Working Capital Management of Hindalco for the last five years CONTENTS S No 1.
Titles
Page No
CHAPTER – 1 Executive Summary Introduction Literature Review Research Design • Management Problem • Statement of Problem • Importance of Study •
Objectives of Study
• Limitation of the Study 2.
CHAPTER – 2 Organizational structure Company Profile Data Collection Method
3.
CHAPTER – 3 Research Analysis Findings & suggestions Conclusion
4.
CHAPTER – 4 Bibliography
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Working Capital Management of Hindalco for the last five years
Executive Summary Introduction Literature review Management Problem Research Problem Purpose of the study Scope of the study
EXECUTIVE SUMMARY Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years The discussion in this report is focused on “Working Capital Management” at Hindalco
Belgaum
Works.
The
various
information
regarding
classification,
determinants, components, sources, arrangement of working capital & operating cycle have been also discussed in my study and also aspects relating to the perspective of Hindalco Industries Ltd, Belgaum.
I have also emphasized more on need & Importance of Working Capital Management. The Four Major aspects of Working Capital Management have been outlined below : •
Debtors Management
•
Creditors Management
•
Inventory Management
•
Cash Management
Ratio Analysis has been carried out using Financial Information for last four accounting
years i.e. from 2004 to 2007 like Working Capital Turnover Ratio, Quick
Ratio, Current Ratio, Inventory Turnover Ratio, Debtors Turnover Ratio have also been analyzed. A Statement of Changes in Working Capital has also been analyzed and attached Turnover & Performance of the Company for last five years has also been analyzed.
After conducting my study I have found that Working Capital has been Effectively managed and all the other departments are working in perfect co-ordination to ensure the progress of Hindalco Industries Ltd, Belgaum. But I have given some suggestions & Conclusions on the basis of my project study, which is highlighted in my study.
INTRODUCTION Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years Working Capital is defined varyingly keeping in view the objectives and purposes. To businessman. Working Capital comprises Current Assets of Business, where as to the Accountant or Creditors investment analysis Working Capital is understood as the difference of Current Assets & Current Liabilities. This also called as Net Working Capital.
There is operative aspects of Working Capital i.e. Current Assets which is know as funds also employed to the business process form the Gross Working Capital. Current Assets Comprises : Cash Receivables, Inventories, Marketable Securities held as shortterm Investment and other items nearer to Cash or equivalent to Cash. Working Capital Comes into business operation when actual operation takes place generally the requirement of quantum of Working Capital is determined by the level of production which depends upon the management attitude towards risk and the factors which influence the amount of Cash, Inventories, Receivables and other current assets require to support given volume of production.
Working Capital Management as usually concerned with administration of the Current Assets as well as Current Liabilities. The area includes the requirement of funds from various resources and to utilize them in all result oriented manner. It can be stated without exaggeration that effective working capital management is the short requirement of long term success.
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Working Capital Management of Hindalco for the last five years
LITERATURE REVIEW: WORKING CAPITAL MANAGEMENT Working Capital is needed for the smooth conduct of day to day business activities. It is needed to finance the current assets of the firm. The working capital should neither be in excess nor should it be inadequate. Excessive investment in current assets would have a negative impact on the firm’s profitability because of idle nvestment on the other hand, inadequate working capital would lead to inability to meet the current obligations which would hamper the firm’s creditability and thereby its reputation.
Usually the current assets are maintained at twice the level of current liabilities i.e., the current ratio is 2:1. But the quality of current assets is important. The current assets should be easily marketable i.e., they should be liquid. If the Liquidity is harmful, it may be due to miss management of current assets.
A. On the basics of Concept (a) Net Working Capital: This is the difference between current assets and current liabilities. Current Liabilities are those that are expected to mature within an accounting year and include creditors, bills payable and outstanding expenses. Investment is current assets represent a very significant portion of the total investment in assets. In case of public limited companies in India, current assets constitute around 60% of the total capital employed. Therefore the finance manager should be attention to working capital management. Working Capital Management is no doubt significant for all firms, but its significance is enhanced in cases of small firms.
A small firm has more
investment in current assets than fixed assets and therefore current assets should be efficiently managed. The working capital needs increase as the firm grows. As sales grow, the firm needs to invest more in debtors and inventories. The finance manager should
be
aware
of
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such
needs
and
finance
them
quickly.
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Working Capital Management of Hindalco for the last five years Current Assets can be financed through long-term and short-term sources. The ratio of long-term to short-term source will depend on whether the firm is aggressive of conservative. It the firm is aggressive then it will finance a part of its permanent current assets with short term funds. On the other hand, a conservative firm will finance its permanent assets and also a part of temporary current assets with long-term financing.
(b) Gross Working Capital This refers to the firm’s investment in current assets. Current Assets are the assets which can be converted into cash within a short period say, an accounting year. Current assets include cash, debtors, and bill receivable, short-term securities. etc.
B. On the basis of Time (a). Permanent Working Capital Permanent Working Capital is permanently locked up in the circulation of current assets. It covers the minimum amount requested for maintaining the circulation of current assets. i. Initial Working Capital At its inception and during the formative period of its operations a company must have enough cash fund to meet its obligations. The need for initial working capital is for every company to consolidate its position. ii. Regular Working Capital It refers to the minimum amount of liquid capital required to keep up the circulation of the capital from the cash inventories to account receivable and from account receivables to back again cash. It consists of adequate cash balance on hand and at bank, adequate stock of raw materials and finished goods and amount of receivables.
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Working Capital Management of Hindalco for the last five years
(b).
Variable Working Capital It refers to the past of the Working Capital that changes with the volume
of business, it may be divided into two classes. i. Seasonal Working Capital There is many line of business where the volumes of operations are different and hence the amount of working capital varies with seasons. The capital required to meet the seasonal needs of the enterprise knows as Seasonal Working Capital.
ii. Special Working Capital The capital required to meet any special operations such as experiments with new products or new techniques of production and making interior advertising campaign etc, are also know as Special Working Capital.
C. Other Determinants of Working Capital In order to manage the Working Capital optimally; on has to give due consideration to the factors that influence the amount of Working Capital to be maintained. The determinants of Working Capital are stated below with reference to the operations of Hindalco Industries Ltd. Belgaum:•
Nature of Business
•
Capacity Utilization
•
Credit Policy
•
Demand, Sales & Conditions
•
Availability of Credit
•
Price Level
•
Degree of Competition
•
Conditions of Supply
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Working Capital Management of Hindalco for the last five years
Finance Department at Hindalco, Belgaum unit
Vice President Works Vice President Works
Deputy General manager Accounts
Manager Accounts
Costing
Stores A/c
Fixed Assets
Payroll
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Cash and Bank
Sales Invoice
Excise Cell
Bills payable
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Working Capital Management of Hindalco for the last five years
The main objective of the finance department is to keep all the accounts of the financial matters. It is responsible for maintaining up to date accounts. The various activities are allocated to different sections
The costing section determines the costs incurred on various items in relating to consumption and management information system is adopted in this department for work efficiency. They deal with only working capital management with various banks of the Belgaum city. Excise section files periodic returns under acts like central tax, etc. This section carries out all the activities concerned with the excise. Pay roll section prepares the pay sheet. They keep accounts of the raise in pay, bonus, and deduction in salary of an each employee. The net salary of each employee is tabulated here.
Cash in bank section deals with day today cash transactions. This section issues cheque to suppliers after the instruction give by the bills payable section. It also makes the reconciliation statement of bank and customers. It also provides all records to the internal and external auditors.
Bills payable section verifies the purchases bills and receives the debit notes and credit notes as per the instruction of the purchases of the purchase department.
Sales invoice section looks after both Indian & abroad market. There are 30-40 grades for sales invoice. Transactions with foreign countries can be done with help of clearing agents. Sales officers negotiate the matter. Execution of sales order is done by on –line base. Hindalco at Belgaum works sends all the figures to the Head office for the further calculation, like preparing balance sheet, profit and loss account, etc.
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Working Capital Management of Hindalco for the last five years COMPONENTS OF WORKING CAPITAL There are two components of Working Capital A. Current Assets B. Current Liabilities
A. Current Assets An asset is termed as current assets when it is acquired either for the purpose of selling or disposing of after taking some required benefit through the process of manufacturing of which constantly changes in form and contributes to transactions take place with the operation of the business although such assets does continue for long in the same form.
Components of Current Assets are as follows: •
Cash & Bank Balance
•
Stock of Raw Material at cost- work in process and Finished Goods.
•
Advanced Recoverable in Cash or kind or kind or for value to be received.
•
Security deposits with electricity board-telephone department balances with customers.
•
Deposits under the company scheme.
•
Prepaid Expenses.
•
Miscellaneous Stores implements goods in transit.
•
Advanced payment of income takes credit certificates.
•
Excise duty and sales tax recoverable.
•
Outstanding debts for a period exceeding six months.
•
Balance with central excise authorities.
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Working Capital Management of Hindalco for the last five years
B. Current Liabilities: Components of Current Liabilities are as follows: •
Non-Refundable non-interest bearing advances against subscription to shares.
•
Sundry Creditors for the goods and expenses.
•
Income tax deducted at sources from contractors.
•
Expenses Payable.
•
Amount due to promoter of company.
•
Unclaimed Dividend.
•
Security Deposits.
•
Dealers Deposits.
•
Liabilities for bills discounted.
•
Bank Overdraft Acceptance.
•
Dividend warrants but not un-cashed.
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Working Capital Management of Hindalco for the last five years SOURCES OF WORING CAPITAL
SOURCES OF WORKING CAPITAL
Short Term Sources
Long Term Sources: Issue of Shares Issue of Debentures Retained Profit Reserves & Surplus Long Term Loans
Internal & External
Short Term Sources
Depreciation Funds
Trade Credits
Provision for Taxation
Bank Credits
Accrued Expenses
Credit Paper Consumer Credit Public Deposits Financial Co-Operation Government Assistance Loan from Directors
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Working Capital Management of Hindalco for the last five years ARRANGEMENT OF WORKING CAPITAL The trade credit and cash creditors are two primary sources of working capital in India. Bank loan and trade creditors together account for finance about 75% of the working capital credit requirements of industry. The bankers after granting of the loans and applications on the line suggested by Reserve Bank of India determine the maximum line of credit permissible for the period based on the margin requirement of the security offered. After getting the over all credit limit sanctioned by the banker the company actually draws the funds needed from time to time using all or any of the following forms of credit. 1. Loan Arrangement The bank credits the entire amount of loan to the parties account. Interest is payable on the entire amount or when loan is repaid in installments on the actual balance of outstanding.
2. Overdraft Arrangement The party is permitted to overdraft on his current account with his banker up to a specified amount and during a specified period. Interest is charged on the amount actually utilized and repayments and permitted. 3. Cash Credit Arrangement The borrower is allowed to withdraw funds from the bank up to the sanctioned credit once rather he can draw periodically to the extent of his requirements and repay by depositing surplus funds in his cash credit amount.
4. Term Loan for Working Capital Under this arrangement borrower can obtain a loan for appeared three to five years and the said amount in nearly or half yearly installments.
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Working Capital Management of Hindalco for the last five years
5.
Bills Purchased or Bill Discounted Bills are purchased by bankers and advance bills are discounted whether bills are purchased as discounted the amount need available under this arrangement is covered by cash and over draft element. In obtaining commercial bank credit the various modes of security are such as:
i. Hypothecation Under hypothecation money is borrowed by owner of gods on the security of movable property (normal inventories) without parting with the possession of movable property. The right of the hypothecation depends upon the term of the contract between parties.
ii. Pledge Under this arrangement the borrower is required to transfer the physical possession of the property offered as security to the bank to obtain credit.
iii. Lien It is the right of retaining goods belonging to the another until the debts due to him are paid.
iv. Mortgage It is the transfer of interest in specific immovable property for securing the payment of money advanced.
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Working Capital Management of Hindalco for the last five years OPERATING CYCLE OF WORKING CAPITAL The operating cycle can be said to be at the heart of the need for Working Capital. “The continuing flow from cash as advances to suppliers, to inventory, to accounts receivable and back into cash is what is called the operating cycle�. It is essential that the operating cycle should be kept up continuously. Others the fixed asset will remain idle and to the cost without brining any reserve. So long with fixed capital ready and adequate working capital is necessary to get the understanding successful on a sound pedestal.
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Working Capital Management of Hindalco for the last five years NEED FOR WORKING CAPITAL The needs for the working capital cannot be once emphasized. Every business need some amount of working capital. The need for working capital arises due to the time gap between production and realization of cash form sales. Therefore Working Capital required for: •
To meet the cost of inventories including total of raw materials purchased parts, operating supplies, work in progress, finished goods.
•
To pay wages, salaries, for indirect labor, clerical staff, managerial and supervision staff.
•
To meet overhead costs, including those of maintenance services activities, fuel, power charges, taxes and general expense administration
•
To bear the expansion (with regard to promotion of sales) e.g. expenses on packing, advertisement, salesmanship, Sales Servicing, After requires, Credit Facilities, Delivery Services, etc.
IMPORTANCE OF WORKING CAPITAL MANAGEMENT Adequate working capital created certainty, security and confidence in the minds of the persons in the management as well as in the minds of creditors and workers.
•
It creates a good credit standing for the firm because credit standing depends upon the ability to pay promptly. A Company with adequate working capital is always able to meet current liabilities.
•
It ensures solvency and stability of the enterprises. It also ensures continuity in production and sales.
•
It enables the company to take advantage of cash discount offered by the suppliers of raw materials or merchandise.
•
It enhances the prestige of the company and moral of its workers because a company with adequate working capital is always able to pay wages and salaries promptly and regularly.
•
It enables the company to procure loans from banks on easy and competitive terms.
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Working Capital Management of Hindalco for the last five years •
In times of boom, it enables the company to meet increasing demands for its products.
•
In times of dispersion the company to overcome the crisis successfully.
•
It enables the company to hold carry on its business successfully and active continued progress and prospective.
•
It enables the company to carry on its business successfully and active continued progress and prosperity.
Working Capital Management is concerned with the following aspects: •
Debtors Management
•
Creditors Management
•
Inventory Management
•
Cash Management
All these aspects will be analyzed in relation to the functioning of Ashok Iron Works Ltd. In the report as below:
Debtors Management Now a day’s debtor’s management has assumed a lot of importance. If the debtors are efficiently managed, the blocked capital will be reduced and thereby the associated costs. Due to the increase in Competition, one cannot do away with credit sales. Credit provision can increase sales. It is particularly appealing to those customers who cannot borrow form other sources or find it inconvenient to do so. A firm’s investment is accounts receivable depends on how much it sells on credit and how long it takes to collect receivables. The firm should be very good at assessing the credit worthiness of its customers and effective collection methods. Debt collection is no doubt challenging but a firm, which executes it efficiently, will reduce costs to a great extent.
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Working Capital Management of Hindalco for the last five years Debtor’s Management mainly concerns itself with three major aspects: Credit Policy Credit Analysis Collection Policy
INVENTORY MANAGEMENT The inventory is broadly classified into the following 1. Raw Material Inventory. 2. Consumables Inventory consisting of tools, stationary, fuel etc. 3. Work in Progress Inventory. 4. Finished Goods Inventory.
Usually the finished goods inventory is maintained at zero level. The parts are manufactured to fulfill the current demand. Raw Materials (basic) are usually in stock for 4 to 15 days. Raw Material (others) or consumables are kept for 15 days to 1 month. The duration depends the availability, prices, demand and other market factors. Say, if the price of a certain raw material is expected to increase or it is likely to be in short supply in the future, then the quantity purchased will be more than usual and it will be stocked. On the other hand if the raw material is freely available, then it will be purchased as and when required. ABC Analysis is carried out to determine the relative importance of the types of raw materials and the stocking duration is determined based on the rating assigned to the particular raw material. The materials with rating ‘A’ will be the most controlled because they constitute a major portion of the investment.
Economic Order Quantity (E.O.Q.) & Re-Order Level (R.O.L.) Now, two important questions need to be answered – ‘when to purchase?’ and ‘How much to Purchase?’ The first question can be answered by fixing the Re-Order level (ROL). This is the level after reaching which the order for the material should be placed. Calculation of this level and its practical implementation will ensure the smooth flow
of
production
activity
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without
bottlenecks.
This
is
calculated
as:
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Working Capital Management of Hindalco for the last five years ROL = Average Daily Consumption * Lead Time + Safety Stock The second question can be answered by finding out the Economic Order Quantity (EOQ). Now, EOQ is the trade-off between the carrying costs and the ordering costs. It is that quantity at which the ordering costs and carrying costs are minimum. This is calculated by using the formula: E.O.Q = 2AO / C Here, A = Annual Consumption O= Ordering Cost Per Order C= Carrying Cost Per Unit
Safety Stock is maintained to avoid unnecessary stoppage in production. Minimum & Maximum stock level is also calculated on average yearly basis. But all these calculations made may be altered depending on the activity of market forces.
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Working Capital Management of Hindalco for the last five years CASH MANAGEMENT Cash is the basic input of any business. It is necessary for the smooth flow of the business operations. The cash balance with any business firm should neither be in excess or in shortage. Inadequate cash will disrupt the business operations and excess cash will result in higher opportunity costs because it is idle. Cash management is important function of the finance manager. Sufficient cash balance has to be maintained to run the firm efficiently. But at the same time, the finance manager has to bear in mind that cash balance is an idle resource which has an opportunity cost. The liquidity provided by the cash holding is by sacrificing the profits of a forgone alternative investment opportune Hence the finance manager should: Establish reliable forecasting and reporting systems, Improve cash collections & disbursements & Achieve optimal conservation and utilization of funds.
There are three possible motives for holding cash. They are:
Transaction Motive Precautionary Motive Speculative Motive
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Working Capital Management of Hindalco for the last five years Transaction Motive: Cash is required to carry out the numerous transactions involved in day to day business activities. The firm needs cash to make payments for wages and salaries, for purchase other operating expenses, taxes, dividends, etc.
There would have been no
need to hold cash if their receipts and payments were perfectly synchronized.
Precautionary Motive: Cash is also needed to effectively confront uncertainties in the future. There may be some uncertainty about the timing of cash inflows form sale of goods & Services, assets, etc. Similarly, there may be uncertainty about cash outflows resulting form purchase an other obligations. Stronger the ability of the firm to borrow at short notice less the need for precautionary balance. The precautionary balance may be kept in cash and marketable securities.
Speculative Motive: This motive relates to the holding of cash for investing in profit making opportunities arising from fluctuation in commodity prices, security prices, interest rates and foreign exchange rates. A Cash –rich firm is better prepared to exploit such bargains. By and large business firms do not engage in speculations.
Four Facts of Cash Management In order to manage cash effectively, the firm should evolve strategies regarding the following four facets of cash management.
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Working Capital Management of Hindalco for the last five years a) Cash planning: Cash inflows & outflows should be planned to project cash surplus or deficit for each period of the planning period. Cash planning is a technique to plan and control the use of cash. Projected cash. Projected cash statement is prepared form forecast have expected cash inflows and Outflows for a given period. The forecasts may be bases on the present operations or the anticipated future operations. Cash planning may be done on daily, weekly or monthly basis. The period and frequency of cash planning generally depends upon the size of the firm and the philosophy of the management.
Large firms prepare daily and weekly forecasts.
Medium size firms usually prepare weekly and monthly forecasts. Small firms not prepare formal cash forecasts.
b) Managing Cash Collection & Disbursements : The projected cash flows should match the actual cash flows actual cash flows and the finance manager should ensure that there is no significant deviation. To achieve this, cash management efficiency will have to be improved through proper control on cash collection and disbursements. Generally it is recommended that the collections should be accelerated and the payments should be delayed.
But to manage cash
efficiently we need to understand the concept of float. The cash balance shown by a firm in its books is called the book or ledger balance shown it its bank account is called the available or collected balance. The difference between the available and the ledger balance is called float. There are two kinds of float-disbursement float and collection float. Say a company has issued a cheque worth Rs.1Lakh. It will reduce the company’s available balance only when the cheque is presented for encashment. The created disbursement float of Rs. 1Lakh. Similarly we have the collection float. When a company receives a cheque of say of Rs. 2Lakhs, then it will increase its book balance by the above amount. However, the company’s bank will increase the available balance only when the cheque is presented to the customer’s bank.
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Working Capital Management of Hindalco for the last five years C] Optimal Cash Balance : It is one of the primary responsibilities of the finance manager to maintain a sound liquidity position so that the production operation is carried on smoothly and also the dues are settled in time. If a firm maintains a small cash balance, it has to sell its marketable securities more frequently and this will result in increasing transaction costs. On the other hand if the firm maintains a large cash balance then it will lead to higher opportunity costs. Therefore the cash balance should neither be too small nor too large. We find that there is a trade-off between transaction costs and opportunity costs. Hence the balance maintained should result in minimum possible transaction costs and opportunity costs. This case is similar to the calculation of E.O.Q.
We have the
Baumol’s Model to find optimal cash balance under certainty. The formula is :
C = 2FT/K Where, C= Optimal Cash Balance T= Per Transaction Cost F= Total Funds Requirement During the year. K= Opportunity Cost.
The Baumol Model does not provide a solution in cases of uncertainty. To overcome this disadvantage we have the Miller-Orr Model. It assumes that the net cash flows are normally distributed with a zero value of mean and a slandered deviation. In this case the firm should fix the upper control limit. The lower control limit and the return point. The return point is normal level of cash balance, which is a healthy level. If the firm’s cash flows fluctuate and touch the upper. Control Limit, then it buys sufficient marketable securities to reach the return point if the cash balance touches the lower control limit then sufficient marketable securities are sold to reach the return point. The firm sets the lower limit a at a point, which is its minimum cash requirement. The formula for determining the distance [Z] between the upper and lower control limit is: Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years Z = [ ž* Transaction Cost* Cash flow Variance/Interest Rate] 1/3
d] Investing Surplus Funds: The Surplus funds with a company can be invested for short periods before they are required. The surplus can be invested in marketable securities, which can be sold easily later when funds are required. The various options available for investments are as follows: i.
Term Deposits with Scheduled Banks: Banks accept term deposits for periods ranging from 15 days to 5 years. The interest may vary from 6% to 11% per annum. The interest rates rises sharply as the period of deposit increases from 30 days to 1 year.
ii.
Mutual Funds Schemes: There are a variety of schemes offered by mutual funds likely equity schemes, balance schemes and debt schemes. The most popular scheme is the debt scheme for investing short-term surplus because the investments are for a short period and highly and therefore less risky.
iii.
Treasury Bills: Treasury bills are the short-term obligations of the government. They have maturity periods of 91 days, 182 days and 364 days. They do not carry an explicit interest rate [Coupon Rate] but are instead sold at discount and redeemed at par.
iv.
Inter-Corporate Deposits: An inter-corporate deposit is a deposit made by one company with another for a period of six month. The inter-corporate deposits represent unsecured borrowings; hence the lending company must satisfy itself about the credit-worthiness of the borrowing firm. There are also certain conditions prescribed under section 370 of the Company’s Act 1956, which should be adhered to by the lending company.
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Working Capital Management of Hindalco for the last five years v.
Bills Discounting: A bank may purchase a premature bill from the drawer at a discount and it will release the worth of the bill less discount to the drawer. Similarly a company can purchase a bill like a bank at a discount and thereby invest its idle funds. But a company should ensure that the bill and should try to go for bills that are backed by letters of credit for security.
TECHNIQUES OF WORKING CAPITAL MANAGEMENT: Working Capital Management involves deciding upon the amount and compositions of current assets and how to finance the assets. These decisions involve trade off between risk and profitability. Working Capital Balances are measured forms the financial data of the company’s Balance Sheet. A study of the causes of changes of working capital that takes placed in the balance form time to time in necessary. These changes can be measured in rupee amount and also in percentage by company current assets, current liabilities and working capital over the given period. The important tools of Working Capital are: 1.
Ratio Analysis of Working Capital
2.
Funds flow analysis of Working Capital
3.
Working Capital Budget.
4.
Trend Analysis.
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Working Capital Management of Hindalco for the last five years 1.
Ratio Analysis of Working Capital: Management as a means of checking upon the efficiency with which working
capital is being used in the enterprises can the ratio analysis of working Capital. The important ratios of working capital management are: [a]
Turnover of Working Capital Ratio: It can be calculated as net sales divided by average net working capital. The turnover of net working capital ratio measured the rate of working capital utilization. The ratio shows how many times working capital turns over the trading transactions. Formula: Turnover Working Capital = Net Sales/Net Working Capital
[b]
Current Ratio It can be calculated as current assets divided by current liabilities. The current ratio measured the relative ability of a company to pay its short-term debts. The ratio is used to reveal how well a company could meet
a
sudden
demand
to
pay
off
its
short-term
creditors.
Formula : Current Ratio = Current Assets/ Current Liabilities [c]
Current Debt to Tangible Net worth : It can be calculated as current liabilities divided by tangible net worth. The ratio of current liabilities to tangible net worth shows how much capital used in the enterprises has been provided by the short creditors and how much by other owners. Formula: Current Debt to Tangible Net worth = Current Liabilities/ Total Net Worth
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Working Capital Management of Hindalco for the last five years [d]
Quick Ratio [Acid Test Ratio] Quick Ratio can be calculated as quick assets divided by current liabilities. Quick ratio establishes relationship between quick of liquid assets and current liabilities and asset is liquid or quick if it can be converted into cash immediately or reasonably soon without a loss of value. Formula: Quick Ratio = Quick Assets /Current Liabilities
[e]
Inventory Turnover Ratio: Turnover Ratio can be calculated at cost of goods sold by average inventory. It shows the number of times the stock in trade is turned over in business during a period. This may be used to arise stock utilization and efficiency of the firm in selling its products. Formula: Inventory Turnover Ratio=Cost of Goods Sold/Average Inventory
[f]
Debtors Turnover Ratio: It can be calculated as Sales divided by debtors. Debtor’s turnover indicates the number of times the debtors are turn over during a year. Formula: Debtors Turnover = Sales/Debtors
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Working Capital Management of Hindalco for the last five years
2.
Funds Flow Analyses of Working Capital It is an effective management tool to study how funds have been procured for a
business and how they have been employed. This technique helps to analyze changes in working capital components between two data. The comparison of current asset and current liabilities, at the beginning and at the end of specie period shows changes in such type of current asset and resources from which working capital has been obtained. Funds flow statement contributes material to the financial aspects of the answers to such questions. •
Why the net current assets were done through the net income was upon visa versa.
•
How was it possible to distribute divided in excess of current earning and in the present of a net loss for the period?
•
How was the expansion in equipment, plant and machinery financed?
3.
•
What happened to the proceeds of sales and plants equipments?
•
How was the retirement of the department accomplished?
•
What becomes to the process of share issue or debenture issue?
•
How was the increase in working capital Financed?
Working Capital Budget : The working capital budget is an important phase of overall financing budgeting.
This budget should be distinguished from a cash budget that is designed to measure all the financial requirements of a business including funds for fixed assets, repayments of business including funds for fixed assets, repayments of loans, and similar items on the requirements and assures that they are duly provided for. The objectives of that budget are to secure an effective utilization of investments.
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Working Capital Management of Hindalco for the last five years
4.
Trend Analysis A Trend analysis indicates the changes, which have taking place from time to
time an individual item of current assets. Current liabilities and net working capital on the basis of some slandered year and its effect on working capital portion. It enables evaluate the upward and downward trend of current assets and current liabilities. These are usually measured from review of the comparative balance sheets. Of a concern at the end of the accounting years and results are drawn on the basis of trend shown by them.
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Working Capital Management of Hindalco for the last five years
RESEARCH DESIGN: TITLE OF THE STUDY A Study on “Working Capital Management” at Hindalco Industries Belgaum works, group of Aditya Birla Group of Industries.
MANAGEMENT PROBLEM There is a fluctuation in working capital i.e. increase and decrease and also current and quick ratio of the firm is not adequate, the firm want to know the reason for declining the working capital and also the there is no effectively utilized by other resources the want to find the reason.
STATEMENT OF THE PROBLEM The study has been taken in the organization for the purpose to know the “Working Capital Management” of the company for five years.
IMPORTANCE OF THE STUDY There are numerous aspects of working capital management that makes it an important topic for the study: •
Working Capital needs is generally financed through outside sources. So a continuous care in necessary to utilize them is best manner.
•
Fixed assets can be often acquired even on lease but in case of current assets there is no alternative way of avoiding an investment in inventory,receivables.
•
Firms level of working capital should optimize the firms rate or return. The optimum level is the point of which the incremental cost associated with a decline in working capital investment is equal to incremental gain associated with it.
•
Investment to fixed or working capital should contribute to the net worth of the firm.
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Working Capital Management of Hindalco for the last five years
OBJECTIVES OF THE STUDY I as a researcher kept the following main objectives for the purpose of present study, they are as follows: •
To Study and examine the present situation and nature of Working Capital Position.
•
To analyze the Working Capital with the help of the Ratio & identify the strength and weakness of the Organization.
•
To study the sources and uses of the Working Capital.
LIMITATIONS OF THE STUDY • The most important limitation of the study is that the study slowly depends on the published data and documents such as balance sheet and income statements. • It was difficult to obtain confidential data from the concern department with a viewpoint of secrecy that the company would like to observe. • The summer in Plant Training period was not sufficient to study all the aspects.
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Working Capital Management of Hindalco for the last five years
Organization Structure Company Profile Data collection methods
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Working Capital Management of Hindalco for the last five years
ORGANISATION STRUCTURE Hindalco’s organization is structured into Strategic Business Units (SBU’s) each responsible for its own production, technology development and marketing, drawing upon centralized service functions in Corporate Finance, Human Resource Development, Corporate Affairs, Planning & Monitoring, Legal, Engineering Projects & Materials Management, Secretarial &Investor Services and Info-com.
The heads of each business and function along with the Chief Operating Officer constitute the Management Committee. This Committee formulates strategic plans and policies to take the business forward and monitors/reviews implementation of the Company’s Strategic Business Plans.
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Working Capital Management of Hindalco for the last five years
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Working Capital Management of Hindalco for the last five years
ORGANIZATION STRUCTURE Vice president chemical business
Chief executive (Operations) Chemical business unit head
Head of
Head of BRDC
Operations
Head of
Head of
Accounts
Systems
Head of production special products
Head of EDP
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Head of machinery, boiler, house, and service Engg
Head of
Head of
Head of
HR
CP & BP
Materials
Head of production bayer process
Head
Head
Of
Of
R&D
E&I
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Working Capital Management of Hindalco for the last five years
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Working Capital Management of Hindalco for the last five years
Company profile: Hindalco Industries Limited, a flagship company of the Aditya Birla Group, is structured into two strategic businesses — Aluminium and copper — Hindalco is an industry leader in both segments. A non-ferrous metals powerhouse, close to global scale, it ranks among India's top 10 companies in terms of market capitalization.
Hindalco commenced its operations in 1962 with an Aluminium facility at Renukoot in eastern Uttar Pradesh. Over the years, it grew into the largest integrated Aluminium manufacturer in the country. With an eye to build size and scale, Hindalco in FY 2000 has acquired a majority stake in Indian Aluminium Company Limited (Indal) having a major presence in downstream aluminum products and a leader in special alumina from Alcan of Canada.
In August 2004, the boards of Hindalco and Indal approved a Scheme of Arrangement wherein all the assets of Indal other than the foil unit at Kollur in Andhra Pradesh were to be demerged into Hindalco. This has come into effect retrospectively from 1 April 2004.
Hindalco is Asia's largest primary producer of Aluminium and among the most cost-efficient producers globally. In India, Hindalco enjoys a leadership position in primary Aluminium and downstream products.
Smelters are located at Hirakud, Orissa, with a captive power plant and coal mines, and at Alupuram, Kerala. Rolled product manufacturing facilities are located at Belur and Taloja and an extrusions plant at Alupuram.
The company's R&D centers are located at Belgaum, Renukoot and Taloja. The government of India’s Department of Scientific and Industrial Research (DSIR) has recognized these. Hindalco's units are ISO 9001 and 14001 certified, while several have Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years also attained the OHSAS 18001 - the occupational health and safety certification. On the export front, the company has been accorded a 'Trading House' status by the Indian government.
As a member of the Aditya Birla Group, Indal is a part of a $6 billion corporation, with a market cap of $5 billion. The Group’s multi-cultural, multi-lingual workforce of 72,000 employees belongs to 20 different nationalities and its products and services reach across more than 100 countries. Its flagship companies include Hindalco, Grasim, Indian Rayon and Indo Gulf.
Indal along with Hindalco and its Copper Division forms a non-ferrous metals powerhouse of global size and scale, with the Hindalco-Indal combine providing opportunities for synergy and strong market position.
INDIAN ALUMINIUM COMPANY, LIMITED (INDAL) (Now part of Hindalco industries) India’s foremost aluminum producer and a member of the country’s leading business house – the Aditya Birla Group. A partner to Hindalco, India’s largest aluminium producer, together forming a non-ferrous metals powerhouse. With technical know-how acquired from its original promoter, Alcan Aluminium Limited, Canada (now Alcan Inc.), Indal has brought aluminium to touch every aspect of modern day industry and life in India.
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Working Capital Management of Hindalco for the last five years Complete Capabilities in Aluminium Hindalco's facilities cover a wide range of operations: bauxite mining, alumina refining, aluminium smelting with captive power generation to downstream rolling of sheet, foil and other semi fabricated products. With technological expertise of over 60 years of experience in the aluminium industry in India, HINDALCO is a market leader in the upstream range of standard and speciality alumina products in India, providing applications for refractors, ceramics and electrical industries. In the downstream segment, HINDAL is the largest manufacturer of rolled products in India with the widest range of extrusions, meeting the requirements of different industrial applications such as building, transportation, consumer durables, packaging and telecommunication.
Creating and Adding Value Established in 1938, Indal operates across the value chain from bauxite mining to alumina refining, smelting and rolling. A nationwide spread of plants, mines and offices gives Indal the advantage of being in proximity to various regional markets within and outside the country. The Company’s plants and mines are certified with ISO 9001, ISO 14001 and OHSAS 18001 certifications for quality, environment, safety and health. Hindalco enjoys a leading market position in India for specialty alumina chemicals and value-added products of aluminium sheet. The Hindalco units comprise two smelters, one located at Hirakud, Orissa, with a captive power plant and coal mines, and the other at Alupuram, Kerala, two sheet plants at Belur, West Bengal, and Taloja, Maharashtra, and an extrusions unit at Alupuram. The Company's two DSIR recognized R&D centers are located at Belgaum and Taloja.
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Working Capital Management of Hindalco for the last five years TAKE A VIEW OF HINDALCO INDUSTRIES BELGAUM. HISTORY OF THE PLANT (Belgaum works)
The HINDALCO plant at Belgaum was established in 1968 and started operations on the 7th November 1970. It is situated about 6 Kms., from Belgaum City, beside the National Highway. It has a total area of 1400 acres.
This was the only unit of INDAL, which started with both the facilities - Alumina Plant and Smelter Plant. The main products of this unit are Alumina Hydrate, Calcined metallurgical grade alumina and Special grades of aluminas and Hydrate. The Alumina Plant was set up with a capacity of 1,60,000 tons of Alumina per year and Smelter Plant had a capacity of 73,000 tons of metal per year. Due to the hike in the power rates, the potlines in the Smelter had to be de energized in 1995. The subsidiary of Smelter plant – Carbon Paste and Block Plant is still in operation. Owing to increased demand of hydrate, aluminas and Speciality chemicals in the export market, the Alumina Plant was expanded in several stages and currently operates at about 3,40,000 T of Hydrate (as Alumina) per annum. The Specials plant – a branch of Alumina plant manufacturing specialty grades of hydrate and Alumina is being operated at 60 KT per annum. The raw material-Bauxite is brought from Durgmanwadi Mines 140 Kms from Belgaum. About 70% of the total production are exported. The Carbon Paste and Block Plant is operated using imported raw materials (Carbon Pitch Coke) from Korea.
Marketing of Hydrates and Aluminas is a major business objective, both at the domestic and International Levels. The non-metallurgical grade Aluminas, also termed as ‘Special Alumina Chemicals’, find wide usage in diverse industries such as high-grade refractors, zeolite, alum, plastics, paper, industrial ceramics and high-tension insulators.
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Working Capital Management of Hindalco for the last five years VISION “To be a premium metals major, Global in size and reach, With a passion for excellence”
MISSION “To relentlessly pursue the creation of superior Shareholder value by exceeding customer Expectations profitability, Unleashing employee potential and being a Responsible corporate citizen adhering to our Values”
SOCIAL VISION “To actively contribute to the social and economic Development of the communities in which We operate and beyond. In so doing build a better, sustainable Way of life for the weaker sections of society And help rise the country’s Human Development Index.”
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Working Capital Management of Hindalco for the last five years
VALUES Integrity Honesty in every action.
Commitment On the foundation of integrity, doing whatever it takes to deliver, as promised
Passion Missionary Zeal, arising out of an emotional engagement with work.
Seamlesssness Thinking and working together across functional silos, hierarchy levels business and geographies.
Speed Responding to stakeholders with a sense of urgency.
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Working Capital Management of Hindalco for the last five years Strategic Objectives The Company recognizes that the conduct and effectiveness of an organization are mainly anchored to the quality of its workforce. In order to fulfill its purpose and to achieve its objectives the company requires commitment and dedication of its employees who place high value not only in the interest of the company but also in the interest of other individual entities. The other Objectives are: •
To operate at a level of profitability, which will ensure the long term economic viability of the company by providing a return on equity, which compares favorably with other industries of similar capital intensity and risk which will enable the company to attract adequate to support its growth.
•
To aspire towards a high level of operating, technical and marketing excellence, and to make the optimum use of assets, which will ensure a strong competitive
•
position
in
the
markets
served
by
the
company.
To strive to satisfy customers by integrating there needs into the company products and services with efficiency and professionalism and to give the best value to them by promoting quality products.
•
To improve the process of managing the company affairs through proper planing, timely implementation of plans and regular performance reviews.
•
To sustain an organization of able and committed employees and to provide the with opportunities for growth and advancement.
•
To foster a culture of innovation with the application of new ideas and methods to solve business problems and seize opportunities.
•
To recognize and seek to balance the interest of shareholders, employees, customers, suppliers, government as well as the public at large.
•
To uphold the highest standards of integrity in the conduct of all phases of business.
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Working Capital Management of Hindalco for the last five years SECRET OF SUCCESS: The Board of Directors of Hindalco and Indal in their respective meetings today have approved a scheme of arrangement between the two Companies, which entails the demerger of all the businesses of Indal with the exception of the business pertaining to the foil plant at Kollur, into Hindalco.
The scheme of arrangement is subject to
necessary approvals, and will take effect retrospectively from 1 April 2004 when sanctioned by the courts. According to Mr. Kumar Mangalam Birla, Chairman of the Aditya Birla Group, “Hindalco owns nearly 97 percent equity in Indal. I believe that the time is opportune to take this strategic stake to its logical conclusion. We would like to bring the maximum focus and harness all possible synergies to attain even higher levels of growth and enhance stakeholder value.”
Over the last four years, both Hindalco and Indal have worked in tandem for the growth and development of the aluminium sector. Both Hindalco and Indal have posted path-breaking results. Such a move would help in leveraging their combined strength even further said Mr. D. Bhattacharya, Managing Director, and Hindalco.
Future outlook The company’s business strategy is to ensure profitable growth in the future will be through: Realization of synergy gain with Hindalco to ensure better market position, combining Indal’s strengths in Alumina and down stream segments with Hindalco’s advantage in primary metal.
Higher assets utilization across plant location, particularly leveraging the benefits of the upgraded rolling mills as well as taking steps to optimize use of idle physical infrastructure assets and enriched product mix for higher returns from existing assets.
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Working Capital Management of Hindalco for the last five years Strengthening of exports with an emphasis on consolidating Indal’s presence in existing market
while tapping new regions for export of value added product viz.,
especially alumina and downstream sheet, foil and extrusions. Cost control efforts including better logistics, higher operating efficiencies and improved working capital management.
Strategic growth plans All apex plans pertaining to Hindalco, for which a sum of Rs.2000 crore has been earmarked, will be undertaken as planned under the aegis of Hindalco. Among these are: •
The expansion of its metal capacity to 100,000 MT per annum,
•
Its power generating capacity to reach 267.5 MW at Hirakud,
•
Ramping up the alumina plant at Muri to 500,000 MT per annum and
•
Enhancing the special alumina chemical capacity to 127,000 MT per annum at Belgaum.
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Working Capital Management of Hindalco for the last five years PRODUCTS OF HINDALCO – BELGAUM: CHEMICALS (Aluminium Capacity 14,01,000 TPA) The chemicals units comprise bauxite mining at lohardaga (Jharkhand), Durgmanwadi (Maharashtra), the alumina refineries at Muri (Jharkhand) and Belgaum (Karnataka), including facilities for specialty grade alumina chemicals.
ALUMINUM Metal & Power (Metal capacity 1,10,10,000 TPA captive power 67.5 MW) Indal’s smelters are located at Hirakund (Orissa) & Alupuram (Kerala).
SHEET Indal’s sheet rolling mills are located at Bellur (West Bengal) and Taloja (Maharashtra). The continuous caster at Hirakund (Orissa) Provides Comcast coils for cold rolling at Bellur.
FOIL & PACKAGING The foil plant is located at Kalwa (Maharashtra) is equipped with the latest microprocessor based gauge control system to ensure world class rolling of foil and state of the art converting equipment.
EXTRUSIONS Indal’s extrusions unit based at Alupuram (Kerala) offers the widest range of alloys and shapes in India.
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Working Capital Management of Hindalco for the last five years PRODUCTS The main products of Alumina Plant, Special Products & Carbon Paste & Block Plant are as under:
Aluminium Hydrate
Calcined Alumina
Vanadium Sludge
Various Grades of Alumina & Hydrate produced as Special Products.
Carbon Paste & Blocks.
SPECIAL PRODUCTS Alumina can be broadly divided into two types-Metallurgical and NonMetallurgical Grades. Metallurgical grade alumina is being used for the production of aluminium.
While Speciality
grade hydrate & alumina is used for various other
applications like fusion, grinding media, tiles, refractory, high tech ceramics, filler in SMC/DMC compound, Alum, Glass etc.
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Working Capital Management of Hindalco for the last five years The Belgaum Works is divided into the following Departments: Alumina operations and production Specials Alumina R&D Alumina mechanical Boiler house Machine shop Garage PPC CPBP Civil & pump house Alumina electrical E & I Smelter R&D HR Accounts Purchase Stores Exim Dispatch Systems BRDC In all there are around 777 employees, who include the management, workers these all are full time enrolled people.
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Working Capital Management of Hindalco for the last five years Marketing Hindalco has no marketing division at Belgaum works, the units work independently and for the sales and marketing there are the separate centers which coordinate with all the units and look into the sales and marketing of the products. The sales office is in Bangalore, Delhi and Hyderabad.
Finance (Accounts Department) This department handles all financial transactions, costing and billing operations negotiation process, maintaining and preparing various invoices, payments and receipts are the to major areas of operation done by this department. In addition taxation cash loan normal and statuary payments expenses, this section handles advances and other operations relating to banks.
Operations The main operations are based in the CPBP, Alumina and special products. These department are the core for the manufacturing of Alumina carbon block, carbon paste and special products. These departments comprise of smaller departments and each of these 3 major departments has a department head. The majority of the people are working in Alumina, CPBP and Special products departments, and the work is carried out in shifts.
Research and Development: Hindalco’s R&D centers at Belgaum and Taloja are recognized by the department of Scientific and industrial research (DSIR). The Belgaum R & D center carries out studies on ores, alumina and specially grades and carries out overseas assignments in collaboration with ALCAN. The R & D lab has the status of “Center of Excellence� for predicting organic behavior in refineries. A joint technical development program with ALCAN is under execution in the field of raw materials. Both the R & D centers have attained ISO 9001 &9002 certification, with the Belgaum R&D center having recently Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years adopted the revised ISO9001:2000 standard. Over the last five years, about rupees 560 million has been spent on R &D – a testimony to HINDALCO’s commitment towards developing new applications for alumina/aluminum, optimizing manufacturing process and ensuring environmental friendliness.
Human Resource Department Belgaum works has a separate HR Department, which looks into the daily administration and also into the specific and nitty gritty of the company, it is the bridge between the production, employees, management and the outside world. This department is concerned with implementation of the plans, with the welfare of the plant, with the industrial relations and above all safety and security of the plant and the work force is its prime concerns. This department looks after the subsidiaries like recruitment selection training and induction, canteen community development disciplinary actions ESI, welfare, security, guesthouse medical facility etc.
OTHER VARIOUS DEPARTMENTS: ♦ Commercial Department
Stores Department
Purchase Department
Accounts Department
Dispatch Department
♦ Production Department
♦ Accounts Department
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Working Capital Management of Hindalco for the last five years Other departments are:
Traffic Department
Exports Department
Project Department
Legal Cells
Systems Department
Environment Department
Work Managers Office
WORLD CLASS MANUFACTURING ACTIVITIES: WCM WCM is a competitive strategy that aims for shareholder’s value creation enough focus on sustainable and superior QCEIP performance and other parameters.
The
objective of our WCM initiative is to successfully compete with any organization in which every employee from top to bottom is working towards making that organization the best in its particular field. It is based on the idea that each person is an expert in his or her own job, and by synergizing the collective thinking power, creativity and job knowledge of everyone in the organization, we can accomplish this objective. One cannot seek cultural change in a business like manner. It is not something that can be bought or installed like computer software. Developing a culture is like planting a garden.
It takes time.
It requires vision, planning and systematic & disciplined
application of skill & effort. We could understand that the task is by no means easy, as part of the problem is duality of WEM philosophy that stresses both on Instrumental and the inspirational.
The inspirational is essentialfor sustaining the initial flush of
enthusiasm.
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Working Capital Management of Hindalco for the last five years Main Purposes of WCM Workshop are:
To introduce and proliferate the concepts, tools and techniques of World Class Manufacturing at all levels.
Develop Leads (known as Champions of Change) to further proliferate the WCM Concepts in plant once the Conference Cum Workshop is over.
Establish a common language amongst the Champions of Change.
Develop a Culture for Excellence involving People, and creating a Mindset for doing quality work in all that we do, everytime, and all the time.
WCM (WORLD CLASS MANUFACTURING) A main aspect of the company, it is moving towards building a WCM unit in the organization.
WCM Model for Excellence and Competitive Advantage
6 Quality First: Six Sigma/SQM & Best Practices
nd M i
5 Customer Driven: Internal and External
io n
7 Liaison, Team Force and Skill Development
4 Equipment Effectiveness/ TPM
s p ir a t io n & C o m p e t it
Quality & Quantity Cost Delivery Innovations & Intellectual Capital Productivity & Pride
s-In
8 Information, Systems/BPR, Technology and Cash Flows
am
1 Waste (MUDA) Elimination
2 Work Environment 3 (5S) JIT / Supply Chain Management
Te
u lt u r e & P a se t , C s s io n
, S tra te gy & L is s io n ead M , e rs n o h ip i s i V
S h a re h o l d e r ’s V a l u e Below is the WCM model of the company. ZERO DEFECTS Babasabpatilfreepptmba.com
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Working Capital Management of Hindalco for the last five years ZERO LOSSES ZERO BREAKDOWNS ZERO POLLUTION ZERO ACCIDENTS ZERO CUSTOMER COMPLAINTS
EIGHT DIMENSIONS: 1.
Waste Elimination (MUDA): Waste is anything which customer does not look for or pay for. Any activity, which is not adding any value to business, is considered as MUDA.
2.
Work Environment (5s): It stands for good house keeping concepts and is considered the basis for continuous productivity and quality improvements Respect Standards and cultivates good habits.
The 5s Stands for:
3.
Sorting
Systematic Arrangement
Spick & Span
Serene Atmosphere
Self Discipline
Just In Time: The prime goal of just in time is the achievement of Zero Inventories not just within the confines of a single organization but ultimate through.
4.
Equipment Effectiveness / TPM: It is an innovative approach to maintenance that Optimized Equipment Effectiveness, Minimizes waste promote, Zero Accidents, Zero Breakdowns & Zero Pollution- through team activities involving all levels of employees.
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Working Capital Management of Hindalco for the last five years
5.
Customer Driven (Internal & External): This dimension ensures customer delight, both internal as well as external in enables understanding of customer expectations of our products / services.
6.
Strategic Quality Management (SQM): It is the process of establishing longterm quality goals and defining the approach to meet these goals. It is centered on quality based on the participation of all its members and aiming at long-term success through customer’s satisfaction and benefits to the members of organization and society. SQM is developed, implemented and led by the upper management. Here, we integrate quality into strategic planning.
7.
Liaison and Understanding: Liaison is co-ordination/communication between the two extreme ends, liaison needs proper scheduling to achieve the satisfaction of your customer liaison and understanding therefore is most essential. The need for liaison and understanding is to meet the immediate demand of the market.
8.
Information, Systems, Technology & Cash Flow: Keeping upto date with information from various sources the suppliers, customers, competitors, employees and other stake holders is extremely necessary for managing the business systems for effective manufacturing, continuous up-gradation of technology and effective cash flow are the basic requirements and WCM.
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Working Capital Management of Hindalco for the last five years AWARDS & RECOGNISATION
1996:
National Award for Energy Conservation (Aluminium Sector) from ministry of Power, Government of India.
2001:
National Energy Conservation Award for Belgaum.
2003:
Greentech Gold Award for Environment Management.
2004:
Greentech Gold Award for Safety.
2007:
Best Employers In India.
2007:
Best Employers In Asia
MAJOR PLAYERS The Industry is oligopolistic in nature with three players in the sector
National Aluminium Co Ltd. (NALCO)
Sharat Aluminium Co Ltd. (SALCO)
The Madras Aluminium Co Ltd. (MALCO)
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Working Capital Management of Hindalco for the last five years
SWOT Analysis of Hindalco Industries Limited, Belgaum Works STRENGTS: Integrated Operations from Bauxite Mining, Alumina Refining & Specials. Dominate Player in Domestic Market in Specialty Alumina & Hydrates. Established Export Presence in 30 Countries. Highly Competent, Committed & Skilled Operatives & Technical Personnel. Among the Best in Specific Energy Consumption in Alumina Industry. WEAKNESS: Non-Global Scale of Operations. High Exposure to Furnace Oil as majors Source of Energy Input. High Cost of State Grid Electrical Energy & Supply interruptions. Higher Cost of Logistics & Inward and Outward Material movement 100% by Road. Alumina Quality More Suited to HSS Technology, which is getting phased out.
OPPORTUNITIES: Growing Speciality Alumina & Hydrate Market. Changes In Speciality Market Structure with two Major Global Players Vacating the Market. Growing Metallurgical Alumina Demand. Lower Investment Cost for Brownfield Expansion.
THREATS: Inadequate Bauxite Reserves for operations both at current level & for Expansion. Cyclical Metallurgical Alumina Prices Causing Wide Fluctuations in Profitability Cyclical & Rising Furnace Oil Prices
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Working Capital Management of Hindalco for the last five years ď ś DATA COLLECTION METHOD: To fulfill the set of objectives regarding study of working capital. The researcher collected mainly secondary data, primary data & Information was also collected to a substantiate the findings derived form the secondary data.
A. Primary Data Primary Data is collected during the course of training through observations &n discussions with departmental heads, accountants, assistants & officers.
B. Secondary Data Secondary Data is collected from published annual reports and prospects of the company. The process of data collection is further supplemented by an extensive library conducted in the library of IMER.
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Working Capital Management of Hindalco for the last five years
Research Analysis Findings And Suggestions Conclusion
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Working Capital Management of Hindalco for the last five years RESEARCH ANALYSIS Statement’s showing Changes in Working Capital in 2002-2003 ( Rs in Thousand App.) Particulars
2001-2002
2002- 2003
Increase
Decrease
A]. Current Assets Cash & Bank
16,834
1,515
15,319
2,78,541
3,01,361
Inventory
6,51,891
5,87,964
63,927
Loans &
42,101
24,843
17,258
9,89,367
9,15,683
Balance Sundry Debtors &
22,820
Others
Advances Total of A
B].Current Liabilities Current liabilities
1,80,997
1,98,309
Provisions
1,47,029
90,021
Total of B
3,28,026
2,88,330
Change in Working
6,61,341
6,27,353
17,312 57,008
Capital (A-B) Decrease in
33,988
33,988
6,61,341
1,13,816
Working Capital Total
6,61,341
1,13,816
COMMENTS:•
Above table shows that working capital has been decreased by Rs.33,988 thousand in the year 2002-2003.
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Working Capital Management of Hindalco for the last five years •
This is because in the year 2002-03 only debtors have increased and remaining assets are decreased as compared to last year i.e. 2001-02.
•
And further current liabilities are increased in the year 2002-03 as compared to last year.
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Working Capital Management of Hindalco for the last five years Statement’s showing Changes in Working Capital in 2003-2004 (Rs in Thousand App.) Particulars
2002-2003
2003- 2004
Increase
Decrease
A]. Current Assets Cash & Bank Balance 1,515
359
-----
1,156
3,01,361
2,51,787
-----
49,574
5,87,964
4,36,579
-----
1,51,385
24,843
34,887
10,044
-----
9,15,683
7,23,612
1,98,309
2,02,192
-----
3,883
Provisions
90,021
1,01,365
-----
11,344
Total of B
2,88,330
3,03,557
-----
-----
Change in Working
6,27,353
4,20,055
10,044
2,17,342
-----
2,07,298
2,07,298
6,27,353
6,27,353
2,17,342
Sundry Debtors &
�
Others Inventory Loans & Advances Total of A B].Current Liabilities
Current liabilities
Capital (A-B) Decrease in Working
-----
Capital Total
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2,17,342
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Working Capital Management of Hindalco for the last five years COMMENTS:•
Above table shows that working capital has decreased by Rs.2,07,298 thousand in the year 2003-2004.
•
This is because we can see in the above table the Current assets is decreased as compared to the last year, as there is only increase in the Loan & Advances and all others assets have been decreased as per the comparison of the last year.
•
As we can see there is decrease in both the current liabilities, so it is good for the company as compared to the last year current liabilities.
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Working Capital Management of Hindalco for the last five years Statement’s showing Changes in Working Capital in 2004-2005 (Rs in Thousand App.) Particulars
2003-2004
2004- 2005
Increase
Decrease
A]. Current Assets Cash & Bank Balance
359
241
-----
118
2,51,787
2,07,823
-----
43,964
Inventory
4,36,579
7,58,938
3,22,359
Loans &
34,887
40,323
5,436
7,23,612
10,07,325
Current liabilities
2,02,192
2,24,330
-----
2,21,38
Provisions
1,01,365
1,78,346
-----
76,981
Total of B
3,03,557
4,02,676
-----
-----
Change in Working
4,20,055
6,04,649
3,27,795
1,43,201
-----
1,84,594
3,27,795
3,27,795
Sundry Debtors &
←
Others
-----
Advances Total of A B].Current Liabilities
Capital (A-B) Increase in
1,84,594
-----
Working Capital Total
6,04,649
6,04,649
COMMENTS :•
In the above table we can notice that after two years of gap there is an increase in the working capital as compared to last year 2003-2004 by Rs 1,84,594 thousand.
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Working Capital Management of Hindalco for the last five years •
This is because as we can see that there is a great increase in Current Assets as the company is looking to invest more in inventory of raw material in this year 2004-2005 because of the shortage of raw material for that year, so overall there is increase in the current assets.
•
As we can see there is decrease in the liabilities of the company which is good for the company.
•
So from all the above calculation we can say that there is good increase in the working capital as compared to the last year working capital. So we can say that company is more likely to increase their inventory because they are thinking it for the long term perspective.
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Working Capital Management of Hindalco for the last five years Statement’s showing Changes in Working Capital in 2005-2006 (Rs in Thousand App.) Particulars
2004- 2005
2005- 2006
Increase
Decrease
241
← 57,588
57,347
------
2,07,823
3,08,145
1,00,322
------
Inventory
7,58,938
5,04,056
------
2,54,882
Loans &
40,323
40,037
------
286
10,07,325
9,09,826
Current liabilities
2,24,330
2,50,308
-----
25,978
Provisions
1,78,346
2,31,606
-----
53,260
Total of B
4,02,676
4,81,914
-----
-----
Change in Working
6,04,649
4,27,912
1,57,669
3,34,406
------
1,76,737
1,76,737
------
6,04,649
6,04,649
3,34,406
3,34,406
A]. Current Assets Cash & Bank Balance Sundry Debtors & Others
Advances Total of A
B].Current Liabilities
Capital (A-B) Decrease in Working Capital Total
COMMENTS:•
We can view from the above table that there was decrease in working capital as compared to the last year.
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Working Capital Management of Hindalco for the last five years •
As we can see in Current Assets there is an increase in cash & Debtors from the last year, but there is much more decrease in inventory & Others.
•
We can see their is decrease in Inventory due to unavailability of raw material (Bauxite).
•
On other side Current Liabilities has been being decreased for both Provision and Current liabilities
Statement’s showing Changes in Working Capital in 2006-2007 (Rs in Thousand App.) Particulars
2005- 2006
2006- 2007
Increase
Decrease
A]. Current Assets Cash & Bank
57,588
← 12,825
-----
44,763
3,08,145
1,64,921
-----
1,43,224
Balance Sundry Debtors &
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Working Capital Management of Hindalco for the last five years Others Inventory
5,04,056
9,39,138
4,35,082
------
Loans &
40,037
63,050
23,013
------
9,09,826
11,79,934
-----
------
Current liabilities
2,50,308
3,44,107
-----
93,799
Provisions
2,31,606
2,10,337
21,269
------
Total of B
4,81,914
5,54,444
-----
-----
Change in Working
4,27,912
6,25,491
4,79,364
2,81,786
1,97,579
-----
-----
1,97,579
6,25,491
6,25,491
4,79,364
4,79,364
Advances Total of A
B].Current Liabilities
Capital (A-B) Increase in Working Capital Total
COMMENTS:•
In the above table, it is seen that working capital has been increased by Rs. 1,97,579 thousand in the year 2006-2007.
•
This is because there is increase in all the Current Assets as per the last year, as shown in the above table.
•
As we can see there is increase in the current liabilities & there is decrease in other provisions for the liabilities.
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Working Capital Management of Hindalco for the last five years
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Working Capital Management of Hindalco for the last five years 1. Working Capital Turnover Ratio : Working Capital Turnover Ratio =
Net Annual Sales Net working Capital
Net Working Capital = Gross Current Assets - Current Liabilities
Table Showing Working Capital Turnover Ratio of Hindalco Industries, Belgaum Year
Net Annual Sales
Net Annual
(Rs In Lakhs)
Capital (Rs In
Calculation
Ratio
Lakhs)
2002-2003
29074.00
6613.41
29074.00/6613.41
4.39
2003-2004
28357.00
6273.53
28357.00/6273.53
4.52
2004-2005
32015.10
6046.49
32015.10/6046.49
5.29:1
2005-2006
42868.00
4279.12
42868.00/4279.12
10.00:1
2006-2007
77704.00
6254.91
77704.00/6254.91
12.42:1
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Working Capital Management of Hindalco for the last five years
Working Capital Turnover Ratio Ratio 14 12 10 8 6
10
4 2
4.39
4.52
12.42
5.29
0 2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
Analysis The above table shows that the working capital ratio of Hindalco industries, Belgaum is changing significantly over the period under the study. The ratio was 12.42 in the year 2006-07 & it was decreased to 5.29 in the year 2004-2005.due to the overall economic recession.
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Working Capital Management of Hindalco for the last five years 2. Quick Ratio : Quick Ratio/Acid Test Ratio = Current Assets – Inventories Current Liabilities
Table Showing Acid Test Ratio of Hindalco Industries, Belgaum Year
Current Assets – Inventories Current Liabilities
Ratio
2002-2003
9156.83 - 5879.64/2883.30
1.14:1
2003-2004
7236.12 - 4365.79/3035.57
0.95:1
2004-2005
10073.25 - 7589.38/4026.76
0.62:1
2005-2006
9098.26 - 5040.56/4819.14
0.84:1
2006-2007
11799.34 - 9391.38/5544.44
0.43:1
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Working Capital Management of Hindalco for the last five years
Analysis: An acid test ratio or quick ratio of 1:1 is considered satisfactory, the above figure in the table are satisfactory to certain extent, as the company is able to meet its debt. It is observed that comparing to 2002-2003 ,Quick ratio was reduced from 1.14 to 0.43 in the year 2006-2007.
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Working Capital Management of Hindalco for the last five years 3. Current Ratio: Current Ratio =
Current Assets Current Liabilities
Table showing current ratio of Hindalco industries. Belgaum Year
Current Assets/Current Liabilities
Ratio
2002-2003
9156.83/1983.09
4.61
2003-2004
7236.12/2021.92
3.57
2004-2005
10073.25/2443.30
4.12
2005-2006
9098.26/2503.08
3.63
2006-2007
11799.34/3441.07
3.42
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Working Capital Management of Hindalco for the last five years
Analysis From the above table it is seen that the current ratio of the company is flexible throughout five years. It means in 2002-2003 it was 4.16 to 1, in 2003-2004 it was 3.57 to 1 in the year 2004-2005 it was 4.12 to 1, But in the year 2005-2006 it was 3.63 to 1.and in the current year 2006-2007 it was decreased to 3.42. It shows that the liability is more than the assets so for this reason the ratio of the company is changing frequently.
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Working Capital Management of Hindalco for the last five years 4. Inventory Turnover Ratio : Inventory Turnover Ratio =
Sales
Average Inventory
Average Inventory =
Opening Stock + Closing Stock 2
Table Showing the Inventory Turnover Ratio of Hindalco Industries, Belgaum O/p stock + C/o stock Year
Sales Turnover (RS IN LAKHS)
2 (RS IN LAKHS)
AVERAGE INVENTORY
Inventory T/O Ratio (NO,TIMES)
2002-2003
29074.00
6518.91 + 5879.64/2
6199.28
4.70
2003-2004
28357.00
5879.64 + 4365.79/2
5122.72
5.50
2004-2005
32015.10
4365.79 + 7589.38/2
5977.59
5.40
2005-2006
42868.00
7589.38 + 5040.56/2
6314.97
6.80
2006-2007
77704.00
5040.56 + 9391.38/2
7215.97
10.80
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Working Capital Management of Hindalco for the last five years
Analysis: From the above table it is seen that Inventory Ratio of the company was 4.70 in the year 2002-2003,But it was increased to 10.80 in 2006-2007 it is good to company, because the standard norm is 5 to 6 times, it should not less than 5 to 6 times. The above table shows the efficient inventory management of the company.
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Working Capital Management of Hindalco for the last five years Table Showing growth in working capital of Hindalco Industries, Belgaum Particular
02-03
03-04
04-05
05-06
06-07
Average Invested
Percentage
In Rs.
Inventory
5879.64
4365.79
Cash & Bank
15.15
Sundry
3013.61
2517.87
248.43
3.59
7589.38 2.41
5040.56 9391.38
6453.35
68.13
575.88
128.25
145.05
1.53
2078.23
3081.45
1649.21
2468.07
26.05
348.87
403.23
400.37
630.50
406.28
4.29
7236.12
10073.2
9098.26
11799.34
9472.75
Debtors Loan & Advances Gross Capital 9156.83
100
Graphical Representation of Working Capital on percentage basis
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Working Capital Management of Hindalco for the last five years Table Showing the Current Liabilities of Hindalco Industries, Belgaum PARTICULAR
02-03
03-04
04-05
05-06
06-07
Average
Percentage
Invested In Rs.
Current
1983.09
2021.92
2443.30
2503.08
3441.07
2478.49
60.42
Provisions
900.21
1013.65
1783.46
2316.06
2103.37
1623.35
39.57
Total
2883.30
3035.57
4026.76
4819.14
5544.44
4101.84
Liabilities
100
Graphical Representation of Current Liabilities in Percentage
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Working Capital Management of Hindalco for the last five years Chart Showing Sales Turnover of the company
Year
Turnover of the company
2002-2003
29074.00
2003-2004
28357.00
2004-2005
32015.10
2005-2006
42868.00
2006-2007
77704.00
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Working Capital Management of Hindalco for the last five years
Findings & Suggestions: From the study conducted over the Working Capital Management” at Belgaum Works. We have used “Statement Change in Working Capital” & “Ratio Analysis”.
Findings: •
Overall the working capital Turnover Ratio is low it shows that the current assets have been utilized properly by the company in making more sales.
•
The quick ratio or acid ratio of the company shows that the liquidity position of the company is very good (Prefer Table).
•
Current Ratio is changing subsequently due to the reason that current liability is more than the assets.
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Working Capital Management of Hindalco for the last five years •
As we can see that their inventories is 68.13% of all the current assets. So main finding of the working capital management is that company is more looking to invest in their inventories rather than other assets and also looking to decrease their liabilities year by year.
Suggestions: •
The firm has insufficient cash and bank balances due to more credit sales of the company. So the company should transact more on cash basis.
•
The materials available locally should be minimized to the larger extent as they may be purchased within shorter period of time, this will reduce the block of money as well as increase the liquidity position of the division.
•
Every year on an average 26% of amount is invested in sundry debtors it should be reduced as much as possible. (debts must be recollected from the debtors)
•
Having an Optimum Stock Level of raw materials, by storing only the required material which will help.
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Working Capital Management of Hindalco for the last five years
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Working Capital Management of Hindalco for the last five years
CONCLUSION: •
It has been an excellent opportunity for me to carry out the study on working capital management at Hindalco Industries, Belgaum it has helped me to a great extent to have an insight into the practical realities of the subject. I have been able to study and suggest to the best of my knowledge. I try my best effort for the completion of my project study.
•
According to me Hindalco Industries is managing there working capital quite well. The Finance Department is carrying out its responsibilities efficiently. All the major departments are cooperating and synchronizing their efforts for the progress of Hindalco Industries, Belgaum.
•
A Firm should always invest in current assets for smooth & uninterrupted production & sale.
•
The concept of working capital is used in two ways gross working capital refers to the firms Investment in current assets. Net working capital occurs the difference between current assets and current liabilities.
•
Working Capital Management changes as per the season, as the company are looking to make stock of Bauxite before the commencement of rainy season, it automatically increases the Inventory which also increases the Current Assets.
•
At the end I Thank to each & every one who have helped me in the completion of my implant training at Hindalco Industries, Belgaum Plant (Karnataka).
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Working Capital Management of Hindalco for the last five years
BIBLIOGRAPHY
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Working Capital Management of Hindalco for the last five years
BIBLIOGRAPHY 1. Financial Management by :
M. V. Khan and P. K. Jain
2. Financial Management by :
I. M. Pande
3. Financial Management by :
S. K. Pant
4. Financial Annual Reports of Hindalco Industries Ltd for the year 2002-2003 to 2006-2007
5. Fundamentals Of Financial Management by : Prasanna Chandra
6. Internet:
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www.hindalco.com
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