Fin. working capital aakriti

REPORT
ON
WORKING CAPITAL MANAGEMENT & RATIO ANALYSIS
OF
NATIONAL FERTILIZAERS LIMITED
PRESENTED BY:-
Aakriti Rohatgi
DATE OF SUBMISSION : AUGUST 01, 2012

NFL'S Core Competence
NFL, a Schedule A and Mini Ratna Company, is the second largest
producers of Nitrogenous Fertilizers in the country with 16.6%
share in Urea production during 2005-2006.

THE COMPANY
National Fertilizers Limited was established in August, 1974 to set up two Fuel Oil
based plants at Bhatinda (Punjab) and Panipat (Haryana). Both of them were
commissioned in 1979. The Nangal Fertilizer plant of Fertilizer Corporation of India
(FCI) had been merged with National Fertilizers Limited (NFL) in 1978 on the
reorganization of FCI and NFL group of companies. Later NFL executed the country’s
1st
inland gas based plant at Vijaipur (in Madhya Pradesh) on HBJ (Hazira-Jagdishpur)
gas pipeline. The Vijaipur Project received First Prize for “Excellence in Project
Management” from the ministry of Program implementation, Govt. of India. Vijaipur plant
had gone in commercial production in July, 1988. Subsequently, expansion undertaken
in 1997 for doubling the capacity of Vijaipur unit.
NFL is a multi unit, multi Product Company and is one of the India’s largest producers of
Nitrogenous fertilizer with a market share of 16.6%. NFL is a Mini Ratna Category-1
Company and has the distinction of being a profitable public sector undertaking. The
company is now operating three fuel oil based Plants located at Nangal, Bhatinda and
Panipat and gas based plants at Vijaipur. The company has an installed capacity of
32.31 lakh MT of Nitrogenous fertilizer “UREA” It is an ISO-9001; 2000 and ISO-
14001:1996 company.
NFL produces two popular brands of chemical fertilizers, i.e. Kisan Khad (Calcium
Ammonium Nitrate-CAN) and Kisan Urea. Besides the fertilizers, it manufactures and
markets the industrial products (Liquid Oxygen, Liquid Nitrogen, Liquid Carbon Di-
Oxide, Nitric Acid, Methanol, and Argon) and by-products (Sulphar).
Now NFL entered “silver jubilee year” on 23rd
August, 1999. NFL operates three oil
based plant Three of the Units are strategically located in the high consumption areas of
Punjab and Haryana. The Company has an installed capacity of 32.31 lakh MTs of
Urea and has recorded an annual sales turnover of Rs.3, 591 crores during 2005-
06.The Company’s strength lies in its sizeable presence, professional marketing and
strong distribution network nationwide and a gas based plant. Company
NFL has been signing a Memorandum of Understanding (MOU) with the government of
India since 1991-92every year under which the Government undertakes to assist NFL
with regard to availability of inputs, obtaining ECA allocations commensurate with the
availability of fertilizers from NFL plants etc. NFL on its part undertakes to adhere to its
production and movement plans, achieve its ECA allocation and provide regular feed
back to the Administrative department. All the years, after signing the MOU,

Government has rated the performance off the company as “excellent” Company has
been performing at high level of capacity utilization over the years.
The company also produces bio-fertilizer at its Indore plant since October 1996.NFL
commissioned its 120 Nm3/hr.Argon based plant at Panipat unit in October, 1997.
During September 1998 NFL has commissioned the Methanol Augmentation Scheme at
Nangal unit. In order to sustain and enhance the company’s growth NFL successfully
completed the revamping of UREA plant at Nangal. Commercial production of this plant
was declared w.e.f 1st Feb. 2001. The annual installed capacity of Nangal plant has
thus increased from 3.30lakh tones of UREA to 4.78 lakh tones. With the re rating of
installed capacities of Vijaipur plant and revamping of urea plant at Nangal, the total
annual installed capacity of UREA at NFL has reached to 32.31 lakh tones. The
company during the year 2005-06 produced 33.44 lakh tones of UREA, thereby
achieving a capacity utilization of 103.5%. NFL is the 2nd
largest producer of
Nitrogenous Fertilizer in the country.
Three Zonal offices at Bhopal, Lucknow and Chandigarh with central control at Delhi co-
ordinate the company-marketing network.Kisan Urea NFL’s popular brand is sold over a
large marketing territory spanning the length and breadth of the country. The Company
also manufactures and markets Biofertilizers and a wide range of industrial products like
Methanol, Nitric Acid, Sulphur, Liquid Oxygen, Liquid Nitrogen etc. The Company has
developed Neem coated Urea which on demonstration has improved the crop yield by
4-5%. The Company is focusing its thrust to widen the marketing operations of Neem
coated Urea.
NFL has been brought in Information Technology for its day to day office use. The
company has Satellite Based Communication System installed with the assistance of
NIC and its office Complex in NOIDA, Units and Zonal Marketing offices through Local
Area Networking (LAN). The company has also launched its Website
www.nationalfertilizers.com to make feel its presence at the global level.
Today NFL stands for hope, prosperity & growth. It has succeeded in enthusing
its people with sense of dynamism and pride by developing a work culture, where
team spirit takes precedence over personal factors.
NFL is already geared up to meet the challenge of the 21st
century. NFL over the years
has developed a team of dedicated professionals in the areas of production,
maintenance, project management, safety and environment control. These
professionals are sought after in the Industry both in India & abroad for their Specialized
Services .
NFL is known in the industry for its work culture; value added human resources, safety,
environment, concern for ecology and its commitment to social upliftment. All NFL
plants have been certified for ISO-9001(2000) for conforming to international quality
standards and International Environmental Standard i.e. ISO-14001. Apart from above
NFL has also obtained OHSAS -18001 safety standards for its two parts. With the
certification of Corporate Office/Marketing operations under ISO-9001:2000, NFL has
become the first Fertilizer Company in the country to have its total business covered
under ISO-9001 Certification.

MARKETING REVIEW
Despite of the fact there is tremendous untapped
potential and great need for fertilizer use in the sectors like waste land, rain fed
agriculture, horticulture etc., present fertilizer use is quite low. Country’s future need of
food security and balance diet can be met only by expanding the base and quantum of
fertilizer use in addition to use of organic, bio-fertilizers, etc. Demand for fertilizer in non-
traditional sector is bound to increase.
The company achieved sales turnover of Rs. 3590.53
crores as compared to Rs. 3474.06 crores for the previous year. In terms of quantity,
33.63 lakh MT of Urea was sold against 34.73 lakh MT sold during the previous year.
Company has been making continuous efforts to contain the marketing expenses,
especially warehouse handling, rake handling, and inventory carrying cost. Products
movements are continuously monitored to achieve the highest level of efficiency.
Outlook and Initiatives for the current year
Agriculture sector will continue to remain
important for Indian economy since over 50% of population is actively engaged in
agriculture. A second green revolution is needed to transform subsistence farmers to
surplus growers. Domestic gas based Urea industry is comparable to the best in the
world. The single major factor for wide differences in manufacturing costs of various
units is the feed-stock.
Keeping in view the Government of India future
policy, Company has been planning switchover of feed-stock from Fuel Oil/LSHS to
gas.
Feasibility study has been carried out by licensors for revamp of
Panipat Unit for change over of feed-stock from Fuel Oil to RLNG. Based on the reports
of the licensors, M/S.PDIL has been lined up for the selection of technology and
preparation of the detailed feasibility report. The study made at Panipat would be
applicable for Bhatinda and Nangal with modifications. Gas suppliers are being
contacted for committing supply of RLNG for Panipat Unit and possibilities are also
being explored for committing availability of gas for Nangal and Bhatinda units.

Feasibility report is under preparation for capacity
enhancement at Vijaipur-II unit, Vijaipur I unit is implementing energy selling project in
Ammonia plant for reducing the energy consumption, project is scheduled to be
completed by April 2008. In addition to this Company is also implementing various
proposals involving technology absorption to make the pant more efficient
Possibilities are being explored to set up joint venture fertilizer
plant in the countries where raw material is available in sufficient quantities at
economical rates. A core group has been established for the purpose. Company ahs
developed value added products i.e. Zincated and Sulphar coated Urea and trial runs
are being carried out to ascertain crop yield and their advantages. Once the benefits are
established, these value added products would be produced and marketed
commercially.

National Fertilizers Limited,
Gohana Road,
Panipat,
Haryana-132106.
Email: nflpanipat@nfl.co.in
Fax : 0180- 2652515
Tel. : 0180- 2652481 to 485, &
0180- 2655570
PANIPAT UNIT
The Panipat Unit of National Fertilizer Ltd. is situated on
National Highway No.1 and Delhi- Amritsar railway trunk route. Panipat city is about 90
km. away from Delhi and is covered in the National capital region. Panipat is a historical
city, which was the scene of three historical battles. Panipat is also famous for its
handloom industry.
The Panipat project was approved by Govt. of India on 10th
Feb. 1975 for implementation. Prime consultants for design, engineering, erection and
commissioning of the plant were m/s Toyo Engineering Corporation of Japan and M/s
Engineers India Ltd. Starting from the Zero-date 30.0475, the Feed-in was achieved on
01.09.79 i.e. within 40 months of the Zero-date. The unit went in commercial production
from 01.09.79. The total cost of the project was Rs. 221.33 crore (Rs. 2213.3 Million)
Performance of the unit in all the areas has also been widely
acknowledged. It has won number of Awards and recognition in the Fields of
production, productivity, safety, welfare, innovation, environment protection, skill etc.
The unit is also well known for its commitment towards environment protection and
social welfare in the Region.
Panipat Unit is considered the show window of the
company. The unit being near to the National Capital, it hosts a number of distinguished
guests and visitors from within and outside the country.
Environmental Control & Ecological Balance

Panipat Unit is acknowledged for its environmental
friendliness. The Unit is fully conscious of its responsibility towards pollution control &
environmental protection. Utmost care is taken to ensure that no harmful gasses are
discharged to the atmosphere. The dust evolved during prilling of UREA in the prilling
tower is scrubbed in the dust chamber by water spray. Unit has a flare stack of 80-M
height to release the gasses from production streams and to burn them. A computer
based wind
Monitoring system has been installed in one of the monitoring
stations located at the center of the laboratory. In order to maintain ecological balance,
in and around the factory and township a dense green belt has been provided and
about 6.0 lakhs trees have been planted within the factory and township premises.
Employee Welfare
The Company is very conscious of the welfare of its employees at
all units. At Panipat unit there is a modern township, which is spread over an area of
100 Acre. There are 900 dwellings in township, which accommodate officers, workmen,
and CISF and railway staff. Company gives liberal House Building advance at nominal
interest to the employees to construct their own houses. Company has provided a 30
bed hospital in the heart of township. Management provides canteen facilities to its
employees in the factory. Management organizes Inter-unit and Inter-Departmental
Tournaments for various games, for which a yearly sports calendar is drawn.
Industrial Relations
Industrial Relation at Panipat Unit has always remained
peaceful and cordial. At Panipat unit there is only one registered and recognized
workers union i.e. NFEU. The union is only affiliated to FWFI (Fertilizers Workers
Federation of India) No outsider is the member of the union .The scheme of employee
participation in management is operated at unit level. Under this scheme employees are
encouraged to suggest improvements in productivity, production, cost of production,
import substitution, working conditions etc.
Human Resource Development
The company considers its employees as its greatest assets. It takes
care of its training needs of employees. A separate HRD department is established for
this purpose.
NFL Panipat unit has always remained conscious towards social
upliftment of weaker sections and development of surrounding villages. NFL lays
emphasis on total system approach towards maintenance management. Various area of
weakness is analyzed and subsequently improved. Increasing use of computers is
made to meet the information needs of Maintenance Personnel. Maintenance

Departments have been continuously making efforts to improve the reliability,
availability and maintainability of the equipment/systems and also to optimize the cost of
maintenance. A systematic approach has been developed and implemented at the Unit.
The Panipat Unit encourages setting up of ancillary units.
Presently there are two ancillary units manufacturing Jute bags and other two units
manufacturing HDPE bags. Four ancillary units are bottling Carbon dioxide (CO2) in
cylinders and are manufacturing dry ice.
National Fertilizers Limited is a quality conscious organization.
All the raw materials, chemicals, intermediate products, by-products and finished
products are checked for their quality with respect to the standards. Central Laboratory
and the laboratories in each plant are equipped with most
Sophisticated instruments and are manned by well qualified staff.
Quality of the final product UREA is regularly monitored. It is ensured that the product
meets the quality standard laid down in the Fertilizer Control Order
.
Management is always conscious about the safety of the
employees. Safety Department with well qualified and experienced Safety engineers
ensures that working conditions are safe, safety procedures are followed and personnel
protective equipment are used. Safety Department increases the awareness about
safety amongst the employees by way of seminars, exhibitions, slogans, safety
competition etc
Public Relations wing of the unit is continuously engaged in
“Image Building” by projecting performance highlights through dissemination of
information. The company has to maintain vital links with various “Publics” e.g.
employees, media, men, specialized institutes who sponsored visitors, District
Administrators, farmers, dealers besides hosts of other agencies for inculcating
appreciation and understanding about the efforts of the organization.

DIFFERENT PLANTS IN PANIPAT UNIT
Ammonia Plant:
The Ammonia plant is based on Fuel oil as feed stock and
is designed to produce 900 MT/day ofAmmonia.The Fuel oil is partially oxidized in the
Gasification Reactorsat 1350 degree C by Shell Gasification process. The raw gas
produced in the reactors mainly consists of H2, CO, CO2 and H2S. The heat generated
in the process is recovered in the Waste Heat Boilers to produce high pressure steam at
100 KG/cm2. About 80% of the carbon produced in the Gasification reactors, is recycled
along with the feedstock.
Hydrogen Sulphide in the raw gas is removed by absorption in cold Methanol in
Desulphurization Section of Rectisol. The carbon monoxide in the desulpharised gas is
converted to Carbon dioxide by double stage H.T. Shift Conversion. The CO2 is, later
removed from the process gas in the Decarbonation Section of Rectisol Section and
both the gasses are recovered by regeneration of Methanol at low pressure. H2S in the
form of clause gas is sent to Sulphar Recovery Plant for recovery of Sulphar. The CO2
gas is sent to Urea Plant for synthesizing with Ammonia to manufacture Urea. The
process gas from Rectisol Section is sent to Nitrogen Wash Unit to remove the traces of
impurities by liquid nitrogen wash. Nitrogen is further added to the process gas (i.e.
hydrogen) to obtain a ratio of 3:1 of N2 and H2. This synthesis gas mixture is
compressed to 230 kg/cm2 pressure and synthesis of n2 &h2 is carried out in the
Haldor Topsoe loop in a radial flow Ammonia converter and Ammonia is produced.
Argon Recovery Plant
Atmospheric air contains 0.93% of Argon gas by volume. Till recently this
gas had been passing back to the atmosphere without any use, along with purge gases
from northern loop of the Ammonia plant. An idea of installing Argon Recovery Plant
was mooted to recover the Argon gas for sale to augment NFL’s profit margin.
The plant has the capacity of producing 0.95 million cubic meters/ annum of
argon based on 330 stream days. The purity of gas produced is more than 99.999%
Urea Plant
Urea plant is designed to produce1550 TPD based on Mitsui
Toatsu Total Recycle ‘C’ improved process. The Ammonia and Carbon dioxide,
produced in Ammonia plant, are pressurized to about 250 Kg/cm2 pressure. Synthesis
takes place in the Urea reactor, where Ammonia and CO2 react at 250 Kg/cm2

pressure and 200 degree C temperature to produce Urea. The reactor outlets products
are then decomposed. The Urea solution, produced in this process, is crystallized in the
Vacuum Crystallizer. Crystal slurry is centrifuged to separate crystals, which are, then
dried in the
Drier and pneumatically conveyed to the top of Prilling tower. Urea crystals are melted
in the Melter and the molten Urea is sprayed through Acoustic Granulators from 68 m
high prilling tower. Urea in the form of prills is collected at the bottom of the prilling tower
on CFD bed, where it is cooled by air. Product Urea then sent to bagging plant and
bagged in 50 Kg bags.
Sulphur Recovery Plant
Sulphur is present in the fuel oil/LSHS, used as feedstock for manufacture of
Ammonia. Clause gas rich in Hydrogen Sulphide is obtained in the Rectisol Section of
Ammonia plant and is burnt and partially oxidized to SO2 to form elemental Sulphar by
condensing, the residual H2S reacts with SO2 to form more sulphar in two catalytic
reactors in series. The unconverted waste gas is burnt in the incinerator and heat is
recovered in Heat Recovery Exchanger, where low pressure steam is produced. The
sulphar recovery plant serves the double purpose i.e. to recover costly Sulphar and to
prevent pollution.
Captive Power Plant
The captive power plant has been installed to meet the total power requirement of
the plants .Two Turbo Generators of 15 MW each, generate power at 11 KV. The power
plant can be run in parallel with the northern grid or in isolation. A boiler of 210 T/hr has
been provided to supply steam to the Turbo Generators and meet part of the steam
requirement of the process plants. The boiler is designed to operate on coal with
support oil or fully on fuel oil.
Off Sites and Utilities
The off Sites & Utilities consists of following facilities:
• Raw Water Reservoirs & Filtration Plant
• De mineralized Water
• Steam Generation Plant
• Cooling Towers
• Fuel Oil Handling and Storage
• Railway Siding
Effluent Treatment Plant
One of the most sophisticated Effluent Treatment plant has been
installed in the unit, which meets the latest standards, laid down by the Central Board
for the Prevention & Control of Water Pollution. Treatment of liquid effluents is carried
out by physical, chemical and biological treatment process.

PLANTS AND CAPACITIES
Ammonia Plant 900MT/Day
Urea Plant 1550 Mt/Day
Sulphar Recovery Plant 26.5MT/day
Captive Power Plant 1Boiler of 210 MT/hr
2 Turbo Generators of 15 MWH/Hr.each
Steam Generation Plant 3 boilers of 150 MT/Hr.
Bagging Plant 4000 MT/day
Effluent Treatment Plant 200 M3
/Hr
Raw Water Plant 2400 M3
/Hr
DM Water Plant 375 M3
/Hr

CORPORATE OBJECTIVES OF NFL
NFL is an instrument of society. It has to service the needs of people within the scope of its basic
objectives. To achieve this NFL must:
• Select capable people and improve their knowledge and skills on organized basis.
• Motivate and enthuse the employees to achieve higher productivity with team spirit.
• Lay down integrated objectives, define individual goals and maintain an atmosphere
conductive to achievement of these goals.
The Corporate Objectives of NFL are:
In terms of Memorandum of Association, NFL was set up to manufacture and market chemical
fertilizers, other chemicals and by-products as well as to provide the allied services. In order to
achieve and maintain the leading position in the production and marketing of fertilizers, the
following micro objectives have been intensified:
1. PRODUCTIVITY
To achieve the best possible levels of production and economy in the use of
inputs while ensuring safety and proper maintenance of plant and machinery and pollution
control. More specifically (a) To strive to raise capacity utilization. (b) To improve upon
consumption norms consistently.
2. RESEARCH & DEVELOPMENT
To carry out R&D activities for-
(a) Increasing plant availability.
(b) Saving use of energy in different forms.
(c) Better recovery of saleable by-products,
(d) Process improvement/development and
(e) Increasing efficiency utilization on a sustained basis in the application of chemical
fertilizers in combination with other agricultural inputs.

3. PROFITABILITY
To mange the assets, men and materials in most effective and efficient
manner ensuring (a) reasonable return on investment commensurate with the principles laid
down by the Government from time to time, and (b) generation of increasing internal resources.
4. MARKETING & CONSUMER SERVICES
(a) To provide to the farmers high quality products in right time and in adequate quantities
and with a package of modern agricultural practices.
(b) To further intensify promotional efforts for increased use of fertilizers and to maximize
distribution of Company’s products within the areas covered by the company consistent
with Government Policy.
5. ORGANIZATION
To develop and maintain an organizational environment for encouraging individual and group
initiative, innovation and productivity and also sustain fair deal and humane approach.
6. GROWTH
(a) To achieve reasonable and consistent growth in the business of manufacture and
marketing of fertilizers and chemicals compatible with needs of the market.
(b) To work out diversification/expansions schemes to increase profitability of the Company
and meet the changing needs of the customers.
7. OBLIGATIONS TO SOCIETY
(a) To conduct the business of NFL in accordance with ethical and legal standards and to
under take socio-economic activities, consistent with Government policies, in order to
generate good environment, in which Company operates.
(b) To promote development of ancillary industries.

SWOT ANALYSIS
STRENGTHS:
The company’s strengths lies in its brand loyal customers, its harmonious commitments on
human resources, its efficient operations, IR, goodwill it has generated over by the work culture,
fulfilling its social commitments. The strengths that drive its achievements are:
 The company with an excellent track record and high profits.
 An early starter- more than 40 years experience in fertilizer industry.
 Highly motivated and dedicated workers and staff-no industrial relations problem.
 All plants are situated amidst high fertilizers consumption areas in the states of Punjab,
Haryana and Madhya Pradesh.
 A well developed and efficient marketing network including private and institutional
marketing arrangements.
 Bio Fertilizers plants of 100 tonnes capacity per annum at Indore in Madhya Pradesh.
 Excellent growth prospects with significant additions, modifications and replacements.
WEAKNESSES:
 Credit Policy
 Claim policy
.
OPPORTUNITIES:
 Marketing of Agricultural inputs/ services under one roof.
 Setting up of Joint Ventures in India/ Abroad.
 Deploying existing marketing set-up and marketing channels for allied business product
lines including agricultural inputs.
 Good demand for Neem-coated Urea.
 Scope for growth in Bio-fertilizers.
 Locational advantage as the production unit are located in the main consumption areas.
 Once the gas is available at Panipat, Nangal and Bhatinda, the company would be able to
produce UREA at competitive price at these three units.

THREATS:
 Energy intensive i.e. Fuel Oil/LSHS based plants could become unviable under new
fertilizer policy unless feed stock is switched over from Fuel oil/LSHS to NG/R-LNG.
 Increasing input costs of feed stock i.e. Fuel Oil/LSHS/Naphtha/NG
 Single nutrient product base.
 Uncertainty in the availability & pricing of R-LNG for change over of feed stock at
Panipat, Bhatinda.
 Slow growth in UREA consumption during last 7-8 years.
 Globalized competitive scenario in industrial products and reducing trend of import
duties and threat from dumping of low price products.

ORGANISATIONAL SETUP OF
FINANCE & ACCOUNT SECTION AT NFL PANIPAT
Sr. Manager (Finance & Account)
Manager (Finance & Account)
Deputy Manager
Sr. Assistant Manager
Assistant Manager
Sr. Account Officer Manager
Junior Executive & Selection Grade
Supervisor (S.G)
Supervisor
Sr. Assistant

ORGANISATIONAL SETUP OF
FINANCE & ACCOUNT SECTION AT NFL PANIPAT
F&A Department is under the overall control of Director (Finance) who is
appointed by the Government of India. Director is the full time member of the board of directors
of the company. Organization operates through four production units at Naya Nangal, Bhatinda,
Panipat, Vijaipur, Central marketing office at New Delhi and corporate office at New Delhi. At
Corporate office, F&A Department is headed by Deputy General Manager who reports to
Director (Finance). Manager (F&A), Deputy Manager (F&A) & other officers assists him.
Deputy General Manager/ Manager Finance heads finance department in the production units at
Naya Nangal, Panipat, Vijaipur and Bhatinda, administratively reporting to General Manager of
the respective unit. Finance and Accounts department at each unit comprises of various sections.
They are:
• Purchase Accounts Section
• Sales Accounts Section
• Stores Accounts Section
• Works Accounts Section
• Cash Accounts Section
• Establishment Accounts Section/Provident Fund Accounts Section
• Miscellaneous Accounts Section and Estate Accounts Section
• Central Account Section
• Management Reporting & Costing & Budgeting Section
• Internal Audit Section.
Each of these sections is headed by Deputy Manager/ Assistant Manger/ Accounts
Officer/Assistant Account Officer who is supported by officers and staff depending upon work
load of the section.
PURCHASE ACCOUNTS SECTION
Purchase Account Section is mainly responsible for-
(a) Timely release of payment to suppliers as per terms and conditions of Purchase order.
(b) Clearance of provisional liability created by store Accounts section
(c) Accounting for the purchase of –
- Raw material
- Packing material
- Furniture
- Spares
- Stores/consumables etc
Junior Assistant

System summary
The procurement of all types of plant and machinery, store, spares, consumables and
equipments are done through material department. Head of department would estimate their
requirement for the purchase of goods in respect of each financial year well in advance and
communicate to the Accounts/Material department for inclusion in the annual revenue/
capital budget. Once the budget has been approved, the various officers delegated with
powers would be free to indent within the approved budgetary limits. In case of capital items
all indents shall be sent to Finance &Accounts department by the indenter to ensure
availability of budget before such indents are forwarded to stores/purchase section for
procurement. The materials are broadly classified in three categories: (a) Specific Items(ST):
Items for specific works plant and machinery, equipment etc.(b) Regular stock items(RST):
Items of normal requirement of recurring nature for operation , maintenance and other
purposes.(c) Insurance stock items(IST):Items for use as replacement in the event of a
possible breakdown.
Indenting
The user department places the indent through stores section for the assessed quantities.
Store section will then check the stock position of the indented items and in consultation with the
indenter, finalize quantities to be purchased. The indent should specify whether it is for
“RST”,”ST”,”IST” or of capital nature. The indent will be prepared in 5 copies and will be
distributed among different departments.
Tendering
Tenders are classified into three classes:
Open Tenders: Open tenders should be invited in the most open and public manner and, as such
tender notices should be advertised in the leading news papers or in Indian trade journal
Limited tenders: Direct invitation/ enquiry to all or limited number of suppliers/ manufacturers
on the approved list.
Single tender: invitation/enquiry to a single party on the approved list
Earnest Money/ Security Deposit
EMD/SD must be insisted upon in respect of items which are critical/ important and will
hamper production, such as capital equipment etc. It may be waived off only in respect of
simple and non-critical items with the approval of competent authority i.e. General Manager /
Executive Director. Specific rates are applicable for EMD.EMD may not be asked for, in case of
purchase of proprietary items
Security Deposit: From successful Tenderers, 10%of value of the order, after adjusting EMD if
already deposited.
All the deposits should be made in the favor of concerned unit of NFL in the form of cross
Demand Draft payable at (the place of unit)

Earnest money should be refunded to the unsuccessful tenderers on the recommendations of
Manager (Materials) immediately after placement of order against the tender. Security deposit of
the parties on whom Purchase orders have been placed, shall however be refunded as per terms
and conditions of the Purchase order after consulting the indenting department.
Evaluation of Tenders:
All tenders will be received in sealed cover by post or deposited in a locked and
sealed
Box which would be kept at conspicuous place. In the presence of two officers one from
Purchase wing and the representative of F&A department, the tender will be opened and
Read out. Evaluation of tender shall be done on comparative statements by bringing all
Tenders at par after adding al elements like duties, taxes, frieghtand deducting
Discounts/rebates if any to indicate the delivered cost. All tenders would then be ranked in
Roman figures.
Tender committee
All proposals of purchase exceeding 2.0 laks in value would require scrutiny and
Recommendation by tender committee .The scrutiny of tenders will include technical and
Financial check of the specifications/samples, rates and other terms & conditions of the tender.
Tender committee shall take a note of the Purchase section, F&A and user departments during
the course of scrutiny of tenders. On the basis of above scrutiny the tender committee will
recommend acceptance of the lowest acceptable tender.
Negotiations
Negotiations shall not be resorted to in case of open/limited tenders. If negotiations
are considered necessary to be resorted to, the guidelines of the Central Vigilance Commission
should be kept view.
Contracts
The contracts may be of following types: a) Supply Contracts b) Rate Contracts c)
Running contracts. Contract is an agreement enforceable by law .For supply of materials,
acceptance of terms and conditions of tender/ purchase order and schedule of accepted rate,
attached thereto, shall constitute a contract.
Petty Purchases
All purchases up to the value of Rs. 1500 per item shall be considered as
petty purchase. These purchases can be affected by Purchase section without calling for tenders
and without issuing Purchase orders. After purchase the purchase section shall handover the
materials on Local Purchase cum Receipt Voucher in 4 copies...
SALES ACCOUNTS SECTION

The Government under Essential Commodity Act shall control distribution of fertilizer. All the
dispatches from the unit are made based on instruction of Dispatch & Coordination (D&C) cell,
of the Central Marketing office situated at respective unit by road or rail.
Dispatch by Road
D&C cell receives the order through telephone and interoffice memos from various
zonal offices, CMO for dispatch of specified quantities to dealer at specified destinations.
Dispatch instructions are prepared by D&C cell stating name and code with CST no. and amount
deposited etc. These are forwarded to transport department and sales account section of unit.
Supplies are made for the dealer’s godown. The traffic department requisitions trucks from
transport union. Bagging department supervises loading of fertilizer bags in trucks. Traffic
Department shall prepare a daily Loading Statement /Delivery Challans. Sale accounts section
shall file serially all dispatch instructions and delivery challans product wise separately. It shall
be ensured that the quantity dispatched as per delivery challan issued by traffic department is not
more than quantity indicated in the dispatch instruction issued by D&C cell. For cross checking
and future reference sales account section shall record the serial no. of the delivery challan on the
dispatch instructions as well as delivery challans. Invoices shall be dispatched to parties, CMO,
D&C cell on daily basis.
Dispatch by Rail:-
D&C cell shall prepare rake programs and dispatch to sale account section and traffic
department .Traffic department call for rake with Chief Good Clerk (CGC), Indian Railway. On
arrival of rake for siding; loading shall be made and forwarding note prepared for each wagon.
CGC shall prepare railway receipt. Traffic department shall
Check weather freight is as per tariff and shortest route has been taken into consideration. A rates
and amount chargeable and loading statement shall be prepared by Traffic Department which is
dispatched to D&C cell and Sales account section. Sales account section shall note details in
Rake Register and prepare monthly debit advice on the rake disposal statement received from
marketing division.
Sale of Industrial Products-
Numbers of Industrial/by-products are obtained during the production of
Ammonia/Urea at Panipat .These are Nitrogen, Carbon dioxide, Oxygen, Sulphar, Argon gas and
carbon slurry. These are termed and sold as industrial products .D&C cell route sale of all these
products. This cell receive demand draft from the purchaser and according to the sales terms
Dispatch instruction is issued to Traffic, Production and Sales account section Delivery is
authenticated by Officer-in-charge to the purchaser according to the dispatch instructions. The
concerned department of the unit deals gate passes and excise duty. Invoices are raised on the
basis of Gat pass/Loading statement received by sales account section. Invoices are entered in
Sales day book product wise.
Payment of freight-
The company has an agreement with truck transport union for transportation of Urea to
various destinations where dealers has been appointed. The recipient authenticates receipt of

material on Goods Received Note/Delivery Challan. Transporter will raise bill for freight on the
basis of authenticated GTRs
The traffic department would request the sales account section for issuance of MICR
check towards Outward freight charges based on the amount claimed in R.R’s by Local Railways
Goods clerk after checking that the freight charge is as per tariff and shortest route.
WORKS ACCOUNTING
Works Accounting shall be responsible for payment, receipt and maintenance of accounts in
respect of expenditure and income of capital/revenue nature. This section shall be responsible for
rendering guidance on financial matters to all engineering departments, scrutiny of estimates of
works, checking of comparative statements, evaluation of tenders, passing of contractor’s bills,
keeping account of all construction work-in-progress and capitalization of work on completion.
Functions
1. Ensuring that execution of capital schemes is taken up only for which both the
adequate budget provision and approved estimate exists and monitoring with
reference to progress of expenditure on continuing schemes.
2. Checking of estimates of works for obtaining administrative approval and
expenditure sanction of the competent authority.
3. Scrutiny of tenders received, checking of comparative statement, evaluation of
commercial conditions of the tenders and concurrence of proposals of engineering
department for award of work.
4. Checking of contractor’s bills for work done with reference to entries in
measurement books, accounting of expenditure, recoveries to be made from
contractor release of payment as per terms of agreement.
5. Maintain accounts of earnest money deposits and security deposits of contractors.
6. Maintain record of various bank guarantees, insurance guarantees, and FDR’s
received from contractors, to scrutinize them and keep their validity, release or
encash the same as the case may be.
7. Examine proposals for extra items and extra items rates.
8. Release payments of various advances to contractors.
9. Effect from the contractor’s in respect of supplies of material, water and power,
hire of equipment, income tax, sales tax etc.
10. Maintains accounts of works-in-progress and capitalize them on completion.
11. Maintain accounts of deposit works undertaken through outside agencies on
behalf of outside parties.
12. To examine contractor’s claim.
13. Check final bills of the Contractors along with deviation statement, material
consumption statement.
14. Furnish monthly, quarterly, and annual returns for demands of funds, monitor
budget provisions and sanctioned estimated cost.
15. Check and pay bills of service and maintenance contractor.

CASH AND BANK ACCOUNT SECTION
System Summary
Cash and bank accounting section deals with receipt and disbursement of cash directly
and/or through bank. Cash handling is a high risk area, there being greater need to ensure proper
authenticity, validity, authorization and control of all cash and bank transactions.
Functions:
1. Receive cash, check and demand draft from employees and outside parties against dues to
companies, tender fees, earnest money and refund of advances against receipt voucher
from the concerned section.
2. Make payment in cash, check and demand draft to employees and other outside parties on
the basis of payments order issued by different sections.
3. Handling of bank deposits, withdrawal and custody of cash.
4. Maintenance of cash and bank books.
5. Intimate bank name to officers authorized to operate bank accounts and send their
specimen signatures and also cancel specimen signatures of those who cease to hold
authority to operate bank accounts.
6. Send report to corporate office, of all remittances made by various area office banks to
corporate office.
7. Prepare bank reconciliation statements.
8. Keep liaison with bank for the discrepancies found in bank reconciliation and for delay in
remittances to units, CMO and delay in collection and credit for cheques / drafts/postal
orders sent to bank for collection.
9. Physically verify the cash on daily basis and also surprise cash check by an officer other
than in-charge of cash section on monthly basis
10. Security of cash handling.
11. Insure cash in safe and cash in transit.
12. Safe custody of all bank guarantees and fixed deposit receipts, and other valuable
documents.
13. Maintain Register of valuable documents kept in safe custody.
14. Check correctness of amount charged by bank for demand draft, telegraphic transfers,
issuing of bank guarantees.
15. Check interest charged by bank on cash credit account and credit for interest allowed by
bank under value dating of remittances.
Time Office Section/ Establishment Account Section/ Provident Fund
Time Office Section

Time Office Section deals with the preparations of attendance records, overtime and
leaves records. Proper documentation, authorization, and authenticity of all time office records
are under them.
Aims of time office
• Used for preparation of payroll.
• For distribution of labor cost to jobs, process departments or cost centers.
• Submissions of various statutory returns to Government agencies.
Functions of Time Office:
1. Compilation/validation of Attendance statements based on data received from various
departments.
2. Compilation of overtime statements from overtime data received from different
departments.
3. Keeping record leaves application, reports and leave ledger.
4. Ensuring authorization of following competent authority:
I. Attendance sheet.
II. Overtime statements.
III. Leave application of all types.
5. Submitting the data promptly to EDP section.
6. Obtaining the checklist from EDP section, for every batch of source documents and informs
EDP section regarding errors (if any).
7. ensuring all the errors have been corrected.
8. Feed the attendance data to computer for calculation of Productions incentives.
ESTABLISHMENT ACCOUNT SECTION
This section is responsible for scrutiny, disbursement and accounting of claims of employees in
respect of salaries, wages, shift and dust allowances, LTC, encashment of LTC, medical
reimbursements, various advances etc. Close cooperation between Time office and establishment
A/C section is essential to ensure timely receipts of basic documents related to employee’s
claims and their processing. Establishment A/C section is also responsible for recovery of
Income Tax deducted at source, depositing the same with Government and submissions of
reports and returns thereto.
Functions of Establishment Section:
1. Prepare monthly salary bill of staff and officers and make disbursement.
2. Calculate, recover and deposit income tax on salaries, issue IT deductions certificates and
file return to TDS as per Income Tax rules.
3. Keep record of unclaimed Salaries.
4. Check and pay the overtime wages to staff.
5. Submitting the monthly statement of overtime paid information to departmental heads
and General Manager.

6. Remit to outside authorities’ amount recovered from employees on account of
insurance premium, EPF, ESI, house rent.
7. Pay bonus, gratuity, and incentives to employees as per rules.
8. Check and pay leave encashment, medical claims, local conveyance reimbursement,
traveling allowances, LTC encashment and advance to employees.
9. Calculate and make recovery for above advances and interest wherever applicable.
10. Keep sub ledger of advances to employees and prepare schedule of outstanding advances.
11. Compilation of employee’s statistics for management and statutory authorities.
PROVIDENT FUND ACCOUNTS SECTION
System Summary
Provident Fund Scheme for the Board of Trustees shall manage the employees constituted in
accordance with Provident fund rule of the company .This amount is deposited at NFL trust at
Nangal Unit. After 6 months from joining of a regular employee deductions started.
Functions of Provident Fund Section:
1. Maintain member wise details of Provident fund balances, contributions and loans.
2. Check eligibility of new members and make Family Provident Fund and PF deductions
and ensure that nomination forms have been obtained in all case by personnel
department.
3. Examine the applications for the loans taken by members as per rule of the trust and to
disburse the loans as per PF rules.
4. Charge the interest on loans taken by members as per PF rules.
5. Credit the interest on PF balances as decided by the trust.
6. Ensure the recovery of loan installments, interest on loan and crediting interest on
member balances.
7. Process the application for transfer Provident Fund to other units and organizations.
8. Process the applications for final withdrawal as per rules of the trust.
9. Prepare the monthly returns of the members, investment of PF money, employer deposit
Link Insurance etc. for submission to RPFC (Regional Provident Fund Commission)
10. Maintenance of proper accounts of all receipts, payments, assets and liabilities of the
Provident Fund as per the requirement of EPF Act and PF rules and compilation of
Balance Sheet and Interest Income statement etc. for trust and arranging thereof.
11. Comply with provisions of Section 418 of Companies Act 1956.
12. Arrange timely investment of PF money in the prescribed pattern as per instructions
issued by the Government of India from time to time.
Every employee has to deposit 12%of basic salary and DA into PF. From this
6500*8.33%=541.45 are deposited under Pension Scheme (RPFC). This scheme was
started from 16th
November 1995.
MISCELLANEOUS ACCOUNTS AND ESTATE ACCOUNT
SECTION

Miscellaneous and estate accounts section are responsible for processing of
miscellaneous payments which are neither against specific purchase order or work order
e.g. power bills,CISF payments, entertainment expenses, rent of buildings and recovery
of rent for company’s houses etc.
Functions:
1. Quarters are allotted by Personnel & Administration Department or Estate department
as per approved rules of allotment. A copy of occupation / vacation report shall be
endorsed to F&A department and entered in occupation/vacation register
.Miscellaneous and estate section shall intimate EDP section for deduction of rent etc.
from salary.
2. Deductions for water shall be made at the flat rate fixed. Monthly deductions towards
electrical charges shall be made on the approved provisional rate basis.
3. Imprest shall be given to various departments as per need with the approval of
Manager/Head of dept.
4. The guest hose staff will maintain record of all guests in the guest’s house, in a
register. The receipts will be deposited with the accounts depts. daily/ weekly basis,
depending on the amount collected through Estate/Misc. section, who will verify the
correctness of the amount from the guest house register and duplicates of receipts
books. All expenses for guest house like washer man’s bill etc. will be paid through
Estate/Misc.Section
5. Miscellaneous section makes all the payment of CISF bills and entry shall be made in
CISF payment control register.
6. Miscellaneous Account Section is also responsible for miscellaneous types of
payments like:
I. Record of all the payment of telephone bills are made by Misc. section to
ensure that duplicate payments are not made.
II. The expenditure on entertainment will be authorized within budgetary
allocations/ limits fixed for the unit/office/head of department.
III. Contracts for services, such as canteen, horticulture, repairs to typewriters,
office furniture, air conditioners etc.
IV. Matters relating to sports and welfare activities.
V. Advertisement and publicity, conference and seminars, payments for
journals and periodicals, legal expenses etc.
MANAGEMENT REPORTING SECTION
System Summary
Management reporting Section is responsible for:-
1. Timely send various reports to corporate office (Noida).On the basis of which it allocates
the funds to all units and control them.
2. Send the necessary information to FICC (Fertilizer Industrial coordination Committee)
for getting subsidy.
3. Send the information to other agencies like Ministry of Law Justice & Company Affairs
and BOP (Beauro O Public Enterprises) whenever necessary.
4. Reporting for the Auditing purpose. There are two types of Audit

(a) Internal Audit: the auditors, which are authorized by Company itself, or outsiders do it
as the case may be.
(b) External Audit: It includes:
• Statutory Auditors
• Government Auditors
• Cost Auditors
• Ficc Auditors
Management Information Systems
There are many reports and presentations prepared for effective administrations and controlling
functions at NFL panipat, which flow vertically. These report are prepared and sent regularly,
monthly, quarterly, half yearly, and annually as per the schedules. Thus it is the sole purpose of
reporting to establish an effective information and controlling system for quick decision making.
With an effective MIS, officer can proceed for better decision after reviewing the every aspect
of the problem .If there is any delay for decision/ corrective action, then there may be heavy/
huge losses to be suffered by the company specially in case of manufacturing unit like NFL,
where production per day matters a lot.
STORES ACCOUNTING SECTION
Store keeping activities play an important role in Material Management function. It has to be
released that stores means money and any saving effected in reducing inventory, its carrying cost
and obsolesce will contribute in improving the profitability of the company.
Functions:
The main function of store section is of receiving, inspection, storing, issuing and take suitable
steps for evolving methods and procedures for inventory control. It has to keep in coordination
with purchase department as well as finance department with regard to stores accounting,
physical stock verification, disposal of scrap and surplus material, lodging of formal claims on
the carriers and underwriters etc.
Receipt and inspection of material:
The receipt and inspection wing is responsible for Railway Receipt/ Goods
Receipt/ Advance Dispatch Documents. The RR/GR is entered serially in the Goods Inward
Register meant for the purpose. All documents relating to the consignment shall bear the GIR
no .which will serve the purpose of control of subsequent linking. The work of clearance,
unloading and shifting of material from railways/ Transport Companies and Railway siding shall
be arranged through material handling contractor. The store wing of material department shall
make arrangement for payment of freight. On receipt of Delivery Challan that shall also bear
GIR control number, relevant documents including purchase order shall be taken out for
preparation of Material Inspection Note cum Store Receipt Voucher. The receipt and inspection
section attach the item identification tag to the item. To avoid errors in processing of SRV on the
computer, the material code and unit of measurement shall e checked from the issue section of
store wing.
Inspection note shall be prepared in 6 copies. Store wing shall be responsible for
carrying out preliminary checks to determine any shortage or breakage.
In case of any discrepancies, section will inform to the insurance section and the package shall
be preserved for survey, if necessary as claims procedure & insurance policy. The discrepancies

shall be intimated to supplier immediately after inspection, not later than two weeks after receipt
of material to store. After the material has been checked and accepted , SRV no. will be allotted
by Receipt & Inspection Section and the document shall be released to different departments for
further processes.
Maintenance of store:
Care is taken by the store to preserve the various types of materials by using proper
preservatives. To facilitate Computer processing and proper accounting all items of stores are
allocated 7 digit material code. A control register is maintained for allocating code numbers to
stores and spares. Considering the importance of the function new codes shall be allotted by a
competent officer in the Material Department. At the beginning of each financial year Material
Department obtain a list from the computer center of all the items having no movement for 2
years. Disposal of Scrap shall be carried out by Public Auction or tender system as per procedure
after approval by an officer competent to do so as per delegation of powers
Issue of Materials
The materials shall be issued from stores on the strength of store issue Note. This store
issue Note contains the name and designation of the officer requisitioning the material. It also
contain the Material Code Number, quantity to be issued, cost head and unit of measurement
Insurance of stores:
The items damaged in transit and having scrap value shall be separately stored for being
returned to Insurance Company and procedures on settlements of claim.
]
CENTRAL ACCOUNTS SECTION
Central Accounts Section is responsible for:
1. Fixed Assets Accounting
2. Inter unit Accounting and Reconciliation
3. Coordination with EDP for preparation of daybooks, sub ledger, main ledger, trial
balance, consolidated transaction summaries and party ledgers.
4. Preparation of periodical Final Accounts.
5. Finalization of Final Accounts and coordination with statutory auditors and Government
Auditors for Audit.
6. Submission of Company’s Income Tax Return and all other information required for
assessment of tax by tax authorities.
7. Coordination for tax audit of the company.
8. Interaction with local income tax and sales tax authorities.
9. Accounting systems and procedures.

INTRODUCTION TO THE PROJECT
The term Working Capital is one of the most misunderstood terms in Finance.
The number one reason most people look at a balance sheet is to find out a company's
working capital (or "current") position. It reveals more about the financial condition of a
business than almost any other calculation. It tells you what would be left if a company
raised all of its short term resources, and used them to pay off its short term liabilities. The
more working capital, the less financial strain a company experiences. By studying a
company's position, you can clearly see if it has the resources necessary to expand
internally or if it will have to turn to a bank and take on debt.
Working Capital is the easiest of all the balance sheet calculations. Here's the formula:
Current Assets - Current Liabilities = Working Capital
One of the main advantages of looking at the working capital position is being able to
foresee any financial difficulties that may arise. Even a business that has billions of dollars
in fixed assets will quickly find itself in bankruptcy court if it can't pay its monthly bills.
Under the best circumstances, poor working capital leads to financial pressure on a
company, increased borrowing, and late payments to creditor - all of which result in a lower
credit rating. A lower credit rating means banks charge a higher interest rate, which can
cost a corporation a lot of money over time.
Companies that have high inventory turns and do business on a cash basis (such as a
grocery store) need very little working capital. These types of businesses raise money
every time they open their doors, then turn around and plow that money back into
inventory to increase sales. Since cash is generated so quickly, managements can simply
stock pile the proceeds from their daily sales for a short period of time if a financial crisis
arises. Since cash can be raised so quickly, there is no need to have a large amount of
working capital available.
A company that makes heavy machinery is a completely different story. Because these
types of businesses are selling expensive items on a long-term payment basis, they can't
raise cash as quickly. Since the inventory on their balance sheet is normally ordered
months in advance, it can rarely be sold fast enough to raise money for short-term financial
crises (by the time it is sold, it may be too late). It's easy to see why companies such as
this must keep enough working capital on hand to get through any unforeseen difficulties.
Working Capital Management is usually being described as involving the
administration of assets namely- cash and marketable securities and
inventories and administration of Current Liabilities. Management of Working

Capital i.e. Current assets is somewhat similar to that of fixed assets in the
sense that in both the cases the firm has to analyze their effects in the
profitability and risk. The management of fixed and current assets are different
in certain aspects:
Time: In managing fixed assets, time is very important factor. But it plays minor role in
managing current assets.
Liquidity: Holding large current assets, strengthens the firms liquidity position but
reduces riskiness and over all profitability.
Expected Sale: The level of current assets and fixed assets depends upon expected
sale. There is greater degree of flexibility in managing current assets.
Working Capital must be in proportion to fixed assets, so that business may operate
smoothly. Working at the inception of the business can result in early financial
failure. The capital requirement for plant and equipment can be measured with
accuracy but promoters underestimate working capital requirements. So a
serious unbalance might develop between production capacity of fixed assets
and amount of working capital available to business.
Defining Working Capital
The term working capital refers to the amount of capital which is readily available to an
organization. That is, working capital is the difference between resources in cash or
readily convertible into cash (Current Assets) and organizational commitments for which
cash will soon be required (Current Liabilities).
Current Assets are resources which are in cash or will soon be converted into cash in
"the ordinary course of business".
Current Liabilities are commitments which will soon require cash settlement in "the
ordinary course of business".
Thus:
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
In a department's Statement of Financial Position, these components of working capital
are reported under the following headings:
Current Assets
• Liquid Assets (cash and bank deposits)
• Inventory
• Debtors and Receivables
Current Liabilities

• Bank Overdraft
• Creditors and Payables
• Other Short Term Liabilities
MEANING OF WORKING CAPITAL
MANAGEMENT
Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the short term assets and its short term
liabilities. The goal of Working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both maturing short term
debt and upcoming operational expenses.
NEED FOR WORKING CAPITAL MANAGEMENT
Working capital measures the company’s efficiency and its short term financial health. The
number one reason most people look at a balance sheet is to find out a company's working
capital (or "current") position. It reveals more about the financial condition of a business than
almost any other calculation. It tells you what would be left if a company raised all of its short
term resources, and used them to pay off its short term liabilities. The more working capital, the
less financial strain a company experiences. By studying a company's position, you can clearly
see if it has the resources necessary to expand internally or if it will have to turn to a bank and
take on debt.
Working capital can be either positive or negative. A positive working capital indicates
that company is healthy enough to pay its short term liabilities whereas a negative working
capital indicates that company’s inability to meet its short term liabilities. Worst case can be that
a company can become bankrupt. Continuous declining in working capital is also alarming and
need a quick look upon the matter. Working capital gives investors an idea of company’s
underlining operational efficiency like slow collection may signal an underlying problem.

Working capital is also need for the purpose of inventory funding. As your company grows
the sales grow also the receivables and marketing expenses also grow so proper working capital
management is required so that at any point of time during the regular operation of the company
enough assets are available to meet the liabilities.
There are different business needs and working capital is used for it like-
• Critical to meeting short-term cash needs and liquidity for the firm to survive.
• A permanent working capital investment to be able to operate a business with a comfort
margin to meeting short-term liabilities.
• Seasonal or cyclical working capital to finance the temporary cash shortfalls due to the
nature of the firm’s normal business cycle.
• Working capital needed for fund growth. As a firm grows, it needs to maker greater
investments in inventory, accounts receivable, personnel, etc. to realize increased sales.
• "Working capital" to support new market or product development, undertakes R&D to
improve existing products & operations.
ADVANTAGES OF WORKING CAPITAL
MANAGEMENT
One of the main advantages of looking at the working capital position is being able to foresee
any financial difficulties that may arise. Even a business that has billions of dollars in fixed
assets will quickly find itself in bankruptcy court if it can't pay its monthly bills. Under the best
circumstances, poor working capital leads to financial pressure on a company, increased
borrowing, and late payments to creditor - all of which result in a lower credit rating. A lower
credit rating means banks charge a higher interest rate, which can cost a corporation a lot of
money over time
ESTIMATING WORKING CAPITAL
REQUIREMENTS
For estimating working capital following three techniques are required-

• ESTIMATION OF COMPONENTS OF WORKING CAPITAL METHOD
Since working capital is the excess of current assets over current liabilities an assessment
of the working capital requirements can be made by estimating the amounts of different
constituents of working capital like Inventories, Accounts Receivable, Cash, and Accounts
Payable etc.
• PERCENT OF SALES METHOD
According to this method, on the basis of past experience between sales and working
capital requirement in future is estimated.
• OPERATING CYCLE APPROACHES
According to this approach, the requirement of working capital depends upon the
operating cycle of the business. It begins with the acquisition of Raw Materials and ends with the
collection of the receivables.
Pros and cons of maintaining excess or inadequate working Capital
The firm should maintain sound working capital. It should have adequate working Capital to
own its business operations. Both inadequate and excessive working Capital positions are
dangerous from the firm’s point of view. Excessive Working Capital mean sidle funds, which
earns no profit for the firm. Paucity of Working Capital not only impairs firm’s profitability but
also results in production interruptions and ineffectiveness. A firm’s net Working Capital
position is not only important as an index of liquidity but it is also used as a measure of the
firm’s risk. Risk means chances of the firm’s being enable to meet its obligation on due date.
DISADVANTAGES OF EXCESS WORKING
CAPITAL
The company may suffer for having excess working Capital as:

1) Return on investment will be inadequate.
2) The management might not be taking advantage of purchasing on credit.
3) The business of company is not expanding.
4) Money is being blocked in excessive inventories for debtors who have adverse
affects.
5) Management is not maintaining relations with the bank.
6) It results in unnecessary accumulation of inventory and the chances of
mishandling, wastage, theft and losses increases.
Advantages of adequate Working Capital
1) To avoid technical insolvency, inability to pay creditors, wages, expenses to
purchase material etc.
2) To maintain creditworthiness to suppliers, banks and financial institutions.
3) To pay dividend regularly to shareholders and to maintain efficiency of the work
in the company.
Adequate working Capitals prevent decline in efficiency and create goodwill for company.
The company has inadequate working capital then:
a) The firm will unable to attract positive credit opportunities.
b) Fixed Assets can’t be efficiently utilized
c) Operating inefficiency creep in when it becomes difficult to meet day to day
commitment.
d) It stagnate growth. It becomes difficult for the firm to undertake profitable projects due to
non availability of working capital.
DETERMINANTS OF WORKING CAPITAL
There is no set rule or formulae to determine the working capital requirement of the firm. A large
number of Factors, each having a different importance, influence working capital needs of a
firm. . Therefore a thorough analysis of all these
Factors should be made before trying to estimate the amount of Working Capital needed. Some
of the factors can be:-
• NATURE OF BUSINESS

Nature of Business is one of the most important factors in determining the Working
Capital requirement of any company. Some companies do need low investment in the fixed
assets and high investment in working capital e.g.- Trading and Financial companies whereas
some companies like public utilities require high investment in fixed assets and low in working
capital.
• SIZE OF BUSINESS
Size of any business is also a very important factor in determining the Working Capital of
any company. Size of any business depends upon the operating cycle and working capital is in
direct proportion with the operating cycle of the company. Thus with larger operating cycle large
working capital is needed whereas small working capital will be enough for small operating
cycle.
• MANUFACTURING CYCLE
Manufacturing cycle refers to the cycle which starts with the procurement of raw
materials and ends with the production of the finished goods. The larger the manufacturing
cycle will be the more the working capital will be required and vice versa.
• FIRM’S CREDIT POLICY
Credit Policy of any company effects the working capital requirement to a great extent.
Every company has to decide upon the credit terms which it will provide to its customers. A
liberal credit policy will need more working capital whereas a stern policy can reduce the
working capital to a great extent. But liberal policy can cause large bad debts whereas stern
policy can reduce sales. So a company has to form credit policy with at most care.
• AVAILABILITY OF CREDIT
The terms on which the company is having the availability of credit by its creditors
also affect the working capital requirement of the company. If the company is able to get credit
on liberal terms then the working capital requirement will be low whereas it will be high if the
credit available is on stern basis.
• PRICE LEVEL CHANGES
If the price of raw materials increases then more working capital will be required in order to
purchase them. But all the companies will not react with the change in prices in the same way as
the price change will affect different companies differently.
• BUSINESS FLUCTIONS

All business experience cyclical and seasonal fluctuations regarding demand and supply
of their goods and services and these fluctuations do have an impact on the Working capital of
the company. During boom period due to increase in the activities there is more requirement of
the working capital whereas during recession low working capital will be required as activities of
the business also slows down.
• PRODUCTION POLICY
A firm can select a strategy of constant production, in order to resolve the
working capital problem arising due to seasonal changes in the demand for the firm’s
product. A steady production policy will cause inventories to accumulate during the off
season periods. Thus every company has to cope with different fluctuations as stated above
so a production policy for every company is required. As fluctuations are different with
different companies so a unique production policy is required by each company. For example
At NFL, the production is continuous. But the demand is very limited in a year i.e. during
Rabi season and Khariff season. So company has to maintain a sufficient amount of finished
goods so as to meet the demand of customer during the peak period.
• OPERATING EFFICIENCY
Operating Efficiency, i.e. the optimum utilization of resources at
minimum cost will also determine the amount of working capital requirement.

WORKING CAPITAL CYCLE
Cash flows in a cycle into, around and out of a business. It is the
business's life blood and every manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating profitably, then it should, in theory,
generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of
cash and expire..
The faster a business expands the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within business. Good
management of working capital will generate cash will help improve profits and reduce risks.
Bear in mind that the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-
progress) and Receivables (debtors owing you money). The main sources of cash are Payables
(your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two
dimensions ........TIME ......... and MONEY. When it comes to managing working capital -
TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies
due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory
levels relative to sales), the business will generate more cash or it will need to borrow less
money to fund working capital. As a consequence, you could reduce the cost of bank interest or
you'll have additional free money available to support additional sales growth or investment.
Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an
increased credit limit; you effectively create free finance to help fund future sales.
If you ....... Then ......
• Collect receivables (debtors) faster You release cash from the
cycle
• Collect receivables (debtors) slower Your receivables soak up
cash
• Get better credit (in terms of duration or amount)
from suppliers
You increase your cash
resources
• Shift inventory (stocks) faster You free up cash
• Move inventory (stocks) slower You consume more cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc.
If you do pay cash, remember that this is now longer available for working capital. Therefore,
if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc.
Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water
flowing downs a plug hole, they remove liquidity from the business.
More businesses fail for lack of cash than for want of profit.

The way working capital moves around the business is modeled by the working capital cycle.
This shows the cash coming into the business, what happens to it while the business has it and
then where it goes. A simple working capital cycle may look something like:-
A more versatile Working Capital Cycle is shown below:-

The upper portion of the diagram above shows in a simplified form the
chain of events in a firm. Each of the boxes in the upper part of the diagram can be seen as a tank
through which funds flow. These tanks, which are concerned with day-to-day activities, have
funds constantly flowing into and out of them.
• The chain starts with the firm buying raw materials on credit.
• In due course this stock will be used in production, work will be carried out on the stock, and it
will become part of the firm’s work in progress (WIP)
• Work will continue on the WIP until it eventually emerges as the finished product
• As production progresses, labor costs and overheads will need to be met
• Of course at some stage trade creditors will need to be paid
• When the finished goods are sold on credit, debtors are increased
• They will eventually pay, so that cash will be injected into the firm
Each of the areas – stocks (raw materials, work in progress and finished goods), trade debtors,
cash (positive or negative) and trade creditors – can be viewed as tanks into and from which
funds flow.
Working capital is clearly not the only aspect of a business that affects the amount of cash:
• The business will have to make payments to government for taxation
• Fixed assets will be purchased and sold
• Leaser of fixed assets will be paid their rent
• Shareholders (existing or new) may provide new funds in the form of cash
• Some shares may be redeemed for cash
• Dividends may be paid
• Long-term loan creditors (existing or new) may provide loan finance, loans will need to be
repaid from time to time, and
• Interest obligations will have to be met by the business.
Unlike movements in the working capital items, most of these ‘non-working capital’ cash
transactions are not everyday events. Some of them are annual events (e.g. tax payments, lease
payments, dividends, interest and, possibly, fixed asset purchases and sales). Others (e.g. new
equity and loan finance and redemption of old equity and loan finance) would typically be rarer
events.

APPROACHES TO WORKING CAPITAL MANAGEMENT
The objective of working capital management is to maintain the
optimum balance of each of the working capital components. This includes making sure
that funds are held as cash in bank deposits for as long as and in the largest amounts
possible, thereby maximizing the interest earned. However, such cash may more
appropriately be "invested" in other assets or in reducing other liabilities.
Working capital management takes place on two levels:
• Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management
• The individual components of working capital can be effectively managed by
using various techniques and strategies.
When considering these techniques and strategies, departments
need to recognize that each department has a unique mix of working capital
components. The emphasis that needs to be placed on each component varies
according to department. For example, some departments have significant inventory
levels; others have little if any inventory.
Furthermore, working capital management is not an end in itself. It is an integral part of
the department's overall management. The needs of efficient working capital
management must be considered in relation to other aspects of the department's
financial and non-financial performance.
FINANCIAL RATIO ANALYSIS
INTRODUCTION
Financial ratio analysis calculates and compares various ratios of amounts
and balances taken from the financial statements.
The main purposes of working capital ratio analysis are:
• to indicate working capital management performance; and
• To assist in identifying areas requiring closer management.
Three key points need to be taken into account when analyzing financial ratios:
• The results are based on highly summarized information. Consequently, situations which
require control might not be apparent, or situations which do not warrant significant
effort might be unnecessarily highlighted;

• Different departments face very different situations. Comparisons between them, or with
global "ideal" ratio values, can be misleading;
• Ratio analysis is somewhat one-sided; favorable results mean little, whereas unfavorable
results are usually significant.
•
However, financial ratio analysis is valuable because it raises questions and indicates directions
for more detailed investigation.
The following ratios are of interest to those managing working capital:
• working capital ratio;
• liquid interval measure;
• stock turnover;
• debtors ratio;
• Creditors’ ratio.
WORKING CAPITAL RATIO
Current Assets divided by Current Liabilities
The working capital ratio (or current ratio) attempts to measure the level of
liquidity, that is, the level of safety provided by the excess of current assets over current
liabilities.
The "quick ratio" a derivative, excludes inventories from the current assets,
considering only those assets most swiftly realizable. There are also other possible refinements.
There is no particular benchmark value or range that can be recommended as
suitable for all government departments. However, if a department tracks its own working capital
ratio over a period of time, the trends-the way in which the liquidity is changing-will become
apparent.
LIQUID INTERVAL MEASURE
Liquid Assets divided by Average Operating Expenses
This is another measure of liquidity. It looks at the number of days that liquid assets
(for example, inventory) could service daily operating expenses (including salaries).
STOCK TURNOVER

Cost of Sales divided by Average Stock Level
This ratio applies only to finished goods. It indicates the speed with which
inventory is sold-or, to look at it from the other angle, how long inventory items remain on the
shelves. It can be used for the inventory balance as a whole, for classes of inventory, or for
individual inventory items.
The figure produced by the stock turnover ratio is not important in itself, but the
trend over time is a good indicator of the validity of changes in inventory policies.
In general, a higher turnover ratio indicates that a lower level of investment is
required to serve the department.
Most departments do not hold significant inventories of finished goods, so this
ratio will have only limited relevance.
DEBTOR RATIO
There is a close relationship between debtors and credit sales to
third parties (that is, sales other than to the Crown). If sales increase, debtors will increase, and
conversely, if sales decrease debtors will decrease.
The best way to explain this relationship is to express it as the number of
days that credit sales are carried on the books:
Credit Sales per Period x Days per period
Average Debtors
Where trading terms are 30 days net cash, and customers buy from day-to-
day during the 30 day period and pay 30 days after a statement is rendered, a collection period of
45 days (the average between 30 and 60 days) would be satisfactory.
If the average collection period extends beyond 60 days, debtors are holding
cash that should have flowed into the department. This means that the department is unable to
satisfy pressing liabilities or to invest that cash.
The debtor ratio does not solve the collection problem, but it acts as an indicator that an adverse
trend is developing. Remedial action can then be instigated.
CREDITOR RATIO
This ratio is much the same as the debtor ratio. It expresses the relationship
between credit purchases and the liability to creditors. It can be stated as the number of days that
credit purchases are carried on the books.
Credit Purchases per Period x Days per period
Average Creditors
Note that non-credit purchases (such as salaries) and non-cash expenses
(such as depreciation) need to be excluded from "credit purchases" and any provisions need to be
excluded from "creditors".

There is no need to pay creditors before payment is due. The department's
objective should be to make effective use of this source of free credit, while maintaining a good
relationship with creditors.
As with debtors, if a department has been granted credit terms of 30 days net
cash, credit purchases should not be carried on the books for more than an average of 45 days. If
payment is withheld for 60 days or more it is likely that creditors will become impatient and
impose stricter and less convenient trading terms-for example, "cash on delivery".
SPECIFIC STRATEGIES
INVENTORY
Inventory refers to the holding of raw materials. Work-in-progress and finished good held
by a firm at any time. Inventory turns over at frequent intervals and thus can be expected to
convert in cash rather quickly. The speed with which inventory is turned into cash depends on
firm’s business line. As lot of cash is blocked in the inventories so it is essential that inventory
cycle should be less so that the flow of working capital is properly maintained.
NEED FOR INVENTORY
Inventory is maintained to widen the latitude in planning and scheduling successive
operations.
Inventory of raw materials provide flexibility in purchasing and production. Thus firm can
wait for an opportune buying movement without affecting its production schedule and like wise
production schedule need not be influenced by immediate purchasing activity.
Inventory of work-in-progress provides flexibility in production scheduling so
that an efficient schedule and high utilization of capacity may be attained thus reducing delay
and idle facilities.
Inventory of finished goods provides flexibility in production program and
marketing activities. With proper finished goods inventory marketing department can meet the
needs of the customer promptly irrespective on quantity flowing out of the production line.
Inventory management is an important aspect of working capital management
because inventories themselves do not earn any revenue. Holding either too little or too much
inventory incurs costs.
Costs of carrying too much inventory are:
• opportunity cost of foregone interest;
• warehousing costs;
• damage and pilferage;
• obsolescence;
• Insurance.
•

Costs of carrying too little inventory are:
• stockout costs:
- Lost sales;
- delayed service.
• ordering costs:
- Freight;
- order administration;
- loss of quantity discounts.
Carrying costs can be minimized by making frequent small orders but this
increases ordering costs and the risk of stock-outs. Risk of stock-outs can be reduced by carrying
"safety stocks" (at a cost) and re-ordering ahead of time.
The best ordering strategy requires balancing the various cost factors to ensure the
department incurs minimum inventory costs. The optimum inventory position is known as the
Economic Reorder Quantity (ERQ). There are a number of mathematical models (of varying
complexity) for calculating ERQ.
Managing inventory is a juggling act. Excessive stocks can place a heavy
burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for
customers etc.
The key is to know how quickly your overall stock is moving or, put another
way, how long each item of stock sit on shelves before being sold. Obviously, average stock-
holding periods will be influenced by the nature of the business. For example, a fresh vegetable
shop might turn over its entire stock every few days while a motor factor would be much slower
as it may carry a wide range of rarely-used spare parts in case somebody needs them.
Nowadays, many large manufacturers operate on a just-in-time (JIT) basis
whereby all the components to be assembled on a particular today, arrive at the factory early that
morning, no earlier - no later. This helps to minimize manufacturing costs as JIT stocks take up
little space, minimize stock-holding and virtually eliminate the risks of obsolete or damaged
stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve
substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent
stock management.
The key issue for a business is to identify the fast and slow stock movers with the objectives of
establishing optimum stock levels for each category and, thereby, minimize the cash tied up in
stocks. Factors to be considered when determining optimum stock levels include:
• What are the projected sales of each product?
• How widely available are raw materials, components etc.?
• How long does it take for delivery by suppliers?
• Can you remove slow movers from your product range without compromising best
sellers?
MONITORING AND CONTROL OF INVENTORY

• ABC Analysis- In this method the inventory is divided into three categories A, B and C.
A items are those which constitute the highest percentage of value of all the inventory
held but with the least number of items where as C items are just reverse of it constituting
the lowest value and highest number of items. B items are average in both the terms.
Greater control is needed on A level items because of their value and so higher
management takes it care whereas low control is done for the C level items.
• FSM Analysis- Here the inventory is dividing into the Fast moving, Slow moving and
Non-moving inventory. This is the kind of analysis done at the aggregate level.
• Just-in-time Inventory level- It was originally developed by Taichi Okno of Japan. It
simply implies that the firm should maintain a minimum level of inventory and rely on
suppliers to provide the parts and components just in time to meet its assembly
requirements. It is difficult to implement because it involves a significant change in the
total production and management system by having a strong and reliable relationship
with suppiers which are not remotely located and a reliable transport system.
DEBTORS
Debtors (Accounts Receivable) are customers who have not yet made payment for goods or
services which the department has provided.
The objective of debtor management is to minimize the time-lapse between completion of sales
and receipt of payment. The costs of having debtors are:
• opportunity costs (cash is not available for other purposes);
• Bad debts.
Debtor management includes both pre-sale and debt collection strategies.
Pre-sale strategies include:
• offering cash discounts for early payment and/or imposing penalties for late payment;
• agreeing payment terms in advance;
• requiring cash before delivery;
• setting credit limits;
• setting criteria for obtaining credit;
• billing as early as possible;
• Requiring deposits and/or progress payments.
• Post-sale strategies include:
• Placing the responsibility for collecting the debt upon the center that made the sale;
• Identifying long overdue balances and doubtful debts by regular analytical reviews;
• Having an established procedure for late collections, such as
- a reminder;
- a letter;
- cancellation of further credit;
- telephone calls;
- use of a collection agency;
- legal action.
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster.
Every business needs to know.... who owes them money.... how much is owed.... how long it is
owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses who can least
afford it. If you don't manage debtors, they will begin to manage your business as you will
gradually lose control due to reduced cash flow and, of course, you could experience an
increased incidence of bad debt. The following measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the
priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank
references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large
or too old.
Recognize that the longer someone owes you, the greater the chance you will never get paid
Thus it is necessary for any firm to have proper credit variables.
CREDIT POLICY VARIABLES
• Credit Standards- Here company decides –What standard should be applied in accepying
or rejecting an account for credit graning. Like liberal credit terms do tend to push up
sales but incidencs of bad dabts also goes up as well as the collection cost is increased.
• Credit Period- It reffers to the length of time customers are allowed to pay for their
purchases. Like higher credit period will push sales but more money wil be blocked
during the credit period also the bad debts can also go up.
• Cash Discount- These are generally offered to the customers so that they make prompt
payment. The percentage dicount and the period which it is avialable is reflected in the
credit terms. Eg- 2/10 net 30 mean that a discount of 2% is offered if the payment is
made by the tenth day otherwise full payment is due by the thirtieth day. This is to reduce
the average collection period.
• Collection Effort- it aims at timely colletion of the receivables and the procedure
followed by the firm in this respect so that money locked in the receivables is quickly
released.
CREDIT EVALUATION

Before giving credit to any customer it is important it is important that risk involved in
giving credit should be considered. There can be two types of errors –
Type I error- A good customer is misclassified as a poor credit risk.
Type II error- A bad customer is misclassified as a good credit risk.
Both the errors are costly. Type I error leads to loss of profit on sales to good customers
who are denied credit. Type II error results in bad debt losses on credit sales made to risky
customers.
APPROACHES FOR CREDIT EVALUATION
There are same main factors considered while evaluating and classifying the customers.
This can be done by adopting various techniques.
• Traditional Credit Analysis- The credit should be given toa customer or not is assessed in
terms of five C’s- Character, Capacity, Capital, Collateral and Condition. These can be
done by studying the financial statements, bank references, experience etc.
• Numerical Credit Scoring- This technique is somewhat adhoc in nature as it is based on
the weights assigned by the firm which are subjective in nature. Firstly some factors
relevents for credit evaluation are identified and weights are assigned to them on their
relative importance. Then rating is done on these factors using a suitable rating scale.
Then multiply the factor rating with the factor weight to get factor score and add add all
scores to get overall customer rating index.
• Discriminates Analysis- This technique may be employed to create a better risk index. It
considers some financial ratios of its customers as the basic determinants of
creditworthiness. Accordingly it is plotted on a graph with X axis as the customers who
paid their dues while on Y axis are customers who default the payments. The higher the
value higher the creditworthiness.
ACCOUNTS PAYABLE / CREDITORS
Creditors (Accounts Payable) are suppliers whose invoices for goods or services have been
processed but who have not yet been paid.
There is an old adage in business that if you can buy well then you can sell well. Management of
your creditors and suppliers is just as important as the management of your debtors. It is
important to look after your creditors - slow payment by you may create ill-feeling and can
signal that your company is inefficient (or in trouble!).
Remember, a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.
Organizations often regard the amount owing to creditors as a source of free credit. However,
creditor administration systems are expensive and time-consuming to run. The over-riding
concern in this area should be to minimize costs with simple procedures.

While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to delay
all payments until the latest possible date., Regular weekly or fortnightly payment of all due
accounts is the simplest technique for creditor management.
Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity
problems. So these points can be considered to make any policy for creditors.
• Who authorizes purchasing in the firm - is it tightly managed or spread among a number
of (junior) people?
• Are purchase quantities geared to demand forecasts?
• Do the firm use order quantities which take account of stock-holding and purchasing
costs?
• Does the firm know the cost to the company of carrying stock?
• Does the firm have alternative sources of supply? If not, get quotes from major suppliers
and shop around for the best discounts, credit terms, and reduce dependence on a single
supplier.
• How many of the firm’s suppliers have a returns policy?
• Is the firm in a position to pass on cost increases quickly through price increases to your
customers?
• If a supplier of goods or services lets you down can you charge back the cost of the
delay?
• Can you arrange to have delivery of supplies staggered or on a just-in-time basis?
CASH AND BANK BALANCES
Introduction
Cash is the most important Current assets for the operation of the business. Cash is the basic
input needed to keep the business running on a continuous basis; it is also ultimate output
expected to be released by selling of service or product manufactured by the firm. Cash is the
medium of exchange to purchase the goods and services and to discharge the liabilities. In
business enterprises, it includes cash in hand and readily market securities. Now a day’s liquidity
band solvency maintenance has become the main task of financial executives. The firm should
keep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturing
operations while excessive cash will simply remains idle without contributing any thing towards
the firm profitability
NEED FOR CASH
The first important thing for any business is to understand that why cash is needed in
business. The main reasons are-
• Transaction Motive- so some cash is always required as buffer for this purpose.
• Precautionary Motives- to protect uncertainties related to inflow and outflow of cash
• Speculative Motives- to tap profit making opportunities arising from the fluctuations in
the market.

So cash can be maintained by-
• Establish reliable forecasting system.
• Improve cash collection and cash disbursement.
• Achieve optimal conservation and utilization of funds.
Facets of Cash management
Cash management is concerned with the managing of: (a) Cash flows into and out of the firm. (b)
Cash flows within the firm. (c) Cash balances held by the firm at a point of time by financing
deficit or investing surplus cash. It can be represented by cash management cycle. Cash
management seeks to accomplish this cycle at a minimum cost. At the same it also seeks to
achieve liquidity and control. The aim of cash management is to maintain adequate cash control
over cash position to keep the firm sufficiently liquid and o use excess cash in some profitable
way. The management of cash is important because it is difficult to predict cash flows
accurately, particularly the inflows, there is no perfect coincidence between the inflows and
outflows of cash. Cash management is also important because management devote their
considerable time in managing it. In recent past number of innovations have been done in cash
management techniques In order to resolve the uncertainty about the cash flow predictions and
lack of synchronization between receipts and payments, the firm should develop appropriate
strategies for cash management. The firm should evolve strategies regarding the following facets
of cash management:
• Cash planning: cash inflows and outflows should be planned to project cash surplus or
deficit for each period of the planning period. Cash budget is prepared for this purpose.
• Managing the cash flows the flow of cash should be properly managed. The cash inflows
should be accelerated while cash outflows should be decelerated.
• Optimum Cash level the firm should decide the appropriate level of cash balances. The
cost of excess cash and danger of cash deficiency should be matched to determine the
optimum level of cash balances.
• Investing Surplus Cash the surplus cash balance should be properly invested to earn
profits. The firm should decide about the division of such cash balance between
alternative short term investment opportunities such as bank deposits, marketable
securities or incorporate lending.
FORECASTING OF CASH REQUIREMENT
Cash should be within the business in proper amount so that it can be neither excess
nor scarcity of the cash. For this proper forecasting for the need of the cash is required. It can
be done by—
• Receipt and Payment Method- It can be done by monitoring collections and payments by
the firm and also by looking at the timing and magnitude of expected cash receipts and
payments. The collection can be done by prompt billing and expeditious collection of
cheque while payments to be made only when due, done on a centralized basis and
should match with the receipts during that period.

Also it is necessary that there should be reconciliation of cash and bank balances on a regular
basis.
MANAGING SURPLUS FUNDS
If at any point of time there is excess or surplus fund available with the firm then it can
adopt the following strategies for maintaining that surplus funds-
• Do nothing- thus the opportunity cost will be incurred by the firm.
• Make ad hoc Investments- here there will be no optimal contribution.
• Ride the Yield Curve- it is to increase the yield from portfolio of marketable securities by
betting on the interest rate charges. If interest rate decreases then buy long term securities
as they appreciate more than short term securities. Whereas if interest rate increases then
sell the long term securities.
• Develop Guidelines- it is to develop a set of guidelines which reflect view of
management towards risk and return and then make investment accordingly.
• Utilize Control Limits- here the firm set upper and lower limit of cash which the firm
should posses. If cash is on the upper limit then invest it in some marketable securities
whereas in lower limit sell some securities to realize cash.
• Manage with a Portfolio Perspective- here firm have many efficient portfolios and then
select the one optimal one so as to have maximum gains.
• Follow a Mechanical Procedure- here firm keeps switching funds between the cash and
securities.
Sources of Additional Working Capital
Sources of additional working capital include the following:
• Existing cash reserves
• Profits (when you secure it as cash)
• Payables (credit from suppliers)
• New equity or loans from shareholders
• Bank overdrafts or lines of credit
• Long-term loans
If you have insufficient working capital and try to increase sales, you can easily over-stretch the
financial resources of the business. This is called overtrading. Early warning signs include:
• Pressure on existing cash
• Exceptional cash generating activities e.g. offering high discounts for early cash payment
• Bank overdraft exceeds authorized limit
• Seeking greater overdrafts or lines of credit
• Part-paying suppliers or other creditors
• Paying bills in cash to secure additional supplies
• Management pre-occupation with surviving rather than managing
• Frequent short-term emergency requests to the bank (to help pay wages, pending receipt
of a cheque).

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