I.

EXECUTIVE SUMMARY

Oil India Limited (OIL) is a Navratna Company and it has achieved Miniratna Award
from the Government of India in the year 2010. It is engaged in the business of exploration,
development, production and transportation of crude oil and natural gas. OIL is a “Schedule A”
company under the administrative control of the Ministry of Petroleum and Natural Gas of the
Government of India. The Company also processes its produced natural gas to extract Liquefied
Petroleum Gas. It also conducts exploration activity both in India and overseas through joint
venture arrangements and production sharing contracts with other oil companies.

The internship with Oil India Limited is a rich learning experience, as it has given me an
opportunity to work in an Energy and Power sector and discussing about the working capital
management of the company.

The present study has been conducted to understand the working capital management of
the company and also to analyse various factors which has a significant effect on the working of
the organization.

Objective of the Study:

Study of the working capital management is important because unless the working capital
is managed effectively, monitored efficiently, planned properly and reviewed periodically at
regular intervals to remove bottlenecks, if any, the company can not earn profits and increase its
turnover. With this primary objective of the study, the following further objectives are framed for
in depth analysis.

1. To study the working capital management of Oil India Limited.

2. To study the optimum level of current assets and current liabilities of
the company.
3. To study the liquidity position through various working capital related
Ratios of the company.
4. To study the working capital components such as receivables accounts,
cash management, Inventory position, and also creditors analysis of the
company
5. To study the way and means of working capital finance of the Oil India
Limited.
6. To estimate the working capital requirement of Oil India Limited.
7. To study the operating and cash cycle of the company.

Methodology:
 Research methodology is a very important step in every project as it concerned with
generation, collection, and evaluation of data. Without proper methodology a project cannot be
done accurately.

Generally there are two methods for collection of data viz. Primary Data Collection and
Secondary Data Collection

Primary data are those data which are collected fresh or first hand, for the first time and
which are original in nature. Primary data can be collected through personal interview,
questionnaire etc. to support the secondary data.

On the other hand, secondary data are those data which have already been collected and
stored. These types of data can be collected from records, journals, annual reports of the
company etc which in turn saves time money and efforts. Secondary data are often available in
trade magazines, balance sheets, books etc.

This present project is based on both primary and secondary data. The primary data are
collected through personal interview by visiting head of Accounts department, head of
Administrative Department and Materials Department, Research and Development department
and other concerned staff member of different departments. But primary data collection had
limitations such as confidential information which cannot be revealed. Thus this project is based
on secondary information collected through five years annual reports of the company, supported
by various books and internet sites. The data collection was aimed at study of working capital
management of the company.

This project is based on Annual Reports of Last 5 years i.e.

Annual Report of 2005-06

Annual Report of 2006-07
Annual Report of 2007-08
Annual Report of 2008-09
Annual Report of 2009-10

Application of Learning’s:

This project is based on inventory management, cash management, debtors analysis,

creditors analysis and also calculation of various accounting ratios to find out the working capital
position at Oil India Limited and also to analyse how far the company is successful in meeting its
obligations. A conscious endeavor to sharpen up these skills encouraged me to make the best
possible use of the opportunities existing at one of the PSUs of the country.

Scope of the Study:

1. The study will be useful for the company in assessing its working capital
position as well as the short term financial position.
 2. The study will be fruitful for the company in finding out the strengths and
weaknesses of its working capital.
3. The study will be useful for the company in formulating policies about its
working capital.
4. The study will be useful for the other researchers in the future in similar kind of
studies.

Limitation of the Study:

Following limitations were encountered while preparing this project:

Limited data:

This project has been completed with annual reports; which constitutes only one part of
data collection i.e. secondary. There were limitations for primary data collection because of
confidentiality.

Limited period:

This project is based on five year annual reports. Conclusions and recommendations are
based on such limited data. The trend of last five year may or may not reflect the real working
capital position of the company.

Limited area:

It was also difficult to collect the data regarding the competitors and their financial
information. Industry figures were also difficult to get.

Strict Government Policy:

Being a PSU all the current assets rules are not practiced in OIL as it is being adhered to
some strict government policies.

Major Findings:

The following observations have been made during the study:

1. The working capital elements are functioning pretty well due to the well defined and
strict following of the company procedures, division of work and organisational hierarchy.

2.Cash management system of the company is also sound. Oil India maintains a
minimum cash balance to the extent of 1 week requirement at any point of time. The minimum
cash balance maintained by Oil India is Rs.1.25 crores to meet its requirements on time. The
reorder level of cash is 25 lacs.

3. Oil India has 12260.53 crores of current assets in the year 2010 whereas, the amount of
current liabilities is 1804.52 crores. Hence the net working capital for the year is 10465.01
crores.

4. Again by making necessary calculations it has been observed that the inventory
turnover ratio (excluding goods in transit) has reduced from 1.20 in 2008-09 to 0.94 in 2009-10,
which is a record of achievement in containing the inventory value of Duliajan fields.

5. The various Accounting Ratios depict that the short-term financial performance as well
as the position of the company is good enough.

6. The current ratio for the year 2010 is 6.80:1. As a thumb rule the current ratio should
be equal or more than 2:1. Hence, current ratio for the year is satisfactory.

7. The quick ratio for the year is 6.55:1. As a matter of practice the current liabilities
should not exceed the proportion of current assets, hence this ratio shows satisfactory financial
position of the company.

8. The liquidity ratio which was 4.73 in the year 2010 also shows sound position of the
company.

9. EOQ system is not followed. Orders are based on stock position and projected
requirements

10. It has been observed that company follows various techniques such as ABC analysis,
HML analysis, FSN analysis for inventory management.

11. Introduction of SAP system to the organization also made the materials planning
system proper and adequate.

12. No abnormal excess/shortage has been observed in respect of stock of crude oil, LPG
and stores & spares.

13. The average collection period for crude oil has improved significantly in the recent
accounting years. The average collection period for natural gas has improved significantly but it
is still above the credit period allowed, causing delay in the conversion of finished goods to cash
in the working capital cycle.

14. The company is loosing money as it has to provide subsidies and discounts to various
parties according to the Government rules and procedures.

Capital required for a business can be classified under two main categories viz.,
 1. Fixed Capital
2. Working Capital

Every business needs funds for two purposes for its establishment and to carry out its
day- to-day operations. Long terms funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land, building, furniture, etc. Investments
in these assets represent that part of firm’s capital which is blocked on 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 known as
working capital. It refers to that part of the firm’s capital which is required for financing short-
term or current assets such as cash, marketable securities, debtors & inventories.

Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist between
them. The term current assets refers to those assets which in ordinary course of business can be,
or will be, turned in to cash within one year without undergoing a diminution in value and
without disrupting the operation of the firm. The major current assets are cash, marketable
securities, account receivable and inventory. Current liabilities are those liabilities which
intended at there inception to be paid in ordinary course of business, within a year, out of the
current assets or earnings of the concern.
The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding
expenses.

Thus from the above discussions it is clear that Working Capital refers to that part of the
firm’s capital which is required for financing short term or current assets such as cash, debtors,
inventories, etc. Funds, thus invested in current assets keep revolving fast and are being
constantly converted into cash and this cash flows are used again for exchange of other current
assets. Hence, it is also known as Revolving or Circulating capital or Short-Term capital.

The goal of working capital management is to manage the firm’s current assets and
current liabilities in such way that the satisfactory level of working capital is maintained. The
current assets should be large enough to cover its current liabilities in order to ensure a
reasonable margin of the safety.