WORKING CAPITAL

MANAGEMENT FOR SUGAR

INDUSTRY
WORKING CAPITAL
 It is a measure which gives the operating liquidity of the
company
 Gross working capital : total of all the current assets
 Net working capital : excess of current assets over current
liabilities
 Working capital components :
1. Accounts receivables
2. Cash and bank balances
3. Inventory
4. Other current assets
5. Accounts payables
6. Short term borrowings
PROCESS OF SUGAR MANUFACTURING

 Process of manufacturing of sugar can be

broadly classified into 3 stages :

 Extraction of juice from sugar cane

 Clarification and evaporation of juice

 Crystallization and centrifugation

SUGAR INDUSTRY
 India is the second largest producer of sugarcane next
to Brazil
 Modern sugar processing industry in India began in
the late 1930’s
o In India, the major sugar cane producing areas are
Uttar Pradesh, Maharashtra, Andhra Pradesh, Gujarat,
Karnataka, and Tamil Nadu
o These states together account for 85-90 per cent of
the sugarcane produced in India.
o In India, around 90 per cent of the sugarcane
cultivation is under irrigated land.
SUGAR INDUSTRY
 Sugar cane is the key input for sugar production
 The crop grows for 8-14 months
 In India sugar production follows a 3-5 year cycle
 Sugar production is cyclical in nature and is
highly inpredictable
 The major sugar producers in India are :

Balrampur chini mills ltd,

Bajaj Hindustan Ltd,
Andhra sugars ltd,
Thiru Arooran Sugars Ltd and
Dhampur sugar ltd
FACTORS THAT AFFECT SUGAR
INDUSTRY

The financial performance of a sugar factory mainly

depends on the following:

 Demand-supply position and its impact on prices

 Sugarcane prices

 Utilisation of by-products

 Plant size and location

  Working capital requirement and cost of funds

 Interest burden
WORKING CAPITAL REQUIREMENTS
 Sugar is a working capital intensive industry
 Mainly produced between November and May
 Consumed through out the year
 Sugar mill owners are forced to carry large
inventories over a long period of time
 Sugar industry depends on short term funds
 Funds are available at high interest rates
 Sugar cane being the main raw material for
sugar constitutes around 65% of the cost of
sugar production
 Sugar mills should have comfortable cash flow
and DER( debt equity ratio ).
DEMAND SUPPLY ANALYSIS
INVENTORY MANAGEMENT
 Between 2001-03 there was a relatively slower growth in
demand

 resulted in massive inventory levels and high inventory

holding cost

 Govt. decontrolled the sugar industry

 In 2004-06 sugar prices increased due to decline in

inventory levels

 Average DER was high at 2.4 times due to high borrowings

required to fund the sugar inventory.

 Sugar inventory is generally at its peak in march due to the

end of the crushing season.
OPERATING CYCLE IN SUGAR
INDUSTRY
 SUPPLIER – farmer
 RAW MATERIAL - sugar cane

 WIP – industrial alcohol , juice in the form of

thick syrup
 Finished product – granulated sugar , brown
sugar, liquid sugar
 Sales to customer – PDS ( levy sugar , non
levy sugar) , general consumer market
 Cash from customers
WORKING CAPITAL
 Current assets in sugar industry comprises of
60-70% of the total assets
 Average current ratio for the years 2002-07 has
been 0.8 times
 Average debt – equity ratio has been 2.5 times

 Average return on capital employed is 10.3 %

 Average debtors days is 15.8 days

 Average creditors days is 114 days

 Stock– to use ratio – 55%

CALCULATION OF CASH CYCLE
 Inventory period – 180 days
 Accounts receivable period – 15 .8 days

 Accounts payable period – 114 days

 operating cycle = inventory period + accounts

receivable period
Therefore , operating cycle = 180 +158
= 195.8 days
 Cash cycle = operating cycle – accounts payable
period
Therefore, cash cycle = 195.8 – 114
=81.8 days