ACKNOWLEDGEMENT

At the prime outset I owe my sincere gratitude to the management and allied discipline of MCL, Sambalpur for giving me an opportunity to undergo training for a period of 45 days.

My project has been influenced by annual report of the company and information provided by employees in the field. As far as possible they have been fully acknowledged at their appropriate places. I express my gratitude to all of them. My deepest sense of gratitude goes to Mr.M.Nagarajan(CGM,FINANCE) for giving me such a great opertunity.

Also, I would like to thank executives and personnel in the organization that helped me a lot in collection of data and their suggestions enabled me to complete the project.

CERTIFICATE

This is to certify that the project titled "Working Capital Management" is an original work of the summer training done by ------------and is being submitted as an essential part of her summer training with MCL under my guidance and supervision for partial fulfillment of M.B.A. curriculum of. This report has not been submitted earlier either to this company or to any other company for the fulfillment of the requirement of summer training certificate.

Date: - Signature (guide)

DECLARATION

I, hereby declare that this project report entitled “A study on Working Capital Management of MCL”, is completed by me. I have underdone the project training as a part of the course curriculum in “Master of Business Administration” at. I did my summer training under the guidance of,Deputy Finance Manager I, thereby declare that this project report has not been submitted anywhere else for the award of any degree or diploma.I further declare that all the figures included in the project report are indicated in nature and shall not be constructed for their precision.

PREFACE

The project is an attempt to understand and analyze the working capital management at MCL. This project encompasses all the financial aspects of working capital management in Mahanadi Coal Field Ltd. Besides, focusing on the various activities undertaking to ensure a strong working position, the project also tries to shed light on the decision making involved in working capital management in MCL.

The main objective of the project is to conduct in a depth analysisof working capital management in MCL. For this purpose, various working capital data are recorded from the Annual report and financial year-books of MCL. Components of working capital like inventory, cash, creditors and Debtors are recorded in a year-wise manner and trend-analysis is carried out on them, further, these data are again analyzed using research tools, like ratio analysis from the analysis interpretation and suggestion are made to strengthen the financial situation of MCL.

EXECUTIVE SUMMARY

Name of the organization – MAHANADI COAL FIELDS, LTD (SAMBALPUR)

Name of the institute-

Name of the guide- Mr.Ajit Behura,Deputy Finance Manager.

Title of the project- "Working Capital Management"

Project period- 45 DAYS

OBJECTIVES OF THE STUDY

To know the financial performance of the company.

To study the coal mines industry and determine the position of the company as well as its competitors.

To study the over all operating cycle of the company.

To study receivable management, inventory management and cash management.

To study the working capital financing practices of the company.

TABLE OF CONTENTS :

1. INDUSTRY ANALYSIS

2. COMPANY ANALYSIS

3. WORKING CAPITAL MANAGEMENT

4. RECEIVABLES MANAGEMENT

5. INVENTORY MANAGEMENT

6. CASH MANAGEMENT

7. WORKING CAPITAL FINANCE

8. CONCLUSION AND SUGESSTION

Chapter-1

IndustrAnalysis COAL: THE BLACK DIAMOND

Coal was the main source of energy after the industrial revolution which influenced the world in many ways. Before the popularity of the crude oil world wide and before the formation of the “International Oil Cartel” by the oil producing countries, the coal was the major supplier of world’s energy (approx 80%). Eventually, oil had replaced coal as the world’s primary fuel. But today, international crude price had touched to a new height of about $123 per barrel. This resulted in search for the alternative source of energy. Now the world is reverting towards coal, so much that, it is likely to become once again the unrivaled source of energy.

India has been the importing country for the crude oil. Its energy requirement can’t be met sufficiently through crude oil. The fact of heavy reserve of coal in India can’t be ignored, so India right from the very beginning had relied on coal. The “Black Diamond” is being treated as the other alternative source of energy in India and considered as the healing medicine against the wound of expensive crude oil. Coal India – the gem of coal industry, is the one who had stepped forward for the fulfillment of the demand of coal in India. But owning to some of the reasons, few of its subsidiaries had suffered heavy losses and failed to meet the demand of coal in India.

ORIGIN OF COAL

Coal is a fossil fuel formed in eco-system from the decay of trees, bushes and forms of plants which were saved by water and mud from oxidation and bio-degradation from millions of years. It is a readily combustible black or brown rock.

An enormous of coal found at the coal bed which were formed from the engulfing of vegetation by the rivers, swamps and mud which gradually with the passage of time has turned to coal.

The earliest period of formation of the coal generally occurred during the “Upper Carboniferous” and “Permian” periods of the Carboniferous era. In India, the main deposits are found in the Permian series, known as “Goundwana”.

TYPES/CATEGORIES OF COAL

‘COAL TYPE’ is mainly related to the type of plantation and the age of the fossil and their extent of biodegradation and chemical reaction.Coal type is being determined from their chemical composition, carbon content, moisture content, volatile matter, etc. The classification system adopted by the “American System for Testing Materials” has classified the coal into the following categories:-

Peat: It is the precursor of coal and has less value for its very poor quality. Lignite: It is brown coal composed of woody matter embedded in macerated and

decomposed vegetation. It also has low value. Sub- Bituminous: It is the coal whose properties lies between the category of

lignite and bituminous. Its moisture content is low and hence used for the electricity generation.

Anthracite: It is the highest ranked coal which is hard, glossy primarily used for the household purpose and commercial heating purpose.

Graphite: Technically, it is the highest rank of coal but not considered as coal because it is difficult to ignite. It is used to make pencils and used as lubricants at its powdered form.

From commercial point of view, the coal has been categorized into three classes A) Coking coal; B) Semi-Coking coal; C) Non-Coking Coal.

IMPORTANCE OF COAL

Coal is the most important and abundant source of energy in India. It accounts for almost 60% of the energy need of India.

Coal is being used as the fuel for the thermal power stations for the production of electricity;

Coke is being used for the production of iron being put in the blast furnaces; Coal has been used for the household purpose.

Considering the limited reserve of both crude oil and uranium ore, coal will be continuing to be the undisputed leader for the fulfillment of the Indian energy need.

With coal reserve of 247847 million tones, Indian coal industry will be satisfying the ever-growing energy need of India which will drive the Indian economic growth in future.

With hard coal reserve, Indian coal offers a unique eco-friendly fuel source to the domestic energy market for the next century and beyond. Hard coal deposits spread over 27 coalfields and are mainly confined to the eastern, central and Southern part of the country. 90% of the lignite reserve is found in the southern state of the country mainly in Tamil Nadu.

THE INDIAN COAL INDUSTRY

COAL MINING IN INDIA: THE PAST

India has a long history of coal mining covering nearly 224 years starting from 1774 by M/s Sumner and Healthy of East India Company in the Raniganj Coalfield along the Western bank of river Damodar. However, for about a century the growth of the Indian coal industry was sluggish because of the drying up of the demand for coal, but with the introduction of the steam locomotives in 1853 had the industry to flourish. Within a short span of time, production rose to an annual average of 1 million tones (mts) and India had achieved the production of 6.12 mts per year by 1900 and 18 mts per year by 1920. The production got a sudden boom because of the First World War but went through a period of slump in the early thirties. The production reached to a height of 29 mts per year by 1942 and 30 mts by the year 1946.

With the advent of independence of India, the country had earmarked the 5-year development plans. At the 1st 5-year plan the production of coal has been focused more

due to the need of the energy to make the country prosper. During this period India had achieved the annual production of up to 33 mts. During the 1 st 5-year plan period, the need for the increasing coal production was being felt, thus, a step towards the systematic and scientific development being initiated by the government. Setting up of the National Coal Development Corporation (NCDC), a Government of India Undertaking in 1956 with the collieries owned by the railways as its nucleus was the first major step towards planned development of Indian Coal Industry. Along with the Singareni Collieries Company Ltd. (SCCL) which was already in operation since 1945 and which became a Government company under the control of Government of Andhra Pradesh in 1956, India thus had two Government coal companies in the fifties. SCCL is now a joint undertaking of Government of Andhra Pradesh and Government of India sharing its equity in 51:49 ratios.

NATIONALISATION OF COAL MINES:

Right from its genesis, the commercial coal mining in modern times in India has been dictated by the needs of the domestic consumption. On account of the growing needs of the steel industry, a thrust had to be given on systematic exploitation of coking coal reserves in Jharia Coalfield. Adequate capital investment to meet the burgeoning energy needs of the country was not forthcoming from the private coal mine owners. Unscientific mining practices adopted by some of them and poor working conditions of labor in some of the private coal mines became matters of concern for the Government. On account of these reasons, the Central Government took a decision to nationalise the private coal mines.

India's coal industry was nationalized in the year 1972 and 1973.The nationalisation was done in two phases, the first with the coking coal mines in 1971-72 and then with the non-coking coal mines in 1973. In October, 1971, the Coking Coal Mines (Emergency Provisions) Act, 1971 provided for taking over in public interest of the management of coking coal mines and coke oven plants pending nationalization. This was followed by the Coking Coal Mines (Nationalization) Act, 1972 under which the coking coal mines and the coke oven plants other than those with the Tata Iron & Steel Company Limited and Indian Iron & Steel Company Limited, were nationalized on 1.5.1972 and brought under the Bharat Coking Coal Limited (BCCL), a new Central Government Undertaking. Another enactment, namely the Coal Mines (Taking over of Management) Act, 1973, extended the right of the Government of India to take over the management of the coking and non-coking coal mines in seven States including the coking coal mines taken over in 1971. This was followed by the nationalization of all these mines on 1.5.1973 with the enactment of the Coal Mines (Nationalization) Act,

1973 which now is the piece of Central legislation determining the eligibility of coal mining in India.

COAL MINING IN INDIA: AT PRESENT

The Coal Industry in India contributes a lot to the present commercial and economic successes. Industries such as steel and Carbo-Chemicals largely depend upon coal industry.

Presently the industry is controlled by the Coal India Limited (CIL) and Singareni Collieries Company Limited (SCCL). The industry is facing the problem of lower productivity in the recent years. For raising productivity in the industry, the Government has delicensed the coal and lignite.

A new technology of liquidation of coal has been developed which will produce synthetic oil from the coal in order to meet the ever growing need of the Indian economy. The technology is being termed as the Liquefaction - Coal-To-Liquids (CTL). This technology has increased the demand for coal in order to meet the energy requirement of the country.

COAL PRODUCTION IN INDIA:

Coal is largely available in the areas situated in the valleys of the rivers Sone, Damodar, Godavari and Vardha. Generally Anthracite and Bituminous qualities of coals are found in these areas. Major portions are available in the states like Jharkhand, Orissa, Chhattisgarh, Madhya Pradesh, Andhra Pradesh and West Bengal. The lignite quality of coal is found in the areas of Rajasthan, Tamil Nadu, Meghalaya and Jammu and Kashmir.The following table shows the statistics on coal production in India:

YEAR QUANTITY(in lakh tones)

2000-01 33262001-02 3526

2002-03 3673

2003-04 3892

2004-05 4130

DIAGRAMATIC REPRESENTATION OF COAL PRODUCTION:-

REASONS FOR THE GROWING PRODUCTIVITY:

The following factors were the main driver of the rise in the production of by the Coal Industry:-

Use of new modern technology and use of Heavy Earth Movers Machines like Shovels, Dumpers, etc..

Continuous innovation in the field of safety of the employees at the industry; Continuous incentives to the employees for better production; Discovery of the new areas of the production of coal in the vicinity of the coal

industry; Extension and expansion of the old projects; Re-estimation and valuation of coal production at the production areas, etc.

Background History: -

YEAR EVENTS

1743Commercial production of coal by East India Company for

the manufacture of arms and ammunitions.

1774 Warren Hastings initiated commercial coal mining at Ranigunj (West Bengal).

1815 – 1820 Opening of the First Shaft Mine near Raniganj town.

1835 Carr, Tagore and company takes over Raniganj Coal Mines

1843 Bengal Coal Company takes over Ranigunj Coal Mines and

others; is first Joint Stock Coal Company in India

1855Opening of Railway from Calcutta to Raniganj, the turning point of the coal industry in India.

1862Coal mining began in Central Provinces Jharia Coal Fields by the Govt. of India undertaking first phase of coal nationalisation.

Early 1900s Capacity at 6 million tones per annum registered.

1955-1956 Focus on Coal Industry; capacity up to 38.4 Million tones

1956 National Coal Development Corporation (NCDC) formed to explore and expand coal mining in Public Sector

1972 Coking Coal Industry Nationalized, Bharat Coking Coal Limited formed to manage operations of all Coking Coal mines in Jharia Coalfield.

1973 Non-coking coal nationalized; Coal Mine Authority Limited set up to manage these mines; NCDC operations bought under the ambit of CMAL.

1975 Coal India Limited formed as holding Company with 5 subsidiaries viz. Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Western Coalfields Limited (WCL), Eastern Coalfields Limited (ECL) and Central Mine Planning and Design Institute Limited

(CMPDIL).

1985 Northern Coalfields Limited (NCL) and South Eastern Coalfields Limited (SECL) carved out of CCL and WCL

1992 Mahanadi Coalfields Limited (MCL) formed out of SECL to manage the Talcher and IB Valley Coalfields in Orissa.

2000 De-regulation of Coal pricing and distribution of coal.

COAL RESERVES IN INDIA:

Coal is found in the region of the valleys of the rivers Damodar, Vardha, Godavari, Sone, etc. Most of the anthracite coal found in these regions which are of great importance and its value is also quite higher because of its higher heat value.

States such as Madhya Pradesh, Orissa, Jharkhand and West Bengal have the highest reserves of coals. The following table shows the volumes of coal reserves in the Indian states as in the year 2005.

STATE RESERVES(in million tons)

Madhya Pradesh 72,204

Orissa 60,984

Jharkhand 39,975

West Bengal 27,813

Chhattisgarh 19,232

Andhra Pradesh 16,926

Maharashtra 8,582

Uttar Pradesh 1,062

Meghalaya 459

Assam 340

Bihar 160

Arunachal Pradesh 90

Nagaland 20

Total 247,847

DIAGRAMATIC REPRESENTATION OF RESERVES:

HIGHLIGHTS OF THE INDIAN COAL INDUSTRY:

At present, India is the third largest producer of coal in the world after China and U.S.A;

Coal is one of the primary source of energy, accounting for about 70% of the total energy requirement by the country;

India has a coal reserve of about 248 billion tones, which is approximately the highest reserve in the world;

The technology of Coal-To-Liquidation, growing the demand of coal in India; The production of better coal at the areas making the industry to flourish.

INDIAN COAL EXPORT SCENARIO:

Presently, India is not a major contributor in the field of coal export because of its low production which is not enabling the economy to export. However, there is no restriction on the export of coal under the provisions being led by the Export-Import policies formulated by the government.

INDIAN COAL IMPORT:

India import small quantity of coal which of higher heat value containing low ash principally used by the steel plants. The coals which are being imported by the country are being used by mixing with the coal produced in India.

Indian coal import is expected to decline because of the better quality of coal being produced in India and also the production of coal is rising day-by-day with the use of more modern technology in India like the use of Heavy Earth Movers Machines (HEMM) such as Shovels, Dumpers, etc. Mainly the underground mines are producing good quality coal of grade-C. The household consumption of coal is decreasing and the coal producing companies have stopped giving coal to its employees for the household consumption.

CATEGORISATION OF COAL RESOURCES:

The coal resources in India are available in the sedimentary rocks of the older Godwana formations of the peninsular India and younger Tertiary formation of the northern/north-eastern hilly region. Based on the results of the Regional/Promotional Exploration, where the boreholes are placed from 1-2 kms apart, the resources are classified into Indicated or Inferred category. Subsequent Detailed Exploration in selected blocks, where boreholes are placed less than 400 meters apart, upgrades the resources into more reliable Proved category.The Formation-wise and Category-wise coal resources of India as on 01.01.2005 are given below:(In Million Tones)

FORMATION PROVED(A)

INDICATED(B)

INFERRED(C)

TOTALD=A+B+C

Godwana Coal 92528 116984 37428 246940Tertiary Coal 432 106 369 907TOTAL 92960 117090 37797 247847

Type-wise and Category-wise coal resources of India as on 01.01.2005 are given below:

(In Million tons )

TYPE OF COAL PROVED(A)

INDICATED(B)

INFERRED(C)

TOTALD=A+B+C

I: Coking Prime Coking 4614 699 - 5313Medium Coking 11417 11765 1889 25071Semi Coking 482 1003 222 1707Sub -Total 16513 13467 2111 32091II: Non-Coking 76447 103623 35686 215756Total(I+II) 92960 117090 37797 247847

THE FUTURE PROSPECTS OF THE INDUSTRY:

As India is at the developing stage, India’s energy needs are growing at a faster rate. A year-by-year rate of growth of the country’s energy requirement is about 700%. This fact is providing the incentive to the coal industry to grow more and more. So it is expected that the demand for the coal will show an uptrend in the near future. The use of modern technology like Side Discharge Loaders (SDL), Haulpec and Load Haul

Dumpers (LHD) will enable the coal industry to mitigate the gap between the demand and supply of coal in the economy.

India has huge reserves of coal as nard when compared with others countries of the world. It is estimated to last for more than 100 years without any expedition or search for new reserves but the Central Mine Planning & Design Institute Limited (CMPDI) situated at Ranchi is the Government Undertaking which has been vested the work of the expedition for the coal reserves in India. It has been working towards the vested job by the government and the coal industry. The CMPDI has been planning for the production of the industry in various coal mines and collieries and the major initiator for the safety of the employees being working at the industry.

The introduction of new technology called “Liquidation” which converts the coal into the liquid to be used as the fuel in the energy sector will make the Coal Industry to flourish because of the higher demand for coal in the country.

In the recent times, we have been witnessing the growth of the steel industry in India and establishment of many steel plants at different parts of the country which is also contributing for the growth of the coal industry.

Indian coal industry is producing higher grade of coal with low ash-content and of higher heating value, that means, the coal quality is rising which will fetch higher value for the coal industry.

COAL INDIA LIMITED – THE PARENT COMPANY

IntroductionCoal India Limited (CIL) is the diamond name of the coal industry in India

contributing almost 86% of coal production in India. Coal India Limited is the third largest coal producing company in the world after United States and China having about 5 lakhs employees with the headquarter located at Kolkata. It is a holding company under the Ministry of Coal, Government of India, for whole of the coal industry in India.Formation & Incorporation

The COAL INDIA LIMITED was formed in 21st October, 1975 as a holding company having 5 subsidiaries and incorporated under the Companies Act, 1956 and it is now an undertaking company being shared by both government and the private players. Its main objective is to promote the development and utilization of the coal reserves in the country for meeting the present and future requirement of energy of the nation. With the objective to provide for the energy requirement by the country, Coal India Limited will give the due importance to the safety of the mines workers in the industry.

Subsidiaries of the COAL INDIA LIMITED:From the time of incorporation, COAL INDIA LIMITED was functioning as the

parent company of the 5-subsdiaries but now it is operating through 8-subsidiaries out of which 7-subsidiaries are producing ones and the 8th subsidiary is in the field of the planning and design consultancy. This includes the following:-s

1. Bharat Coking Coal Limited(BCCL)2. Eastern Coalfields Limited(ECL)3. Central Coalfields Limited(CCL)4. Western Coalfields Limited(WCL)5. South Eastern Coalfields Limited(SECL)6. Northern Coalfields Limited(NCL)7. Mahanadi Coalfields Limited(MCL)8. Central Mine Planning & Design Institute Limited(CMPDIL)

OBJECTIVES OF COAL INDIA LIMITED:

To carry on the business of the coal mining; Acquisition of coal mining; Production, sale and dispatch of coal and its by-products; Reorganization and reconstruction of the coal mines taken over by the Govt.; Policy formulation and advisory functions; To act as the entrepreneur on the behalf of the state in respect of Coal industry; To finance the replacement expenditure; To develop the technical know-how; Exploration and Prospecting; To keep control over the subsidiaries; To manufacture and sell coal as a patent fuel; To guide the coal industry from time to time.

MAIN FUNCITONS OF COAL INDIA LIMITED

To act towards achieving corporate objectives and approve and review strategies for achievement of these objectives;

To establish policies regarding the long term planning, conservation, research and development, finance, recruitment, training, safety of the mines workers, industrial relations, etc..

To set targets and monitor them; To approve budgets, determine standard cost and retention prices and evaluate

performances; To coordinate among the subsidiary companies;

To lay down overall policies regarding coal distribution; To establish board linkage to the consumers at coalfields; To maintain liaisons with the major customers; On behalf of the subsidiaries, to make the purchase of plants, equipments, etc; All imports and exports of coal to be routed through Coal India Ltd.; To operate a common goal cadre for CIL and its subsidiaries. Under this

recruitment of personnel at the level of executives would be done by Coal India Ltd only.

MAHANADI COALFIELDS LIMITED:

Mahanadi Coalfields Limited (MCL) is the subsidiary of the Coal India Limited (CIL) which was incorporated on 3rd April, 1992. The company was being formed by taking up of the assets and liabilities of the South Eastern Coalfields Limited (SECL) in respect of mining in the State of Orissa to meet the ever-growing demand for the power grade coal for the power sector. Recently the company has been honored as “MINIRATNA” by the Govt. of India.

Due to the exploration of coal mines in the state of Orissa was becoming large and the demand for coal was showing a good speed, it was difficult to handle it. So under the scheme of restructuring the parent company Coal India Limited had decided to form the new subsidiary for coal mining at Orissa under the name of MAHANADI COALFIELDS LIMITED. The Coal India Limited was being formed after the nationalization of Indian Coal industry in 1973-74. Coal India Limited acts as the holding company for the Mahanadi Coalfields Limited.

Mahanadi Coalfields Limited consisting of the two coalfields: Talcher Coalfields and Ib Valley Coalfields in the state of Orissa with its headquarter at Burla, Sambalpur under the Chairmanship of Mr.Shri Ram Upadhaya. This subsidiary was being formed to meet the demand for coal by the industries situated in the state of Orissa and the southern states of the country.

Mahanadi Coalfields Limited has achieved its target being set for the production of coal and its dispatch to the different industries in the region of its operations and it had been continuously marching towards higher profits. This is due to the rise in the production of coal, better human resources employed by the company with right kind of work and right kind of working environment both blended with the right quality of working life and life outside the workplace. Better quality of life brings satisfied workforce which ultimately leads to harmony and consequently to willful application.

Mahanadi Coalfields Limited has been pioneered in ensuring better life of 16 hours that our employees and family members spend in their houses, villages. During the 8 hour hazardous work, statutory and non-statutory safety & welfare measures has been taken at every step to ensure safety which add to the commitment and productivity.

Apart from the these, management had adopted peripheral development program, education, health cares, mobile dispensary, rural roads, drinking water facility for the population living in the vicinity of the coalfields in order to beneficiate them and to maintain a cordial relationship.

MAHANADI COALFIELDS LTD AT A GLANCE:

1. The company is situated at Jagruti Vihar, Burla, Sambalpur with sight-seeing environment and huge amount of water reserve;

2. The product of the company is coal. Registration No. : 15-03038 and the Item No. : 270112.00;

3. The major consumers of the coal produced by the company:i. Core Sector:

Power, Steel, Cement, Railways, Fertilizers, etc.ii. Non- Core Sector:

Textile, Cotton, Household, Brick Manufacturer, etc.Mahanadi Coalfields Ltd consists of 10 areas, as given below:

Talcher Area Jagannath Area Hingula Area Lingraj Area Kalinga Area Ib Valley Area Orient Area Lakhanpur Area Basundhara Area and Talabira Area

Apart from this, the company has two Central Work Shops (CWSs) at Talcher Area and at Ib Valley Area.

1. Mahanadi Coalfields Ltd produces non-coking coal of Grade-B, Grade-C, Grade-D, Grade-E, and Grade-F at its coal mines which is in operation since 100 years.

2. Mahanadi Coalfields Ltd sales its coal through the rail, road, Free On Board (Ex-Paradip) to the customers. Rail accounts for almost 75% of the total dispatch.

A new initiative has been taken for the sale of coal by the company through e-auction where the buying party will be purchasing coal through internet. The major participants in this concept would be the big parties along with the company itself.

OBJECTIVES OF MAHANADI COALFIELDS LIMITED:

To carry on the business of the coal mining; Acquisition of coal mining; Production , sale and dispatch of coal and its by-products; Reorganization and reconstruction of the coal mines taken over by the

Government; Policy formulation and advisory functions; To act as the entrepreneur on the behalf of the state in respect of Coal industry; To finance the replacement expenditure; To develop the technical know-how; Exploration and Prospecting; To manufacture and sell coal as a patent fuel.

MAIN FUNCTONS OF MAHANADI COALFIELDS LIMITED:

To act towards achieving corporate objectives and approve and review strategies for achievement of these objectives;

To establish policies regarding the long term planning, conservation, research and development, finance, recriutment, training, safety of the mines workers, industrial relations,etc;

To set targets and monitor them; To approve budgets, determine standard cost and retention prices and

evaluate performances; To ensure Environment management; To coordinate among the subsidiary companies; To lay down overall policies regarding coal distribution; To establish board linkage to the consumers at the coalfields; To maintain liasions with the major customers;

On behalf of the subsidiaries, to make the purchase of plants, equipments, etc;

MCL is responsible to deliver coal, maintain quality control and carry out after-sale service once the distribution and broad linkages are decided;

MCL is also responsible to realise sales proceeds of coal bills.

ORGANISATION STRUCTURE AND ITS APPRAISAL

Chairman-cum-Managing Director of Mahanadi Coalfields Limited is the supreme personnel of the company who is sole responsible for the affairs of the company. He is responsible and accountable for all deeds, achievements, actions and results that are to be occurred during the process of action. Chief Managing Director (C.M.D) position is the highest hierarchy of the organization. Under his supervision there are Chief General Manager of different sections and every other General Manager at each & every Area. Besides this the areas are divided into sub areas and project units, which are supervised by Sub-Area Managers and Project Officers.

The sub-areas and project units receives the direction from the General Managers and then it passes on to the subordinates. The General Managers receives the order from the Chairman-cum-Managing Director.

All the Directors are responsible to report to the Chairman-cum-Chief Managing Director who is directly responsible to the Coal India Limited. Proper control is very much essential for the good organizational structure.

FINANCIAL STRUCTURE OF THE MAHANADI COALFIELDS LTD:

CAPITAL STRUCTURE:

On 31.03.2007, the authorized Share Capital of the company stands at Rs. 500 crores, divided into 29,58,200 Equity Shares of Rs. 1000/- each and 20,41,800 10% Cumulative Redeemable Preference Shares of Rs. 1000/- each.

The paid up Equity Share Capital of the company as on 31.03.2007 stands unchanged at Rs. 186.4009 crores. The entire Equity Share Capital is being held by the parent company – Coal India Limited (CIL) and its nominees.

FINANCIAL REVIEW:

The company has recorded the highest ever gross Sales Value of Rs.6229.49 crores against Rs. 5391.33 crores of the previous years. The Profit Before Tax (PBT) has gone up to 2950.57 crores from Rs. 2600.91 crores in the previous year. Profit After Tax (PAT) for the year stands at Rs. 1946.69 crores.

The year-on-year PBT has been depicted through the graph:

PROFITABILITY (PBT) RS. IN CRORES

0

500

1000

1500

2000

2500

3000

2003-04

2004-05

2005-06

2006-07

2007-08

PROFITABILITY(PBT) RS. INCRORES

TRANSFER TO RESERVE:

An amount of Rs. 14000.00 lakhs being 10.23% of the Profit After Tax for the current year against 12610.00 lakhs of the previous year has been transferred to the General Reserve. Thus registering a 11.02% growth in the transfer to reserve for the current year against the transfer of the previous year 2006-07.An amount of Rs.140.00 Crores & Rs.165.00 Crores transfer to reserves during the year 2006-07 & 2007-08 respectively and registered 18% growth on reserves. Amount of Rs.550.50 Crs & Rs.1000.00 Crs transfer to dividend during the year2006 -07 & 2007-08 respectively and registered 82% growth on dividend.

DIVIDEND:

The company has been consistently paying its dividend through out its life of operation. The company had proudly declared a dividend of 295.33% of the paid up equity share capital for the current year amounting to Rs. 550.50 crores (interim dividend of Rs. 500 crores & final dividend of Rs. 50.50) against a dividend of 270.38% of the paid up equity share capital for the previous year amounting to Rs. 504.00 crores.

The total outflow (dividend + tax in dividend) in respect of the dividend amounted to Rs. 629.21 crores comprising of Rs. 550.50 crores of dividend and Rs. 78.71 crores towards tax on dividend. The total out flow during the year 2006-07 & 2007-08 are Rs.629.21 Crs & Rs.1169.95 Crs and registered 80% growth.

The year-on-year dividend pay-out by the company has been depicted in the following diagram:

UNSECURED LOANS:

The amount due to Coal India Limited (CIL) as on 31.03.2007 stands at Rs.170.06 crores out of which loan of Rs. 159.13 crores pertains to IBRD & JBIC.

The balance of amount due to M/s. Liebherr, France SA, France stands at Rs.10.93 crores for the supply of four Hydraulic Shovels.

INVESTMENTS:

As per the tripartite agreements with State Electricity Boards (SEBs), in the year 2003-04 the company had invested in 8.5% Tax Free Power Bonds (unquoted long term investment) of the nominal value of Rs. 34432.00 lakhs at the starting of the financial year. During the year, Rs. 3443.20 lakhs being one-tenth of the investment has been redeemed resulting in the balance of Rs. 30988.80 lakhs of investment as on 31.03.2007.

The investment is made in the bonds issued by the Maharashtra state Electricity Board, Tamil Nadu Electricity Board, West Bengal Power Development Corporation Limited.

CAPITAL EXPENDITURE:

During the year 07-08 the total capital expenditure of the company has amounted to Rs. 276.16 crores against the previous year’s capital expenditure of Rs. 266.87 crores. Hence growth is 3%.

Major capital expenditure has been made with respect to the recent developments of the expansion of production for the Ananta Open Cast Project at the Jagannath Area under Talcher Coalfields, Bhubaneswari Open Cast Project, Kaniha Open Cast Project, Hingula Expansion – II, etc.

COALFIELDS UNDER THE PURVIEW OF MCL:

Mahanadi Coalfields Ltd has been formed by taking up of assets and liabilities from South-Eastern Coalfields Ltd to ensure better mining in the state of Orissa. It is comprises of two coalfields: a) Ib Valley Coalfields, b) Talcher Coalfields.IB

VALLEY COALFIELDS

The Ib Valley Coalfields has derived its name from the Ib river, a tributary of the Mahanadi river. The Himgir field lies on the north-west. This coalfields lies between latitude 210 41’ and 220 06’ and longitude 830 30’ and 840 08’ covering an area of about 1375 square kms. It has a coal reserve of 21.680 billion tones.

This coalfield is a part of large Gondwana basin of Raigarh-Himgir and Chhattisgarh Coalfields (Mahanadi Valley) and forms its South Eastern most member.

Coal potentiality of this coalfield was being investigated as early as 1871-75 by Mr. V. Ball of Geological Survey of India. Some works has also been done by Mr. W. King during 1884-86. During 1900-01 exposures of various seams were found while constructing bridge over the river Ib on the Bombay-Howrah Railway line. Geological Survey of India undertook further work. During 1977 the CMPDIL entrusted the Directorate of Mining & Geology (Govt. of Orissa) for the detailed exploration of the coalfield.

TALCHER COALFIELDS

Talcher Coalfields was first discovered at Gopal Prasad in the year 1837. Later on Geological Survey of India surveyed and mapped in 1855. M/s Villers Ltd opened M/s East India Prospecting Syndicate in Talcher town in 1920 and Handidhua Colliery in 1921. NCDC opened mines at South Belanda, Nandira and Jagannath in the year 1960, 1962 and 1972 respectively. After the formation of the Coal India Limited all mines were ion Central Coalfields Limited, then it was been under the vicinity of South Eastern Coalfields Limited and now it is under the purview of the Mahanadi Coalfields Limited since 1992. Production of coal at this coalfield rose from 0.91 mts in 1972-73 to 33.10 mts in 2001-02.

DIAGRAMMATIC REPRESENTATION OF THE MCL:

MAHANADI COALFIELDS LIMITED

IB VALLEY COALFIEDS

IB VALLEY AREA

ORIENT AREA

BASUNDHARA AREA

LAKHANPUR AREA

TALABIRA AREA

TALCHER AREA

JAGANNATH AREA

BALARAM AREA

LINGARAJ AREA

HINGULA AREA

TALCHER COALFIELDS

STRUCTURE OF MCL OPERATING COALFIELDS AND ITS RESPECTIVE OPERATING AREAS

DEPARTMENTS OF MAHANADI COALFIELDS LIMITED & THEIR FUNCTIONS:

PRODUCTION DEPARTMENT:

The production department is directly under the control of Director (Technical) and is headed by the CGM (Production). The department’s functions are further divided among various sub departments, viz. underground production department, open cast production department, excavation department, E&M department, etc headed by their respective General Managers.

GM(Underground) is responsible for all the operations concerning the production of coal from the underground mines of the company and GM(Open Cast) is responsible for the production affairs of the opencasts mines. The functions of the respective GMs are to set the production targets as recommended by the CIL and the CMD of the company. GM(Excavation) is responsible for monitoring the removal of the overburden in the open cast mines and management of various equipments used at the open cast mines. Whereas the GM(E&M) is responsible for the management of the various equipments being used by the underground mines and also for providing ventilation and other facilities in the underground mines.Process of Mining:

Generally, there are two broad methods of mining: a) Open Cast Mining and b) Underground Mining. Normally, the economics of coal mining decides the method of mining to be followed for a particular project whether the underground mining to be followed or the method of opencast mining. The economics of coal mining is based on the thickness of the overburden and the seam’s nature.However, the open cast mining have some of the major advantages over the underground mining, which are mentioned below:

a) The percentage of coal extraction is much higher;b) It is safer in operation than underground mining;c) It is least prone to mechanization;d) The build up of production is much higher.

In spite of all the above advantages, the underground mining has not been ignored. Though the Indian condition favours for the opencast mining and also the fact that the opencast mining are more economical than underground mining, the underground mining holds the importance as in India, the superior quality coal is normally available

in thin seams and greater depth. This is one of the main reasons why the underground mining holds its importance and the coal being produced at the opencasts are of detoriated quality because of the exposures to dirt and overburdens.Opencast Mining:

This method of coal extraction is superior and us the oldest form of coal extraction which is dominating the coal industry till now also. There are 13 opencast mines in the vicinity of the company. The major machineries used in this form of mining is the Heavy Earth Movers Machines (HEMMs) like Shovels, Draglines, etc.

Underground Mining:This comprises of mainly two methods of coal extraction:

BoardJRoom & Pillar method Long-Wall method

Basically, a coal deposit is divided into pillars by a network of tunnel of coal. When these pillars are small, the method of working is called Board (Room) & Pillar method and when these pillars are very big, the method of working is called “Long-Wall” method. Coal from these pillars is extracted through tunnels known as Boards or Galleries. If the coal seam has no breakage up to 1 to 2 kms, the property is preferred to be worked by Long-Wall method where as if the coal seam occurs in patches, parted by stones, it is worked by the method of Board & Pillars.

Year-on-year production of the company is increasing. The main increase in production is shown by the opencast project due to high productivity at these projects. This year the opencast projects had produced Mts of coal by surface miner. The opencast production had shoe the figure mts where at it was 47.58% mts in the previous year 2006-07.

COAL PRODUCTION IN MILLION TONNS

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2003-04 2004-05 2005-06 2006-07 2007-08

TARGET

ACTUAL

CORPORATE PLANNING & PROJECT DEPARTMENT

The Department of “Corporate Planning & Project”, headed by Chief General Manager (Corporate Planning & Project), is the prime planning unit of the company. This division not only plans for the project, but also monitors at various stages of approval system for the projects under proposals until CIL board and Govt. of India approves the project. Then the acquisition of the land for project and environment management becomes the responsibility of the department to carry out. Rehabilitation of the land pushes, payment of compensation and other operations till the start of the project and then the survey of the ongoing projects, all forms part of functions performed by the department.

Hierarchy and Structure:

The department of “Corporate Planning & Project” is headed by one ChiefGeneral Manager (Corporate Planning & Project) who reports to CMD of the company. Deputy GM(L&R) coordinated by his subordinates SE(Civil), Senior Personnel Officer, Senior Revenue Inspector; Deputy Chief Engineer (CP&P); Supdt. Of Mines; Deputy GM (Diversification) coordinated by the Manager (Diversification); Supdt. Geologist; Deputy Chief Mining Engineer; Conservative Officer (Forest); Chief Engineer (Environment) subordinated by Executive Engineer(Environment), Senior Under Manager, Deputy Chief Geologist, Senior Engineer (Civil).Assets the cam (CP&P) is his day to day duties/function.

FUNCTIONS OF THE CORPORATE PLANNING & PROJECT DEPT:-

The function of the Corporate Planning & Project department is very crucial from the production point of view. Generally, they use to carry out the explorationprogramme to tune with the project report preparation & coordinate the exploration done by CMPDIL with State Govt., and control Govt. agencies like MDEF, ministry of Rail etc.

The main functions of the department are being categorized into two:1. In case of ongoing projects or completed projects:

Being the prime planning department of the company, it sets the targets and drafts plans for the various projects and units, on the basis of the direction prescribed by the CIL.

Quarterly review of the performance of the various projects to trace the deficiencies and ensure corrective measures.

Regular surveys to estimate the existing reserves of various mines in order to estimate the steps needed to enhance the production.

Taking measures for the effective environmental management and creating awareness among the people.

Master planning of the coalfields including infrastructure planning like roads, railways, etc.

Preparation of the 5-year plans/annual plans to be followed by the Company. Monitoring the matters related to the captive mine blocks. Timely submission of the project report to the CMPDIL, etc.

2. In case of projects under approval:

While ongoing projects exhausts the existing reserves, planning for new projects becomes quite essential to the meet the demand for coal. The department performs the following functions in this behalf:

Recording and affirming the data collected by the “Geological Survey of India” and CMPDIL about the explorable reserves in the command area of the company;

Hiring CMPDIL for preparing the project report about the geological survey of the explored reserve, etc;

Initializing the approval for the new projects and monitoring the progress of the project seeking the approval from the MCL board, CIL board and the Govt. of India;

Negotiating with the prospective customers; Taking necessary actions for the acquisition of land for the project, payment of

compensation and rehabilitation to the land trustees, etc. Monitoring each and every aspect of the proposed new project till its

completion; Master planning of the coalfields including infrastructure planning like roads,

railways sidings, CHP’s etc primarily essential for coal evaluation. Preparation of the 5-year plans/annual plans to be followed by the Company. Monitoring the matters related to the captive mine blocks. Timely submission of the project report to the CMPDIL, etc.

SAFETY DEPARTMENT

Human concerns particularly for the welfare and safety of the employees are of the prime importance at the organization. The department is headed by the Chief General Manager (Safety) who along with his team of mining engineers, is responsible for various safety measure to be taken at each and every unit of the coalfields. They are responsible for taking the preventive measures in order to avoid accidents at the mines or units of the company. They have performed their duty very well resulting in the lowering down of the accident at the working places. This year (2006-07) company had witnessed only 2 fatal accidents which 4 times lesser than the accidents occurred during the previous year. Some of the following measures have been taken to ensure safety of the employees:-To prevent accident from fall of roof and sides: -

Introduction of the steel support for better roof-control in the forms of props and bots, etc;

In case of continuous seams, the panel barriers are maintained in vertical coincidence;

Regular dressing and support of the over-hangs; Deployment of personnel only after half an hour of the blast;

To prevent accident from rope haulages: -

Keeping all safety devices such as stop blocks, drags,’ runway switches, manholes, etc;

Strict enforcement of the Coal Mines Regulation Act 1957’s directions, prohibiting unauthorized entry in rope-haulages;

Timely-timely inspections of the haulage ropes, etc.

To prevent spontaneous heating of coal: -

Use of special sealant on fires stopping; Use of gas chromatograph and other precise instruments; Frequent inspections of the identified fiery mines.

To suppress dust: -

Creating and maintaining provision for the supply of water from the surface for the suppression of the dust at the faces;

Regular sampling and analysis to monitor the level and quality of dust.

Additional measures: -

The mines are made compulsory to follow a safety week at each and every month;

Close monitoring of accidents-prone mines by the Internal Safety Organization(ISO).

MATERIAL MANAGEMENT DEPARTMENT:

The Material Management Department is primary concerned with the purchases to be made by the company whenever the need for the material arises. It performs the duty of the procurement of equipments and their spares and their stores arrangement to make these available to the departments/areas according to their needs. The Material Management Department is divided into Purchase & Stores Department.

Purchase Department

The purchase department is directly under the control of Director (Technical). The Chief General Manager (Purchase) is assisted by a team of purchase, executives and associates finance to retire the responsibilities of the department. There are separate cells for indent- processing, tender-evaluation and follow up activities under the charges of thePurchase Officers.

The prime function of the purchase department is to make arrangements for the procurements of the equipments, stores and spares according to the indent of the concerned department with a view to help in the continuation of the production by obtaining the correct supplies in time and thus contribute towards total productivity.

The purchase of materials as per the requirement is arranged in the following steps:

Calling for the tender Operating DGS&D rates-contracts; Placing order with appropriate authorities for the controlled commodities; Placing the repeat orders.

Types of equipments & stores to be procured: -

The equipments/stores needed by MCL can be classified into: Capital equipments/stores purchased by the CIL;Items purchased by the MCL based on the specific needs. The purchase by the Coal India Limited is made in accordance with the indents

submitted by the subsidiaries. The items generally purchased centrally includes: -o Those items whose costs are relatively higher like HEMMs and

who acquisition needs the prior approval of the Chairman, CIL & Govt. of India;

o Imported items, whose imports needs the prior approval from the Govt of India;

o Controlled commodities like steel, cements, etc.

All others items are being procured by the company itself whenever the need for the material arises by the Material Management Department.

Stores Department

Stores play the vital role for the smooth production in the company. The main role of the stores department is to provide the necessary materials required for the production in the areas where there is a need for such materials. This department is responsible for the supplies of required material. The department is headed by the ChiefGeneral Manager (Stores) under the supervision of the Director (Finance). CGM (Stores) is assisted by the Dy. SMM (Stores), Senior Stores Officers and a team of other personnel in order to discharge their liabilities. Some of the chief functions performed by thedepartments are as stated below: -

Estimation of the material requirements and preparation of budgets; Provision for the better storage and preservation of the various items; Meeting the demand of the concerned department by proper issue and accounts

for the consumption; To highlight stock accumulation, discrepancies and abnormal consumption and

effect measures to control it; Proper standardization and codification of various equipments/stores; To assist the verification of the stock, and providing information for the

effective purchase action and many other functions such as scrap disposal, etc;

At the level of Area, the General Manager is responsible for the stores, who are assisted by the Staff Officers (MM) and Depot Officers (MM) who retires the functions of the General Manager with respect to the functioning of Stores.

Inventory Control Technique: -

The Material Management department of the company follows the technique of “ABC Analysis” in order to control its materials and stores. The company had categorized the material it requires into three categories: A, B, C

Category A: - This category of inventory forms only 10% of the total inventory but it cost the money value of 70% of the total inventory. Ex: - Spares of HEMMs.

Category B: - This category of inventory forms 30% of the total inventory, whose value can be turned out to be 20% of the total money value.

Category C: - This category of inventory forms the 70% of the total inventory but costs the least of about 10% of the total money value of the inventory in the company.

SALES & MARKETING DEPARTMENT:

The coal being the main input for the manufacturing concerns for their need for the energy and for the smooth functioning of the concern and for the continuous production, they need continuous supply of the coal. The Sales & Marketing department of MCL is concerned with the sales of coal to the party. Generally, they are concerned about the how to meet the demand of various sectors.

Hierarchy & Structure

Being the most eminent department of the company, it is directly under the control of the Chairman-cum-Managing Director of the MCL. The department has been bifurcated into separate departments known to be ‘Sales & Marketing’ and ‘QualityControl’, both headed by their respective Chief General Managers.

The hierarchy of the department starts with the General Manager(Sales & Marketing) under whom there are the Deputy Chief Finance Manager (2 nos.) coordinated by Deputy Finance Manager; Deputy Chief Sales Manager (3 nos.) subordinated by Sales Manager (3 nos.), Deputy Sales Manager, Sr. Sales Officer; Manager (Statistics).

FUNCTIONS OF THE DEPARTMENT:

The department performs the important function of trading the product produced by the company. They have to keep track of the coal dispatch to the sector which needs coal and orders for the same. Some of the job being performed by the Sales & Marketing Department at the company level is as follows:-

To issue coal by rail for linked Core & Non-Core Sector and e-booking consumers;

Dispatch of coal through all other modes from colliery to the linked Core or Non-Core Sectors and e-booking consumers;

Signing of agreement with linked Core/Non-Core Sector consumers; To ensure timely billing of all dispatches; To ensure timely issue of credit notes against any excess billing; Arranging timely refund of excess payment to road sale consumers; Verification of units as and when required; Maintaining good and harmonious relationship with consumers and buyers; To ensure quality and quantity dispatches of coal to all consumers; To keep and maintain all records for future reference in regard to dispatch of

coal; To do proper sampling as per the 1ST standard; Declaration of grade; Realization of coal sales dues; Liaison between Ministry of Coal and Coal India Ltd on all matters related to the

dispatches.

Major customers of MCL:

MCL has been selling coal mainly to the following consumers:a) Core Sectorb) Non-Core Sectorc) Others/Traders

Coal to the Core sector comprising of Power, Steel, Cement, Fertilizers,Aluminium, Public Sector Undertakings, Export, etc.

After the deregulation of coal with effect from 01.01.2000, non-core sector has been laid less importance and the coal released to the sector on the basis of Maximum Permissible Quantity (MPQ) determined on year-on-year basis, being highest lifting in the preceding 3 years.

Marketing Strategies followed by the Company:

CIL/MCL has taken the decision to start a new scheme for the sale of coal through ‘e-auction’. This new scheme was implemented in MCL with effect from April 2005. Under this scheme, two service providers namely, M/s. MSTC Ltd and M/s. Metal Junction Services Ltd were entrusted with the job for conducting the e-auction in the company.

Under this scheme, the consumers have to bid for the quantity at the market driven prices of coal without any formalities. The “Floor Price” is fixed at 20% above the notified price and the consumers were required to bid at price higher than floor price.

Beside the above scheme company directly market its products to different sectors that require coal for carrying out their business activity. In addition, MCL follows other schemes such as URS/LSS/OSS, etc where the customers have to book the quantity of coal required and then they are permitted to lift coal directly from the production units or areas. Even coal trading is permitted to the consumers who takes coal in a large quantities.

PERSONNEL DEPARTMENT: -

The department mainly concerned with the welfare of the employees. Thefunctions of this department is assumed to be crucial because “Happy Employees,Brighter the Company.” They performs the function of ‘Being the medicine for theof the Employees.’ The company has made the provision for the all rounddevelopment of the employees at the organization. The personnel departments also presentthe each and every area of the coalfields in the company which performs the functions

of making bills for the employees which will help the company to pay the salary and alsothe employees to know how much salary they are drawing.The department is responsible to keep adequate knowledge of the employees.They are responsible for taking proper steps for the solution of the problems of theemployees.

Hierarchy & Structure:

The Personnel Department is being headed by the Director (Personnel) subordinated by the Personnel Manager/Technical Secretary to Director (P) co worked bythe Personnel Secretary to Director(P) at the one end & at the other end, he is beingassisted by the GM (MP&W) co-worked by the Deputy Chief Personnel Managerassisted by PM (MP) & PM (Welfare); GM(A&EE/IR) subordinated by the PM(IR), PM(EE), Senior PO(Adm.) & GM (Legal) assisted by the Senior PO(Legal).

FUNCTIONS OF THE DEPARTMENT:

The global market made the competition very tense and it is difficult to sustain the competition. This leads to the evolution of Human Resource Management.

The department is mainly formed for the HUMAN RESOURCE MANAGEMENT in order to boost the morale of employees which results for the allsatisfaction and development of the employees which will fruit with the rise in the production at the collieries and project units.MCL provides different types of facilities like:-

Medical Facility:-

Medical care assumes much importance in hazardous industries like mining. MCL realizing this has been instrumental in bringing state of art medical facilities at its doorstep with 2 central hospitals at each of the coalfields. In addition, it runs 16 dispensaries 4 hospitals with 101 doctors using 38 ambulances and 2 Mobile Medical vans for emergencies. A medical College is also on the cards to be opened at NSCH, Talcher. Apart From free medical re-imbursement to its employees and their wards, MCL has also tied of with prominent medical institutions of the country for referral cases requiring super specialized treatment.

Education Facility of MCL:-

MCL is committed to provide quality education not only to its employee’s wards but to the general public. Its 9 DAV School cater to 8265 students out of whom 2612 students are non MCL wards. In 2008-09 MCL spent a total of Rs. 6.78 crores as education grants to its 9 DAV Schools, 1 College an IGIT, Sarang and OSME, Keonjhar.

Concern for Employees:-

MCL believes in providing the best of welfare amenities to its employees and their families. MCL has constructed 16622 houses with 12 playgrounds and 9 children parks in its well laid down townships. MCL has built recreation clubs and workers institutes for the recreation of the employees in each of its townships. The Mahila Mandals of MCL and the ladies clubs organize social activities for the benefit of the wives of the employees. Canteens are run by the company coalfields for the workers. To combat the oppressive heat in the mining areas MCL is in the process of installing ACs in all its 34 canteens and in all heavy machine equipments to provide relief to the workers. MCL also has a well structured 3-tier industrial relation system i.e. at the unit level, area level and at the corporate level which has also been instrumental in the growth of the company.

Corporate social responsibilities:-

In corporate social responsibilities (CSR) MCL has spent a total sum of around Rs.290.00 crores since its inception. MCL’s CSR encompasses activities ranging from integrated water supply scheme, construction of highways, public utility roads, community centers, hostel for SC/ST students, stadia, railway lines, etc. MCL also renders preventive health care programmes, free eye-camp, village heath programmes, family welfare programmes, etc. MCL has also undertaken periodical free check-up camps among project affected villages through mobile medical vans on a regular basis. Free OPD facility is also being provided to project affected villages and weekly health check-up at the village levels through mobile vans in on the anvil.

Concern for the environment:-

Mining being an environmentally hazardous industry, MCL gives environmental protection as one of the top priority. MCL till 2008-09 has planted 4.71 million trees in mining areas and colonies. MCL is the forerunner in land reclamations and eco-restoration with concurrent back filling of decoaled areas in time. MCL was the 1st company to introduce the eco-friendly surface miner in 1999, which completely eliminates drilling, blasting and crushing operations. In 2008-09 MCL produced 46% coal through surface miners. To further control population, MCL utilizes mobile water sprinklers, fixed automatic sprinklers, instant showering system, enclosures and mist spraying arrangements at CHP, developing of Green Belts etc. Clean water is being provided by the integrated water supply scheme installed at both the fields. All industrial water requirements are met from water stored in mine reservoirs/worked out quarries as part of our water conservation programme. All

industrial waste water are treated through mine discharge treatment plants, sedimentation ponds, oil and grease traps in workshops, domestic effluent treatment plant in colonies and garland drain around quarry & dumps. Routine monitoring is being done through specialized agencies who have also been engaged for modulating of mine closure and land use pattern by remote sensing of 14 nos. of mines and two coalfields at three years interval. A feather in the cap was when 6 units of MCL were accredited with the

ISO:- 14001 certification for environmental management system.

Chapter-3

WORKING CAPITAL MANAGEMENT

INTRODUCTION

CONCEPT OF WORKING CAPITAL

OPERATING CYCLE

ISSUES IN WORKING CAPITAL MANAGEMENT

INTRODUCTION

Capital required for a business can be classified under two main categories viz ,(A) Fixed Capital, and(B) Working capital.

Every business needs funds for two purposes-for its establishment and to carry out its day to day operation. Long term funds are required to create production facilities through purchase of fixed assets such as plant, machinery, land, building, furniture, etc. Investments in these assets represent that part of firm’s capital which is blocked on a permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day to day expenses, etc.. These funds are also known as working capital. In simple words, working capital refers to – “It is that part of firm’s capital which is required for financing short term or current asset such as cash, marketable securities, debtors and inventories”.

In the words of Shubin, “Working capital is the amount of funds necessary to cover the cost of operating the enterprise”.

According to Genestenberg, defines the working capital as “It is the difference between inflow and outflow of funds or it is the net cash inflow or it can be defined as the excess of current assets over current liabilities and provisions.

Funds, thus, invested in current assets keep revolving fast and are being constantly converted in short period of into cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital. The term current assets refer to those assets, which can be easily converted into cash within short period of time generally one year, such as marketable securities, bills receivables, sundry debtors, inventories, work-in-progressed. Period expenses should also include in current assets because they represent made in advance which will not have to pay in near future.

The major current assets are as follow:-a. Cashb. Marketable securities(short-term)c. Account receivabled. Loans and advancese. Inventoriesf. Raw materials and componentsg. Work in progressh. Finished goods i. Others Prepaid expenses

Current liabilities are those liabilities, which are included at their inception to be paid in the ordinary course of business within a year, or short period of time.

The basic current liabilities are as follows:-

I. Accounts payableII. Bills payable

III. Bank overdraftIV. Outstanding expensesV. Dividend payable

VI. Short term advancesVII. Income-tax payable

Working capital may be classified in two ways(a) Concept based working capitals(b) Time based working capital

Concepts of working capital

1. Gross working capital: it refers to the firm’s investment in total current or circulating assets.

2. Net working capital:The term “Net working capital” has been defined in two different ways:

I. It is the excess of current assets over current liabilities. This is, as a matter of fact, the most commonly accepted definition. Some people define it as only the difference between current assets and current liabilities. The former seems to be a better definition as compared to the later.

II. It is that portion of firm’s current assets which is financed by long term funds. 3. Permanent working capital: This refers to that minimum amount of investment in all

current assets which is required at all times to carry out minimum level of business of activities. In other words, it represents the current assets required on a continuing basis over the entire year.

4. The amount of such working capital keeps on fluctuating from time to time on the useless activities. In other words, it represents additional current assets required at different times during the operating year. For example, extra inventory has to be maintained to support sales during peak sales period. Similarly, receivable also increase and must be financed during period of high sales. On the other hand investment in inventories, receivables, etc, will decrease in periods of depression.

Suppliers of temporary working capital can expect its return during off season when it is not required by the firm. Hence, temporary working capital is generally financed from short term sources of finance such as bank credit.

Temporary or variable working capital

Working capital

TIME

Temporary or variable working capital

Permanent of fixed working capital

Time

Permanent of fixed working

Working capital

5. Negative working capital: this situation occurs when the current liabilities exceeds the current assets. It is an indication of crisis to the firm.

Need for working capitalWorking capital is needed till a firm gets cash on sale of finished products. It depends on two factors:

1. Manufacturing cycles i.e. time required for converting the raw material into finished product: and

2. Credit policy i.e. credit period given to customers and credit period allowed by creditors. Thus, the sum total of these times is called an “OPERATING CYCLES” and it consists of the following six steps;

i) Conversion of cash into raw materials.ii) Conversion of raw materials into work-in process iii) Conversion of working process into finished products iv) Time for sale of finished goods-cashes and credit salesv) Time for realization from debtors and bills receivables into cashvi) Credit period allowed by creditors for credit purchased of raw materials,

inventory and creditors for wages and over heads.

Chart for operating cycles or working capital cycle

In case of trading concerns, the operating cycle will be:Cash Stock Debtors Cash.

In case of financial concerns, the operating cycle will be:Cash Debtors Cash only.

DETERMINANTS OF WORKING CAPITAL:The factors influencing the working capital decision of a firm may be classified as two groups , such as

I. Internal factorsII. External factors

The internal factors includes i) Nature and size of the businessii) Firm’s production policyiii) Firm’s credit policyiv) Availability of creditv) Growth and expansion of business vi) Profit margin and dividend policyvii) Operating efficiency of the firmviii) Coordinating activities in firm

The external factors include:i) Business fluctuationsii) Changes in the technologyiii) Import policiesiv) Infrastructural facilitiesv) Taxation policies

The factor are discussed in brief in the following lines(1) Internal factors:

a) Nature and size of the businessThe working capital requirements of a firm are basically influenced by the nature and size of the business. A firm with larger scale of operations will need more working capital than a small firm. Service firms like a transport corporation, which has a short operating cycle and which sale predominantly on cash basis has a modest working capital requirement. On the other hand manufacturing concerns like a machine tools unit, which has a long operating cycle and which sales largely on credit have very substantial working capital requirements.

b) Firms production policiesThe firm production policy is an important factor to decide the working capital requirements of the firm. The production cycle starts with the purchase and use of raw

materials and completes with the production of finished goods. On the other hand production policy is uniform production policy or seasonal production policy etc, also influence the working capital decision.

c) Firms credit policyThe credit policy of a concern in its dealing with debtors and creditors influences considerably the requirement of working capital. Concerns that purchase its requirement on credit and sales its product on cash require lesser amount of working capital. On the other hand a concern buying its requirement for cash allowing credit to its customer, shall needed a larger amount of working capital as very huge amount of funds are bound to be tied up in debtor or bills receivables.d) Availability of credits

The working capital requirements of a firm or also affected by credit terms granted by its suppliers i.e. creditors. A firm needs less working capital if liberal credit terms are available to it. A firm which can get bank credit easily on favorable conditions will be operated with less working capital that a firm without such a facility.Growth and expansion of businessThe working capital requirement of a concern increases with the growth and expansion of its business activities. Although, it is difficult to determine the relationship between the growth in the volume of business and growth in the working capital of a business, yet it may be concluded that normal rate of expansion in the volume of business e)Profit margin and dividend policySome firm with high earning capacity may generate cash profits from operation and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. A firm that maintain a steady high rate of cash dividend irrespective of its generation of profits needed more working capital than the firm that retain larger part of its profits and does not pay so high rate of cash dividend. f)Operating efficiency of a firmOperating efficiency means “the optimum utilization of a firm’s resources at minimum cost”. If a firm successfully controls operating cost, it will be able to improve net profit margin which will in turn release greater funds for working capital purposes.g)Coordinating activities in firmThe working capital requirements of a firm are depend upon the coordination between production and distribution activities. The greater and effective the coordination, the pressure on the working capital will be minimized. In the absence of coordination, demand for working capital is reduced.External factors:

a. Business fluctuationMost firm experiences fluctuations in demand for their products and services. These business variations affect the working capital requirement. Under boom, additional investment in fixed assets may be made by some firms to increase their productive capacity. This act of the firm will require additional funds. On the other hand when there is a decline in economy sales will come down and consequently the conditions, the firm try to reduce their short term borrowings.

b. Change in the technologyThe technological changes and developments in the area of production can have immediate effects on the need for working capital. If the firm wish to install a new machine in the place of old system, the new system can utilize less expensive raw materials, the inventory needs may be reduced thereby working capital needs.

c. Import policyImport policy of the government may also affect the level of working capital of a firm since they have to arrange funds for importing goods at specified times.

d. Infrastructural facilitiesThe firms may require additional funds to maintain the levels of inventory and other current assets, when there is a good infrastructural facility in the company like transportation and communications.

e. Taxation policyThe tax policy of a government will influence the working capital decisions. If the government follows regressive taxation policy i.e. imposing heavy tax burden on business firms, they are left with very little profits for distribution and retention purpose. Consequently the firm has to burrow additional funds to meet their increased working capital needs. When there is a liberalized tax policy, the pressure in working capital requirement is minimized.

Thus, the working capital requirements of a firm are influenced by the internal and external factors.

Advantages of adequate working capitalWorking capital is the life blood and nerve centre of a business justas calculation of blood is essential in the human body for maintaining life, working capital is very essenial to maintain the smooth running of a business. No business capitals can run successfully without an adequate amount working capital are as follows:

1) Solvency of the business: Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

2) Goodwill: sufficient working capital enables a prompt payments and hence helps in creating and maintaining goodwill.

3) Easy loans: a concern having adequate working capital high solvency and good credit standing can arrange loans from bank and others on easy and favorable terms.

4) Cash discounts: adequate working capital also enables a concern to avail cash discount on the purchases and hence it reduces costs.

5) Regular supplies of raw materials: sufficient working capital ensures regular supply of raw materials and continuous production.

6) Regular payment of salaries wages and other day to day commitments: a company which has ample working capital can make regular payment of salaries, wages and other day to day commitments which raises the moral of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits.

7) Exploitation of favorable market condition: only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.

8) Availability to face prices: adequate working capital enables a concern to face business prices in emergencies such as depression because during such periods generally much pressure on working capital.

9) We can regular return on investment: every investors wants a quick a regular return on each investment. Sufficiency of working capital enables concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back.

10) High morals: adequacy of working capital creates an environment of security, confidence, high morals and creates overall efficiencies in a business.

Excess or inadequate working capitalEvery business concerns should have adequate working capital to run its business operations. It’s should have neither redundant or excess working capital nor inadequate or shortage of working capitals, both excess as well as short working capitals position are bad for any business. However out of the two it is the inadequacy of working capital which is more dangerous from the point of view of the firm.Disadvantages of redundant or excessive working capitals

i) Excessive working capital means ideal funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investment.

ii) When there is a redundant working capital it may lead to unnecessary purchasing and accumulation of inventories causing more chances of thefts, waste and losses.

iii) Excessive working capitals implies excessive debtors and defective credit policies which may cause higher incidence of bad debts.

iv) It may results into overall inefficiencies in the organization .v) When there is excessive working capitals, relations with banks and other

financial institutions may not be maintained.vi) Due to lower rate of return on investment the value of shares may also fall.vii) The redundant working capital gives rise to speculative transactions.

Disadvantages of dangers of inadequate working capitali) A concern which has inadequate working capital cannot pay its short term

liabilities in time. Thus, it will lose its reputation and shall not be able to get good credits facilities

ii) It cannot buy its requirements I bulk and cannot avail of discounts, etc.iii) It becomes difficult for the firm to exploit favorable market conditions and

undertake profitable projects due to lack of working capitals.

iv) The firm cannot pay day to day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business.

v) It becomes impossible to utilize efficiently the fixed assets due to unavailability of liquid funds.

vi) The rate of return on investments also fall with shortage of working capitals.ss

WORKING CAPITAL MANAGEMENTDecisions relating to working capital and short-term financing are referred to as working capital management. These invoice managing the relationship between a firm’s short-term liabilities. The goal of working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. By definition, working capital management entails short-term decisions generally, relating to the next one year periods- which are “reversible”. These decisions are therefore not taken on the same basis as capital investment decisions (NPV or related, as above) rather they will be based on cash flows and/or profitability.

MANAGEMENT OF WORKING CAPITALManagement will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short-term financing, such that cash flows and returns are acceptable.

Cash management identifies the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory management identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials – and minimizes reordering costs- and hence increases cash flow; see supply chain management; just in time (JIT);economic order quantity (EOQ); economic production quantity(EOQ).

Debtor’s management identify the appropriate credit policy i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on capital (or vice-versa);see discounts and allowances.

Short term financing identify the appropriate source of financing, given the cash conversion cycle. The inventory is ideally financed by credit granted by the suppliers; however it may be necessary to utilize a bank loan (or overdraft)or to “convert debtors to cash “through “factoring”

CONCEPT OF WORKING CAPITAL

Each concepts of working capital has two dimensions. One is time and another is money. When it comes managing working time of money, if MCL can get money to move faster around the cycle or reduce the amount of money tied up, the business will generate more cash or it will need to borrow less money to found working capital .As a consequence it will reduce the cost of bank interest. There are two concepts of working capital :-

Gross Working Capital Net Working Capital

Gross Working Capital:- This capital refers to the firm’s investment in current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash, short-term securities, debtors, and stocks.

The table below shows the gross working capital of MCL from 2007 to 2010 i.e. of four accounting year:-

A GLANCE AT MCL’S CURRENT ASSETS

CURRENT ASSETS As on 31/3/10 As on 31/3/09 As on 31/3/08 As on31/3/07

(a)Inventories

(b)Loans and advances

(c)Sundry debtors

(d)Cash & bank balances

(e)Other current assets

45272.22

357890.13

1282.65

750701.43

26792.87

51819.51

302152.27

4663.56

577330.21

24109.57

35489.64

260640.27

13957.51

346163.78

27496.94

26359.49

239386.36

8879.00

242767.01

7875.41

Total 1181939.30 960075.12 683748.14 525267.27

Net working capital:- This refers to the difference between current assets and current liabilities those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceeds current liabilities. Negative net working capital occurs when current liabilities are in excess of current assets.

GLANCE Of MCL’s NET WORKING CAPITAL

AS ON 2009-10 AS ON 2008-09 ASON 2007-08 AS ON 2006-07

(a) Inventories (b)Loans & Advances

(c)Sundry Debtors

(d)Cash & Bank Balances

(e)Other Current Assets

Total Current Assets Current liabilities

a) Sundry creditors

b)Employees remuneration & b benefits

c) Other expenses

d) Statutory dues

e) Other liabilities & provisions

Total current liabilities

Net working capital

45272.22

357890.13

1282.65

750701.43

26792.87

51819.51

302152.27

4663,56

577330.21

24109.57

35489.64

260640.27

13957.51

346163.78

27496.94

26359.49

239386.36

8879.00

242767.01

7875.41

1181939.30 960075.12 683748.14 525267.27

10287.12

60787.60

13569.35

10979.29

706872.46

10767.55

54153.89

14963.08

12779.40

517289.67

8909.61

23672.88

6982.43

14219.45

324172.82

8313.65

29208.35

6809.14

11674.06

212265.61

810370.73 611170.02 382764.30 272929.39

371568.57 348905.10 308388.21 252337.88

OPERATING CYCLEThe need of working capital to run the day-to-day business activities cannot be overemphasized. The firm asset has to invest enough funds in current assets for generating sales. Current assets are needed because sales don’t convert into cash instantaneously. There is always an operating cycle involved in the conversion of sales into cash.

Operating cycle is the time duration to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of MCL includes three phases: -

(1) Acquisition of resources, such as raw material, labour, power, and fuel etc.(2) Manufacture of the product which includes conversion of raw materials into

work-in-progress.(3) Sale of the product either for cash or credit.

A credit sale creates accounts receivables for collection.

The above cycle is the MCL’s operating cycle which shows different stages of conversion of raw materials into cash. The length of operating cycle of MCL is the sum of inventory conversion period and debtor conversion period. The inventory conversion period is the total time taken for producing and selling the product. Typically it includes raw materials conversion period, work-in-progress conversion period, stores and spares conversion period, fuel conversion period, and finished goods conversion period. The debtor conversion period is the time required to collect the outstanding amount from the customer. The total of inventory conversion period is referred to as gross operating cycle.

MCL may acquire resources on credit and temporarily postponed payment of certain expenses. Payables, which the firm can differ, are spontaneous sources of capital to finance investment in current assets. The creditors deferred period (CDP) is the length of time the firm is able to differ payments on various resources purchases. The difference between gross operating cycle and payable deferral period is net operating cycle (NOC) we had calculated the raw material conversion period, work-in-progress conversion period, and finished goods conversion period, debtor conversion period, and creditors conversion period, and net working of MCL for five years from the data’s available by the annual report and the other sources as given by our guide at MCL.

Determinants of Working Capital Seasonality of operation Market conditions Present position of Refractories market Conditions of supply Nature of business.

ISSUES IN WORKING CAPITAL MANAGEMENTWorking capital management is the administration of all components of working

capital. It is necessary to determine the level of current assets and then see the right

sources to finance the current assets and pay the current liabilities on time. Investment

in current assets represents a very significant portion of the total investment in assets.

There is a direct relationship between a firm’s growth and its working capital needs. As sales grow company needs to invest more inventories and debtors. As the firm’s output and sales increases, YEAR SALES(in lakhs) CURRENT

ASSETSRATIO

2009-10

2008-09

2007-08

2006-07

2005-06

622949.64

539133.04

434708.02

371274.64

327711.38

371568.57

348905.10

308388.21

252337.88

189170.69

1.68

1.55

1.41

1.47

1.73

The need for current assets increases, but current assets don’t increase in direct proportion to output. MCL’s sales for five years are shown below. The amount of sales

CURRENT ASSETS IN PROPORTION TO TOTAL ASSETS

YEAR CURRENT ASSETSTOTAL ASSETS RATIO’s

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

371568.57

348905.10

308388.21

252337.88

189170.69

1401436.96

1146766.03

862827.81

712856.81

608661.43

0.265

0.304

0.357

0.354

0.310

in relation to current assets is not a function of direct proportionality. These figures are shown below in table and graph.

YEAR

YEAR CURRENT ASSETSFIXED ASSETS CA/FA

2009-2010

2008-2009

2007-2008

2006-2007

2005-2006

371568.57

348905.10

308388.21

252337.88

189170.69

201713.46

170786.51

160918.07

156600.74

145542.83

1.842

2.042

1.916

1.611

1.299

CURRENT ASSETS TO FIXED ASSETS RATIO

YEARThe level of current assets can be measured by relating to current assets by fixed assets.

A higher CA/FA – indicates a conservative current asset policy. A lower CA/FA - indicates an aggressive current asset policy.

CURRENT ASSETS FINANCING POLICY

A conservative policy implies greater liquidity and lower risk while an aggressive policy indicates higher risk and poor liquidity. Moderate current assets policy fall in the middle of conservative and aggressive policy.

METHODOLOGY USED FOR WORKING CAPITAL ANALYSIS

Liquidity Ratios :- Liquidity ratio measured the ability of a firm to meet it’s current liabilities. In fact, analysis of liquidity needs the preparation of cash budget cash fund flow statement , by liquidity ratio’s, by establishing a relationship between cash and other current assets to current liabilities provide a quick measure of liquidity.

Activity ratios:- Funds of creditors and owners are invested in various assets to generate sales and profits. The better the management of assets the larger the amount of sales. Activity ratios are employed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the speed with which assets are being converted or turned over into sales. Activity ratios, thus involves a relationship between sales and assets. A proper balance between sales and assets generally reflects that assets are managed well. Several activity ratios can be calculated to judge the effectiveness of assets utilization.

RATIOS 2009-10 2008-09 2007-08 2006-07 2005-06

(1)Inventory turnover ratio

(2)Debtors turnover ratio

(3)working capital turnover ratio

13.76

485.67

1.68

10.40

115.61

1.55

12.24

31.14

1.41

14.08

41.82

1.47

17.26

41.28

1.73

Chapter-4

RECEIVABLES MANAGEMENT

INTRODUCTION

ASPECTS OF CREDIT MANAGEMENT

MODES OF PAYMENT BY DEBTORS

MONITORING RECEIVABLES

FACTORING

Year Debtor turnover No.of working daysRatio

2008-9

2007-08

2006-07

2005-06

115

31.14

41.8

41.28

360

360

360

360

3.13

11.56

8.61

8.7

So in the above table the average collection period determines the speed of payment by customers. It measures the number of days for which credit sales remain outstanding. The longer the ACP, the higher the firm’s investment in account receivable.

INTERPRETATION: - So here we are seeing that in the financial year 2007-2008 the average collection period is very high that means MCL’s investment in account receivable is also higher. MCL has setup a task force compromising of members for marketing and finance department

ASPECTS OF CREDIT MANAGEMENT

(1) Terms of payment

100% advance 30 days credit 60 days credit Letter of credit Payment on the basis of performance

(2) Credit Policy Variables

Credit Standards: It is the criteria which a firm follows in selecting customers for the purpose of credit extension.MCL gives credit according to the past history and past experience of the customer.

Credit Period: The Credit period given by MCL is generally 30days. Cash discount: The discount rate is 3% on list price if it is paid on

advance. Collection effort: In MCL collection effort is done by the marketing

department.

(3) Credit evaluation of the customer

(4) MCL adopt traditional credit analysis, so it calls for assening prospective customers in terms of four “C”. Character, capacity, condition, and collateral. MCL has categorized it’s customer in categories:

Red:- It indicates financially very weak, high risk customers. Yellow:- It indicates customers with moderate health and risk. Green:-It indicates financially strong customers. (5) Credit granting decision: - once the firm has assessed the credit worthiness of a

customer, it has to decide weather or not credit should be granted. In MCL basically there is a thumb rule for credit granting decisions. All decisions related to credit is granting is taken heads of the dept.

(6) Control of account receivablesMCL has setup a task force compromising of members from marketing and finance department. The task force is mostly setup to identify the lacuna in the system of collection on time and also given more attention for collecting the old dues.

(7) Measures commonly employed for studying bad debt losses ratios.Default rate can be measured in terms of bad losses indicates default risk.Default risk is the likelihood that a customer will fail to repay the credit obligation.

So while seeing on the above table we can conclude that MCL has taken some major

steps to control doubtful debts.

MODES OF PAYMENTS BY DEBTORSThe debtors pay to MCL in the form of:

(1) ADVANCE PAYMENT: - It is the payment received in advance before delivering the goods or services to the customer. Advance payments are usually take advance payment from their red customers and sometimes from yellow customers.

(2) LETTER OF CREDIT PAYMENT: - A letter of credit is a bank instrument that is issued to protect the beneficiary in a commercial transaction. Technically a letter of credit is not a guarantee although payment of an obligation to a beneficiary.

CONTENTS OF LETTER OF CREDIT Terms Conditions Procedures

Parties to letter of credit:- There are five parties to the letter of credit :- Issuer Applicant Beneficiary Advising bank Confirming bank

Basically letter of credit is win- win situation for both the parties.MCL uses SBI Commercial Branch, jagriti vihar as an issuer bank for letter of credit. (3)Credit payment of 30 days and 60 days

Steel plants are the major customers of the company and they have generally made the payments for the credit allowed to them in 30 days. For other customers the credit payment is 30 days or 60 days.

(4)Other modes of payment by debtors:-

Postdated cheques:- Many customers of MCL in northern region prefer make this mode of payment. MCL takes postdated cheques with bank guarantee certificate.

Payment on the basis of performance: - For customers like integrated steel plants MCL collected the money from them on the basis of performance of the product. Guarantee of the product performance is supported by the help of R&D’s approval certificate with bank guarantee certificate, which is issued by basically SBI, A slab has been made by MCL which shows the payment procedure 10% of payment at the time of delivering the product for the bank guarantees 80% of payment during the performance of the product and other 10% of payment after customer satisfaction.

MONITORING RECEIVABLES

A firm needs continuously monitoring and controlling its receivables to ensure the success of collection effort. MCL uses aging schedule method for evaluating the management of receivables.

Aging schedule shows the outstanding amount with a limited credit period which is remaining uncollected that period. It breakdown the receivables according to the length of time for which they have been outstanding. Aging schedule provides more information about the collection experience. It helps to spot out the slow paying debtors.

FACTORING

Factoring is a popular mechanism, financing, and collecting receivables by companies. It is a method of converting a non-productive, in active asset into a productive asset by selling receivables to a company that specializes in their collection and administration. In other words it means getting the money before due date (selling bills receivables to bank) The factor is the financial institution that purchases the clients accounts receivables and in relation thereto, control the credit, extended to customers. Factoring facility is given by MCL only to its green customers.The factor (bank) which gives service to MCL for bills discounting facility is HSBC, Bhubaneswar.

TYPES OF FACTORING DONE BY MCL

RECOURSE :- In this method of factoring MCL is not protected against the risk of bad debts.MCL has no indemnity against unsettled or uncollected debts. If the factor (bank) has advance funds against book debts on which a customer’s subsequently defaults, the MCL will have to refund the money, basically this facility is only given to green customers

NON -RECOURSE:- Under this method book debts are purchase by the factor, assuming 100% credit risk. The company is protected against the bad debt. In this customer are required to make payment directly to the factor. The factor maintains the sales ledger and accounts and prepares age wise reports of outstanding book debts.MCL only gives this facility to its holding company which is coal India ltd.

Chapter-5

INVENTORY MANAGEMENT

INTRODUCTION

DECISION IN INVENTORY MANAGEMENT

INTRODUCTION

Inventory is a list for goods and materials or those goods and materials themselves, held available in stock by a business. It is also used for a list for a list for testamentary purpose of the possessions of someone who has died. In accounting inventory is considered an assets. Inventory constitutes about 60% of current assets of public limited companies. The inventories can be in the form of raw materials, work-in-progress and finished goods, fuel, stores, and spares.

NEED FOR INVENTORY MANGEMENT

To facilitate smooth production and sales operation. To guard against the risk of unpredictable changes in usage rate and

delivery time. To take advantages of price fluctuation. For extensive database with respect to monthly consumption and lead time.

In order to reduce the working capital days MCL has to force on inventory control. In MCL the Baan ERP software system has been implemented. This makes easier for the control of control. For procurement and control of raw material management department in MCL looks at the following in display item data :-

Safety stock Inventory on hand Inventory on hold Inventory on order Allocated inventory Economic stock

For inventory control E.O.Q, maximum level, minimum level, reordering level, is used.(1)Average monthly consumption=total consumption/ no. of month(2) Lead time = lead for procurement.Factors which are taken into account in fixing ROP

Sudden changes. Price changes. Obsolescence risk. Government restriction. Marketing/ strategic conditions.

Four different models of inventory management depending upon:- Constant MC and constant Lead Time (LT). Constant MC and variable Lead Time Variable MC and variable Lead Time Varying MC and constant Lead Time.

Note:- Model 1 is the simplest and Model 4 is the most complex. In our case 4 is normally applicable.Cost associated with order size

Ordering cost:-Requisition, packing of order, transportation, receiving, inspection, and storing and clerical and staff services. Ordering cost is fixed per order. Therefore they decline as the order size increases.

Carrying cost:- warehousing, handling, clericals and staff services, insurance, and taxes. Carrying cost vary with inventory holding. As order size increases average inventory holding increases and therefore the carrying cost increases.

Note:- These cost should be optimized in order to minimize overall costs.

Re-ordering point (ROP):- In the real world procurement of raw material takes time. Hence the order level must be such that the inventory at the time of ordering must be sufficient to meet the need of production during the procurement period i.e. during lead time (LT).

ROP = (ALT*AMC) + Minimum stockWhere ALT is the average lead time. AMC is the average monthly consumption.

Minimum stock level (MSL):- It is also known as safety stock level (SSL).Inventory carrying cost is proportional to the level of inventories carried. Hence it is rarely make sense to seek 100% protection against stock out.The optimal level of safety stock is usually less than the level of safety stock required to achieve the total protection against stock out.Normally a satisfaction level (also called service level of 95% or 99%is selected as the goal). Formula for MSL is MSL = Z*FWhere Z =(ALT * dm^2 +AMC ^2 *dl ^2 )1/2Dm =standard deviation of monthly consumption

Guidance for the above table from MCL Uses a two year data base for monthly consumption and lead time for determining

AMC, ALT, dm, and dl.

Recalculate these figures on 1st April and 1st October every year.We have analyzed the balance sheet of MCL then it can be observed that out of total current assets major amount is inventory. It is one of the major factors affecting working capital cycle of MCL in order to reduce working capital days MCL has to focus on inventory control.MCL has adopted Baan ERP software system display item data of all the raw material forming part of inventory. The percentage of inventory over current assets is calculated and displayed below in form of table and graph for five years:-YEAR INVENTORIES CURRENT ASSETS RATIOS

2009-10

2008-09

2007-08

2006-07

2005-06

45272.22

51819.57

35489.64

26359.49

19050.87

1181939.30

960075.12

683748.14

525267.27

428686.60

0.038

0.054

0.051

0.050

0.044

Interpretation: - Inventory amount to 40%of current assets investment of MCL Inventories are stock of product, company is manufacturing for sale and component that makeup the product.

Chapter-6

CASH MANAGEMENT

INTRODUCTION

CASH PLANNING

MANAGING CASH COLLECTION AND DISBURSEMENTS.

INTRODUCTION

Cash is one of the most important current assets of the firm. Cash or fund is the basic input needed to keep the business in a running condition; it is also the ultimate output expected to be realized by selling the service or product manufactured by the firm. The firm should keep sufficient cash, neither less nor more. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain idle, without contributing anything towards the firm’s profitability. So to effective cash flow inside and outside the firm there should be effective management of cash. Basically in MCL cash management is known as Funds management.

An asset is liquid if it can be converted into cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset. Other assets that are considered relatively liquid and included in quick assets are debtors, loose tools and marketable securities. Inventories are considered to be less liquid. Inventories normally require sometime realizing into cash; their value also has a tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities.

Quick ratio =quick assets/current liabilities Quick assets =current assets – inventories %of quick assets over current liabilities of MCL for five years is shown below in the form of table and graph:-

YEAR CURRENT ASSETS CURRENT LIABILITES RATIO’S

2009-10

2008-09

2007-08

2006-07

2005-06

371568.57

348905.10

308388.21

252337.88

189170.69

810370.73

611170.02

375359.93

272929.39

239515.91

0.485

0.570

0.821

0.924

0.789

A quick ratio of 1:1 is considered to represent a satisfactory current financial condition. Although quick ratio is a more penetrating test of liquidity then the current ratio, a quick ratio1:1 or more does not necessarily imply sound liquidity position. It should be remembered that all debtors may not be liquid and cash may be immediately needed to pay operating expenses. It should also be noted that inventories are not absolutely non- liquid. To a measurable extent, inventories are available to meet current obligations. So here MCL is having high value of quick ratio which tends to shortage of funds if it has slow paying, doubtful and long duration outstanding debtors.

Since we know that cash is the most important liquid asset, so here MCL has also examined cash ratio and its equivalent to current liability.

Cash ratio = (cash + marketable securities)/ current liabilitiesThe ratio of cash over current liabilities of MCL for five years is shown below in the form of table and graph:-

YEAR CASH&BANK CURRENT LIABILITES RATIO’S

2009-10

2008-09

2007-08

2006-07

2005-06

750701.43

577330.21

346163.78

242767.01

189755.34

371568.557

611170.02

375359.93

252337.88

189170.69

2.020

0.944

0.922

0.962

1.003

Interpretation:- So here MCL don’t have worried about lack of cash because it’s having a high reserve borrowing power and it also having a credit limit sanctioned from bank and easily draw cash in future.

Cash Management is concerned with the managing of:- Cash flow into and out of the firm:- In MCL the cash which comes from debtors

through the sale of products is the cash inflow and the cash which is Paid to creditors for the purchase of raw materials like Spares and parts, machinery is the cash outflow.

Cash flow within the firm:- cash flow within MCL would constitute:-(a)MCL is paying wages and salaries to their employees and labour.(b)It has made separate department for provident fund (PF) trust.(c)For the payment of gratuity MCL tie up with LIC gratuity.(d)For supper annuation MCL is deducting 15% of basic salary which LIC is depositing for 55 years after which a monthly pension is given to employee for lifetime.

Cash balances held by the firm at a point of time by financing deficit or investing surplus cash. At the time of deficit of cash MCL take short term loan (SLT) from their respective banks and at the time of surplus of cash it does not invest in marketable securities until it pays its debts.

CASH PLANNINGIt is a technique to plan and control the use of cash. It helps to anticipate the future cash flows and needs of the firm and reduces the profitability of idle cash balances (which lowers the firm’s profitability) and cash deficits (which can cause the firms failure).Cash planning protects the financial condition of the firm by developing a protected cash statement from a forecast of expected cash inflows and outflow for a given period.

The forecast may be based on the present operations or the anticipated future operations. Cash plans are very critical in developing the overall operational plans of the firm.In MCL the management makes 5 years business plan for future, if it requires they also makes 10 years business plan. Taking this into consideration they make cash planning for annual business plan for 1 year.

CASH BUDGETING

Cash budget is the most significant device to plan for and control cash receipts and payments. Cash budget is a summary statement of the firm’s expected cash inflows and outflows over a projected time period. It gives information on the timing and magnitude of expected cash flows and cash balances over the projected period. In MCL the cash budgeting is done for every month for determining cash requirements if cash flow shows extreme fluctuations. It is highly advantageous because it helps to determine the net cash inflow or outflow so that at the end it can arrange its funds.Cash forecasts are needed to prepare cash budgets. In MCL cash forecasting is done on short –term and long –term basis. For short- term decisions the head of finance department takes his own decisions and for long term board of directors (BOD) of MCL take decisions.The cash inflow includes sales realization, export packing credit, short term loan, term loan, receipts of fixed deposits etc. The cash outflows from the firm are raw materials, fuel, salary and wages, gratuity, bonus, stores and spares, repairs, power, sales tax, income tax, interest on capital expenditure.

MANAGING CASH COLLECTION AND DISBURSEMENTS

(1)Accelerating cash collection:- A firm can conserve cash and reduce its requirements for cash balances if it can speed up its cash collections. The first hurdle in accelerating the cash collection is the extra time enjoyed by the customers in accelerating the bills. Cash collections can be accelerated by reducing the lag or gap between the time a customer pays bill and the time the cheque is collected and funds become available for the firm’s use. For accelerating cash collection MCL has adopted several strategies viz. use of cash management system a/c with ICICI bank and HDFC bank. Cash management system a/c makes online payment transaction possible which leads to drastic reduction in processing time than traditional way.

ICICI bank charges 0.5 paisa per thousand per day collection. HDFC bank charges are nil for these transactions.

MCL is planning to close its a/c with ICICI bank and open a new a/c (CMS a/c) with AXIS bank (charges nil).

(2)Stretching accounts payables:- One basic strategy of efficient cash management is to stretch the accounts payables. In other words, a firm should pay its accounts payable as

late as possible without damaging its credit standing. It should however take advantages of the cash discount available on prompt payment.

As in MCL collection procedure is very fast in some way it also makes prompt payment to their suppliers. So MCL does not adopt the policy of stretching account payables. It pays to their suppliers according to their convenience in one of the following ways:-

(a)Multicity cheques:- The banker issuing this cheques is SBI Belpahar . This cheque is presented in any of SBI branches, the amount due there on is immediately paid and account of MCL with SBI, Samada is debited respectively.

(b)At par cheques:- The banker issuing this cheques is SBI, Samada and CBI Gomadera. No charges are deducted by the bank when encashed.(c)MICR:- The banker issuing this instrument is SBI. In this the clearing process has been highly automated. Electronic data is used instead of paper. So MCL have started using MICR to automate the clearing process. They maintain an account with Reserve Bank of India (RBI) which is debited for inward clearing and credited for outward clearing.

(3)Other Incomes:- Sources of other income for MCL are:- (a)Scrap sale (b)Hospital (c)school

Note:- MCL does not invest its surplus cash in short term marketable securities. The surplus cash is used to repay the debts.

Two scenario of cash management (a)Ample cash:- Inter corporate deposits.(b)Limited funds:- unsecured loan and secured loan.

Chapter-7

WORKING CAPITAL FINANCE

INTRODUCTION

BANK FINANCE FOR WORKING CAPITAL

OTHER SOURCES OF FINANCE

INTRODUCTION

External funds available for a period of one year or less are called short term finance. In MCL, short term funds are used to finance working capital. Two most significant short term sources of finance for working capital are: trade credit and banking borrowing. Trade credit as a ratio as a of current assets is about 40%bank borrowing is the next important source of working capital finance.Two other sources of working capital finance which have recently used in MCL are factoring and commercial paper.

TRADE CREDIT Trade credit refers to the credit that the customers get from suppliers purchase of goods in the normal course of business. In practice, immediate cash payment is not required to be made for the purchase. This deferral of payments is a short term financing called trade credit. Trade credit is mostly an informal arrangement, and is granted on open account basis. A supplier sends goods to the buyer on credit which the buyer accepts and thus in effect, agrees to pay the amount due as per sales terms in the invoice.

CREDIT TERM

It refers to the condition under which the supplier sells on credit to the buyer, and the buyer is required to repay the credit. This condition includes the due date and the cash discount given for payment. Due date is the date by which supplier expects payment. Credit term indicates the length and beginning date of the credit period. The due date for trade credit for MCL:-

Normal goods:-30 to 90 days Imported goods:-60 to 90 days

CASH DISCOUNTCash discount is the concession offered to the buyer by the supplier to encourage him to make payment promptly. The cash discount can be available to the buyer if he pays by certain date which is quite earlier then the due date. The cash discount enjoyed by MCL is about 10 %to 15% per annum. In context of MCL there are three types of creditors:-suppliers, employees and miscellaneous creditors.In addition to trade credit deferred income are other spontaneous source of short term financing. Deferred income represents funds received by the firm for goods and services which it has agreed to supply in future. This receipt increases the firm’s liquidity in the form of cash; therefore they constitute an important source of financing. Advance payments made by customer constitute the main item of deferred income. These payments are not recorded as revenue until goods and services have been delivered to the customers.

BANK FINANCE REQUIRED FOR WORKING CAPITAL

Banks are the main institutional sources of working capital finance. After trade credit, bank credit is the most important source of financing working capital requirements. A bank considers a firm’s sales and production plans and the desirable levels of current assets are determining its working capital requirements. The amount approved by the bank for the firm’s working capital is called credit limit. Credit limit is the maximum funds which a firm can obtain from the banking system. In practice banks don’t lend 100% of the credit limit, they deduct the margin money from the amount applied for.SBI, Samada and CBI gomadera deducts 25% margin from short term loans extended to MCL. It uses following forms of working finance:-

Cash credit Discounting of bills Letter of credit Short term loans

Security required in bank finance

Bank generally does not provide working capital finance without adequate security. MCL uses following mode of security which a bank may require:-

Hypothecation:- under hypothecation MCL is provided with working capital finance by the bank (SBI,CBI) against the security of inventories and debtors for obtaining short term loans. Hypothecation is the charge against property for an amount of debt where neither ownership nor possession is passed to the creditors.

CONCLUSION AND SUGESSTION

By studying the working capital of a company the efficiency of different function departments come into picture along with that finance department. Though MCL is managing its working capital well, a through study of the working capital management of the company brings out many opportunities for improvement of the company.

Through MCL is trying to overcome its shortcomings at various levels, here are some suggestions for MCL which may help to improve the working capital position.

1. MCL has introduced task force to study the drawbacks of method of collecting money. At one area where MCL is lacking and it has to take immediate action is regularity in collection from debtors. Many times it has been observed that the focus on collections is irregular.

2. In the 30 days credit payment M/s MCL actual receives its money by the end of 55th or 60th day. If possible they can try to reduce the number of credit days and encourage customers by allowing some discounts or lowering price of the product.

Track and purse late payers. Getting external help if MCL's efforts fall. Debtors should not given any excuses for not paying. MCL marketing personals have to be hard on issue. Solve the problem of the customers viz. problem of invoice not received,

problem of wrong invoice etc.

3. Manufacturing cycle of a product does effect the working capital cycle days. If individual production department can reduce the manufacturing cycle days by implementing better technology and proper planning to reduce time.

4. The production departments can try to improve the quality and minimize the rejections with aid of suitable techniques.

5. The finished stock should be stored properly otherwise some of the products which get hydrated very fast will be damaged quickly and they will be treated as non- moving current assets.

6. Special care should be taken to reduce the non-moving finished stock should be evaluated and production departments have to plan to minimize occurrence of such causes.

7. MCL gets coal from MCL which is very near to Belpahar working unit. MCL can negotiate with MCL and receive coal on regular basis thus stock of coal can be reduced more.

8. Material management department along with finance department can try to bargain with supplier to reduce the price and change the mode off payment, which is suitable for the company.

9. Individual person assigned for different task which directly or indirectly affects the working capital should be made realize their responsibilities. This can be done by giving the persons at work more authority, responsibility, remuneration for increasing their efficiency. All different works and relating persons, as it is needed as together form a team.

The work-in-progress at different stages kept in the plant is high considering their cycle time. Steps may be taken to reduce such high stock, which will help in reducing current assets.

BIBLIOGRAPHY

(1) Annual report (2006 to 10)

(2) Magazines (published by MCL)

(3)Financial Management by I. M Pandey

(4) www.mcl.com

(5) www.google.com

(6) www.wikipedia.com

A project on Working capital Management in “MAHANADI COAL FIELD LIMITED”

SUMMER INTERNSHIP PROJECT SUBMITTED TO:SAMBALPUR UNIVERSITY

SUBMITTED BY: SONAM AGRAWALUNDER THE GUIDANCE OF: