Question

Steel Authority of India Limited (SAIL), one of the world’s largest government-owned steel making companies and India’s largest, was incorporated on January 24, 1973. The Government of India held 75% of the stake in SAIL. The working capital management at SAIL was vital to ensure the firm’s liquidity and profitability as a large part of the assets was attached to its current assets. This case is designed to analyze the working capital management at SAIL in order to understand the current assets and current liabilities of a manufacturing firm vis-a-vis a non-manufacturing firm. The computation of the operating cycle and analysis of liquidity ratios provide an important basis for decision making.

a. Analyze how the global market situation may impact a firm’s working capital. (10)

b. Identify the areas where businesses can take strategic decisions for optimizing the operating cycle.

Answer 1

The working capital of a company includes its current assets and current liabilities. The current assets includes our debtors, cash, stock, Prepaid liabilities. And current liabilties includes creditors, and other committments for short term ( less than a year). All this are effected by the global markets. The global markets have a constant impact on the working capital of a company.

The global markets affects debtors as the debtors will delay payments if they get an opportunity to invest the funds in global markets and thus earn money while enjoying interest free credit. Also if the global markets are quing down the funds are stuck and thus he won't be able to retract his funds and thus pay and hence deteriorate the quality of working capital.

The cash reserves of a company is also dependent on the global cues. If the markets are inclined to move up companies shall start investing their surplus cash in the markets and vice versa thus affecting working capital.

The global market scenario also affect drastically the stock that a company holds . If there is good demand in the international markets for our products the companies hold a sufficient amount of stock so as to prevent from stock out condition.

B.

The most important element of a business is the efficiency of its operating cycle.

The lessening of the days of the operating cycle days improves the efficiency of the operating cycle.

The areas where business can take strategic decisions are:

1.The company can talk to the suppliers and avail credit Facilities and thus conserve cash till they realise their bills.

2.The company shall focus on having a good inventory turnover ratio and thus improving the working cycle.

3.The Company can take a decision for the uopfront payments from its debtors or ask for a deposit from its customers or they can decrease the line of credit from the current scenario.