to stay in the ware
house before sale

• Period of credit availed of from creditors

• Time- lag involved in the payment of wages and overhead expenses

4. Balance sheet method

In this method a forecast is made of the various assets and liabilities. Thereafter, the difference
between the two is taken out the difference will indicate the deficiency or surplus of cash.

WORKING CAPITAL CYCLE/ OPERATING CYCLE


The length of time involved in the conversion of cash into raw materials, raw materials into
work- in-progress, work –in-progress into finished goods, finished goods into debtors ,debtors
into cash again the operating cycle or working capital cycle.

The length of operating cycle or working capital cycle may differ from one firm to another,
depending upon the nature of the business.

WORKING CAPITAL POLICIES

A business firm can adapt any of the following working capital policies:

1. Conservative working capital policy

2. Aggressive working capital policy

3. Moderate working capital policy

Under Conservative approach, the firm carries high investment in current assets such as cash,
marketable securities and carries large amount of inventories and grants generous terms of credit
to customers resulting in a high level of debtors. The consequences of conservative working
capital policy are quick deliveries to customers and more sales due to generous credit terms.

Under Aggressive working capital policy, investment in current assets is very low. The firm
keeps less amount of cash and marketable securities, manages with less inventories and tight
credit terms resulting in low level of debtors. The consequences of aggressive working capital
policy are frequent production stoppages, delayed deliveries to customers and loss of sales. A
trade off between two costs namely carrying cost and shortage cost determines the optimal level
of current assets. Costs that rise with current assets i.e. that cost of financing a higher level of
current assets form carrying costs. Shortage costs are in the form of disruption in production
schedule, loss of sales and loss of goodwill.

The optimum level of current assets is denoted by the total costs (= carrying costs + shortage
costs) minimized at that level

Working capital financing strategies

After determining the level of current assets, the firm must determine how these should be
financed.

Investment in current assets can be broken into two parts

1. Permanent current assets

2. Temporary current assets

A firm requires a certain amount of current assets to meet even the minimum level of sales where
as temporary current assets reflects a variable component that moves in line with seasonal
fluctuations. Several strategies are available for financing capital requirements

The fixed proportion of working capital should be generally financed from the fixed capital
sources while the temporary or variable working capital requirements of a firm may be met from
the short term sources of capital. Based on this idea, we have 3 strategies possible.
Strategy A

Long term financing is used to meet fixed asset requirement as well as peak working capital
requirement. When the working capital requirement is less than its peak level, the surplus is
invested in liquid assets (cash & marketable securities)

Strategy B

Long term financing is used to meet fixed asset requirements, permanent working capital
requirement, and a portion of Fluctuating working capital requirement. During seasonal
upswings, short term financing is used. During seasonal downswings, surplus is invested in
liquid assets.

Strategy C

Long term financing is used to meet fixed asset requirement and permanent working capital
requirement. Short term financing is used to meet fluctuating working capital requirement.

Integrated Working Capital Policy

Working capital requirement of a firm is determined by considering two questions in mind.

1. What should be the level of current assets in relation to sales?

2. What should be the ratio of long term and short term financing?

Current Asset Policy

Question 1 tells one what should be the level of current assets to be maintained by the firm and
hence it gives rise to three types of current asset policy namely

a. Conservative approach : It is carrying more amount of current assets in relation to sales which
results in more carrying costs, relaxed credit terms and period and hence less turnover.

b. Moderate approach: It is always maintaining required amount of current assets depending


upon sales. c. Aggressive Approach:
It is managing with fewer current assets in relation to sales and hence may result in more
turnover, stringent credit terms and may lead to loss of customer goodwill and low liquidity.

CURRENT ASSETS POLICY GRAPH


CONSERVATIVE
CONSERVATIVE
APPROACH
APPROACH

MODERATE
MODERATE
APPROACH
APPROACH
CURRENT
CURRENT
ASSET
ASSET
AGRESSIVE
AGRESSIVE
APPROACH
APPROACH

SALES
SALES

Question 2 is about how the currents should be financed, either long term or short term
financing. Current assets being financed using long term funds namely Equity shares, Debentures
results in more costs of capital and relatively less profits whereas short term financing namely
short term loans from banks and financial institutions, overdrafts, trade credit, commercial paper
etc. results in more profits and relatively less costs A judicious mix of Current Asset policy and
Current Asset Financing Policy gives rise to an integrate Working Capital policy.

Reason for selection of the topic

Working capital management is concerned with the problems that arise in attempting to manage
current assets; the current liabilities and the relationship arise between them. It is one of the
important aspects of the overall financial management. Working capital is the business lifeblood.
Every manager’s primary task is to help keep it flowing, and use the cash flow to generate
profits. If a business is operating profitably, then it should in theory, generate cash surplus if it
doesn’t generate surpluses, the business will eventually run out of cash and expire. Proper
management of working capital is very important for the success of an enterprise. Just a
circulation of blood is essential in the human body for maintaining life; working capital is very
essential to maintain the smooth running of a business.
It’s also an important yardstick to measure a company's operational and financial efficiency. This
aspect must form part of the company's strategic and operational thinking. Efforts should
constantly be made to improve the working capital position. This will yield greater efficiency
and improve customer satisfaction.
CHAPTER- 4

DATA ANALYSIS AND


INTERPRETATION
CURRENT ASSET DETAILS

a) CURRENT ASSETS OF HNL from 31/3/2004 to 31/3/2009

Table 1

Rs. In Lakhs)

Year Inventory Debtors Cash & Other Loans & Total


Bank current advances current
assets assets

2004-2005 7074 2468 1148 7 2455 13152

2005-2006 6820 1593 2712 25 2727 13877

2006-2007 7068 1436 4773 34 2325 15636

2007-2008 7024 901 5610 51 2591 16177

2008-2009 14415 4298 375 23 2803 21914

Source : Annual report of HNL

INTERPRETATION

The total current asset in the year 2004-2005 was RS13152 Lakhs. In the last year 2008-2009 the current
asset was RS 21914 Lakhs. If it is largest amount compared to other years. The reason in that current asset in
the year 2009 was increased with inventories and sundry debtors.
GRAPHICAL REPRESENTATION OF CURRENT ASSETS OF HNL

45000 Inventory
40000
35000 Debtors
30000
25000
20000 Cash & Bank
15000
10000 Other Current Assets
5000
0
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009

Loans& Advances

Total Current assets

Figure 1
CURRENT LIABILITY DETAILS

CURRENT LIABILITIES OF HNL from 31/3/2004 to 31/3/2009

Table 2 (Rs inLakhs)

Year Creditor Advance Security Liability Other Provisio Total


s from Deposits Current ns Current
To govt
Custom Liabilitie Liabilitie
& local
ers s s
Bodies

2004- 2304 18 552 70 143 967 4054


2005

2005- 1303 31 630 128 156 2151 4399


2006

2006- 1388 39 885 209 112 2575 5208


2007

2007- 2136 96 972 130 137 1760 5231


2008

2008- 5360 26 1257 77 89 1343 8152


2009

Source Annual Report

INTERPRETATION

In the year 2009; the current liability was RS 8152LAKHS. It is the largest amount compared to
all previous year. The major reason for increased current liability was increased the amount of
sundry creditors and security deposits.

The smallest amount of total current liability was in the year 2004. It was RS 4054 LAKHS The major reason
for decreased current liability in the year 2004 was decreased the amount other liability &advance from custom.
GRAPHICAL REPRESENTATION OF CURRENT LIABILITY DETAILS

Total current Liabilities


9000
8000
Provisions
7000
6000
Other Current
5000
Liabilities
4000
Liability to Govt &
3000
Local Bodies
2000
Security Deposits
1000
0
2004- 2005- 2006- 2007- 2008- Advance from
Customers
2005 2006 2007 2008 2009
Creditors
Figure 2
CALCULATION OF WORKING CAPITAL from 31/3/2004 to 31/3/2009

WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES

Table 3

(Rs in Lakhs)

Year CURRENT ASSET CURRENT WORKING CAPITAL


LIABILITY

2004-2005 13150 4054 9096

2005-2006 13877 4955 8922

2006-2007 15636 6080 9556

2007-2008 16177 5243 10934

2008-2009 21913 8618 13295

Source Annual Report

From the year 2004-05 there was an increasing trend in the level of Working Capital, in the
2004-05 the Working Capital stood at Rs 9096 Lakhs. The increasing trend in the period there
after was due to the increase in the level of Current Assets. In the 2008-2009 the Level of
Working Capital reached to Rs 13295 Lakhs.
GRAPHICAL REPRESENTATION OF WORKING CAPITAL = CURRENT ASSETS –
CURRENT LIABILITIES

14000
12000
10000
8000
WorkingCapital
6000
4000
2000
0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

Figure3
Table showing schedule of changes in Working Capital for the year 2004-2005 and 2005-2006
Table-4 Rs in Lakhs

PARTICULAR 2004-2005 2005-2006 INCREASE DECREASE


S

CURRENT

ASSETS

Stock 7073.94 6820.06 253.88

Debtors 2467.93 1593.40 874.53

Cash 1148.21 2711.69 1563.48

Other 7.11 24.59 17.48


current

Assets

Loans and 2454.70 2666.21 211.51

advances

Total 13151.89 13815.95

CURRENT
LIABILITY

Creditors 2304.87 1302.74 1002.13

Advances 17.74 30.55 12.81


from

customers

Security 552.31 630.45 78.14


deposit

Liability to 69.58 128.17 58.59

government

Other 862.43 712.84 149.59


liability

Provisions 966.89 2150.67 1183.78

Total 4773.82 4955.42

WC 8378.07 8860.53

Increase in 482.46 482.46


WC

Total 8860.53 8860.53 2944.19 2944.19


TABLE1

9000
8800
8600 8860.53 Series1
8400 Series2

8200 8378.07 Series2


Series1
8000
1 2
Table showing schedule of changes in Working Capital for the year 2005-2006 and 2006-2007
PARTICULAR 2005-2006 2006-2007 INCREASE DECREASE
S

CURRENT

ASSETS

Stock 6820.06 7068.87 248.81

Debtors 1593.40 1436.21 157.19

Cash 2711.69 4773.14 2061.45

Other 24.59 34.04 9.45


current

Assets

Loans and 2727.46 2324.83 402.63

advances

Total 13877.2 15637.09

CURRENT
LIABILITY

Creditors 1302.74 1387.85 1002.13 85.11

Advances 30.55 39.26 8.71


from

customers

Security 630.45 885.17 254.72


deposit

Liability to 128.17 209.45 81.28

government

Other 712.84 983.46 149.59 270.62


liability

Provisions 2150.67 2574.81 424.14

Total 4955.42 6080

WC 8921.78 9557.09

Increase in 635.31 635.31


WC

Total 10428 10428 2319.71 2319.71


Table-5 Rs in Lakhs

TABLE2

9600
9400
9557.09 Series1
9200
9000 Series2

8800 8921.78 Series2


Series1
8600
1 2
Table showing schedule of changes in Working Capital for the year 2006-2007 and 2007-2008
PARTICULAR 2005-2006 2006-2007 INCREASE DECREASE
S

CURRENT

ASSETS

Stock 7068.87 7023.97 44.9

Debtors 1436.21 901.31 534.9

Cash 4773.14 5610.37 837.23

Other 34.04 50.63 16.59


current

Assets

Loans and 2324.83 2590.67 265.84 .

advances

Total 15637.09 16176.95

CURRENT
LIABILITY

Creditors 1387.85 2136.39 748.54

Advances 39.26 96.01 56.75


from

customers

Security 885.17 972.41 87.24


deposit

Liability to 209.45 130.24 79.21

government

Other 112.02 136.54 24.52


liability

Provisions 2574.81 1760.40 814.41

Total 5208.56 5231.99

WC 10428.53 10944.96

Increase in 516.43 516.43


WC

Total 10944.96 10944.96 2013.28 2013.28


Tables -6 Rs in Lakhs

TABLE3

11000
10900
10800
10700 10944.96
10600 Series1
10500 Series2
10400
10300 10428.53 Series2
10200 Series1
10100
1 2
Table showing schedule of changes in Working Capital for the year 2007-2008 and 2008-2009
Table-7 Rs in Lakhs
PARTICULAR 2007-2008 2008-2009 INCREASE DECREASE
S

CURRENT

ASSETS

Stock 7023.97 14415.30 7391.33

Debtors 901.31 4297.76 3396.45

Cash 5610.37 374.70 5235.67

Other 50.63 22.50 28.13


current

Assets

Loans and 2590.67 2802.56 211.9

advances

Total 16176.95 21912.82

CURRENT
LIABILITY

Creditors 2136.39 5360.33 3223.94

Advances 96.01 26.33 69.68


from

customers

Security 972.41 1256.84 284.43


deposit

Liability to 130.24 77.06 53.18

government

Other 136.54 88.91 47.63


liability

Provisions 1760.40 1342.53 417.87

Total 5231.99 8152

WC 10944.96 13760.82

Increase in 2815.86 2815.86


WC

Total 13760.82 13760.82 11588.03 11588.03


TABLE 4

14000
12000
10000
13760.82
8000 Series1
6000 10944.96 Series2
4000
2000 Series2
Series1
0
1 2

RATIO ANALYSIS

a) Liquidity ratio:- Liquidity refers to affirms ability to meet its obligations in the short
term, usually one year. These ratios are based on the relationship between current assets
and current liabilities. The important ratios are current ratio, acid test ratio and cash ratio.

1.CURRENT RATIO
Current Ratio is the ratio of Current Assets to the Current Liabilities. It shows the ability of a
firm to cover its Current Liabilities with the Current Assets.

CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES

Table 8

(Rs in Lakhs)

Year CURRENT ASSET CURRENT CURRENT RATIO


LIABILITY

2004-2005 13150 4054 3.24

2005-2006 13877 4955 2.80

2006-2007 15636 6080 2.57

2007-2008 16177 5243 3.09

2008-2009 21913 8618 2.54

Source Annual Report

GRAPHICAL REPRESENTATION OF CURRENT RATIO = CURRENT ASSETS –


CURRENT LIABILITIES
3.5

2.5

2
Working
1.5 Ratio
1

0.5

0
2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Inference

Current ratio is optimum at 2:1 i.e. Current Assets should be 2 times that of Current Liability.
But this rule need not work well in real life situation as it depends on many other factors.

Since the availability of the raw materials are seasonal in nature and the industry uses imported
Materials and Stores the Company have to stock them for a longer period to avoid lead time.
Both these components make the Inventory level very high in turn resulting in a higher Current
Assets level over the Current Liability, this in turn lead to a higher Current Ratio.

Over the period of analysis the Current Ratio of the company never went below 2.5:1. For the
last 5 years i.e. from the year 2004-2009, the Company was stable in maintaining its Current
Ratio. In the year 2009 the Companies Current Ratio was at 2.54:1 which is best as per the above
rule.

Overall the Company is found satisfactory with its Current Ratio

2. Acid test Ratio=Quick Assets/C Liabilities

Table-9 Rs in Lakhs
Year QUICK ASSETS CURRENT QUICK RATIO
LIABILITIES

2001-2002 6005.14 4446.85 1.35

2002-2003 5678.87 4054.79 1.40

2003-2004 7044.71 3082.84 2.29

2004-2005 6076 4771.89 1.27

2005-2006 6995.89 4955.42 1.41

2006-2007 8568.22 6080 1.4

2007-2008 9152.98 5262.6 1.74

2008-2009 7497.52 8617.8 0.87

AVERAGE 5937.5 1.3

Source Annual Report

GRAPHICAL REPRESENTATION OF Acid Test Ratio = Quick Assets/ Current


Liabilities
2.5

1.5
QuickRatio
1

0.5

0
2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008-
2002 2003 2004 2005 2006 2007 2008 2009

Inference

The Liquid Ratio shows the actual liquidity of a firm. As a convention the Liquid Ratio of 1:1 is
considered satisfactory. The company has been efficient in maintaining its Liquid Assets over its
Current liability.

Over the period of analysis the Company has maintained its Quick Assets more than its Current
Liabilities till 2008.But in the year2009 the company had stepped into severe liquidity crisis and
the quick ratio had gone below the ideal ratioi.e 0.87 The Company was successful in
maintaining its Liquid Ratio below 2:1 after the year 2004-05 thereby increasing the efficiency
of the firm. The Liquid Ratio of the Company is not at a satisfactory level. The Company is not
in a safe position.

b) LEVERAGE RATIO

Financial leverages refer to the debt finance. Leverage ratios helps in assessing the risk
assessing the risk arising from the use of debt capital. The important ratios are debt equity
ratio, debt assets ratio, interest coverage ratio, and fixed coverage ratio.
1) Debt equity ratio=outsiders fund/shareholders funds

Table-10 (Rs in Lakhs)

Year Debt Equity Debt Equity Ratio

2001-2002 375.39 19419.59 0.02

2002-2003 3610.7 18930.73 0.19

2003-2004 4754.13 19153.89 0.25

2004-2005 4280.56 19292.46 0.22

2005-2006 3195.94 19825.29 0.16

2006-2007 1402.44 21569.10 0.07

2007-2008 787.7 23883.81 0.03

2008-2009 3265.5 23977.43 0.14

Source Annual Report

GRAPHICAL REPRESENTATION OF Debt equity ratio=outsiders fund/shareholders


funds
0.3
0.25
0.2
0.15 Debt Equity
Ratio
0.1
0.05
0
02 2

03 3

04 4

05 5

06 6

07 7

08 8

9
20 200

20 00

20 200

20 200

20 200

20 00

20 200

00
-2

-2
-2
-

-
01
20

INFERENCE

This ratio shows the relative contribution of the creditors and owners. In general, the lower this
ratio the higher the degree of protection enjoyed by the firm. So the company was having a low
ratio till 2007-2008 i.e. 0.03 which is favorable. But in the year 2008-09 it rose to 0.14.This ratio
ascertains the soundness of long term financial policies of the company.

2) Debt Asset Ratio


DEBT ASSET RATIO=DEBT/ASSETS

Table 11 (Rs in Lakhs)

Year Debt Assets Debt Asset Ratio

2001-2002 375.39 22245.62 0.02

2002-2003 3610.7 24795.04 0.15

2003-2004 4754.13 26395.31 0.18

2004-2005 4280.56 26437.71 0.16

2005-2006 3195.94 26795.96 0.12

2006-2007 1402.44 26578.82 0.05

2007-2008 787.7 23883.81 0.03

2008-2009 3265.5 30487.51 0.12

Source Annual Report

GRAPHICAL REPRESENTATION OF- Debt Asset Ratio


0.2
0.18
0.16
0.14
0.12
0.1 Debt Asset
0.08 Ratio
0.06
0.04
0.02
0
02 2

03 3

04 4

05 5

06 6

07 7

08 8

9
20 00

20 00

20 00

20 00

20 00

20 00

20 00

00
-2

-2

-2

-2

-2

-2
-2

-2
01
20

INFERENCE

This ratio measures the extent to which borrowed funds support the firm’s assets. It is related to
the debt equity ratio and so the lower the ratio the more sound the form is said to be. As shown
this ratio is high during 2003-2004, but decreased during 2005-2006 and continued this decline
till 2007-2008 but then rose to0 .12 in the year 2008-09 which is not favorable.

CURRENT ASSET TURNOVER RATIO (CATR)


The Sales to current assets ratio is best measured over several periods and needs to be compared
to industry averages, as the amount of current assets varies widely among companies and
industries. A decreasing current assets turnover ratio is generally a negative sign, indicating the
company may have slowed production, decreasing the amount of inventory and resultantly the
current assets.

CATR=NET SALES CURRENT ASSETS

Table 12

(Rs in Lakhs)

Year SALES CURRENT ASSETS Current assets


Turnover Ratio

2004-2005 27393 13150 2.08

2005-2006 30296 13877 2.19

2006-2007 31519 15636 2.01

2007-2008 29861 16177 1.84

2008-2009 29767 21913 1.36

Source Annual Report

GRAPHICAL REPRESENTATION OF CURRENT ASSETS TURNOVER RATIO


2.5

1.5
Current
1 Assets
Turnover
Ratio
0.5

0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009
Inference

The Current Assets Turnover Ratio shows the number of times the Current Assets are being
turned over in a stated period. It also shows how well the Current Assets are being used in the
business. A high ratio indicates high degree of efficiency in asset utilization

The Company was found satisfactory with the level Current Assets turnover ratio. There was an
increasing trend in the ratio till the 2005-06 after that the ratio gradually started decreasing; this
was because of the increase in the level of Current Assets during the period. In the year 2008-
2009 current asset turnover ratio was 1.36.

WORKING CAPITAL TURNOVER RATIO (WCTR)

A high or increase working capital turnover is usually a positive sign, showing the company
is better able to generate sales from its Working Capital. Either the company has been able to
gain more Net Sales with the same or smaller amount of working capital, or it has been able
to reduce its working capital while being able to maintain its sales. Efforts to streamline the
operations of the company will often show favorably in this ratio.

WCTR = NET SALES/WORKING CAPITAL

Table 13 (Rs in Lakhs)

Year SALES WPRKING CAPITAL Working Capital


Turnover Ratio

2004 -2005 27393 9096 3.01

2005 -2006 30296 9478 3.19

2006 -2007 31519 10428 3.02

2007 -2008 29861 10946 2.72

2008 -2009 29767 13295 2.24

Source Annual Report

GRAPHICAL REPRESENTATION OF- WCTR = NET SALES/WORKING CAPITAL


3.5
3
2.5
2
Working
1.5 Capital
1 Turnover
Ratio
0.5
0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

Inference

This ratio measures the number of times the Working Capital is turned over. The Company could
maintain a satisfactory level of Working Capital Turnover Ratio in the period of analysis.

The Working Capital Turnover Ratio stood at the highest level in the year 2005-06. Owing to
lower Unit Net Sales Realization during the year 2007-08 the Working Capital turnover of the
Company decreased to 2.72 from 3.02 in the 2006-07.It further decreased to 2.24 in the year
2008-2009.

d) Profitability ratio:- Profitability reflects the final results of the business operations. There
are two aspects of profitability ratios: profit margin ratio and rate of return ratios. Profit
margin ratio shows the relationship between profit and sales. Rate of return ratio reflects the
relationship between profit and investments.

1) Net profit margin ratio =net profit/net sales

Table -14 (Rs in Lakhs)

Year Net Profit Net sales Net Profit Margin


Ratio

2001-2002 407.23 23375.95 0.02

2002-2003 -488.91 21457.4 -0.02

2003-2004 502.46 25267.61 0.02

2004-2005 421.55 27393.28 0.02

2005-2006 1568.11 30296.34 0.05

2006-2007 3192.31 31519.30 0.10

2007-2008 1153.69 29860.84 0.04

2008-2009 1263.56 29767.37 0.04

Source Annual Report


GRAPHICAL REPRESENTATION OF- Net profit margin ratio =net profit/net sales

0.12
0.1
0.08
0.06
0.04 Net profit
0.02 Margin
Ratio
0
-0.02
04 4

06 6

08 8
02 2
03 3

05 5

07 7

9
20 200
20 200

20 200
20 200

20 200
20 200

20 200

00
-2

-0.04
-

-
-

-
-

-
-
01
20

INFERENCE

This ratio explains the per rupee profit generating capacity of sales. If the cost of sales is
lower than the net profit will be higher and then we divide it with the net sales, the result is
the sales efficiency. This ratio is very useful for proprietors and prospective investors
because it reveals the overall profitability of the firm. The ratio was high in the year2006-
2007 but in the year 2007-2008 it has declined to 0.04 and still continuing so there is a
chance of increasing the ratio through improved efficiency of the concern
OPERATING CYCLE ANALYSIS

CREDITORS PAYMENT PERIOD

The Creditors payment period is the time taken to set off the Creditors of the Company. It starts
from the date at which the purchases are made and ends when the payments are made to the
Creditors.

The Creditors Payment Period can be calculated using the formula:-

Average Trade Creditors/Average Credit Purchases per day

Table -15

Credit Average Opening Closing Average Creditor


s
Purchas Credit Creditor Creditor Creditor
es s s s Payment
Year Purchas
es Period

(Rs in (RS in (Rs in (Rs in


Lakhs) Lakhs) Lakhs) Lakhs)
(Days) (Days)

2004- 9112 26.14 1280 2305 1792.5 68.56


2005

2005- 9404 26.12 2305 1303 1804 69.05


2006

2006- 9873 27.42 1303 1388 1345.5 49.06


2007

2007- 11119 30.88 1388 2136 1762 57.04


2008

2008- 20452 56 2136 5360 3748 66.9


2009
CREDITORS PAYMENT PERIOD

80
70
60
50
40 Creditors
Payment Period
30
20
10
0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

INFERENCE

The Creditors payment period is the time taken to set off the Creditors of the Company. It
starts from the date at which the purchases are made and ends when the payments are made
to the Creditors. The average creditor’s payment period is between 45-90 days .So the
Creditors payment period is considered satisfactory at HNL.
DEBTORS COLLECTION PERIOD

The Debtors collection period is the time taken for the collection of Debtors. It starts from the
sale of finished goods to the customers on credits till the collection of receivables from them.

It can be calculated using the formula:-

Average Book Debts/Average credit sales per day

Table-16

Opening Closing Credit Average Average Debtors


Debtors
Debtors Sales Credit Book Collectio
n
Year Sales/da Debts
(Rs in y Period
(RS in (Rs in (Rs in
Lakhs)
Lakhs) Lakhs) Lakhs)

(Days) (Days)

2004- 3955 2468 20544 57.06 3211.5 56.27


2005

2005- 2468 1593 22722 63.11 2030.5 32.17


2006

2006- 1593 1436 23639 65.66 1514.5 23.06


2007

2007- 1436 901 22395 62021 1168.5 18.78


2008

2008- 901 4298 21368 58.5 2599.5 44.4


2009
DEBTORS COLLECTION PERIOD

60

50

40
Debtors
30 Collection
Period
20

10

0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

INFERENCE

The Debtors collection period is the time taken for the collection of Debtors. It starts from the
sale of finished goods to the customers on credits till the collection of receivables from them. Till
2007-08 the analysis reveals that the company is able to collect its dues rapidly from its
customers. On an average of 35 days the company’s funds are locked up with their customers,
which indicate the soundness of the credit policy of the company is not satisfactory. Debtors
collection period was high in the year 2008-09;as it rose to 44.4 days. So effective collection
methods should be adopted.
RAW MATERIAL INVENTORY PERIOD

Raw Material inventory period is the time period for which the Raw Materials are kept in the
inventory. The duration of the Raw material stage depends on the regularity of supply,
transportation time, degree of perish ability, price fluctuation and economies of bulk purchases.

Average Stock of Raw Materials/Consumption of Raw Materials per day

Table-17

Consumpti Average Raw


on of Stock Material

Raw Of Raw And


Year
Materials Materials
Stores
Per day (Rs in Inventory

(Days) Lakhs) Period

(Days)

2004-2005 20.9 1659.41 79.3

2005-2006 21.9 1815.55 82.9

2006-2007 22.3 2100.24 94.1

2007-2008 24.9 2234.47 89.7

2008- 26 9644.02 156


2009
RAW MATERIALS & STORES INVENTORY PERIOD

180
160
140
120
100 Raw Materials&
StoresInventory
80 Period
60
40
20
0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

INFERENCE

Raw Material inventory period is the time period for which the Raw Materials are kept in the
inventory. The duration of the Raw material stage depends on the regularity of supply,
transportation time, degree of perish ability, price fluctuation and economies of bulk purchases.
It was low in the year 2005-06 but in 2008-09 it showed an inclined trend.
WORK IN PROCESS INVENTORY PERIOD

The WIP inventory period is time taken for the conversion of a Raw Material into finished
product. The duration of the WIP inventory period depends on the length of manufacturing cycle,
consistency in capacities at different stages, and efficient coordination of various inputs.

Average WIP Inventory/Cost of production per day

Table-18

Cost of Average Cost of Work in


WIP
Productio Production/Da Process
n Inventory y
Year Inventory

Period
(Rs in

(Rs in Lakhs) (Rs in


(Days)
Lakhs)
Lakhs)

2004- 21813 85 60.59 1.40


2005

2005- 22081 68.5 61.33 1.11


2006

2006- 21747 77 60.40 1.27


2007
2007- 23024 77 63.95 1.20
2008

2008- 30268 89 82.9 1.2


2009

WORK IN PROCESS INVENTORY PERIOD

1.6
1.4
1.2
1
Work in Process
0.8
Inventory Period
0.6
0.4
0.2
0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

INFERENCE
The WIP inventory period is time taken for the conversion of a Raw Material into finished
product. The duration of the WIP inventory period depends on the length of manufacturing cycle,
consistency in capacities at different stages, and efficient coordination of various inputs. Five
years of analysis reveals that the company is showing an favorable work in process inventory
period.

FINISHED GOODS INVENTORY PERIOD

The Finished goods inventory is the time period for which finished products are stored in
godown. The duration of this stage depends on the pattern of production and sales.

Average Finished goods inventory/Average Cost of goods sold per day

Table-19

Finished

Average CGS per Goods


Stock day
Inventory

Period

Year
(Rs in
(Days)
Lakhs)
(Rs in
Lakhs)

2004-2005 0 60.59 0
2005-2006 0 61.33 0

2006-2007 0 60.40 0

2007-2008 0 63.95 0

2008-2009 4249.46 77.3 55

FINISHED GOODS INVENTORY PERIUOD

60

50

40

30 Finished goods
inventory period
20

10

0
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009

INFERENCE

The Finished goods inventory is the time period for which finished products are stored in
godown. The duration of this stage depends on the pattern of production and sales .The finished
goods inventory period was 55 days in the year 2008-09 as its finished stock level was high as
20529 MT as on 31.3.2009 as against the track record of NIL stock position at the end of the
immediately preceeding 4 financial years.
OPERATING CYCLE

Length of operating cycle = Creditors payment period + Debtors collection period +


Raw materials inventory period + Work-in-period
inventory period + Finished goods inventory period

Table-20 (In Days)

Debtor Finishe Raw Work in Duratio


s d materia n
Process
l
Collecti Goods Of
Year Invento
on And
Invento ry
stores
Period ry
Operati
Invento
ng
ry period
(in period Cycle
period
days)
2004-2005 56.27 0 79.3 1.4 136.97

2005-2006 32.17 0 82.9 1.11 116.18

2006-2007 23.06 0 94.1 1.27 118.43

2007-2008 18.78 0 89.7 1.2 109.68

2008-2009 44.4 55 156 1.2 256.6

DURATION of OPERATING CYCLE

300

250

200

150 Duration of
operating cycle
100

50

0
Inference

The Working Capital requirement depends on the level of operations and the length of the
operating cycle. Monitoring the duration of the operating cycle is an important ingredient of
Working Capital control.

In the period of analysis it was found the HNL has an operating of 90.180days which is fairly
normal. But the operating cycle was lengthiest during 2008-2009 since there was increase in the
creditors payment period and debtors collection period compared to previous years So the
duration of operating cycle rose to 257days.Higher the ratio the less favorable it is because it
would have a similar margin of operating profit for the payment of dividend and the creation of
reserves.

WORKING CAPITAL LEVERAGE

Working capital leverage reflects the sensitivity of return on investment to change in the
level of current assets. To express the formula for working capital leverage the following
symbols can be used:-

CA - Value of Current Asset (Gross Working Capital)

ΔCA - Change in the level of current assets

FA - Value of net fixed assets

TA - Value of total assets (TA=CA+FA)


WCL - Working Capital Leverage

• WCL = CA/(TA+ACA)
If there is an increase in the level of Current Assets

• WCL = CA/(TA-ACA)
If there is a decrease in the level of Current Assets

Calculation of Working Capital Leverage

Table21 (Rs in Lakhs)

Year CA Δ CA FA TA WCL

2004 -2005 13150 31 17230 30380 0.43

2005 -2006 13877 664 17744 31621 0.44

2006 -2007 15636 1821 16738 32374 0.48

2007 -2008 16177 540 15923 32100 0.50

2008 -2009 21913 5717 15480 37393 0.51

Source Annual Report


GRAPHICAL REPRESENTATION OF- Calculation of Working Capital Leverage

0.52
0.5
0.48
0.46
Working
0.44 Capital
Leverage
0.42
0.4
0.38
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009
Inference
There is an increase in the level of Working Capital Leverage of the Company in the year 2008-
09. A higher level of Working Capital Leverage means that the Firm is more sensitive to the
changes in Current Asset.

The Company is having its Working Capital Leverage below 1 on all the years which means that
the Companies Return on Investments are not affected to a great extend by the changes in the
Current Assets.

PRODUCTION HIGHLIGHTS

Table 22

(Rs in Lakhs)

Year Installed Capacity Actual Sales Capacity


of Saleable
Production Utilization
Newsprint
(In MT) (In MT)
(In MT)

2004 -2005 100000 112202 112202 112%

2005 -2006 100000 113050 113050 113%

2006 -2007 100000 112565 112565 113%

2007 -2008 100000 116111 116111 116%

2008 -2009 100000 108005 108005 108%


Source Annual Report

GRAPHICAL REPRESENTATION OF- Capacity Utilization

118%
116%
114%
112%
110% Capacity
Utilization
108%
106%
104%
2004- 2005- 2006- 2007- 2008-
2005 2006 2007 2008 2009
Inference

During the year 2007-08 the Company could reach higher levels of operational performance by
establishing record in production at 116111 MT as against 112565MT in the year 2006-07 with a
sales turnover of Rs 298.61 crores which was less by Rs 16.58 crores compared to the highest
ever turnover of Rs 315.19 achieved during the previous year .But in the year 2008-09 the
company’s operational performance declined to 108% owing to lower Unit Net Sales
Realization. The Company could not maintain the NIL stock position

CHAPTER- 5
FINDINGS
SUGGESTIONS AND CONCLUSIONS
FINDINGS

1. The company has performed exceptionally well during the year 2008-2009 inspite of
economic meltdown which had hit the domestic newsprint market badly.

2. Actual production has been increasing consistently but was low in 2008-2009 when
compared with the previous year.
3. Upkeep of machinery and equipments has been one of the impeding factors in realizing
production target.

4. Great fluctuations in the loans and advances.

5. The current ratio of HNL is satisfactory .The company is fully utilizing its assets.

6. The quick ratio is also satisfactory because the ratio is nearest to the ideal ratio.

7. The debt equity ratio is not favorable from long term creditor’s point of view.

8. The debt asset ratio is not favorable in the year 2008-2009 so there will be adverse affect in
the financial strength of the business enterprise.

9. Considerable reduction of variable cost is already achieved by replacing chemical pulp by


deinked pulp.

10. The company could notch up impressive capacity utilization of 108% during the year 2008-
2009.

11. The company has exercised control over its fixed expenses through extensive cost cutting
measures.

12The Company has accumulated lossess of 0.04lakhs for the sale of fixed assets in the current
financial year.

13. Cash position of HNL has declined from 5610.37 to 374.70 in the current financial year.

14. The company was not successful in maintaining a satisfactory operating cycle.

15. The company has maintained proper records showing full particulars, including

Quantitative details and situation of fixed assets.


SUGGESTIONS

The company has a sound working capital managements system. The company continued to
maintain higher levels of operational and financial performance by achieving production and
sale of 108005 MT as against 116111 MT last year and setting new record in sales turnover at
Rs.297.61 crores inspite of the onset and onslaught of economic melt down in general and
removal of customs duty on imported newsprint in particular badly hit the domestic newsprint
market.

In our opinion and to the best of knowledge of information about the company does not have
accumulated losses as at the end of the financial year and the company has not incurred cash
losses in the current financial year and in the immediately preceding financial year.

The major sources of Working Capital of HNL are Sundry Debtors, Sundry Creditors, and
Advances from customers and Provisions. A large chunk of working capital is blocked in the
HNL. The internal control procedures need to be more ad equals so as to be commensurate
with the size of the company and the nature of its business with regard to accounting, handling,
control and valuation of inventories, so that it does not block a huge amount of money in
inventory.

The bad/doubtful debts for the last five years are showing an increasing trend. This should be
given due attention as it implies the provision for bad debts made in the previous years were
not sufficient as compared to the reality. So effective collection methods should be adopted.
Quick ratio of HNL from 2004-2005 to 2007-08 is more than ideal ratio 1:1.But in the year
2008-09 it has declined to 0.87 .So. Management has to take actions to maintain the ratios at
the standard level as it is important for the concern to keep its liquid assets at least equal to the
liquid liabilities at all times. The cash position should be improved as early as possible since it
is at an alarmingly low level.

CONCLUSION

A study conducted in Hindustan Newsprint LTD Kottayam; enable to get practical touch to the
topic Working Capital Management of the company. The management of working capital plays
an important role in maintaining the financial health of the company during the normal course
of business. The company should maintain sufficient level of working capital to produce upto a
given capacity and maximize the return on investment in fixed assets .Shortage of working
capital leads to lower capacity utilization.

To maintain the solvency of the business and continue production,it is necessary that adequate
funds be available to pay the bills for material , labor ,selling and administrative expenses and
other cost of doing business .The prompt payment of b ills to suppliers of materials ensures a
continued supply of raw materials and established credit for the future or for reasonable
operations.
A skilled inventory management helps the company to maintain inventories at an optimum
level, thereby keeping the inventory cost minimum and at the same time ,there is no stock out
cost , which may result in loss of sale or stoppage of production.

The maintenance of receivables involves direct and indirect costs .Direct cost includes the cost
of investments allowances and con cessions to customers and also losses on account of bad
debts. Prompt collection reduces the receivables to the minimum dictated by the credit policy
and helps the management to optimize the investment in receivables. In fact the receivables in
an organization should be managed in a way that the sales are expanded to an extent where risk
remains within the acceptable limits.

The goal of working capital management is to ensure that a firm is able to continue its
operations and that it has sufficient ability to satisfy both maturing short term debt and
upcoming operational expenses.
CHAPTER-7

BIBLIOGRAPHY

BIBLIOGRAPHY
REFERENCES

BOOKS

[1] Dr. Prasanna Chandra (IIM B), Financial Management Theory and Practice, Second Edition,
Tata Mc-Graw Hill Publications, New Delhi, pp- 245-265

[2] Pandey,”Financial Management”, Vikas Publishing House Pvt Ltd, pp108-157,808-939

[3]Sharma,”Working Capital Management”Surabhi Pulications, 103-173.

WEBSITE

[1]http://www.hnlonline.com

OTHER SOURCES

[1]Annual Report of the company, Year 2001-02 to 2008-09

[2]Articles issued by the Company

[3]Monthly Statement of Operational Data (MSOD)

[4]Journals, Magazines issued by the Company.

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