26-06-2012, 12:37 PM
WORKING CAPITAL MANAGEMENT OF ONGC
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INTRODUCTION
Oil and Natural Gas Corporation Limited (ONGC) (NSE: ONGC, BSE: 500312) is an Indian state-owned oil and gas company headquartered in New Delhi, India. It is one of the largest Asia-based oil and gas exploration and production companies, and produces around 77% of India's total crude oil production (and around 30% of total demand) and around 81% of natural gas production. ONGC is one of the largest publicly traded companies by market capitalization in India and the largest India-based company measured by profits.
ONGC was founded on 14 August 1956 by the Indian state, which currently holds a 74.14% equity stake. It is involved in exploring for and exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometres of pipelines in the country. In 2010, it was ranked 18th in the Platts Top 250 Global Energy Company Rankings and 413th in the Fortune Global 500.
ONGC Videsh Limited (OVL) is the international arm of ONGC. It was rechristened on 15 June 1989. It currently has 14 oil and projects across 15 countries. Its oil and gas production reached 8.87 MMT of O+oEG in 2010, up from 0.252 MMT of O+OEG in 2002/03.
MEANING OF WORKING CAPITAL MANAGEMENT
Working capital management is treated as driving seat of a finance manager. It is important in a business firm as a blood in a human life. A firm should have an adequate fund to meet day-to-day expenses and to finance current assets. This fund is known as working capital funds. Proper management of working capital is necessary to maintain both liquidity and profitability. Liquidity is necessary for the survival of the firm. A firm having no profit may be treated as sick but not having liquidity may die over a period of time. In this way the working capital management involves deciding upon the amount and composition of current assets and how to finance these assets. It has become an important tool to judge the performance of a firm. It is concerned with problems of managing the inter-relationship of current assets and current liabilities. Firm should maintain sufficient level of working capital to produce up to a given capacity and maximize the return on investment in fixed assets. Shortage of working capital leads to lower capacity utilization, lower turnover and hence lower profits. Hence the dictum “adequacy is a virtue, surfeit is not.” 7 Louis Brandt observes: “we need to know when to look for working capital funds, how to use them and how to measure, plan and control them.”
CONCEPT OF WORKING CAPITAL MANAGEMENT
There are two concepts of working capital namely, Gross concept and Net concept.
GROSS WORKING CAPITAL
According to this concept, working capital refers to the firm’s investment in current assets. The amount of current liabilities is not deducted from the total of current assets.
This concept views Working Capital and aggregate of Current Assets as two inter-changeable terms. This concept is also referred to as ‘Current Capital’ or ‘Circulating Capital’. Working capital means total of all the current assets of a business. It is also called circulating capital. When individual current assets are to be managed, gross concept of working capital is used. There are difference on opinions among different authors about the definition of working capital.
According to J.S.Mill: “The sum of current assets is the capital of business.”
According to Mead, Malott &Field “Working means current assets”
According to Bonneville “Any acquisition of fund which increases the current assets increases working capital, for they are one and the same.”
Gross Working Capital = Total Current Assets
This concept focuses attention on two aspects of current assets management:
a. Optimum investment in current assets: The investment in current assets should avoid two danger points-excessive and inadequate investments in current assets. The investment should not more or not less to the need of the business. Excessive investment in current assets should be avoided because it impairs firm’s profitability, as idle investment earns nothing. On the other hand, inadequate amount of working capital can threaten the solvency of the firm, if it fails to meet current obligations.
b. Financing of current assets: Another concept is financing of current assets. Whenever a need for working capital fund arises due to increasing level of enterprise activity, or for any other reason, the arrangement should be made quickly. Similarly some surplus funds arise they should not be allowed to remain idle, but should be invested in short term securities.
NET WORKING CAPITAL
The Net Working Capital refers to the difference between Current Assets and Current Liabilities or the excess of Current Assets over Current Liabilities.
Net Working Capital = Current Assets – Current Liabilities
Net working capital means the excess of current assets over current liabilities. If current assets are equal to current liabilities then according to this concept working capital will be zero and in case current liabilities are more than current assets, the working capital will be called negative working capital. Modern economist considers this concept as more suitable. Net concept of working capital emphasizes on how much current assets have been financed out of long term funds. Under this concept the relationship between current assets and current liabilities is established or their liquidity is determined. It indicates the liquidity portion of enterprise and suggests the extent to which working capital need may be financed by permanent sources of fund. Current assets should be sufficiently in excess of current liabilities to constitute a margin of buffer for maturing obligations within the ordinary operating cycle of an enterprise. The quality of current assets should be considered in determining the level of current assets vis-à-vis current liabilities.