PROJECT FINAL REPORT

ON

“Working capital
management at Nalco”

BY
RAKESH KUMAR BARAL
(PGDM)

Accman institute of management

Summer Internship Project

(Batch of 2008)
 PREFACE

To start any business, First of all we need finance and the success of that business
entirely depends on the proper management of day-to-day finance and the
management of this short-term capital or finance of the business is called Working
capital Management.

Working Capital is the money used to pay for the everyday trading activities
carried out by the business - stationery needs, staff salaries and wages, rent, energy
bills, payments for supplies and so on.

I have tried to put my best effort to complete this task on the basis of skill that I
have achieved during the last one year study in the institute.

I have tried to put my maximum effort to get the accurate statistical data. However
I would appreciate if any mistakes are brought to my by the reader.
 ACKNOWLEDGEMENT

A work is never a work of an individual. I owe a sense of gratitude to the

intelligence and co-operation of those people who had been so easy to let me
understand what I needed from time to time for completion of this exclusive
project.

I am greatly indebted to my guides Prof. DENESH SINGH ,faculty guide for

Finance (summer internship), Accman Institute Of Management & Mr.
SATYABRATA DASH , Manager , Finance Department ,corporate office ,
NALCO , Bhubaneswar for their constant guidance ,advice and help which enabled
me to finish this project report properly in time .

I am also grateful to Prof. S.C.GHOSH, CRIC Chief and Mr. RAJIV KUMAR,
DIRECTOR, Accman Institute of Management, for permitting me to undertake this
study.

Last but not the least, I would like to forward my gratitude to my friends & other
faculty members who always endured me and stood with me and without whom I
could not have completed the project.

Rakesh Kumar Baral

 DECLARATION

I do hereby declare that this piece of project report entitled “A Study on Working
capital Management practices in NALCO” for partial fulfillment of the
requirements for the award of the degree of “POST GRADUATE DIPLOMA IN
MANAGEMENT” is a record of original work done by me under the supervision
and guidance of Prof. DENESH SINGH, Accman Institute Of Management .This
project work is my own and has neither been submitted nor published elsewhere.

PLACE: SIGNATURE OF THE STUDENT

DATE:
 CERTIFICATE

This is to satisfy that the summer project work of Mr. Rakesh Kumar Baral Titled
Working capital management is an original work and this work has not been
submitted elsewhere in any form. The indebtness to other works/publications has
been duly acknowledged at the relevant places. The project work was carried out
during 02.05.2009 to 02.07.2009 in National Aluminum Company Limited
(NALCO).

Date:
Mr. Satyabrata Dash, Manager (finance)
NALCO, Corporate office
NALCO Bhaban, Bhubaneswar
 TABLE OF CONTENTS

Sr. No. Contents Page No.

1 Preface 2
2 Acknowledgement 3
3 Declaration 4
4 Certificate 5
5 Executive Summary 8
6 Introduction To The Study 9-10
Objective Of The Study
(A)

Research Methodology and Scope Of Study

(B)

Limitation Of The Study

(C )

7 Introduction- Indian Aluminium Industry 11-21

Aluminium Structure, Inputs and Products
(A)

Financial Year-08
(B)

Prospects
(c)

Salient Features Of The Industry

(D)

Quantitative Industry
(E)
 Consumption Of Aluminium In India
(F)

8 Introduction – NALCO 22-34

Brief History
(A)

Achievements
(B)

Nalco- products
(C)

5 years performance – physical and highlights

(D)

Production - next 5 years

(E)

9 Introduction-Working Capital 35-42

10 Working Capital Management 43-51
Consequences of under and over assessment of W.C
(A)

Types of W.C
(B)

Financing W.C
(C)

Inventory Management
(D)

Cash Management
(E)

Receivables Management
(F)

11 Important Terms and Ratios (graphical presentation) 52-62

12 Conclusion 63
13 Bibliography 64

EXECUTIVE SUMMERY
The major objective of the study is to proper understanding the working capital of
NALCO & to suggest measures to overcome the shortfalls if any.

Funds needed for short term needs for the purpose like raw materials, payment of
wages and other day to day expenses are known as working capital. Decisions
relating to working capital (Current assets-Current liabilities) and short term
financing are known as working capital management. It involves the relationship
between a firm’s short-term assets and its short term liabilities. By definition,
working capital management entails short-term definitions, generally relating to the
next one year period.

The goal of working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient cash flow to satisfy both maturing
short term debt and upcoming operational expenses.

Working capital is primarily concerned with inventories management, Receivable

management, cash management & Payable management.

Inventories management at NALCO:

NALCO is a large scale manufacturing company involved in mining of Bauxite
and production of Aluminum. Therefore, it has to maintain large quantity of
inventories at production units for its smooth running and functioning.

Cash management at NALCO:

NALCO has been accumulating huge cash surpluses over last several years, which
enables the organization to maintain adequate cash reserves and to generate
required amount of cash.

Receivables management at NALCO:

NALCO has set up its marketing office at all metro cities in India i.e. Mumbai,
Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office
obtains sales order from Aluminum users in India as well as globally. On the basis
of order received for different products it marks production planning of different
i.e. Ingot sow ingot, Billets, Wire etc.

INTRODUCTION

Working Capital:-
The life blood of business, as is evident, signified funds required for day-to-day
operations of the firm. The management of working capital assumes great
importance because shortage of working capital funds is perhaps the biggest
possible cause of failure of many business units in recent times. There it is of great
importance on the part of management to pay particular attention to the planning
and control for working capital. An attempt has been made to make critical study of
the various dimensions of the working capital management of NALCO, a Star
Trading House with NAVRATNA Status.

Decisions relating to working capital and short term financing are referred to as
working capital management. These involve managing the relationship between a
firm's 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 money flow to satisfy both maturing short-term debt and upcoming
operational expenses.

Objective of the study:-

The following are the main objective which has been undertaken in the present
study:

1. To determine the amount of working capital requirement and to calculate

various ratios relating to working capital.

2. To make an item wise study of the components of the working capital.

 3. To suggest the steps to be taken to increase the efficiency in management of
working capital.

Place of study:-
The project study is carried out at the Finance Department of NALCO Corporate
office Situated at Bhubaneswar, ORISSA. The study is undertaken as a part of the
PGDM curriculum from 02 MAY 2009 to 02 JULY 2009 in the form of summer
placement.

Study design and methodology:-

Two types of data are collected, one is primary data and second one is secondary
data. The primary data were collected from the Department of finance, NALCO.
The secondary data were collected from the Annual Report of NALCO, NALCO
website, etc.

Limitations:-
There may be limitations to this study because the study duration (summer
placement) is very short and it’s not possible to observe every aspect of working
capital management practices.
 INDIAN ALUMINIUM INDUSTRY
Aluminium Industries in India is one of the leading industries in the Indian
economy. The growth of the aluminum Metal industry in India would be sustained
by the diversification and exploration of new horizons for the industry. India has
huge deposits of natural resources in form of minerals like copper, chromite, iron
ore, manganese, bauxite, gold, etc. The India aluminum industry falls under the
category of non iron based which include the production of copper, tin, brass, lead,
zinc,aluminum,andmanganese.

The main operations of the of the India aluminum industry is mining of ores,
refining of the ore, casting, alloying, sheet, and rolling into foils. At present,
Hindalco and Nalco are one of the most economical in the production of aluminum
in the world. For the sustenance of the growth the aluminum industry in India has
to develop research and development units to assist the production and improve on
the quality measures to keep a stringent quality control.

The India aluminum Metal Industries sector in the previous decade experienced
substantial success among the other industries. The India aluminum industry is
developing fast and the advancement in its technologies is boosting the growth
even faster. The utilization of both international and domestic resources was
significant in the rapid development of the India aluminum industry. This rapid
development has made the India aluminum industry prominent among the
investors. The India aluminum industry has a bright future as it can become one of
the largest players in the global aluminum market as in India the consumption is
fairly low, the industry may use the surplus production to cater the international
need for aluminum which is used all over the world for several applications such as
aircraft manufacturing, automobile manufacturing, utensils, etc.

The per capita consumption of aluminium in India is only 0.5 kg as against 25 kg.
In USA, 19 kg.in Japan and 10 kg. In Europe , Even the World’s average per capita
consumption is about 10times of that in India. One reason of low consumption in
the country could be that consumption pattern of aluminium in India is vastly
different from that of developed countries. The demand of aluminium is expected
to grow by about 9 percent per annum from present consumption levels. This sector
is going through a consolidation phase and existing producers are in the process of
enhancing their production capacity so that a demand supply gap expected in future
is bridged. However, India is a net exporter of alumina and aluminium metal at
present.

ALUMINIUM-STRUCTURE
• The aluminium industry in India can be classified as:
(a) The primary producers who produce ingots and billets (primary form of
aluminium) using bauxite.
(b) The secondary producers who add value to the ingots and billets to
produce semi-fabricated products.

• At present there are only five companies in the primary aluminium market
viz. Hindalco, Indian Aluminum (Indal), Madras Aluminum (Malco),
National Aluminum (Nalco) and Bharat Aluminum (Balco). The former
three are private sector companies while the latter two are government
owned.

• All the primary producers have integrated forward into the manufacture of
high value semi-fabricated products like rods, rolled products, extrusions and
foils.

Regulated till 1989

o Until 1989, the Aluminum Control Order (ACO) required all domestic
manufacturers to ensure that atleast 50% of their ingot production was
electrical grade, for use by the transmission power industry. The government
fixed ingot prices on the basis of a Retention Pricing Mechanism, taking into
consideration the average retention prices of all producers and a minimum
return on equity.

o The above control resulted in a skewed product mix and shortages of

aluminum for other sectors. The problem was further compounded by the
vulnerable financial position of State Electricity Boards (the main users of
electrical grade aluminum) and high import and excise duties. The producers
resorted to inflated prices for other types of aluminium to compensate for the
disadvantages they suffered because of this regulation.
o The ACO was scrapped in 1989 and in 1991 the government lifted
restrictions on capacity additions resulting in a free market environment.

Aluminium – Inputs

• The aluminium industry in India can be classified as: Captive power, ample
bauxite reserves, coupled with cheap labour costs make Indian companies
amongst the most competitive aluminium producers globally.

• The main raw material for the manufacture of aluminium includes bauxite,
caustic soda, calcined petroleum coke, coal tar pitch, and LS/FS furnace oil.
The production process for manufacture of aluminium is briefly outlined
below.

• The mined bauxite ore is mixed with caustic liquor and is refined to produce
alumina. This is then smelted (through electrolysis in a smelter) to obtain
aluminium. Depending on the quality of bauxite, 2.5 – 3 tonnes are required
for manufacture of 1 tonne of alumina. In turn, 2 tonnes of alumina are
required for manufacture of 1 tonne of aluminium.
Bauxite
o Indian bauxite reserves at 3 bn tonnes, are the 5th largest in the world, and
account for 6% of total world reserves. Most alumina refineries are designed
around the bauxite reserves to reduce transportation costs. Cost per tonne of
bauxite varies for players depending on the location of the refinery and
bauxite mines.

o For example, Nalco has an estimated 1,600 m tonnes of bauxite reserves

only 20 kms from its alumina refinery, enabling it to become one of the most
economical bauxite producers in the world.

Power
• Power constitutes the single largest cost component for aluminium
manufacturers (35–40% of operating costs). Almost all the major Indian
companies have captive power plants thus giving them access to cheap
power. This makes India one of the most competitive low cost aluminium
producers in the world.

• Hindalco and Nalco’s production costs are amongst the lowest in the world.
Both companies have the advantage of 100% captive power, vital in a power
intensive industry and in a power deficit country like India.
 Aluminium – Products
o Aluminium products can be segregated into rolled products, extrusions, and
foils.

o Rolled products find applications in automobiles (paneling, floors and

windows, but are yet to find use in structural parts and bodies), construction
(roofing and walls), consumer durables, engineering applications, web stock
for laminated packaging (for toothpastes). A major portion of rolled products
capacity is accounted for by the five integrated producers (around 82%).

o Extrusions include products as bars, pipes and tubes. Major users of extruded
aluminium products are buildings, transportation and electrical sector

o Production in this segment is widely spread and the top three players control
around 31% of the market (the largest company - Hindalco commands
around 14% market share in this segment).

o Foils are sheets having thickness of less than 0.2 mm up to 0.006 mm finding
application mainly in the packaging sector. Major users of aluminium foils
include the pharmaceutical, consumer products, cigarette and cable
manufacturing industries.

KEY POINTS
Supply - Supply of aluminum is in excess and any deficit can be imported at
low rates of duty. Currently, domestic production comfortably meets domestic
requirements.

Demand- Demand for aluminium is estimated to grow at 6%-8% per annum in

view of the low per capita consumption in India. Also, demand for the metal is
expected to pick up as the scenario improves for user industries, like power,
infrastructure and transportation.

Barriers to entry- Large economies of scale. Consequently, high capital costs.

 Bargaining power of suppliers- Most domestic players operate integrated
plants. Bargaining power is limited in case of power purchase, as Government is
the only supplier. However, increasing usage of captive power plants (CPP) will
help to rationalise power costs to a certain extent in the long-term.

Bargaining power of customers- Being a commodity, customers enjoy

relatively high bargaining power, as prices are determined on demand and
supply.

Competition- competition is primarily on quality and price, as being a

commodity, differentiation is difficult. However, the recent spate of consolidation
has reduced the competitive pressure in the industry. Further, increasing value
addition to aluminium products has helped some companies protect themselves
from the high volatilities witnessed in this industry.

FINANCIAL YEAR-08

• Global production of primary aluminum rose from 32 million tons (MT) in

2005 to 34 MT in 2006, a jump of 6%. In 2007, it further increased to 38
MT, an increase of 12% YoY. China alone accounted for 29% of global
primary aluminum production. Asia, once again showed the largest annual
increases in consumption of primary aluminum, driven largely by increased
industrial consumption in China, which has emerged as the largest aluminum
consuming nation, accounting for 30% of global primary aluminum
consumption in 2007. As far as global consumption is concerned, it
increased by 8.2% in 2006 and touched 34.7 MT. In 2007, the corresponding
figures were 10% and 37.8 MT respectively.

• The Indian aluminium industry registered a strong double-digit growth in

2007 in tune with the economic growth. Strong growths in industrial,
infrastructure, automobile, transportation and power sectors were the drivers
 for the metals demand. However, macroeconomic parameters like the rupee
appreciation, import duty cut and unrelenting cost-push impacted the sector
adversely. Thus causing margins to squeeze at both ends. Although the
average LME remained strong but could not help the companies like
Hindalco to increase the domestic realisation due to fall in import duty and
rupee appreciation, causing a drop in average rupee realisation per tonne of
the primary metal as compared to FY07.

PROSPECTS
o Globally, newer packaging applications and increased usage in automobiles
is expected to keep the demand growth for aluminium over 5% in the long-
term. Asia will continue to be the high consumption growth area led by
China, which is expected to continue to register double-digit growth rates in
aluminium consumption in the medium-term.
o With key consuming industries forming part of the domestic core sector, the
aluminium industry is sensitive to fluctuations in performance of the
economy. Power, infrastructure and transportation account for almost 3/4th
of domestic aluminium consumption. With the government focusing towards
attaining GDP growth rates above 8%, the key consuming industries are
likely to lead the way, which could positively impact aluminium
consumption. Domestic demand growth is estimated to average in the region
of over 8% over the longer-term.
o Lowering of duties reduces the net tariff protection for domestic aluminium
producers. Aluminum imports are currently subject to a customs duty of 5%
and an additional surcharge of 3% of the customs duty. The customs duty has
been reduced in a series of steps from 15% in 2003 to 5% in January 2007.
With reduction in import duties, domestic realisation of aluminium majors,
namely Hindalco and Nalco, is likely to be under pressure, as the buffer on
international prices is reduced. Moreover, with greater linkage to
international prices, volatility in financials could increase. However,
producers are moving downstream to negate the higher volatility.

Salient features of Indian Aluminium Industry

• Highly concentrated industry with only five primary plants in the country
• Controlled by two private groups and one public sector unit

• Bayer-Hall-Heroult technology used by all producers

• Electricity, coal and furnace oil are primary energy inputs

• All plants have their own captive power units for cheaper and un-interrupted
power Supply

• Energy cost is 40% of manufacturing cost for metal and 30% for rolled
products

• Plants have set internal target of 1 – 2% reduction in specific energy

consumption in the next 5 – 8 years

• Energy management is a critical focus in all the plants

• Two plants have declared formal energy policy

• Each plant has an Energy Management Cell

• Achievements in energy conservation are highlighted in the Annual Report

of the Company

• Energy targets are based on best energy figures achieved in their sector /
region and by the plant itself in the past

• Generally, government policies were rated as conducive to energy

management

• ‘Task Force’ formed by BEE in this sector to work as catalyst in promoting

energy efficiency

• High cost of technology is the main barrier in achieving high energy

efficiency
Quantitative details
Raw material and product type:

Bauxite and calcined petroleum coke are primary raw materials for this industry.
However, alumina is raw materials for smelters and aluminium metal is raw
material for fabrication units.

Fuel Usage:

Coal, Furnace oil and electricity are primary energy inputs in aluminium
production. Coal is primarily used to generate steam, which is used in the process
while fuel oil is mainly used in Calcinations of alumina and various furnaces in
fabrication plants. Electricity is the major energy input in aluminium production
and is considered to be prime factor in determining economics of aluminium
production. Hence, all primary metal producers have installed their own captive
power plants to supply cheaper and uninterrupted power for their use. Majority of
electricity consumed in this industry is supplied by their captive power plants.

Technology Status:

Invented over 100 years ago, Bayer-Hall-Heroult is the only available commercial
technology, even today, for the production of aluminium. Alumina is the basic raw
material for the production of aluminium metal through electrolytic process. The
production of alumina obtained from bauxite, a mineral containing up to 60% in
the form of mono/tribhydrate is carried out through the Bayer route, which is an
extractive hydro-metallurgical process.

Consumption of Aluminium in India

The consumption of aluminium in India of 0.7 kg per person in 2005 is very low in
keeping with the countries low GDP. However, the low per capita consumption of
aluminum in India is in fact an opportunity for growth in aluminium consumption
against the back drop of fast growing economic conditions in India.

However, aluminum consumption has increased 12.6% in 2006 to around 1.08mt.

Consumption is estimated to have increased to a 5 year CAGR of 12.9%.
Secondary aluminium demand also shot up to 0.6 MT last year.

Sector-wise aluminum consumption

Aluminium is used in various sectors, such as, transportation, packaging, building
/ construction and electricity. However, the usage pattern differs significantly for
Indian and rest of the world. Globally, the automotive, packaging and the
construction sectors are the major end users of aluminium, while in India the power
sector consumes most followed by automotive and housing sectors.

Sector wise consumption break up

Electrical – 65%

Transport-21%

Construction -8%

Packaging – 5%

Industrial machinery – 4%

Consumer durables – 4%

Steel sweetening, powers & chemicals – 13%

The Transportation sector is a major driver of aluminum consumption in the future

where the onus of growing consumption lies with the industry. The automobile
segment has attracted major global producers to set up their manufacturing
facilities in the country. All these manufacturers are now engaged in bringing out
high quality fuel-efficient cars in the market for India as well as global markets.
Besides cars, there are commercial vehicles which have also witnessed quantum
growth over the years.

Use of Aluminum as an alternative to steel has huge potential in the railways. The
government has taken note of this and has started working on that. Aluminum
castings are primarily used in transport and automobile sectors.

The global casting is currently estimated at around 7.4 million tons, against that
consumption in India as only around 110,000 tons. The country’s share in the
global downstream sector is low as compared to other developed countries.

Casting of aluminum alloys is a particularly versatile process and offers greater

degree of flexibility than other methods of manufacture, and can be done by
various methods like in sand, in metallic dies, under gravity or pressure, and cast
by modern methods like low-pressure die- casting (LPDC), investment casting, and
squeeze casting. No other metal can be cast under such a wide range of processes
and sizes varying from a few grams to 100 kg.

Although, domestic aluminum production exceeds the domestic demand, India

imports on an average 15-20 per cent of the total supply of aluminum. Imports are
necessary, due to the shortage of domestically produced ingots. India’s imports of
aluminum and products primarily comprise of unwrought items like ingots, billets,
scrap, bars and rods. Imports of primary aluminum products account for less than
10 per cent of domestic consumption. India also exports aluminum products such
as, scrap, powder and flakes, bar rods, foil, pellets, sheets, tubes and pipes. Exports
figures hovers around 82000 tons annually and the major importer countries of
Indian aluminium are Bangladesh, Sri Lanka, Egypt and Iraq.

NATIONAL ALUMINIUM COMPANY LTD.

National Aluminium Company Ltd. (Nalco) is considered to be a turning
point in the history of Indian Aluminium Industry. In a major leap forward, Nalco
has not only addressed the need for self-sufficiency in aluminium, but also given
the country a technological edge in producing this strategic metal to the best of
world standards. Nalco was incorporated in 1981 in the Public Sector, to exploit a
part of the large deposits of bauxite discovered in the East Coast. The Captive
Power Plant (CPP) & Smelter Plant are situated near Angul.

Nalco is one of the biggest and Asia’s largest integrated complex, encompassing
Bauxite mining, Alumina refining, Aluminium smelting and casting power
generation, rail and port operations. NALCO was established in 1981 as a public
sector enterprise of the Govt.of India. It is considered a truing point in the 50-year-
old history of the Indian aluminum industry.

In Orissa, for setting up Asia's largest integrated alumina-aluminium complex in

1981, National Aluminium Company Limited (Nalco) acquired 7263 acres of land
at Damanjodi in Koraput district and 4057 acres at Angul. During the inception of
the company, 635 families in 51 villages were displaced - 600 families in
Damanjodi sector and 35 families in Angul sector. From these 635 displaced
families, employment has been provided to 625 nominees. Confusion regarding
educational background and nomination status of balance 10 families has been
taken up at appropriate level. Besides, 1495 families were substantially affected
(i.e. parting with one third or more land) in Angul sector. Even from these, jobs
have been provided to 1060 persons. Nalco has also been sponsoring ITI training to
such persons and 543 have been technically trained so far. Apart from financial
compensation, employment and rehabilitation packages, Nalco has also spent more
than Rs. 100 crore towards various social sector development activities. Creation of
infrastructure in the surrounding villages for communication, education, health care
and drinking water gets priority in the periphery development plans of the
company. Community participation in innovative farming, pisciculture, social
forestry and sanitation programmes apart, encouragement to sports, art, culture and
literature are all a part of Nalco's deep involvement with the life of the community.
Successful operations of the company have led to employment and income
generation for the local people in many significant ways.

ALUMINIUM SMELTER PLANT

The 2, 30,000 tpa capacity Aluminium Smelter is located at Angul in Orissa.
Based on energy efficient state-of-the-art technology of smelting and pollution
control, the Smelter Plant is in operation since early 1987.

Presently, the capacity is being expanded to 3, 45,000 tpa.

The salient features:

o Advanced 180 KA cell technology

o Micro-processor based pot regulation system

o Fume treatment plant with dry-scrubbing system for pollution control

and fluoride salt recovery

o Integrated facility for manufacturing carbon anodes, bus bars, anode

tems etc.

o 4 x 35 tone and 4 x 45 tone furnaces and 2 x 15 tph and 2 x 20 tph

ingot casting machines

o 4 x 45 tonne furnaces and 2 x 9.5 tph wire rod mills

o 2 x 45 tonne furnaces and 60/42 per drop billet casting machine

o 2 x 1.5 tonne induction furnace with a 4 tph alloy ingot casting machine

o 26,000 tpa strip casting machines

With the acquisition and subsequent merger of International Aluminium

Products Limited (IAPL) with Nalco, the 50,000 tpa export-oriented Rolled
Products Unit is all set to produce foil stock, fin stock, can stock, circles, coil
stock, cable wraps, standard sheets and coils

CAPTIVE POWER PLANT

Close to the Aluminium Smelter at Angul, a Captive Power Plant of 720 MW
capacity, comprising 6 x 120 MW clusters, has been established for firm supply of
power to the Smelter.

Presently, the capacity is being expanded to 960 MW.

The salient features:

• Micro-processor based burner management system for optimum thermal

efficiency

• Computer controlled data acquisition system for on-line monitoring

• Automatic turbine run-up system

• Specially designed barrel type high pressure turbine

• Electrostatic precipitators with advanced intelligent controllers

• Wet disposal of ash

The water for the Plant is drawn from River Brahmani through a 7 km long
double circuit pipeline. The coal demand is met from a mine of 3.5 million tpa
capacity opened up for Nalco at Bharatpur in Talcher by Mahanadi Coalfields
Limited. The Power Plant is inter-connected with the State Grid.
Brief History:
After the discovery of 1000 million tons of Bauxite reserves in the Eastern Ghats,
the govt. of India on the 28th March, 1978, authorized Aluminum Pechiney of
France to prepare a feasibility report on the industrial exploration of bauxite for the
establishment of an integrated

Aluminum complex. The result of this study led to sifting of focus of attention to
Panchpattermali, 30km.East of Koraput District of Orissa. Nalco was incorporated
in 1981as a public sector Unit. The newly founded NALCO signed an agreement of
collaboration with aluminum Pechiney, the world leader in this field for
incorporation of technical know-how to set up Asia’s largest integrated aluminium
complex.

Location:

Registered office………………………………...Bhubaneswar

Bauxite mine…………………………………….Panchpatmali

Aluminium refinery…………..............................Damanjodi

Captive power plant….…………………………Angul

Aluminium smelter…………………………..…Angul

Port facilities….………………………………….Visakhapatnam

Rolled product unit……………………………….Angul

Achievements of Nalco:
1980:
A Memorandum of Understanding was signed in January, by the Government of
India for technical collaboration and financing of an integrated alumina-aluminium
complex with Aluminium Pechiney of France.

1981:
The Company was incorporated on 7th January, as a wholly owned enterprise of
Government of India. The Company Manufacture aluminium hydrate, claimed
alumina, aluminium ingots and aluminium wire rods.

1993:
NALCO signed a project co-operation agreement with Hydro Aluminium AG,
Norway to carry out a joint study for feasibility of setting up a100% export
oriented aluminium plant of 0.9 million tonnes per annum capacity.
1,28,86,19,200 No. of shares allotted

1994:
The Company proposed to undertake expansion of bauxite mine from2.4million
TPA. to 4.8 million tpa. and alumina refinery from 8,00,000 tpa. to 13,50,000 tpa.
This was subject to necessary clearances.

1995:
A Smelter plant at Angul was undertaken with a capacity of 26000 TPY of strip
casting facility. A special Alumina plant at Damanjodi was undertaken with a
Capacity of 20,000 TPY. A 10,000 TPY detergent grade Zeolite (Zeolite-A) plant at
Damanjodi, was undertaken.

1996:
The proposal to expand the capacities of bauxite mine at Panchpatmali from 24
lakh tonnes to 48 lakh tonnes and alumina refinery at Damanjodi from 8 lakh
tonnes to 15.75 lakh tonnes was approved by the Government on 18.12.1996.

1997:
Subject to necessary approvals being obtained the company proposed to convert
50% of its existing equity capital into debt. The public sector aluminium giant,
National Aluminium Company (NALCO) set up in technical collaboration with
Pechiney, France is the largest integrated aluminium company in Asia. National
Aluminium Company Ltd (Nalco), country's largest Aluminium Company, has
opened a stockyard at Bhiwandi in Thane district. National Aluminium Company
(Nalco), India's largest producer andex porter, got the ISO 14001 certification for
environmental excellence. The National Aluminium Company, Bhubaneswar,
signed an agreement of national importance with the NRDC for licensing from the
NRDC the knowhow to manufacture gallium from the sodium alumina plant.

1998:
The company has been forced to curtail its power generation capacity due to a
drastic reduction in intake by Gridco. - the nodal power transmission and
distribution agency in Orissa.

1999:
The National Aluminium Company Ltd (NALCO) a Government of India
undertaking is setting up a plant for extraction of gallium at its aluminium refinery
complex at Damanjodi. The National Aluminium Company (Nalco) will take over
International

2000:
Icra has retained the Laaa rating for the Rs 642.58-crore Non-convertible debenture
issue of the company, while it has assigned an A1 rating to the Rs 5-crore CP issue
of Narmada Chematur Petrochemicals.

2001:
A public sector Aluminium Company making a foray into detergent business
sounds out of place. But if senior officials of National Aluminium Company
(Nalco) are to be believed, the country’s second largest aluminium company will be
doing that at its zeolite plant scheduled to start operations in July end.

2002:
S Behuria appointed as part time official Director of Nalco. Nalco's alumina
refinery capacity increased to 15.75 lakh tone

2003:
Commissions one unit of Captive Power Plant with a capacity of 120 MW and 120
pots of Smelter with a capacity to produce 57,500 MT of Aluminium per year
Nalco members okay delisting of securities from stock exchanges of
Bhubaneshwar, Delhi, Calcutta & Madras

2004:
National Aluminium Company Limited (NALCO) has informed that Madras Stock
Exchange Limited vide its letter dated December 22, 2003 have withdrawn the
admission granted to dealings on their exchange for the securities of NALCO.
Nalco open offer to acquire 20% stake for Ondeo Nalco India.

2005:
Nalco inks agreement with NMDC.

NALCO-PRODUCTS
Aluminium Metal
 Ingots

 Sows

 Billets

 Wire rods

 Alloy wire rods

 Cast strips

Alumina & Hydrate

 Calcined Alumina

 Alumina Hydrate

Zeolite-A

5 years performance at a glance (physical)

particulars units 2007/08 2006/07 2005/06 2004/05 2003/04
1.production
Bauxite MT 46,84,684 46,23278 4854253 4851721 48,16,762

Alumina MT 1575500 1475200 15,90,000 1575500 1556100

Hydride
Alumina for MT 3,60,457 3,58,734 3,58,954 3,38,483 2,98,207
In
consumption
Rolled products MT 10,004 2,587 5,040 858 2,660
Power(net) MU 5,609 5,968 5,679 5,613 5,122
2.Export sales
Alumina MT 8,59,943 7,73,573 8,62,616 9,09,081 9,34,874
Aluminum MT 1,00,847 92,678 95,747 1,32,730 1,29,718
3.Domestic
sales
Alumina MT 11,307 10,920 12,994 21,177 17,784
/hydride
Aluminum MT 2,43,064 2,61,636 2,58,094 2,05,794 1,66,650
Power MU 129 421 322 406 498

5 YEARS PERFORMANCE HIGHLIGHTS

1. SALES – Rs.crores

6515

5324
4420

3349
2740

2003 2004 2005 2006 2007

2. EXPORTS-Rs.crores

2586
2306
2200

1717
1501

2003 2004 2005 2006 2007

3. NET PROFIT-Rs.crores
 2381

1562

1235

737
521

2003 2004 2005 2006 2007

4. EARNING PER SHARE-Rs.

37

24.25
19.17
11.44
8.08

2003 2004 2005 2006 2007

PRODUCTION-NEXT 5 YEARS
 Bauxite
90
90

80

63 64 64
70

60 50
46.5
Lakh MT

50

40

30

20

10

0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Year

Alumina
30

30

22.75 22.75
25 21

20 16.3
15.75

15
M
T
h
L
k
a

10

Aluminium
5

5.85
60
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
4.7 4.7
4.6 Year
5

3.57 3.7
4

3
M
T
h
L
k
a

0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year
 Power
9500
10000

9000 8000 8000 8000

8000

7000 6000
5650
6000
Mln KWH

5000

4000

3000

2000

1000

0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13
Year

Working Capital
Every business needs investment to procure fixed assets, which remain in use for a
longer period. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed
Capital’.
Business also needs funds for short-term purposes to finance current operations.
Investment in short term assets like cash, inventories, debtors etc., is called ‘Short-
term Funds’ or ‘Working Capital’. The ‘Working Capital’ can be categorized, as
funds needed for carrying out day-to-day operations of the business smoothly. The
management of the working capital is equally important
as the management of long-term financial investment.

Every running business needs working capital. Even a business which is fully
equipped with all types of fixed assets required is bound to collapse without
o adequate supply of raw materials for processing;
o cash to pay for wages, power and other costs;
o creating a stock of finished goods to feed the market demand regularly; and,
o The ability to grant credit to its customers.

All these require working capital. Working capital is thus like the lifeblood of a
business. The business will not be able to carry on day-to-day activities without the
availability of adequate working capital.

Working capital cycle involves conversions and rotation of various constituents

Components of the working capital. Initially ‘cash’ is converted into raw materials.

Subsequently, with the usage of fixed assets resulting in value additions, the raw
materials get converted into work in process and then into finished goods. When
sold on credit, the finished goods assume the form of debtors who give the business
cash on due date. Thus ‘cash’ assumes its original form again at the end of one such
working capital cycle but in the course it passes through various other forms of
current assets too. This is how various components of current assets keep on
changing their forms due to value addition. As a result, they rotate and business
operations continue. Thus, the working capital cycle involves rotation of various
constituents of the working capital.

While managing the working capital, two characteristics of current assets should be
kept in mind viz. (i) short life span, and (ii) swift transformation into other form of
current asset.
Each constituent of current asset has comparatively very short life span. Investment
remains in a particular form of current asset for a short period. The life span of
current assets depends upon the time required in the activities of procurement;
production, sales and collection and degree of synchronization among them. A very
short life span of current assets results into swift transformation into other form of
current assets for a running business.

These characteristics have certain implications:

• Decision regarding management of the working capital has to be taken

frequently and on a repeat basis.

• The various components of the working capital are closely related and
mismanagement of any one component adversely affects the other
components too.

• The difference between the present value and the book value of profit is not
significant.

The working capital has the following components, which are in several forms of
current assets:

o Stock of Cash

o Stock of Raw Material

o Stock of Finished Goods

o Value of Debtors

o Miscellaneous current assets like short term investment loans & Advances
A number of definitions have been formulated: perhaps the most widely
acceptable would be;

“WORKING CAPITAL represents the excess of CURRENT ASSETS over

CURRENT LIABILITIES “

The same may be designated in the following equation:

WORKING CAPITAL= CURRENT ASSETS – CURRENT LIABILITIES:

Funds thus invested in current assets keep revolving fast and are being constantly
converted in to cash and this cash flows out again in exchange for other current
assets. Thus it is known as revolving or circulating capital or short term capital.

These are two concepts of working capital:-

a. Gross Working Capital.

b. Net Working Capital.

Gross working capital is the total of all current assets. Net working capital is the
difference between current assets and current liabilities. Though the later concept
of working capital is commonly used it is an accounting concept with little sense to
say that a firm manages its net working capital. What a firm really does is to take
decisions with respect to various current assets and current liabilities. The
constituents of current assets and current liabilities are shown in table A.
 Constituents of Current Assets and Current Liabilities

Current Assets
• Inventories – Raw materials and components, Work in progress, Finished
goods, other.

• Trade Debtors.
• Loans and Advances.
• Investments.
• Cash and Bank balance.

Current Liabilities
• Sundry Creditors.
• Trade Advances.
• Borrowings.
• Provisions.

The working capital needs of a business are influenced by numerous

factors. The important ones are discussed in brief as given below:

Nature of Enterprise

The nature and the working capital requirements of an enterprise are interlinked.
While a manufacturing industry has a long cycle of operation of the working
capital, the same would be short in an enterprise involved in providing services.
The amount required also varies as per the nature; an enterprise involved in
production would require more working capital than a service sector enterprise.
 Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own production policy, some
follow the policy of uniform production even if the demand varies from time to
time, and others may follow the principle of 'demand-based production' in which
production is based on the demand during that particular phase of time.
Accordingly, the working capital requirements vary for both of them.

Working Capital Cycle

In manufacturing concern, working capital cycle starts with the purchase of raw
materials and ends with realization of cash from the sale of finished goods. The
cycle involves the purchase of raw materials and ends with the realization of cash
from the sale of finished products. The cycle involves purchase of raw materials
and stores, its conversion in to stock of finished goods through work in progress
with progressive increment of labor and service cost, conversion of finished stick in
to sales and receivables and ultimately realization of cash and this cycle continuous
again from cash to purchase of raw materials and so on.

Operations

The requirement of working capital fluctuates for seasonal business. The working
capital needs of such businesses may increase considerably during the busy season
and decrease during the slack season. Ice creams and cold drinks have a great
demand during summers, while in winters the sales are negligible.

Market Condition

If there is high competition in the chosen product category, then one shall need to
offer sops like credit, immediate delivery of goods etc. for which the working
capital requirement will be high. Otherwise, if there is no competition or less
competition in the market then the working capital requirements will be low.
 Credit Policy
The credit policy is concerned in its dealings with debtors and creditors influence
considerably the requirements of the working capital. A concern that purchases its
requirements on credit and sells its products/services on cash requires lesser
amount of working capital. On the other hand a concern buying its requirements for
cash and allowing credit to its customers, shall need larger amount of funds are
bound to be tied up in debtors or bills receivables.

Business Cycle

Business Cycle refers to alternate expansion and contraction in general business

activities. In a period of born i.e. when the business is prosperous there is a need
for larger amount of working capital due to increase in sales, rise in prices,
optimistic expansion of business etc. On the country at he time of depression i.e.
when there is a down swing of the cycle, business contracts, sales decline,
difficulties are faced in collections from debtors and firms may have a large
amount of working capital lying ideal

Availability of Raw Material

If raw material is readily available then one need not maintain a large stock of the
same, thereby reducing the working capital investment in raw material stock. On
the other hand, if raw material is not readily available then a large inventory/stock
needs to be maintained, thereby calling for substantial investment in the same.

Growth and Expansion

Growth and expansion in the volume of business results in enhancement of the

working capital requirement. As business grows and expands, it needs a larger
amount of working capital. Normally, the need for increased working capital funds
precedes growth in business activities.
 Earning Capacity and Dividend policy

Some firms have more earning capacity than others due to the quality of their
products, monopoly conditions etc. Such firms with high earning capacity may
generate cash profits from operations and contribute to their capital. The dividend
policy of a concern also influences the requirements of the working capital. A firm
that maintains steady high rate of cash dividend irrespective of its generation of
profits needs more capital than the firm retains larger part of its profits and does not
pay high rate of cash dividend.

Price Level Changes

Generally, rising price level requires a higher investment in the working capital.
With increasing prices, the same level of current assets needs enhanced investment.

Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw material and is completed
with the production of finished goods. If the manufacturing cycle involves a longer
period, the need for working capital would be more. At times, business needs to
estimate the requirement of working capital in advance for proper control and
management. The factors discussed above influence the quantum of working
capital in the business. The assessment of working capital requirement is made
keeping these factors in view. Each constituent of working capital retains its form
for a certain period and that holding period is determined by the factors discussed
above. So for correct assessment of the working capital requirement, the duration at
various stages of the working capital cycle is estimated. Thereafter, proper value is
assigned to the respective current assets, depending on its level of completion.

Other Factors

Certain other factors such as operating efficiency, management ability,

irregularities a supply, import policy, asset structure, importance of labor, banking
facilities etc. also influences the requirement of working capital.
Component of Working Capital Basis of Valuation

• Stock of raw material Purchase cost of raw materials

• Stock of work in process At cost or market value, whichever is lower

• Stock of finished goods Cost of production

• Debtors Cost of sales or sales value

• Cash Working expenses

Each constituent of the working capital is valued on the basis of valuation

Enumerated above for the holding period estimated. The total of all such valuation
becomes the total estimated working capital requirement.

The assessment of the working capital should be accurate even in the case of small
and micro enterprises where business operation is not very large. We know that
working capital has a very close relationship with day-to-day operations of a
business. Negligence in proper assessment of the working capital, therefore, can
affect the day-to-day operations severely. It may lead to cash crisis and ultimately
to liquidation. An inaccurate assessment of the working capital may cause either
under-assessment or over-assessment of the working capital and both of them are
dangerous.
 WORKING CAPITAL MANAGEMENT

Working Capital Management refers to management of current assets and current

liabilities. The major thrust of course is on the management of current assets .This
is understandable because current liabilities arise in the context of current assets.
Working Capital Management is a significant fact of financial management. Its
importance stems from two reasons:-

• Investment in current assets represents a substantial portion of

total investment.
• Investment in current assets and the level of current liabilities have to be
geared quickly to change in sales. To be sure, fixed asset investment and
long term financing are responsive to variation in sales. However, this
relationship is not as close and direct as it is in the case of working capital
components.

The importance of working capital management is effected in the fact that financial
manages spend a great deal of time in managing current assets and current
liabilities. Arranging short term financing, negotiating favorable credit terms,
controlling the movement of cash, administering the accounts receivable, and
monitoring the inventories consume a great deal of time of financial managers.

The problem of working capital management is one of the “best” utilization of a

scarce resource.

Thus the job of efficient working capital management is a formidable one, since it
depends upon several variables such as character of the business, the lengths of the
merchandising cycle, rapidity of turnover, scale of operations, volume and terms of
purchase & sales and seasonal and other variations.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING

CAPITAL

o Growth may be stunted. It may become difficult for the enterprise to

undertake profitable projects due to non-availability of working capital.
 o I mplementation of operating plans may become difficult and consequently
the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieved due to non
availability of the working capital.

o The business may fail to honour its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.

o The business may be compelled to buy raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing cost of
purchases and reducing selling prices by offering discounts. Both these
situations would affect profitability adversely.

o Non-availability of stocks due to non-availability of funds may result in

production stoppage.

o While underassessment of working capital has disastrous implications on

business, over assessment of working capital also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING

CAPITAL

o E
 xcess of working capital may result in unnecessary accumulation of
inventories.

o It may lead to offer too liberal credit terms to buyers and very poor recovery
system and cash management.

o I t may make management complacent leading to its inefficiency.

o Over-investment in working capital makes capital less productive and may

reduce return on investment. Working capital is very essential for success of
a business and, therefore, needs efficient management and control. Each of
the components of the working capital needs proper management to optimize
profit.
The working capital in certain enterprise may be classified into the
following kinds.

1. Initial working capital. The capital, which is required at the time of the
commencement of business, is called initial working capital. These are the
promotion expenses incurred at the earliest stage of formation of the enterprise
which include the incorporation fees. Attorney's fees, office expenses and other
expenses.

2. Regular working capital. This type of working capital remains always in the
enterprise for the successful operation. It supplies the funds necessary to meet the
current working expenses i.e. for purchasing raw material and supplies, payment of
wages, salaries and other sundry expenses.

3. Fluctuating working capital. This capital is needed to meet the seasonal

requirements of the business. It is used to raise the volume of production by
improvement or extension of machinery. It may be secured from any financial
institution which can, of course, be met with short term capital. It is also called
variable working capital.

4. Reserve margin working capital. It represents the amount utilized at the time
of contingencies. These unpleasant events may occur at any time in the running life
of the business such as inflation, depression, slump, flood, fire, earthquakes, strike,
lay off and unavoidable competition etc. In this case greater amount of capital is
required for maintenance of the business.
 Financing Working Capital

Now let us understand the means to finance the working capital. Working capital or
current assets are those assets, which unlike fixed assets change their forms rapidly.
Due to this nature, they need to be financed through short-term funds. Short-term
funds are also called current liabilities. The following are the major sources of
raising short-term funds:

I. Supplier’s Credit

At times, business gets raw material on credit from the suppliers. The cost of raw
material is paid after some time, i.e. upon completion of the credit period. Thus,
without having an outflow of cash the business is in a position to use raw material
and continue the activities. The credit given by the suppliers of raw materials is for
a short period and is considered current liabilities. These funds should be used for
creating current assets like stock of raw material, work in process, finished goods,
etc.

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to
businesses to help them create necessary current assets so as to achieve the
Required business level. The loans are available for creating the following current
Assets:
• Stock of Raw Materials
• Stock of Work in Process
• Stock of Finished Goods
• Debtors
Banks give short-term loans against these assets, keeping some security margin.
The advances given by banks against current assets are short-term in nature and
banks have the right to ask for immediate repayment if they consider doing so.
Thus bank loans for creation of current assets are also current liabilities.

iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s funds.

They are long-term funds and, therefore do not require immediate repayment.
These funds increase the liquidity of the business.
 Management of Inventory

Inventories constitute the most significant part of current assets of a large majority
of companies in India. On an average, inventories are approximately 60 % of
current assets in public limited companies in India.

Because of the large size of inventories maintained by firms maintained by firms, a

considerable amount of funds is required to be committed to them. It is, therefore
very necessary to manage inventories efficiently and effectively in order to avoid
unnecessary investments. A firm neglecting a firm the management of inventories
will be jeopardizing its long run profitability and may fail ultimately.

The purpose of inventory management is to ensure availability of materials in

sufficient quantity as and when required and also to minimize investment in
inventories at considerable degrees, without any adverse effect on production and
sales, by using simple inventory planning and control techniques.

Needs to hold inventories:-

There are three general motives for holding inventories:-

• Transaction motive emphasizes the need to maintain inventories to facilitate

smooth production and sales operation.

• Precautionary motive necessities holding of inventories to guard against the

risk of unpredictable changes in demand and supply forces and other factors.

• Speculative motive influences the decision to increases or reduce inventory

levels to take advantage of price fluctuations and also for saving in re-
ordering costs and quantity discounts etc.
Objective of Inventory Management:-

The main objectives of inventory management are operational and financial. The
operational mean that means that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of inventory. The financial
objective means that investments in inventories should not remain ideal and
minimum working capital should be locked in it.

The following are the objectives of inventory management:-

o To ensure continuous supply of materials, spares and finished goods.

o To avoid both over-stocking of inventory.
o To maintain investments in inventories at the optimum level as required by
the operational and sale activities.
o To keep material cost under control so that they contribute in reducing cost
of production and overall purchases.
o To eliminate duplication in ordering or replenishing stocks. This is possible
with the help of centralizing purchases.
o To minimize losses through deterioration, pilferage, wastages and damages.
o To design proper organization for inventory control so that management.
Clear cut account ability should be fixed at various levels of the
organization.
o To ensure perpetual inventory control so that materials shown in stock
ledgers should be actually lying in the stores.
o To ensure right quality of goods at reasonable prices.
o To facilitate furnishing of data for short-term and long term planning and
control of inventory
 Management of cash

Cash is the important current asset for the operation of the business. Cash is the
basic input needed to keep the business running in the continuous basis, it is also
the ultimate output expected to be realized by selling or product manufactured by
the firm.

The firm should keep sufficient cash neither more nor less. Cash shortage will
disrupt the firm’s manufacturing operations while excessive cash will simply
remain ideal without contributing anything towards the firm’s profitability. Thus a
major function of the financial manager is to maintain a sound cash position.

Cash is the money, which a firm can disburse immediately without any restriction.
The term cash includes coins, currency and cheques held by the firm and balances
in its bank account. Sometimes near cash items such as marketing securities or
bank term deposits are also included in cash. Generally when a firm has excess
cash, it invests it is marketable securities. This kind of investment contributes some
profit to the firm.

Need to hold cash

The firm’s need to hold cash may be attributed to the following three motives:-

The Transaction Motive: The transaction motive requires a firm to hold cash to
conduct its business in the ordinary course. The firm needs cash primarily to make
payments for purchases, wages and salaries, other operating expenses, taxes,
dividends, etc.
The Precautionary Motive: A firm is required to keep cash for meeting various
contingencies. Though cash inflows and outflows are anticipated but there may be
variations in these estimates. For example a debtor who pays after 7 days may
inform of his inability to pay, on the other hand a supplier who used to give credit
for 15 days may not have the stock to supply or he may not be in opposition to give
credit at present.

Speculative Motive: - The speculative motive relates to the holding of cash for
investing in profit making opportunities as and when they arise.

The opportunities to make profit changes. The firm will hold cash, when it is
expected that interest rates will rise and security price will fall.

Components of working capital are calculated as follows:

1) Raw Materials Storage Period=Average stock of raw materials/Average cost of

raw material consumption per day.

2.) W-I-P Holding period=Average w-i-p in inventory/Average cost of production

per day.

3.) Stores and spares conversion period= Average stock of Stores and spares/
Average consumption per day.

4.) Finished goods conversion period= Average stock of finished goods/Average

cost of goods sold per day.

5.) Debtors collection period=Average book debts/Average credit sales per day.

6.) Credit period availed=Average trade creditors/Average credit purchase per

day.
 Management of Receivables

A sound managerial control requires proper management of liquid assets and

inventory. These assets are a part of working capital of the business. An efficient
use of financial resources is necessary to avoid financial distress. Receivables
result from credit sales.

A concern is required to allow credit sales in order to expand its sales volume. It is
not always possible to sell goods on cash basis only. Sometimes other concern in
that line might have established a practice of selling goods on credit basis. Under
these circumstances, it is not possible to avoid credit sales without adversely
affecting sales.

The increase in sales is also essential to increases profitability. After a certain level
of sales the increase in sales will not proportionately increase production costs. The
increase in sales will bring in more profits. Thus, receivables constitute a
significant portion of current assets of a firm. But for investment in receivables, a
firm has to insure certain costs. Further, there is a risk of bad debts also. It is
therefore, very necessary to have a proper control and management of receivables.

Needs to hold cash:

Receivables management is the process of making decisions relating to investment
in trade debtors. Certain investments in receivables are necessary to increase the
sales and the profits of a firm. But at the same time investment in this asset
involves cost consideration also. Further, there is always a risk of bad debts too.

Thus, the objective of receivable management is to take a sound decision as regards

investments in debtors. In the words of Bolton, S.E., the need of receivables
management is “to promote sales and profits until that point is reached where the
return of investment in further funding of receivables is less than the cost of funds
raised to finance that additional credit.”
 Important Terms

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 You increase your
duration or amount) from suppliers 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.
 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:

o Pressure on existing cash

o Exceptional cash generating activities e.g. offering high discounts for early
cash payment
o Bank overdraft exceeds authorized limit
o Seeking greater overdrafts or lines of credit
o Part-paying suppliers or other creditors
o Paying bills in cash to secure additional supplies
o 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).

Handling Receivables (Debtors)

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. If the average age of your debtors is getting longer, or is already very
long, you may need to look for the following possible defects:
 • weak credit judgement
• poor collection procedures
• lax enforcement of credit terms
• slow issue of invoices or statements
• errors in invoices or statements
• Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention. Look for the warning signs of a future bad debt. For
example.........

o longer credit terms taken with approval, particularly for smaller orders
o use of post-dated checks by debtors who normally settle within agreed terms
o evidence of customers switching to additional suppliers for the same goods
o new customers who are reluctant to give credit references
o Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons and
therefore put on the long finger because they convince themselves there is
something more urgent or important that demand their attention now. There is
nothing more important than getting paid for your product or service. A
customer who does not pay is not a customer.

Managing Payables (Creditors)

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. Consider the following:

o Who authorizes purchasing in your company - is it tightly managed or spread

among a number of (junior) people?
o Are purchase quantities geared to demand forecasts?
o Do you use order quantities which take account of stock-holding and
purchasing costs?
o Do you know the cost to the company of carrying stock?
o Do you 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.
o How many of your suppliers have a returns policy?
o Are you in a position to pass on cost increases quickly through price
increases to your customers?
o If a supplier of goods or services lets you down can you charge back the cost
of the delay?
o Can you arrange (with confidence!) to have delivery of supplies staggered or
on a just-in-time basis?

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

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital
utilization.

Ratio Formulae Result Interpretation

On average, you turn over the value of
your entire stock every x days. You may
Average Stock need to break this down into product
Stock
* 365/ =x groups for effective stock management.
Turnover
Cost of Goods days Obsolete stock, slow moving lines will
(in days)
Sold extend overall stock turnover days. Faster
production, fewer product lines, just in
time ordering will reduce average days.
It takes you on average x days to collect
monies due to you. If you’re official credit
Receivables terms are 45 day and it takes you 65 days...
Debtors * 365/ = x
Ratio why?
Sales days
(in days) One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.
On average, you pay your suppliers every
x days. If you negotiate better credit terms
this will increase. If you pay earlier, say, to
Creditors *
Payables get a discount this will decline. If you
365/ =x
Ratio simply defer paying your suppliers
Cost of Sales days
(in days) (without agreement) this will also increase
(or Purchases)
- but your reputation, the quality of service
and any flexibility provided by your
suppliers may suffer.
Current Total Current = x Current Assets are assets that you can
Ratio Assets/ times readily turn in to cash or will do so within
Total Current 12 months in the course of business.
Liabilities Current Liabilities are amount you are due
to pay within the coming 12 months. For
example, 1.5 times means that you should
be able to lay your hands on $1.50 for
every $1.00 you owe. Less than 1 times
e.g. 0.75 means that you could have
liquidity problems and be under pressure
 to generate sufficient cash to meet
oncoming demands.
(Total Current
Assets - Similar to the Current Ratio but takes
=x
Quick Ratio Inventory)/ account of the fact that it may take time to
times
Total Current convert inventory into cash.
Liabilities
(Inventory +
Working A high percentage means that working
Receivables - As %
Capital capital needs are high relative to your
Payables)/ Sales
Ratio sales.
Sales

Other working capital measures include the following:

• Bad debts expressed as a percentage of sales.

• Cost of bank loans, lines of credit, invoice discounting etc.
• Debtor concentration - degree of dependency on a limited number of
customers.

Once ratios have been established for your business, it is important to track them
over time and to compare them with ratios for other comparable businesses or
industry sectors.

When planning the development of a business, it is critical that the impact of

working capital be fully assessed when making cash flow forecasts.

DATA ANALYSIS AND INTERPRETATION

(Rs in cores)
 2004/05 2005/6 2006/7 2007/8
A: CURRENT ASSETS:

Inventories: 529.06 591.58 634.96 686.65

Sundry debtors: 92.81 29.42 34.13 60.65

Cash and bank balance: 755.21 2193.71 3686.53 3516.46

Other current assets: 82.01 118.62 212.4 236.46

Loans and advances: 351.95 364.95 406.42 541.10

……………………………………………………………………………..

TOTAL: 1811.04 3257.88 5041.33 4974.08

B: CURRENT LIABELITIES:

Sundry creditors:

a) On capital a/c: 64.72 44.39 102.09 272.78

b) on others: 169.38 222.95 260.74 324.94

Other liabilities: 326.92 284.96 424.64 557.94

Security deposit: 55.92 55.10 74.66 162.69

Book over draft ……. ……… 9.98 …….

Provisions: 190.14 332.82 346.49 222.57

… …………………………………………………………

TOTAL: 806.39 940.15 1218.61 1540.40

WORKING CAPITAL (A-B): 1004.65 2317.73 3822.72 3433.68

IMPORTANT RATIOS OF NALCO

1. OPERATING PROFIT MARGIN (%)

61.12
56.36 54.81
48.46 46.36

2004 2005 2006 2007 2008

2. NET PROFIT MARGIN (%)

40.09
31.96 32.71
30.09
23.6

30.95
2004 2005 2006 2007 2008
26.51
26.29 18.39
3. RETURN ON NETWORTH (RONW) (%)
19.63

2004 2005 2006 2007 2008

 4. RETURN ON CAPITAL EMPLOYED (ROCE)

31.89

24.79
24.01 23.21
18.3

2004 2005 2006 2007 2008

CONCLUSION

After studying the components of working capital management system

of NALCO. It is found that the company has a sound and effective
policy and its performance is very good even in this bad recession
situation company has managed to post good profit. Company is
competing well at the domestic as well as the international level and it is
among the low cost producers of aluminium in the world only because of
its proper management of finance, specially the short term finance
known as the working capital.
The company is a matured one and it has contributed well in the
countries growth and development and will also continue to perform and
contribute to the whole nation.
In conclusion ,we can say that the companies management is an effective
one and knows well the management of finance, its working capital
management system is very good because of which only the company
has got the status of NAVRATNA company.

BIBLIOGRAPHY

1. Financial Management……..Prasanna Chandra

2. Financial Management…….I.M.Pandey

3. Annual Report of NALCO.

4. Auditors Report, Directors Report and Investors Report.

5. Nalco’s official website….www.nalco.co.in

6. www.google.co.in