Project Report On Bhel
Project Report On Bhel
Project Report On Bhel
ON
Working Capital Management
In
Bharat Heavy Electrical Limited
HERP - Varanasi
In Partial Fulfillment of MBA Degree
(2014-2016)
Submitted ByAditi Mishra
MBA General (2014-2016)
PREFACE
Learning categorizes us and practicing on that learning specializes us.
Theoretical concepts taught and discussed in the classroom prove useful if
they have to remain relevant. Practice orientation of management student
is must generating competence to deal with issues at grass root level it is
for this reason that training & project study is prescribed as a part of
syllabus for MBA Degree in Lucknow.
This training is the mode of imparting practical training to the student.
The objective is to provide a deep insight into practical aspects of the
functioning of the organization. The train apprises the student to the
actual function, responsibility and problem faced by an organization. It
provides him with the knowledge of the various kind of problem that crop
up in the day to day functioning of the organization .The way they are
solved by the departments and appraisal of the crucial decision taken by
the manager at the crucial time.
I was fortunate enough to complete my financial training at Bharat Heavy
Electrical Limited (BHEL, HERP), Shivpur, Tarna Varanasi. This has
given me an altogether new experience, which would be immense help to
me in my days to come.
ACKNOWLEDGEMENT
I owe a great deal to greet many people, for the successful completion of
this survey report. Survey is a team project; literally many of people have
contributed to this survey report. Every work requires a commitment but
this commitment goes in vain when there is no guidance.
DECLARATION
CONTENT
1. Executive Summary
2. Introduction
3. Purpose of the study
4. Objective of the study
5. Research Methodology
6. Company profile :-
BHEL Background
Vision, Mission & Values of BHEL
Company and its product
Performance of BHEL at a glance
BHEL Balance sheet & Income Statement
Board of Directors
Achievements & Projects
SWOT Analysis of BHEL
7. Unit Profile:-
Payables management
Inventory management
9. Key Ratios
10. Conclusion
11. Suggestion & Recommendation
12. Limitations
13. Appendix
14. Bibliography
EXECUTIVE SUMMARY
Working capital is the capital required for maintenance of day-to-day
business operations. The present day competitive market environment calls
for an efficient management of working capital. The reason for this is
attributed to the fact that an ineffective working capital management may
force the firm to stop its business operations, may even lead to bankruptcy.
Hence the goal of working capital management is not just concerned with
the management of current assets & current liabilities but also in
maintaining a satisfactory level of working capital.
Holding of current assets in substantial amount strengthens the
liquidity position & reduces the riskiness but only at the expense of
profitability. Therefore achieving risk-return trade off is significant in
holding of current assets. While cash outflows are predictable it runs
contrary in case of cash inflows. Sales program of any business concern
does not bring back cash immediately. There is a time lag that exists
between sale of goods & sales realization. The capital requirement during
this time lag is maintained by working capital in the form of current assets.
The whole process of this conversion is explained by the operating cycle
concept.
This study gives in detail the working capital management practices
in BHEL. Management of each current assets, namely inventory
management, cash management, accounts receivable management is
studied permanent to BHEL. Similarly management of accounts payable is
studied to understand the managing of current liabilities. A part from this
concept of operating cycle is studied.
7
INTRODUCTION
Capital is essential for the setting up and smooth running of any
business. Investments made on fixed assets will yield excess cash inflows
apart from the payback amount and is spread over a longer period of time.
Hence the cash inflows (or) benefits associated are not immediate but are
expected in the future. Cash inflows & outflows occur on a continuous basis
in case of current assets. Since there is some time lag from the time of sales
& sales realization current assets & current liabilities, which together
constitute the net working capital, supports the business in its normal of
operations. This calls for an efficient management of working capital.
The policies, procedures and measures taken for managing of
working capital gain further importance in an organization like BHEL
where the working capital requirements runs in crores of rupees. Any
mismanagement on the part of authority will not just cause loss but may
even impair business operations. It is in this context working capital has
gained importance.
The growth of any organization depends on overall performance of
all the departments. A firms financial performance reflects its strength,
weaknesses, of the organization w.r.t profits earned, investments, sales
realization, turnover, turn on investment, net worth of capital. Efficient
management of financial resources and analysis of financial results are
prerequisite for success of an enterprise. In that working capital
management is one of the major area of financial management. Managing
of working capital implies managing of current assets of the company like
cash, inventory, accounts receivable, loans and advances and current
liabilities like sundry creditors, interest payment and provision.
9
PURPOSE OF STUDY
The main aim of any firm is to maximize the wealth of shareholders.
This can be achieved only by a steady flow of profits. Which inter area
depend on successful sales activity. To generate sales, investment of
sufficient funds in current assets is required. The need of current assets
should be emphasized, as the sales dont convert into cash immediately but
involved a cycle of operations, namely operating cycle.
BHEL is multi product manufacturing unit with varying cycle for
each product. The capital requirement for each department in an
organization of BHEL is large which (depends on the product target for that
particular year) calls for an effective working capital management.
Monitoring the operation on cycle duration is an important aspect of
working capital.
Some prominent issues that are to be addressed are,
Duration of raw material stage (depends on regularity of supply,
transactions time).
Duration of work in progress (depends on length of manufacturing
cycle, consistency in capacity utilization).
Duration at the finished goods state (depends on pattern of
production & sale).
Thus a detailed study regarding the working capital management in BHEL
is to be done to consider the effectiveness of working capital management,
identify the shortcoming in management and to suggest for improvement in
working capital management.
10
OBJECTIVE OF STUDY
11
RESEARCH METHODOLOGY
Research methodology used for data collection includes both primary&
secondary sources of data.
Data collection
Data collection refers to the gathering of data from various sources, these
sources of data are: - Primary Data Sources & Secondary data Sources
13
14
BHEL Has
1. Installed equipment for over 90000 MW of power generation-for
utilities, captive and industrial users.
15
16
MISSION
To be an Indian Multinational Engineering Enterprise providing Total
Business Solution through Quality Products, Systems and Services in the
fields of Energy, Industry, Transportation, Infrastructure and other
potential areas.
VALUES
Commitment
Customer satisfaction
Continuous improvement
Concern for environment
17
CORPORATE PROFILE
BHEL is the largest engineering and manufacturing enterprise in India in
the energy related infrastructure sector BHEL is established more than 4
decades ago ushering in the indigenous heavy electrical equipment industry
in India. BHEL has built over the years , a robust domestic market position
by becoming the largest supplier of power plant equipment in India and by
developing strong market presence in select segments of the industrial
sector and the railways . Currently, 80 % of the nuclear power generated in
country is through the BHEL equipment
BHEL caters to core sectors of the Indian economy viz., power generation
and transmission , industry transportation , renewable energy defiance
etc. the wide network of BHEL 14 manufacturing divisions 4 power sector
regional centers, 8 service centers, 15 regional office, one subsidiary co.
joint venture and a large number of projects sites spread all over India and
abroad enables the company to promptly serve its customers and provide
them with suitable products, systems and servicers- efficiently and at
competitive prices.
BHEL where quality systems as per ISO-9000 have taken deep roots has
now made significant achievements in total quality management by
adopting the CII/EFQM model for business excellence. BHEL become the
first public sector company in the country to win the coveted PRIZE
through its Haridwar unit under the CII EXIM award Scheme. BHEL
Bhopal and JHANSI units and power sector northern and eastern regions
18
POWER SECTOR
Power generation sector comprises thermal, gas, hydro and nuclear power
plant business. As of 31-3-2010, BHEL supplied sets account for nearly
71,255 MW or 64% of the total installed capacity of 1,11,151 MW in the
country, as against nil till 1969-70.
BHEL has proven turnkey capabilities for executing power projects from
concepts to commissioning. It possesses the technology and capability to
produce thermal sets with supercritical parameters up to 1000 mw unit
rating and gas turbine-generator sets of up to 250 mw unit rating.
Cogeneration and combined-cycle plants have been introduced to achieve
higher plant efficiencies. To make efficient use of the high ash-content coal
available in India, BHEL supplies circulating fluidized bed combustion
boilers to both thermal and combined-cycle power plants.
19
TRANSMISSION
BHEL also supplies a wide range of transmission products and systems of
up to 400KV class. These include high voltage power & instrument
transformers, dry type transformers, shunt & series reactors, safe switch
gear, 33KV gas insulated substation capacitors, and insulators etc. for
economic transmission of bulk power over long distances, High Voltage
Direct Current (HVDC) systems are supplied. Series and shunt
compensation systems, to minimize transmission loses, have also been
supplied
INDUSTRY SECTOR
BHEL is a major contributor of equipment and systems to industries:
cement, sugar, fertilizer, refineries, petrochemicals, steel, paper etc. the
20
TRANSPORTATION
Mostly of the trains operated by the Indian railways, including the metro in
Calcutta, are equipped with BHELs traction electrics and traction control
equipment. The company supplies electric locomotives to Indian Railways
and diesel shunting locomotives to various industries. 5000/4600 hp ac/dc
locomotives developed and manufactured by BHEL have been supplied to
Indian railways. Battery powered road vehicles are also manufactured by
the company. BHEL also supplies traction electrics and traction control
equipment for electric locos, diesel electric locos, and EMUs/ DEMUs to
the railways.
TELECOMMUNICATION
BHEL also caters to telecommunication sector by way of small, medium,
and large switching systems.
RENEWABLE ENERGY
21
INTERNATIONAL OPERATIONS
BHEL has, over the years established its references in over 50 countries of
the world, ranging from the United States in the west to New-Zealand in the
far east. These references encompass almost the entire product range of
BHEL, covering turnkey power projects of thermal, hydro and gas based
type sub-station projects, rehabilitation projects, besides a wide variety of
products, like switch gear, transformer, heat exchangers
,insulators,
22
PRODUCTS
Thermal Power Plants
Steam turbines, boilers and generators of up to 800 MW capacity for
utility and combined-cycle applications;
Capacity to manufacture boilers and steam turbines with supercritical
system cycle parameter and matching generator up to 1000 MW unit
size.
Steam turbines, boilers and generators of CPP applications; capacity
to manufacture condensing, extraction, back pressure, injection or
any combination of these types of steam turbines.
24
Transformers
Insulators
Industrial and Special Ceramics
Capacitors
Electrical Machines
Compressors
Control Gear
Silicon Rectifiers
Power Devices
Transportation Equipment
Oil Field Equipment
Seamless Steel Tubes
Systems and Services
25
BOARD OF DIRECTORS
CHAIRMAN & MANAGING
DIRECTOR
DIRECTORS
Mr. S. Ravi
DIRECTOR (Finance)
Mr. C. S. Verma
Mr. C. P. Singh
DIRECTOR (HR)
Mr. Anil Sachdev
26
COMPANY SECRETARY
Order outstanding
Order received
2009 - 10
144300
59037
2008 - 09
Change (%)
117000
23.33
59678
-1.07
Turnover
34154
28033
21.83
Value added
13171
9894
33.12
Employees(nos)
46274
45666
1.33
6591
4849
35.92
4311
3138
37.38
Dividend
1141
832
37.14
191
142
36.17
2979
2164
37.62
Corporate dividend
tax
Retained earnings
27
Total assets
46960
39581
18.64
Net worth
15917
12939
23.02
128
149
-14.09
0.01
0.01
325.16
88.06
264.32
64.11
23.02
37.36
2670
2008
32.97
Total borrowings
Debt equity
PER SHARE (IN RS.)
-Net worth
-Earnings
Economic
Added
Value
28
29
30
31
32
33
BALANCE SHEET
As at March 31, 2010
34
2011
2-Apr2011
38
7-Feb2011
12-Nov- Mr. B.P. Rao, CMD, BHEL, receiving the Golden Peacock Award
2010
for Excellence in Corporate Governance 2010 from Justice P.N.
Bhagwati
39
7-Oct2010
BHEL wins Rs.37,000 Million EPC Contract for the first 700
MW Supercritical Thermal Unit
24-Sep- BHEL pays all-time high Equity Dividend of 233 percent for
2010
fiscal 2009-10
13-Sep- BHEL wins India Pride Growth Leader of the Year Award
2010
41
9-Jul2010
7-Jun2010
42
43
FINANCIALS (Comparison)
INCOME STATEMENT
Period Ending
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and
Administrative
Non Recurring
Others
Total Operating Expenses
Mar 31,
Mar 31,
Mar 31,
Mar 31, 2007
2010
2009
2008
331,992,000 265,477,000 194,013,000 173,371,000
205,400,000 171,850,000 115,195,000 104,668,000
126,592,000
93,628,000
78,818,000
68,703,000
44
55,917,000
38,871,000
35,230,000
33,991,000
43,269,000
31,152,000
28,593,000
24,147,000
43,269,000
31,152,000
28,593,000
24,147,000
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Preferred Stock And Other
Adjustments
Net Income Applicable To Common
Shares
45
Period Ending
Mar 31, 2010 Mar 31, 2009 Mar 31, 2008 Mar 31, 2007
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Other Current Assets
Total Current Assets
Long Term Investments
Property Plant and Equipment
Goodwill
Intangible Assets
Accumulated Amortization
Other Assets
Deferred Long Term Asset Charges
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term
Debt
Other Current Liabilities
98,564,000 103,295,000
83,860,000
58,089,000
97,972,000
42,177,000
11,562,000
18,410,000
13,379,000
9,352,000
76,099,000
58,981,000
44,240,000
34,570,000
1,483,000
1,666,000
952,000
893,000
94,684,000
Total Liabilities
Stockholders' Equity
Misc Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock
24,000
4,895,000
4,895,000
4,895,000
2,448,000
46
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
85,372,000
63,000
565,000
-
47
Mar 31,
Mar 31,
Mar 31,
Mar 31,
2010
2009
2008
Net Income
43,269,000 31,152,000 28,593,000 24,147,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation
4,595,000
3,421,000
2,972,000
2,732,000
Adjustments To Net Income
Period Ending
Changes In Liabilities
Changes In Inventories
Changes In Other Operating
Activities
(4,733,000)
(125,000)
(2,127,000)
6,851,000
2,234,000
(8,883,000)
(9,338,000)
(4,730,000) 19,336,000
25,771,000
16,749,000
Currency in INR.
48
Strength
Weakness
Opportunities
Threat
STRENGTHS
Sound engineering base and ability to assimilate relatively
stable industrial relationship
49
WEAKNESSES
Difficulty in keeping up the commitments on the product
delivery and desired sequence of supplies.
OPPORTUNITIES
Demand for power and hence plant equipment is expected to
grow.
THREATS
Increased competition both national and international.
52
53
Bearings.
Tools & Tackles of Steam Turbines
Limiter Assembly, Oil Filter Assembly & Speed Changer
Assembly of Governing System.
CUSTOMERS
HERP's customers are various SEBs viz. APGENCO, BSEB, CSEB,
MSEB, MPEB, PSEB, RVUNL, TNEB, UPRVUNL, NTPCs, OPPs &
Private Power Plants.
PARTNERS
Our partners & suppliers include our sister units viz. Haridwar,
Bhopal, Tiruchy, Hyderabad, Varanasi as well as various ancillaries
developed by various units of BHEL.
BUSINESS POLICY
"In line with Company's Vision, Mission and Values, we
dedicate ourselves to sustained growth with increasing
Positive Economic Value Addition and Customer focused
business leadership in the Power & Industry Sector"
One of the major strengths of HERP Varanasi is its free, open and
consistent work culture for making continuous improvement. To
recognize employees participation & valued suggestions HERP has
always been recognizing their good efforts. Felicitation letters are
distributed on 15th August & 26th January regularly.
57
BALANCE SHEET
As 31-03-11
Sources of funds
Shareholders fund
share capital
Funds from Head office
Funds TO &From Corp. Off ccc
A/C (cr. Balance)
Reserves and surplus
Loan Funds
Secured Loan
Unsecured loan
Deferred tax liability
Application of funds
Fixed assets
Gross block
Less DEP. /Amortization to date
Add/ deduct: lease adjustment
account
less :Impairment loss
Net Block
Capital work in Progress
Investment
Inter division a/c (Dr. balance)
Current assets , Loans And
Advances
As 31-03-10
48.82
48.82
50.44
130.99
26329.84
26429.1
19214.1
8
51.17
51.17
26492.86
19265.3
5
2620.2
1583.61
1036.59
1036.59
481.78
19034.37
2565.19
1381.78
1183.41
1518.37
1192.56
NIL
1183.41
9.15
1149.19
NIL
15777.22
1192.56
58
Current assets
Inventories
Sundry debtors
Cash and bank balance
Other current assets
Loans and advances
less:
Current Liabilities And provision
Liabilities
Provisions
Net current assets
Profit and loss account (Dr.
balance )
5853.93
12108.57
2.7
5828.46
9800.98
1.08
391.33
18356.53
224.48
15855
7473.28
1685.98
9159.26
7251.99
1180.85
8432.84
9197.27
26492.86
7422.16
19265.3
5
59
Inventory
Current Liabilities
Bank Overdraft
There are basically two concepts of working capital:1. Gross working capital
2. Net working capital
Current assets are those which can be converted into cash within an accounting year and
include cash, short-term securities, debtors, bills receivables (accounts receivables or
book debts) and stock(inventory)
Current liabilities are those claim of outsiders which are expected to mature for payment
within an accounting year and include creditors(accounts payable),bills payable and
outstanding expenses.
Net Working Capital:- it refers to the difference between current assets and
current liabilities.
62
CRITICALITY: working capital management has great signifance for all firms
but it is very critical for small firms.
GROWTH: the need for working capital is directly related to the firms growth.
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-avis 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
companys 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-ter 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.
64
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. 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 current financial
obligations. Lenders such as commercial banks insist that the firm should maintain a
minimum net working capital position.
NATURE OF BUSINESS
Working capital requirements of a firm are basically influenced by the nature of its
business. Trading and financial firms have a very small investment in fixed assets, but
require a large sum of money to be invested in working capital. In contrast, public
utilities may have limited need for working capital and have to invest abundantly in
fixed assets. Their working capital requirements are normal because they may have only
cash sales and supply services, not products. Thus no funds will be tied up in debtors
and stock (inventories). For the working capital requirements most of the
manufacturing companies will fall between the two extreme requirements of trading
66
firms and public utilities. Such concerns have to make adequate investment in current
assets depending upon the total assets structure and other variables.
The working capital needs of a firm are related to its sales. However, it is difficult to
precisely determine the relationship between volumes of sales and working capital
needs. In practice, current assets will have to be employed before growth takes place. it
is therefore necessary to make advance planning of working capital for a growing firm
on continuous basis.
Growing firms may need to invest funds in fixed assets in order to sustain growing
production and sales. This will, in turn, increase investment in current assets to support
enlarged scale of operations. Growing firms need funds continuously. They use external
sources as well as internal sources to meet increasing needs of funds. These firms face
further problems when they retain substantial portion of profits, as they will not be able
to pay dividends to shareholders. It is therefore imperative that such firms do proper
planning to finance their increasing needs of working capital.
Sales depend upon demand conditions. Large number of firms experience seasonal and
cyclical fluctuations in the demand for their products and services. These business
variations affect the working capital requirement, specially the temporary working
capital requirement of the firm. When there is an upward swing in the economy ,sales
will increase correspondingly , the firms investment in inventories and debtors will also
increase. Under boom additional investment in fixed assets may be made by some firms
to increase their productive capacity. This act of firms will require additions of working
capital. To meet their requirements of funds for fixed assets and current assets under
boom period firms generally resort to substantial borrowing. On the other hand when
there is decline in the economy sales will fall and consequently, levels of inventories and
debtors will also fall under recession firm try to reduce their short term borrowings.
67
Seasonal fluctuations not only affect working capital requirement but also create
production problems for the firms. During peak periods of demand increasing
production may be expensive for the firm. Similarly it will be more expensive during the
slack periods when the firm has to sustain its working force and physical facilities
without adequate production and sales.
production irrespective of seasonal changes in order to utilize its resources to the fullest
extent. Such a policy will mean accumulation of inventories during off season and their
quick disposal during the peak season.
The increasing level of inventories during the slack season will require increasing funds
to be tied up in the working capital for some months. Unlike cyclical fluctuations,
seasonal fluctuations generally conform to a steady pattern. Therefore financial
arrangements for seasonal working capital requirements can be made in advance.
The manufacturing cycle comprise of the purchase and use of raw materials and the
production of finished goods. Longer the manufacturing cycle ,larger will be the firms
working capital requirements therefore the technological process with the shortest
manufacturing cycle may be chosen once a manufacturing
selected, it should be ensured that manufacturing cycle must be completed within the
specified period. This needs proper planning and coordination at all levels of activity.
Any delay in the manufacturing process will result in the accumulation of WIP and
waste of time. In order to minimize their investment in working capital, some firms,
specifically those manufacturing industrial products have a policy of asking for advance
payments from their customers. Non manufacturing firms services and financial
enterprises do not have a manufacturing cycle.
CREDIT POLICY
68
The credit policy of the firm affects the working capital by influencing the level of
debtors. The credit terms to be granted to customers may depend upon the norms of the
industry to which the firm belongs. But a firm has the flexibility of shaping its credit
policy within the constraint of industry norms and practices. The firm should use
discretion in granting credit terms to its customers. Depending upon the individual case
different terms may be given to different customers. A liberal credit policy without
rating the credit worthiness of customers will be detrimental to the firm and will create a
problem of collection later on. The firm should be prompt in making collections. A high
collection period will mean tie up of large funds in debtors. Slack collection procedures
can increase the chance of bad debts. In order to ensure that unnecessary funds are not
tied up in debtors, the firm should follow a rationalized credit policy based on the credit
standing of customers and other relevant factors. The firm should evaluate the credit
standing of new customers and periodically review the credit worthiness of the existing
customers. The case of delayed payments should be thoroughly investigated.
The working capital requirements of a firm are also affected by credit terms granted by
its suppliers. A firm will needless working capital if liberal credit terms are available to it
from suppliers. Suppliers credit finances the firms inventories and reduces the cash
conversion cycle. In the absence of suppliers credit the firm will borrow funds for bank.
The availability of credit at reasonable cost from banks is crucial. It influences the
working capital policy of the firm. A firm without the suppliers credit, but which can get
bank credit easily on favourable conditions, will be able to finance its inventories and
debtors without much difficulty.
OPERATING EFFICIENCY
The operating efficiency of the firm relates to the optimum utilization of all its resources
at minimum costs. The efficiency in controlling operating costs and utilizing fixed and
69
current assets leads to operating efficiency. The use of working capital is improved and
pace of cash conversion cycle is accelerated with operating efficiency. Better utilization
of resources improves profitability and thus helps in releasing the pressure on working
capital. Although it may not be possible for a firm to control prices of materials or wages
of labour it can certainly ensure efficient and effective utilization of materials labour and
other resources.
profits. There are two elements in the business cycle that absorb cash - Inventory (stocks
and work-in-progress) and Receivables (debtors owing you money). The main sources of
cash are Payables (your creditors) and Equity and Loans.
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. Similarly, if you can negotiate improved terms
with suppliers e.g. get longer credit or an increased credit limit, you effectively create
free finance to help fund future sales
71
If You .......
Then ......
You release cash from
the cycle
Your receivables soak
up cash
You increase your cash
resources
You free up cash
cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If you do pay cash, remember that this is now longer available for working
capital. Therefore, if cash is tight, consider other ways of financing capital investment loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are
cash outflows and, like water flowing down a plug hole, they remove liquidity from the
business
Management Of Cash
72
CASH MANAGEMENT
Cash is an important current asset for the operation of the business. Cash is the basic
input needed to keep the business running on a continuation basis. It is also the
ultimate output realized by selling the services or product manufactured by the firm.
Cash is the most liquid of all the current assets. Higher cash and bank balance indicate
high liquidity position in lower profitability, as ideal cash fetches no return. Thus a
major function of finance manager is maintaining sound cash position.
Cash management is concerned with managing of: (i) Cash flow in and out of the firm.
(ii) Cash flow within the firm.
(iii) Cash balance held by the firm at a point of time by financing deficit or investing
surplus cash.
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The only source of cash inflow for unit is corporate office. The sale proceeds cannot be
directly utilized. Based on the above requisitions, the corporate office allocates the
funds.
For cash credit, corporate office will negotiate with consortium of Bank for total cash
credit required for the company as the whole. A consortium deed for hypothecation of
stocks and stores of company is executed by corporate office. All the information,
documents etc. required in this connection will be called for by the corporate office from
the division. Arrangements have been already been made by the State Bank of India,
HDFC Bank, Canara Bank, Bank of Baroda and Indian Overseas Bank for centralizing
total cash credit limits at New Delhi. Under this scheme, the units have finished the
required information under the following documents. The units will send estimated,
monthly cash flow statement to the corporate office by 18th of every month. Based on
these cash flow statements, the corporate office will allocate the sub limits will be
transferred to the consortium of the bank by 25th of the month. The unit can utilize this
fund. The actual cash flow statement will be send to corporate office monthly i.e. 1st of
succeeding month. The units are also required to send the weekly report of daily bank
transactions to the corporate office. These reports shows the detail of daily debit and
credit transaction appearing in bankbook of the company, enabling the posting of
corporate bankbooks as well as verification of bank statement received from banks.
These reports are sent to corporate office on
1st (showing the transaction from 25th to 30th of the previous month)
8th (showing the transaction from 1st to 7th of the current month)
16th (Showing the transaction from 8th to 15th of the current month)
25th (showing the transaction from 16th to 21st of current month)
The units are required to send the comparative statement of estimated and annual cash
flow of the preceding month. This report will be sent quarterly after inter-unit
reconciliation meeting. The total interest payable on cash credit availed by corporate
office is to be allocated among the units in the ratio of utilization of funds. Thus cash
forecasting & budget are the principal tools of cash management. Forecasting helps
manager to know how much cash will be held in balance, to what extent the firm should
rely on banks financing and how much to invest in marketable securities.
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RECEIVABLE MANAGEMENT
Customers arising from sale of goods or services define the term receivable as debt owed
to the firm in the ordinary course of business. Receivable constitute a substantial
position of current assets. Granting credit and creating debtors amount to the blocking
of firms fund. The interval between the date of sale and date of payment has to be
financed out of working capital. Thus traders debtors represent investment.
Business firm generally sell goods on credit to facilitate sales. When a firm makes an
ordinary sale of goods on services and does not receive payment, the firm grant trade
credit and create accounts receivable that would be collected in the future.
4) Default Cost
When customers make default in payments, not only the collection effort has to be
increased but the firm may also have to incur losses due to bad debts.
Power Industries and other Private Parties. BHEL has overseas sales also. All the BHEL
units are having their commercial department. Commercial department and Regional
Operational Divisions (RDOs) primarily carry out the job of recovery from the
customers. The sales section of finance department also actively takes part in receivable
management by preparing and sending invoices and reminders to customers at
appropriate time. They take track of money received from customers as advances, as
against dispatch of finished goods and money recoverable on account of price variation
claims and conversion of deferred debts into debtors. This monitoring is done work
order wise. The aging schedule of customers also prepared which gives the regarding
period of outstanding balances.
The terms and conditions with the customers are finalized according to the credit policy
laid down by corporate office BHEL. However deviations are permitted with the due
approval from corporate office.
While lying down of credit policy by head office, industry conditions are taken into
consideration. Seeing huge investment in execution of work order, BHEL demands
considerable payment in advance in different phases of completion of work i.e. erection,
installation, commissioning, maintenance etc. Despite all these BHEL is presently facing
cash crunch because a major chunk of BHELs customers consists of government bodies,
which are very casual in clearance of dues.
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INVENTORY MANAGEMENT
Inventory constitutes the most significant part of the current assets of the large
majorities of the companies in India. On an average, inventories are approximately 60%
of current assets in public limited companies in India. Inventories are stock of the
product, a company is manufacturing for sale and components that make up the
product. The various forms in which inventories exist in manufacturing company are
raw material; work in process and finished goods.
The level of above mentioned three kinds of inventories for a firm depend on the nature
of its business. Manufacturing firm will have substantially high level of all three kinds of
inventories, while a retail or wholesale firm will have a very high level of finished goods
inventories and raw material and work in process inventories. In a manufacturing firm
the level of inventory depends on the operating cycle. A manufacturing firm with a long
operating cycle has to maintain a high inventory level.
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material, work in progress and conversion cost. Production planning and control
department plays a pivotal role in inventory management. The engineering department
plays a supporting role and provides the requisition regarding technology to be applied
and material requires to PPC department. In BHEL the inventory control is perform
with following steps: 1. Planning- This is done by PPC department is consultation with purchase,
commercial, design and manufacturing department prepares the planning schedule.
This schedule along with information provided by engineering and design department
helps in material planning and inventory control.
2. Procurement The procurement is done by purchase department. It is done with
the assistance of PPC and commercial department for maintaining a tradeoff between
carrying cost and ordering cost. A single purchase order is placed for the entire quantity
of a specific item and its scattered delivery over a period of time is received. This method
helps in obtaining cash and quantity discounts and saving carrying cost. In case of
foreign purchase also one order is placed for the full requirement of an item and
scattered delivery is opted because variation caused in material cost due to fluctuation
in exchange rate is much less than the carrying cost of the material which is
approximately 25% of the total price.
3. Receipt and Custody- For the proper inventory control on receipt of materialin
store, quality control department checks the material as per specification. The cost
section fills details of all the purchase by issuing store receipt voucher and material issue
voucher.
4. Issue -After receiving the material and storing, the management keeps the
information whether these material are being issued to desired destination. Full record
of every issuing of material is kept for the proper inventory control.
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5. Accounting -The record of every transaction regarding the use of material in every
department is kept. These records give the overall view of how and where inventories
have been used.
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(iii) Material Return Note this is an authorization to the storekeeper regarding raw
material, finished parts or other stores no longer required by the factory. The various
stock records and cost accounts are adjusted in due course from the details given on the
form.
(iv) Material Transfer Note This is issued when the material booked to one
particular order is transferred to another work order.
(v) Material is kept in appropriate bin and draws. For each kind of material a bin card
is maintained showing details. A bin card assists the storekeeper to control the stock.
The bin card incorporates all information viz. opening balance of materials, materials
ordered, materials allocated and closing balance of materials. As a result the bin card
shows the full cycle of material like the order of few supplies, allocation of material to
jobs, receipt and issued of material, stock in hand and balance available.
RATIO ANALYSIS
Meaning of ratio
A ratio is an expression of the quantitative relationship between tow numbers.
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Ratio as a tool of financial analysis provides symptoms with the help of which
an analyst is in a position to diagnose the financial health of the unit. Financial analysis
can be compared with biopsy conducted by the doctor on the patient in order to
diagnose the cases of illness so that treatment may be prescribed to the patient to help
in recover. As there are different groups of interested parties so significance to them are
different.
MANAGEMENT
Management needs information regarding the profitability, operational efficiency and
financial soundness of the business, so that weakness of the business may be identified
and effective business plans may be formulated. Ratio analysis helps the management in
decision making, financial forecasting and planning. It helps in communicating the
desired information to the relevant parties and facilitates coordination. Ratios provide
actual basis, which can be compared with the standards, thus helps in effective control.
SHAREHOLDERS
The shareholders, the virtual owners of business corporate units have an interest in the
welfare and progress of business. They want to know about the profitability and future
prospects of the enterprise. The requisite information is available from the analysis of
financial statements.
WORKERS
Employees of the business are interested in the profit of business. Workers in the
business are paid bonus on the basis of productivity and profitability, so they have an
interest in the financial analysis of the business.
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CREDITORS
Creditors of the enterprise are interested in the short term and long term financial
soundness of the business. They want to ensure themselves, whether their funds are safe
and secure and the business is capable of making payment of interest regularly.
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Ratio
Formulae
Result Interpretation
On average, you turn over the value of your
entire stock every x days. You may need to
Stock
Turnover
(in days)
Average Stock *
365/
Sold
overall
stock
turnover
days.
Faster
Debtors * 365/ =
Sales
the
average
days.
Effective
debtor
Creditors
365/
(or Purchases)
Current
Total
Ratio
Assets/
Total
Current
Current
=
Current Assets are assets that you can readily
turn in to cash or will do so within 12 months
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(Total Current
Assets
Current
=x
times
Liabilities
Working
Capital
Ratio
(Inventory
Receivables
- As
Payables)/
Sales
Sales
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Particulars
Low Risk
Current Ratio
>1.40
1.20-1.40
<1.20
TOL/TNW
<2.00
2.00-3.50
<3.50
Interest Coverage
>3.50
2.00-3.50
<2.00
PAT/Sales %
>10.00
4.00-10.00
<4.00
<60
60-90
>90
<45
45-90
>90
Debt.-Equity Ratio
<1.25
1.25-1.75
>1.75
>2.00
1.25-2.00
<1.25
Medium Risk
High Risk
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( Rs in lakhs)
CURRENT ASSET
CURRENT LIABILITY
31-03-2009
CU
31-03-2010
RRENT RATIO
9031
CURRENT ASSET
15855
4476
CURRENT LIABILITY
7252
RATIO
2.186
2.017
QUICK RATIO
( Rs in lakhs)
C.A.-INVENTORY
C.L.
31-03-2009
QUICK RATIO
31-03-2010
93
4629
C.A.-INVENTORY
10027
4476
CURRENT LIABILITY
7252
RATIO
1.382
1.034
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Due to order base work in unit the inventories are determined after the order is
received. It takes time to inform the requirement for the inventories to higher
authority .unit should arrange the raw material in advance which may reduce the
time and leads to overcome the outstanding orders problem and defiantly help in
the expansion of capacity production..
Outstanding orders of recent past years are in increasing mode these orders
should be minimize as far as possible. It shows the capacity of production of any
company but with reference of past data available with us the production
turnover is also increasing thus it clearly seems that the order receiving one in
financial year is somewhere higher than increased production capacity.
Storage capacity should be made more reliable so that the storage of materials
can be made in safe manner which leads to faster production.
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CONCLUSION
Any change in the working capital will have an effect on a business's cash flows.
A positive change in working capital indicates that the business has paid out cash, for
example in purchasing or converting inventory, paying creditors etc. Hence, an increase
in working capital will have a negative effect on the business's cash holding. However, a
negative change in working capital indicates lower funds to pay off short term liabilities
(current liabilities), which may have bad repercussions to the future of the company.
The Company is focusing strict eye watch on cash management now days.
The WC is also showing an increasing trend which is attributed to the increasing
profits.
Net working capital increased year on year. The factors contributing to th
increase are:
a) Increase in Sundry Debtors due to relaxing of the credit policy , although
the AR days has remained more or less constant
b) Increase in Inventory.
c) Increase in Other Current Assets and Loans and Advances. However,
increase in Current Liabilities and Provisions has offset the increase in
Current Assets.
The Current and Quick ratio are around 2.18 and 1.38 respectively indicating that
the firm is highly liquid and would be able to meet its short term liabilities
effectively.
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BIBLIOGRAPHY
Books of these kinds naturally proved to be very helpful by
dealing with subject matter that is presented here.
REFERENCE BOOKS
Financial Management
Financial Management
Financial Management
Pandey I.M
Chandra Prasanna
Rustagi R.P
WEBSITE
www.bhel.com
www.indianinfoline.com
NEWSPAPERS
Economic Times of India
The Hindu
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