A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF BHARAT HEAVY ELECTRICALS LIMITED

A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF BHARAT HEAVY ELECTRICALS LIMITED (Submitted in partial fulfillment of the requirement of Master of Business Administration, Distance Education, Guru Jambheshwar University of science & technology, Hisar)

SESSION 2008-10 DIRECTORATE OF DISTANCE EDUCATION GURU JAMBHESHWAR UNIVERSITY OF SCIENCE & TECHNOLOGY, HISAR

WORKING CAPITAL MANAGEMENT

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CERTIFICATE This is to certify that Mr. Amit Kumar Enrolment No. 08061237002 has proceeded under

my

supervision

his Research

Poject on

“WORKING

CAPITAL

MANAGEMENT AT BHEL” in the specialization area “Finance”.

The work embodied in this report is original and is of the standard expected of an MBA student and has not been submitted in part or full to this or any other University for the award of any degree or diploma. He has completed all requirements of guidelines for research project report and the work is fit for evaluation.

WORKING CAPITAL MANAGEMENT

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ACKNOWLEDGEMENT

At the outset, I owe my success to God Almighty, but for his grace, nothing would have happened.

It always takes the contribution of lot of people to complete a project. No project can be completed through individual effort alone. The contributions of some are direct and evident and of others are indirect and obscured. I express my sincere gratitude towards all those who have directly and indirectly helped me through out this project.

I am thankful to the BHEL for permitting me for making a project in their organization.

I am also grateful to Maj.Gen.S S Chahal –Director – Netaji subash institute of management sciences and my mentor Prof. P C Chhabra other teacher at the institute, who helped me, in preparing the project The learning during the project was immense and invaluable. My work included the Management of Working Capital in BHEL. It is with great sense of gratitude that I submitted my project report.

Amit kumar Enrollment No 08061237002 WORKING CAPITAL MANAGEMENT

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WORKING CAPITAL MANAGEMENT

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DECLARATION

Amit Kumar, Enrollment No. 08061237002 Certify that this project Report (WORKING CAPITAL MANAGEMENT AT BHEL.) is original work done by me for the partial fulfillment of the award of Master in Business Administration(MBA) Degree form Guru Jambheshwar University Of Science and Technology, Hisar , Haryana,(Session 2008-2010).

This Report or a similar report on the topic has not been submitted by any University / Institute and does not use part /full for any other Degree/ Diploma.

Amit Kumar Enrollment No. 08061237002

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CONTENTS

TOPICS BHEL AN OVERVIEW

PAGE NO: 8 - 25

•

Introduction

9

•

BHEL ,a corporate giant

11

•

International business

12

•

BHEL in India

•

Vision, mission, values

15

•

Objectives of proposed study.

16

•

Contribution to various sectors.

19

•

Collaborations ,competitors and its products

23

BHEL HARIDWAR UNIT, HEEP

13

28 - 38

•

Historical profile.

30

•

Overview of finance functions.

32

•

SWOT analysis.

37

WORKING CAPITAL MANAGEMENT

39 - 66

•

Meaning.

40

•

Classification

41.

•

Issues in working capital management.

46

•

Policies for financing.

48

•

Needs and objectives for working capital.

50

•

Its importance.

51

•

Factors determining the WC requirements.

52

WORKING CAPITAL MANAGEMENT

6

•

Management of WC.

55

•

Existing system of WC in HEEP.

57

•

Liquidity management.

59

•

WC turnover ratio.

64

•

Current assets turnover ratio.

65

MANAGEMENT OF DIFFERENT COMPONENTS OF WORKING CAPITAL: DEBTOR MANAGEMENT

67 - 75

•

Introduction.

68

•

Debtor management in HEEP.

70

•

Analysis of debtors.

71

•

Steps involved in management of debts

75.

INVENTORY MANAGEMENT

76 - 88

•

Introduction.

77

•

Objectives.

78

•

Inventory analysis.

•

79

-

ABC analysis.

79

-

VED analysis.

80

-

SDE analysis.

81

-

HML analysis.

81

-

FSN analysis

81

Functions of inventory control.

WORKING CAPITAL MANAGEMENT

82 7

•

Record keeping and related procedures.

83

•

Inventory management in HEEP.

84

•

Need of inventory.

87

•

Strategies/measures.

88

•

Suggestions.

88

CASH MANAGEMENT

89 - 94

•

Meaning.

90

•

Reasons of cash management.

91

•

Tools of cash control.

93

•

Analysis of cash management.

94

SUMMARY OF FINDINGS

98

SUGGESTIONS

100

BIBLIOGRAPHY

102

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• •

Employees - 43636 (As on 1-4-08) Turnover - Rs 33000 Crores (200809)

• 14 Manufacturing divisions BHEL Corporation - An • Introduction 4 Power Sector regional centers’ • 8 service centre’s and 16 regional offices GOINDWAL HARIDWAR

•

RUDRAPUR JHANSI

JAGDISHPUR

BHOPAL

• •

NEW

WORKING CAPITAL MANAGEMENT DELHI HYDERABAD BANGALOREE RANIPET TIRUCHIRAPALLY

•

Major Units/Divisions are Certified with ISO 9001(2000), ISO 14001 and OHSAS 18001 Continuous Profits since 1971-72 Caters to Core Sectors viz., Power, Industry, Transportation, 9 Telecommunication, Renewable Energy etc.

Manufactures over 180 products under 30 major product groups

VARANASI PATNA

BARODA NAGPUR

CALCUTTA AAAA

CORPORATE OFFICE

MANUFACTURING LOCATIONS

SERVICE CENTRES

Figure 1

WORKING CAPITAL MANAGEMENT

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B. H. E. L. A CORPORATE GIANT Established in the late 50's BHARAT HEAVY ELECTRICALS LIMITED (BHEL) is a name which is recognized across the industrial world. It is one of the largest engineering and manufacturing enterprises in INDIA and is one of the leading international companies in the power field. BHEL offers a wide spectrum of products and services for core sectors like power transmission, industrial transportation, oil and gas, telecommunication etc. Besides supply of non-conventional energy systems. It has also embarked into other areas including defense and civil aviation. A dynamic 63000 strong team embodies the BHEL philosophy excellence through continuous striving for state of the art technology. With corporate headquarters in NEW DELHI, fourteen manufacturing units, a wide spread regional services network and projects sites all over India and even abroad, BHEL is India's industrial ambassador to the world with export presence in more than 50 countries.

B.H.E.L.'s range of services extent from project feasibility studies to after sales services, successfully meeting diverse needs through turn key capability.

BHEL has had a consistent track record of growth, performance and profitability. The World Bank in its report on the Indian Public Sectors, has described BHEL as “one of the most efficient enterprises in the industrial sector, at par with international standards of efficiency". BHEL has acquired ISO 9000 certificate for most of its operations and has taken up Total Quality Management (TQM).

All the major units/divisions of BHEL have been upgraded to the latest ISO-9001: 2000 version quality standard certification for quality management. All the major units/divisions of BHEL have been awarded ISO-14001 certification for environmental management systems and OHSAS-18001 certification for occupational health and safety management systems.

WORKING CAPITAL MANAGEMENT

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BHEL occupies an all-important niche as evident by its ranking by CII amongst top eight PSUs based on financial performance. Recently in survey conducted by business India, BHEL has been rated as seventh Best Employer in India.

International Business: BHEL has, over the years, established its references in 60 countries of the world. These references encompass almost the entire range of BHEL products and services, covering turnkey power projects in thermal, hydro and gas-based sectors, substation projects, rehabilitation projects, besides a wide variety of products like: Transformers, compressors, Valves, Oil field equipment, electrostatic Precipitators, Insulators, heat Exchangers, Switchgears, Castings and Forgings etc. Some of the major successes achieved by BHEL have been in Gas-based power projects in Oman, Libya, Malaysia, Saudi Arabia, Iraq, Bangladesh, Sri Lanka, China, Kazakhstan; Thermal Power Projects in Cyprus, Malta, Libya, Egypt, Indonesia, Thailand, Malaysia; Hydro power plants in New Zealand, Malaysia, Azerbaijan, Bhutan, Nepal, Taiwan and Substation projects & equipment in various countries. Execution of these overseas projects has also provided BHEL the experience of working with world renowned Consulting Organizations and Inspection Agencies. The Company has been successful in meeting demanding requirements International markets, in terms of complexity of the works as well as technological, quality and other requirements viz., financing package, associated O&M services to name a few. BHEL has proved its capability to undertake projects on fasttrack basis. BHEL has also established its versatility to successfully meet the other varying needs of various sectors, be it captive power, utility power generation or for the oil flexibility to exhibited adaptability by manufacturing and supplying intermediate products.

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B.H.E.L. IN INDIA  REGIONAL OFFICES (POWER SECTORS) 1. NEW DELHI (NORTHERN REGION) 2. KOLKATA (EASTERN REGION) 3. NAGPUR (WESTERN REGION) 4. CHENNAI (SOUTHERN REGION)

 BUSSINESS OFFICES

 SERVICE CENTRES

1. BANGLORE

1. NOIDA

2. BARODA

2. BARODA

3. BHUBANESHWAR 4. MUMBAI

3. KOLKATA

5. KOLKATA

4. CHANDIGARH

6. CHANDIGARH 7. GUWAHATI

5. SECUNDRABAD

8. JABALPUR

6. NEW DELHI

9. JAIPUR 10.LUCKNOW 11.CHENNAI 12.NEW DELHI 13.PATNA

7. NAGPUR 8. PATNA 9. VARANASI

14.RANCHI

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15.SECUNDRABAD

 MANUFACTURING UNIT

1. HEAVY ELECTRICAL EQUIPMENT PLANT, HARIDWAR 2. CENTRAL FOUNDRY FORGE PLANT, HARIDWAR 3. HEAVY POWER EQUIPMENT PLANT, HYDERABAD 4. HIGH PRESSURE BOILER PLANT, TRICHY 5. HEAVY ELECTRICALS PLANT, BHOPAL 6. TRANSFORMER PLANT, JHANSI 7. ELECTRONICS DIVISION, BANGALORE 8. BOILER AUXILIARIES PLANT, RANIPET 9. INDUSTRIAL VALVES PLANT, GOINDWAL 10.ELECTRO-PORCELAINS DIVISION, BANGALORE 11.INSULATOR PLANT, JAGDISHPUR 12.COMPONENT FABRICATION PLANT, RUDRAPUR 13.HEAVY EQUIPMENT REPAIR PLANT, VARANASI 14.ELECTRICAL MACHINE REPAIR PLANT, MUMBAI

WORKING CAPITAL MANAGEMENT

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OBJECTIVES OF THE PROPOSED STUDY

The objective of the study is to provide the solutions for reducing down the duration of the operating cycle, to analyze the working capital position of the company and the liquidity position, finding out the problems that the company is facing in managing the working capital and showing trend of particular ratios in future and at same suggesting them to solve their problems.

•

To study the Working Capital Concept.

•

To see how the day to day operations of the company takes place.

•

To study the Working Capital Management process in Bharat Heavy Electricals Limited.

•

To see whether the company is prepared with enough Working Capital to face any kind of contingencies.

•

To compare the performance of Working Capital for a particular year with previous years.

•

To assess Liquidity position, Long term solvency, operational efficiency and overall profitability of BHEL.

•

Providing suggestions to solve the problems of the company.

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COMPANY'S BUSINESS MISSION AND OBJECTIVES  BUSINESS MISSION To maintain a leading position as suppliers of quality equipment, systems and services in the field of conversion of energy, for application in the areas of electric power transportation, oil and gas exploration and industries. Utilize company's capabilities and resources to expand business into allied areas and other priority sectors of the economy like defense, telecommunications and electronics.

 BUSINESS OBJECTIVES •

GROWTH: To ensure a steady growth by enhancing the competitive edge of BHEL defense, telecommunication and electronics in existing business, new areas and international operations so as to fulfill national expectations from BHEL.

• PROFITABILITY: To provide a reasonable and adequate return on capital employed, primarily through

improvements

in

operational

efficiency,

capacity

utilization,

productivity and generate adequate internal resources to finance the company's growth.

• CUSTOMER FOCUS: To build a high degree of customer confidence by providing increased value for his money through international standards of product quality, performance and superior services.

WORKING CAPITAL MANAGEMENT

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• PEOPLE- ORIENTATION: To enable each employee to achieve his potential, improve his capabilities, perceive his role and responsibilities and participate and contribute positively to the growth and success of the company and to invest in human resources continuously and be alive to their needs.

• TECHNOLOGY: Achieve technological excellence in operations by development of indigenous technologies

and

efficient

absorption

and

adaptations

of

imported

technologies to suit business need and priorities and provide the competitive advantage to the company.

• IMAGE: To fulfill the expectations which stakeholders like government as owner, employees, customers and the country at large have from BHEL.

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CONTRIBUTION OF BHEL IN VARIOUS CORE SECTORS BUSINESS SECTORS: BHEL's operations are organized around three business sectors, mainly power, industry and international operations. This enables BHEL to have a strong customer’s orientation, to be sensitive to his needs and respond quickly to the changes in the market.

POWER SECTORS: Power is the core sector of BHEL and comprises of thermal, nuclear gas, diesel and hydro business. Today BHEL supplied sets, accounts for nearly 66 % of the total installed capacity in the country as against nil till 1969-70. BHEL manufactures boilers auxiliaries, TG sets and associate controls, piping and station C & I up to 500 MW rating with technology and capability to go up to 1000 MW range.

BHEL has contracted so far around 240 thermal sets of various ratings, which includes 14 power plants set up on turnkey basis. Nearly 85 % of World Bank tenders for thermal sets floated in India have been won by the company against international competition.

It has the capability to manufacture gas turbines up to 200 MW rating and custom built combined cycle power plants. Nuclear steams generators, turbine generators, sets and related equipment of 235 MW rating have been supplied to most of the nuclear power plants in India Production of 500 MW nuclear sets, for which orders have been received.

BHEL has developed expertise in renovation and maintenance of power plant equipment besides specialized know how of residual life assessment, health diagnostic and life extensions of plants. The four power sectors regional centers at

WORKING CAPITAL MANAGEMENT

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New Delhi, Chennai, Kolkata and Nagpur will play a major role in giving a thrust to this business and focus BHEL's efforts in this area.

INDUSTRY SECTORS:BHEL is a major producer of large size thruster devices. The products include centrifugal compressors, high speed industrial drive turbines, industrial boilers and auxiliaries, waste heat recovery boilers, gas turbines, electric motors, drives, and control equipments, high voltage transformers, switch gears and heavy castings and forgings.

TRANSMISSION:A wide range of transmission products and systems are produced by BHEL to meet the needs of power transmission and distribution sector. These include: • Dry Type Transformers • SF6 Switch Gears • 400 KW Transmission Equipment • High Voltage Direct Current System • Series and Shunt Compensation Systems In anticipation of the need for improved substations, a 33 KV gas insulated substation with micro processors base control and protection system has been done.

TRANSPORTATION:65 % of trains in Indian Railways are equipped with BHEL's traction and traction control equipment. These include: • Broad Gauge 3900 HP AC / DC locomotives • Diesel Shunting Locomotives up to 2600 HP • 5000 HP AC Loco with thyristor control • Battery Powered Road Vehicles and Locomotives

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RESEARCH AND DEVELOPMENT:BHEL has a corporate R & D center supported by R & D groups at each of the manufacturing divisions. The dedicated effort of BHEL's R & D engineers have produced several new products like automated storage retrieval system automated guide vehicles for material transportation etc. Establishment of Asia's largest fuel evaluation test facility at Tiruchy was high light of the year. This facility will enable evaluation of combustion, heat transfer and pollution parameters in boilers.

Major R & D achievement include: • Design manufacture and supply of countries first 17.2 MW industrial steam turbines.

• Development of 4700 HP AC / DC loco for Indian Railways.

• Development of largest capacitor voltage transformers of 8800 PF 400 KV rating.

• Development and application low cost ROBOTS for job loading/unloading.

According to ex- CMD MR. R.K.D. SHAH, "BHEL is spending Rs. 60 Crores on Research and Development. Earning from product which has been commercialized has gone up 26 % to Rs. 760 Crores."

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HUMAN RESOURCE DEVELOPMENT INSTITUTE:BHEL has envisioned becoming "A World Class Engineering Enterprise committed to enhancing stakeholder value". Force behind realization of this vision and the source of our competitive advantage is the energy and ideas of our 44,000 strong highly skilled and motivated people. The Human Resource Development Institute situated in NOIDA, a corner-stone of BHEL learning infrastructure, along with Advanced Technical Education Center (ATEC) in Hyderabad and the Human Resource Development Center at the manufacturing Units, through various organizational developmental efforts ensure that the prime resource of the organization – the Human Capital is “Always in a state of Readiness”, to meet the dynamic challenges posed by a fast changing environment. It is their constant endeavour to take the HRD activities to the strategic level of becoming active partner to the (organizational) pursuits of achieving the organizational goals.

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TECHNICAL COLLABORATIONS, DIVISIONS, COMPETITORS AND VARIOUS PRODUCT OF BHEL  TECHNICAL COLLABORATION

PRODUCT

# Thermal Sets, Hydro Sets, Motors & Control Gears.

# Bypass & Pressure Reducing Systems

COLLABORATIONS

PROMMASHEXPORT RUSSIA

SULZER BROTHER LTD. SWITZERLAND

# Electronic Automation System for Steam Turbine & Generators

# Francis Type Hydro Turbines

SIEMENS AG. GERMANY

GENERAL ELECTRIC CANADA

# Moisture Separator Reheaters

BALOKE DUERR GERMANY

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# Christmas Trees & Conventional Well Head Assemblies

# Steam Turbines, Generators and Axial Condensers

# Cam Shaft Controllers and Tractions Current Control Units

# HDVC

NATIONAL OIL WELL USA

SIEMENS AG. GERMANY

SIEMENS AG. GERMANY

ABB SWEDEN

# Programmable Controls

ABB SWITZERLAND

# Gas Turbines

GENERAL ELECTRIC CO. USA

# Tube Mills

STIEN INDUSTRIES FRANCE

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 DIVISIONS OF BHEL: There are 20 Divisions of BHEL, they are as follows: • HEEP, Haridwar • HPEP, Hyderabad • HPBP, Tiruchy • SSTP & MHD, Tiruchy • CFFP, Haridwar • BHEL, Jhansi • BHEL, Bhopal • EPD, Bangalore • SG, Bangalore • ED, Bangalore • BAP, Ranipet • IP, Jagdishpur • IOD, New Delhi • COTT, Hyderabad • IS, New Delhi • CFP, Rudrapur • HERP, Varanasi • Regional Operations Division ARP, New Delhi • TPG, Bhopal •

Power Group (Four Regions and PEM)

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 MAJOR COMPETITORS OF BHEL •

Ansaldo

Italy

•

Asea Brown Boueri

Switzerland

•

Beehtel

USA

•

Block & Neatch

USA

•

CNMI & EC

China

•

Costain

U.K.

•

Elect rim

Poland

•

Energostio

Russia

•

Electro Consult

Italy

•

Franco Tosi

France

•

Fuji

Japan

•

GEC Alsthom

U.K.

•

General Electric

USA

•

Hitachi

Japan

•

LMZ

Russia

•

Mitsubishi

Japan

•

Mitsui

Japan

•

NEI

U.K.

•

Raytheon

USA

•

Rolls Royce

Germany

•

Shanghai Electric Co.

China

WORKING CAPITAL MANAGEMENT

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 PRODUCTS OF BHEL 1.

Thermal power plants

16. Industrial and special ceramics

2.

Nuclear power plants

17. Capacitors

3.

Gas Based power plants

18. Energy Meters

4.

Hydro power plants

19. Electrical Machines

5.

Dg power plants

20. Compressors

6.

Industrial sets

21. Control Gear

7.

Boilers

22. Silicon Rectifiers

8.

Boiler Auxiliaries

23. Thyristor GTO/ IGBT equipments

9.

Piping System

24. Power Devices

10.

Heat exchangers and pressure

25. Transportation equipments

Vessels

26. Oil Field equipments

11.

Pumps

27. Castings and Forgings

12.

Power station Control

28. Steams Steel Tubes

equipment

29. Distributed power Generation and Small

13.

Switchgear

14.

Bus Ducts

15.

Transformers

Hydro Plant 30. Systems and Services

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The Heavy Electrical Equipment Plant (HEEP) located in Haridwar, is one of the major manufacturing plants of BHEL. The core business of HEEP includes design and manufacture of large steam and gas turbines, turbo generators, hydro turbines and generators, hydro turbines and generators, large AC/DC motors and so on.

Heavy Electrical Equipment Plant, Haridwar of this Multi-unit corporation with 7467 strong highly skilled technicians, engineers, specialists and professional experts is the symbol of Indo Soviet and Indo German Collaboration. It is one of the four major manufacturing units of the BHEL. With turnover of 164059 lacks and PBT of Rs.32489 lacks HEEP added 3000 MW of power to the National grid during 200506.

HEEP is engaged in the manufacture of Thermal and Nuclear Sets up to 1000MW, Hydro Sets up to HT Runner dia 6300mm, associated Apparatus Control gears, AC & DC Electrical machines and large size Gas Turbine of 60-200 MW. HEEP Haridwar contributes about 44% of India’s total installed capacity for power generation with total capacity of Thermal, Nuclear & Hydro Sets of over 45000MW currently working at a Plant Load Factor of 76% and Operational Availability of 86%.

In spite of acute recession in economy, BHEL Haridwar received recent orders for Mejia-5&6, Sipat, Bhatinda, Chandrapura, Bakreshwar, Santaldih, Bhilai, Dholpur.

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HISTORICAL PROFILE: The construction of heavy electrical equipment Plant commenced in Oct.”1963”after indo- soviet technical co-operation agreement in Sept.”1959”The first product to roll out from the plant was an electric motor in January 1967.This was followed by first 100 MW Steam Turbine in Dec.1969 and first 100MW Turbo Generator in August 1971.The plant’s “break even” was achieved in March 1974.BHEL went in for technical collaboration with M/s Siemens, Germany to undertake design and manufacture to large size thermal sets upto a unit rating of 1000 MW in the year 1976.First 200 MWTG set was commissioned at Obra in 1977.The continuum of technological advancement subsequently saw the commissioning of 500 MW TG Set in 1984 .The technical cooperation of Gas Turbine manufacture was also signed with M/s Siemens Germany. First 150 MW ISO rating gas Turbine was exported to Germany in Feb”1995”.Our 250 MW thermal set up at Dahanu Plant of BSES made a history by continuous operation for over 150 days and notching up a record plant load factor greater than 100%.

CORPORATE CITIZEN: HEEP Hardwars Strategic plans and its policy & strategy are commensurate with BHEL Corporate / strategic Plan . As first PSU to adopt Corporate Planning as a process . Board meetings for long –range development , BHEL has always guided other PSU’s in their Corporate planning

WORKING CAPITAL MANAGEMENT

process .Board meeting , monthly 30

Management Committee meetings, Annual Revenue Budget exercise , Mid term reviews , Apex TQ council reviews, Personnel Heads Meet, Quality Heads Meet , Technology Meets , Product committees meetings, Inter-Unit Quality Circle Meets etc. Are the some of crore strengths of BHEL Corporation’s vast network. .

FAVOURABLE BUSINESS ENVIRONMENT: Power Sector has to grow over 10% annually to reach the 7% GDP level. Thus, the demand for thermal sets will remain high. Central Electricity Authority (CEA) is the guiding authority for Power Sector strategies in our country. BHEL representatives, along with representatives from various domestic customers, are an integral part of various committees formed by CEA. This enables us to guide and understand the market requirements and future challenges. To meet the 11th Five Year Plan target of adding 61,000MW, CEA has planned addition of 23 nos. Standardized 500MW sets for faster project execution and cost reduction. BHEL, including HEEP, is a part of this process. CEA has standardized for the next capacity of 800MW sets and has asked BHEL to prepare itself for manufacturing and supply in the 11th Five Year Plan. BHEL has tied up with Siemens for upgradation of technology. Further CEA’s stress on R&M of ageing Power Plants is also providing business opportunity to unit.

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OVERVIEW OF FINANCE FUNCTIONS ROLE OF FINANCE FUNCTION Finance function is the backbone of any organization. The finance function plays a very critical role in the maximization of shareholders who provide the funds to the company. This objective is being achieved by the finance department, which provides the carious information on the financial parameters such as cash flows, profitability, cost and margin, assets, working capital and shareholder value for the purpose of efficient utilization of resources resulting in better profitability of the company. The importance of the finance functions cannot be undetermined in any organization as many companies have perished not due to bad production management but due to poor financial management function acts like radar of the ship, which guides the direction of the ship and saves it from the perils of the sea.

The various activities undertaken by the finance department achieve the aforesaid objectives, may be summarized as follows• Maintenance of account books, cost records.

• Preparation of salary bills and other related payment to employees: PP, bonus, TA, departmental advances of PF accounts etc.

• Preparation of Profit & Loss a/c and Balance Sheet.

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32

• Generation of various mirs for management use: mires relating to turnover, profitability, cash requirements, inventory.

• Coordination with company auditors, Govt. Auditors, cost auditors and tax auditors.

• Decisions relating to purchase and sales.

• Investment decisions: capital investment decisions and working capital management decisions.

• Financing decisions: decisions relating to financing-mix or capital structure or leverage and Dividend policy decisions.

COST SECTION Cost- section of the company is divided into following two sections viz, PRODUCT COST & CENTRAL COST and these deals with the following functions: (i)

Determination of periodic profits including inventory valuation.

(ii)

Determination of pricing policy of the company.

(iii)

Work related to capital expenditures of the company.

(iv)

Developing variance Management Information report for different parts of management for purpose of cost control and reduction.

(v)

Valuation of work in progress and finished goods.

(vi)

Interaction with management of top management link for achieving cost control and cost reduction and thereby improving bottom line of the company.

(vii)

Preparation of cost sheet of different product and their analysis for future planning.

BOOKS AND BUDGET SECTION This section deals mainly with the following:(i)

Preparation of operating budget for the company as a whole.

WORKING CAPITAL MANAGEMENT

33

(ii)

Co-ordination with various functions of organization with regard to generation and submission of important MIR's to corporate office.

(iii)

Preparation of annual accounts of the company.

(iv)

Coordination with company auditors with regard to company accounts.

(v)

Maintenance and accounting of fixed assets accounts.

(vi)

Preparation of long term profit plans based on broad objectives of the company.

SALES SECTION Sales accounts section will deal mainly with the following items:(i)

Scrutiny and vetting of estimates / quotation for sale of products / services, wherever financial concurrence is required.

(ii)

Scrutiny and vetting of agreements for sales of products and services

(iii)

Invoicing for sale / advance or progressive payment / erection income and other.

(iv)

Maintenance of subsidiary records like sales journals / sales daybook, sundry debtor’s ledgers, advances from customer ledger etc.

(v)

Payments, recovery and accounting of sales tax, excise duty.

(vi)

Accounting of claims on carriers/ insurance companies for missing items / damages on outward consignments.

(vii)

Scrutiny, payments and accounting of bills of carriers and insurers and other miscellaneous claims relating to the outwards consignments.

(viii)

Calculation and scrutiny of data for payments of royalties to the collaborators.

(ix)

Review and reconciliation as well as follow up of recovery of outstanding dues from the customers in coordination with the commercial department.

WORKING CAPITAL MANAGEMENT

34

STORES SECTION For the convenience of performance of various functions it is divided in to further three sections which are as follows: a)

Stores bills.

b)

Stores review.

c)

Foreign payment.

They deal mainly with the following items of works:

(i)

Payment of supplier’s bills including bills for advances - indigenous and foreign.

(ii)

Pricing of stores receipt vouchers including fixed assets vouchers and fixed assets receipt vouchers.

(iii)

Maintenance of accounts of advances to suppliers, claims recoverable, claims for short suppliers, rejections and rectifications of materials and sundry creditors.

(iv)

Opening of letter of credit and arranging payments to foreign suppliers under foreign credit / differed payment agreements.

WORKING CAPITAL MANAGEMENT

35

(v)

Payment of bills for ocean freight, port trust dues, custom duty, local agents commission and clearing agents bills, transit insurance bills, bills of contractors for transport /handling etc. And accounting of such payments is made at regional offices.

(vi)

Maintenance of accounts of material issued on loan and materials issued to subcontractors.

(vii)

Keeping account of earnest money and security deposits received from tender and suppliers.

(viii)

Adjustment of stores in transit to be made at the close of the year.

PAYROLL SECTION This section deals mainly with the following functions: (i)

Preparation of monthly wage bills.

(ii)

All account work related to personal payments and discloses profit and loss account of the company.

(iii)

Dealing with income tax authority with regard to personal taxation of employee.

(iv)

Dealing with other statutory authority such as P.F. Commissioner, ESI (employee state insurance).

(v)

To ensure correct payment of salary and wages and other benefits to employees in, telephone and miscellaneous payments

WORKS SECTION Works section of the company is dealing with the following functions:

WORKING CAPITAL MANAGEMENT

36

(i)

Payments of contractor’s bills including bills for advance.

(ii)

Maintenance of accounts of contractors with regard to security deposits, earnest money, progressive payments.

(iii)

Maintenance of accounts of materials issued on loans to contractors.

(iv)

All accounting work related to capital expenditure in progress on erection of plant & machinery and building.

(v)

All other miscellaneous work relating to hiring of various facilities.

STRENGTH (S): • Low cost producer of quality equipment due to cheap labour and fully depreciated plants.

• Flexible manufacturing set up.

• Entry barrier due to high replacement cost of its manufacturing facilities.

WEAKNESSES (W): • High working capital requirement due to its exposure to cash starved SEBs (State electricity boards) and High WIP. • Inability to provide project financing.

WORKING CAPITAL MANAGEMENT

37

OPPORTUNITIES (O): • High-expected growth in power sectors (7000 MW/p.a.needs to be added) • High growth forecast in India’s index of industrial production would increase demand for industrial equipment such as motors and compressors.

THREATS (T): • Technical suppliers are becoming competitors with the opening up of the Indian economy.

• Fall in global power equipment prices can affect profitability

RESEARCH METHODOLOGY

After discussion with my locality member. I choose the project of Working capital management. I discussed the project with my instructor and coordinator Mrs.SANTOSH ANAND (Sr.A/0) at H.E.E.P., BHEL, Hardwar.

She approved the project. After that, a simple course of action has been followed for working on this project. Entire information and data were gathered from the respective annual report of BHEL, Haridwar. All the figures are taken from their balance sheet, profit & loss account of the respective years and the other internal documents, which were personally shown by the members of company in our interest.

WORKING CAPITAL MANAGEMENT

38

WORKING CAPITAL MANAGEMENT

39

MEANING OF WORKING CAPITAL

Working Capital is commonly defined as the difference between current assets and current liabilities. Efficient working capital management requires that firms should operate with some amount of working capital, the exact amount varying from firm to firm and depending, among other things on the nature of industry.

WORKING CAPITAL MANAGEMENT

40

Capital required for a business can be classified in two main categories viz.

1) Fixed capital, and 2) Working capital.

Every business needs funds for two purposes-for establishments and to carry out its day-to-day operations. Long-term funds are required to create production facilities.

Through purchase of fixed assets such as plants 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 purpose for the purchase of raw material, payment of wages and other day-to-day expenses, etc. These funds are known working Capital. In simple words, working capital 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 and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted 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.

CLASSIFICATION OF WORKING CAPITAL Working Capital may be classified on two basis: a) On the basis of Concept: On the basis of concept, working capital can be classified as, • Gross Working Capital • Net Working Capital

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41

b) On the basis of Time: On the basis of time, working capital can be classified as, • Permanent or Fixed Working Capital • Temporary or Variable Working Capital

Gross Working Capital: The Gross Working Capital is the Capital invested in the total current assets of the enterprises. Current assets are those assets, which can be converted into cash within a short period, normally an accounting year.

Gross Working Capital = Total Current Assets

Net Working Capital: The term Net Working Capital refers to the excess of current assets over current liabilities, or say, Net Working Capital = Current Assets – Current Liabilities Net Working Capital can be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets of the income of the business. The gross working capital concept is financial

WORKING CAPITAL MANAGEMENT

42

or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.

The gross concept is sometime preferred to the concept of working capital for the following reasons: • It enables the enterprise to provide correct amount of working capital at correct time.

• Every management is more interested in total current assets with which it has to operate then the sources from where it is made available.

• It takes into consideration of the fact every increase in the funds of the enterprise would increase its working capital.

• The concept is also useful in determining the rate of return on investments in working capital.

• The net working capital concept, however, is also important for the following reasons:• It is a qualitative concept, which indicates the firm’s ability to meet its operating expenses the short-term liabilities.

• It indicates the margin of protection available to short term creditors.

• It is an indicator of financial soundness of enterprise.

• It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.

Permanent or Fixed Working Capital: Permanent or fixed capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of current assets is called permanent or fixed working capital as this part of working capital is permanently

WORKING CAPITAL MANAGEMENT

43

blocked in current assets. As the business, grow the requirement of working capital also increases due to increase in current assets.

Temporary or Variable Working Capital: Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called the seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaign for conducting research etc.

Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in business

Calculate current assets to fixed asset ratio: A firm needs current and fixed assets to support a particular level of output.

However, to support the same level of output the firm can have different levels of current assets. As the firm’s output and sales increases, the need for current asset increases. Generally the current assets do not increase in direct proportion to output; current assets may increase at a decreasing rate with input. This relationship is based upon the notion that it takes a greater proportional investment in current assets when only a few units of output are produced than it does later on when the firm can use its current assets more efficiently.

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

There are three policies:-

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1) Conservative current assets policy: CA/FA is higher. It implies greater liquidity and lower risk.

2) Aggressive current assets policy: CA/FA is lower. It implies higher risk and poor liquidity.

3) Moderate current assets policy: CA/FA ratio falls in the middle of conservative and aggressive policies.

Figure 2 Alternative current asset policies

In case of BHEL HEEP Haridwar the ratio of current asset to fixed asset is

CURRENT ASSETS / FIXED ASSETS RATIO PARTICULARS 2003-04 2004-05 2005-06 2006-07 2007-08 Current Assets 100671

112836

WORKING CAPITAL MANAGEMENT

139668

167961

200112 45

Fixed Assets

14082

16565

13896

16858

15948

CA/FA

7.15:1

6.81:1

10.05:1

9.96:1

12.5:1

Table 1 : showing ratio of current assets to fixed assets

ISSUES IN WORKING CAPITAL MANAGEMENT 1. Liquidity vs. Profitability: Risk Return Trade Off .

The firm would make just enough investment in current assets if it were possible to estimate working capital needs exactly. Under perfect certainty, current assets

WORKING CAPITAL MANAGEMENT

46

holdings would be at the minimum level. A larger investment in current assets under certainty would mean a low rate of return of investment for the firm, as excess investment in current assets will not earn enough return. A small invest in current assets, on the other hand, would mean interrupted production and sales, because of frequent stock-cuts and inability to pay to creditors in time due to restrictive policy.

As it is not possible to estimate working capital needs accurately, the firm must decide about levels of current assets to be carried.

2. The Cost Trade Off: A different way of looking into the risk return trade off is in terms of the cost of maintaining a particular level of current assets. There are two types of

cost

involved:I. Cost of liquidity II. Cost of illiquidity • --If the firm’s level of current assets is very high, it has excessive liquidity. Its return on assets will be low, as funds tied up in idle cash and stocks earn nothing and high level of debtors reduces profitability. Thus, the cost of liquidity increases with the level of current assets.

WORKING CAPITAL MANAGEMENT

47

• --the cost of illiquidity is the cost of holding insufficient current assets. The firm will not be in a position to honor its obligations if it carries to little cash. This may force the firm to borrow at high rates of interests. This will also adversely affect the credit-worthiness of the firm and it will face difficulties in obtaining funds in the future. All this may force the firm into insolvency. Similarly, the

low levels of stock will result in loss of sales and customers may shift to Figure 3: Cost Trade-off competitors. Also, low level of debtors may be due to right credit policy, which

would impair sales further. Thus the low level of current assets involves cost that increase as this level falls.

POLICIES FOR FINANCING CURRENT ASSETS The following policies for financing current assets in HEEP, Haridwar: LONG TERM FINANCING:

WORKING CAPITAL MANAGEMENT

48

The sources of long term financing include ordinary shares capital, preference share capital debentures, long term borrowings from financial institutions and reserves and surplus. The HEEP Haridwar manages its long term financing from capital reserve, share premium A/C, foreign project reserve, bonds redemption reserve and general reserve.  SHORT TERM FINANCING: The short term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short-term finance include working capital funds from banks, public deposits, commercial paper, factoring of receivables etc.

The HEEP, Haridwar manages SECURED LOANS as:1) Loans and advances from banks 2) Other loans and advances: A) Debentures/bonds B) Loans from State Govt.

C) Loans from financial institutions (secured by pledge of PSU Bonds and bills accepted guaranteed by banks)

3) Interest accrued and due on loans a) From State Govt. b) From financial institutions bonds and other The HEEP, Haridwar manages UNSECURED LOANS as: 1) Public deposits 2) Short term loans and advances:

WORKING CAPITAL MANAGEMENT

49

a) From banks b) Commercial papers c) From companies d) From financial institutions 3) Other loans and advances a) From banks b) From others -from govt. of India -from state govt.

-from financial institutions -from foreign financial institution -post shipment credit exim bank -credit for assets taken on lease 4) Interest accrued and due on -Post shipment credit -Govt. credit -State Govt. loans -Credits for assets taken on lease -Financial institutions and others -Foreign financial institutions -Public deposits

WORKING CAPITAL MANAGEMENT

50



SPONTANEOUS FINANCING:-

Spontaneous financing refers to the automatic sources of short term funds arising in the normal course of a business. Trade Credit and outstanding expenses are examples of spontaneous financing.

A firm is expected to utilize these sources of finances to the fullest extent. The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long term and short term sources of finances.

Needs and Objectives for Working Capital Every business needs some amount of working capital. The needs for working capital, arises due to time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production, production and sales, and realization of cash.

Thus, working capital is needed for the following purposes: • For the purchase of raw material, component and spares.

• To pay wages and salaries.

• To incur day- to- day expenses and overhead costs such as fuel, power and office expenses etc.

• To meet the selling costs such as packing, advertising etc.

• To provide credit facilities to the customers.

• To maintain the inventories of raw material, work in progress, store, spares, and finished stock.

For studying the need of working capital in a business, one has to study the business under varying circumstances such as new concern, as a growing and one,

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51

which has attained maturity. A new concern requires a lot of funds to meets its initial requirement such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and the ambition of its promoters. Greater the size of the business unit, generally will be the requirement of the working capital.

The requirement of the working capital goes on increasing with the growth and expansion of the business until its gains maturity. At maturity, the amount of working capital required is called normal working capital.

IMPORTANCE OF WORKING CAPITAL 1. Time devoted to working capital management:The largest portion of financial manager’s time is devoted to day to day internal operation the firm. This may be appropriately sum up under the heading "WORKING CAPITAL MANAGEMENT".

2. Investment in current assets: Current assets represent more than half of the total assets of a business firm.

Because they represent largest investment and because this investment tends to relatively volatile, current assets are worthy for the financial manager's careful attention.

3. Importance for small firm:Current assets are similarly important for the financial manager's of small firm.

Further small firm are relatively limited access to the long term markets, it must

WORKING CAPITAL MANAGEMENT

52

necessarily rely on the trade credit and short term bank loan , both of net effect on net working capital by increased current liabilities.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT

• NATURE OF BUSINESS: • PRODUCTION POLICY: • LENGTH OF PRODUCTION CYCLE: • CREDIT POLICY: • WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.

DEBTORS

FINISHED GOODS

CASH

RAW MATERIAL

WORK IN PROGRESS

Figure 4: Working Capital Cycle

WORKING CAPITAL MANAGEMENT

53

Figure 5 : Working Capital Cycle

Each component of working capital (namely inventory, receivables and payables) has two dimensions ... TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment.

WORKING CAPITAL MANAGEMENT

54

If you ...

•

Then ...

Collect receivables (debtors) faster

You release cash from the cycle

•

Collect receivables (debtors) slower

Your receivables soak up cash

•

Get better credit (in terms of duration or amount) from suppliers

You increase your cash resources

• RATE OF GROWTH AND EXPANSION OF BUSINESS: • BUSINESS FLUCTUATION: • EARNING CAPACITY AND DIVIDEND POLICY: WORKING CAPITAL MANAGEMENT

55

• PRICE LEVEL CHANGES: • AVAILABILITY OF RAW MATERIAL: • OTHER FACTOR: a) Operating efficiency

b) Management ability

c) Irregularities of supply

d) Import policy

e) Asset structure

f) Importance of labor

g) Seasonal Variations

MANAGEMENT OF WORKING CAPITAL Management of working capital means management of all aspects of current assets and

current liabilities.

Basically,

“Working

capital

management is

concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that exist between them”.

Financial management should determine the quantum and structure of current assets. It should also see that current assets are financed from the proper sources.

Management should also see that current liabilities are paid in time, while managing the working capital.

The main objective of working capital management is to manage current assets and current liabilities in a manner so that working capital can be kept in a satisfactory level. It is also taken in to account that the working capital should be neither excessive nor inadequate. The amount of current assets should be adequate to pay the current liabilities in time and adequate security margin can be maintained.

Accordingly, proper balance among the different constituents of current assets is maintained so that no current has more than require amount invested in it.

WORKING CAPITAL MANAGEMENT

56

Management of working capital affects profitability, risk and liquidity of the business significantly. Management should, therefore, maintain proper balance among these factors while managing working capital. If the quantum of working capital is more, it will increase liquidity, but decrease profitability and risk. If working capital relatively declines, it will decrease liquidity but cause an increase in profitability and risk. If business wants to earn more profit, it will have to bear higher risk. Risk means inability of the firm to pay current liabilities in time.

Working capital management is three dimensional in nature: 1) It concerned with the formulation. It of policies with regard to profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets.

3) It is concerned with the decisions about the composition and level of current liabilities.

Policies regarding to Profitability, Liquidity and Risk

Composition of level of Current assets WORKING CAPITAL MANAGEMENT

Composition of level of current liabilities 57

Figure 6: Dimensions of Working Capital

EXISTING SYSTEM OF WORKING CAPITAL IN BHEL, HEEP, HARIDWAR

To maintain the optimum level of working capital in such a big organization is really a challenging task. The three basic components that determine the level of working capital in any organization are: • Cash • Debtors ,B/R • Inventory.

On the basis of our research in the BHEL Hardwar, these basic components are managed in the organisation, in the under mentioned manner.

Particulars

2003-04

2004-05

2005-06

2006-07

2007-08

10

9

9

111

5

Current Assets Cash and Bank Balance

WORKING CAPITAL MANAGEMENT

58

Sundry Debtors

55866

48552

64709

91067

123091

Inventory

39214

58976

69798

67627

65365

Loans and Advances

5581

5299

5152

9156

11651

TOTAL

100671

112836

139668

167961

200112

Sundry Creditors

13953

16205

16674

21570

33545

Advances from customer

45214

55048

61889

94345

128554

Other Liabilities

8457

9250

12370

14307

23956

Provisions

14572

18887

19990

19834

23348

TOTAL

82196

99390

110923

150056

209403

Net working capital

18475

13446

28745

17905

-9291

Turnover

97432

140697

164059

210494

235096

Current Liabilities

Table 2: Working Capital in HEEP (In RS/ LACS)

Graphical presentation of current assets of the company Current Assets Years/Particulars

03-04

04-05

05-06

06-07

07-08

Debtors

55866

48552

64709

91067

12309 1

Inventory

39214

58976

69798

67627

65365

10

9

9

111

5

Cash

WORKING CAPITAL MANAGEMENT

59

Loan & Advances Total

5581

5299

5152

9156

11651

100671

11283 6

13966 8

16796 1

20011 2

Table 3: Current Assets of HEEP Haridwar

Graphical presentation of current assets

140000 120000 100000

Debtors

80000

Inventory

60000

Cash

40000

Loan and advance

20000 0 2003-04 2004-05 2005-06 2006-07 2007-08

Figure 7 : current assets position in past five years

Focusing on liquidity management Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the

WORKING CAPITAL MANAGEMENT

60

ordinary operating cycle of a business. In order to protect their interests, short-term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. However, the quality of current assets should be considered in determining the level of current assets Vis-a –Vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity and may prove to be harmful for the company’s reputation.

Excessive liquidity is also bad. It may be due to mismanagement of current assets.

Therefore prompt and timely action should be taken by management to improve and correct imbalances in the liquidity position of the firm.

Net working capital concept also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm there is a minimum amount of net working capital, which is permanent. Therefore a portion of the working capital should be financed with the permanent sources of funds such as equity, share capital, debentures, long-term debt, preference share capital or retained earnings. Management must decide the extent to which current assets should be financed with equity capital or borrowed capital.

Balanced working capital position The firm should maintain a sound working capital position. it should have adequate working capital to run its business operations. both excessive and inadequate working capital positions are dangerous from the firm’s point of view. Excessive working capital means holding costs and idle funds which earn no profits for the firm. paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies and sales disruptions.

The dangers of excessive working capital are as follows:

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61

1. It results in unnecessary accumulation of inventories. Thus chances of inventory mishandling, waste, theft and losses increase.

2. It is an indication of defective credit policy and slack collection period.

Consequently, higher incidence of bad debts results, which adversely affects profits.

3. Excessive working capital makes management complacent which degenerates into managerial inefficiency.

4. Tendencies of accumulating inventories tend to make speculative profits grow.

This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.

Inadequate working capital is also bad and has the following dangers which BHEL might face if inadequate working capital continuous for longer period of time: 1. It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.

2. It becomes difficult to implement operating plans and achieve the firm’s profit target.

3. Operating inefficiencies creep in when it becomes difficult even to meet day to day commitments.

4. Fixed are not efficiently utilized for the lack of working capital funds. Thus the firm’s profitability would deteriorate.

5. paucity of working capital funds render the firm unable to avail attractive credit opportunities etc, 6. The firm loses its reputation when it is not in a position to honor its short term obligations. As a result the firm faces tight credit terms.

Management of BHEL, HEEP should, therefore, maintain the right amount of working capital on the continuous basis. Only then a proper functioning of business operations will be ensured. Sound financial and statistical techniques, supported by

WORKING CAPITAL MANAGEMENT

62

judgement, should be used to predict the quantum of working capital needed at different time periods.

A firm’s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm’s risk. Risk in this regard means chances of the firm being unable to meet its obligations on due date. The lender considers a positive networking as a measure of safety. All other things being equal, the more the networking capital a firm has, the less likely that it will default in meeting its

WORKING CAPITAL -9291

18475

2003-04

17905

2004-05 2005-06 13446 28745

2006-07 2007-08

current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position .

Graphical Representaion Of Working Capital In BHEL Interpretation WORKING CAPITAL MANAGEMENT Figure 8: Graphical Representation of Working Capital in BHEL HEEP Haridwar

63

In the above chart, it is clearly visible that the net working capital has decreased drastically in the past five years as it was in negative in 2007-08 i.e.

-9291 as compare to other years. It has come down to 13446 Lacs in 2004-05 from 18475 Lacs in 2003-04.But in 2005-06 it has increased which is good for the company because its turnover has also increased. Moreover if we see 2007-08 year there is a huge turn around in WC, as cash balance has decreased drastically in comparison to previous year and on the other hand creditors have also increased .The main reason for working capital to be in negative is the untimely payment from debtors. And more over, there is a direct relation between working capital requirements with Debtors and Inventory.

There has given reasons to the organization to take certain strategic measures to manage its Debtors and Inventory.

Following are the measures: • Special task forces were built up from debtors and Inventory Management at

senior level.

• Regular follow up at senior level.

• A close contact with the customers.

• Proper age- wise analysis of the debtors.

• Proper classification between collectible Debtors and bad debts.

• Bad debts written off as early as possible after making all efforts for its collection.

• Product cycle minimized so that cost of the product does not become high to the agreed amount because of time factor.

• Formation of specific group in each area to identify the wastage elements and seek participation of all.

• Formulation of action plan to eliminate/minimize wastages.

• Identification of corrective actions and their implementation. .

Working Capital Turnover Ratio WORKING CAPITAL MANAGEMENT

64

This ratio helps to measure the efficiency of the utilization of the working capital. It signifies that for an amount of sales, a relative amount of working capital is needed.

This ratio shows the direct relationship between the sales and working capital.

W.C. Turnover Ratio = Sales/ Working Capital

YEARS CALCULATION RATIO 2003-04 2004-05 2005-06 2006-07 2007-08

97432/18475 140697/13446 164059/28745 200864/17905 235096/-9291

5.27 10.46 5.71 11.22 -25.30

Table 4: Calculation of Working Capital Turnover Ratio In HEEP Haridwar

Graphical Presentation of Working Capital Turnover Ratio

Figure 9: Working Capital Ratio of HEEP Haridwar

WORKING CAPITAL MANAGEMENT

65

Current Assets Turnover Ratio This ratio indicates the efficiency with which current assets turn into sales. A higher current assets turnover rate or a lower current assets turnover period is better. It indicates the efficient use of the funds and the reverse case indicates reduced lockup of funds in current assets.

C.A. Turnover Ratio = Sales / Current Assets

Years

Calculations

Ratio

2003-2004

97432 / 100671

0.97:1

2004-2005

140697 /112836

1.25:1

2005-2006

164060 /139668

1.18:1

2006-2007

200864/167961

1.19:1

2007-2008

235096/200112

1.17:1

Table 5: Calculation of Current Assets Turnover Ratio

WORKING CAPITAL MANAGEMENT

66

Graphical presentation of current assets turnover ratio

1.4 1.2 1 0.8 0.6 0.4 0.2 0 2003-04

2004-05

2005-06 YEARS

2006-07

2007-08

Figure 10: Graphical Presentation of Current Assets Turnover Ratio

Interpretation By observing the above ratio we find that current assets turnover rate increased from 03-04 to 04-05. Then after there was a slight decline in 05-06 and in very next year there was slight increase in it. In 2007-2008 ratios shows a slight decline but taking into consideration last five years from

03-04 to 07-08 the

company improved its current assets position from 0.97 to 1.17 which shows that current assets management is improved.

WORKING CAPITAL MANAGEMENT

67

INTRODUCTION

WORKING CAPITAL MANAGEMENT

68

It is very difficult for the organization to sell always on cash basis in today’s competitive market. In almost every business, we have to sell on credit basis. The basic objective of management of sundry debtor is to optimize the return on investment on this asset. It is obvious that if there are large amounts tied up in sundry debtors, working capital requirement would be high and consequently interest charges will be high. In such cases, the bad debts and cost of collection of debts would be high. On the other hand if the credit policy is very tight, investment in sundry debtors is low but the sale may be restricted, since the competitors may offer more liberal credit term.

We have limited resources and therefore every resource has its own opportunity cost. Therefore, the management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies. Debtors and cost of debtors have direct relation; cost will increase due to increase in debtors and vice versa. It depends on the credit sale of concern and credit period (collection period) allowed to customer. It is in interest of customer to pay as late as possible, and company whom made sales, would like to collect their debtor as early as possible.

There is a conflict between the two aspects. Debtor management is the process of finding the equilibrium at which company agrees to receive its payment without hampering or having any adverse effect on its sales and customer agree to pay at their economical buying concept.

Sundry debtor level depends on two measure issues One is volume of credit sales and another is credit period allowed to customer.

It is the essence of every business that to sale on credit and allow credit period to the customer in such a competitive market.

Following factors may be considered before allowing credit period to the customer • Nature of the product

WORKING CAPITAL MANAGEMENT

69

• Credit worthiness of the customer, which varies from customer to customer.

• Quantum of advance received from customers • Credit policy of company, say number of days allowed to customer for payment to the customers.

• Cost of debtors • Manufacturing cycle time of the product etc.

Debtors Management There are mainly three aspects of Management of Debtors 1. Credit Policy: The credit policy is to determine. It involves a tradeoff between the profits on additional sale that arises due to credit being extended on one hand and the cost of carrying those debtors and bad debts losses on the other.

2. Credit Analysis This requires determining as how risky is to advance credit to a particular customer.

3. Control of Receivables This requires to the firm to follow up debtors and decide about a suitable credit collection policy. It involves both lying down of credit policy and execution of such policies.

There is a cost of maintaining receivables, which comprises Cost of: • The company require additional funds as resources are blocked in receivables which involves a cost in the form of interest (loan fund) or opportunity cost (own fund).

• Administrative cost which includes record keeping, investigation of credit worthiness etc.

• Collection cost • Defaulting cost or Bad debts

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70

DEBTORS MANAGEMENT IN HEEP - HARIDWAR B.H.E.L Haridwar is engaged in the manufacturing business of heavy electrical equipments, where cycle time of the product is 18- 24 months and most of the contracts take approximately 3-5 years to complete. Customers of B.H.E.L. Hardwar are broadly divided into following categories: • State electricity board • Power Project • Public Sector Under takings • Railways • Government Departments • Private Sectors • Exports In most of the contracts, payments of B.H.E.L. Hardwar are made in following stages:

Payment Terms Advance from customers:-

At the time of dispatch of goods.

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-

At the time of MRC (material receipt at site) Deferred payment after commissioning of project with certain test

However, the above terms may vary from contract to contract.

Based on the above payment terms, B.H.E.L. Hardwar categories their debtors into two parts: • Collectible debtors • Deferred debtors Collectible debtors are those, which are due for payment as on now and there is no credit time allowed to the customer say payment at the time of dispatch .

Deferred debtors are those, which will become due on the occurrence of a particular event such as issuing of MRC (material Receipt Certificate) from customer or completion of contract with certain tests etc.

ANALYSIS OF DEBTORS Management with the help of certain ratio’s DEBTORS TURNOVER RATIO Debtor’s turnover ratio establishes a relationship between net credit sales and average trade debtors. The major objective to calculate ratio is to determine the efficiency with which the trade debtors are managed. We can easily calculate this ratio with the help of the following formula:

Debtor Turnover Ratio = Net Credit sales / Average Debtors YEARS Turnover

2003-04

2004-05

2005-06

2006-07

2007-08

97432

140697

164060

200864

235096

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Average Debtors

55866

48552

64709

91067

123091

Ratio

1.74

2.89

2.53

2.21

1.9

Table 6: Debtor Turnover Ratio in HEEP Haridwar

(In Rs/ lacks)

Graphical presentation of debtor turnover ratio

J

Figure 11: Graphical Presentation of Debtor Turnover Ratio

Interpretation:

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It indicates the speed with which the debtors turnover an average each year. In general a high ratio indicates the shorter collection period which implies prompt payments by debtors and a low ratio indicates a long collection period which implies delayed payment by debtors. So we can see from the graph and the table above that in the last five years the company debtor’s turnover ratio has declined. In 200003 it is the least i.e. 1.74 but it improved in 2004-05 i.e. .2.89. From 2005 to 2008 the debtor turnover ratio has continuously declined. It depicts that how inefficiently debtors are collected.

AVERAGE COLLECTION PERIOD Average Collection Period = 365 / Debtors Turnover Ratio

YEARS

2003-04

2004-05

2005-06

2006-07

2007-08

Turnover

97432

140697

164060

200864

235096

Average Debtors

55866

48552

64709

91067

123091

Ratio

1.74

2.89

2.53

2.21

1.9

Average Collection Period

210

126

144

165

192

Table 7: Calculation of Average Collection Period In HEEP Haridwar

Graphical representation of average collection period WORKING CAPITAL MANAGEMENT

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Figure 12: Graphical representation of Average Collection Period

Interpretation: We can check the managerial efficiency with the help of this ratio by the comparison of average collection period and credit policy of the company form the table we can clearly see that in the year 2003-04 is 210 days, but in year 2004-05 there was a decrease and it falls down to 126 and from the year 2005-06 there is constant increase in it. As it was 144 days, 165 days, and 192 days in the year 05-06, 06-07, 07-08 respectively. This indicates that the company is following a very liberal policy in recent years. If the days are increasing it indicates that the bad debts are also increasing. It is difficult to lay down a standard collection period; it depends upon the

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nature of the business. As a general rule the receivables should not exceed 4 to 5 months of credit sales.

STEPS INVOLVED IN MANAGEMENT OF DEBTS: The following steps are involved in debtor’s management • There should a close contact with the customers.

• There should be proper age- wise analysis of the debtors.

• There should be proper classification between collectible Debtors and bad debts.

• Bad debts should be written of as early as possible after making all efforts for its collection.

• Product cycle should be minimized so that cost of the product should not become high to the agreed amount because of time factor.

• There must be a provision of discount for early payment of debts by the customers.

• Regular checking of the records of the debtors is essential so as to analysis the current position of that organization.

• While making a policy, regarding the debtors the point should be considered that customer having excellent past record, follow the lenient policy is adopted for doubtful customers • Manage the working capital according to need as recovering the debt from customer as early as possible while, get extension of payment of dues on the company of others as suppliers of raw material as late as possible.

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INVENTORY MANAGEMENT Introduction Inventories constitute most significant part of current assets, in most of the companies in India. To maintain a large size of inventory, a considerable amount of fund is required. It is, therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree, e.g.10% to 20%, without any adverse effect on production and sales, by using inventory planning and control techniques. The reduction in ‘excessive’ inventories carries a favorable impact on a company’s profitability.

There are at least three motives for holding inventories: 1. To facilitate smooth production and sales operation (transaction motive).

2. To guards against the risk of unpredictable changes in usage rate and delivery time (precautionary motive).

3. To make advantage of price fluctuations (speculative motive).

OBJECTIVE:

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Inventories represent investment of a firm’s funds. The objective of the inventory management should be the maximization of the value of the firm. The firm should therefore consider: (a)

Costs,

(b)

Return, and

(c)

Risk factors in establishing its inventory policy.

Two types of costs are involved in the inventory maintenance: 1-Ordering costs: - Requisition, placing of order, transportation, and staff services.

Ordering costs are fixed per order size increases.

2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance and taxes. Carrying cost increases.

The firm should minimize the total cost (ordering cost + carrying cost). The economic order quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The following formula can be used to determine EOQ: EOQ= (2AO/C) ^1/2

Where, A = Annual requirement.

O = Per order cost.

C = Per unit carrying cost.

WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH INVENTORY? The inventory level at which the firm places order to replenish inventory is called reorder point. It depends on (a) the lead time and (b) the usage rate.

Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead time0, the reorder point will be equal to: Lead-time *Usage rate +Safety stock.

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The firm should strike a trade-off between the marginal rate of return and marginal cost of funds to determine the level of safety stock.

INVENTORY ANALYSIS Altogether the company deals with stock of thousands of items raising a serious problem of how one can keep control of track of all items also, where it is necessary to have some extent of control on each and every item. Different types of analysis each having its own advantages and purpose help in bringing a particular solution to the control of inventory. The most important of all such analysis is ABC analysis.

The other one ABC analysis

VED analysis

HML analysis

FSN analysis

SDT analysis

ABC ANALYSIS

A formal way of classifying inventory items so that important ones will be given the most attention. Through this analysis the professional inventory manager will concentrate his efforts on where they will yield the greatest rewards. The ABC of ABC analysis refers to the classes, A, B and c into which the inventory is divided. is high value items whose rupee volume typically account for 75-80% of the value of total inventory while representing only 10-15% of the inventory items.

Class is lesser value items whose rupee volume accounts for 15-20% of the value of inventory, while representing 15-20% of the inventory items.

Class items are low value items whose volume accounts for 10-15% of the inventory values but 75-80% of the inventory items.

The same degree of control is not justified for all the three classes of items. Class [A] requires the greatest attention and class [C] items require least attention. Class

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[C] items need no special calculations since they represent a low inventory investment. The order might be placed once a year and periodically reviewed once a year, class [B] items are paid more attention then, proper CODs are developed and semi-annual review of variables must be done. Class [A] items needs direct attention to the inventory items, EOQ's are to be developed each time an order is placed. The major concern of an ABC classification is to give direct attention to the inventory items that represent the largest amount of expenditure. If inventory levels can be reduced for claim of items it result in a significant reduction in inventory investment.

ABC INVENTORY CLASSIFICATION:Percentage

of inventory

Category

of

value

of

the

total

items

classes

inventory(rupee volume in %)

10

A

75

15

B

15

75

C

10

Table 8: ABC classification VED ANALYSIS

This analysis specially pertains to the classification of maintenance of spares denoting the essentiality of blocking spares.

V - Stands for vital - items when out of stock or when not readily available, completely brings the production a halt.

E - Is for essential - items without which we can temporarily loose our production or disclosure of production occurs within a week.

D - Denotes desirable items - all other items, which are necessary but do not cause any immediate effect on production.

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S.D.E. ANALYSIS For developing countries and especially where certain items are in scarce supply.

This analysis is very useful.

S - Refers to scarce items, especially imported items and those which are very much in short supply.

D - Are difficult items which are available in market but not easily available?

E - Items are those which are easily available, most local items.

HML ANALYSIS The cost per item is considered for this analysis (H) High cost items (M) Medium cost items (L) Low cost items Help in bringing controls over consumption at departments level and for storage.

FSN ANALYSIS Materials are classified as (F) Fast moving (S) Slow moving and (N) Non moving items

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The non-moving items are of great importance. It is found that many companies maintain huge stock of non-moving items and the number of such items running is thousands. Resulting of non-moving items is to be made to determine where they could be used or to be disclosed off. The fast and slow moving classification helps in arrangement of stocks in stores and their distribution handling methods.

FUNCTION OF INVENTORY CONTROL: Functions to be performed in the field of Inventory Control are: 1 Setting up norms for carrying Inventory.

2 Determining what items to be stocked.

3 Setting rules for Inventory replenishments.

4 Receiving, storing and issuing inventory items as needed.

5 Maintaining records of inventory quantities and values.

6 Identifying and deposing of slow moving, non-moving, obsolete or damage inventories.

7 Furnishing summary information on inventory position for control purposes.

Locations of position responsible for performing each of these functions in organization structure greatly vary from company to company.

In BHEL Hardwar determination of product material or direct work order material (what?) to be carried in Inventory is more or less automatic result of product design formulation and is given in material forecast for a work order. Indirect materials consumed in

manufacturing process such as electrodes, brazing alloys, tooling etc.

are usually given by process engineering or at times by design departments.

Balance great bulk of indirect materials is made up of repair parts and general supplies.

Responsibility for specific (what?) items to be carried in inventory rests with Works Engineering. With respect to raw materials and purchased parts, responsibility for determining (when?) and how much to buy is a sign to relevant product manufacturing i.e. production planning and material planning groups. However a strict budgetary

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control and allocation to specific work order control on high value items is exercised by Inventory control department organized separately under Material Management.

Purchase department attached to manufacturing department determines (where?) to buy. Determination of indirect material (when?) and how much to buy and (where?), is done by central group under Material Management by consolidating requirements of all sections and while looking at consumption trends over a Number Years.

Again a strict budgetary control and control on high value items for their allocation is exercised by Inventory control group. Receiving and storing is done by Central Stores CSX under Material Management Department. Issuing Inventory is done by CSX on demand from manufacturing and is controlled by Material Planning. Again some online checks are proposed to be introduced at raising of Store Issue voucher stage itself, for high value items so that induction is controlled strictly as per requirement of production schedule based on lead time for manufacture to keep WIP inventory under control.

Records of Inventory are maintained on a mainframe computer centrally arranged having shared access from all functions for their specific use.

Inventory Record Keeping and Related Procedures How well Inventory records are maintained has a major bearing on the effectiveness of Inventory control program. Mostly information recorded in B.H.E.L. system is: •

Name of the part or material

•

Short description

•

Identifying No called Material code

•

Unit of measurement

•

Location in store (custody)

•

Bin no.

•

Opening, received, issue, closing quantity and value these records are maintained in an online system on main frame computer user departments have shared access for posting and retrieval of information.

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There is a system for reserving specific items as customer specific, which is done by tagging on the item. Posting of withdrawals or issue from inventory is done on specific authorization by a document called Store Issue voucher.

INVENTORY MANAGEMENT IN BHEL •

BHEL produces long production cycle items against the firm orders from customers.

Because of this as well as sizeable imported raw materials and compulsory bulk purchase of items like steel and copper in line with availability from SAIL and MMTC, the company has to carry high level of inventories.

TABLE OF INVENTORY MANAGEMENT IN BHEL.HEEP HARIDWAR

Particulars Raw Material & components Material With Fabricators Stores & Spares (INCL.SCRAP) Material In Transit Finished Good At Plant Finished Good With Customers W.I.P Transfer In Transit TOTAL Turnover Average Inventory Inventory Turnover Ratio

200304

200405

200506

200607

2007-08

5338

10469

11567

10375

10386

155

105

306

395

353

2092

1594

1848

2989

3061

3819

3716

9910

8193

9705

2603

2181

1770

2454

1819

0

0

0

0

0

23699

38585

42120

38398

36411

1508

2326

2277

4823

3630

39214

58976

69798

67627

65365

97432

140697

164060

200864

235096

35792

49095

64387

68713

66496

2.72

2.87

2.55

2.92

3.54

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Days Of Inventory Holding

134

127

143

125

103

Table 9: Inventory Management in HEEP Haridwar

Inventory Turnover Ratio = Sales / Average Inventory Days of Inventory Holding = 365 / Inventory Turnover Ratio

Graphical representation of days of Inventory Turnover Ratio

Figure 13: Graphical representation of days of Inventory Turnover Ratio

Interpretation This ratio indicates the effectiveness and efficiency of the inventory management.

The ratio shows how speedily the inventory turned into account receivables through sales. The higher the inventory to sales ratio, the more efficiently the inventory is said to be managed and vice-versa.

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By observing the above ratio we find that the company is able to manage the inventory efficiently as the year progresses. This ratio was lowest as 2.55 in 2005-06 in last 5 years. And since then it is increasing as the year progresses. In 2007-08 it is 3.54. The organization should try to maintain the highest on the above ratio.

Graphical representation of days of Inventory Holding 160 140 120 100 80 60 40 20 0

Days of inventory holding 134

143

127

125 103

2003-04

2004-05

2005-06

2006-07`

2007-08

YEARS Figure 14: Graphical representation of days of Inventory Holding

Interpretation If we see from the above table that the days of inventory holding in the year 2007-08 has come down to 103 days from 125 days in the previous year. In spite of increase in turnover i.e. 233169 in 2007-08 from 200864 in the year 2006-07 the days of inventory holding decreases. This indicates that the company is using effective strategy to bring down its inventory level. This makes very less investment in inventory. It is in the interest of every organization to minimize its inventory level.

Following is the process through which the company can achieve the optimum inventory level STANDARD INVENTORY WORKING CAPITAL LEVEL

TAKING ACTUAL MANAGEMENT INVENTORY LEVEL

COMPARISION OF ACTUAL WITH STANDARD

87

ANALYSING REASON OF VARIATION/DEVIATION

TAKE CORRECTIVE ACTIONS

VARIATION/ DEVIATION

Need of Inventory Management: • Stiff competition, globalization of trade and liberalization.

• Achieving, increasing and positive EVA. • Cost reduction.

• Energy conservation.

• Conservation of natural resources.

• Better, work environment.

• Improved health and safety.

• Enhanced public image.

Graph of Inventory In BHEL 80000 70000 60000 50000 40000 30000 20000 10000 0

Amount Of Inventory

200304

200405

200506

200607

200708

Figure 15: Amount of Inventory in HEEP Haridwar

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Interpretation By the graphical representation, we can easily understand that the level of inventory has come down in 2006-07 and 2007-08. But in 2005-06, 2004-05 it increases due to large amount of raw material. It comes down because company takes some effective measures to control the level of inventory. Those steps are following steps to control its inventory:

Strategies/measures: • Formation of specific group in each area to identify the wastage elements and seek participation of all.

• Identification of wastage.

• Formulation of action plan to eliminate/minimize wastage.

• Review of status.

• Identification of corrective actions and their implementation.

• Highlighting the gains.

Suggestion: After analyzing the steps taken by the company there are some suggestions to manage the Inventory • There should proper analysis of requirement of raw material.

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• Order should be placed according to the lead-time.

• Wastage should be avoided.

• There should be proper coordination between the Inventory Department and Production Department

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MANAGEMENT OF CASH It is the duty of the finance manager to provide adequate cash to all segments of the organization. At the same time, he /she has also to ensure that no funds are blocked in idle cash as this will involve cost in terms of interest to the concern. A sound cash management scheme has to maintain the twin objective of liquidity and cost.

Meaning of cash management: The term cash management refers to the management of cash and ‘near cash assets’ while cash includes coins, currency notes, cheques, bank drafts, and the demand deposits, the near cash assets include marketable securities and time deposits with banks. Such securities and deposits are easily convertible into cash.

Motives for Holding Cash In spite of the fact that cash does not earn any substantial return for the business, it is held by the concern with the following motives.

1. Transaction motive: A Company enters a variety of business transactions resulting both inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a firm with the motive of making routine business payments maintains cash balance.

2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of unexpected contingencies such as floods, strikes, obsolesces, sharp increase in prices of raw materials, presentation of bills for payment earlier than expected date. More amounts of cash will be kept by the firm if there is more possibility of such contingencies.

3. Speculative motive: BHEL also keeps cash balance to take advantage of unexpected business opportunities. Such motive is there of speculative nature.

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4. Compensation motive: Banks provide certain services to their customers free of charge. So they usually require the customers to keep minimum cash balance with them which enables them to earn interest and compensate for the free services rendered.

Reasons of cash management: Cash management involves the following basic problems.

1. Controlling level of cash: - One of the basic objectives of cash management is to minimize the level of cash balances with the firm. This objective is sought to be achieved by means of the following: - Preparing cash budget: Cash budget is the most important device for planning and controlling the use of cash. It involves the future receipts and payments of the firm. On the basis of this information the finance manager

can determine the

future cash needs of the firm.

- Providing for unpredictable discrepancies: Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities.

- Availability of alternative source of funds: A firm need not keep large cash balance if it has arrangements with banks for borrowing money in times of emergencies.

2. Controlling of cash inflow: In order to prevent fraudulent diversion of cash receipt and speeding up collections of cash, an adequate control on cash inflow is necessary. A properly installed internal check system can, to a great extent, minimize the possibility of fraudulent diversion of cash. Speedier collection of cash can be made possible by adoption of the following two techniques: - Concentration banking system: it is a system of decentralizing collection of account receivables. According to this system, BHEL’s branch

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Offices are authorized to collect the payment from the customers, and deposit in the local bank accounts; this system facilities fast movement of funds. This system is good in case of the firms having their spread over a large area.

- Lock box system: This system is more popular in the U.S.A. and is further step in speeding up collection of cash. This system has been devised to element delay arising in cash of the concentration banking system on account of a time gap between actual receipt of cheques by the regional collection centers and its deposits in the local bank account. Under this system BHEL hires a post office box and instruct its customers for there remits to the box. It also reduces the chances of frauds in the cash collection process and controls the cash inflows better. In order to avoid the unnecessary pockets of idle funds, the company should maintain minimum number of bank accounts.

3. Controlling outflows of cash: An efficient control over cash outflows is equally important for conserving cash and reducing financial requirements. Control over cash outflows signifies slow disbursement. In order to control the outflows of cash efficiently, a firm should keep in view the following considerations: - Centralized system for cash payments should be followed as compared to decentralized system in cash of collections. All payments should be made from a single control account, i.e., from the central office of the company. However, the local office of the company may pay local expenses.

- Payment should be made on the due dates neither before nor after. The company should neither lose cash discount nor its prestige on account of delayed payments. The company should, there fore, made payments within the terms offered by the suppliers.

- Playing float, technique should be used by the company for maximizing the availability of funds. The term ‘float’ means the account tied up in checks which have been issued by BHEL but not have been yet been presented for payment by the creditors. As a result of a time lag between issue of a cheque and its actual

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presentation, the actual bank balance of a firm may be more than the balance shown in the books. The difference is called ‘payment of float’. The longer the ‘float period’ the greater would be the benefit of the firm.

Tools of cash control

Cash Budget: It is the most significant tool of controlling the use of cash. It provides a comparison between actual and budgeted cash receipts and disbursements locating the points of deviations, if any. The financial manager, after ascertaining the reasons for deviations between the actual and budgeted figures, can take the necessary action to remove.

Inflows and outflows of cash: in order to check the change in cash position of the firm from one period to another, a cash flow statement is prepared. It helps management in controlling inflows and outflows of cash.

Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial ratios are used for this purpose. These ratios include current ratio, liquidity ratio, receivables turnover ratio, and inventory turnover ratio and cash position ratios.

ANALYSIS OF CASH MANAGEMENT WITH THE HELP OF CERTAIN RATIOS WORKING CAPITAL MANAGEMENT

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CURRENT RATIO: This ratio represents a margin of safety for creditors. The higher the current ratio, greater is the margin of safety; the higher the amount of current assets in relation to current liabilities, the more the firm’s ability to meet its current obligation. It is the best ratio to find relationship between the current assets and current liabilities of BHEL. We can easily calculate the current ratio with the help of the following formula:

Current Ratio = Current Assets / Current Liabilities Table showing Current Ratio in last five years

Years

Calculations

Ratio

20032004

100671/82196

1.2:1

20042005

112836/99390

1.1:1

20052006

139668/110923 1.3:1

20062007

167961/150056 1.12:1

20072008

200112/209403 0.96:1

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Table: 10 Current Asset Ratio of HEEP Haridwar

ANALYSIS OF CURRENT RATIO 1.4 1.2 1 0.8 0.6 0.4 0.2 0

CURRENT RATIO

2003-04

2004-05

2005-06

2006-07

2007-08

YEARS Figure 16: Graphical presentation of Current Ratio

Interpretation: As a conventional rule, a current ratio of 2 to 1 or more is considered satisfactory.

The BHEL organization in the year 2007-08 has the ratio of 0.96:1 which is quite low the reason being is that its current liabilities are more in comparison to its current assets this means that there is in sufficient fund with organization to meet its current obligations. Moreover, as we can see from the above table and graph the current ratio of BHEL is in 2003-04 is 1.2:1 which is quite low but still it is able meet its obligation. In 2004-05, the current ratio goes down to 1.1:1 due to increase in the

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current liabilities and decrease in current assets as compared to previous year. In 2005-06 the ratio has raised to 1.3:1 which is highest in last five years. Ratio increase due to increase in current assets. In 2006-07 the ratio is 1.12:1. It decline because current liabilities are growing at faster rate in comparison to current assets.

LIQUID RATIO: This ratio establishes a relationship between quick assets and current liabilities. The major objective to compute this ratio is to measure the ability of the firm to meet its short-term obligations as and when due without relying upon the realization stock.

We can easily calculate this ratio with the help of the following formula:

Liquid Ratio= Liquid Assets / current liabilities

YEARS 2003-

CALCULATION S

RATIO

61457/82196

0.74:1

53860/99390

0.54:1

69870/110923

0.63:1

2006-07

100334/150056

0.67:1

2007-08

134747/209403

0.64:1

2004 20042005 20052006

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Table: 11 calculation of liquid ratio in HEEP Haridwar

Graphical presentation of liquid ratio:

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Liquid Ratio 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2003-04

2004-05

2005-06

2006-07

2007-08

YEARS

Figure 17: Graphical Representation of Liquid Ratio:

Interpretation: Liquid ratio indicates that what amounts of liquid assets are available for each rupee of current liability. We know that the liquid ratio of any organization may be 1:1, is considered to be satisfactory. Now comparing the company's position according to the liquid ratio in 2003-04 the ratio was .74:1 which the best liquidity position year was for the company. But it decreases to 0.54:1 in 2004-05. In 05-06, 200607 and in 2007-08 the ratios are 0.63:1, 0.67:1 and 0.64:1 respectively. It means that the liquidity position of the company is constantly decreasing it is due to large amount of current liabilities as compared to liquid assets and also the number of debtors of the company are increasing. This is not better from management's point of view. As more of amount is blocked in the debts and chances of bad debt will increase.

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SUMMARY OF FINDINGS • The company is able to reduce its working capital continuously in last five years but in the year 2007-08 the working capital has turned in to negative i.e. -9291 which means that companies current liabilities are in excess of its current assets .The main reason for working capital to be in negative is the untimely payment from debtors.

• The creditors of the company has increased from 13953 lacs to 33545 lacs while the current liabilities of the company has increased which means that company has adopted a good realization policy.

• The increased current liability is about Rs/127207 lacs in just a span of seven years.

• The current ratio of the company in last five years has decreased from 1.2 to 1.12 which revels that company is moving from aggressive working capital strategy to conservative working capital strategy.

• The quick ratio of the company has declined from 0.74 to 0.64 in the span of five years.

• The latest working capita turnover ratio indicates the inefficiency of utilization of fund as it is -25.3.

• The current assets turnover ratio has increased from .97 to 1.17 in a span of five years which indicates that current assets are efficiently turning into sales.

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• The debtor’s turnover ratio has gone up from 1.74 to 1.9 which shows that the company is collecting its debtors efficiently but not as efficiently as it was doing in the 2004-05, 2005-06, 2006-07 years because in that time period their ratio were quite high i.e. 2.89, 2.53, 2.21 respectively.

• The average collection period has decreased from 210 days to 192 days which shows that the company is collecting its debts speedily but it can improve it further also by improving it debtor turnover ratio.

• The inventory holding period has reduced from 134 to 103 days which shows that inventory is turning into finished goods very quickly and the company has reduced the locking of funds in inventories.

• The inventory turnover ratio has increased from 2.72 to 3.54 with in a span of five years. This shows that company is able to manage inventory efficiently.

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SUGGESTIONS

Analysis of financial statements and working capital of organization reveals many strong and weak points of the organization HEEP-BHEL HARDWAR. As far as the current ratio of the organization is concerned, it is decreasing in the recent years. In 2007-08 it is 0.96:1. Although the current ratio of the company should be 2:1 is considered to be good but this ratio is not too good for the organization in which cash, inventory & debtors play a significant role but here in HEEP department all the financial activities and funds allocations are dealt at the corporate office of BHEL, which is situated at DELHI. Debtors are also very nominal as NON-BHEL sales constitute 87% approximately. Hence the organization should try to manage its inventory in best possible manner. By decreasing inventory and reduce the un-necessary lock up of funds in inventory the organization can improve its current ratio.

The current assets turnover has increased from in 0.97 to 1.17 in last five years but there is a fluctuation in this ratio as in 2004-05 it has gone up to 1.25. So the company should try to improve this ratio through increase in sales or reduce the unnecessary lock up of funds in current assets.

There is a increase in current liabilities about RS/127207 lacks in a span of five years which is not good for the credit of company so the organization should try to reduce the current liabilities through speedy payment to creditors and reduce the unnecessary provisions.

There is a big fluctuation in working capital turnover ratio. This ratio was 5.27 in 0304 and in 04-05 it suddenly went up to 10.46 and again in 05-06 there is a big decline in working capital turnover ratio and this ratio come down to 5.71. This was because the sales did not increase in the same ratio as working capital increased.

So the company should manage the working capital and should properly estimate 102

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for an amount of sales how much working is needed so that the un-necessary lock up of funds in working capital may not occur.

The amount of cash balance has reduced drastically from RS/ 111 lacks to Rs/ 5 lacks within the span of 1 year. And moreover debtors have also increased at a faster rate. So the company should made such policies so that cash can be realized quickly from debtors and thus maintain its liquidity.

Finally, I wish that organization should improve more and more in the coming years and reach the maximum heights of development.

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BIBLOGRAPHY FINANCIAL MANAGEMENT - I.M. PANDAY

WORKING CAPITAL MANAGEMENT- J.D. AGGARWAL

FINANCIAL MANAGEMENT- SASHI K. GUPTA

BHEL HEEP- BALANCE SHEET

BHEL- ANNUAL REPORT

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