Mahesh Final

CONTENTS
CHAPTER 1:
EXECUTIVE SUMMARY 03
INTRODUCTION 05
PURPOSE OF THE STUDY 06
OBJECTIVE OF THE STUDY 07
RESEARCH METHODOLOGY 08
CHAPTER 2:
PROFILE OF RASHTRYA ISPAT NIGAM LIMITED

BACK GROUND 10
PROFILE 11
VISION, MISSION & OBJECTIVES 15
POLICIES & RULES OF ‘RINL’ 17
‘VSP’ ACHIEVEMENTS AND AWARDS 18
PERFORMANCE OF ‘RINL’ AT A GLANCE 19
BOARD OF DIRECTORS 22
CHAPTER 3:
THEORETICAL FRAME WORK
INDUSTRY ANALYSIS 23
GLOBAL SCENARIO INDIAN STEEL INDUSTRY
SWOT ANALYSIS 28
1
WORKING CAPITAL MANAGEMENT 32
INVENTORY MANAGEMENT 44
CASH MANAGEMENT 49
RECEIVABLE MANAGEMENT 51
PAYABLE MANAGEMENT
WORKING CAPITAL TURN OVER RATIO 56
INVENTORY TURN OVER RATIO 60
CASH MANAGEMENT IN VSP 79
RECEIVABLE TURN OVER RATIO 84
PAYABLE TURN OVER RATIO 89
CAPTER-5
ANALYSIS OF WORK
CHAPTER-6
FINDINGS 92
SUMMARY AND SUGGESTIONS 94
CONCLUSION 98
BIBLOGRAPHY 100
EXECUTIVE SUMMARY
2
Working capital is the capital required for maintenance of day-to-day business
operations. The present day competitive market environment calls for an efficient
management of working capital. The reason for that is attributed to the fact that an
ineffective working capital management may force the firm to stop its business operations,
may even lead to bankruptcy. Hence the goal of working capital management is not just
concerned with the management of current assets & current liabilities but also in
maintaining a satisfactory level of working capital.
Holding of current assets in substantial amount strengthens the liquidity position &
reduces the risk but at the expense of profitability. Therefore achieving risk-return trade
off is significant in holding of current assets. While cash outflows are predictable it runs
contrary in case of cash inflows. Sales program of any business concern does not bring
back cash immediately. There is a time lag that exists between sale of goods & sales
realization. The capital requirement during this time lag is maintained by working capital
in the form of current assets. The whole process of this conversion is explained by the
operating cycle concept.
This study gives in detail the working capital management practices in VSP.
Management of each current assets, namely inventory management, cash management,
accounts receivable management is studied permanent to VSP. Similarly management of
accounts payable is studied to understand the managing of current liabilities. A part from
this concept of operating cycle is studied.
The research methodology adopted for this study is mainly from secondary sources
of data which include annual reports of VSP, & website of the company. The use of
primary sources is limited to interviews with few of the employees in finance department.
3
The study of working capital management has shown that VSP has a strong
working capital position (from 2002-till date) since its inception. The company is also
enjoying reasonable net profits from 2002 onwards. VSP employs forex funds instead of
domestic loans & W.C facilitates for procurement of their major raw materials. VSP sales
position is also very encouraging. Its excellent performance is attributed to reduced cost of
production.
The overall position of VSP is good & the same is expected by continue
considering its existing management policies, management of exchange rate risk,
competing with domestic and global players in terms of quality & quantity.
INTRODUCTION
4
Capital is essential for the setting up and smooth running of any business.
Investments made on fixed assets will yield excess cash inflows apart from the payback
amount and is spread over a longer period of time. Hence the cash inflows (or) benefits
associated are not immediate but are expected in the future. Cash inflows & outflows occur
on a continuous basis in case of current assets. Credit forms an essential feature in the
business (credit given to customers & credit from suppliers). Since there is some time lag
from the time of sales & sales realization current assets & current liabilities, which
together constitute the net working capital, supports the business in its normal of
operations. This calls for an efficient management of working capital.
The policies, procedures and measures taken for managing of working capital gain
further importance in an organization like VSP where the working capital requirements
runs in crores of rupees. Any mismanagement on the part of authority will not just cause
loss but may even impair business operations. It is in this context working capital has
gained importance.
The growth of any organization depends on overall performance of all the

departments. A firms financial performance reflects its strength, weaknesses, opportunities
and threats of the organization with respect to profits earned, investments, sales
realization, turnover, turn on investment, net worth of capital. Efficient management of
financial resources and analysis of financial results are prerequisite for success of an
enterprise. In that working capital management is one of the major area of financial
management. Managing of working capital implies managing of current assets of the
company like cash, inventory, accounts receivable, loans and advances and current
liabilities like sundry creditors, interest payment and provision.
PURPOSE OF THE STUDY:
5
The main aim of any firm is to maximize the wealth of shareholders. This can be
achieved only by a steady flow of profits. Which in turn depend on successful sales activity.
To generate sales, investment of sufficient funds in current assets is required. The need of
current assets should be emphasized, as the sales don’t convert into cash immediately but
involved a cycle of operations, namely operating cycle.
VSP is multi product manufacturing unit with varying cycle for each product. The
capital requirement for each department in an organization of VSP is large which
(depends on the product target for that particular year) calls for an effective working
capital management. Monitoring the operation on cycle duration is an important aspect of
working capital.
Some prominent issues that are to be addressed are,

• Duration of raw material stage (depends on regularity of supply, transactions time).
• Duration of work in progress (depends on length of manufacturing cycle,
consistency in capacity utilization).
• Duration at the finished goods state (depends on pattern of production & sale).
Thus a detailed study regarding the working capital management in VSP is to be

done to consider the effectiveness of working capital management, identify the shortcoming
in management and to suggest for improvement in working capital management.
OBJECTIVES OF THE STUDY
6
• To study in general the working capital management procedure in VSP,
Visakhapatnam.
• To analyze and apply operating cycle concept of working capital in VSP,

Visakhapatnam.
• To know how the working capital is being financed.
• To know the various methods to be followed by VSP for inventories and accounts
receivables.
• To give suggestions, if any, for better working capital management in VSP.
Research methodology:
7
Research methodology used for study includes both primary& secondary sources of
data. However most of study is conducted based on secondary sources.
Secondary sources of data mainly include annual reports of VSP. Statement of

changes in working capital for the past 5 years is done using the data taken from these
financial reports. Similarly time series analysis of operating cycle and calculations of ratios
is done. Apart from this, the website of RINL is referred to know the products, product
facilities, network etc.
Industry analysis is done based on the information gathered from newspapers and
websites of Indian steel ministry & other sector related websites.
The use of primary sources is limited to interviews with some of the employees in
finance department. The reason being, it is against the company’s policies & producers to
reveal the sensitive financial information.
Limitations of the study:
8
Although every effort has been made to study the “Working Capital Management”
in detail, in an organization of VSP size, it is not possible to make an exhaustive study in a
limited duration of 2 months.
It is not possible to include data of 2007-08, as the audited financial report has not
come yet (at the time of preparation of this report). However data of 2007-08 is included
partially from the un audited financial reports of VSP.
Apart from the above constraint, one serious limitation of the study is, that it is not
possible to reveal some of the financial data owing to the policies and procedures laid down
by VSP. However the available data is analyzed with great effort to get an insight into
Working Capital Management in VSP.
VISAKHAPATNAM STEEL PLANT

9
BACK GROUND:
The government of India has decided to set up an integrated steel plant at

Visakhapatnam to meet the growing domestic needs of steel.
The decision of the government to set up an integrated steel plant was laid down by
the then Prime Minister Mrs. Indira Gandhi. The prime minister laid down the foundation
stone on 20th jan 1971.
The consultant, M/s. M.N.Dastus & Co (pvt.) Ltd., submitted a techno economic
feasibility report in Feb. 1972 &detailed project report for the plant, with an annual
capacity of 3.4MT of liquid steel.
The Govt of Indira and VSP signed an agreement on 12th June 1979 for the
cooperation in setting up 3.4 MT integrated steel plant. The project was estimated to cost
to Rs. 3,897.28 Cr based on prices as on 4 th Q of 1981. However, on completion of the
construction & commissioning of the whole plant in 1992, the cost escalated to Rs. 8,755 Cr
based on prices as on 2nd Q of 1994. The plant was dedicated to the nation on 1st Aug 1992
by the then PM, Mr. P.V. Narasimha Rao.
The man power in the VSP has been limited to 17,500 employees. The plant has the
capacity of producing 3.0 MT of liquid steel & 2.656 MT of saleable steel.
It has set up two major Blast Furnaces, the Godavari, & the Krishna, which are the
envy of any modern steel making complex.
PROFILE:
10
Steel comprises one of the most important inputs in all sectors of economy. Steel is
the basic input for automobiles, construction, machine building, fabrication and
transportation industries. Keeping in view, the government of India constituted VSP in
1982 by Prime Minister Mrs. Indira Gandhi with the collaboration of Russia. Its process is
to produce a range of steel products. It’s a subsidiary of Rashtriya Ispat Nigam Limited.
VSP has come a long way before becoming debt-free company in October 2003 (for
the first time since its inception in 1992). VSP is now poised at 4th position among Indian
steel majors (Ranked no. 69 among global steel makers) after passing through a turbulent
phase & crisis that had threatened its very existence.
The success story of VSP is depicted in its efficient capacity utilization & good
labour productivity. The positive trends in VSP’s performance are expected to wipe out the
plants accumulated losses completely by 2007-08.
Location :
The plant is located on the coast of Bay Of Bengal, 16 Kms to the south west of the
Visakhapatnam port. It lies between the northern boundaries of the National Highway
No.5 from Madras to Calcutta and 7 kms to the south-west of Howrah Madras Railway
line.
PRODUCT MIX :
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Visakhapatnam steel plant products angles, channels, bars, wire rods and billets for
re-rolling. The plant also produces pig iron & 1.44 MT of granulated slag, besides normal
by- products from the coke oven and Coal Chemical Plant.
VSP TECHNOLOGY :
• 7m tall coke oven batteries with coke dry quenching.
• Biggest Blast Furnace in the country.
• Bell less top charging system in Blast Furnace.
• 100% slag granulation at the BF cast house.
• Suppressed combustion LD gas recovery system.
• 100% continuous casting of Liquid Steel.
• “Tempcore” & “Stelmor” cooling process in LMMM & WRM.
• Extensive waste heat recovery systems.
• Comprehensive pollution control measures.
MAJOR PLANT UNITS :
VSP has the following major production facilities :

• 3 Coke oven batteries of 67 ovens each having 41.6 m3.
• 2 Sinter machines of 312-m2 area.
• 2 Blast furnace of 3200-m3 useful volume.
• Steel melt shop with 3 L.D converters of 150T capacity each and 6 Nos of 4 strand
continuous bloom casters.
• Light and medium merchant mill of 7,10,000 tonnes per year capacity.
• Wire rod mill of 8,50,000 tonnes per year capacity.
• Medium & merchant & structured mill of 8,50,000 tonnes per year capacity.
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Extensive facilities have been provided for repair and maintenance as well as manufacture
of spare parts. A power plant, captive mines for flux, oxygen plant, acetylene plant,
compressed air plant also forms parts of the plant facilities. A part from the above works
departments, the non-works departments in VSP are Personnel, Training & Development
center, purchase, Marketing, Finance, Design & Engineering & Township Administration.
MAJOR SOURCES OF RAW MATERIAL :
TABLE 2.1
The places where the steel

plant is getting it supplies
Raw Materials of raw materials
Iron or lumps & fines Bailadill, M.P
BF Line stone Jaggayyapeta, A.P.

SMS Line stone UAE
BF Dolamite Madharam, A.P.

SMS Dolamte Madharam, A.P.
Manganese Ore Chipuripalli, A.P.
Boiler Coal Talcher, Orissa
Cokig coal Australia

Medium Coking Coal Gidi /Swang
(MMC) /Rajarappa/kargila
13
WATER & POWER SUPPLY:
Operational water requirements are met from Yeluru water supply scheme of AP
State Government. Power requirements are met by captive Power Plant having 3 No.s of
60 MW sets and from APSEB grid.
VISION MISSSION & OBJECTIVES :
RINL MISSION :
To attain 10 million ton liquid steel capacity through technological up gradation,
operational efficiency and expansion; to produce steel at international standards of cost &
quality; & to meet the aspirations of the stake holders.
RINL VISSION :
To become a continuously growing world class company .
• To harness the growth potential & sustain profitable growth.
• To deliver high quality & cost competitive products & to be the first choice of
customers.
• Create an inspiring work environment to unleash the creative energy of people.
• Achieve excellence in enterprise management.
• Be a respected corporate citizen, ensure clean & green environment & develop
vibrant communities.
CORE VALUES :
• Commitment
• Customer satisfaction
• Continuous improvement
• Concern for environment
• Creativity & innovation
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OBJECTIVES :
Towards growth: Expand the plant capacity to 7 MT by 2011-12.
Towards profitability: Achieve net profits with special emphasis on enhancement of

production of value added steels & cost reduction.
Towards employees: Make RINL the employer of choice. Upgrade the skills and efficiency
of employees through training & development & maintain high levels of motivation &
satisfaction.
Towards customers : Promote branding of products for quality & customer relations
management.
Towards quality : Promote quality movement in all functions of the company through
quality management system.
Towards technology upgradation& productivity : Upgrade technology & practice bench

marking to achieve continuously international efficiency levels. Adopt latest developments
in information & communication technology.
Towards safety, environment & society : continue efforts towards the safety of employees,
conservation of environment & be a good corporate citizen.
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POLICIES & RULES OF RINL/VSP :
VSP takes all necessary actions for the fulfillment of regulatory requirements. In this
regard VSP follows the following policies.
1. Quality policy: Continuously improve the quality of all materials processes and
products, services for customers.
2. Environment policy : Maintain a high level of environmental consciousness amongst

employees and prevention of pollution by minimizing emissions and discharge.
3. Energy policy : By adopting appropriate energy conservation technologies, VSP

controls the consumption of various forms of energy.
4. OSHAS policy : VSP is committed to occupational health and safety of employees

and contract workers.
5. HR policy : VSP believe that their employees are the most important resource, so it
provides good working environment tnet makes the employees committed and
motivated for maximizing the productivity.
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ACHIEVEMENTS AND AWRDS :
• ISO 9002 for SMS and all the down stream units- it is a unique distinction in the
Indian steel industry.
• Received Indira Priya Dhaashini Vriksha Mithra Award 1992-93.
• Nehru Memorial National Award for pollution control 92-93 & 93-94.
• EEPC – Export Excellence Award ; 94-95 CII (southern region). Energy
Conservation Award 95-96.
• Golden peacock (1st prize) “National Quality Award-96”.
• Steel Ministries Trophy for “Best safety Performance” in 1996.
• Selected for “World Quality Commitment Award-1997” of Japan, Spain.
• Udyoug excellence Gold medal Award for excellence in steel industry.
• Excellence Award for outstanding performance in productivity management.
• Ispat Surakshya Puraskar (1st prize) for longest accident free period 91-94.
• Best labour management award from the government of AP.
• SCOPE award for best turn around for 2001.
• Environment Excellence award from green tech foundation for energy conservation
in 2002.
• Best enterprise award from SCOPE, WIPS for 2001-02.
• “SAIL chairman’s silver plaque” for No. Fatal Accident for the year 1999.
• Best enterprise award from SCOPE for surpassing MOU targets 2003-04.
• ISTD award for “Best HR practices“ -2002.
• Prime Minister trophy for “Best integrated steel plant”-2002-03.
• “World Quality Commitment International Star Award” in the gold category
conferred by business initiative directions, Paris.
• “Organizational excellence award” for 2003-04 conferred by INSSAN.
• National Energy Conservation Award, 2004 and special prize from Ministry of
Power, Govt of India.
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PERFORMANCE OF RINL AT A GLANCE
PRODUCTION PERFORMANCE:
Achieving new targets year after year in production has become a part of the work culture.
The production performance of VSP in the last four years is as follows:
PRODUCTION PERFORMANCE-(‘000 TONS)
SALEABLE LABOUR
LIQUID PRODUCTIVITY
YEAR HOT METAL METAL STEEL (Tones/man)
1999-2000 2943 2656 2382 192
2000-2001 3165 2909 2507 211
2001-2002 3485 3083 2757 228
2002-2003 3941 3356 3056 253
2003-2004 4055 3508 3169 262
2004-2005 3920 3560 3173 398
2005-2006 4153 3603 3237 414
2006-2007 4046 3606 3290 413
2007-2008 3913 3322 3074 446
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COMMERCIAL PERFORMANCE :
The commercial performance of VSP for the past four years is as follows
TABLE 2.3(In crores)
SALES DOMESTIC CASH

YEAR TURNOVER SALES PROFIT
2000-
2001 3436 3122 153
2001-
2002 4080 3710 399
2002-
2003 5058 4433 626
2003-
2004 6169 5406 768
2004-
2005 8190 7942 248
2005-
2006 8491 8048 443
2006-
2007 9151 8726 425
2007-
2008 10443 9878 555
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FINANCIAL PERFORMANCE :
VSP had to bear the burnt of huge project cost right from the day of its inception.
This has affected the company’s balance sheet due to very high interest burden. The
company, in spite of making operating profit every year had to report net loss during all
financial years. This on the other hand had resulted in making VSP to take great care in
planning the financial resources.
The financial performance of VSP for the past ten years is as follows:
TABLE 2.4
GROSS CASH NET

YEAR SALES MARGIN PROFIT PROFIT
1998-
1999 2762 15 -346 -
1999-
2000 2973 252 -130 (-) 562
2000-
2001 3436 504 153 (-) 291
2001-
2002 4081 690 400 (-) 75
2002-
2003 5059 1049 915 521
2003-
2004 6174 2073 2024 1547
2004-
2005 8181 3271 3260 2008
2005-
2006 8482 2354 2323 1252
20006-
2007 9151 2632 2583 1363
20007-
2008 10433 3515 2303 1943
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BOARD OF DIRECTORS
CHAIRMAN-CUM-MANAGING
DIRECTOR
P.K. Bishnoi
DIRECTOR (FINANCE)
DIRECTOR (PERSONNEL) Y.Manohar
DIRECTOR (COMMERCIAL) M.B.Chatwal.
DIRECTOR (OPERATIONAL)
P.K.Mishra
`
DIRECTORS(Govt.) G.Elias
Arun Kumar Rath
DIRECTORS(Independent)
RSSLN Bhaskarudu
Dr.V.K.Bhalla
J.S.Mathur
AGM (CA) & COMPANY SECRETARY P.Mohan Rao
Adimistrative Building
Visakhapatnam Steel
Plant
Visakhapatnam -- 530
OFFICE 001
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INDUSTRY ANALYSIS
Economic stability of nation depends on the strong industrial base it enjoys. The
Indian economy is on a new growth path with buoyancy in capital markets, positive growth
in GDP, strong forex reserves and a remarkable growth in industrial sector. Industry
output has grown by 8.2% in 2005-06 compared to 7.0% growth in 2004-05.
manufacturing industry has grown at 10% (till Apr 05) as against 8.8% growth in Apr 04.
with brisk demand for steel, textiles, non-ferrous metals, gem & jewellary. The future
prospects of Indian industrial sector as a whole looks promising as outlays on mega
projects in steel, power & oil natural gas sectors are contemplated in unprecedented
manner. India is going to be a base for expansion of capacity of many industries by many
multinationals and others with lower costs & higher scope for increasing exports to
neighboring countries.
The following literature looks into the global & Indian steel sector scenario in brief.
Global Scenario :
Global steel demand is on rise on the back of accelerated infrastructure activity in

China, booming housing industry & recovering auto industry in U.S, buoyant housing &
white good industry in Europe. Reconstruction work in Iraq is expected to fuel further
demand for steel over next 3 years.
At present China is the world’s largest crude steel producer followed by Japan &
U.S.A. while U.S.A is the largest importer of semi finished & finished steel products, Japan
is the largest exporter of the same.
However, the world at large is grappling with over capacity problem.

The industry had gone through the most difficult years between 1998 & 2002.
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The reasons for this difficult phase are owned to:
• Demand – Supply mismatch due to unfair priced trading regime.
• Large gap between installed capacity & effective capacity and effective capacity &
actual production.
• Anti-dumping measures taken against CIS, China, Brazil, India & a few other
countries led to distortion in world trade.
• Over capacity.
The global steel industry is facing the raw material shortage in wake of China’s
massive infrastructure building exercise in view of 2008 Beijing Olympics. The prices may
stabilized after the Olympics.
A move has been initiated globally to cut production of steel thereby to control the
declining steel prices. This cut down of capacity is expected to restore supply demand
balance to some extent.
It is projected that China will emerge a net exporter for exports of Semi, long
products & HR wide coils. Imports by U.S may continue with the dollar losing its shine
against major currencies.
Global steel industry is presently poised to reasonable growth, which is reflected in
renewed interest shown by entrepreneurs for investments in the sector. The demand push
in China, India CIS & also in U.S & E.U. signaled the much awaited revival of the steel
industry.
INDIAN STEEL SECTOR :
`Operating performance is a main driver of competitiveness of any company. Based

on this parameter Indian steel industry is much below global standards. Although
significant improvement has been observed in material, energy and man power
productivity, it is not in a position to compete with steel majors like PSCO, CS or NUCOR.
India is placed in 8th position overall among the steel producing countries in the world.
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The reasons for slow growth in India steel industry are,
• Poor productivity due to small size of plants & policy lapses and poor investment in
technology.
• Less spending on R & D (less than 1% of revenues) & use of obsolete technology.
• Outdated mining policies.
• High transaction costs (nearly 10% of foreign trade).
• Costly freight charges.
• Cost of capital is 2 times the world average interest rate.
• Taxes and levies constitute 30% of final value of steel.
• Significant government intervention.
ss
In line with global trend, the Indian steel industry has been passing through tough
conditions. The prices have declined due to over capacity, cheap imports, declining global
steel prices and also due to anti dumping duty imposed by USA on Indian exports.
However, the present condition is better compared to last decade, which saw steel prices at
rock bottom levels.
There is a gradual improvement in steel prices owing to-
• Trade cases & import restrictions by many steel-producing countries.

• Voluntary production cuts after sharp tall in prices.
• Continuing strong demand in USA, China.
• Recovery in Asian Economics.
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The consumption of finished carbon steel increased from 14.84 MT in 1991-92 to 33.37 MT
in 2004-05. China has been an important export destination for Indian steel.
In 2004-05 the production of finished carbon steel & pig iron are as follows.
2004-2005 2005-06
Category (million tones) (million tones)
Pig Iron 0.273 0.439
Finished
Carbon
Steel 3.023 3.084
The share of main producers (SAIL, RINL, TISCO ) & secondary producers in total
production of finished carbon steel was 40% & 60% respectively during the year 2004-05.
The total steel import are estimated to be 2.050 MT while exports stands at 4.375 MT in
2004-05.
Domestic demand is expected to steadily rise from the current level of 34 million tones of
apparent to the projected level of 60 MT by 2011-12. This makes it necessary to have fresh
capacity additions in steel. This in turn is to be supported by adequate sourcing of metallic
and infrastructure growth including port development to support the transportation needs
of output to cater both domestic & global demands.
The industry now looks ahead with anew resolve & determination. Reaping the benefits of
globalized markets calls for utmost vigilance from all stakeholders – producers, consumers
25
& state. The industry should capitalize the opportunities and mitigate the dangers of
synchronized global trends.
SWOT ANALYSIS:
SWOT analysis of VSP depicts the strengths of VSP, weakness that are to be
avoided, opportunities that should be banked, and threats that should be faced & yet
survive in the business.
Strengths:
• State of the art technology:
VSP was built with the co-operation of USSR and claims to be one of the most
modern steel plants in the country . VSP employs highly sophisticated technology,
large-scale computerization & automation in the production.
• Location advantages:
VSP was rendered with additional advantages due to its location. The location
aspect has helped the VSP in easy procurement of raw materials as most of the raw
materials are imported from Andhra it self, apart from Orissa & M.P which are
located near by.
More over the existence of Visakhapatnam port makes it easy in procurement of

raw materials like cooking coal from Australia. Also exports to various countries
can be made directly from Visakhapatnam port.
• Self-Sufficiency in power:
VSP has its own power generation unit with a total capacity of 286.5 MW. VSP
requires power of 180 MW to 200 MW. VSP, after meeting its requirement exports
power to APSEB.
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• High commitment on part of employees:
The productive environment prevailing in the company fosters an atmosphere of
growth both for employees & for the company. The labour productivity is currently
262 tonnes/man/year unparallel in the public sector steel industry.
• Strong commitment to conserve environment:

VSP is forefront of Indian industry in area of pollution control, equipment &
measures. The total cost of these measures works out at Rs.4600 million which
forms nearly 8% of total cost of steel plant. VSP is an ISO-14001 certified company
(certificate for environment protection & pollution control measures).
• ISO 9002 Certification:

VSP has ISO 9002: 2000 certifications for SMS & all the downstream units. ISO
certification gives an edge for VSP over other companies & depicts the competency
of Vizag steel to compete with the global steel producers.
Weakness:
• High intake of employees:

VSP employs 17,500 employees including both administrative and plant. When
compared to international standard companies like POSCO and other major steel
producers, VSP employs 50% more for the same capacity. Hence the salaries of
these employees, medical & other facilities will rise cost further which may disturb
the cost effectiveness achieved in the production front.
• Low return product mix:
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The product mix of VSP is small. VSP’s long products like billets, wire rods,
structural are facing less demand due to the crisis in South East Asian nations.
• Inadequate port facilities:
The berthing facilities at VSP are not adequate relative to the requirements of VSP.
Opportunities:
Sizeable export markets:
China is the biggest importer of Indian steel. China is going to have huge
requirements of steel in next 5 years due to Olympics (in 2008), shanghai expo (in 2010).
Reconstruction work in Iraq requires huge amounts of steel where RINL can play a
significant role.
Other promising factors are-
• proximity to southern market.

• Strong economy.
• Possibility of new markets.
• A slow but steady increase in domestic steel demand.
Threats:
Global steel majors like POSCO & Mittal steel are venturing into steel production
very soon (in Orissa). This may pose a problem to VSP in the procurement of raw
materials as it is dependent on Orissa for these materials. Input costs are increasing due to
the increasing cost of raw material. Also the demand for coal & coke is escalating.
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No captive iron ore mine:
VSP is the only steel major in the country with out a captive iron ore mine. This
may present a difficult situation when the demand supplies equation for the iron ore
changes.
Other disturbing trends include-
• Weak domestic market.

• Liberalization & decontrol.
• Sensitive to exchange rate risk.
• Excise duty continues to be high.
( Excise duty on steel has been increased from 12% to 16% in union budget 2005-06.)
• TISCO’s rod mill 3,00,000 tap capacity is a major threat for marketing VSP’s wire
rods.
WORKING CAPITAL MANAGEMENT
Working capital is the firm’s holdings of current assets such as cash, receivables,
inventory & marketable securities. Every firm requires working capital for its day to day
transactions such as purchasing raw material, for meeting salaries, wages, rents, rates,
advertising etc.
Significance of working capital:
The world in which real firms function is not perfect. It is characterized by the firms
considerable uncertainty regarding the demand, market price, quality & availability of its
own products and those suppliers. While the firm has many strategies available to address
these circumstances, strategies that utilize investment or financing with working capital
accounts often offer a substantial advantage over the other techniques. The importance of
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working capital management is reflected in the fact that financial managers spend a great
deal of time in managing current assets and current liabilities like-
• Arranging short term financing.

• Negotiating favorable credit terms.
• Controlling the movement of cash.
• Administering accounts receivables.
• Monitoring investment in receivables.
Decision concerning the above areas play a vital role in maximizing the overall value of the
firm. Once decisions concerning these areas are reached, the level of working capital is also
determined in active decision sense, but falls out as residual from the decision just made.
The management of working capital plays an important role in maintaining the

financial health during the normal course of business. This critical role can be enunciated
by examining the flow of resources through the firm. By far the major flow is the working
capital cycle.
30
This is the loop (previous page) which starts at the cash and the marketable
securities account, goes through the current account as direct labour and materials which
are purchased and use to produce inventory, which in turn is sold and generates accounts
receivables, which are finally collected to replenish cash. The major point to notice about
this cycle is that the turnover or velocity of resources through this is very high related to
the other inflows and outflows of the cash account.
31
There are two concepts of working capital namely; Gross working capital and Net
working capital.
Gross working capital, simply called as working capital refers to the firm’s
investment in current assets. Current assets are the assets, which in ordinary course of
business can be converted into cash within an accounting year. Current assets include cash
and bank balances, short term loans and advances bills receivables, sundry debtors,
inventory, prepaid expenses, accured incomes, money receivable (within 12 months).
The gross working capital focuses attention of two aspects of current assets
management.
a) Optimum investment in current assets and
b) Financing of current assets.
The consideration of the level of investment in current assets should avoid two
danger points-excessive and inadequate investment in current arranging funds to finance
current assets. Whenever a need for working capital funds arises due to the increasing
level of business activity or for any other reason arrangement should be made quickly.
Net working capital :
Net working capital refers to the difference between the current assets and current
liabilities. Current liabilities are those claims of outsiders, which are accepted, to measure
for payment with an accounting year and include creditors, bills payable and outstanding
expenses.
Net Working Capital = Current Assets – Current Liabilities
32
Net working capital can be positive or negative. A positive net working capital will arise
when current assets exceeds current liabilities. It is a quantitative concept, which indicates
the liquidity position of the firm and suggests the extent to which working capital needs
may be financed by permanent sources of funds.
Working capital can be classified into two categories i.e,
1. Permanent working capital.

2. Temporary or variable working capital.
Permanent working capital:

It is the minimum amount of investment in all current assets which is required at
all times to carry out minimum level of business activities. Tandon committee has reserved
to this type of working capital as “ Core Current Assets”.
Amount of permanent working capital remains in the business in one form or

another. It also grows with the size of the business. It is permanently needed for the
business, and therefore be financed out of long-term funds.
Variable working capital :

The amount of working capital over permanent working capital is known as
variable working capital. The amount of such working capital keeps on fluctuating from
time on the business activities. It may further be divided into seasonal working capital and
special working capital. Seasonal working capital is required to meet the seasonal demands
of busy periods occurring at stated intervals. On the other hand, special working capital is
required to meet extraordinary needs for contingencies. Events like strikes, fire,
unexpected competition, rising price tendencies or initiating a big advertisement campaign
require such capital.
33
Approaches for financing working capital :
There are three approaches to financing the working capital :
1. Hedging approach
2. Conservation approach
3. aggressive approach
Hedging approach :
A firm is said to be following Hedging approach if it matches the maturity of the
debt with the maturity of assets. For the firm following hedging approach, long term
financing will be used to finance fixed assets and permanent current assets and short term
financing for temporary or variable current assets. As the level of these assets increases,
the long financing level also increases.
However, it should be realized that exact matching is not possible because of the
uncertainty about the expected lives of assets.
Conservative approach:
A firm in practice may adopt a conservative approach in financing its current and
fixed assets. The financing policy of the firm is said to be conservative when it depends
more on long term funds for financing needs. Under a conservative plan, the firm finances
its permanent assets and also a part of temporary current assets, the idle long-term funds
can be invested in the tradable securities to conserve liquidity. The conservative plan relies
heavily on long term financing.
Aggressive approach :
A firm may be aggressive in financing its assets. A firm follows aggressive policy
when it uses more short-term financing than warranted by the matching plan. Under an
34
aggressive policy, the firm financing a part of its permanent current assets with short term
financing. Some extremely aggressive firms may even finance a part of their fixed assets
with short-term financing.
Importance of working capital :

A business firm must maintain an adequate level of working capital in order to run
its business smoothly. It is worthy to note that both excessive and inadequate working
capital positions are harmful. Out of two, inadequacy of working capital is more dangerous
for a firm. Excessive working capital results in idle funds on which no profits are earned.
Similarly insufficiency of working capital results in interruption of production. This will
lead to inefficiencies, increase in costs and reduction in profits. Working capital is like the
lifeblood of business. If it becomes weak, the business can hardly prosper and survive. No
business can run successfully with out and adequate amount of working capital.
The following are the few advantages of adequate working capital in the business :
• Cash Discount : Adequate working capital enables a firm to avail cash discount
facilitates offered to it by the suppliers. The amount of cash discount reduces the
cost of purchase.
• Goodwill : Adequate working capital enables a firm to make prompt payment.

Making prompt payment is a base to create and maintain goodwill.
• Ability to face crisis : The provision of adequate working capital facilities to meet
situations of crisis and emergencies. It enables a business to with stand periods of
depression smoothly.
35
• Credit-worthiness : It enables a firm to operate its business more efficiently because
there is not delay in getting loans from banks and others on easy and favorable
terms.
• Regular supply of raw materials : It permits the carrying of inventories at a level

that would enable a business to serve satisfactory the needs of its customers. That is
it ensures regular supply of raw materials and continuous production.
• Expansion of markets : A firm which has adequate working capital, can create
favorable market condition i.e, purchasing its requirements in bulk when prices are
lower and holding its inventories for higher. Thus profits are increased.
• Increased productivity.
• Research programs.
• High Morale.
Problems of inadequate working capital :

• Firm may not be able to take advantage of profitable business opportunities.
• Production facilities cannot be utilized fully.
• Short-term liabilities cannot be paid because of non-availability of funds.
• Its low liquidity may lead to low profitability. In the same way, low profitability
results in low liquidity.
• It may not be able to take advantages of cash discounts.
• Credit worthiness of the firm may be damaged because of lack of liquidity. Thus it
may be lose its reputation; thereafter a firm may not be able get credit facilities.
36
Danger of excessive working capital :
• A firm may be tempted to over trade and lose heavily.

• Unable to extract benefits of customers credit.
• The situation may lead to unnecessary purchases and accumulation of inventories.
This cause more chances of theft, waste, losses etc.
• There arise an imbalance between liquidity and profitability.
• Excessive working capital means funds are idle.
• The situation leads to greater production, which may not be having matching
demand.
• The excess of working capital leads to carelessness about cost of production.
Determinants of Working Capital :

The need of working capital is not always the same it varies from year to year or
even month-to-month depending upon a number of factors. There is no set of rules or
formulate to determine the working capital needs of the firm. Each factor has its own
importance and its importance of the factors changes for a firms over time.
In order to determine the proper amount of working capital of concern, the following
factors should be considered.
• Nature of business.
• Size of the business unit.
• Seasonal variation.
• Time consumed in manufacturing.
• Turnover of circulating capital.
• Need to stockpile raw material and finished goods.
37
• Growth and expansion.
• Business cycle fluctuations.
• Terms of purchase and sale.
• Pricing level changes.
• Inventory turnover.
• Dividend policy.
Ratio to measure the efficiency of working capital :

Current Ratio : Current assets/Current liabilities
• Quick Ratio : (current assets – Inventories) /Current liabilities
• Sales to cash : Sales during a period / Averge cash balance.
• Average collection period : Debtors dividend by annual credit sales and the
resulting figure multiplied by 365. This retio indicates how many days of credit is
being obtained from the suppliers.
• Average payment Period : Creditors divided by annual credit purchase and the
resultant figure is multiplied by 365. This retio indicates how many days of credit
are being obtained from the suppliers.
• Inventory turnover ratio : Sales /Average inventory.
Working capital policy :

Working capital management policies have a great effect on firm`s profitability, liquidity
and its structural health. A finance manager should therefore, chalk out appropriate
working capital policies in respect of each competent of working capital so as to ensure
high profitability, proper liquidity and sound structural health of the organization.
In order to achieve this objective the financial manager has to perform basically following
two function.
1.Estimating the amount of working capital .

2.Sources from which these funds have to be raised.
38
Objectives of Working Capital Management :
The objectives of working capital management are two fold :
1. Maintenance of working capital and

2. Ability of ample funds at the time of need.
The basic goal of working capital management is to manage each of the funds current
assets and current liabilities in such a way that an acceptable level of net working capital is
always maintained in the business.
Operating Cycle :
Working capital is required because of the time gap between the sales and their
actual realization in cash. This time gap is technically terms as operating cycle of the
business.
In case manufacturing company, the operating cycle of time necessary to complete the
following cycle of event.
• Conversion of cash into raw materials.

• Conversion of raw materials into work in progress.
• Conversion of work in progress into finished goods.
• Conversion of finished goods into accounts receivables.
• Conversion of accounts receivable into cash.
39
This cycle is continuous phenomena. In case of “Trading Firm” the operating cycle will
include the length of time required to :
a) Cash into inventories.

b) Inventories into accounts receivables.
c) Accounts receivables into cash.
In case of “Financing Firm” the operating cycle includes the length of time taken for 1
year.
a) Conversion of cash debtors, and

b) Conversion of debtors into cash.
Working capital turnover ratio :
It measures the efficiency of the employment of working capital. Generally higher

the turnover, greater is the efficiency and larger the sale of profits. Working capital
turnover ratio can be calculating with help of the following formula.
Working capital turnover ratio = sales .

Net working capital
40
INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets for a majority of
companies in India. The term inventory refers to the stockpile of the product.
Inventories can be classified as three categories :
1. Raw material : Inputs that are converted into finished products through
manufacturing process.
2. Work in progress : semi finished products that require further work to be
done before they are ready for sale.
3. Finished goods : Goods which are completely manufactured products and/or
ready for sale.
Need to hold Inventories :
There are three general motives for holding inventories.
1. The Transaction Motive : Which emphasis the need to maintain inventories to

facilitate smooth production and sales operation.
2. The Precaution Motive : Which necessitates holding of inventories to guard against

the risk of unpredictable changes in demand and supply forces and other factors.
3. The Speculative Motive : Which influences the decision to increase or reduce

inventory level to take advantage of price fluctuation.
41
OBJECTIVES :
The objective of inventory management is to determine and maintain the optimum

level of inventory management as both excessive and inadequate inventories are not
desirable. The optimum level inventory lies between the two danger points, excessive and
inadequate inventories. The optimum level of inventory should be determined on the basis
of trade off between costs and benefits associated with the levels of inventory.
TECHNIQUES :
Attention is given to the basic concepts relevant to the management and control of
inventory. The aspects include-
• Determination of the type of control required.

• The basic economic order quantity.
• The re-order point.
• Safety stock.
As a matter of fact the inventory management techniques are a part of production

management. However a familiarity with them is essential for a financial manager in
planning and budgeting inventory.
DETERMINATION OF THE TYPE OF THE CONTROL REQUIRED:
ABC System :
42
The ABC system is a widely used classification technique to identify various items of
inventory for purposes of inventory control. This technique is based on the assumption that
a firm should not exercise the same degree of control on all items of inventory. It should
rather keep a more rigorous control on items that are (1) most costly, and/or (2) slowest
turning while items that are less expensive should be given less control effort.
On the basis of cost involved the various inventory items according to the system
are categorized into three classes.
A = Largest inventory leading to most sophisticated inventory control techniques.
B = Midway and deserving less attention than ‘A’ but more than ‘C’ leading to
employing less sophisticated techniques.
C = Small investment with fairly large number deserving minimum attention.
Order Quantity Problem :
Economic Order Quantity (EOQ) model :
After various items are classified on the basis of the ABC analysis, the management
becomes aware of the type of control that would be appropriate for each of the three
categories of the inventory items. The group ‘A’ items warrants the maximum attention
and the most rigorous control. A key inventory problem particularly in respect of the
group ‘A’ items relates to the determination of the size or quantity of inventory.
Buying in large quantities implies a high inventory level, which will assure
(i) Smooth production /sale operation and
(ii) Lower ordering or set-up costs. However it increases the ordering costs and
likelihood of interruption in the operation due to stock outs.
Thus a trade-off between benefits derived from the availability of inventory and the cost of
carrying that level of inventory has to be derived by placing an optimum level of inventory
43
order that minimizes the cost associated with inventory order that minimizes the cost
associated with inventory management.
The optimum level thus derived is known as Economic Order Quantity. EOQ
equates the cost of ordering with the cost of storage of raw materials.
Ordering cost :
It is difficult to quantify this cost, as there are many factors involved. It include cost of
stationary, salaries of those engaged in preparing the purchase orders etc.
Cost of storage (or) cost of carrying inventory :
This includes the cost of store keeping, interest on capital locked up in stores, the incidence
of insurance cost, evaporation etc.
For effective material control and to avoid overstocking and under stocking of raw
materials, an important requirement is to decide upon various levels of materials.
These levels are maximum level, minimum level and re-order level. By taking action on the
basis of these levels, each item of material will automatically be held within appropriate
limits of control.
These level are not permanent, but need revision according to the changes in the factors,
which determine these levels.
44
Factors include :
• Rate of consumption of materials.

• Lead time i.e, time lag.
• Storage capacity.
• Availability of funds for investment in inventories.
• Cost of storage.
• Risks of loss due to deterioration, theft, fine etc.
• Seasonal factors – certain materials are cheaply available during certain seasons.
• Fluctuation in market prices.
• Insurance costs.
CASH MANAGEMENT
Cash is the most important factor in financial management. It is also the most
important current asset for the operation of the business. Every activity in an enterprise
revolves round the cash. Cash is limited in every enterprise and it cannot be raised as and
when required which calls for an efficient management of funds available.
Cash is the most liquid asset and is of vital importance to the daily operations of the
business. While the proportion of corporate assets held in the form of cash is very small
(often in between 1% to 3%) its efficient management is crucial to the business because
cash is the focal point in business.
Meaning of cash :
45
The term ‘cash’ is used in two senses. In a narrower sense it includes currency notes,
cheques, bank drafts held by a firm with it and the demand deposits held by it in banks. In
a broader sense it also includes near cash assets such as marketable securities and time
deposits with bank.
The main reason for a firm to hold cash is to meet the needs of day-to-day transactions and
to protect the firm against uncertainties characterizing its cash flows.
While cash serves these functions, it is an idle resource which has an opportunity cost. The
liquidity provided by cash holding is at the expense of profits sacrificed foregoing
alternative opportunities. Hence, the finance manager should carefully plan and control
cash.
OBJECTIVES OF CASH MANAGEMENT :
• To meet the cash disbursement need as per the payment schedule.

• To minimize the amount locked up as cash balances.
Advantages of sample cash funds:
a) A shield for technical inefficiency.

b) Maintenance of goodwill.
c) Availing of cash discount.
d) Good bank-relations.
e) Exploitation of business opportunities.
f) Encouragement to new investment.
g) Increase in efficiency.
h) Over coming abnormal financial situations.
46
RECEIVABLE MANAGEMENT
Accounts receivables constitute a significance portion of the total current assets. They are
direct consequences of “trade credit” which has become an essential marketing tool in
modern business.
Meaning of receivable :
Receivables are asset accounts representing amounts owned to the firm as a result
of sale of goods or services in the ordinary course of business.
The management of receivables is basically a problem of balancing profitability and

liquidity. Soft credit terms are attractive for higher sales and hence longer the time a
company allows its customers to pay the higher are the sales and hence profits. However,
on the other hand the longer the period of credit, the greater the risk, greater the level of
debt and greater the strain on the liquidity of the company.
Cost of receivables :
Capital cost : It is the cost associated with the blocking of firm’s resources in the
receivables because of the time lag between the sale of goods to customers and realization
of sales. The firm therefore has to customers and realization of sales. The firm therefore
has to arrange for additional funds to meet its current obligations.
Administrative cost : The firm has to incur additional administration costs for
maintaining account receivable in the form of salaries etc.
47
Collection cost : The firm has to incur costs for collecting the payments.
Defaulting cost : Sometimes after making all serious efforts to collect money from
defaulting customers the firm may not able to recover the over debts because of the
inability of the customers. Such debts are treated as bad and have to be written off since
they cannot be realized.
Optimum size of receivables :
When the firm resorts to liberal credit policy, the profitability of the firm increases
on account of higher sales. However such a policy results in increased investment in
receivables and the problem of liquidity is created. On the other hand a stringent credit
policy reduces the profitability but increase the liquidity of the firm. Thus optimum credit
policy occurs are a point where “Trade off between liquidity and profitability”.
48
Credit policy variables :
The important dimensions of a firm credit policy are,
• Credit standards.
• Credit period.
• Cash discount.
• Collection effort.
System for receivable control :

The management should consider the following four factors in keeping the level of
investment in receivables within the controllable limits.
1. Deciding acceptable level of risk : The first point is to decide to whom goods should
be supplied bearing in mind the risk involved. It is therefore essential to assess the
credit worthiness of the customers before advancing any credit to them.
2. Terms of credit sales : The second step in this regard in to decide terms of credit
sales and the level of cash discounts. Cash discount has important bearing on the
cost of capital and on credit sales.
3. Credit collection policy : The management should provide for bad debts to keep the
losses minimum. (Usually 5% to 7% of sundry debtors are provided for bad debts).
A collection procedure should be established and action should be taken
accordingly. The other steps should be record the age of debt to facilitate the
collection of debts.
49
The age of debt is called as average collection period.
• Average collection period = (credit sales in the period)/average accounts receivables.

• Accounts receivables turnover = average accounts receivables/average
monthly/daily credit sales.
• An increase in the age of receivables or debt collection period is an indication of
lenient credit of inefficiency collection.
The effective of the receivable management should be analyzed from time to time with the
help of certain ratios such as average collection period, debtor’s turnover ratio, receivable
current assets ratio etc.
50
PAYABLE MANAGEMENT
Management of accounts payable is as much important as the management of

accounts receivable. However there is a basic difference between the approaches adopted
by the Finance Manager in both the cases. The underlying objective in case of accounts
receivables is to maximize the acceleration of collection process while incase of accounts
payable it is to slow down the payments process as much as possible. The delay in
payments of accounts payable may result in saving of some interests costs but proves very
costly to the firm in the form of loss of credit in the market. The Finance Manager
therefore has to ensure that the payments to the credits are made at the stipulated time
period after obtaining the best credit term possible.
Control of accounts payable :
Computing the average age of payable can be calculated by any of the following
methods.
Months or days in the period / Accounts payable turnover accounts payable turnover =
Credit purchase in the period / Average accounts payable.
Average accounts payable / average month / daily credit purchase.
Average accounts payable / average month / daily credit purchases during the period.
51
WORKING CAPITAL MANAGEMENT IN VSP
Management efforts over the few years have been to inculcate cash consciousness through
constant emphasis on working capital, mainly inventory and book debtors. In all these, it is
to be kept in mind that VSP is a multi product undertaking, were management decisions
affecting working capital are taken at managerial level.
Sources of funds:
Visakhapatnam steel plant raises its working capital by multiple banking arrangements
with 10 Banks. The following are the ten banks, where funds for working capital are
raised:
1. State bank of India

2. Canara bank
3. UCO bank
4. Bank of Baroda
5. Andhra bank
6. Indian Overseas Bank
7. State Bank of Hyderabad
8. Allahabad Bank
9. IDBI Bank Ltd.
10. HSBC Ltd.
52
In VSP working capital requirement is assessed by
• Fixing the target production
• Preparation of Budget (in rupees)
Working capital requirement are prepared taking into account :

• Actual value of the previous two years working capital.
• Projected value for the next two years
Limits:
Visakhapantam steel plant is having fund-based limits of Rs.570.65 crores and Non-fund
based limits up to Rs.1231 crores.
Procedure for procurement of funds:
Visakhapatnam steel plant applies a credit monitoring and appraisal (CMA)

report (a 40-page document). The document consists of historical data about the company
and profit and loss account, balance sheet, current assets current liabilities, working
capital assessment, fund flows etc.. SBI subscribes the maximum working capital limit (up
to extent of 38%) of the entire working capital assessed. The other banks of the under the
multiple banking arrangement above provide the rest of Working capital limits.
53
WORKING CAPITAL LIMITS (UNDER MULTIPLE BANKING ARRANGEMENT)
(Rs in Crs)
Fund Based Non-Fund based
WCD Total
Sl.No CC Total EPC Total LC BG Total
Name of Bank L
.
(c=a+b (e=c+d
(a)3 (b) (d) (f) (g) (h=f+g) (i=e+h)
) )
1. State Bank of India 36.00 44.00 80.00 60.00 140.00 450.00 25.00 475.00 615.00
2. Canara Bank 30.00 45.00 75.00 45.00 120.00 270.00 15.00 285.00 405.00
3. Bank of Baroda 13.54 20.31 33.85 20.00 53.85 50.00 1.00 51.00 104.85
4. UCO Bank 5.00 20.00 25.00 15.00 40.00 35.00 5.00 40.00 80.00
State Bank of
8.30 12.83 21.13 9.17 30.30 36.00 1.00 37.00 67.30
5. Hyderabad
6. Allahabad Bank 25.00 0.00 25.00 15.00 40.00 90.00 5.00 95.00 135.00
7. HSBC Ltd. 0.00 0.00 0.00 0.00 0.00 50.00 0.00 50.00 50.00
8. IDBI Ltd. 0.00 0.00 0.00 0.00 0.00 50.00 0.00 50.00 50.00
9. Andhra Bank 14.00 21.00 35.00 11.50 46.50 45.00 3.00 48.00 94.50
10. Indian Overseas Bank 0.00 100.00 100.00 0.00 100.00 100.00 0.00 100.00 200.00
Total 131.84 263.14 394.98 175.67 570.65 1,176.00 55.00 1,231.00 1,801.65
WCDL : Working Capital Demand Loan

CC : Cash Credit
EPC : Export Packing Credit
LC : Letter of
Credit
BG : Bank
Guarantee
Types of working capital source :
1. Fund based limits : under this source, Visakhapatnam steel Plant can obtain
working capital finance by bank borrowing in the form of cash credit of export
packing credit.
2. Non-fund based limits : Visakhapatnam Steel Plant receives non-fund based

working capital in the form of letter of credit or bank guarantee.
54
YEAR WISE CHANGES IN WORKING CAPITAL
NET
GROSS WORKING
WORKING
YEARS CAPITAL CAPITAL
Amount Change Amount Change

(In Lakhs) percentage (In Lakhs) percentage
2001-02 171378.57 - 49279.44 -
2002-03 186360.02 8.74 63385.73 26.62
2003-04 271668.92 46.31 149133.81 135.27
2004-05 604752.10 121.78 462336.44 210.01
2005-06 825200.00 36.45 66614.00 44.14
2006-07 104410.00 26.61 834380.00 25.20
2007-08 11804.59 12.98 86120.92 3.22
Interpretation: The above table indicates that working capital is highest for the year 2005-
06. The net working capital has shown a gradual increase from 2003-04 till 2004-05.
Statement of changes in working capital is done in the pages that follow to give the
complete picture of variations in working capital.
55
Statement of changes in working capital for the year 1999-2000
(figures in Lakhs)
Particulars 1999 2000 Increase Decrease

Current Assets
Inventories
Sundry debtors
Cash and bank bal
Other current
assets 100940.24 111103.82
Loans and 11780.52 16342.80 10163.6
advances 15067.08 15993.13 4562.28
Total current 647.30 647.30 926.05
assets 27246.26 22352.96 20.49 4893.30
Current Liabilities 155681.40 166460.50
Liabilities
Provision 103228.63 115695.66
Total current 3129.57 3555.19 12467.00
liabilities 106358.20 119250.85 425.62
Net decrease in Working
Capital 2113.5
Total 17785.92 17785.92
Source: Annual reports of VSP
Interpretation:
Net working capital has decreased by Rs. 2113.5 lacks due to the increased current
liabilities. At the same time loans and advances too decreased by Rs.4893.30 lakhs.
Although there is an increase in the all of the remaining current assets, the higher value of
56
current liabilities has offset the increase in current assets. The net effect is the decrease in
working capital.
(figures in Lakhs)

Current Assets
Inventories
Sundry debtors 111103.82 120747.5
Cash and bank bal 16342.80 17383.52 9643.66
Other current assets 15993.13 16366.93 1040.7
Loans and advances 647.30 634.66 373.80
Total current assets 22352.96 24303.43 33.13
Current Liabilities 166460.50 179436.02 1950.47
Liabilities
Provision 115695.66 125509.9 9814.22
Total current 3555.19 4841.72 1286.53
liabilities 119250.85 4841.72
Net increase in Working Capital 1874.77
Total 13008.65 13008.65
Interpretation :
An increase in networking capital is observed (1874.77 lacks) due to significant

increase in inventories. Sundry debtors, cash & bank balances and loans &advances have
also shown a positive growth. The net increase in working capital would have been a very
positive figure due for the drastic increase in liabilities.
57
(figures in Lakhs)

Current Assets
Inventories 111137.9
Sundry debtors 5
Cash and bank bal 21249.40
Other current 16122.22
assets 120747.5 540.50 9609.53
Loans and 17383.52 22338.50
advances 16366.93 171388.5 3865.88 244.71
Total current 634.66 7 94.16
assets 24303.43 1964.93
Liabilities 2
Provision 125509.9 7783.31
Total current 4841.72 122099.1 11194.06
liabilities 4841.72 3 2941.59
Net Increase in Working Capital 205.02
Total 15059.94 15059.94
Interpretation :
58
The increase in net working capital in 2002 over 2001 is very small (195.02 lacs).
Although a decrease is observed in liabilities , a negative is observed in all the current
assets excluding sundry debtors. The net result is the decreased amount of working capital.
(figures in Lakhs)

Current Assets
Inventories
Sundry debtors 85755.23
Cash and bank bal 21757.92
Other current 54157.34
assets 111137.95 526.06
Loans and 21249.40 24163.47 25382.63
advances 16112.22 186360.0 508.52
Total current 540.50 2 38045.14
assets 22338.50 14.44
Liabilities 2
Provision 114315.82 9069.97
Total current 7783.31 122974.2 411.5
liabilities 122099.13 9 1286.66
Total 40790.13 40790.13
Interpretation :
59
Net working capital increase stood at 14106.3 lakhs. Cash & bank balances have
shown positive with an increase of Rs.38035.14 Added to this is the decrease in liabilities.
This resulted in increase in net working capital.
(figures in Lakhs)

70634.36
Current Assets 8561.55
Inventories 135971.2
Sundry debtors 7
Cash and bank 85755.23 2431.49
balance 21757.92 55070.25 15120.87
Loans and advances 526.06 2 818113.93
Total current assets 24163.47 1905.43
Liabilities 4
Provision 114037.78 15651.27
Total current 9069.97 123535.1 6153.94
liabilities 123107.75 1 6581.3
Total 120780.08 120780.08
60
Interpretation: The increase in net working capital in 2004 over 2003 is Rs.85881.54 lakhs .
For the second consecutive year the cash and bank balances have a shown an increasing
trend. Other current assets and loan advances have also increased. All these changes have
brought about an increase in net working capital
(figures in Lakhs)

Current Assets
Inventories
Sundry debtors
Cash and bank bal
Other current
assets 70634.36 125530.98 54896.62
Loans and 8561.55 4930.06 3631.49
advances 135971.27 393260.86 257289.59
Total current 2431.49 10017.95 7586.46
assets 55070.25 71012.25 1594.2
Liabilities
Provision 107883.84 115488.43 7604.59
Total current 15651.27 26927.23 11275.96
liabilities 123535.11 142415.66
Net Increase in Working
Capital 313202.63
Total 335714.67 335714.67
Interpretation:
61
There is a significant increase in net working capital which amounts to 3132 crores. There
noticeable increase in net working capital is due to increase in cash &bank balances. The
increase in cash is 2572.89 crores (189%). A positive growth is observed in loans &
advances and other current assets. The increase in liabilities is offset by the increase in
total current assets. The net effect of the above changes has brought about the increased
working capital.
62
(Figures in Lakhs)

Current Assets
Inventories 125530.98 121645.00 4108.00
Sundry debtors 4930.06 16565.00 11635.00

Cash and bank bal 393260.86 562170.00 168909.00
Current Liabilities
Liabilities 115488.43 87149.00 15903.00
Provision 26927.23 71637.00 44710.00
Total current 142415.66 158786.00
liabilities
Net Increase in 159613.00
Working Capital
Total 224334.00 224334.00
Interpretation:
There is a significant increase in net working capital, which amounts to 159613.00 lakhs.
There noticeable increase in net working capital is due to increase in cash &bank balances.
The increase in cash is 168909.00 lakhs. A positive growth is observed in loans & advances
and other current assets. The increase in liabilities is offset by the increase in total current
assets. The net effect of the above changes has brought about the increased working
capital.
63
(Figures in Lakhs)

Current Assets
Inventories 121645.00 120324.00 1511.00
Sundry debtors 16565.00 21680.00 5053.00

Cash and bank bal 562170.00 719468.00 157298.00

Current Liabilities
Liabilities 87149.00 101153.00 22576.00
Provision 71637.00 109277.00 37640.00
Total current liabilities 158786.00 210430.00
Net Increase in Working 159394.00
Capital
Total 221121.00 221121.00
Interpretation:
There is a significant increase in net working capital, which amounts to 159394.00 lakhs.
There noticeable increase in net working capital is due to increase in cash &bank balances.
The increase in cash is 157298.00 lakhs. A positive growth is observed in loans & advances
and other current assets. The increase in liabilities is offset by the increase in total current
assets. The net effect of the above changes has brought about the increased working
capital.
64
(figures in lakhs)
Current assets
Inventories 120324 176115 55791
Sundry debtors 21680 9341 12339
Cash & bank balances 719468 769911 50443
Other current assets 31448 29243 2205
Loans& advances 151890 195849 43959
Total current assets 1044810 1180459
Current liabilities
Liabilities 101153 161015 59862
Provisions 109277 158147 48870
Total current 210430 319162
liabilities
Net increase in 26916
working capital
Total 150193 150193
Source: annual reports of vsp
Interpretation:
The increase in net working capital in 2008 over 2007 is Rs 26917 lakhs. For the
second consecutive year the inventories shown an increasing trend. Cash & bank balances
and loans & advances are also increased. All these changes have brought about an increase
in net working capital.
65
OPERATING CYCLE ANALYSIS:
The level of current assets needed for a business significantly depends upon the length of
the operating cycle. The longer the operating cycle, larger will be the working capital
requirement of the firm for funds needed at different stages of operating cycle and vice-
versa.
Time series analysis of operating cycle in VSP
Year 97-98* 98-99 99-2000 2000-01

Raw Material stage Days Days Days Days
i.Consumption of
R.M stores spares 717.68 1219.65 1394.31 1443.68

ii.per day
consumption 1.96 3.34 3.82 3.95
iii.Avg.stock of
R.M. Stores,
spares 630.44 320.64 628.51 188.06 614.25 16.8 614.05 155.3
Duration of R.M Iii/ii Iii/ii Iii/ii Iii/ii
Work in process stage

i.sales 1007.91 2527.39 2839.58 2789.53
ii.per day
consumption 2.76 41 6.92 15.4 7.77 12.8 7.64 15.14
iii.duration of
F/G stage Iii/ii Iii/ii Iii/ii Iii/ii
Finished goods stage period

i.sales 1663.66 2.63 2761.13 6.12 2972.6 8.58 3435.96
ii.Avg stock of
F/G 630.65 450.83 346.26 429.45
iii.duration of
F/G stage I/ii I/ii I/ii I/ii
Debtors collection period
i.sales 1663.66 2761.16 2972.6 3435.96

ii.sales per day 4.55 33.21 7.56 1595 8.14 17.27 9.41 17.91
66
Gross working capital
Gross Working Capital

Year (Rs.In lakhs)
1998-99 155681.4
1999-00 166460.5
2000-01 199436.4
2001-02 171378.57
2002-03 186360.02
2003-04 272668.92
2004-05 604752.1
2005-06 825200.00
2006-07 1044810.00
2007-08 1180459.00
1200000 1998-99
1000000 1999-00
2000-01
800000
2001-02
600000 2002-03
2003-04
400000
2004-05
200000 2005-06
2006-07
0
GrossWorkingCapital(Rs.Inlakhs) 2007-08
67
Net working capital:
The net working capital of visakhaptnam steel plant shows an increasing trend from 1993-
98 and decreasing tread from 1997-98 to 2000-01. It is showing a positive figure after that
till 2004-05.
The main reason for the decreasing trend in the years is due to the increasing creditors
year after year. If also indicates a weak cash balance to meet the liabilities. The current
liabilities of the company is increasing by 200 crores almost every year. The inability of the
company to pay the creditors is also evident from the reducing net operating cycle period.
The operating cycle period has reduced continuously from 138 days during to 42 days
during year 2000-01 against decreasing trends in the previous years.
The increase in working capital is due to better sales and full capacity utilization.
Which has resulted in reduction of cost of production. The net working capital of VSP
for the past 10 years is depicted in the table.
68
Net working capital:
Net Working Capital

years (Rs.In lakhs)
1998-99 49323.2
1999-00 47209.65
2000-01 49084.42
2001-02 49289.44
2002-03 63252.27
2003-04 149133.81
2004-05 462336.44
2006-07 834380.00
2007-08 861297.00
900000
800000 1998-99
700000 1999-00
600000 2000-01
500000 2001-02
400000 2002-03
300000 2003-04
200000 2004-05
100000 2006-07
0 2007-08
NetWorkingCapital(Rs.Inlakhs)
69
Current ratio:
A current ratio of 2:1 is considered to do ideal. The ration is an indicator of the firm’s
commitment to meet its short-term liabilities. It indicates the rupees of current assets
available for each rupee of current liability. The higher the current ratio the higher the
funds available for a rupee of current liabilities. As a convention rule a current ratio of 2:1
or more is considered satisfactory.
The higher the current ratio the higher the funds available for a firm.
Current ratio=current assets/current liabilities.
YEAR CURRENT RATIO

1998-99 1.5
1999-00 1.4
2000-01 1.4
2001-02 1.4
2002-03 1.5
2003-04 2.2
2004-05 4.2
2006-07 4.9
2007-08 3.7
Interpretation: the current ratio was around 1.5 in 1998=99. the current ratio is poised
around 1.4 from 1999-2000 to 1200-2993. the ratio has started increasing from there on
70
and is at4.2 in 2004-05. this shows that there is drastic increase is firms current assets
which shows the high liquidity position of the firm.
71
Working capital turn over ratio:
Working capital turnover ratio is ratio of sales to net working capital. It is indicator of
efficiency of working capital management. Higher the ratio greater is the efficiency.
The working capital turnover ratio has constantly increased from 1998-99 to till date. This
is mainly due to increased sales and delay in payment to creditors.
Working capital turn over ratio= net sales / average working capital.
The turn over ratio for the last 10 accounting periods is as shown:
WORKING CAPITAL
YEAR TURNOVER RATIO
1998-99 5.6
1999-00 6.3
2000-01 7
2001-02 8.3
2002-03 8
2003-04 4.2
2004-05 1.8
2006-07 1.02
2007-08 1.21
Note: here current assets are taken as working capital;
72
Working capital turnover ratio
working capital turnover ratio
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
73
INVENTORY MANAGEMENT IS VSP
VSP is multi-product, integrated steel plant with 3.0 M.T capacity. this makes VSP to
store, handle and process of huge quantity of material. Also VSP being a process industry
running 365 days throughout the year 24 hrs a day it material. This calls form efficient
inventory management o the part of VSP.VSP holds three types of inventory, they are:
1. raw materials
2. stores, spares and scrap
3. semi/finished goods.
Different sections carry out the procurement, storage and control of these inventories.
Raw materials:
The raw materials are produced and stored by raw materials department. The basic
principle followed by VSP in holding raw material inventory is to hold indigenous raw
material for 10 days.
Stores and spears: the stores and spares are procured and stored by central stores
department(a part of purchase department).
74
The store and spares recategorized as
1. automatic recoupment items:

2. department specific items
Automatic recoupemnt items: A.R items are those, which are general consumables with
standard specification and required by more than one department. The main objective
of stock control is to make available vital items all time.
The AR items are classified as a class, b class and c class as per value given below.
a. annual consumption value more than rs.100,000

b. annual consumption value between rs.100,000-50,000
c. annual consumption value less than rs50,000
The stocks of these items are maintained as per their vitality, consumption frequency,
automatic indenting of the items done once the level of stock comes to recumbent level
foxed for each item.
Department specific items: user departments based on approval given by top

management for level of inventory to hold indents department specific items. The
amount is fixed based on consumption of a particular item in the previous years. These
items are also stored by stored department and are released against stores indent note
issued by department.
75
Inventory control:
Inventory control is major responsibility of stores department in VSP. It adopts

following procedure for inventory control:
1. The stores department generates data periodically on the inventory status and
conducts analysis of it. The same is circulated to all departments once in a quarter.
2. XYZ analysis of all items is carried out and circulated to all departments.
Categorization is based on values of item contributing to total value of stock.
3. Identification of non-moving and slow moving items on regular basis and intimating
it to user departments and there by reducing the indent quantity.
4. Identification of absolute and surplus items which are of no use and disposal of the
same after receiving clearance from top management.
5. Standardization of general store material and spares and reduce the number of
items.
6. Conduct ABC analysis on consumption pattern o items and submit the same to
purchase department for regulation of supplies.
Semi/finished goods: the semi-finished goods comprise blooms and billets and finished
goods are the various products mentioned in product mix of VSP. The semi finished goods
are stocked and controlled by production planning and monitoring department. They
chart plans based on inputs from marketing department for holding inventory of various
grades. They generally hold stock for 10 days production, the finished goods stocks are
held at central stockyard within plant and at various stockyards spread all over India.
76
Inventory turnover ratio:
Inventory turnover ratio is ratio of sales to average inventory, the turnover ratio of
VSP is between 2 and 8.
This is however a low value, indicating huge quantity of funds locked up in stock.As
mentioned earlier the reason for low turnover is due to large quantity of nonmoving
spares and stores.
The inventory turnover ration of VSP for the past 10accounting periods is shown in the
table.
working capital turnover ratio
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
YEAR Total Avg.Inventory Inv.Turnover
77
Sales ratio
1998-99 276113 120049 2.3
1999-00 297259 106164 2.8
2000-01 343596 114532 3
2001-02 408095.4 1100295 3.7
505925.0
2002-03 4 98447 5.1
2003-04 617400 78194.6 7.9
2004-05 8181.44 980.83 8.3
2005-06 8482.44 1236.99 6.8
2006-07 9150.57 1210.79 7.5
2007-08 10433.00 1482.19 7.0
90
80
70
60
50 East
40 West
30 North
20
10
0
1st Qtr 2ndQtr 3rdQtr 4thQtr
Interpretation:
The Inventory turnover ratio for the year 2007-08 was 7.03 times.that is
the firm is able to convert its inventoy for nearly 7 times within a year.
Normally,higher the ratio indicates the better inventory management.Though the

ratio is not so high it is reasonably high.It shows that there is a rapid turning of the
increase in the ratio is obtained due to incease in its turnover.
78
CASH MANAGEMENT IN VSP
Method of cash management:
In VSP cash requirement is planned and arrived at in the following manner:

1. the chairman cum managing director of VSP in consultation with board of directors
decides the production schedule for the following year.
2. the production schedule as approved by the directors is then circulated to all
departments, after which production target for each month is set.
3. the heads of each of 35 budgets, the directors formulate a master budget allocation
for each section.
4. after receiving all the budgets, the directors formulate master budget for the
particular year and the monthly budget allocation for each section.
5. at the end of each of month, the actual versus the projected budget is put up to the
management and directors discuss the reason for the variances. Any deficit in the
cash inflow is adjusted buy pushing the sales in the following month.
Initially cash section of the finance department prepares the cash budget. They forecast
monthly and weekly requirements of cash. The forecast of information regarding cash
inflows which include the cash from customers, export incentive export credit, etc), cash
outflows which include purchase of row materials, spares, excise duty, sales tax, personnel
payments customs duty, railway freight etc.
79
Source of funds:
The main source of funds is sales realization. Sales are carried out at heat quarters
and at various branches located through out India. The funds collected are received at
the head quarter in such a way to minimize the delays in remittance of funds from the
place of collection to head quarter.
The sales realization in head quarters includes both domestic and export sales receipts.
Domestic receipts are directly credited to cash credit accounts of VSP’s and the export
sales realizations are credited to VSP’s packing credit account with the negotiating banks.
Polling of funds:
As mentioned earlier the major source of fund to VSP is the sales realization at the various
branch sales offices located through out India. As all payments are effected through the
head quarters, a need to pool all the funds to head quarters account is imminent. In order
to achieve this, collection accounts are opened with banks at all sales centers, where all
collections are deposited on daily basis. The banks are in turn instructed to remit the
proceeds immediately on realization to VSP ‘s account at head quarters. The collection
accounts of V are with SBI,SBH,BOB and Canara bank who are the major providers of
working capital. Cash section has a system of closely monitoring the receipts of the
accounts of the above-mentioned banks at their head quarters, which enables the release of
payment. The major objective of cash section is to avoid delays between the time of
deposition of funds in the banks at collection centers and the time at which the same are
received at head quarters. To achieve this is need continuous liaison between the banks,
collection centers and head quarters is a must.
80
Management of cash credit limit:
As the company is maintaining cash credit account with multiple banking arrangements
with 10 banks. It does not maintain cash balance except for some petty cash expenses. The
company maintains two types of accounts at the branches and head quarters viz, collection
account and imprested account for petty expenses. Therefore, the question of managing
surplus cash does not a rise. However the management6 has to keep an eagle’s eye on fund
flow and working capital limit. The have to see that the balance will not go out of the limits
given by the banks. At the same time they should be position of utilize funds to the extant
of the limits available.
As regards to information reports the cash section generates daily-
a. Daily collection at various banks with branch-wise break up
b. Daily position as regards to utilization of cash credit/packing credit

limits with various consortium member banks financing their working capital
requirements.
c. Statement showing the details of payments released in the day,
d. Statement showing the details of payments outstanding at the end of the day after
taking into account the payments released on the.
e. Monthly cash flow statement showing the actual cash flow in the month with the
projected expenditure of the ensuing month.
81
From the above it can be seen that the section interacts with numerous agencies such as the
various other departments of the organization, consortium of banks, branch collection
centers, suppliers and customers.
As many critical decisions are made based on the repots generated at the cash section,
accuracy of the same assumes significance.
Cash ratio:
Cash ratio is ratio of cash held by a firm to current liabilities. VSP is maintaining almost
an average cash of around 0.13 except for the past three accounting periods. This is
because as mentioned earlier cash holding is kept at minimum except for some petty cash
needs. The increase in cash ratio indicates the significant increase in cash and bank
balances in the total current assets.
Cash ration = cash in hand (or bank)/current liabilities.

Cash ratio for the past few years is as shown.
Cash in Current Cash

YEAR Hand/Bank Liabilities ratio
2001-02 161.12 1220.99 0.13
2002-03 541.57 1231.07 0.44
2003-04 1359.71 1235.35 1.10

2004-05 3932.61 1424.15 2.76
2005-06 5621.70 1502.14 3.54
82
2006-07 7194.68 2104.30 3.42
2007-08 7699.11 3191.62 2.41
4500
4000
3500 YEAR
3000
Cash in
2500 Hand/Bank
2000 Current Liabilities
1500
Cash ratio
1000
500
0
1 2 3 4 5 6 7
RECEIVEBLES MANAGEMENT IN VSP
Procedure of receivables management:

VSP sells its product directly to its customers. It has 27 marketing officers spread through
the country. The marketing and the finance department and top management at the lead
quarter formalize the price of different products and different branches jointly. the price
list for cash product in their region is circulated to all branch offices.
The sales and billing are done at the individual branches and the record of
the daily transactions is maintained. The cash deposits are done at one of the respective
banks and are the entire sum is in turn transferred to the banks at visakhapatnam through
telegraphic transfer.
Credit policy of VSP:
83
The credit policy of VSP is strict in one sense and flexible in other. As VSP has got a wide
network of marketing offices numbering 27 there is always a possibility of increased credit
sales by the branch sales offices, resulting in liquidity crunch if proper control is not
maintained. Therefore, all regions and branches are given a limit for credit sales beyond
which they cannot sell on credit without prior approval of competent authority. At any
given point of time credit sales should not exceed the limit given.
At the same time branch sales offices are given the freedom to give interest bearing credit
which they can decide depending upon the level of finished goods inventory in their
stockyard and other aspects of customer.
Collection policy of VSP:
VSP follows two types of credit sales of its products. They are:
1) secured credit sales

2) Unsecured credit sales
Secured sales are backed by securities, which can be
a) letter of credit: letter of credit is an agreement where by the banks opens

letter of credit of its customers in favor of suppliers and undertakes the
responsibility of payment obligation of its client.
b) Bank guarantee: bank guarantee is like issuance letter of credit where by the
customer’s bank gives the guarantee to VSP to undertake responsibility of
payment obligation of its credit.
Secured credit sales are primarily done with private customers. Cheque facility is
extended to the customer based on the credit worthiness of the party. The average
collection period of VSP is 30 days. VSP stock holding period is 30 days. If the cheque is
84
dishonored, notice to the customer will be sent. In case of no satisfactory reply from the
customer VSP issues investigation notice to banker who guaranteed the customer ad the
banker has to pay the money to VSP. Cheque facility for such customers for all further
sales stands cancelled.
Unsecured sales are made mostly to government agencies. There will be no security in such
cases. Credit period varies from 15=60 days. Generally, VSP cannot compel government
agencies for prompt release of payments due unlike private parties since they are also part
of government undertakings.
Interest charges for credit sales:
Penal
interest on
violation
Type of of redit
customer Secured Unsecured period
Project
customer 15% 17% 2%
Other
customer 16% 18% 2%
Receivable turnover ratio:
Receivable turnover ration is defined as ratio of total sales to average receivables. This
ratio indicates the number of times the management is able o convert the receivables in to
sales and it indicates the efficiency with which receivable are managed. The receivables
turn over ratio of VSP for past 10 accounting years are given in the table.
85
Receivables turnover ration= sales/ Average receivables
Receivables turnover ratio:
AVG. REC.TURNOVER
YEAR SALES RECEIVABLES RATO
2002-03 276113 12068 23
2003-04 297259 14062 21
2004-05 343596 16863 20.3
2005-06 408095 19316 21.1
2006-07 505900 21502 23.5
2007-08 617400 15159 40.72
700000
600000
500000 SALES
400000
AVG.
RECEIVABLES
300000
REC.TURNOVER
200000 RATO
100000
0
2002- 2003- 2004- 2005- 2006- 2007--
03 04 05 06 07 08
86
Interpretation:
The receivables turnover ratio has always been around 21=23 almost every year. The
turnover ratio for VSP is high and this shows that bulk of VSP’s sales is cash sales through
out the last accounting periods. The increase trend earlier was due to cash constraint in
VSP, which necessitated the need for VSP to go only for cash sales. The decreasing trend in
last year is due to sluggish market conditions. Which prompted all steel manufacturers to
push sales through credit sales and also due to good cash position of VSP, which allowed it
go for credit sales.
87
PAYBLE MANAGEMENT IN VSP
In VSP all payments are done through the cash section of finance department in the head
quarters. Cash sections monitor the cash position on a daily basis and prioritize the
payments. Cash section prepares cash report every morning and checks with the banks for
cash balance. Based on the balance available in the banks and prioritized of payments,
cheques are issued to the parties. Payments are prioritized so as to optimize the cost.
Prioritized is done based on the financial implication of non-payment of the due.
The financial implications considered by VSP for non-payment of due are

1. interest cost penal and over due
2. penalties and fines in case of statuary obligation
3. impact of production and sales in case of payment is for critical item.
Close liaison is maintained between purchase department, bill-passing section of finance

department and cash section for efficient management off account payable.
The major payments of the plant are towards:
1. purchase of raw material

2. purchase of stores and spares
3. employee wages
4. freight payments
5. interest on loans including working capital
6. repairs and loans including working capital
7. statutory duties like excise and sales tax.
88
The company pays:
1. excise duty-2crores/day
2. sales tax-12 crores/month
3. custom duty 12 crores/month
4. employee salary-35 crores/month
5. iron ore-15 crores/month
6. coal blast-70 crores/month
7. railway fright 50 crores/month
8. ocean fright-15 crores/month
Payable turnover ratio:
Payables turnover ratio is ratio of total purchases to average payable. It indicates the
number of times management is able to convert accounts payables into purchase. Payable
turn over ratio= purchases/average payable.
Avg. Payable turnover

YEAR Purchases Payable ratio
2002-03 1449.55 569.34 2.5
2003-04 1809.12 577.8 3.1
2004-05 1900.68 606.54 3.1
2005-06 2118.78 706.58 3.1
2006-07 1967.3 614.61 3.2
2007-08 2061.3 618.26 3.3
89
100%
80%
60% Payable turnover ratio

Avg. Payable
40% Purchases
20%
0%
2002- 2003- 2004- 2005- 2006- 2007-
03 04 05 06 07 08
Interpretation:
The turnover ratio is maintained between 2.0 and 3.0. this was mainly possible due to
improved sales cost reduction purchase value reduction and better cash position.
90
FINDINGS:
1. The total sales of VSP are showing a positive trend despite cut down in steel
prices across the globe. The rise in sales is 32.5% in terms of sales turnover during 2005-
2006 compared to 2004-2005 and 22.03% during 2003-2004 compared to 2002-2003. the
increase in sales by over 20% indicates the excellence achieved by VSP in spite of over
capacity problem in the market.
2. The gross margin of VSP has increased from Rs 2073 crores in 2003-20004 to
Rs503.89 crores in 2004-05 (an increase of 57.79%).
3. The payable turnover ratio is maintained on an average at 3.0 from 1998

onwards.
4. The consumption at raw material stage has increased from Rs 1394.32 crores in
1999-00 to Rs 2050.44 crores in 2000-01.
5. All units in VSP have achieved their rated capacity during the year 2000-01 and
poised to exceed the same current year. This has resulted in
a. reduction in cost of production of saleable steel. The cost of production of

VSP 1 following a decreasing trend over the past few years. This is evident from following
table given overleaf.
b. The reduction is cost of production has increased the leverage to extend

cash discount to push sales. This is one of the major reasons for cap to register impressive
sales figures in spite of huge dumping from international players.
91
6. VSP has started making net profits from 2002-03. the net profit during 2003-04 was
Rs1547 crores while the net profits touched Rs2000 crores in 2004-05. the net profit
was due to higher cash income than cash expenditure. This is also reflected by net
position of VSP.
COST OF
YEAR PRODUCTION
2002-03 13075
2003-04 11921
2004-05 1127
2005-06 11697
2006-07 10234
2007-08 3238.15
7. For the first time VSP was able to raise working capital funds at an interest rate of
less than 4%. It is in the range of 1.8-3.6% in 2003-04 compared to 8-9% in the
previous year. This has resulted in the increase in net working capital significantly.
8. He current ratio of VSP is being maintained at 4.2. it shows a very high degree of
short term liquidity position of the firm.
9. VSP has it record all-time high turnover net profit during year 2007-2008 Rs 10,433
Crores
92
SUMMARY AND SUGGESTIONS
The concept of working capital is used in two ways i.e., gross and net. Gross working
capital refers to the firms investments in current assets. Net working capital means the
difference between current assets and current liabilities, and therefore represents the
position of current assets, which is financed either from long term funds or banks
borrowings.
Cash is required to meet a firm’s transactions and precautionary needs. A firm needs cash
to make payments for acquisitions of resources and services for normal conduct of
business. Cash is also held to meet emergency situations. Some firms hold cash to take
advantage of speculative changes in prices of input and out put. Management of cash
involves three things.
a) managing cash flows in and out of a firm
b) managing cash flows within a firm
c) financing deficit or investing surplus cash
And thus, controlling cash balance sat any point of time. Firms prepare cash budget to
plan and control and cash flows. Cash budget can serve its purpose only when firm can
manage its collection and payments with in the allowed limits. A firm should hold optimum
amount of cash at any time and invest the temporary excess amount in short term
securities.
Trade credit creates book debts accounts receivable. It issued as a marketing tool to
expand or maintain the firm’s sales. A firm’s sales. A firm’s investment on account
receivable depends on volume of credit sales and collection period through credit policy.
Credit policy. Credit policy includes credit terms and collection efforts the firm’s credit
policy will be considered optimum at the three methods monitor book debts.
93
They are:
a) average collection period
b) ageing schedule
c) collection experience matrix
the first two methods are based on the showing payments patterns and hence do not
provide meaningful information for collecting book debts. The third approach uses the
desegregated data and it is better method than first two methods.
Inventories constitute about 60% of current assets to public limited companies of India.
The manufacturing companies hold inventories in the form of raw materials work in
process and finished goods. They are three motives for holding inventories. They are
transaction motive, precautionary motive and speculative motive.
VSP is a multi product manufacturer unit with varying cycle time for each product. The
capital required by each manufacturing unit of VSP depends on the individuals products
cycle of each item. The department wise capital whose capital requirement coupled with
their production target for a year invites and effective working capital management.
In finance, working capital is synonymous with current assets; VSP is a multi product
large organization with huge capital turnover where the working capital requirement
depends on the level of operation and the length of operation cycle. monitoring the
duration of the operating cycle is an important aspect of current assets management and
control.
94
* Scope of enhancing : during the year 2004-05 the turnover is Rs8181 crores and profit is
Rs2008 crores, during the year 2003-04 turnover is rs6174 crores and profit is rs1547
crores. It indicates that the net profit forms nearly 25% of the total sales turnover. During
the last financial year average rate is of interest 2-3%. In such situation the company
should try to go for expansion, such as production enhancement system, so that the
company comes to a position for further increasing its profits.
* During the financial year 2003-04 the company’s average cost of interest is 3-4%, which
the company has acquired by forex funds replacing domestic loans and working capital
facilities. If the company utilizes the forex replacing domestic loans and working capital
facilities. F the company utilizes the forex funds where ever it is possible i.e. when ever
the payment are made in Indian rupees of foreign currency such as ocean freight, other
music payments like suppliers. The company will be in position to take a better
advantage to increase the profits.
* Currently the company’s payables towards raw material are replaced with buyer’s
credit/suppliers credit in the form of forex funds. The company has tried to nullify the
exchange risk by going for forward cover considering India’s dependency on other
countries in exchange .Better risk monitoring would be required at the expansion stage
when the quantum of import rises.
* The steel industries are having very good time but VSP could not able to take full of its
advantage due to the constraints, primarily raw materials. Unlike any other steel
company , VSP is not having its own sources of raw material i.e coal mine. These are very
basic needs as the company always depends on its supplier for its raw material. Had the
company always depends on its supplier for its raw material. Had the company utilized
its 2-3 half% of working capital limits for acquisition of mines, purchasing of mines, etc.
It could have been a favorable situation.
* The company is getting all its funds i.e. day zero(0) when the rates are compared, the
company is investing surplus funds at 8-8.5% and paying at 7-8% to get the funds on
zero(0) day. This spread should be maintained during the time of expansion also.
95
* The company has already accumulated funds in excess of Rs.5500 Crores and can look
forward to bigger investment in building up capacities as compared to the proposed 6.1
Million tons.
* VSP should invest its short investments in short term, low risk and medium return
instruments rather than in the fixed deposits which it is presently employing for surplus
funds, this would help the company manage its funds better at the time of expansion
when the liquidity would be at premium.
96
CONCLUSIONS:
1) The interest rate at which VSP is producing its working capital is about 14-15% against
a normal rate of 9-12% in 2000-01, in 2001-02 it was 12%-14%, in 2002-03 it was 8%-9%
and in 2003-04, it was only 1.8%-3.6%because of forex and exchange credit. Also higher
profit realization by selling the produces in higher margins will eventually result in higher
cash accrual and hence higher credit rating. Higher credit rating results in reduction in
interest rates. Hence the company should either try to enhance the production facilities or
better investment opportunities other than fixed deposits what the company currently is
using for investing surplus funds.
2) The non moving inventory is one of the gray areas in VSP’s working capital
management. They account for 1/3 rd of value total inventory. This is really a critical area
where VSP’s management should focus to bring down the level of non moving inventory.
VSP has to identity areas for using inventory to dispose it. Also identification of such items
will help in preventing procurement of such items on future.
3) The other main area where VSP has tremendous scope for improvement is in
manufacturing value an added product. This will result in better sales realization and
higher profit.
4) The export sales of VSP are only 30% of total sales during 2003-04. present scenario of
steel industry indicates the need for more steel even with the cause of lower production
facilities. The company should now give more importance to exports because it provides
good net sales realization but also export benefits.
The following table the contribution of export sales to sales and the justification for the
above suggestions.
97
Year 01-02 02-03 03-04 04-05 05-06 06-07 07-08
Export sales 371 626 768 248 443 425 555

Domestic
sales 3710 4433 5406 7933 8026 8702 9878
Total sales 4081 5059 6174 8181 8469 9127 10433
% Export sale
to total sale 8 12 12 3 5 4.5 5
Considering the fact that the margins in the export sales are low, but have the potential to
rise in the near future, the company can maintain a minimum level of presence in the
global market.
98
BIBLOGRAPHY
Financial management I.M. pandey
Financial management Presanna Chandra
Financial management My Khan
Working capital Management I.M. pandey
Financial Management R.K. Sharma & S.K. Gupta
Financial Management R.P. Rustagi
Annual Reports Of Visakhapatnam Steel Plant
Genaral Articles And MagaZines Of Visakhapatnam Steel Plant
Website: www.vizagsteel.com, www.indianinfoline.com,
www.jpcsteelonline.com, www.cii.com.
BOOKS: Survay of Indian industry-the Hindu
Newspapaers: Deccam Chronicle, The Hindu.
99

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CONTENTS

PROFILE OF RASHTRYA ISPAT NIGAM LIMITED

SUMMARY AND SUGGESTIONS 94

The growth of any organization depends on overall performance of all the

PURPOSE OF THE STUDY:

Some prominent issues that are to be addressed are,

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

OBJECTIVES OF THE STUDY

• To analyze and apply operating cycle concept of working capital in VSP,

• To know how the working capital is being financed.

• To give suggestions, if any, for better working capital management in VSP.

Secondary sources of data mainly include annual reports of VSP. Statement of

Limitations of the study:

VISAKHAPATNAM STEEL PLANT

The government of India has decided to set up an integrated steel plant at

MAJOR PLANT UNITS :

VSP has the following major production facilities :

MAJOR SOURCES OF RAW MATERIAL :

The places where the steel

BF Line stone Jaggayyapeta, A.P.

BF Dolamite Madharam, A.P.

Boiler Coal Talcher, Orissa

Cokig coal Australia

VISION MISSSION & OBJECTIVES :

Towards growth: Expand the plant capacity to 7 MT by 2011-12.

Towards profitability: Achieve net profits with special emphasis on enhancement of

Towards technology upgradation& productivity : Upgrade technology & practice bench

2. Environment policy : Maintain a high level of environmental consciousness amongst

3. Energy policy : By adopting appropriate energy conservation technologies, VSP

4. OSHAS policy : VSP is committed to occupational health and safety of employees

The production performance of VSP in the last four years is as follows:

PRODUCTION PERFORMANCE-(‘000 TONS)

TABLE 2.3(In crores)

SALES DOMESTIC CASH

GROSS CASH NET

DIRECTOR (PERSONNEL) Y.Manohar

DIRECTOR (COMMERCIAL) M.B.Chatwal.

AGM (CA) & COMPANY SECRETARY P.Mohan Rao

Global steel demand is on rise on the back of accelerated infrastructure activity in

However, the world at large is grappling with over capacity problem.

`Operating performance is a main driver of competitiveness of any company. Based

There is a gradual improvement in steel prices owing to-

• Trade cases & import restrictions by many steel-producing countries.

More over the existence of Visakhapatnam port makes it easy in procurement of

• Strong commitment to conserve environment:

• ISO 9002 Certification:

• High intake of employees:

• Low return product mix:

Sizeable export markets:

Other promising factors are-

• proximity to southern market.

Other disturbing trends include-

• Weak domestic market.

WORKING CAPITAL MANAGEMENT

Significance of working capital:

• Arranging short term financing.

The management of working capital plays an important role in maintaining the

Net working capital :

Net Working Capital = Current Assets – Current Liabilities

Working capital can be classified into two categories i.e,

1. Permanent working capital.

Permanent working capital:

Amount of permanent working capital remains in the business in one form or