Project on Working Capital Mgt

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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)

Research supervisor: Submitted by:

Prof. Prakash Chhabra Amit Kumar

NIMS Delhi Enrollment No.08061237002

Semester MBA IV(Finance)

SESSION 2008-10

DIRECTORATE OF DISTANCE EDUCATION

GURU JAMBHESHWAR UNIVERSITY OF SCIENCE & TECHNOLOGY,

HISAR

WORKING CAPITAL MANAGEMENT 1


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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.

Signature of Supervisor/ Guide (with seal)

Name : P. C. Chhabra

Designation: HOD, Finance

Organization: Netaji Subhash Institute of Management Sciences

Forwarded by Head/Director of Study Centre

(With signature, Name & SEAL)



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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



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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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RESUME OF SUPERVISOR/GUIDE

NAME: Prakash Chhabra

DESIGNATION: HOD, Finance

QUALIFICATIONS: B.Sc(Hons), MA, CAIIB, DBM, MBA, CFA

AREA OF SPECIALIZATION: Finance

EXPERIENCE: 34 years

OFFICIAL ADDRESS: Netaji Subhash Institude of Management Science

City Tower, Netaji Subash Place, Delhi

TELEPHONE No. 011-47007900

MOBILE: 9811326961

E-mail [email protected]

I am willing to supervise Mr.Amit Kumar

Enrolment number: 08061237002

On the Topic WORKING CAPITAL MANAGEMENT AT BHARAT HEAVY

ELECTRICALS LTD.

(Signature of supervisor with seal)

(Countersigned by Director of study centre )



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CONTENTS

TOPICS PAGE NO:

BHEL AN OVERVIEW 8 - 25

Introduction 9

BHEL ,a corporate giant 11

International business 12

BHEL in India 13

Vision, mission, values 15

Objectives of proposed study. 16

Contribution to various sectors. 19

Collaborations ,competitors and its products 23

BHEL HARIDWAR UNIT, HEEP 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

Management of WC. 55



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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. 82

Record keeping and related procedures. 83



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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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BHEL Corporation - An Introduction

GOINDWAL

HARIDWAR

RUDRAPUR

JAGDISHPURJHANSI

BHOPAL

HYDERABAD

BANGALOREE

RANIPET

TIRUCHIRAPALLY

NEW

DELHI

Employees - 43636 (As on 1-4-08) Turnover - Rs 33000 Crores (2008-

09)

14 Manufacturing divisions

4 Power Sector regional centers

8 service centres and 16 regional

offices

Major Units/Divisions are Certifiedwith ISO 9001(2000), ISO 14001and OHSAS 18001

Continuous Profits since 1971-72

Caters to Core Sectors viz., Power,Industry, Transportation,Telecommunication, RenewableEnergy etc.

Manufactures over 180 productsunder 30 major product groups


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Figure 1


BARODA

NAGPUR

PATNA

CALCUTTA

AAAA

VARANASI

CORPORATE OFFICE

MANUFACTURING

LOCATIONS

SERVICE CENTRES


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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, telecommunicationetc. 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 ofBHEL have been upgraded to the latest ISO-9001: 2000

version quality standard certification for quality management. All the major

units/divisions ofBHEL have been awarded ISO-14001 certification for environmental

management systems and OHSAS-18001 certification for occupational health and

safety management systems.



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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 successesachieved 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 fast-

track 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

1. BANGLORE

2. BARODA

3. BHUBANESHWAR

4. MUMBAI

5. KOLKATA

6. CHANDIGARH

7. GUWAHATI

8. JABALPUR

9. JAIPUR

10.LUCKNOW

11.CHENNAI

12.NEW DELHI

13.PATNA

14.RANCHI

WORKING CAPITAL MANAGEMENT

SERVICE CENTRES

1. NOIDA

2. BARODA

3. KOLKATA

4. CHANDIGARH

5. SECUNDRABAD

6. NEW DELHI

7. NAGPUR

8. PATNA

9. VARANASI

14


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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



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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 ElectricalsLimited.

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

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

To assess Liquidity position, Long term solvency, operational efficiency andoverall 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:

Toprovide 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.



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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

customers 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



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diagnostic and life extensions of plants. The four power sectors regional centers at

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 sub-

station 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 haveproduced 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 beencommercialized

hasgone up 26 % to Rs. 760 Crores."



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HUMAN RESOURCE DEVELOPMENT INSTITUTE:-

BHEL has envisioned becoming "A World Class Engineering Enterprise committedto 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 COLLABORATIONS

# Thermal Sets, Hydro Sets, Motors & PROMMASHEXPORT

Control Gears. RUSSIA

# Bypass & Pressure Reducing Systems SULZER BROTHER LTD.

SWITZERLAND

# Electronic Automation System for SIEMENS AG.

Steam Turbine & Generators GERMANY

# Francis Type Hydro Turbines GENERAL ELECTRIC

CANADA

# Moisture Separator Reheaters BALOKE DUERR

GERMANY



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# Christmas Trees & Conventional Well NATIONAL OIL WELL

Head Assemblies USA

# Steam Turbines, Generators and Axial SIEMENS AG.

Condensers GERMANY

# Cam Shaft Controllers and Tractions SIEMENS AG.

Current Control Units GERMANY

# HDVC 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



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PRODUCTS OF BHEL

1. Thermal power plants

2. Nuclear power plants

3. Gas Based power plants

4. Hydro power plants

5. Dg power plants

6. Industrial sets

7. Boilers

8. Boiler Auxiliaries

9. Piping System

10. Heat exchangers and pressure

Vessels

11. Pumps

12. Power station Control

equipment

13. Switchgear

14. Bus Ducts

15. Transformers


16. Industrial and special ceramics

17. Capacitors

18. Energy Meters

19. Electrical Machines

20. Compressors

21. Control Gear

22. Silicon Rectifiers

23. Thyristor GTO/ IGBT equipments

24. Power Devices

25. Transportation equipments

26. Oil Field equipments

27. Castings and Forgings

28. Steams Steel Tubes

29. Distributed power Generation and Small

Hydro Plant

30. Systems and Services

29


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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 2005-

06.

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 Indias 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.1963after

indo- soviet technical co-operation agreement in Sept.1959The 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 plants 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 Feb1995.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 PSUs in their Corporate planning process .Board meeting , monthly



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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 Corporations 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 CEAs

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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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.



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(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

debtors 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.



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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 suppliers 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 sundrycreditors.

(iv) Opening of letter of credit and arranging payments to foreign suppliers under

foreign credit / differed payment agreements.



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(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:



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(i) Payments of contractors 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.



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OPPORTUNITIES (O):

High-expected growth in power sectors (7000 MW/p.a.needs to be added)

High growth forecast in Indias 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.



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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.



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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 firms 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 firms 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



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Net Working Capital

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.

Net Working Capital:

The term Net Working Capital refers to the excess of current assets over current

liabilities, or say,

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 capitalresults 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


Gross Working Capital = Total Current Assets

Net Working Capital = Current Assets Current Liabilities

44


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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 firms 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



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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 firms 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 theratio 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 139668 167961 200112



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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

holdings would be at the minimum level. A larger investment in current assets under



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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 firms 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.



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--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

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:


Figure 3: Cost Trade-off

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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:



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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



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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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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 managers 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



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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.

Figure 4: Working Capital Cycle


DEBTORS

CASH FINISHED

GOODS

RAW

MATERIAL

WORK IN

PROGRESS

55


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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.


Figure 5 : Working Capital Cycle

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RATE OF GROWTH AND EXPANSION OF BUSINESS:

BUSINESS FLUCTUATION:

EARNING CAPACITY AND DIVIDEND POLICY:

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


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

57


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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.

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.



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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 Composition of

level of level of

Current assets current liabilities

Figure 6: Dimensions of Working Capital



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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 componentsare managed in the organisation, in the under mentioned manner.

Particulars 2003-04 2004-05 2005-06 2006-07 2007-08

Current Assets

Cash and Bank Balance 10 9 9 111 5

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

Current Liabilities

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



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Net working capital 18475 13446 28745 17905 -9291

Turnover 97432 140697 164059 210494 235096

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

Cash 10 9 9 111 5

Loan &

Advances 5581 5299 5152 9156 11651

Total 100671

11283

6

13966

8

16796

1

20011

2

Table 3: Current Assets of HEEP Haridwar



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Graphical presentation of current assets

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

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. Anegative working capital means a negative liquidity and

may prove to be harmful for the companys reputation.


0

20000

40000

60000

80000

100000

120000

140000

D

In

C

Lo

ad

62


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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 firms 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 firms profitability but also results in

production interruptions and inefficiencies and sales disruptions.

The dangers of excessive working capital are as follows:

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.



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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 firms 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

firms 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

judgement, should be used to predict the quantum of working capital needed at

different time periods.

A firms net working capital position is not only important as an index of liquidity but it

is also used as a measure of the firms 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



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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

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


WORKING CAPITAL

18475

13446

28745

17905

-9291

Figure 8: Graphical Representation of Working Capital in BHEL HEEP Haridwar

65


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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

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

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YEARSCALCULAT IONRAT I

2003-04 97432/ 18475 5.27

2004-05 140697/ 13446 10.42005-06 164059/ 28745 5.7

2006-07 200864/ 17905 11.2

2007-08 235096/ -9291 -25.3

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



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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 lock-

up of funds in 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

C.A. Turnover Ratio = Sales / Current Assets

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Graphical presentation of current assets turnover ratio

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 invery 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.


0

0.2

0.4

0.6

0.8

1

1.21.4

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

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INTRODUCTION



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It is very difficult for the organization to sell always on cash basis in todays

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 andrequires 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



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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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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 intotwo 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 customeror completion of contract with certain tests etc.

ANALYSIS OF DEBTORS

Management with the help of certain ratios

DEBTORS TURNOVER RATIO

Debtors 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 2003-04 2004-05 2005-06 2006-07 2007-08



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Turnover 97432 140697 164060 200864 235096

Average

Debtors55866 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 debtors turnover ratio has declined. In 2000-

03 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

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

Turnover 97432 140697 164060 200864 235096

Average

Debtors55866 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


Average Collection Period = 365 / Debtors Turnover Ratio

76


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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 debtors 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 companys 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 (speculativemotive).

OBJECTIVE:



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Inventories represent investment of a firms 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:



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Lead-time *Usage rate +Safety stock.

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 SDT analysis

HML analysis FSN 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 oftotal 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.



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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

[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 AB

Documents

Project on Working Capital Mgt